International business the new realities 2e cavusgil knight 1

International business the new realities 2e cavusgil knight 1 International business the new realities 2e cavusgil knight 1 International business the new realities 2e cavusgil knight 1 International business the new realities 2e cavusgil knight 1 International business the new realities 2e cavusgil knight 1 International business the new realities 2e cavusgil knight 1 International business the new realities 2e cavusgil knight 1

y o c u -tr a c k c d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k 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 c y o c u -tr a c k c Editorial Director: Sally Yagan Editor in Chief: Eric Svendsen Director of Editorial Services: Ashley Santora Director of Development: Steve Deitmer Editorial Project Manager: Meg O’Rourke Editorial Assistant: Carter Anderson Director of Marketing: Patrice Lumumba Jones Marketing Manager: Nikki Ayana Jones Marketing Assistant: Ian Gold Senior Managing Editor: Judy Leale Sr Production Project Manager/Supervisor: Lynn Savino Wendel Senior Operations Supervisor: Arnold Vila Creative Director: Christy Mahon Sr Art Director/Design Supervisor: Janet Slowik Art Director: Steven Frim Interior Designers: Rob Aleman / Steven Frim Cover Designer: Joseph Depinho Cover Illustration/Photo: Tan Wei Ming/Shutterstock; Adrian Lindley/Shutterstock; Stanislav Komogorov/Shutterstock; Andy Heyward/Shutterstock Manager, Rights and Permissions: Hessa Albader Editorial Media Project Manager: Denise Vaughn MyLab Product Manager: Joan Waxman Media Project Manager: Lisa Rinaldi Full-Service Project Management: Christian Holdener, S4Carlisle Publishing Services Composition: S4Carlisle Publishing Services Printer/Binder: Webcrafters, Inc Cover Printer: Lehigh-Phoenix Color/Hagerstown Text Font: 10/12 Palatino Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text (or on page 592) Copyright © 2012, 2008 Pearson Education, Inc., publishing as Prentice Hall, One Lake Street, Upper Saddle River, New Jersey 07458 All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458 Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps 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) International business enterprises—Management I Knight, Gary A II Riesenberger, John R., 1948- III Title HD62.4.C389 2012 658'.049—dc22 2010030667 10 ISBN 10: 0-13-609098-2 ISBN 13: 978-0-13-609098-4 d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k c y o c u -tr a c k c d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k 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 c y o c u -tr a c k c > 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 d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k c F- w y c 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 .d o m v o m w o c u -tr ack C lic k to bu y bu to C lic k About the Authors w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k c y o c u -tr a c k c This page intentionally left blank d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k c y o c u -tr a c k c > Brief Contents d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k Preface xxv Part Foundation Concepts Introduction: What Is International Business? 2 Globalization of Markets and the Internationalization of the Firm 28 Organizational Participants That Make International Business Happen 58 Part The Environment of International Business 86 The Cultural Environment of International Business 86 Ethics and International Business 118 Theories of International Trade and Investment 140 Political and Legal Systems in National Environments 172 Government Intervention in International Business 200 Regional Economic Integration 226 10 Emerging Markets, Developing Economies, and Advanced Economies 252 11 The International Monetary and Financial Environment 282 Part Strategy and Opportunity Assessment 306 12 Strategy and Organization in the International Firm 306 13 Global Market Opportunity Assessment 334 Part 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 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 vii c y o c u -tr a c k c This page intentionally left blank d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k c y o c u -tr a c k c > Contents d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k Preface xxv Part Foundation Concepts Introduction: What Is International Business? > A Typical Day in the Global Economy What Is International Business? What Are the Key Concepts in International Trade and Investment? The Nature of International Trade The Nature of International Investment Services as Well as Products The International Financial Services Sector 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 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 ix c F- w y c u -tr 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 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 d o m w c o ack C lic k Contents o m to bu y bu to k lic C x w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k c F- w y c u -tr Muzaffer Bodur, Bogazici University Jacobus Boers, Georgia State University Nakiye Boyacigiller, Sabanci University John Brawley, The Upjohn Company David Bruce, Georgia State University Pedro Carrillo, Georgia State University Erin Cavusgil, University of Michigan-Flint Brian Chabowski, University of Tulsa Emin Civi, University of New Brunswick, St John, Canada Tevfik Dalgic, University of Texas at Dallas Guillermo D’Andrea, Universidad AustralArgentina Angela da Rocha, Universidad Federal Rio de Janeiro, Brazil Fernando Doria, Georgia State University Rick Della Guardia, The Upjohn Company Deniz Erden, Bogazici University Felicitas Evangelista, University of Western Sydney, Australia Cuneyt Evirgen, Sabanci University Carol Finnegan, University of Colorado at Colorado Springs Harold Fishkin, The Upjohn Company Michael Fishkin, Stony Brook University Richard Fletcher, University of Western Sydney, Australia Esra Gencturk, Ozyegin University Pervez Ghauri, Kings College London Tracy Gonzalez-Padron, University of Colorado at Colorado Springs Bill Hahn, Science Branding Communications Tomas Hult, Michigan State University Destan Kandemir, Bilkent University George Kaufman, The Upjohn Company Ihsen Ketata, Georgia State University Irem Kiyak, Michigan State University Tunga Kiyak, Michigan State University Yener Kndogan, University of Michigan-Flint Phillip Kotler, Northwestern University Tiger Li, Florida International University Karen Loch, Georgia State University Mushtaq Luqmani, Western Michigan University Robert McCarthy, The Upjohn Company Myron Miller, Michigan State University (ret.) Vincent Mongello, The Upjohn Company Robert T Moran, Thunderbird G M Naidu, University of WisconsinWhitewater John R Nevin, University of Wisconsin Gregory Osland, Butler University Aysegul Ozsomer, Koc University Ed Perper, Science Branding Communications Morys Perry, University of Michigan-Flint Alex Rialp, Universidad Autonoma de Barcelona, Spain Tony Roath, University of Oklahoma Carol Sanchez, Grand Valley State University Michael Savitt, The Upjohn Company Peter Seaver, The Upjohn Company Linda Hui Shi, University of Victoria Rudolf R Sinkovics, The University of Manchester Carl Arthur Solberg, Norwegian School of Management, Norway Elif Sonmez-Persinger, Eastern Michigan University Douglas Squires, The Upjohn Company of Canada Barbara Stoettinger, Wirtschaftuniversitaet Wein, Austria Detmar Straub, Georgia State University Berk Talay, University of New Hampshire Cherian Thachenkary, Georgia State University David Tse, University of Hong Kong Mithat Uner, Gazi University Nukhet Vardar, Yeditepe University Marta Szabo White, Georgia State University Fang Wu, University of Texas-Dallas Shichun (Alex) Xu, University of Tennessee Goksel Yalcinkaya, University of New Hampshire Attila Yaprak, Wayne State University Ugur Yavas, East Tennessee State University Sengun Yeniyurt, Rutgers University Poh-Lin Yeoh, Bentley College Eden Yin, University of Cambridge Chun Zhang, University of Vermont Shaoming Zou, University of Missouri Our Prentice Hall Team This book would not have been possible without the tireless efforts of many dedicated professionals at our publisher, Prentice Hall We are especially grateful to Eric Svendsen, Editor-in-Chief; Meg O’Rourke, Editorial Project Manager; Carter Anderson, Editorial Assistant; Nikki Jones, Marketing Manager; Ian Gold, Marketing Assistant; and Lynn Savino Wendel, Production Project Manager Kathleen McLellan helped organize numerous focus groups with insightful educators and assisted with marketing efforts Our appreciation goes to many other individuals at Prentice Hall, including: Linda Albelli, Steve Deitmer, Jerome Grant, Patrice Jones, Brian Kibby, Judy Leale, Patrick Leow, Ben Paris, and Ashley Santora .d o m w c o ack C lic k Acknowledgments o m to bu y bu to k lic C xxxvi w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k c y c d o m w o o c u -tr a c k w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k International Business c O W N y bu to k LEARNING OBJECTIVES In this chapter, you will learn about: What is international business? Who participates in international What are the key concepts in business? Why firms internationalize? Why study international business? d o m w CHAPTER international trade and investment? How does international business differ from domestic business? ! PD w o m o PART h a n g e Vi e lic O W N y bu to k C lic c XC er c u -tr a c k w w d o w w w F- w C h a n g e Vi e ! XC er PD F- c u -tr a c k c y o c u -tr a c k c d o m o w w w d o C lic k to bu y bu to k lic C w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k Introduction: What Is International Business? A Typical Day in the Global Economy Julie Valentine is a college junior majoring in business On a recent Saturday, she went shopping at a local mall First, she ordered a big breakfast, unaware that most of her meal was imported from abroad: bacon from Spain, juice from Brazil, and French-branded yogurt Julie then headed to the department store to buy a gift for her father She perused neckties with Italian and French brand names, and others made in China and Romania She also considered electric shavers made by Braun (a German brand) and Philips (a Dutch brand) She eventually bought a Panasonic (a Japanese brand) Next, she headed to the perfume counter, where she tried various brands, including Chanel (France), French Connection (United Kingdom), and Shiseido (Japan) Julie was dreaming of buying a laptop computer At the electronics store, she explored several models made in China, Ireland, and Malaysia As she passed a travel agency, she remembered her spring vacation was just around the corner and decided to consult her best friend, Melissa Whipping out her Nokia cell phone (a Finnish brand, but made in Hungary and South Korea), Julie reached Melissa, who answered on her Motorola phone (from a U.S firm, but made in Malaysia) The two chatted about their dream trip to the beaches of southern Spain, considered Mexico, but decided they will probably end up in Florida Julie looked at a blouse made in Vietnam, but hesitated to buy it because she had read that some products from Southeast Asia are made with child labor Julie left the mall and drove away in her Hyundai (a Korean brand, made from Chinese, Korean, and U.S parts) She liked Melissa’s car, a BMW (German, but made in the United States from Asian and European components) Over the following weeks, Julie and her exchange-student friend, Anders (her favorite Norwegian import), met several times at restaurants featuring food from various countries, including France, India, and Lebanon On Friday night, they watched The Dark Knight (made in Britain, Hong Kong, and the United States, and featuring Australian and British actors) on a friend’s big-screen TV (a Dutch brand, but made in Indonesia) Over dinner, Julie and Anders enjoyed pasta from Italy and shrimp from El Salvador and chatted about their future Julie was dreaming of an international career c F- w y k lic What Is International Business? International business Performance of trade and investment activities by firms across national borders Globalization of markets Ongoing economic integration and growing interdependency of countries worldwide As you can see from the opening vignette, international business touches our daily experiences International business refers to the performance of trade and investment activities by firms across national borders Because it emphasizes crossing national boundaries, we also refer to international business as cross-border business Firms organize, source, manufacture, market, and conduct other value-adding activities on an international scale They seek foreign customers and engage in collaborative relationships with foreign business partners While international business is performed mainly by individual firms, governments and international agencies also undertake international business activities.1 Firms and nations exchange many physical and intellectual assets, including products, services, capital, technology, know-how, and labor In this book, we are mainly concerned with the international business activities of the individual firm While international business has been around for centuries, it has gained much momentum and complexity over the past three decades Firms seek international market opportunities more today than ever before, touching the lives of billions of people worldwide Daily chores such as shopping and leisure activities such as listening to music, watching a movie, or surfing the Internet involve transactions that connect you to the global economy International business gives you access to products and services from around the world and profoundly affects your quality of life and economic well-being The growth of international business activity coincides with the broader phenomenon of globalization of markets The globalization of markets refers to the ongoing economic integration and growing interdependency of countries worldwide While internationalization of the firm refers to the tendency of companies to systematically increase the international dimension of their business activities, globalization refers to a macro trend of intense economic interconnectedness between countries Globalization is associated with the internationalization of countless firms and dramatic growth in the volume and variety of cross-border transactions in goods, services, and capital flows It has led to widespread diffusion of products, technology, and knowledge worldwide The globalization of markets is evident in several related trends First is the unprecedented growth of international trade In 1960, cross-border trade was modest—about $100 billion per year Today, it accounts for a substantial proportion of the world economy, amounting to some $13 trillion annually—that is, $13,000,000,000,000! Second, trade between nations is accompanied by substantial flows of capital, technology, and knowledge Third is the development of highly sophisticated global financial systems and mechanisms that facilitate the cross-border flow of products, money, technology, and knowledge Fourth, globalization has brought about a greater degree of collaboration among nations through multilateral regulatory agencies such as the World Trade Organization (WTO; www.wto.org) and the International Monetary Fund (IMF; www.imf.org) Globalization both compels and facilitates companies to expand abroad Simultaneously, company internationalization has become easier than ever before A few decades ago, international business was largely the domain of large, multinational companies Recent developments have created a more level playing field that allows all types of firms to benefit from active participation in international business In this book, you will read about the international activities of smaller firms, along with those of large, multinational enterprises While international business once was conducted mainly by firms that manufacture products, this is no longer the case Companies in the services sector are also internationalizing, in such industries as banking, engineering, insurance, and retailing A recent manifestation of globalization is the global financial crisis, which began in 2008 The global economy is more integrated than ever, and, like a virus, economic problems spread quickly across porous national borders The crisis began in the United d o o w c m C m Chapter Introduction: What Is International Business? o c u -tr ack to bu y bu to k lic C w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k c F- w y c d o c u -tr a c k States and moved to other countries, triggering a severe global recession, a condition in which national economies undergo a sustained period of negative growth.2 Canada’s recession resulted largely from its intense trading relationship with the United States Mexico’s exports to the United States declined substantially, worsening Mexico’s already high unemployment rate Job losses also ensued in Japan and other Asian countries as exports to the United States fell sharply The economies of both China and India, the world’s most populous countries, slowed significantly due to the crisis In short, integration and interdependency of national economies quickly spread the crisis throughout the world It has affected most firms and individuals in an increasingly interconnected world We address globalization and the global financial crisis in more detail in Chapter What Are the Key Concepts in International Trade and Investment? The most conventional international business transactions are international trade and investment International trade refers to an exchange of products and services across national borders Trade involves both products (merchandise) and services (intangibles) Exchange can be through exporting, an entry strategy involving the sale of products or services to customers located abroad, from a base in the home country or a third country Exchange can also take the form of importing or global sourcing—the procurement of products or services from suppliers located abroad for consumption in the home country or a third country While exporting represents the outbound flow of products and services, importing is an inbound activity Both finished products and intermediate goods, such as raw materials and components, are subject to importing and exporting International investment refers to the transfer of assets to another country or the acquisition of assets in that country These assets include capital, technology, managerial talent, and manufacturing infrastructure Economists refer to such assets as factors of production Trade implies that products and services cross national borders By contrast, investment implies the firm itself crosses borders to secure ownership of assets located abroad The two essential types of cross-border investment are international portfolio investment and foreign direct investment International portfolio investment refers to the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns It does not entail active management or control over these assets The foreign investor has a relatively short-term interest in the ownership of these assets Foreign direct investment (FDI) is an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment It is a foreignmarket entry strategy that gives investors partial or full ownership of a productive enterprise typically dedicated to manufacturing, marketing, or management activities Investing such resources abroad is generally for the long term and involves extensive planning The Nature of International Trade Exhibit 1.1 contrasts the growth of total world exports to the growth of total world gross domestic product (GDP) since 1970 GDP is the total value of products and services produced in a country over the course of a year Following a 27-year boom, world trade declined in 2009 due to the global recession The hardest hit imports were consumer goods, cars, and car parts.3 Overall, however, export growth has outpaced the growth of domestic production during the last few decades, illustrating the fast pace of globalization In m o m w o c u -tr ack C lic k to bu y bu to C lic k What Are the Key Concepts in International Trade and Investment? w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- International trade Exchange of products and services across national borders, typically through exporting and importing Exporting The strategy of producing products or services in one country (often the producer’s home country), and selling and distributing them to customers located in other countries Importing or global sourcing Procurement of products or services from suppliers located abroad for consumption in the home country or a third country International investment The transfer of assets to another country or the acquisition of assets in that country International portfolio investment Passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns Foreign direct investment (FDI) An internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labor, land, plant, and equipment .c F- w y c u -tr Exhibit 1.1 Comparing the Growth Rates of World GDP and World Exports World Exports 5000 World GDP 4000 Index: 1970 = 100 SOURCE: World Investment Report 2009 (New York: United Nations, 2008), retrieved from http://www.unctad.org, June 4, 2010; World Trade Organization, World Trade Report 2009 (Geneva, Switzerland: WTO Publications, 2009), retrieved from http://www.wto.org, June 4, 2010; and International Monetary Fund, World Economic Outloo, (Washington, DC: IMF database 2010), retrieved from http://www.imf.org, June 4, 2010 6000 3000 2000 1000 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 fact, during this period, world exports grew more than thirty-fold, while world GDP grew only tenfold To illustrate this point, consider the journey of a shirt sold in France Initially, the cotton to produce the shirt is exported from the United States to China After the shirt is manufactured in China, it is exported to France Eventually, after the French owner discards her used shirt, it is exported once again and sold on the used clothing market in Africa In total, the value generated in exporting the shirt greatly exceeds the cost to produce it Much of the difference in the growth of exports versus GDP is due to advanced (or developed) economies such as Britain and the United States now sourcing many of the products they consume from low-cost manufacturing locations such as China and Mexico For example, although the United States once produced most of the products it consumed, today it depends much more on imports Rapid integration of world economies is fueled by such factors as advances in information and transportation technologies, decline of trade barriers, liberalization of markets, and the remarkable growth of emerging market economies Exhibit 1.2 identifies the nations that lead in the exporting and importing of products (but not services)—that is, international merchandise trade Panel (a) shows the total value of products traded in billions of U.S dollars Panel (b) shows the annual value of products traded as a percentage of each nation’s GDP While the United States is the leading country in terms of the absolute value of total merchandise trade, trade accounts for only 23 percent of its GDP In contrast, merchandise trade is a much larger component of economic activity in countries such as Belgium (171 percent), the Netherlands (138 percent), and Germany (72 percent) These percentages show that some economies are very dependent on international trade relative to the value of all goods and services they produce domestically Indeed, in Singapore, Hong Kong, South Korea, and Malaysia, trade accounts for more than 100 percent of GDP These countries are known as entrepôt economies Entrepôt is from the French for ‘intermediate depot’ Such countries import a large volume of products, some of which they process into higher valueadded products and some they simply re-export to other destinations For example, Singapore is a major entrepôt for petroleum products received from the Middle East, which it then exports to China and other destinations in Asia .d o m w c o ack C lic k Chapter Introduction: What Is International Business? o m to bu y bu to k lic C w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k c F- w y c United States Belgium Germany Netherlands China Germany Japan Canada France China United Kingdom France Italy United Kingdom Netherlands Italy Belgium Japan Canada United States 500 1000 1500 2000 2500 3000 3500 4000 (a) Total annual value of products trade (exports + imports) in billions of U.S dollars 50 100 d o 150 c u -tr a c k 200 (b) Total annual value of products trade (exports + imports) as a percentage of nation’s GDP Exhibit 1.2 Leading The Nature of International Investment Of the two types of investment flows between nations—portfolio investment and foreign direct investment—we are concerned primarily with FDI, because it is the ultimate stage of internationalization and encompasses the widest range of international business involvement FDI is the foreign entry strategy practiced by the most internationally active firms Companies usually engage in FDI for the long term and retain partial or complete ownership of the assets they acquire Firms undertake FDI for a variety of strategic reasons, including to (1) set up manufacturing or assembly operations or other physical facilities, (2) open a sales or representative office or other facility to conduct marketing or distribution activities, or (3) establish a regional headquarters all in foreign countries In the process, the firm establishes a new legal business entity, subject to the regulations of the host government in the country where the entity is established FDI is especially common among large, resourceful companies with substantial international operations For example, many European and U.S firms have invested in China, India, and Russia to establish plants to manufacture or assemble products, taking advantage of low-cost labor and other resources in these countries At the same time, companies from these rapidly developing economies have begun to invest in Western markets For example, in 2008, the Turkish company Yildiz acquired the premium chocolate maker Godiva from U.S.-based Campbell Soup Company in a deal valued at $850 million More recently, Ford invested some $3 billion to build a new car factory in Mexico to manufacture Fiesta automobiles Exhibit 1.3 illustrates the dramatic growth of FDI into various world regions since the 1980s The exhibit reveals that the dollar volume of FDI has grown immensely since the 1980s, especially in advanced economies such as Japan, Europe, and North America FDI inflows were interrupted in 2001 as investors panicked following the September 11 terrorist attacks in the United States, but the trend has remained strong and growing over time Particularly significant is the growth of FDI into developing economies, which are nations with lower incomes, less-developed industrial bases, and less investment capital than the advanced economies Most of the developing economies are located in parts of Africa, Asia, and Latin America Despite lower income levels, developing m o m w o c u -tr ack C lic k to bu y bu to C lic k What Are the Key Concepts in International Trade and Investment? w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- Countries in International Merchandise Trade SOURCE: World Trade Organization http://(www.wto.org); data for 2007 © 2009 World Trade Organization Reprinted with permission .c F- w y c u -tr Exhibit 1.3 Foreign Direct Investment (FDI) Inflows into World Regions (in Billions of U.S Dollars per Year) SOURCE: UNCTAD, World Investment Report 2008, © United Nations The United Nations is the author of the original material Reproduced with permission 2000 World total 1800 1600 Developing economies 1400 1200 Developed economies 1000 800 Former Soviet Union and South-East Europe 600 400 200 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 economies collectively comprise a substantial and growing proportion of international trade and investment Services as Well as Products Historically, international trade and investment were mainly the domain of companies that make and sell products—tangible merchandise such as clothing, computers, and cars Today, firms that produce services (intangibles) are key international business players as well Services are deeds, performances, or efforts performed directly by people working in banks, consulting firms, hotels, construction companies, retailers, and countless other firms in the services sector For example, if you own a house, your mortgage may be underwritten by the Dutch bank ABN Amro Perhaps you eat lunch in a cafeteria owned by the French firm Sodexho, which manages the food and beverage operations on numerous university campuses In the United States and several European countries, travel and tourism are now the number-one source of revenue from foreigners International trade in services accounts for about one-quarter of all international trade and is growing rapidly In recent years, services trade has been growing faster than products trade Exhibit 1.4 identifies the leading countries in total international services trade, including both exports and imports Panel (a) shows the total annual value of services trade in billions of U.S dollars Panel (b) shows the total annual value of services trade as a percentage of each nation’s GDP As with products, larger advanced economies account for the greatest proportion of world services trade This is expected, because services typically comprise more than two-thirds of the GDPs of these countries Compare the value of merchandise trade in Exhibit 1.2 with the value of services trade in Exhibit 1.4 for each country Although services trade is growing rapidly, the value of merchandise trade is still much larger One reason is that services face greater challenges and barriers in cross-border trade than merchandise goods Not all services can be exported For example, you cannot export the construction work to build a house, repair work done on your car, or the experience of eating a meal in a restaurant Although some services can be digitized and moved across borders, most service providers can operate internationally only by establishing a physical presence d o m w c o ack C lic k Chapter Introduction: What Is International Business? o m to bu y bu to k lic C w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k c F- w y c d o c u -tr a c k Exhibit 1.4 Leading United States Netherlands Germany United Kingdom United Kingdom Spain Japan Germany France Italy China France Italy Canada Spain China Netherlands Japan Canada United States 500 1000 (a) Total annual value of services trade (exports + imports) in billions of U.S dollars Countries in International Services Trade SOURCE: Copyright © 2008 World Trade Organization Reprinted with permission 10 20 30 (b) Total annual value of services trade (exports + imports) as a percentage of nation’s GDP abroad through direct investment Firms employ FDI to set up restaurants, retail stores, and other physical facilities through which they sell trillions of dollars worth of services abroad every year There are numerous industries in the services sector with strong potential for internationalization The giant Internet retailer eBay earned nearly $9 billion in 2009, of which more than 50 percent came from international sales The company expects most future revenue growth will come from abroad When developing its business in India, eBay acquired the Mumbai-based e-retailer Baazee This acquisition followed eBay’s expansion into China, Korea, and Europe.4 Exhibit 1.5 illustrates the diversity of service sectors that are internationalizing, extending their reach beyond the countries where they are based If you are considering a career in international business, keep these industries in mind The International Financial Services Sector International banking and financial services are among the most internationally active service industries Explosive growth of investment and financial flows has led to the emergence of capital markets worldwide It resulted from two main factors: the internationalization of banks and the massive flow of money across national borders into pension funds and portfolio investments In the developing economies, banks and other financial institutions have been fostering economic activity by increasing the availability of local investment capital, which stimulates the development of financial markets and encourages locals to save money International banking is flourishing in such regions as the Middle East, where the return on equity in Saudi Arabia, for instance, often exceeds 20 percent (compared to 15 percent in the United States and much less in France and Germany) Citibank, Deutsche Bank, BNP Paribas, and other international banks are thriving because of higher oil prices, a boom in consumer banking, and low taxes National Commercial Bank, the biggest bank in the region, calculates that non-interest-bearing deposits comprise nearly 50 percent of total deposits in Saudi Arabia Banks lend this free money to companies and consumers at high margins By structuring loans as partnerships, they comply with Islamic rules that forbid banks to pay interest.5 m o m w o c u -tr ack C lic k to bu y bu to C lic k What Are the Key Concepts in International Trade and Investment? w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c F- w y Exhibit 1.5 Service Industry Sectors that Are Rapidly Internationalizing SOURCE: International Trade Administration, Washington, DC: U.S Department of Commerce Industry Representative Activities Representative Companies Architectural, construction, and engineering Construction, power utilities, design, engineering services, for airports, hospitals, dams ABB, Bechtel Group, Halliburton, Kajima, Philip Holzman, Skanska AB Banking, finance, and insurance Banks, insurance, risk evaluation, management Bank of America, CIGNA, Barclays, HSBC, Ernst & Young Education, training, and publishing Management training, technical training, language training Berlitz, Kumon Math & Reading Centers, NOVA, Pearson, Elsevier Entertainment Movies, recorded music, Internet-based entertainment Time Warner, Sony, Virgin, MGM Information services E-commerce, e-mail, funds transfer, data interchange, data processing, computer services Infosys, EDI, Hitachi, Qualcomm, Cisco Professional business services Accounting, advertising, legal, management consulting Leo Burnett, EYLaw, McKinsey, A.T Kearney, Booz Allen Hamilton Transportation Aviation, ocean shipping, railroads, trucking, airports Maersk, Santa Fe, Port Authority of New Jersey, SNCF (French railroads) Travel and tourism Transportation, lodging, food and beverage, aircraft travel, ocean carriers, railways Carlson Wagonlit, Marriott, British Airways How Does International Business Differ from Domestic Business? Firms that engage in international business operate in environments characterized by unique economic conditions, national culture, and legal and political systems For example, the economic environment of Colombia differs sharply from that of Germany The legal environment of Saudi Arabia does not resemble that of Japan The cultural environment of China is very distinct from that of Kenya Not only does the firm find itself in unfamiliar surroundings, it encounters many uncontrollable variables—factors over which management has little control These factors introduce new or elevated business risks The Four Risks in Internationalization Cross-cultural risk A situation or event where a cultural misunderstanding puts some human value at stake Internationalizing firms are routinely exposed to four major types of risk, as illustrated in Exhibit 1.6: cross-cultural risk, country risk, currency risk, and commercial risk The firm must manage these risks to avoid financial loss or product failures Cross-cultural risk occurs when a cultural misunderstanding puts some human value at stake Cross-cultural risk arises from differences in language, lifestyles, mindsets, customs, and religion Values unique to a culture tend to be long-lasting and transmitted from one generation to the next These values influence the mind-set and work style of employees and the shopping patterns of buyers Foreign customer characteristics differ significantly from those of buyers in the home market Language is a critical d o m w c o w c u -tr C lic k Chapter Introduction: What Is International Business? o m to bu y bu to k C lic ack w 10 d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k c F- w y c u -tr a c k Exhibit 1.6 The Four • Cultural differences • Negotiation patterns • Decision-making styles • Ethical practices Commercial Risk Cross-Cultural Risk Risks in International Business Risks of International Business • Harmful or unstable political system • Laws and regulations unfavorable to foreign firms • Inadequate or underdeveloped legal system • Bureaucracy and red tape • Corruption and other ethical blunders • Government intervention, protectionism, and barriers to trade and investment • Mismanagement or failure of the national economy Country Risk • Weak partner • Operational problems • Timing of entry • Competitive intensity • Poor execution of strategy Currency (Financial) Risk • Currency exposure • Asset valuation • Foreign taxation • Inflationary and transfer pricing dimension of culture In addition to facilitating communication, language is a window on people’s value systems and living conditions For example, Inuit (Eskimo) languages have various words for snow, while the South American Aztecs used the same basic word stem for snow, ice, and cold When translating from one language to another, it is often difficult to find words that convey the same meanings For example, a one-word equivalent to aftertaste does not exist in many languages Such challenges impede effective communication and cause misunderstandings Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers Cross-cultural risk most often occurs in encounters in foreign countries However, the risk also can occur domestically, as when management meets with customers or business associates who visit company headquarters from abroad Country risk (also known as political risk) refers to the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country Country risk includes the possibility of foreign government intervention in firms’ business activities For example, governments may restrict access to markets, impose bureaucratic procedures on business transactions, and limit the amount of income that firms can bring home from foreign operations The degree of government intervention in commercial activities varies from country to country For example, Singapore and Ireland are characterized by substantial economic freedom—that is, a fairly liberal economic environment By contrast, the Chinese and Russian governments regularly intervene in business affairs.6 Country risk also includes laws and regulations that potentially hinder company operations and performance Critical legal dimensions include property rights, intellectual property protection, product liability, and taxation policies Nations also experience potentially harmful economic conditions, often due to high inflation, national debt, and unbalanced international trade Indeed, the global financial crisis plunged many nations into a deep recession in 2009 Currency risk (also known as financial risk) refers to the risk of adverse fluctuations in exchange rates Fluctuation is common for exchange rates—the value of one currency m k lic d o o c 11 C m w o c u -tr ack to bu y bu to C lic k How Does International Business Differ from Domestic Business? w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- Country risk Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments Currency risk Potential harm that arises from changes in the price of one currency relative to another .c F- w y c u -tr c Commercial risk Firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures k lic Who Participates in International Business? What types of organizations are active in international business? Among the most important are focal firms, the companies that directly initiate and implement international business activity Two critical focal firms in international business are the multinational enterprise and the small and medium-sized enterprise Multinational Enterprise (MNE) Multinational enterprise (MNE) A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries Multinational enterprises (also known as multinational corporations) historically have been the most important type of focal firm A multinational enterprise (MNE) is a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries MNEs carry out research and development (R&D), procurement, manufacturing, and marketing activities wherever in the world the firm can reap the most advantages For example, Alcon is a Swiss pharmaceutical firm that established major R&D facilities in the United States to take advantage of the country’s superior know-how in the chemicals sector Verizon Wireless has located much of its technical support operations in India, to take advantage of high-quality, low-cost customer support personnel located there Royal Dutch Shell m C in terms of another Currency risk arises because international transactions are often conducted in more than one national currency For example, when U.S fruit processor Graceland Fruit Inc exports dried cherries to Japan, it is normally paid in Japanese yen When currencies fluctuate significantly, the value of the firm’s earnings can be reduced The cost of importing parts or components used in manufacturing finished products can increase dramatically if the value of the currency in which the imports are denominated rises sharply Inflation and other harmful economic conditions experienced in one country may have immediate consequences for exchange rates due to the interconnectedness of national economies Commercial risk refers to the firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures Managers may make poor choices in such areas as the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes While such failures also exist in domestic business, the consequences are usually more costly when committed abroad For example, in domestic business a company may terminate a poorly performing distributor simply with advance notice In foreign markets, however, terminating business partners can be costly due to regulations that protect local firms Marketing inferior or harmful products, falling short of customer expectations, or failing to provide adequate customer service may damage the firm’s reputation and profitability Commercial risk is also often affected by currency risk, because fluctuating exchange rates can affect various types of business deals The four types of international business risks are omnipresent; the firm may encounter them around every corner Some international risks are extremely challenging A recent example is the global financial crisis that emerged in the fall of 2008 The crisis spread to banks and insurance firms in Asia, Europe, and elsewhere Many countries experienced deflation and severe declines in consumer confidence and spending power The year 2009 saw sharp reductions in international commerce and shipping Central banks worldwide sought to rally national economies by injecting billions of dollars into their financial systems.7 Although risk cannot be avoided, it can be anticipated and managed Experienced international firms constantly assess their environments and conduct research to anticipate potential risks, understand their implications, and take proactive action to reduce their effects This book is dedicated to providing you, the future manager, with a solid understanding of these risks as well as managerial skills and strategies to effectively counter them .d o o w w o m Chapter Introduction: What Is International Business? to bu y bu to k C lic ack w 12 d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k c F- w y owns several oil refineries and nearly 2,000 gasoline stations in Canada In addition to a home office or headquarters, the typical MNE owns a worldwide network of subsidiaries It collaborates with numerous suppliers and independent business partners abroad (sometimes termed affiliates) Typical MNEs include Barclays, Caterpillar, Disney, DHL, Four Seasons Hotels, Samsung, Unilever, Vodafone, and Nippon Life Insurance In recent years, the largest MNEs have been firms in the oil industry (such as Exxon-Mobil and Royal Dutch Shell) and the automotive industry (General Motors and Honda), as well as retailing (Walmart) Exhibit 1.7 shows the geographic distribution of the world’s largest MNEs, drawn from Fortune’s Global 500 list As shown, these firms are concentrated in the advanced economies The United States is home to 140 of the top 500 MNEs, a number that has declined over time as other countries’ firms increase in size Japan has the second-most MNEs (68 firms), followed by France (40 firms), Germany (39 firms), and Britain (26 firms) Collectively, the European Union countries have more top 500 firms than the United States In recent years, large MNEs have begun to appear in emerging market countries, such as China, Mexico, and Russia China currently hosts 37 of the top 500 MNEs, a fairly recent development The “new global challenger” firms from emerging markets are fast becoming key contenders in world markets For example, the Mexican firm Cemex is one of the world’s largest cement producers In Russia, Lukoil has big ambitions in the global energy sector China Mobile dominates the cell phone industry in Asia The new global challengers make best use of home-country natural resources and low-cost labor to succeed in world markets Thousands of firms from emerging markets have big global dreams and pose competitive challenges to companies from the advanced economies Although MNEs are among its leading participants, international business is not the domain of large, resourceful firms alone Many small and medium-sized enterprises (SMEs) participate as well An SME is a company with less than 500 employees, as defined in Canada and the United States In the European Union, SMEs are defined as firms with less than 250 employees In addition to accounting for smaller market shares of their respective industries, SMEs tend to have limited managerial and other resources and primarily use exporting to expand internationally However, in most nations, SMEs constitute the great majority of all firms With the globalization of markets, advances in various technologies, and other facilitating factors, many more SMEs are pursuing international opportunities SMEs account for about one-third of exports from Asia and about a quarter of exports from the affluent countries in Europe and North America In some countries—for example, Italy, South Korea, and China—SMEs contribute roughly 50 percent of total national exports.8 One type of contemporary international SME is the born global firm, a young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets Born globals are found in advanced economies, such as Australia and Japan, and in emerging markets, such as China and India International business requires specialized knowledge, commitment of resources, and considerable time to develop foreign business partnerships How SMEs succeed in international business despite resource limitations? First, compared to large MNEs, smaller firms are often more innovative and adaptable and have quicker response times when it comes to implementing new ideas and technologies and meeting customer needs Second, SMEs are better able to serve niche markets around the world that hold little interest for MNEs Third, smaller firms are usually avid users of information and communication technologies, including the Internet Fourth, as they usually lack substantial resources, smaller firms minimize overhead or fixed investments They rely on external facilitators such as FedEx and DHL, as well as independent distributors in foreign markets Fifth, smaller firms tend to thrive on private knowledge that they possess 13 m k d o o c lic C m w o c u -tr ack to bu y bu to k lic C Who Participates in International Business? w w d o w w w w N O W ! h a n g e Vi e N O W XC er PD h a n g e Vi e ! XC er PD F- c u -tr a c k Small and mediumsized enterprise (SME) A company with 500 or fewer employees (as defined in Canada and the United States) Born global firm A young entrepreneurial company that initiates international business activity very early in its evolution, moving rapidly into foreign markets .c y c Russia 14 2 26 39 40 15 Canada Europe 140 12 United States 1 10 14 37 China Mexico India 68 South Japan Korea Taiwan 1 Indonesia Brazil Australia Exhibit 1.7 Geographic Distribution of the Headquarters of the World's 500 Largest MNEs SOURCE: From Fortune, © 2008 Time Inc All rights reserved Used by permission and protected by the Copyright Laws of the United States The printing, copying, redistribution, or retransmission of the Material without express written permission is prohibited .d o m o o c u -tr a c k C w w w d o lic k to bu y bu to C lic k 14 w w w N O W ! h a n g e Vi e N PD ! XC er O W F- w m h a n g e Vi e w PD XC er F- c u -tr a c k c ... Culture 11 2 ■ Chapter Essentials: Key Terms 11 4 Summary 11 4 Comprehension 11 5 Apply Your Understanding 11 6 globalEDGE™ Internet Exercises 11 7 Ethics and International Business 11 8 > The Challenge... International Trade and Investment 14 2 Why Do Nations Trade? 14 4 Classical Theories 14 4 How Can Nations Enhance Their Competitive Advantage? Contemporary Theories 15 1 14 1 15 1 ■ Global Trend: Moving from... Environment of International Business 86 The Cultural Environment of International Business 86 Ethics and International Business 11 8 Theories of International Trade and Investment 14 0 Political and Legal