Book summary “International business”: summary

Introduction

Operating an international business requires navigating complex political, cultural, economic, and financial environments across borders. You face profound challenges when national systems diverge and markets integrate simultaneously.

Managing an international business requires mastering macro environments, trade theory, financial systems, and firm strategy to succeed across borders.

Charles W. L. Hill structures this book to guide you through these global dynamics. The text examines globalization and national differences, explores international trade and investment, details the global monetary system, and explains multinational firm strategy and operations.

You can answer key questions by studying this framework:

• How do national differences in political economy shape strategy?
• What drives foreign direct investment and regional integration?
• How do foreign exchange markets influence transactions?
• Which organizational architecture best supports global expansion?

1. Globalization and National Differences

Globalization integrates markets and production while national differences in political economy, culture, and ethics dictate cross-border strategy.

You experience the globalization of markets as distinct national preferences merge into a single global marketplace. Companies like Coca-Cola, Starbucks, Sony, and McDonald's act as both beneficiaries and facilitators of converging consumer tastes.

At the same time, the globalization of production involves sourcing goods and services from around the globe to exploit national cost and quality differences. Boeing outsourced roughly 30 percent of the value of its 777 and roughly 65 percent of the total value of its 787 to foreign suppliers.

Two macro factors drive this integration: declining trade barriers and dramatic technological changes. Between 1930 and 1990, the cost of a three-minute phone call between New York and London plummeted from $244.65 to $3.32. Global institutions such as the World Trade Organization, the International Monetary Fund, and the World Bank police this marketplace. As of 2009, the World Trade Organization had 153 member nations accounting for 97 percent of world trade.

Political Economy and Culture

National differences in political economy shape your strategic choices abroad. Political systems emphasize collectivism versus individualism and democracy versus totalitarianism.

Economic systems comprise market, command, and mixed economies. Legal traditions vary across common law, civil law, and theocratic law. Property rights enforcement and intellectual property protection remain vital for long-run economic growth. In 2007, 38 percent of all software applications used globally were pirated, resulting in $48 billion lost by personal computer software firms.

Culture defines a shared system of values and norms within a society. Geert Hofstede isolated core dimensions of workplace values using data from over 100,000 IBM employees surveyed between 1967 and 1973. McDonald's learned the cost of ignoring local norms when it paid a $10 million settlement in a class-action lawsuit over beef extract in French fries. Hindu nationalists also caused $45,000 in damage by vandalizing a McDonald's restaurant in Delhi.

Ethics in International Business

Ethical dilemmas arise when managers confront foreign corruption, substandard labor conditions, and environmental degradation.

Siemens agreed to pay $1.6 billion in fines in December 2008 after investigations revealed it had paid roughly $1.4 billion in bribes globally since 1999. Kellogg Brown & Root utilized intermediary payments to secure lucrative government contracts, involving $132.3 million paid to Jeffrey Tesler from 1994 through early 2004.

You can systematically integrate ethical considerations into international business operations by adopting specific organizational processes:

• favor hiring and promoting people with a well-grounded sense of personal ethics;
• build an organization culture that places a high value on ethical behavior;
• make sure that leaders within the business act in a manner consistent with their ethical rhetoric;
• put decision-making processes in place that require people to consider the ethical dimension of business decisions;
• develop moral courage and encourage others to do the same.

2. International Trade and Investment

Trade theories and government policies shape global exchange, while foreign direct investment and regional integration drive multinational expansion.

Chapters 5 through 8 investigate international trade theories, government trade policies, foreign direct investment trends, and regional economic integration agreements. You operate within this political economy of international trade and investment. Case studies in this section evaluate NAFTA, Boeing versus Airbus, and Starbucks foreign direct investment.

International Trade Theory

Mercantilism is a 16th-century doctrine that views international trade as a zero-sum game, asserting that national wealth depends on maintaining a trade surplus of gold and silver. Critics argue that modern nations like China pursue neo-mercantilist policies by keeping their currency cheap against the U.S. dollar to amass record trade surpluses and foreign exchange reserves. China reached a record trade surplus of 280 billion dollars in 2008 and held foreign exchange reserves exceeding 1.95 trillion dollars, with 70 percent held in U.S. dollars.

Adam Smith argued that countries have absolute advantages in producing different goods efficiently, and both nations benefit by specializing and trading. Ghana has an absolute advantage in producing cocoa, while South Korea has an absolute advantage in producing rice, making specialization and trade mutually beneficial. David Ricardo's theory of comparative advantage demonstrates that even a country less efficient in every industry can benefit from international trade. Ghana can produce both cocoa and rice more efficiently than South Korea, but because its efficiency advantage is greater in cocoa, it has a comparative advantage in cocoa and gains by trading with South Korea.

Paul Samuelson argues that in certain circumstances, a rich country entering a free trade agreement with a fast-developing poor country may suffer a net economic loss due to falling real wages. Bank of America shifted 5,000 information technology jobs to India where work costs 20 dollars an hour instead of 100 dollars an hour, and Accenture moved 5,000 jobs to the Philippines.

The Heckscher-Ohlin theory attributes international trade patterns to differences in national factor endowments rather than labor productivity. The United States exports agricultural goods due to an abundance of arable land, whereas China exports labor-intensive textiles due to low-cost labor. Raymond Vernon's product life-cycle theory suggests that new products are initially developed and exported by innovating advanced nations before production migrates to lower-cost developing countries over time. Xerox originally developed and exported photocopiers from the United States, but as patents expired and production scaled abroad, U.S. firms began importing from foreign producers like Canon in Japan.

New trade theory posits that trade increases product variety and lowers costs through economies of scale, and that global market concentration gives early movers an insurmountable advantage. Airbus developed the A380 super-jumbo jet at a cost of 14 billion dollars, capturing a first-mover advantage in a global market that can only profitably support one super-jumbo producer. Michael Porter's national competitive advantage framework argues that four broad national attributes create an environment that fosters or impedes competitive success in specific industries. Finland's demanding domestic telecommunications environment and early cooperative Nordic wireless network helped Nokia transform into a global leader in mobile phones.

Political Economy of Trade

Governments use seven primary policy instruments to restrict international trade and protect domestic producers, which generally benefit producers at the expense of consumers. In March 2002, the U.S. government placed an ad valorem tariff of 8 percent to 30 percent on foreign steel imports, which raised domestic steel prices by 30 to 50 percent. Governments frequently utilize financial subsidies to bolster domestic producers against foreign competitors and help them capture export markets, with agriculture being a primary beneficiary. In the mid-2000s, the European Union paid around 44 billion euros annually in farm subsidies, while U.S. President George W. Bush signed a bill in 2002 containing over $180 billion in farm subsidies over 10 years.

Antidumping policies are designed to punish foreign firms that sell goods below production cost or fair market value, protecting domestic industries from perceived unfair competition. U.S. Magnesium filed a petition in February 2004 alleging that Russian and Chinese producers were dumping metal below market value, leading the U.S. government to impose duties ranging from 19 percent to over 140 percent.

Political justifications for government intervention in trade typically center on protecting specific domestic interest groups, preserving jobs, or advancing national security and foreign policy goals. In 1986, the U.S. government supported Sematech, a consortium of 14 semiconductor companies, with $100 million per year in subsidies to protect domestic capabilities deemed vital for national security. Brazil built the world's 10th-largest auto industry behind protective barriers, but when tariffs were removed in the late 1980s, the industry was exposed as highly inefficient.

The international trading system evolved from the postwar General Agreement on Tariffs and Trade to the World Trade Organization, establishing binding rules and effective dispute resolution mechanisms. Trade barriers constrain your strategic ability to globally disperse production activities, forcing companies to adapt through local manufacturing, content compliance, or market relocation. Japanese automakers rapidly expanded manufacturing capacity in the United States during the 1980s and 1990s as a direct response to voluntary export restraints limiting auto imports.

Foreign Direct Investment and Integration

Foreign direct investment occurs when a firm invests directly in facilities to produce or market goods abroad, taking an interest of 10 percent or more. Spain's Telefonica transformed from a state-owned monopoly into a multinational by investing $11 billion in Latin America and acquiring a $31.4 billion stake in Britain's O2. Internalization theory explains why firms often prefer foreign direct investment over licensing by highlighting three major drawbacks of licensing. RCA licensed its color television technology to Japanese companies like Matsushita and Sony in the 1960s, enabling them to quickly assimilate the technology and compete directly against RCA in the United States.

Firms in oligopolistic industries tend to engage in foreign direct investment through imitative behavior driven by strategic rivalry and multipoint competition. When Toyota and Nissan observed Honda undertaking FDI in the United States and Europe, they responded by establishing their own manufacturing operations in those regions. John Dunning's eclectic paradigm highlights the critical role of location-specific advantages in explaining the rationale for and direction of foreign direct investment. Foreign computer and semiconductor firms from Europe, Japan, South Korean, and Taiwan invest in Silicon Valley to benefit from local knowledge spillovers and intellectual talent concentrations.

Host countries experience both significant economic benefits and specific potential costs as a result of welcoming inward foreign direct investment. Following the liberalization of retail FDI in South Korea in 1996, Western discounters like Wal-Mart and Costco stimulated domestic competition and lowered prices. Kentucky offered Toyota an incentive package worth $112 million including tax breaks, infrastructure spending, and low-interest loans to build an automobile assembly plant.

Economic integration progresses theoretically through five distinct levels, moving from basic trade barrier reductions to complete political unification. Regional trade blocs benefit the global economy only if their trade creation effects outweigh their trade diversion effects. If the United States replaces domestic high-cost textiles with cheaper Mexican textiles under NAFTA, trade is created, whereas replacing cheaper Costa Rican textiles with higher-cost Mexican textiles diverts trade.

The Single European Act of 1987 committed member countries to eliminate internal administrative and technical barriers to establish a single market. You must execute specific tasks to comply with the single market program:

• remove all frontier controls between EC countries;
• apply the principle of mutual recognition to product standards;
• open public procurement to non-national suppliers;
• lift barriers to competition in retail banking and insurance;
• remove all restrictions on foreign exchange transactions;
• abolish restrictions on cabotage for foreign truckers.

Adopting a common currency creates significant transaction savings and price transparency, but forces nations to surrender control over monetary policy. Great Britain, Denmark, and Sweden opted out of the euro zone to retain control over their national monetary policies and avoid perceived risks. The North American Free Trade Agreement eliminated most trade and investment barriers between Canada, Mexico, and the United States, producing small overall economic gains. The Teamsters Union in the United States successfully delayed the implementation of NAFTA trucking provisions that would have allowed Mexican trucks to deliver goods across borders.

Regional economic integration offers multinational firms opportunities for centralized cost economies while threatening them with heightened price competition. The 3M Company consolidated its European manufacturing, assigning printing products to Great Britain and reflective traffic control materials to a German factory.

3. Global Monetary System and Capital Markets

Foreign exchange markets and global capital flows establish the financial architecture for international transactions and investment.

The global monetary system provides the financial framework and mechanisms through which international business transactions are executed. By 2009, daily flows across national borders reached $2 trillion in the global money market. Chapters 9 through 11 detail the operations of the foreign exchange market, the history and structure of the international monetary system, and the expansion of global capital markets.

The Foreign Exchange Market

Under the gold standard, participating governments agreed to convert paper currency into gold on demand at a fixed rate, known as the gold par value. One U.S. dollar was defined as 23.22 grains of fine gold. An ounce of gold contained 480 grains, costing $20.67 under the original U.S. definition and $35 per ounce after the U.S. revised it in 1934. When a country ran a trade surplus, a net flow of gold into that country increased its money supply and raised prices, while the outflow from a deficit country decreased its money supply and lowered prices, thereby achieving balance-of-trade equilibrium.

Great Britain returned to the gold standard in 1925 at the prewar parity of £4.25 per ounce, which priced British goods out of foreign markets, pushed the country into depression, and forced it to suspend convertibility in 1931. After being abandoned during World War I, countries engaged in destructive competitive devaluations during the 1930s.

The Global Monetary System

Representatives from 44 countries met at Bretton Woods in 1944 to design a system of fixed exchange rates anchored by the U.S. dollar. All countries fixed their currency values in terms of dollars, while only the U.S. dollar remained convertible into gold at 35 dollars per ounce. Participating countries pledged to maintain their exchange rates within 1 percent of par value. The Bretton Woods system collapsed in 1973 after U.S. domestic spending generated inflation and trade deficits that triggered massive speculative attacks and drained foreign reserves.

Since 1973, the global economy has operated on a mixed system of floating, pegged, and managed exchange rates. By 2007, 14 percent of IMF members allowed their currency to float freely, 26 percent used a managed float, and 28 percent used a fixed peg arrangement. China pegged the yuan to the U.S. dollar at 8.28 yuan in 1994, maintaining this rate for 11 years before adopting a managed float in 2005.

The Global Capital Market

The global capital market benefits borrowers by providing a larger liquidity pool that lowers the cost of capital, and benefits investors by enabling international portfolio diversification to reduce risk. Deutsche Telekom raised $13 billion by simultaneously offering shares in Frankfurt, New York, London, and Tokyo during its 1996 privatization. Between 1964 and 1990, real information processing costs fell by 95 percent, driving international market growth alongside government deregulation of financial services like Great Britain's Big Bang in October 1986.

You face foreign exchange risk when you borrow in foreign currencies from the global capital market, as adverse rate movements can increase your cost of capital. In late 1997, South Korean firms that borrowed U.S. dollars saw repayment costs soar when the Korean won depreciated sharply against the dollar.

You must manage these risks using specific structural and financial strategies:

• Utilize the forward exchange market and currency swaps to insure against short-term foreign exchange risk.
• Pursue strategies that increase strategic flexibility to reduce the long-term economic exposure of the firm.
• Disperse production and manufacturing operations to different global locations as a real hedge against currency fluctuations.
• Contract out low-value-added manufacturing to easily switch suppliers across countries in response to relative cost changes from exchange rate movements.

4. Strategy and Operations of International Business

Multinational firms formulate competitive strategies, organize internal architecture, and manage global supply chains and functional operations.

To maximize firm value, you must pursue strategies that increase profitability and profit growth by lowering production costs or differentiating products.

Ford sells the Lincoln Navigator for about $10,000 more than the Ford Expedition by using marketing and minor cosmetic features to increase perceived value. You can achieve location economies by dispersing individual value creation activities to optimal global locations. Clear Vision shifted its eyewear production from the US to Hong Kong and mainland China to lower labor costs.

Strategy and Organization

Achieving superior enterprise profitability requires internal consistency among all elements of organizational architecture. Vertical differentiation determines where decision-making power is concentrated in a hierarchy. Wal-Mart initially kept tight centralized control over its international division from Bentonville, Arkansas, but later decentralized operating responsibilities to country leaders.

When coordination needs are high across geographically dispersed subunits, you must rely on formal integrating mechanisms and informal knowledge networks. You use personal controls, bureaucratic controls, output controls, and cultural controls to ensure subunit actions align with objectives. Lincoln Electric faced legal and cultural roadblocks when attempting to impose its piecework incentive system in European subsidiaries.

Overcoming strong organizational inertia to realign strategy and architecture requires bold actions:

• Unfreeze the organization through shock therapy such as closing uneconomic plants or announcing dramatic structural reorganizations.
• Move the organization to a new state through proactive changes in architecture, closing operations, reassigning responsibilities, and redesigning processes.
• Refreeze the organization in its new state by establishing a new culture through employee socialization, modified hiring policies, and consistent control and incentive systems.

Entry Strategy and Functional Operations

Firms contemplating foreign expansion must systematically decide which foreign markets to enter, the timing of entry, and the scale of entry. Xerox utilized licensing and a joint venture known as Fuji Xerox to enter the Japanese market. Daimler-Benz acquired Chrysler in 1998 for $40 billion, but later sold the unit at a loss due to cultural clashes.

Before committing to an alliance, you should follow specific operational steps:

• Collect as much pertinent, publicly available information on potential allies as possible.
• Gather data from informed third parties, including firms that have had alliances with the potential partners, investment bankers who have had dealings with them, and former employees.
• Get to know the potential partner as well as possible before committing to an alliance through face-to-face meetings between senior and middle-level managers.

You can systematically improve your export performance by adopting proactive strategies and utilizing institutional support. Malden Mills secured a working capital loan guarantee from the U.S. Export-Import Bank, initially set at $20 million and later raised to $35 million. General Electric won a $150 million electric generator project in Romania by agreeing to market an equivalent value of Romanian products.

10 Key Ideas

1. Declining trade barriers and dramatic technological changes drive the globalization of markets and production across converging national economies.
2. National differences in political economy, including varying economic systems, legal traditions, and property rights protection, fundamentally shape your strategic choices abroad.
3. Geert Hofstede isolated core dimensions of workplace values that help managers understand how culture defines a shared system of values and norms within a society.
4. Classical trade theories demonstrate that absolute and comparative advantages allow specialized nations to benefit from international trade.
5. Foreign direct investment occurs when firms invest directly in foreign production facilities to bypass the drawbacks of licensing and capitalize on location-specific advantages.
6. The global monetary system evolved from the gold standard and Bretton Woods fixed rates to a modern mixed system of floating, pegged, and managed exchange rates.
7. The global capital market provides a larger liquidity pool that lowers the cost of capital while enabling international portfolio diversification to reduce risk.
8. To maximize firm value and achieve superior profitability, you must pursue strategies that either lower production costs or differentiate products to increase perceived value.
9. Achieving superior enterprise profitability requires maintaining internal consistency among all elements of organizational architecture, including vertical differentiation, horizontal differentiation, and control systems.
10. Firms expanding abroad must systematically decide which foreign markets to enter, the timing of entry, the scale of entry, and the appropriate entry mode.