A Framework for International Business PDF

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A Framework for International Business S. Tamer Cavusgil Gary Knight John R. Riesenberger PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Sing...

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Int ernat ional Business COMPET ING IN T HE GLOBAL MARKET PLACE aqib saeed Doing Business in Emerging Market s: Ent ry and Negot iat ion St rat egies Tamer Cavusgil, Pervez Ghauri, Milind R Agarwal

A Framework for International Business S. Tamer Cavusgil Gary Knight John R. Riesenberger

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

CONTENTS Preface

xvii

PART 1 F o u n d a t i o n C o n c e p t s

1

Chapter 1 What Is International Business?

2

What Is International Business?

2

What Are the Key Concepts in International Trade and Investment? 3 The Nature of International Trade 4 The Nature of International Investment 5 Services as Well as Products 6 How Does International Business Differ from Domestic Business?

7

The Four Risks in Internationalization

7

Who Participates in International Business? 9 Nongovernmental Organizations (NGOs) 10 What Motivates Firms to Go International?

10

Market Globalization: An Organizing Framework

11

Drivers of Market Globalization 12 Societal Consequences of Market Globalization 13 Loss OF NATIONAL SOVEREIGNTY

13

OFFSHORING AND THE FLIGHT OF JOBS EFFECT ON THE POOR

14

14

EFFECT ON THE NATURAL ENVIRONMENT EFFECT ON NATIONAL CULTURE

14

15

Regional Integration and Economic Blocs 15 Levels of Regional Integration 16 The Leading Economic Blocs 18 Management Implications of Regional Integration 20 Summary

21 • Key Terms 22 • Endnotes 22

Chapter 2 Theories of International Trade and Investment 24 What Theories Explain International Trade and Investment? 24 Why Do Nations Trade? 26 MERCANTILISM

26

ABSOLUTE ADVANTAGE PRINCIPLE

27

COMPARATIVE ADVANTAGE PRINCIPLE

28

LIMITATIONS OF EARLY TRADE THEORIES

29

vi

Contents FACTOR PROPORTIONS THEORY

30

INTERNATIONAL PRODUCT LIFE CYCLE THEORY

30

How Can Nations Enhance Their Competitive Advantage? The Competitive Advantage of Nations The Diamond Model

32

32

National Industrial Policy

33

Why and How Do Firms Internationalize? 1

31

33

Internationalization Process of the Firm

34

BORN GLOBALS AND INTERNATIONAL ENTREPRENEURSHIP

34

How Can Internationalizing Firms Gain and Sustain Competitive Advantage? 34 FDI-Based Explanations

34

MONOPOLISTIC ADVANTAGE THEORY INTERNALIZATION THEORY

34

35

DUNNING'S ECLECTIC PARADIGM

Non-FDI-Based Explanations

36

38

INTERNATIONAL COLLABORATIVE VENTURES NETWORKS AND RELATIONAL ASSETS

38

38

Summary. 38 • Key Terms 39 • Endnotes

39

Chapter 3 Organizational Participants That Make International Business Happen 41 Four Types of Participants in International Business Participants Arranged by Value-Chain Activity

41

42

ILLUSTRATING THE INTERNATIONAL VALUE CHAIN USING DELL INC.

Focal Firms in International Business The Multinational Enterprise

43

43

Small and Medium-Sized Enterprises Born Global Firms

42

43

44

International Entry Strategies of Focal Firms

45

A Framework for Classifying International Entry Strategies Entry Modes Other than Trade and Investment

46

Distribution Channel Intermediaries in International Business 48 Intermediaries Based in the Foreign Market

48

Intermediaries Based in the Home Country

49

Online Intermediaries

49

Facilitators in International Business

50

Governments in International Business 51 Summary 52 • Key Terms 53 • Endnotes 53

45

Contents Chapter 4 Culture and Ethics in International Business 55 Culture and Cross-Cultural Risk 55 Key Concepts of Culture 57 SOCIALIZATION AND ACCULTURATION

57

THE M A N Y DIMENSIONS OF CULTURE

57

NATIONAL, PROFESSIONAL, AND CORPORATE CULTURE

57

Cultural Metaphors and Idioms 57 The Role of Culture in International Business 58 Interpretations of Culture 59 Low- and High-Context Cultures 59 Hofstede's Research on National Culture 60 INDIVIDUALISM VERSUS COLLECTIVISM POWER DISTANCE

60

60

UNCERTAINTY AVOIDANCE

60

MASCULINITY VERSUS FEMININITY

61

THE FIFTH DIMENSION: LONG-TERM VERSUS SHORT-TERM ORIENTATION

61

Subjective versus Objective Dimensions of Culture 61 THE SUBJECTIVE DIMENSION OBJECTIVE DIMENSION

61

63

Language 63 Overcoming Cross-Cultural Risk: Managerial Guidelines 63 Ethics in International Business 65 The Value of Ethical Behavior 67 Variation in Ethical Standards among Countries 67 An Ethical Dilemma 68 Linking Ethics, Corruptipn,'and Responsible Behavior 68 Corporate Social Responsibility 68 The Value of CSR 69 The Role of Sustainability in International Operations 70 Corporate Governance and Its Implications for Managers 70 A Framework for Making Ethical Decisions 71 Embracing CSR and Sustainability 72 Summary 73 • Key Terms 74 • Endnotes 74

PART 2 The International Business Environment Chapter 5 Political and Legal Systems in International Business 78 The Nature of Country Risk 78 How Prevalent Is Country Risk? 79 Political and Legal Environments in International Business 80

77

vii

viii

Contents Political Systems

81

Totalitarianism

82

Socialism

82

Democracy

82

Democracy's Link to Economic Freedom and Openness

83

The Relationship between Political Systems and Economic Systems 83 COMMAND ECONOMY MIXED ECONOMY MARKET ECONOMY

Legal Systems

84

85

Common Law Civil Law

83

84

85

85

Religious Law

86

Mixed Systems

86

Types of Country Risk Produced by Political and Legal Systems 87 Types of Country Risk Produced by Political Systems "" 87 GOVERNMENT TAKEOVER OF CORPORATE ASSETS EMBARGOES AND SANCTIONS

BOYCOTTS AGAINST FIRMS OR NATIONS WAR, INSURRECTION, AND VIOLENCE TERRORISM

87

87 87 88

88

Types of Country Risk Produced by Legal Systems

88

COUNTRY RISK ARISING FROM THE HOST COUNTRY LEGAL ENVIRONMENT COUNTRY RISK ARISING FROM THE HOME COUNTRY LEGAL ENVIRONMENT

Managing Country Risk

90

PROACTIVE ENVIRONMENTAL SCANNING

90

STRICT ADHERENCE TO ETHICAL STANDARDS

90

ALLIANCES WITH QUALIFIED LOCAL PARTNERS PROTECTION THROUGH LEGAL CONTRACTS

90

91

The Nature of Government Intervention

91

Rationale for Government Intervention

92

DEFENSIVE RATIONALE

92

OFFENSIVE RATIONALE

93

Instruments of Government Intervention Tariffs

93

95

Nontariff Trade Barriers Investment Barriers

96

96

Subsidies and Other Government Support Programs Consequences of Government Intervention

98

97

88 89

Contents How Firms Can Respond to Government Intervention Strategies for Managers 99 RESEARCH TO GATHER KNOWLEDGE AND INTELLIGENCE CHOOSE THE M O S T APPROPRIATE ENTRY STRATEGIES TAKE ADVANTAGE OF FOREIGN TRADE ZONES

99

99 99

99

SEEK FAVORABLE CUSTOMS CLASSIFICATIONS FOR EXPORTED PRODUCTS TAKE ADVANTAGE OF INVESTMENT INCENTIVES AND OTHER GOVERNMENT SUPPORT PROGRAMS

100

LOBBY FOR FREER TRADE AND INVESTMENT

100

Summary 100 • Key Terms 101 • Endnotes 101 Chapter 6 The International Monetary Environment and Financial Management in the Global Firm 103 Exchange Rates and Currencies 103 How Exchange Rates are Determined 106 The Contemporary Exchange Rate System 107 The Monetary and Financial Systems 108 Financial Management in the Global Firm 110 Raising Funds for the Firm's International Activities Managing Cash Flow 112 Capital Budgeting 113 Managing Currency Risk 114 Foreign Exchange Trading 114 Hedging, Speculation, and Arbitrage

111

115

Hedging Instruments 116 Managing Accounting and Tax Practices

117

International Taxation / 118 Summary 119 • Key Terms 121 • Endnotes 121 Chapter 7 Emerging Markets, Developing Economies, and Advanced Economies 123 Advanced Economies, Developing Economies, and Emerging Markets 123 Advanced Economies Developing Economies

124 125

Emerging Market Economies 125 What Makes Emerging Markets Attractive for International Business 128 Emerging Markets as Target Markets 128 Emerging Markets as Manufacturing Bases 129 Emerging Markets as Sourcing Destinations

129

100

ix

Contents Assessing the True Potential of Emerging Markets 129 Per-Capita Income as an Indicator of Market Potential 129 Middle Class as an Indicator of Market Potential 130 Risks and Challenges of Emerging Markets 131 Strategies for Doing Business in Emerging Markets 132 Customize Offerings to Unique Emerging Market Needs 132 Partner with Family Conglomerates 133 Target Governments in Emerging Markets 134 Summary 134 • Key Terms 135 • Endnotes 135

PART 3

International Business Strategy and Implementation 137

Chapter 8 Strategy and Organization in the International Firm 138 Strategy in International Business 138 EFFICIENCY 139 FLEXIBILITY 139 LEARNING 139

Building the GJobal Firm 140 Visionary Leadership 140 Organizational Culture 141 Organizational Processes 141 The Distinction between Multidomestic and Global Industries 142 The Integration-Responsiveness Framework 143 Pressures for Global Integration 144 Pressures for LocaJ.,Responsiveness 144 Strategies Based on the Integration-Responsiveness Framework 145 HOME REPLICATION STRATEGY 146 MULTIDOMESTIC STRATEGY 146 GLOBAL STRATEGY 146 TRANSNATIONAL STRATEGY 147

Organizational Structure 147 Centralized or Decentralized Structure? 148 Organizational Structures for International Operations 149 Export Department 150 International Division Structure 151 Geographic Area Structure (Decentralized Structure) 151 Product Structure (Centralized Structure) 152 Functional Structure (Centralized Structure) 153 Global Matrix Structure 154 Summary 155 • Key Terms 156 • Endnotes

156

Contents Chapter 9 Global Market Opportunity Assessment

158

Assessing Global Market Opportunities

158

Task One: Analyzing Organizational Readiness to Internationalize 161 Task Two: Assessing the Suitability of Products and Services for Foreign Markets 162 Factors Contributing to Product Suitability for International Markets 163 Key Issues to Resolve in Measuring Product Potential

163

Task Three: Screening Countries to Identify Target Markets Screening Countries for Exporting

164

SCREENING METHODOLOGY FOR POTENTIAL COUNTRY MARKETS ASSESSING THE EXPORT'POTENTIAL OF EMERGING MARKETS

Country Screening for Foreign Direct Investment Country Screening for Sourcing

164

165

165

166

167

Task Four: Assessing Industry Market Potential

168

Practical Methods for Managers to Assess Industry Market Potential 169 Data Sources for Estimating Industry Market Potential Task Five: Choosing Foreign Business Partners Criteria for Choosing a Partner

169

170

171

r Searching for Prospective Partners

171

Task Six: Estimating Company Sales Potential Determinants of Company Sales Potential

172

172

Practical Approaches to Estimating Company Sales Potential OTHER TECHNIQUES

1.74 '

ASSESSING THE MARKET

In Conclusion 175 Summary 176 •

175

Key Terms 176 • Endnotes 177

Chapter 10 Exporting and Countertrade 178 An Overview of Foreign Market Entry Strategies Internationalization of the Firm

178

181

Diverse Motives for Pursuing Internationalization Characteristics of Firm Internationalization Exporting as a Foreign Market Entry Strategy Exporting and the Global Economy

183

Exporting: A Popular Entry Strategy

183

Services Sector Exports Advantages of Exporting

184 185

181 183

181

173

xi

xii

Contents Limitations of Exporting 185 A Systematic Approach to Exporting

186

STEP ONE: ASSESS GLOBAL MARKET OPPORTUNITY 186 STEP TWO: ORGANIZE FOR EXPORTING 187 STEP THREE: ACQUIRE NEEDED SKILLS AND COMPETENCIES STEP FOUR: EXPORT MANAGEMENT 188

Importing

188

188

Managing Export-Import Transactions Documentation 189 Shipping and Incoterms 189

188

Payment Methods in Exporting and Importing

189

CASH IN ADVANCE 190 LETTER OF CREDIT 191 OPEN ACCOUNT 191

Export-Import Financing 192 Commercial Banks 192 Factoring, Forfaiting, and Confirming 192 Distribution Channel Intermediaries 193 Buyers and Suppliers 193 Intracorporate Financing 193 Government Assistance Programs 193 Multilateral Development Banks 194 Identifying and Working with Foreign Intermediaries Working with Foreign Intermediaries 194 When Intermediary Relations Go Bad 195

194

Countertrade: A Popular Approach for Emerging Markets and Developing Economies 197 Magnitude and Drivers of Countertrade 197 Types of Countertrade

197

Risks of Countertrade 198 Why Consider Countertrade? 198 Summary 199 • Key Terms 200 • Endnotes 200 Chapter 11 Foreign Direct Investment and Collaborative Ventures International Investment and Collaboration 201 Trends in FDI and Collaborative Ventures 202 Motives for FDI and Collaborative Ventures Market-Seeking Motives 202 Resource or Asset-Seeking Motives 203 Efficiency-Seeking Motives 204

202

201

Contents Characteristics of Foreign Direct Investment 204 Key Features of Foreign Direct Investment 205 Corporate Social Responsibility and FDI 205 Most Active Firms in FDI 206 Service Firms and FDI 207 Leading Destinations for FDI 207 Factors to Consider in Choosing FDI Locations 208 Types of Foreign Direct Investment 209 Greenfield Investment versus Mergers and Acquisitions 209 The Nature of Ownership in FDI 209 Vertical versus Horizontal Integration 210 International Collaborative Ventures 210 Equity Joint Ventures 211 Project-Based Nonequity Ventures 211 Differences between Equity and Project-Based Nonequity Ventures 211 Consortium 211 Cross-Licensing Agreements 212 Managing Collaborative Ventures 212 Understand Potential Risks in Collaboration 213 - Pursue a Systematic Process for Partnering 213 Ensure Success with Collaborative Ventures 213 The Experience of Retailers in Foreign Markets 215 Challenges of International Retailing 216 International Retailing Success Factors 216 Summary 217 • Key Terms 217 • Endnotes 218 Chapter 12 Licensing, Franchising, and Other Contractual Strategies Contractual Entry Strategies

221

Unique Aspects of Contractual Relationships 221 Types of Intellectual Property 222 Licensing as an Entry Strategy 223 Trademark and Copyright Licensing 223 Know-How Licensing 224 The World's Top Licensing Firms 224 Advantages and Disadvantages of Licensing Advantages of Licensing 225 Disadvantages of Licensing 226

225

220

xiii

xiv

Contents Franchising as an Entry Strategy 227 Who Are the Top Global Franchisors? 228 Advantages and Disadvantages of Franchising

229

The Franchisor Perspective 229 The Franchisee Perspective 230 Managerial Guidelines for Licensing and Franchising 230 Other Contractual Entry Strategies 231 Turnkey Contracting 231 Build-Operate-Transfer Arrangements (BOT) 232 Management Contracts 232 Leasing 232 The Special Case of Internationalization by Professional Service Firms 233 Guidelines for Protecting Intellectual Property Summary

235

Chapter 13 Global Sourcing

•

Key Terms

235

•

233

Endnotes

236

238

Outsourcing, Global Sourcing, and Offshoring Decision 1: Outsource or Not? 239

239

Decision 2: Where in the World Should Value-Adding Activities Be Located? 239 Global Sourcing 240 Offshoring

242

Scope of Global Sourcing 243 Diversity of Countries that Initiate and Receive Outsourced Work 243 Strategic Choices in Global Sourcing 245 Benefits of Global Sourcing 246 Cost Efficiency 246 Ability to Achieve Strategic Goals 247 Risks of Global Sourcing 248 Strategies for Minimizing the Risks of Global Sourcing Implementing Global Sourcing through Supply-Chain Management 250 Information and Communications Technology 251 Logistics and Transportation Transportation Modes 252

252

249

Contents

Global Sourcing and Corporate Social Responsibility 253 Potential Harm to Local and National Economy from Global Sourcing 253 Public Policy on Global Sourcing 253 Summary 254 • Key Terms 255 • Endnotes 255 Chapter 14 Marketing in the Global Firm 257 Global Marketing Strategy 257 Targeting Customer Segments and Positioning 258 Standardization and Adaptation of International Marketing 259 Standardization 260 Adaptation 261 Standardization and Adaptation: A Balancing Act 262 Global Branding and Product Development 263 Global Branding 263 Global Product Development 264 International Pricing 265 Factors That Affect International Pricing 265 A Framework for Setting International Prices 267 Managing International Price Escalation 268 Managing Pricing under Varying Currency Conditions 269 Transfer Pricing 269 Gray Market Activity (Parallel Imports) 271 International MarketingCdmmunications 272 International Advertising 272 International Promotional Activities 273 International Distribution 274 Global Account Management 275 Summary 275 • Key Terms 276 • Endnotes 276 Chapter 15 Human Resource Management in the Global Firm

278

TheStrategic Role of Human Resources in International Business 278 Three Employee Categories 279 Differences between Domestic and International HRM 279 Key Tasks in International Human Resource Management 28...