International business the new realities 2e cavusgil knight 1

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International
Business
The New Realities

Second Edition

S. Tamer Cavusgil
Georgia State University

Gary Knight
Florida State University

John R. Riesenberger
Thunderbird School of Global Management,
Clinical Professor of Executive Development,
Corporate Learning Group

Prentice Hall
Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam
Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi
Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

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Library of Congress Cataloging-in-Publication Data:
Cavusgil, S. Tamer.
International business : the new realities / S. Tamer Cavusgil, Gary
Knight, John R. Riesenberger. — 2nd ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-13-609098-4 (alk. paper)
1. International business enterprises—Management. I. Knight, Gary A. II. Riesenberger, John R.,
1948- III. Title.
HD62.4.C389 2012
658'.049—dc22
2010030667
10 9 8 7 6 5 4 3 2 1

ISBN 10: 0-13-609098-2
ISBN 13: 978-0-13-609098-4

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Dedicated to. . .
This book is dedicated to my parents, Mehmet and Naciye
Cavusgil, who never received much formal education but
passed on a deep sense of appreciation for knowledge to their
children; my wife, Judy, and my children, Erin and Emre
Cavusgil, who graciously provided much-needed understanding,
support, and encouragement; and my students whom I had the

opportunity to mentor over the years.

S. Tamer Cavusgil
Atlanta, Georgia
This book is dedicated to my wife, Mari, for her patience,
intellect, and adventurous spirit; to Bill and Audrey, for being
great parents and role models; and to the numerous students I
have had the good fortune to influence over the years.

Gary Knight
Tallahassee, Florida
This book is dedicated to my parents, Richard and Marie
Riesenberger, for their example, many sacrifices, and love. To
my wife and best friend, Pat, for her enthusiasm and loving
support. To my daughters, Chris and Jen, and their husbands,
Byron and Martijn, of whom I am so very proud and thankful.
To my amazing grandchildren, Ryan, Paige, and Ethan—the
future of the New Realities.

John R. Riesenberger
Basking Ridge, New Jersey

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> About the Authors
S. Tamer Cavusgil
Georgia State University, Fuller E. Callaway Professorial Chair
Executive Director, Center for International Business Education
and Research, J. Mack Robinson College of Business
Professor Cavusgil has been mentoring students, executives, and educators in international business for the past three decades. A native of Turkey, Professor Cavusgil’s
professional work has taken him to numerous other emerging markets.
Professor Cavusgil has authored more than 190 refereed journal articles and three
dozen books, including Doing Business in the Emerging Markets (Sage). His work is
among the most cited contributions in international business. He is the founding editor of the Journal of International Marketing and Advances in International Marketing.
He serves on the editorial review boards of professional journals.
Professor Cavusgil is an elected Fellow of the Academy of International Business, a distinction earned by a select group of intellectual leaders in international business. He
also served as Vice President of the AIB, and on the Board of Directors of the American
Marketing Association. Michigan State University bestowed him with its highest
recognition for contributions to the international mission: the Ralph H. Smuckler
Award for Advancing International Studies. He was named International Trade
Educator of the Year in 1996 by the National Association of Small Business International Trade Educators (NASBITE). At Michigan State University, he also earned the
distinction of University Distinguished Faculty, the highest award given to a faculty
member. In 2007, he was named an Honorary Fellow of the Sidney Sussex College at
the University of Cambridge.
Professor Cavusgil holds MBA and PhD degrees in business from the University of
Wisconsin. Previously, he held positions at the Middle East Technical University in
Turkey, University of Wisconsin-Whitewater, Bradley University, and Michigan State
University. He also served as Senior Fulbright Scholar to Australia and taught at
Monash University and other Australian institutions. He serves as a visiting Professor at Manchester Business School and was Gianni and Joan Montezemolo Visiting
Chair at the University of Cambridge, the United Kingdom.

Gary Knight

Florida State University, Associate Professor
and Director of Program in International Business
Professor Knight has extensive experience in international business in the private
sector. In his position as Export Manager for a medium-sized enterprise, he directed
the firm’s operations in Canada, Europe, Japan, and Mexico, supervising the business activities of some fifty distributors in these regions. Previously, he worked for
several years in Tokyo, Japan.
At Florida State University, Professor Knight developed the study abroad programs
in business in Britain, France, Japan, and Spain, as well as FSU’s online courses in international business. He has been an invited speaker at numerous institutions worldwide. He has won several awards for research and teaching, including best teacher
in the MBA program and the Hans Thorelli Best Paper Award for his article “Entrepreneurship and Strategy: The SME Under Globalization.” His research emphasizes
international business strategy, international services, emerging markets, and internationalization of small and medium-sized firms.
iv

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Professor Knight is a member of the Academy of International Business. He has
authored six books and more than 100 refereed articles in academic journals and
conference proceedings, including Journal of International Business Studies, Journal of
World Business, International Executive, and Management International Review. Recently, he was ranked one of the top fifteen most prolific scholars in the United
States, and one of the top thirty worldwide, in the six leading international business journals. He is on the editorial review boards of several international journals.
The U.S. House of Representatives’ Committee on Small Business invited Professor Knight to provide expert testimony on international business topics.
Professor Knight earned his MBA at the University of Washington and PhD at
Michigan State University, both in international business. Earlier degrees were in
Finance and Modern Languages. He also attended the University of Paris in France
and Sophia University in Japan and is fluent in French, Japanese, and Spanish.

John R. Riesenberger
Thunderbird School of Global Management, Clinical Professor
of Executive Development, Corporate Learning Group
Mr. Riesenberger’s international business career spans over three decades in the
global pharmaceutical industry. He has conducted business transactions in
twenty-one countries. His passion is to help students develop the managerial skills

frequently required of new graduates entering careers in international business.
Currently, Mr. Riesenberger is the President of Consilium Partners, Inc., a pharmaceutical consulting firm with clients in pharmaceutical, biotechnology, and pharmaceutical agency firms.
He worked for 30 years with Pharmacia & Upjohn and The Upjohn Company as a
senior executive. His experience covered a diverse range of divisional, geographic,
and functional accountabilities. His most recent position was Vice President,
Global Business Management. Mr. Riesenberger also served as Corporate Vice
President and Chief Commercialization Officer for a biotechnology firm and as the
Executive Vice President of a pharmaceutical science agency.
Mr. Riesenberger served as a member of the Global Advisory Board of the American Marketing Association. He serves as an Executive in Residence at the Michigan
State University Center for International Business Education and Research. He
served on the Editorial Review Board of The Journal of International Marketing. He
served as Chairman, Industry Advisory Board, “Value of Marketing Program,” SEI
Center for the Advanced Studies in Management, The Wharton School of the University of Pennsylvania. He is the former Chairman of the Pharmaceutical Manufacturing Association Marketing Practices Committee. John is the coauthor, with
Robert T. Moran, of The Global Challenge: Building the New Worldwide Enterprise
(McGraw-Hill, London).
John holds a Bachelor of Science degree in Economics-Business and an MBA in
Management from Hofstra University. He attended the Harvard Business School’s
International Senior Management Program.

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About the Authors
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> Brief Contents

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Preface xxv

Part 1

Foundation Concepts 2

1. Introduction: What Is International Business? 2
2. Globalization of Markets and the Internationalization of the Firm 28
3. Organizational Participants That Make International Business Happen 58

Part 2

The Environment of International Business 86

4. The Cultural Environment of International Business 86
5. Ethics and International Business 118
6. Theories of International Trade and Investment 140
7. Political and Legal Systems in National Environments 172
8. Government Intervention in International Business 200
9. Regional Economic Integration 226
10. Emerging Markets, Developing Economies, and Advanced Economies 252
11. The International Monetary and Financial Environment 282

Part 3

Strategy and Opportunity Assessment 306

12. Strategy and Organization in the International Firm 306
13. Global Market Opportunity Assessment 334

Part 4

Entering and Operating in International Markets 364

14. Exporting and Countertrade 364
15. Foreign Direct Investment and Collaborative Ventures 396

16. Licensing, Franchising, and Other Contractual Strategies 426
17. Global Sourcing 452

Part 5

Functional Area Excellence 478

18. Marketing in the Global Firm 478
19. Human Resource Management in the Global Firm 508
20. Financial Management and Accounting in the Global Firm 534

Glossary 565
Notes 572
Photo Credits 592
Author Index 594
Company Index 599
Subject Index 603

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> Contents

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Preface xxv

Part 1 Foundation Concepts

2

1 Introduction: What Is International Business?

2

> A Typical Day in the Global Economy 3
What Is International Business? 4
What Are the Key Concepts in International Trade and Investment? 5
The Nature of International Trade 5
The Nature of International Investment 7
Services as Well as Products 8
The International Financial Services Sector 9
How Does International Business Differ from Domestic Business? 10
The Four Risks in Internationalization 10
Who Participates in International Business? 12
Multinational Enterprise (MNE) 12
■ Global Trend: DIESEL: A Smaller Firm’s Smashing International Success 15
Non-governmental Organizations (NGOs) 15
Why Do Firms Internationalize? 16
Why Study International Business? 18
Facilitator of the Global Economy and Interconnectedness 18
Contributor to National Economic Well-Being 18
A Competitive Advantage for the Firm 19
A Competitive Advantage for You 19
■ Recent Grad in IB: Ashley Lumb 20
An Opportunity for Global Corporate Citizenship

21

■ Closing Case: Internationalization at Harley-Davidson 21
■ Chapter Essentials: Key Terms 24 Summary 24
Comprehension 25 Apply Your Understanding 25
globalEDGE™ Internet Exercises

Test Your

26

2 Globalization of Markets and the Internationalization
of the Firm 28

> Bangalore: IT’s Global Destination

29

Why Globalization Is Not New 31
Phases of Globalization 31
Market Globalization: An Organizing Framework
Dimensions of Market Globalization 35
Drivers of Market Globalization 36
Technological Advances 40

34

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Information Technology
Communications 41
Manufacturing 42
Transportation 42

41

■ Global Trend: Globalization and E-Business in the Online World 43
Societal Consequences of Market Globalization 43
Contagion: Rapid Spread of Monetary or Financial Crises 44
Loss of National Sovereignty 45
Offshoring and the Flight of Jobs 46
Effect on the Poor 47
Effect on the Natural Environment 50
Effect on National Culture 50
Globalization and Africa 51
Firm-Level Consequences of Market Globalization: Internationalization
of the Firm’s Value Chain 52
■ Closing Case: Debating the Merits of Globalization 53
■ Chapter Essentials: Key Terms 55 Summary 55 Test Your
Comprehension 56

Apply Your Understanding 56

globalEDGE™ Internet Exercises

57

3 Organizational Participants That Make International
Business Happen 58

> The Emergence of Born Global Firms

59
Four Types of Participants in International Business 60
Participants Arranged by Value-Chain Activity 61
Illustrating the International Value Chain Using Dell Inc. 62
Focal Firms in International Business 63
The Multinational Enterprise 64
Small and Medium-Sized Enterprises 65
Born Global Firms 66
International Entry Strategies of Focal Firms 67
A Framework for Classifying International Entry Strategies 67
Other Types of International Entry Strategies 68
Distribution Channel Intermediaries in International Business
Intermediaries Based in the Foreign Market 71
Intermediaries Based in the Home Country 72
Online Intermediaries 74

70

■ Global Trend: Online Retailers Surge Ahead 75

Facilitators in International Business 75
■ Recent Grad in IB: Cynthia Asoka 77
Governments in International Business 79
■ Closing Case: DHL, FedEx, and UPS: Shifting Fortunes in the Global
Logistics Services Industry 80
■ Chapter Essentials: Key Terms 82 Summary 82
Comprehension 83 Apply Your Understanding 83
globalEDGE™ Internet Exercises

84

Test Your

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Part 2 The Environment of International Business
4 The Cultural Environment of International Business

> Japan’s Unique Toilet Culture 87
Culture and Cross-Cultural Risk 88
Key Concepts of Culture 91
What Culture Is Not 91
Socialization and Acculturation 91
The Many Dimensions of Culture 92

National, Professional, and Corporate Culture 93
The Role of Culture in International Business 94
■ Recent Grad in IB: Zhibo (Lawrence) Yu 96
Cultural Metaphors, Stereotypes, and Idioms 97
Cultural Metaphors 97
Stereotypes 97
Idioms 98
Interpretations of Culture 98
High- and Low-Context Cultures 98
Hofstede’s Research on National Culture 99
Subjective versus Objective Dimensions of Culture 101
Values and Attitudes 101
Deal versus Relationship Orientation 101
Manners and Customs 102
Perceptions of Time 102
Perceptions of Space 103
Religion 103
Symbolic Productions 106
Material Productions and Creative Expressions of Culture 106
Language as a Key Dimension of Culture 106
Contemporary Issues in Culture 108
Culture and the Services Sector 108
Technology, the Internet, and Culture 108
Globalization’s Effect on Culture: Are Cultures Converging? 109
Overcoming Cross-Cultural Risk: Managerial Guidelines 109
■ Global Trend: Minimizing Cross-Cultural Bias with Critical Incident
Analysis

111

■ Closing Case: Hollywood’s Influence on Global Culture 112
■ Chapter Essentials: Key Terms 114 Summary 114
Comprehension 115 Apply Your Understanding 116
globalEDGE™ Internet Exercises

117

5 Ethics and International Business

118

> The Challenge of Corruption Around the World
Ethics in International Business 121
The Value of Ethical Behavior 124
Variation in Ethical Standards among Countries

124

119

Test Your

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An Ethical Dilemma 126
Linking Ethics, Corruption, and Responsible Behavior
Corporate Social Responsibility 127
The Value of CSR 128

126

■ Global Trend: Global Corporate Social Responsibility Rises to the Top
of the MNE Agenda 129

The Role of Sustainability in International Operations 129
Corporate Governance and Its Implications for Managers 131
A Framework for Making Ethical Decisions 132
Embracing CSR and Sustainability 133
A Global Consensus 133
Ethics, CSR, and Sustainability in Practice 134
■ Closing Case: Corruption at Siemens 135
■ Chapter Essentials: Key Terms 137 Summary 137 Test Your
Comprehension 138

Apply Your Understanding 138

globalEDGE™ Internet Exercises

139

6 Theories of International Trade and Investment

140

> Dubai: The Path to Creating a Knowledge-Based Economy
Theories of International Trade and Investment 142
Why Do Nations Trade? 144
Classical Theories 144
How Can Nations Enhance Their Competitive Advantage?
Contemporary Theories 151

141

151

■ Global Trend: Moving from Comparative to National Competitive
Advantages 157
Why and How Do Firms Internationalize? 157
Firm Internationalization 157
How Can Internationalizing Firms Gain and Sustain Competitive
Advantage? 159
FDI-Based Explanations 159
Non-FDI-Based Explanations 164
■ Closing Case: Hyundai: Leading the Way in the Global Auto Industry 165
■ Chapter Essentials: Key Terms 168 Summary 168
Comprehension 169 Apply Your Understanding 170
globalEDGE™ Internet Exercises

Test Your

171

7 Political and Legal Systems in National Environments

> The Political and Legal Realities of Doing Business in Russia
The Nature of Country Risk 174
How Prevalent Is Country Risk? 175
Political and Legal Environments in International Business
Political Systems 177
Totalitarianism 177
Socialism 178

176

173

172

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Democracy 179
Democracy’s Link to Economic Freedom and Openness 179
The Relationship between Political Systems and Economic Systems 180

Legal Systems 181
Common Law 182
Civil Law 182
Religious Law 183
Mixed Systems 184
Participants in Political and Legal Systems 184
Government 184
International Organizations 185
Regional Economic Blocs 185
Special Interest Groups 185
Competing Firms 186
Types of Country Risk Produced by Political Systems 186
Government Takeover of Corporate Assets 186
Embargoes and Sanctions 187
Boycotts against Firms or Nations 187
War, Insurrection, and Violence 188
Terrorism 188
Types of Country Risk Produced by Legal Systems 188
Country Risk Arising from the Host Country Legal Environment 188
Country Risk Arising from the Home Country Legal Environment 191
■ Global Trend: Evolving Legal Aspects of E-Commerce 192
Managing Country Risk 193
Proactive Environmental Scanning 193
Strict Adherence to Ethical Standards 194
Alliances with Qualified Local Partners 194
Protection through Legal Contracts 194
■ Closing Case: Political, Legal, and Ethical Dilemmas in the Global
Pharmaceutical Industry 194

■ Chapter Essentials: Key Terms 197 Summary 197

Comprehension 198 Apply Your Understanding 198
globalEDGE™ Internet Exercises

Test Your

199

8 Government Intervention in International Business

> India’s Transition to a Liberal Economy

201
The Nature of Government Intervention 202
Rationale for Government Intervention 204
Defensive Rationale 204
Offensive Rationale 205
Instruments of Government Intervention 206
Tariffs 207
Nontariff Trade Barriers 208
Investment Barriers 210
Subsidies and Other Government Support Programs

211

200

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Consequences of Government Intervention 213
Evolution of Government Intervention 216
■ Global Trend: The World Trade Organization and Collapse
of the Doha Round 217

Intervention and the Global Financial Crisis 218
How Firms Can Respond to Government Intervention 219
Strategies for Managers 219
■ Closing Case: Government Intervention at Airbus and Boeing 221
■ Chapter Essentials: Key Terms 223 Summary 223 Test Your
Comprehension 224 Apply Your Understanding 224
globalEDGE™ Internet Exercises 225

9 Regional Economic Integration 226

> Evolution of the European Union

227
Regional Integration and Economic Blocs 228
Levels of Regional Integration 229
The Leading Economic Blocs 231
The European Union (EU) 231
European Free Trade Association (EFTA) 236
North American Free Trade Agreement (NAFTA) 236

■ Global Trend: Integrating Eastern Europe and Turkey into the EU 237
El Mercado Comun del Sur (MERCOSUR) 238

The Caribbean Community (CARICOM) 239
Comunidad Andina de Naciones (CAN) 239
Association of Southeast Asian Nations (ASEAN) 239
Asia Pacific Economic Cooperation (APEC) 240
Australia and New Zealand Closer Economic Relations Agreement (CER) 240
Economic Integration in the Middle East and Africa 241
Advantages of Regional Integration 241
Success Factors for Regional Integration 242
Ethical Dilemmas and Drawbacks of Regional Integration 243
Management Implications of Regional Integration 245
■ Closing Case: Russell Corporation: Choosing between Global and Regional
Free Trade 247

■ Chapter Essentials: Key Terms 249 Summary 249 Test Your
Comprehension 250 Apply Your Understanding 250
globalEDGE™ Internet Exercises 251

10 Emerging Markets, Developing Economies,
and Advanced Economies 252

> The New Global Challengers: MNEs from Emerging Markets

253
Advanced Economies, Developing Economies, and Emerging Markets 254
Advanced Economies 255
Developing Economies 255

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Emerging Market Economies

258

■ Global Trend: China’s Evolving Challenges and Opportunities 262
What Makes Emerging Markets Attractive for International Business
Emerging Markets as Target Markets 263
Emerging Markets as Manufacturing Bases 263
Emerging Markets as Sourcing Destinations 264
Assessing the True Potential of Emerging Markets 264
Per-Capita Income as an Indicator of Market Potential 264
Middle Class as an Indicator of Market Potential 266
Risks and Challenges of Emerging Markets 267
Political Instability 267
Weak Intellectual Property Protection 268
Bureaucracy, Red Tape, and Lack of Transparency 268
Poor Physical Infrastructure 268
Partner Availability and Qualifications 268
Dominance of Family Conglomerates 269
Strategies for Emerging Markets 270
Customize Offerings to Unique Emerging Market Needs 270
Partner with Family Conglomerates 271
Target Governments in Emerging Markets 271

262

■ Recent Grads in IB: Andrew & Jamie Waskey 272
Skillfully Challenge Emerging Market Competitors 273
Corporate Social Responsibility in Emerging Markets and Developing
Economies 274
Foster Economic Development with Profitable Projects 274
Microfinance to Facilitate Entrepreneurship 275
The Special Case of Africa 275
■ Closing Case: Tata Group: India’s New Global Challenger 277
■ Chapter Essentials: Key Terms 279 Summary 279
Comprehension 280 Apply Your Understanding 280
globalEDGE™ Internet Exercises

Test Your

281

11 The International Monetary and Financial Environment

> The European Union and the Euro

283
Exchange Rates and Currencies in International Business
Convertible and Nonconvertible Currencies 285
Foreign Exchange Markets 286
Exchange Rates Fluctuate Constantly 286
How Exchange Rates Are Determined 288
Economic Growth 288
Inflation and Interest Rates 289
Market Psychology 289

Government Action 290
Emergence of the Modern Exchange Rate System 290
The Bretton Woods Agreement 291

284

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IMF and the World Bank 291
The Modern Exchange Rate System 291
The Monetary and Financial Systems 292
International Monetary System 292
Global Financial System 293
■ Global Trend: Global Financial Crisis 294
Key Players in the Monetary and Financial Systems
The Firm 295
National Stock Exchanges and Bond Markets 296
Commercial Banks 296

295

■ Recent Grad in IB: Maria Keeley 297
Central Banks 299
The Bank for International Settlements 299
International Monetary Fund 299
The World Bank 300
■ Closing Case: AIG and Global Financial Contagion 301
■ Chapter Essentials: Key Terms 303 Summary 303
Comprehension 304 Apply Your Understanding 305
globalEDGE™ Internet Exercises

Test Your

305

Part 3 Strategy and Opportunity Assessment

306

12 Strategy and Organization in the International Firm

> IKEA’s Global Strategy

306

307
Strategy in International Business 309
Building the Global Firm 310
Visionary Leadership 310
Organizational Culture 312

Organizational Processes 312
The Distinction between Multidomestic and Global Industries 313
The Integration-Responsiveness Framework 314
Pressures for Global Integration 315
Pressures for Local Responsiveness 315
Strategies Based on the Integration-Responsiveness Framework 316
Organizational Structure 319
Centralized or Decentralized Structure? 320
Organizational Structures for International Operations 321
Export Department 321
International Division Structure 321
Geographic Area Structure (Decentralized Structure) 323
Product Structure (Centralized Structure) 324
Functional Structure (Centralized Structure) 325
Global Matrix Structure 325

■ Closing Case: Carlos Ghosn: Leading for Global Success
at Renault-Nissan

327

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■ Chapter Essentials: Key Terms 330 Summary 330

Comprehension 331 Apply Your Understanding 331
globalEDGE™ Internet Exercises

Test Your

332

13 Global Market Opportunity Assessment

334

> Estimating Demand in Emerging Markets

335
Assessing Global Market Opportunities 336
Task One: Analyze Organizational Readiness to Internationalize 338
Task Two: Assess the Suitability of Products and Services for Foreign
Markets 340
Factors Contributing to Product Suitability for International Markets 340
Key Issues to Resolve in Measuring Product Potential 341
Task Three: Screen Countries to Identify Target Markets 341
Screening Countries for Exporting 341
■ Global Trend: Global Macro Trends That Affect International Business 343
Country Screening for Foreign Direct Investment 347
Country Screening for Sourcing 348
Task Four: Assess Industry Market Potential 349
Practical Methods for Managers to Assess Industry Market Potential 350
Data Sources for Estimating Industry Market Potential 350
■ Recent Grad in IB: Javier Estrada 352
Task Five: Choosing Foreign Business Partners 353

Criteria for Choosing a Partner 353
Searching for Prospective Partners 354
Task Six: Estimate Company Sales Potential 354
Determinants of Company Sales Potential 354
Practical Approaches to Estimating Company Sales Potential 355
In Conclusion 357
■ Closing Case: Advanced Biomedical Devices: Assessing Readiness
to Export 358
■ Chapter Essentials: Key Terms 360 Summary 360
Comprehension 361 Apply Your Understanding 361
globalEDGE™ Internet Exercises

363

Part 4 Entering and Operating
in International Markets
14 Exporting and Countertrade

Test Your

364

364

> Exporter’s Dogged Pursuit of International Customers
An Overview of Foreign Market Entry Strategies 366
Internationalization of the Firm 368
Diverse Motives for Pursuing Internationalization 368
Characteristics of Firm Internationalization 369
Exporting as a Foreign Market Entry Strategy 370

Exporting and the Global Economy 371

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Exporting: A Popular Entry Strategy
Service Sector Exports 372
Advantages of Exporting 373
Limitations of Exporting 373

371

■ Global Trend: The Emergence of SME Exporters 374
A Systematic Approach to Exporting 374
Importing 377
Managing Export-Import Transactions 378
Documentation 378
Shipping and Incoterms 379
Payment Methods in Exporting and Importing 380
Cash in Advance 380
Letter of Credit 381

Open Account 382
Export-Import Financing 382
Commercial Banks 383
Factoring, Forfaiting, and Confirming 383
Distribution Channel Intermediaries 383
Buyers and Suppliers 383
Intracorporate Financing 383
Government Assistance Programs 384
Multilateral Development Banks (MDBs) 384
Identifying and Working with Foreign Intermediaries 384
Working with Foreign Intermediaries 385
When Intermediary Relations Go Bad 386
Countertrade: A Popular Approach for Emerging Markets and Developing
Economies 387
Magnitude and Drivers of Countertrade 388
Types of Countertrade 388
Risks of Countertrade 389
Why Consider Countertrade? 389
■ Closing Case: Barrett Farm Foods: A Small Firm’s International
Launch 390

■ Chapter Essentials: Key Terms 392 Summary 392 Test Your
Comprehension

393

Apply Your Understanding 394

globalEDGE™ Internet Exercises

395

15 Foreign Direct Investment and Collaborative Ventures

> Deutsche Post DHL’s Rapid International Expansion
International Investment and Collaboration 398
Trends in Foreign Direct Investment and Collaborative
Ventures 399
Motives for FDI and Collaborative Ventures 400
Market-Seeking Motives 400
Resource- or Asset-Seeking Motives 401
Efficiency-Seeking Motives 401
Characteristics of Foreign Direct Investment 402

397

396

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■ Recent Grad in IB: Jennifer Knippen 403
Key Features of Foreign Direct Investment 403
Corporate Social Responsibility and FDI 405
Most Active Firms in FDI 405

Service Firms and FDI 405
Leading Destinations for FDI 407
Factors to Consider in Choosing FDI Locations 407
Types of Foreign Direct Investment 408
Greenfield Investment versus Mergers and Acquisitions
The Nature of Ownership in FDI 409
Vertical versus Horizontal Integration 409

408

■ Global Trend: FDI in the Global Financial Crisis 411
International Collaborative Ventures 411
Equity Joint Ventures 412
Project-Based, Nonequity Ventures 412
Differences between Equity and Project-Based, Nonequity Ventures
Consortium 413
Cross-Licensing Agreements 413
Managing Collaborative Ventures 414
Understand Potential Risks in Collaboration 414
Pursue a Systematic Process for Partnering 414
Ensure Success with Collaborative Ventures 415
The Experience of Retailers in Foreign Markets 416
Challenges of International Retailing 417
International Retailing Success Factors 418

412

■ Closing Case: AUTOLATINA: A Failed International Partnership 419
■ Chapter Essentials: Key Terms 421 Summary 421
Comprehension 423 Apply Your Understanding 424

globalEDGE™ Internet Exercises

Test Your

425

16 Licensing, Franchising, and Other Contractual
Strategies 426

> Harry Potter: The Magic of Licensing 427
Contractual Entry Strategies 428
Unique Aspects of Contractual Relationships 429
Types of Intellectual Property 429
Licensing as an Entry Strategy 430
Trademark and Copyright Licensing 431
Know-How Licensing 432
The World’s Top Licensing Firms 433
Advantages and Disadvantages of Licensing 433
Advantages of Licensing 434
Disadvantages of Licensing 434
Franchising as an Entry Strategy 435
Who Are the Top Global Franchisors? 437
■ Global Trend: Internationalization of Franchising: Emerging Markets 437
Advantages and Disadvantages of Franchising 439

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The Franchisor Perspective 439
The Franchisee Perspective 440
Managerial Guidelines for Licensing and Franchising 440
Other Contractual Entry Strategies 441
Turnkey Contracting 441
Build-Operate-Transfer Arrangements (BOT) 442
Management Contracts 442
Leasing 442
The Special Case of Internationalization by Professional Service Firms
Guidelines for Protecting Intellectual Property 443

443

■ Closing Case: Subway and the Challenges of Franchising in China 446
■ Chapter Essentials: Key Terms 448 Summary 449
Comprehension 450 Apply Your Understanding 450
globalEDGE™ Internet Exercises

Test Your

451

17 Global Sourcing 452

> Global Sourcing of Pharmaceutical Drug Trials

453

454

Outsourcing, Global Sourcing, and Offshoring
Decision 1: Outsource or Not? 455
Decision 2: Where in the World Should Value-Adding Activities Be
Located? 455
Global Sourcing 456
Offshoring 458
Scope of Global Sourcing 459
Diversity of Countries That Initiate and Receive Outsourced Work 459
■ Global Trend: China and India: Chief Rivals in the Global Sourcing
Game 460
Strategic Choices in Global Sourcing 461
Benefits of Global Sourcing 462
Cost Efficiency 462
Ability to Achieve Strategic Goals 462
Risks of Global Sourcing 465
Strategies for Minimizing the Risks of Global Sourcing 466
Implementing Global Sourcing Through Supply-Chain Management 467
Information and Communications Technology 469
Logistics and Transportation 470
Transportation Modes 470
Global Sourcing and Corporate Social Responsibility 471
Potential Harm to Local and National Economy from Global Sourcing 471
Public Policy on Global Sourcing 472
■ Closing Case: Wolverine World Wide 473
■ Chapter Essentials: Key Terms 475 Summary 475
Comprehension 476 Apply Your Understanding 476
globalEDGE™ Internet Exercises

477

Test Your

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Part 5 Functional Area Excellence

478

18 Marketing in the Global Firm 478

> MTV India: Balancing Global and Local Marketing 479
Global Marketing Strategy 480
Targeting Customer Segments and Positioning 481
Standardization and Adaptation of International Marketing 482
Standardization 482
Adaptation 484
■ Recent Grad in IB: John Dykhouse: Trade Development Manager 485
Standardization and Adaptation: A Balancing Act 486
Global Branding and Product Development 487
Global Branding 487
Global Product Development 489
■ Global Trend: Growing Role for Marketing in Developing Economies 490

International Pricing 491
Factors That Affect International Pricing 491
A Framework for Setting International Prices 492
Managing International Price Escalation 494
Managing Pricing under Varying Currency Conditions
Transfer Pricing 495
Gray Market Activity (Parallel Imports) 496
International Marketing Communications 498
International Advertising 498
International Promotional Activities 500
International Distribution 501
Global Account Management 501

494

■ Closing Case: H&M: International Marketing Success Story 502
■ Chapter Essentials: Key Terms 504 Summary 504
Comprehension 505 Apply Your Understanding 505
globalEDGE™ Internet Exercises

Test Your

506

19 Human Resource Management in the Global Firm 508

> Johnson & Johnson: A Leader in International Human Resource
Management 509
The Strategic Role of Human Resources in International Business
Three Employee Categories 510

Differences between Domestic and International HRM 511
Key Tasks in International Human Resource Management 512
International Staffing Policy 513
Recruiting, Selecting, and Developing Talent 514
Cultivating Global Mind-sets 514
Cultural Intelligence 515

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Expatriate Assignment Failure and Culture Shock 516
Preparation and Training of International Employees 516
Preparing Employees for Repatriation 517
Charting Global Careers for Employees 517
International Performance Appraisal 518
Compensation of Employees 518
International Labor Relations 520
Distinctive Features of Labor around the World 521
Cost, Quality, and Productivity of Labor 522
Workforce Reduction 522
Trends in International Labor 523
Firm Strategy in International Labor Relations 524
Diversity in the International Workforce 524

Women in International Business 524
■ Global Trend: Global Corporate Social Responsibility and the Role of
International Human Resource Management 525

Success Strategies for Women Managers in International Business 527
■ Closing Case: Evolving Human Resource Challenges at Sony 528
■ Chapter Essentials: Key Terms 530 Summary 530 Test Your
Comprehension 531 Apply Your Understanding 531
globalEDGE™ Internet Exercises 533

20 Financial Management and Accounting
in the Global Firm 534

> A Small Firm Rides the Waves of Foreign Exchange

535

Key Tasks in International Financial Management 536
Task One: Decide on the Capital Structure 537
Task Two: Raise Funds for the Firm’s International Activities 538
Financial Centers 538
Sources of Funds for International Operations 539
Debt Financing 541
■ Global Trend: Emerging Markets as International Investment
Destinations 541
Intracorporate Financing 543
Task Three: Manage Working Capital and Cash Flow 543
Methods for Transferring Funds within the MNE 543
Multilateral Netting 544
Task Four: Perform Capital Budgeting 545

Net Present Value Analysis of Capital Investment Projects 545
Task Five: Manage Currency Risk 546
Three Types of Currency Exposure 546
■ Recent Grad in IB: Chip Besse 547
Foreign Exchange Trading 548
Types of Currency Traders 549
Exchange Rate Forecasting 550

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Managing Exposure to Currency Risk through Hedging 551
Best Practice in Minimizing Currency Exposure 552
Task Six: Manage the Diversity of International Accounting and Tax
Practices 553
Transparency in Financial Reporting 553
Trends toward Harmonization 554
Consolidating the Financial Statements of Subsidiaries 555
International Taxation 555
■ Closing Case: International Financial Operations at Tektronix 558
■ Chapter Essentials: Key Terms 560 Summary 560 Test Your
Comprehension 561 Apply Your Understanding 562
globalEDGE™ Internet Exercises 563

Glossary 565
Notes 572

Photo Credits 592
Author Index 594
Company Index 599
Subject Index 603

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> Preface

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What’s New in This Edition
The authors have received an overwhelmingly positive response and many comments
regarding the first edition of International Business. Since the last edition, the international business environment has experienced radical change with the impact of the
global financial crisis and the rapidly changing dynamics among firms conducting business in advanced economies, emerging markets, and developing economies. Many business practices have experienced significant change in focus and direction. This new
edition has undergone significant revision to capture these changes and priorities.

Ethics
We have added a new chapter devoted entirely to ethical conduct in international business. This chapter focuses on the most current and relevant topics associated with five
critical topics: (1) ethics, (2) corruption, (3) corporate social responsibility, (4) sustainability, and (5) corporate governance. We have developed an ethical decision-making framework for analyzing questionable occurrences and practices in international business and
created new Apply Your Understanding exercises for each chapter.

Case Studies
The second edition features six new case studies that address contemporary dynamics
and the latest trends in international business. The new cases feature Harley Davidson,
Siemens, Tata, AIG, Wolverine, and H&M. We have also substantially revised existing
cases featuring Hyundai and DHL, FedEx, and UPS. All other existing cases have been
updated as well.

Opening Vignettes

We have developed a number of new opening vignettes that emphasize such themes as
corruption, the EU, the euro, and cultural differences between Western and Japanese
consumers. All remaining opening vignettes have been updated to reflect the current
environment.

Exhibits
The new edition contains more than 150 new and updated exhibits. A major graphical
redesign has been incorporated in a large number of the exhibits in this edition to enhance reading and retention.

Balanced Geographical Coverage
Geographical coverage of companies and issues affecting African and Latin American
countries has been significantly expanded.

Videos
Fifteen new customized videos have been developed to support the specific major
themes of International Business: The New Realities. Topics include: Globalization and
the Growth of International Business, Internationalization of Born Globals and Other
Small and Medium Enterprises, Impact of Culture on International Business, Ethics
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