Pros & Cons of Globalization Debate the pros and

Page iInternational Business Competing in the Global Marketplace

13e

C h a r l e s W . L . H i l l U N I V E R S I T Y O F W A S H I N G T O N

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INTERNATIONAL BUSINESS Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2021 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 21 20 ISBN 978-1-260-57586-6 MHID 1-260-57586-1 Cover Image: Buslik/Shutterstock All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered

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F o r m y c h i l d r e n , E l i z a b e t h , C h a r l o t t e , a n d M i c h e l l e

— C h a r l e s W . L . H i l l

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about the AUTHOR Charles W. L. Hill University of Washington Charles W. L. Hill is the Hughes M. and Katherine Blake Professor of Strategy and International Business in the Foster School of Business at the University of Washington. Professor Hill has taught in the Management, MBA, Executive MBA, Technology Management MBA, and PhD programs at the University of Washington. During his time at the University of Washington, he has received over 25 awards for teaching excellence, including the Charles E. Summer Outstanding Teaching Award.

A native of the United Kingdom, Professor Hill received his PhD from the University of Manchester, UK. In addition to the University of Washington, he has served on the faculties of the University of Manchester, Texas A&M University, and Michigan State University.

Professor Hill has published over 50 articles in top academic journals, including the Academy of Management Journal, Academy of Management Review, Strategic Management Journal, and Organization Science. Professor Hill has also published several textbooks, including International Business (McGraw-Hill) and Global Business Today (McGraw- Hill). His work is among the most widely cited in international business and strategic management.

Professor Hill works on a private basis with a number of organizations. His clients have included Microsoft, where he taught in-house executive education courses for two decades. He has also consulted for a variety of other large companies (e.g., AT&T Wireless, Boeing, BF Goodrich, Group Health, Hexcel, Philips Healthcare, Philips Medical Systems, Seattle City Light, Swedish Health Services, Tacoma City Light, Thompson Financial Services, WRQ, and Wizards of the Coast). Additionally, Dr. Hill has served on the advisory board of several start-up companies.

For recreation, Professor Hill enjoys skiing and competitive sailing!

part one

Chapter 1

part two

Chapter 2 Chapter 3 Chapter 4 Chapter 5

part three

Chapter 6 Chapter 7 Chapter 8 Chapter 9

part four

Chapter 10 Chapter 11 Chapter 12

part five

Chapter 13 Chapter 14 Chapter 15

part six

Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20

part seven

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brief CONTENTS Introduction and Overview

Globalization 2

National Differences National Differences in Political, Economic, and Legal Systems 38 National Differences in Economic Development 62 Differences in Culture 92 Ethics, Corporate Social Responsibility, and Sustainability 132

The Global Trade and Investment Environment International Trade Theory 164 Government Policy and International Trade 200 Foreign Direct Investment 230 Regional Economic Integration 260

The Global Monetary System The Foreign Exchange Market 294 The International Monetary System 320 The Global Capital Market 348

The Strategy and Structure of International Business The Strategy of International Business 370 The Organization of International Business 402 Entering Developed and Emerging Markets 440

International Business Functions Exporting, Importing, and Countertrade 470 Global Production and Supply Chain Management 498 Global Marketing and Business Analytics 528 Global Human Resource Management 566 Accounting and Finance in International Business 596

Integrative Cases Globalization of BMW, Rolls-Royce, and the MINI 625 The Decline of Zimbabwe 627 Economic Development in Bangladesh 629 The Swatch Group and Cultural Uniqueness 630 Woolworths’ Corporate Responsibility Strategy 632 The Trans Pacific Partnership (TPP) Is Dead: Long Live the CPTPP! 634 Boeing and Airbus Are in a Dogfight over Illegal Subsidies 636 FDI in the Indian Retail Sector 637 Free Trade in Africa 639 The Mexican Peso, the Japanese Yen, and Pokémon Go 641 Egypt and the IMF 642 Alibaba’s Record-Setting IPO 643 Sony Corporation: Still a Leader Globally? 644

Organizational Architecture at P&G 646 Cutco Corporation—Sharpening Your Market Entry 647 Tata Motors and Exporting 649 Alibaba and Global Supply Chains 650 Best Buy Doing a Turnaround Again 651 Sodexo: Building a Diverse Global Workforce 653 Tesla, Inc.—Subsidizing Tesla Automobiles Globally 654

Glossary 656 Indexes 666

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THE PROVEN CHOICE FOR INTERNATIONAL BUSINESS

RELEVANT. PRACTICAL. INTEGRATED. It is now more than a quarter of a century since work began on the first edition of International Business: Competing in the Global Marketplace. By the third edition the book was the most widely used international business text in the world. Since then its market share has only increased. The success of the book can be attributed to a number of unique features. Specifically, for the thirteenth edition we have developed a learning program that

Is comprehensive, state of the art, and timely. Is theoretically sound and practically relevant. Focuses on applications of international business concepts. Tightly integrates the chapter topics throughout. Is fully integrated with results-driven technology. Takes full and integrative advantage of globalEDGE. msu.edu—the Google-ranked #1 web resource for “international business resources.”

International Business, now in its thirteenth edition, authored by Charles W. L. Hill, is a comprehensive and case-oriented version of our text that lends itself to the core course in international business for those courses that want a deeper focus on the global monetary system, structure of international business, international accounting, and international finance. We cover more and integrated cases in International Business 13e and we provide a deeper treatment of the global capital market, the organization of an international business, international accounting, and international finance–topics that are allocated chapters in International Business 13e but are not attended to in the shorter treatment of IB in Global Business Today 11e.

Like our shorter text, Global Business Today 11e (2019), International Business 13e focuses on being current, relevant, application rich, accessible, and student focused. Our goal has always been to cover macro and micro issues equally and in a relevant, practical, accessible, and student focused approach. We believe that anything short of such a breadth and depth of coverage is a serious deficiency. Many of the students in these international business courses will soon be working in global businesses, and they will be expected to understand the implications of international business for their organization’s strategy, structure, and functions in the context of the global marketplace. We are proud and delighted to have put together this international business learning experience for the leaders of tomorrow.

Over the years, and through now 13 editions, Dr. Charles Hill has worked hard to adhere to these goals. Since Global Business Today 9e (2015), and International Business 11e (2017), Charles has been guided not only by his own reading, teaching, and research but also by the invaluable feedback he receives from professors and students around the world, from reviewers, and from the editorial staff at McGraw-Hill Education. His thanks goes out to all of them.

COMPREHENSIVE AND UP-TO-DATE To be relevant and comprehensive, an international business package must

Explain how and why the world’s cultures, countries, and regions differ. Cover economics and politics of international trade and investment. Tackle international issues related to ethics, corporate social responsibility, and sustainability. Explain the functions and form of the global monetary system. Examine the strategies and structures of international businesses. Assess the special roles of the various functions of an international business.

Relevance and comprehensiveness also require coverage of the major theories. It has always been a goal to incorporate the insights gleaned from recent academic scholarship into the book. Consistent with this goal, insights from the following research, as a sample of theoretical streams used in the book, have been incorporated:

New trade theory and strategic trade policy. The work of Nobel Prize–winning economist Amartya Sen on economic development. Samuel Huntington’s influential thesis on the “clash of civilizations.” Growth theory of economic development championed by Paul Romer and Gene Grossman.

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Empirical work by Jeffrey Sachs and others on the relationship between international trade and economic growth. Michael Porter’s theory of the competitive advantage of nations. Robert Reich’s work on national competitive advantage. The work of Nobel Prize–winner Douglass North and others on national institutional structures and the protection of property rights. The market imperfections approach to foreign direct investment that has grown out of Ronald Coase and Oliver Williamson’s work on transaction cost economics. Bartlett and Ghoshal’s research on the transnational corporation. The writings of C. K. Prahalad and Gary Hamel on core competencies, global competition, and global strategic alliances. Insights for international business strategy that can be derived from the resource-based view of the firm and complementary theories. Paul Samuelson’s critique of free trade theory. Conceptual and empirical work on global supply chain management—logistics, purchasing (sourcing), operations, and marketing channels.

In addition to including leading-edge theory, in light of the fast-changing nature of the international business environment, we have made every effort to ensure that this product is as up-to-date as possible. A significant amount has happened in the world since we began revisions of this book. By 2019, almost $4 trillion per day were flowing across national borders. The size of such flows fueled concern about the ability of short-term speculative shifts in global capital markets to destabilize the world economy.

The world continued to become more global. As you can see in Chapter 1 on Globalization, trade across country borders has almost exponentially escalated in the last few years. Several Asian economies, most notably China and India, continued to grow their economies at a rapid rate. New multinationals continued to emerge from developing nations in addition to the world’s established industrial powers.

Increasingly, the globalization of the world economy affected a wide range of firms of all sizes, from the very large to the very small. We take great pride in covering international business for small- and medium-sized enterprises (SMEs), as well as larger multinational corporations. We also take great pride in covering firms from all around the world. Some sixty SMEs and multinational corporations from all six core continents are covered in the chapters’ opening cases, closing cases, and/or Management Focus boxes.

And unfortunately, global terrorism and the attendant geopolitical risks keep emerging in various places globally, many new and inconceivable just a decade ago. These represent a threat to global economic integration and activity. Plus, with the United Kingdom opting to leave the European Union (Brexit), which has implications past 2019, the election of President Donald Trump in the United States (who espouses views on international trade that break with the long established consensus), and several elections around the world, the globe—in many ways—has paid more attention to nationalistic issues over trade. These topics and many more are integrated into this text for maximum learning opportunities.

What’s New in the 13th Edition The success of the first twelve editions of International Business was based in part on the incorporation of leading-edge research into the text, the use of the up-to-date examples and statistics to illustrate global trends and enterprise strategy, and the discussion of current events within the context of the appropriate theory. Building on these strengths, our goals for the twelfth edition have focused on the following:

Incorporate new insights from scholarly research. Make sure the content covers all appropriate issues. Make sure the text is up-to-date with current events, statistics, and examples. Add new and insightful opening and closing cases in most chapters.

Incorporate value-added globalEDGETM features in every chapter. Connect every chapter to a focus on managerial implications. Provide 20 new integrated cases that can be used as additional cases for specific chapters but, more importantly, as learning vehicles across multiple chapters.

As part of the overall revision process, changes have been made to every chapter in the book. All statistics have been updated to incorporate the most recently available data. As before, we are the only text in International Business that ensures that all material is up-to-date on virtually a daily basis. The copyright for the book is 2021 but you

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are likely using the text in 2020, 2021, or 2022–we keep it updated to each semester you use the text in your course! We are able to do this by integrating globalEDGE features in every chapter. Specifically, the Google number-one-ranked globaledge.msu.edu site (for “international business resources”) is used in each chapter to add value to the chapter material and provide up-to-date data and information. This keeps chapter material constantly and dynamically updated for teachers who want to infuse globalEDGE material into the chapter topics, and it keeps students abreast of current developments in international business.

In addition to updating all statistics, figures, and maps to incorporate most recently published data, a chapter-by- chapter selection of changes for the 13th edition include the following:

Chapter 1: Globalization New opening case: How the iPhone is made: Apple’s Global Production System Updated statistics and figures to incorporate the most recent data on global trade flows and foreign direct investment Discussion of the implications of recent political trends (Brexit and the Trump Presidency) and what this might mean for cross border trade and investment New closing case: General Motors in China

Chapter 2: National Differences In Political, Economic, and Legal Systems New opening case: Kenya: An African Lion Updated data on corruption New closing case: Transformation in Saudi Arabia

Chapter 3: National Differences In Economic Development New opening case: Poland: Eastern Europe’s Economic Miracle Updated maps, figures, and in-text statistics to reflect most recently available data Addition of demographic trends to the discussion of Political Economy and Economic Progress Updated discussion of the spread of democracy to reflect recent countertrends toward greater authoritarianism in several nations (e.g., Turkey) New closing case: Brazil’s Struggling Economy

Chapter 4: Differences In Culture New opening case: Singapore: One of the World’s Most Multicultural Places Inclusion of a discussion of patience across cultures Revised the foundation that most religions are now pro-business New Country Focus: Determining Your Social Class by Birth New Country Focus: Turkey, Its Religion, and Politics New closing case: China, Hong Kong, Macau, and Taiwan

Chapter 5: Ethics, Corporate Social Responsibility, and Sustainability New opening case: Ericsson, Sweden, and Sustainability Deepened focus related to United Nations’ Sustainable Development Goals Core focus on ethics as a lead-in to corporate social responsibility and sustainability issues (e.g., UN’s Sustainable Development Goals). New closing case: Sustainability Initiatives at Natura, the Bodyshop, and Aesop

Chapter 6: International Trade Theory New opening case: A Tale of Two Nations: Ghana and South Korea Updated Country Focus on China and currency manipulation Reference to Donal Trump’s trade policies under section on mercantilism New closing case: Trade Wars are Good and Easy to Win Updated balance of payments data in the Appendix to reflect 2018 data

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Chapter 7: Government Policy and International Trade New opening case: American Steel Tariffs Updated discussion of the world trading system to reflect recent developments, including Brexit and the trade policies of President Trump New closing case: The United States and South Korea Strike a Revised Trade Deal

Chapter 8: Foreign Direct Investment New opening case: Starbuck’s Foreign Direct Investment Updated statistics and figures on foreign direct investment in the world economy to incorporate the most recently available data New Management Focus: Burberry Shifts its Entry Strategy in Japan New closing case: Geely Goes Global

Chapter 9: Regional Economic Integration New opening case: The Cost of Brexit Updated discussion of Brexit Added discussion of the renegotiation of NAFTA by the Trump administration and the details of the United States–Canada–Mexico Agreement (USCMA) Additional discussion of new free trade deals in Africa Closing case: NAFTA 2.0: The USCMA

Chapter 10: The Foreign Exchange Market New opening case: Managing Foreign Currency Exposure at 3M Updated data throughout the chapter to reflect currency exchange rates in 2019. New closing case: The Fluctuating Value of the Yuan Gives Chinese Business a Lesson in Foreign Exchange Risk

Chapter 11: The International Monetary System New opening case: Pakistan Takes Another IMF Loan Updated data and discussion of the floating exchange rate regime through till 2019 New Country Focus: China’s Exchange Rate Regime New closing case: Can Dollarization Save Venezuela?

Chapter 12: The Global Capital Market New opening case: Chinese IPOs in the United States Updated statistics and discussion to reflect most recently available data New closing case: Saudi Aramco

Chapter 13: The Strategy of International Business New opening case: International Strategy in the Sharing Economy Inclusion of materials on the “sharing economy” related to strategy, including a discussion of Airbnb, Uber, Lyft, and Turo New Management Focus: IKEA’s Global Strategy New Management Focus: Unilever’s Global Organization New closing case: Red Bull, A Leader in International Strategy

Chapter 14: The Organization of International Business New opening case: Bird, Lime, and Organizing Globally Integration of new materials on the “sharing economy” related to organizations, including a discussion of Bird and Lime

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Deeper focus on small, medium, and sharing economy organizations New closing case: Walmart International

Chapter 15: Entering Developed and Emerging Markets New opening case: Volkswagen, Toyota, and GM in China New scope of the chapter to include entering developed and emerging markets Inclusion of a discussion of less developed markets and base-of-the-pyramid New closing case: IKEA Entering India, Finally!

Chapter 16: Exporting, Importing, and Countertrade New opening case: Higher Education in the U.S. Is about Exporting and International Competitiveness

Revised material on globalEDGETM Diagnostic Tools New Management Focus: Embraer and Brazilian Importing New Management Focus: Exporting Desserts by a Hispanic Entrepreneur New Management Focus: Two Men and a Truck New closing case: Spotify and SoundCloud

Chapter 17: Global Production and Supply Chain Management New opening case: Blockchain Technology and Global Supply Chains New material on blockchain technology New Management Focus: IKEA Production in China New Management Focus: Amazon’s Global Supply Chains New closing case: Procter & Gamble Remakes Its Global Supply Chains

Chapter 18: Global Marketing and Business Analytics New chapter title to signal significant new material on Business Analytics New opening case: Marketing Sneakers New section on Business Analytics Revised section: International Marketing Research Inclusion of more social media topics throughout New Management Focus: Global Branding, Marvel Studios, and Walt Disney Company New Management Focus: Burberry’s Social Media Marketing New closing case: Fake News and Alternative Facts

Chapter 19: Global Human Resource Management New opening case: Evolution of the Kraft Heinz Company New section: Building a Diverse Global Workforce New Management Focus: AstraZeneca and Global Staffing Policy New closing case: Global Mobility at Shell

Chapter 20: Accounting and Finance in the International Business New opening case: Pfizer, Novartis, Bayer, and GlaxoSmithKline New material on the U.S. corporate tax rate and implications New Management Focus: Microsoft and Its Foreign Cash Holdings New closing case: Shoprite—Financial Success of a Food Retailer in Africa

Integrated Cases All of the 20 integrated cases are new for International Business 13e. Many of these cases build on previous opening and closing chapter cases that have been revised, updated, and oftentimes adopted a new angle or focus. A unique feature of the opening and closing cases for the chapters as well as the integrated cases at the back-end of the text is that we cover

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all continents of the world and we do so with regional or country issues and large, medium, and small company scenarios. This makes the 60 total cases we have included in International Business 13e remarkably wealthy as a learning program.

Globalization of BMW, Rolls-Royce, and the MINI The Decline of Zimbabwe Economic Development in Bangladesh The Swatch Group and Cultural Uniqueness Woolworths’ Corporate Responsibility Strategy The Trans Pacific Partnership (TPP) is Dead: Long Live the CTPP! Boeing and Airbus Are in a Dogfight over Illegal Subsidies FDI in the Indian Retail Sector Free Trade in Africa The Mexican Peso, the Japanese Yen, and Pokemon Go Egypt and the IMF Alibaba’s Record-Setting IPO Sony Corporation: Still a Leader Globally? Organizational Architecture at P&G Cutco Corporation–Sharpening Your Market Entry Tata Motors and Exporting Alibaba and Global Supply Chains Best Buy Doing a Turnaround Again Sodexo: Building a Diverse Global Workforce Tesla, Inc.–Subsidizing Tesla Automobiles Globally

BEYOND UNCRITICAL PRESENTATION AND SHALLOW EXPLANATION Many issues in international business are complex and thus necessitate considerations of pros and cons. To demonstrate this to students, we have adopted a critical approach that presents the arguments for and against economic theories, government policies, business strategies, organizational structures, and so on.

Related to this, we have attempted to explain the complexities of the many theories and phenomena unique to international business so the student might fully comprehend the statements of a theory or the reasons a phenomenon is the way it is. We believe that these theories and phenomena are explained in more depth in this work than they are in the competition, which seem to use the rationale that a shallow explanation is little better than no explanation. In international business, a little knowledge is indeed a dangerous thing.

PRACTICAL AND RICH APPLICATIONS We have always believed that it is important to show students how the material covered in the text is relevant to the actual practice of international business. This is explicit in the later chapters of the book, which focus on the practice of international business, but it is not always obvious in the first half of the book, which considers macro topics. Accordingly, at the end of each chapter in Parts Two, Three, and Four—where the focus is on the environment of international business, as opposed to particular firms—there is a section titled Focus on Managerial Implications. In this section, the managerial implications of the material discussed in the chapter are clearly explained. Additionally, most chapters have at least one Management Focus box. The purpose of these boxes is to illustrate the relevance of chapter material for the practice of international business.

A Did You Know? feature challenges students to view the world around them through the lens of international business (e.g., Did you know that sugar prices in the United States are much higher than sugar prices in the rest of the world?). The author recorded short videos explaining the phenomenon.

In addition, each chapter begins with an opening case that sets the stage for the chapter and ends with a closing case that illustrates the relevance of chapter material for the practice of international business.

To help students go a step further in expanding their application-level understanding of international business, each chapter incorporates two globalEDGETM research tasks. The exercises dovetail with the content just covered.

INTEGRATED PROGRESSION OF TOPICS

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A weakness of many texts is that they lack a tight, integrated flow of topics from chapter to chapter. This book explains to students in Chapter 1 how the book’s topics are related to each other. Integration has been achieved by organizing the material so that each chapter builds on the material of the previous ones in a logical fashion.

Part One

Chapter 1 provides an overview of the key issues to be addressed and explains the plan of the book. Globalization of markets and globalization of production is the core focus.

Part Two Chapters 2 through 4 focus on country differences in political economy and culture, and Chapter 5 on ethics, corporate social responsibility, and sustainability issues in international business. Most international business textbooks place this material at a later point, but we believe it is vital to discuss national differences first. After all, many of the central issues in international trade and investment, the global monetary system, international business strategy and structure, and international business functions arise out of national differences in political economy and culture.

Part Three Chapters 6 through 9 investigate the political economy of global trade and investment. The purpose of this part is to describe and explain the trade and investment environment in which international business occurs.

Part Four Chapters 10 and 11 describe and explain the global monetary system, laying out in detail the monetary framework in which international business transactions are conducted.

Part Five In Chapters 12 and 13, attention shifts from the environment to the firm. In other words, we move from a macro focus to a micro focus at this stage of the book. We examine strategies that firms adopt to compete effectively in the international business environment.

Part Six In Chapters 14 through 17, the focus narrows further to investigate business functions and related operations. These chap t er s expl ain how f ir ms can per f orm thei r key f uncti ons —expor ti ng, importing, and counter tr ade; gl obal produ ct i on; global supply chain management; global marketing; global research and development (R&D); human resource management—to compete and succeed in the international business environment.

Throughout the book, the relationship of new material to topics discussed in earlier chapters is pointed out to the students to reinforce their understanding of how the material comprises an integrated whole. We deliberately bring a management focus to the macro chapters (Chapters 1 through 12). We also integrate macro themes in covering the micro chapters (Chapters 13 through 20).

ACCESSIBLE AND INTERESTING The international business arena is fascinating and exciting, and we have tried to communicate our enthusiasm for it to the student. Learning is easier and better if the subject matter is communicated in an interesting, informative, and accessible manner. One technique we have used to achieve this is weaving interesting anecdotes into the narrative of the text, that is, stories that illustrate theory.

Most chapters also have a Country Focus box that provides background on the political, economic, social, or cultural aspects of countries grappling with an international business issue.

ACKNOWLEDGMENTS Numerous people deserve to be thanked for their assistance in preparing this book. First, thank you to all the people at McGraw-Hill Education who have worked with us on this project:

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