The Global business.

Chapter 11: Managing Global Competitive Dynamics 336Competition, Cooperation, and Collusion 339Institutions Governing Domestic and Resources Influencing Competitive Dynamics 346Attacks,

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Preface ix

Chapter 2: Understanding Formal Institutions: Politics, Laws,

Chapter 8: Capitalizing on Global and Regional Integration 232

Chapter 9: Growing and Internationalizing the Entrepreneurial Firm 286

Chapter 13: Strategizing, Structuring, and Learning around the World 394

Chapter 14: Competing on Marketing and Supply Chain Management 466

Brief Contents

Chapter 16: Financing and Governing the Corporation Globally 522

Chapter 17: Managing Corporate Social Responsibility Globally 552

Preface ix

Part 1 Laying Foundations 1

Chapter 1: Globalizing Business 2

Global Business and Globalization

Chapter 2: Understanding Formal

Institutions: Politics, Laws, and Economics 32

An Institution-Based View of Global Business 38

Chapter 3: Emphasizing Informal Institutions:

Cultures, Ethics, and Norms 62

Where Do Informal Institutions Come From? 64

Culture 65

Ethics 78

Chapter 4: Leveraging Resources and

Capabilities 92

Understanding Resources and Capabilities 94

Resources, Capabilities, and the Value Chain 96

Part 1 Integrative Cases 124

1.2 Whose Law Is Bigger: Arbitrating

Government-Firm Disputes in the EU 126

1.3 Fighting Counterfeit Motion Pictures 1281.4 Brazil’s Embraer: From State-Owned

Chapter 5: Trading Internationally 140

Chapter 6: Investing Abroad Directly 174

Why Do Firms Become MNEs

How MNEs and Host Governments Bargain 190

Chapter 7: Dealing with Foreign Exchange 204

What Determines Foreign Exchange Rates? 206Evolution of the International Monetary

System 214Strategic Responses to

Table of Contents

Chapter 11: Managing Global Competitive Dynamics 336

Competition, Cooperation, and Collusion 339Institutions Governing Domestic and

Resources Influencing Competitive Dynamics 346Attacks, Counterattacks, and Signaling 350Local Firms versus Multinational Enterprises 351

Chapter 12: Making Alliances and

Institutions, Resources, Alliances, and Acquisitions 368

Part 3 Integrative Cases 428

3.1 Wikimart: Building a Russian Version of Amazon 428

3.3 Amazon, Bookoff, and the Japanese

3.4 Huawei’s Intellectual Property War 438

Chapter 8: Capitalizing on Global and

Regional Integration 232

Regional Economic Integration in Europe 242

Regional Economic Integration in the

Americas 248

Regional Economic Integration in the

Regional Economic Integration in Africa 252

Part 2 Integrative Cases 270

2.1 Canada and the United States Fight

2.2 Foreign Direct Investment in the Indian

2.4 Jobek do Brasil’s Foreign Exchange

Challenges 276

2.5 The EU–Korea Free Trade Agreement 279

Part 3 Strategizing around the

Globe 285

Chapter 9: Growing and Internationalizing

the Entrepreneurial Firm 286

Entrepreneurship and Entrepreneurial

Firms 289

Institutions, Resources, and

Entrepreneurship 289

Internationalizing the Entrepreneurial Firm 298

Chapter 10: Entering Foreign Markets 310

Overcoming the Liability of Foreignness 312

3.7 Geely’s Acquisition of Volvo 455

3.8 Hilton Welcomes Chinese Travelers

Part 4 Building Functional

Excellence 465

Chapter 14: Competing on Marketing and

Supply Chain Management 466

From Distribution Channel to

The Triple As in Supply Chain Management 475

How Institutions and Resources Affect

Marketing and Supply Chain Management 478

Chapter 15: Managing Human Resources

Globally 492

Staffing 495

Compensation and Performance Appraisal 502

Institutions, Resources, and

Institutions, Resources, and Corporate

Chapter 17: Managing Corporate Social Responsibility Globally 552

Institutions, Resources, and

Part 4 Integrative Cases 582

4.1 ESET: From a “Living-Room” Firm

to a Global Player in the Antivirus

4.3 Microfinance: Macro Success or

The first two editions of Global Business aspired to set a new standard for

interna-tional business (IB) textbooks Based on the enthusiastic support from students

and instructors in Australia, Brazil, Britain, Canada, China, Egypt, France, Hong

Kong, India, Indonesia, Ireland, Israel, Lithuania, Malaysia, Puerto Rico, Russia,

Slovenia, South Africa, South Korea, Taiwan, Thailand, and the United States, the

first two editions achieved unprecedented success A Chinese translation is now

available and a European adaptation (coauthored with Klaus Meyer) has been

suc-cessfully launched In short, Global Business is global

The third edition aspires to do even better It continues the market-winning

framework centered on one big question and two core perspectives pioneered in

the first edition, and has been thoroughly updated to capture the rapidly moving

research and events of the past few years Written for undergraduate and MBA

students around the world, the third edition will continue to make IB teaching and

learning more (1) engaging, (2) comprehensive, (3) fun, and (4) relevant

More Engaging

As an innovation in IB textbooks, a unified framework integrates all chapters

Given the wide range of topics in IB, most textbooks present the discipline in a

fashion that “Today is Tuesday, it must be Luxembourg.” Very rarely do authors

address: “Why Luxembourg today?” More important, why IB? What is the big

ques-tion in IB? Our unified framework suggests that the discipline can be united

by one big question and two core perspectives The big question is: What

deter-mines the success and failure of firms around the globe? To address this question,

Global Business introduces two core perspectives, (1) the institution-based view

and (2) the resource-based view, in all chapters It is this relentless focus on our

big question and core perspectives that enables this book to engage a variety of

IB topics in an integrated fashion This provides unparalleled continuity in the

learning process

Global Business further engages readers through an evidence-based approach I

have endeavored to draw on the latest research rather than the latest fads As an

active researcher myself, I have developed the unified framework not because it

just popped up in my head when I wrote the book Rather, this is an extension of

my own research that consistently takes on the big question and leverages the two

core perspectives.1

1 For the big question, see M W Peng, 2004, Identifying the big question in international business research, Journal of

International Business Studies, 35: 99–108 For the institution-based view, see M W Peng, S L Sun, B Pinkham, &

H. Chen, 2009, The institution-based view as a third leg for a strategy tripod, Academy of Management Perspectives,

23(3): 63–81; M W Peng, D Wang, & Y Jiang, 2008, An institution-based view of international business strategy: A focus

on emerging economies, Journal of International Business Studies, 39: 920–936 For the resource-based view, see

M. W. Peng, 2001, The resource-based view and international business, Journal of Management, 27: 803–829.

Another vehicle to engage students is debates Most textbooks present knowledge

“as is” and ignore debates But obviously our field has no shortage of debates It is the responsibility of textbook authors to engage students by introducing cutting-edge debates Thus, I have written a beefy “Debates and Extensions” section for

every chapter

Finally, this book engages students by packing rigor with accessibility There

is no “dumbing down.” No other competing IB textbook exposes students to an article on how to save Europe by the Managing Director of the International Monetary Fund (In Focus 8.1), a commentary on China’s ten years in the World Trade Organization by the US Ambassador to China (Emerging Markets 8.1), and

a Harvard Business Review article on China’s outward foreign direct investment

(authored by me—Emerging Markets 6.1) These are not excerpts but full-blown, original articles—the first in an IB (and, in fact, in any management) textbook These highly readable short pieces directly give students a flavor of the original insights

More Comprehensive

Global Business offers the most comprehensive and innovative coverage of IB topics

available on the market Unique chapters not found in other IB textbooks are: Chapter 9 on entrepreneurship and small firms’ internationalization

Chapter 11 on global competitive dynamics

Chapter 16 on corporate finance and governance

Chapter 17 on corporate social responsibility (in addition to one full-blown chapter on ethics, cultures, and norms, Chapter 3)

Half of Chapter 12 (alliances and acquisitions) deals with the inadequately covered topic of acquisitions Approximately 70% of market entries based

on foreign direct investment (FDI) around the world use acquisitions Yet, none of the other IB textbooks has a chapter on acquisitions—clearly, a missing gap

The most comprehensive topical coverage is made possible by drawing on the latest and most comprehensive range of the research literature Specifically, I have accelerated my own research, publishing a total of 30 articles since 2010 after I finished the second edition.2 I have drawn on such latest research to inject cutting-edge thinking into the third edition

In addition, I have also endeavored to consult numerous specialty journals For

example, the trade and finance chapters (Chapters 5–7) draw on the American nomic Review, Journal of Economic Literature, and Quarterly Journal of Economics The entrepreneurship chapter (Chapter 9) consults with the Journal of Business Venturing and Entrepreneurship Theory and Practice The marketing and supply chain chapter (Chapter 14) draws heavily from the Journal of Marketing, Journal of International Mar- keting, and Journal of Operations Management The corporate finance and governance chapter (Chapter 16) is visibly guided by research published in the Journal of Finance and Journal of Financial Economics

Eco-The end result is the unparalleled, most comprehensive set of evidence-based insights on the IB market While citing every article is not possible, I am confident

2 All my articles are listed at www.mikepeng.com and www.utdallas.edu/~mikepeng Go to “Journal Articles.”

that I have left no major streams of research untouched Feel free to check the

Name Index to verify this claim

Finally, the third edition of Global Business continues to have a global set of

cases contributed by scholars around the world—an innovation on the IB market

Virtually all other IB textbooks have cases written by book authors In comparison,

this book has been blessed by a global community of case contributors who are

based in Austria, Brazil, China, France, Germany, Hong Kong, India, and the United

States Many are experts who are located in, or are from, the countries in which the

cases take place For example, we now have a Brazil case penned by a Brazil-based

author (see the Integrative Case on Jobek do Brasil), and two China cases written by

China-based authors (see the Integrative Cases on Geely’s acquisition of Volvo and

Sino Iron in Australia) This edition also features a Russia case contributed by the

world’s top two leading experts on Russian management (see the Integrative Case

on Wikimart) The end result is an unparalleled, diverse collection of case materials

that will significantly enhance IB teaching and learning around the world

More Fun

If you fear that this book must be very boring because it draws so heavily on

cur-rent research, you are wrong I have used a clear, engaging, conversational style to

tell the “story.” Relative to rival books, my chapters are generally more lively and

shorter Some reviewers have commented that reading Global Business is like

read-ing a “good magazine.” A large number of interestread-ing anecdotes have been woven

into the text In addition to examples from the business world, non-traditional

(“outside-the-box”) examples range from ancient Chinese military writings to

mu-tually assured destruction (MAD) strategy during the Cold War, from Shakespeare’s

The Merchant of Venice to Tolstoy’s Anna Karenina Popular movies such as A Few Good

Men, Devil’s Advocate, and Legally Blonde are also featured In addition, numerous

Opening Cases, Closing Cases, and In Focus boxes spice up the book Check out

the following fun-filled features:

Partying in Saudi Arabia (Chapter 3 Opening Case)

Adding value to the dirtiest job online (In Focus 4.2)

Why are US exports so competitive? (Chapter 5 Opening Case)

A sticky business in Singapore (In Focus 5.1)

Cry for me, Argentina (Chapter 6 Closing Case)

The Greek tragedy (Chapter 8 Closing Case)

The world’s best place to make Viagra (In Focus 10.1)

A fox in the hen house (In Focus 11.2)

Brazil’s Whopper deal (Emerging Markets 12.2)

Mickey goes to Shanghai (Chapter 13 Opening Case)

Wolf wars (Chapter 17 Closing Case)

Milton Friedman goes global (Emerging Markets 17.1)

There is one Video Case from BBC News to support every chapter While

vir-tually all competing books have some videos, none has a video package that is so

integrated with the learning objectives of every chapter.

Finally, as a new feature introduced since the second edition, PengAtlas allows

you to conduct IB research using informative maps and other geographic and

cultural literacy tools to enhance your learning

More Relevant

So what? Chapters in most textbooks leave students to figure out the crucial “So what?” question for themselves In contrast, I conclude every chapter with an action-packed section titled “Management Savvy.” Each section has at least one table (or one teachable slide) that clearly summarizes the key learning points from

a practical standpoint No other competing IB book is so savvy and so relevant.

Further, ethics is a theme that cuts through the book, with at least one “Ethical Dilemma” feature and a series of Critical Discussion Questions on ethics in each

chapter Finally, many chapters offer career advice for students For example:

Chapter 1 In Focus 1.3 directly addresses a question many students would ask: What language and what fields should I study?

Chapter 4 develops a resource-based view of the individual—that is, about you, the student The upshot? You want to make yourself into an “untouch-able” who adds valuable, rare, and hard-to-imitate capabilities indispensable

to an organization In other words, you want to make sure your job cannot be outsourced

Chapter 15 offers tips on how to strategically and proactively invest in your career now—as a student—for future international career opportunities

What’s New in the Third Edition?

Most importantly, the third edition has (1) highlighted the executive voice by ing more heavily from CEOs and other business leaders, (2) dedicated more space

draw-to emerging economies, and (3) enhanced the quantity and variety of cases

First, since Global Business aims to train a new generation of global business

lead-ers, the third edition has featured more extensive quotes and perspectives from global business leaders These are longer and more visibly prominent break-out quotes—not merely single quotes typically embedded (or “buried”) in paragraphs

In Chapter 1 alone, you will enjoy such insightful quotes from (1) GE’s current chairman and CEO and (2) GE’s former chairman and CEO In later chapters, the following global business leaders will share their thoughts with you:

Applied Materials’ human resource executiveArgentina’s president

Bayer North America’s CEODow Chemical’s CEO IBM’s CEO

IBM’s chief procurement officer

IMF’s managing director—a full article

TNK-BP’s chairman and CEO and Alfa Group’s founder

US Ambassador to China—a full article

US Secretary of Justice (representing the Department of Justice’s challenge of AT&T’s proposed merger with T- Mobile)

US Secretary of Treasury (on the US-China Strategic and Economic Dialogue)Whole Foods’ co-founder and CEO

WTO’s director-general

Second, this edition builds on Global Business’s previous strengths by more

prom-inently highlighting global business challenges in and out of emerging economies This is both a reflection of the global realities in which emerging economies have

played a more prominent role and a reflection of my own strong research interest in

emerging economies Specifically, in the third edition, (1) a new Emerging Markets

in-chapter feature is launched in every in-chapter, and (2) 18 out of 23 (78%) of the longer

Integrative Cases deal with emerging economies (including one case on Central and

Eastern Europe, two cases each on Africa, Brazil, Russia, and India, and six on China)

Third, in response to students’ and professors’ enthusiasm about the

wide-ranging and globally relevant cases in previous editions, the third edition has

fur-ther enhanced the quantity and variety of cases The number of Integrative Cases

has increased from 15 to 23—a 53% increase The variety has also been enhanced

not only in terms of the geographic diversity noted above, but also in terms of the

mix of longer cases and shorter cases In addition, I have pushed myself to

partici-pate more actively in case writing Therefore, I am very proud to report that of the

23 Integrative Cases in the third edition, I personally wrote 10 (43%) This

com-pares very favorably to the one Integrative Case out of a total of 15 that I personally

authored in the second edition (representing a mere 7%)

Of course, in addition to these new features, every chapter has been thoroughly

updated Of the 23 Integrative Cases, 19 (83%) are new to this edition PengAtlas

maps have also been updated to capture the latest statistics

The new BBC News Video Cases provide current, real-world examples of key

course topics The set covers such diverse countries as Brazil, China, Cuba, Dubai,

India, Thailand, and Uruguay, and features a broad array of industries from

high-tech manufacturing to goat farming

Support Materials

A full set of supplements is available for students and adopting instructors, all

de-signed to facilitate ease of learning, teaching, and testing

Global Business CourseMate. Cengage Learning’s Global Business CourseMate

brings course concepts to life with interactive learning, study, and exam

prepara-tion tools that support the printed textbook Through this website, available for

an additional fee, students will have access to their own set of PowerPoint® slides,

flashcards, and games, as well as the Learning Objectives and Glossary for quick

reviews A set of auto-gradable, interactive quizzes (prepared by Timothy R Muth

of Florida Institute of Technology) will allow students to instantly gauge their

comprehension of the material The quizzes are all tagged to the book’s

Learn-ing Objectives, Bloom’s taxonomy, and national standards Finally, Global Business

CourseMate includes interactive maps that delve more deeply into key concepts

presented in the book

Product Support Website The flashcards, Learning Objectives, and Glossary

are available for quick reference on our complimentary student product support

website

Webtutor on BlackBoard ® and Webtutor on WebCT.™ Available on two

differ-ent platforms, Global Business Webtutor enhances studdiffer-ents’ understanding of the

material by featuring the Opening Cases and Video Cases, as well as the Glossary,

study flashcards, and interactive maps that delve more deeply into key concepts

presented in the book

CengageNOW™ Course Management System. Designed by instructors

for instructors, CengageNOW™ mirrors the natural teaching workflow with an

easy-to-use online suite of services and resources, all in one program With this system, instructors can easily plan their courses, manage student assignments, automatically grade, teach with dynamic technology, and assess student progress with pre- and post-tests tagged to course outcomes and national standards For students, study tools include flashcards, PowerPoint® slides, media quizzes, guided cases, and a set of quizzes based on interactive maps that enhance comprehen-sion of the material and develop cultural and geographic literacy Diagnostic tools create a personalized study plan for each student that focuses their study efforts CengageNOW™ operates seamlessly with WebCT™, Blackboard®, and other course management tools.

Global Economic Watch. Cengage Learning’s Global Economic Watch helps instructors bring these pivotal current events into the classroom through a powerful, continuously updated online suite of content, discussion forums, testing tools, and more The Watch, a first-of-its-kind resource, stimulates discussion and understanding of the global downturn with easily integrated teaching solutions:

A thorough overview and timeline of events leading up to the global economic

crisis are included in the ebook module, Impact of the Global Economic Crisis on Small Business

A content-rich blog of breaking news, expert analysis, and commentary—updated multiple times daily—plus links to many other blogs

A powerful real-time database of hundreds of relevant and vetted journal, newspaper, and periodical articles, videos, and podcasts—updated four times every day

Discussion and testing content, PowerPoint® slides on key topics, sample syllabi, and other teaching resources

History is happening now, so bring it into the classroom with The Watch at

Test Bank—The Global Business Test Bank in ExamView® software allows instructors to create customized texts by choosing from 35 True/False,

35 Multiple Choice, and at least 8 short answer/essay questions for each of the 17 chapters Ranging in difficulty, all questions have been tagged to the text’s Learning Objectives, Bloom’s taxonomy, and other national standards

to ensure that students are meeting the course criteria

PowerPoint® Slides—This comprehensive set of more than 250 Powerpoint®slides will assist instructors in the presentation of the chapter material, en-abling students to synthesize key global concepts

Global Business DVD Perhaps one of the most exciting and compelling bonus features of this program, these 17 short and powerful video clips, produced by BBC

News, provide current and relevant real-world examples The set covers such

di-verse countries as Brazil, China, Cuba, Dubai, India, Thailand, and Uruguay, and

features a broad array of industries from high-tech manufacturing to goat farming

Instructor Product Support Website For those instructors who prefer to access

supplements online, the Instructor’s Manual, PowerPoint® slides, and Test Bank are

also available through the instructor’s product support website

Acknowledgments

As Global Business launches its third edition, I first want to thank all the customers—

professors, instructors, and students around the world who have made the book’s

success possible A special thank-you goes to my friend and colleague, Klaus Meyer

(China Europe International Business School), who spearheaded the

develop-ment of International Business, which was tailored for European (or, more broadly,

European, Middle Eastern, and African [EMEA]) students Klaus has made Global

Business more global.

At UT Dallas, I thank my colleagues Dan Bochsler, Larry Chasteen, Tev Dalgic,

Van Dam, Greg Dess, Dave Ford, Richard Harrison, Maria Hasenhuttl, Charlie

Hazzard, Marilyn Kaplan, Seung-Hyun Lee, Elizabeth Lim, John Lin, Livia Markóczy,

Joe Picken, Roberto Ragozzino, Orlando Richard, Jane Salk, Mary Vice, Eric Tsang,

and Habte Woldu, as well as the supportive leadership team—Hasan Pirkul (dean),

Varghese Jacob (associate dean), and Greg Dess (area coordinator) I also thank my

two PhD students, Brian Pinkham (now at Texas Christian University) and Steve

Sauerwald, for their research assistance Three PhD students (Canan Mutlu, Brian

Pinkham, and Weichieh Su) and five MBA students (Simon Ebenezer, Matthew

Lafever, Katie Metzler, Katie Ryan, and Chris Spartz) authored excellent case materials

At South-Western Cengage Learning, I thank the “Peng team:” Erin Joyner,

Publisher; Michele Rhoades, Senior Acquisitions Editor; Jennifer King,

Developmen-tal Editor; Emily Nesheim and Tamborah Moore, Senior Content Project Managers;

Jonathan Monahan, Marketing Manager; Stacy Shirley, Senior Art Director; and

Tamara Grega, Editorial Assistant

In the academic community, I thank Ben Kedia (University of Memphis) for

inviting me to conduct faculty training workshops in Memphis every year since

1999, and Michael Pustay (Texas A&M University) for co-teaching these workshops

with me—widely known as the “M&M Show” in the IB field Discussions with over

200  colleagues who came to these faculty workshops over the last decade have

helped shape this book into a better product I also appreciate the meticulous and

excellent comments from the reviewers:

Nadeem M Firoz (Montclair State University)

Andrew Fleck (Fox Valley Technical College)

Anna Helm (George Washington University)

P Michael McLain (Hampton University)

Mark Quinn (Xavier University of Louisiana)

Al Saber (Friends University)

Sudhir Sachdev (Farmingdale State College)

Continued thanks to the reviewers of the previous editions:

Syed Ahmed (Cameron University)

Richard Ajayi (University of Central Florida, Orlando)

Basil Al-Hashimi (Mesa Community College)Verl Anderson (Dixie State College of Utah)Peter L Banfe (Ohio Northern University)Lawrence A Beer (Arizona State University)Tefvik Dalgic (University of Texas at Dallas)Tim R Davis (Cleveland State University)George DeFeis (Monroe College, Bronx)Ping Deng (Maryville University)Norb Elbert (Eastern Kentucky University)Joe Horton (University of Central Arkansas)Samira Hussein (Johnson County Community College)Ann L Langlois (Palm Beach Atlantic University)Lianlian Lin (California State Polytechnic University, Pomona, California)Ted London (University of Michigan)

Martin Meznar (Arizona State University, West)Dilip Mirchandani (Rowan University)

Timothy R Muth (Florida Institute of Technology)Don A Okhomina (Fayetteville State University)William Piper (Alcorn State University)

Charles A Rarick (Barry University)Tom Roehl (Western Washington University)Bala Subramanian (Morgan State University)Gladys Torres-Baumgarten (Kean University)Susan Trussler (University of Scranton)William R Wilkerson (University of Virginia)Attila Yaprak (Wayne State University)

In addition, I thank many colleagues who provided informal feedback to me

on the book Space constraints here force me to only acknowledge colleagues who wrote me since the second edition, since colleagues who wrote me earlier were thanked in earlier editions

Paul Beamish (University of Western Ontario, Canada)Santanu Borah (University of North Alabama, USA)Thierry Brusselle (Chaffey Community College, USA)Lauren Carey (University of Miami, USA)

Ping Deng (Maryville University, USA)Todd Fitzgerald (Saint Joseph’s University, USA)Dennis Garvis (Washington and Lee University, USA)John Gerace (Chestnut Hill College, USA)

Mike Geringer (Ohio University, USA)

C Gopinath (Suffolk University, USA)Charlie Hazzard (University of Texas at Dallas, USA)Chad Hilton (University of Alabama, USA)

Anisul Islam (University of Houston, USA)Basil Janavaras (Minnesota State University, USA)Marshall Shibing Jiang (Brock University, Canada)Somnath Lahiri (Illinois State University, USA)Ann Langlois (Palm Beach Atlantic University, USA)Lianlian Lin (California State Polytechnic University, USA)Dong Liu (Georgia Institute of Technology, USA)

David Liu (George Fox University, USA)

Ted London (University of Michigan, USA)

Charles Mambula (Langston University, USA)

Daniel McCarthy (Northeastern University, USA)

Hemant Merchant (Florida Atlantic University, USA)

Debmalya Mukherjee (University of Akron, USA)

Asmat Nizam (Universiti Utara, Malaysia)

Kenny Oh (University of Missouri at St Louis, USA)

Eydis Olsen (Drexel University, USA)

Sheila Puffer (Northeastern University, USA)

Gongming Qian (Chinese University of Hong Kong, China)

David Reid (Seattle University, USA)

Surekha Rao (Indiana University Northwest, USA)

Al Rosenbloom (Dominican University, USA)

Anne Smith (University of Tennessee, USA)

Clyde Stoltenberg (Wichita State University, USA)

Steve Strombeck (Azusa Pacific University, USA)

Sunny Li Sun (University of Missouri at Kansas City, USA)

Qingjiu (Tom) Tao (James Madison University, USA)

Vas Taras (University of North Carolina at Greensboro, USA)

Rajaram Veliyath (Kennesaw State University, USA)

Jose Vargas-Hernandez (Universidad de Guadalajara, Mexico)

Loren Vickery (Western Oregon University, USA)

George White (Old Dominion University, USA)

Habte Woldu (University of Texas at Dallas, USA)

Richard Young (Minnesota State University, USA)

Wu Zhan (University of Sydney, Australia)

I also want to thank three very special colleagues: Liu Yi (Shanghai Jiaotong

University), Xie En, and Wang Longwei (Xi’an Jiaotong University) in China They

loved the book so much that they were willing to endure the pain of translating it

into Chinese Their hard work has enabled Global Business to reach wider audiences

globally For the third edition, 28 colleagues graciously contributed cases:

Christoph Barmeyer (Passau University, Germany)

Dirk Michael Boehe (Insper Institute of Education and Research, Brazil)

Charles Byles (Virginia Commonwealth University, USA)

Peggy Chaudhry (Villanova University, USA)

Jessica Chelekis (University of Southern Denmark, Denmark)

Yuan Yi Chen (Hong Kong Baptist University, China)

Zhu Chen (PFC Energy, Beijing, China)

Simon Ebenezer (University of Texas at Dallas, USA)

Juan España (National University, USA)

Steven Globerman (Western Washington University, USA)

Matthew Lafever (University of Texas at Dallas, USA)

Ulrike Mayrhoder (University Lyon 3, France)

Daniel McCarthy (Northeastern University, USA)

Katie Metzler (University of Texas at Dallas, USA)

Klaus Meyer (China Europe International Business School, China)

Susan Mudambi (Temple University, USA)

Canan Mutlu (University of Texas at Dallas, USA)

Brian Pinkham (Texas Christian University, USA)Sheila Puffer (Northeastern University, USA)Katie Ryan (University of Texas at Dallas, USA)Arnold Schuh (Vienna University of Economics and Business, Austria)Chris Spartz (University of Texas at Dallas, USA)

Charles Stevens (University of Wyoming, USA)Weichieh Su (University of Texas at Dallas, USA)Sunny Li Sun (University of Missouri at Kansas City, USA)Michael Young (Hong Kong Baptist University, China)Yanli Zhang (Montclair State University, USA)

Alan Zimmerman (City University of New York, USA)

In addition, the work of the following prominent authors was reprinted to grace the pages of this book:

Rohit Deshpande (Harvard Business School) and Anjali Raina (HBS India Research Center, India)—coauthor of “The Ordinary Heroes of the Taj”

Mikhail Fridman (TNK-BP and Alfa Group, Russia)—chairman and CEO of TNK-BP and founder of Alfa Group

Vijay Govindarajan and Chris Trimble (Dartmouth College)—coauthor of

of “Creating Shared Value”

Jack Welch and Suzy Welch (BusinessWeek)—Jack is the retired chairman and CEO of GE and Suzy is a former editor of Harvard Business Review

Last, but by no means least, I thank my wife Agnes, my daughter Grace, and my son James—to whom this book is dedicated I have named Agnes CEO, CFO, CIO, CTO, and CPO for our family, the last of which is coined by me, which stands for

“chief parenting officer.” When the first edition was conceived, Grace was three, and James one When the second edition came out, Grace declared a career inter-est in being a rock star, and James a race car driver Now my ten-year-old Grace, already a voracious reader and writer, can help me edit, and my eight-year-old James can help me enter grades Grace is writing and editing her 17th short story,

called My Magic Life, and James is very interested in creating Lego models For now,

Grace wants to be a lawyer, and James a banker As a third-generation professor in

my family, I can’t help but wonder whether one (or both) of them will become a fourth-generation professor To all of you, my thanks and my love

MWP

December 1, 2012

About the Author

Mike W Peng is the Jindal Chair of Global Business Strategy at the Jindal School

of Management, University of Texas at Dallas, a National Science Foundation

CAREER Award winner, and a Fellow of the Academy of International Business He

is also Executive Director of the Center for Global Business, which he founded At

UT Dallas, he has been the number-one contributor to the 45 top journals tracked

by Financial Times, which has ranked UT Dallas as a top-20 school in research

world-wide and its MBA and EMBA programs increasingly in the top tier

Professor Peng holds a bachelor’s degree from Winona State University,

Minnesota, and a PhD degree from the University of Washington, Seattle Between

2005 and 2011, he was the first Provost’s Distinguished Professor at UT Dallas, a

chair position that was created to attract him to join the faculty He had previously

been an associate professor (with tenure) at the Ohio State University Prior to

that, he had served on the faculty at the Chinese University of Hong Kong and the

University of Hawaii He has taught in five states in the United States (Hawaii, Ohio,

Tennessee, Texas, and Washington) as well as China, Hong Kong, and Vietnam

He has also held visiting or courtesy appointments in Australia, Britain, China,

Denmark, Hong Kong, and the United States In addition to these countries, he

has presented papers in Austria, Brazil, France, Germany, Japan, Macau, Puerto

Rico, Singapore, South Korea, Switzerland, and Taiwan

Professor Peng is one of the most prolific and most influential scholars in

inter-national business (IB) During the decade 1996–2006, he was the top-seven

con-tributor to IB’s number-one premier outlet: Journal of International Business Studies

His research is also among some of the most widely cited—both the United Nations

and the World Bank have cited his work A Journal of Management article found him

to be among the top 65 most widely cited management scholars, and an Academy of

Management Perspectives study found him to be the fourth most influential

manage-ment scholar both inside and outside of academia (measured by academic citations

and non-edu Google webpages) among professors who obtained their PhD since

1991 Overall, Professor Peng has published over 100 articles in leading journals,

over 30 pieces in non-refereed outlets, and five books Since the launch of Global

Business’s second edition, he has published not only in top IB journals, such as

the Academy of Management Journal, Journal of International Business Studies, Journal of

World Business, and Strategic Management Journal, but also in leading outlets in

op-erations ( Journal of Opop-erations Management), entrepreneurship ( Journal of Business

Venturing and Entrepreneurship Theory and Practice), and human resources

(Interna-tional Journal of Human Resource Management).

Professor Peng’s market leading textbooks, Global Business, Global Strategy, and

GLOBAL, are studied in over 30 countries and have been translated into Chinese,

Spanish, and Portuguese A European adaptation, International Business (with Klaus

Meyer), has been successfully launched

Professor Peng is active in leadership positions He has served on the

edito-rial boards of AMJ, AMR, JIBS, JMS, JWB, and SMJ, and guest-edited a special

issue for the JMS At the Academy of International Business (AIB), he co-chaired the AIB/JIBS Frontiers Conference in San Diego (2006), guest-edited a JIBS

special issue (2010), chaired the Emerging and Transition Economies track for the Nagoya conference (2011), and chaired the Richard Farmer Best Disserta-tion Award Committee for the Washington conference (2012) In 2012, he was elected to be a Fellow of the AIB, joining a distinguished group of about 80 senior scholars who made most significant contributions to IB At the Strategic Manage-ment Society (SMS), he was elected to chair the Global Strategy Interest Group

He also co-chaired the SMS Special Conference on China in Shanghai (2007)

He served one term as Editor-in-Chief of the Asia Pacific Journal of Management

During his editorial tenure, he managed the doubling of submission numbers and the successful bid to enter the Social Sciences Citation Index (SSCI), which

reported APJM’s first citation impact to be 3.36 and rated it as the top 18 among

140 management journals for 2010

Professor Peng is also an active consultant, trainer, and keynote speaker He has provided on-the-job training to over 300 professors He has consulted and been a keynote speaker for multinational enterprises (such as AstraZeneca, Berlitz, KOSTA, Nationwide, SAFRAN, and Texas Instruments), non-profit organiza-tions (such as Greater Dallas Asian American Chamber of Commerce and World Affairs Council of Dallas-Fort Worth), educational and funding organizations (such as Harvard University Kennedy School of Government, Hong Kong Research Grants Council, National Science Foundation of the United States, Social Sciences and Humanities Research Council of Canada, and the University of Memphis), and national and international organizations (such as the US-China Business Council,

US Navy, and World Bank)

Professor Peng has attracted close to $1 million in external funding His ors include a National Science Foundation CAREER Grant, a US Small Business Administration Best Paper Award, a (lifetime) Distinguished Scholar Award from the Southwestern Academy of Management, and a (lifetime) Scholarly Contribu-tion Award from the International Association for Chinese Management Research

hon-He has been quoted in The Economist, Newsweek, Dallas Morning News, Smart Business Dallas, Atlanta Journal-Constitution, The Exporter Magazine, The World Journal, Business Times (Singapore), Sing Tao Daily (Vancouver), and Brasil Econômico (São Paulo), and

on the Voice of America

Learning Objectives

After studying this chapter, you should be able to

1-1 explain the concepts of international

business and global business, with a focus

on emerging economies

1-2 give three reasons why it is important to

study global business

1-3 articulate one fundamental question and

two core perspectives in the study of global business

1-4 identify three ways of understanding what

globalization is

1-5 state the size of the global economy and its

broad trends and understand your likely bias

in the globalization debate

Globalizing Business

In 1994, when Mahindra & Mahindra (M&M) arrived

in the United States, it was already a powerhouse in

its native India The company, founded as a steelmaker

in 1945, had entered the agriculture market nearly

20 years later, partnering with International Harvester

to manufacture a line of sturdy 35-horsepower tractors

under the Mahindra name

The Mahindra tractors became very popular in

India They were affordably priced and fuel efficient,

two qualities highly valued by thrifty Indian farmers,

and the machines were sized appropriately for small

Indian farms Over the years, M&M continued to

in-novate to perfect its offerings, and its tractors

prolif-erated throughout India’s vast agricultural regions

The Mahindra brand became well established and

respected By the mid-1990s, the company was one

of India’s top tractor manufacturers—and it was ready

for new challenges The lucrative US market beckoned

When Mahindra USA (MUSA) opened for

busi-ness, Deere & Company—famous for its John Deere

brand—was the dominant player Deere’s bread and

butter were enormous machines ranging as high as

600 horsepower for industrial-scale agribusiness

Rather than trying to develop a product that could

com-pete head-on with Deere, M&M aimed for a smaller

agricultural niche, one in which it could grow and make

the most of its strengths

Mahindra figured its little tractor would be perfect for hobby farmers, landscapers, and building contractors The machine was sturdy, extremely reliable, and priced to sell With a few modifications for the US market—such

as supersized seats and larger brake pedals to date larger American bodies—Mahindra was good to go.But the company was far from home and hardly a household name The few Americans who had heard

accommo-of the brand thought accommo-of it variously as “red,” “foreign,”

or “cheap.” Even domestic competitors were barely aware of the newcomer Deere gave more of its atten-tion to Case and New Holland than to Mahindra Fly-ing below the radar, MUSA decided to make its mark through personalized service

MUSA built close relationships with small ships, particular family-run operations Rather than saddle dealers with expensive inventory, MUSA allowed them

dealer-to run on a just-in-time basis, offering dealer-to deliver a tracdealer-tor within 24 to 48 hours of receiving the order MUSA also facilitated financing In return, Mahindra benefited from the trust the dealers enjoyed in their communities.MUSA also built close relationships with custom-ers Some 10% to 15% of M&M tractor buyers got phone calls from the company’s president, who asked whether they were pleased with the buying experience and their new tractors The company also offered special incentives—horticultural scholarships,

O p e n i n g C a s e

EmErging markEts: Mahindra & Mahindra versus John Deere

for example—to neglected market segments such as

female hobby farmers

This high-touch strategy paid off handsomely

MUSA’s US sales growth averaged 40% per year from

1999 to 2006 This prompted David C Everitt, president

of Deere’s agricultural division, to remark that Mahindra

“could someday pass Deere in global unit sales.”

Deere responded with short-lived—and seemingly

desperate—cash incentives to induce Mahindra

buy-ers to trade for a Deere This had the unintended effect

of promoting M&M’s brand (“And we didn’t even pay

for it,” said Anjou Choudhari, CEO of M&M’s farm

equipment sector from 2005 to 2010) Mahindra fired

back with an ad featuring the headline: “Deere John, I

have found someone new.”

As Mahindra enjoyed growing success in America,

Deere struggled to gain a foothold in India Unlike

Mahindra, which had innovated both its product and its processes for the US market, Deere tried to tempt Indian farmers with the same product that had under-written its success at home The strategy did not work, and Deere was forced to re-engineer its thinking as well as its product

“We gave a wake-up call to John Deere,” noted Choudhari “Our global threat was one of the motiva-tions for Deere to design a low-horsepower tractor—in India and for India.”

In the meantime, M&M has become the one tractor maker worldwide, as measured by units sold

number-Source: This case was written by Professors Vijay Govindarajan and

Chris Trimble (both at the Tuck School of Business, Dartmouth College)

It was an excerpt from V Govindarajan & C Trimble, 2012, Reverse

Innova-tion (pp 10–11), Boston: Harvard Business Review Press.

How do firms such as Mahindra & Mahindra and Deere compete in India, the United States, and elsewhere? What determines the success and failure of these firms—and numerous others—around the world? This book will address these and other impor-tant questions on global business

1-1a Defining International Business and Global Business

Traditionally, international business (IB) is defined as a business (or firm) that gages in international (cross-border) economic activities It can also refer to the action of doing business abroad The previous generation of IB textbooks almost always takes the foreign entrant’s perspective Consequently, such books deal with issues such as how to enter foreign markets and how to select alliance partners The most frequently discussed foreign entrant is the multinational enterprise (MNE), de-fined as a firm that engages in foreign direct investment (FDI) by directly investing

en-in, controlling, and managing value-added activities in other countries.1 Using our Opening Case, traditional IB textbooks would focus on how MNEs such as Deere enter India by undertaking FDI there MNEs and their cross-border activities are,

of course, important, but they only cover one side of IB—the foreign side Students educated by these books often come away with the impression that the other side

of IB—namely, domestic firms—does not exist Of course, that is not true mestic firms such as Mahindra & Mahindra do not just sit around in the face of foreign entrants Domestic firms actively compete and/or collaborate with foreign entrants such as International Harvester Sometimes strong domestic firms such as Mahindra & Mahindra have also gone overseas themselves Overall, focusing on the foreign entrant side captures only one side of the coin at best.2

Do-There are two key words in IB: international (I) and business (B).3 However, many previous textbooks focus on the international aspect (the foreign entrant) to such an extent that the business part (which also includes domestic business) almost

Learning Objective

Explain the concepts of

international business and

global business, with a focus on

emerging economies.

1-1

International business (IB)

(1) A business (or firm) that

engages in international

(cross-border) economic activities and/

or (2) the action of doing

busi-ness abroad.

Multinational enterprise (MNE)

A firm that engages in foreign

direct investment (FDI).

Foreign direct investment (FDI)

Investment in, controlling, and

managing value-added activities

in other countries.

disappears This is unfortunate, because IB is fundamentally about B in addition to

being I To put it differently, the IB course in the undergraduate and MBA

curri-cula at numerous business schools is probably the only one with the word “business”

in its title All other courses you take are labeled management, marketing, finance,

and so on, representing one functional area but not the overall picture of business

Does it matter? Of course! It means that your IB course is an integrative course that

has the potential to provide you with an overall business perspective (rather than a

functional view) grounded in a global environment Consequently, it makes sense

that your textbook should give you both the I and B parts, not just the I part

To cover both the I and the B parts, global business is defined in this book as

business around the globe—thus, the title of this book is Global Business (not IB)

In other words, global business includes both (1) international (cross-border)

busi-ness activities covered by traditional IB books and (2) domestic busibusi-ness activities

Such deliberate blurring of the traditional boundaries separating international

and domestic business is increasingly important today, because many previously

national (domestic) markets are now globalized

Consider the competition in college textbooks, such as this Global Business book

you are studying now Not long ago, competition among college business textbook

publishers was primarily on a nation-by-nation basis The Big Three—South-Western

Cengage Learning (our publisher, which is the biggest in the college business textbook

market), Prentice Hall, and McGraw-Hill—primarily competed in the United States

A different set of publishers competed in other countries As a result, most textbooks

studied by British students would be authored by British professors and published by

British publishers, most textbooks studied by Brazilian students would be authored

by Brazilian professors and published by Brazilian publishers, and so on Now

South-Western Cengage Learning (under British and Canadian ownership), Pearson

Pren-tice Hall (under British ownership), and McGraw-Hill (still under US ownership)

have significantly globalized their competition, thanks to the rising demand for

high-quality business textbooks in English Around the globe, they are competing against

each other in many markets, publishing in multiple languages and versions For

in-stance, Global Business and its sister books, Global Strategy, GLOBAL (paperback), and

International Business (an adaptation for the European market), are published by

dif-ferent subsidiaries in Chinese, Spanish, and Portuguese in addition to English,

reach-ing customers in over 30 countries Despite such worldwide spread of competition, in

each market—down to each school—textbook publishers have to compete locally In

other words, no professor teaches globally, and all students study locally This means

that Global Business has to win adoption from every class, every semester Overall, it

becomes difficult to tell in this competition what is international and what is domestic

Thus, “global” seems to be a better word to capture the essence of this competition

1-1b Global Business and Emerging Economies

Global Business also differs from other books on IB because most focus on

competi-tion in developed economies Here, by contrast, we devote extensive space to

com-petitive battles waged throughout emerging economies, a term that has gradually

replaced the term “developing countries” since the 1990s Another commonly used

term is emerging markets (see PengAtlas Map 1.1) How important are emerging

economies? Collectively, they now contribute approximately 45% of the global

gross domestic product (GDP), as shown in Figure 1.1 Note that this percentage is

adjusted for purchasing power parity (PPP), which is an adjustment to reflect the

dif-ferences in cost of living (see In Focus 1.1) Using official (nominal) exchange rates

re-Emerging markets

A term that is often used terchangeably with “emerging economies.”

in-Gross domestic product (GDP)

The sum of value added by

resident firms, households, and

governments operating in an economy.

Purchasing power parity (PPP)

A conversion that determines the equivalent amount of goods and services that different currencies can purchase.

Figure 1.1 The Contributions of Emerging Economies Relative to Developed

Economies (World %)

80 90 100

60 70 50

40 30 20 10 0

Developed economies

FDI outflows

GDP (nominal exchange rates) Exports of goods and services FDI inflows

GDP (purchasing power parity) Population

BRIC Emerging economies excluding BRIC

Sources: Data extracted from (1) United Nations, 2011, World Investment Report 2011, New York and Geneva: UN;

(2) World Bank, 2012, World Development Indicators database, Washington: World Bank All data refer to 2011.

GDP, GNP, GNI, PPP—there is a bewildering variety of

acronyms that are used to measure economic

develop-ment It is useful to set these terms straight before

pro-ceeding Gross domestic product (GDP) is measured as

the sum of value added by resident firms, households,

and governments operating in an economy For

exam-ple, the value added by foreign-owned firms operating

in Mexico would be counted as part of Mexico’s GDP

However, the earnings of non-resident sources that are

sent back to Mexico (such as earnings of Mexicans who

do not live and work in Mexico and dividends received

by Mexicans who own non-Mexican stocks) are not

in-cluded in Mexico’s GDP One measure that captures this

is gross national product (GNP) More recently, the World

Bank and other international organizations have used

a new term, gross national income (GNI), to supersede

GNP Conceptually, there is no difference between GNI

and GNP What exactly is GNI/GNP? It comprises GDP

plus income from non-resident sources abroad

While GDP, GNP, and now GNI are often used as

yardsticks of economic development, differences in

cost of living make such a direct comparison less

mean-ingful A dollar of spending in, say, Thailand can buy a

lot more than in Japan Therefore, conversion based

on purchasing power parity (PPP) is often necessary

The PPP between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country’s currency will purchase the same volume of goods and services in the second country (see Chapter 7 for details) According to the In-ternational Monetary Fund (IMF), the Swiss per capita GDP is $81,161 based on official (nominal) exchange

rates—higher than the US per capita GDP of $48,387

However, everything is more expensive in Switzerland

A Big Mac costs $6.81 in Switzerland versus $4.20 in the United States Thus, Switzerland’s per capita GDP

based on PPP becomes $43,370—lower than the US

per capita GDP based on PPP, $48,387 (the IMF uses the United States as benchmark in PPP calculation) On

a worldwide basis, measured at official exchange rates, emerging economies’ share of global GDP is approxi-mately 26% However, measured at PPP, it is about 43% of the global GDP Overall, when you read statis-tics about GDP, GNP, and GNI, always pay attention to whether these numbers are based on official exchange rates or PPP, which can make a huge difference

Sources: Based on (1) Economist, 2012, Big Mac index, January 14: 93; (2) Economist, 2006, Grossly distorted picture, February 11: 72; (3) International Monetary Fund, 2012, World Economic Outlook, April,

Washington, DC: IMF.

Setting the Terms Straight

IN Focus 1.1

Gross national product (GNP)

GDP plus income from

non-resident sources abroad.

Gross national income (GNI)

GDP plus income from

non-resident sources abroad GNI

is the term used by the World

Bank and other international

organizations to supersede the

term GNP.

without adjusting for PPP, emerging economies contribute about 26% of the global

GDP Why is there such a huge difference between the two measures? Because the

cost of living (such as housing and haircuts) in emerging economies tends to be

lower than that in developed economies For instance, one dollar spent in Mexico

can buy a lot more than one dollar spent in the United States

Table 1.1 lists the 33 countries that are classified as “developed economies.”

The rest of the world (more than 150 countries) can be broadly labeled as

“emerging economies.” Of these emerging economies, Brazil, Russia, India, and

China—commonly referred to as BRIC—command more attention As a group,

they generate 17% of world exports, absorb 16% of FDI inflows, and contribute

28% of world GDP (on a PPP basis) Commanding a lion’s share, BRIC

contrib-ute 62% of the GDP of all emerging economies (on a PPP basis) BRIC also

generate 8% of world FDI outflows MNEs from BRIC (such as Mahindra &

Mahindra in the Opening Case) are increasingly visible in making investments

and acquiring firms around the world.4 Clearly, major emerging economies

(es-pecially BRIC) and their firms have become a force to be reckoned with in global

business.5 In addition to BRIC, other interesting terms include BRICS (BRIC +

South Africa), BRICM (BRIC + Mexico), and BRICET (BRIC + Eastern Europe

and Turkey)

Does it make sense to group so many countries with tremendous diversity

in terms of history, geography, politics, and economics together as “emerging

economies”? As compared to developed economies, the label of “emerging

econo-mies,” rightly or wrongly, has emphasized the presumably homogenous nature of

so many different countries While this single label has been useful, more recent

research has endeavored to enrich it.6

Specifically, the two dimensions illustrated in Figure 1.2 can help us

differenti-ate various emerging economies.7 Vertically, the development of market-supporting

political, legal, and economic institutions has been noted as a crucial dimension of

BRIC

Brazil, Russia, India, and China

Table 1.1 Classifying Developed Economies versus Emerging Economies

33 developed economies as classified by the International Monetary Fund (IMF)

All the other 149 economies are classified by the IMF as emerging economies

Source: IMF, www.imf.org The IMF recognizes 182 countries and economies It labels developed economies “advanced economies” and labels emerging economies “emerging and developing economies.”

institutional transitions in many emerging economies.8 Horizontally, the ment of infrastructure and factor markets is also crucial.

develop-Stereotypical or traditional emerging economies suffer from both the lack

of institutional development and the lack of infrastructure and factor market development Most emerging economies 20 years ago would have fit this descrip-tion Today, some emerging economies that have made relatively little progress along these two dimensions (such as Belarus and Zimbabwe) still exist

However, a lot has changed A great deal of institutional development and frastructure and factor market development have taken place Such wide-ranging

in-development has resulted in the emergence of a class of mid-range emerging

econo-mies that differ from both traditional emerging econoecono-mies and developed omies For example, the top down approach to government found in China has facilitated infrastructure and factor market development But China’s political and market institutions tend to be underdeveloped relative to physical infrastructure Alternatively, India has strong political institutions supporting market institutions (although there is still significant corruption in government bureaucracies) While Indian government policy reforms have facilitated better market institutions and associated economic development, world-class physical infrastructure is lacking In the middle area of Figure 1.2, Brazil and Russia can be placed as examples In these mid-range emerging economies, there are some democratic political institutions (despite the recent setback in Russia—see Chapter 2 Opening Case) and some in-frastructure and factor market development Finally, some economies have clearly graduated from the “emerging” phase and become what we call “newly developed economies.” South Korea may be an exemplar country as it has more balanced development in both institutional development and infrastructure/factor markets.1-1c Base of the Pyramid and Reverse Innovation

econ-The global economy can be viewed as a pyramid (Figure 1.3) econ-The top consists

of about one billion people with per capita annual income of $20,000 or higher

Mid-Range Emerging Economies (e.g., INDIA)

Mid-Range Emerging Economies (e.g., CHINA)

Traditional Emerging Economies (e.g., BELARUS)

Less Infrastructure and Factor Market Development

Figure 1.2 A Typology of Emerging Economies

Source: Adapted from R Hoskisson, M Wright, I Filatotchev, & M W Peng, 2013, Emerging multinationals from

mid-range economies: The influence of institutions and factor markets, Journal of Management Studies (in press).

These are mostly people who live in the developed economies in the Triad, which

consists of North America, Western Europe, and Japan Another billion people

earning $2,000 to $20,000 per year make up the second tier The vast majority of

humanity—about five billion people—earn less than $2,000 per year and

com-prise the base of the pyramid (BOP) Most MNEs focus on the top and second tiers

and end up ignoring the base of the pyramid.9 An increasing number of such

low-income countries have shown a great deal of economic opportunities as low-income

levels have risen (see the Closing Case) More Western MNEs, such as GE, are

in-vesting aggressively in the base of the pyramid and leveraging their investment to

tackle markets in both emerging and developed economies

One interesting recent development out of emerging economies is reverse

innovation—an innovation that is adopted first in emerging economies and

then diffused around the world.10 Traditionally, innovations are generated by

Triad-based multinationals with the needs and wants of rich customers at the

top of the pyramid in mind When such multinationals entered lower-income

economies, they tended to simplify the product features and lower the prices

In other words, the innovation flow is top down However, as Deere & Company

found out in India, its large-horsepower tractors designed for American

farmers were a poor fit for the very different needs and wants of Indian

farmers Despite Deere’s efforts to simplify the product and reduce the price,

the price was still too high in India Instead, Mahindra & Mahindra brought its

widely popular small-horsepower tractors that were developed in India to the

United States, and carved out a growing niche that eventually propelled it to

be the world’s largest tractor maker by units sold (see the Opening Case) In

response, Deere abandoned its US tractor designs and “went native” in India,

by launching a local design team charged with developing something from

scratch—with the needs and wants of farmers in India (or, more broadly, in

emerging economies) in mind The result was a 35-horsepower tractor that

Triad

North America, Western Europe, and Japan.

Base of the pyramid (BoP)

Economies where people make less than $2,000 per capita per year.

Reverse innovation

An innovation that is adopted first in emerging economies and is then diffused around the world.

Base of the Pyramid

Per capita GDP/GNI < $2,000 Approximately five billion people

Sources: Adapted from (1) C K Prahalad & S Hart, 2002, The fortune at the bottom of the pyramid, Strategy+Business,

26: 54-67; (2) S Hart, 2005, Capitalism at the Crossroads (p 111), Philadelphia: Wharton School Publishing.

Figure 1.3 The Global Economic Pyramid

Table 1.2 Why Study Global Business?

Enhance your employability and advance your career in the global economy Better preparation for possible expatriate assignments abroad

Stronger competence in interacting with foreign suppliers, partners, and competitors and

in working for foreign-owned employers in your own country

was competitive not only with Mahindra in India, but also in the United States and elsewhere In both cases, the origin of new innovations is from the base

of the pyramid The flow of innovation is bottom up—in other words, reverse innovation

The reverse innovation movement suggests that emerging economies are no longer merely low-cost production locations or attractive new markets (hence the term “emerging markets”) They are also sources of new innovations that may not only grow out of BOP markets, but also have the potential to go uphill to penetrate

into the top of the global economic pyramid In a Harvard Business Review article,

Jeff Immelt, chairman and CEO of a leading practitioner of reverse innovation,

is oxygen 11

As advised by GE’s Immelt, today’s students—and tomorrow’s business leaders—will ignore the opportunities and challenges at the base of the pyramid at their own

peril This book will help ensure that you will not ignore these opportunities.

Global business (or IB) is one of the most exciting, most challenging, and most relevant subjects offered by business schools Why study it? There are at least three compelling reasons why you should study global business—and study hard (Table 1.2)

First, mastering global business knowledge helps advance your employability and career in an increasingly competitive global economy Take a look at the Open-ing Day Quiz in Table 1.3 Can you answer all the questions correctly? If not, you will definitely benefit from studying global business

The answer to Question 1 is empirical—that is, based on data You should guess first and then look at the label of your shirt yourself or ask a friend to help you The key here is international trade Do you wear a shirt made in your own country or another country? Why?

In Question 2, smart students typically ask whether the mobile device (such

as a smartphone or an iPad) means the motherboard or the components My answer is: “I mean the whole device, all the production that went into making

Learning Objective

Give three reasons why it

is important to study global

business.

1-2

the machine.” Then some students would respond: “But they could be made

in different countries!” My point exactly Specifically, the point here is to

appreciate the complexity of a global value chain, with different countries

making different components and handling different tasks Such a value chain

is typically managed by an MNE, such as Apple, Dell, Foxconn, HP, Lenovo, or

Samsung The capabilities necessary to organize a global supply chain hints at

the importance of resources and capabilities—one of the two key themes of this

book

Question 3 is deceptively simple Unfortunately, 100% of my own students—

ranging from undergraduates to PhDs—miss it Surprise! The Group of 20 (G-20)

only has 19 member countries The 20th member is the European Union (EU)—a

regional bloc, not a single country (see PengAtlas Map 1.1) Ideally, why the G-20 is

formed in such an interesting way will make you more curious about how the rules

of the game are made around the world In this case, why are 19 countries in, but

numerous others are out? What is special about the EU? Why are other regional

blocs not included in the G-20? What about the G-7? What about other groups of

countries (see Figure 1.4)? A focus on the rules of the game—more technically,

institutions—is another key theme of the book

Question 4 will really frighten you Some students would typically clarify: “Do

you mean the few security guards looking after the closed plant?” “Not necessarily,”

I would point out “The question is: How many jobs will be kept by the company?”

Students would eventually get it: even adding a few jobs as security guards at the

closed plant, the most optimistic estimates are that only 30 to 50 jobs may be kept

Yes, you guessed it, these jobs typically are high-level positions such as the CEO,

CFO, CIO, factory director, and chief engineer These managers will be sent by the

MNE to start up operations in an emerging economy You need to realize that in a

2,000-employee plant, even if you may be the 51st-highest-ranked employee, your

fate may be the same as the 2,000th employee You really need to work hard and

work smart to position yourself as one of the top 50 (preferably one of the top 30)

Doing well in this class and mastering global business knowledge may help make

it happen

Group of 20 (G-20)

The group of 19 major countries plus the European Union (EU) whose leaders meet on a biannual basis to solve global economic problems.

Table 1.3 Opening Day Quiz

1 Which country made the shirt you are wearing? 2 Which country made your mobile communication device?

3 How many countries does the G-20 have? 4 A 2,000-employee manufacturing plant is closing in a

developed economy, and production is moving to an emerging economy How many of the 2,000 jobs will the company keep?

(A) 0 (B) 5–10 (C) 10–20 (D) 20–30 (E) 30–50

In addition to the first reason to equip you with relevant knowledge, the second compelling reason why you should study global business is related to Question 4 Because many ambitious students aspire to join the top ranks of large firms, expertise in global business is often a prerequisite Today, it is increasingly difficult, if not impossible, to find top managers at large firms without significant global competence Of course, eventually hands-on global experience, not merely knowledge acquired from this course, will be required However, mastery of the knowledge of, and demonstration of interest in, global business during your education will set you apart as a more ideal candidate

to be selected as an expatriate manager

(or “expat”)—a manager who works abroad—to gain such an experience (see Chapter 15 for details)

Thanks to globalization, low-level jobs not only command lower salaries but are also more vulnerable However, high-level jobs, especially those held by expats, are both financially rewarding and relatively secure Expats often command a signifi-cant international premium in compensa-tion—a significant pay raise when work-ing overseas In US firms, an expat’s total compensation package is approximately

$250,000 to $300,000 (including perks and benefits; not all is take-home pay) When they return to the United States after a tour of duty (usually two to three

Expatriate manager

A manager who works abroad,

or “expat” for short.

International premium

A significant pay raise when

working overseas.

Brazil India

South Africa

Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

Italy France Germany Japan UK Canada USA

Shanghai Co-op Organization

BRIC

G7

Kazakhstan Kyrgyztan Tajikistan Uzbekistan Russia China

Argentina Australia Mexico Turkey European Union

G20

Japan South Korea

Figure 1.4 Country Groupings in the 21st Century

Source: Adapted from C Dhanaraj & T Khanna, 2011, Transforming mental models on emerging markets (p 696),

Academy of Management Learning and Education, 10(4): 684-701 G7 = Group of Seven; G20 = Group of Twenty;

BRIC = Brazil, Russia, India, and China; IBSA = India-Brazil-South Africa Dialogue Forum; Shanghai Co-op nization = Shanghai Co-operation Organization; ASEAN = Association of Southeast Asian Nations © Academy of Management.

years), a firm that does not provide attractive career opportunities to

experi-enced expats often finds that they are lured away by competitor firms

Competi-tor firms also want to globalize their business, and tapping into the expertise and

experience of these former expats makes such expansion more likely to succeed

And yes, to hire away these internationally experienced managers, competitor

firms have to pay an even larger premium This indeed is a virtuous cycle

This hypothetical example is designed to motivate you to study hard so that

someday, you may become one of these sought-after globe-trotting managers But

even if you don’t want to be an expat, we assume that you don’t want to join the army

of the unemployed due to factory closings and business failures

Lastly, even if you do not aspire to compete for the top job at a large company

and instead work at a small firm or are self-employed, you may find yourself dealing

with foreign-owned suppliers and buyers, competing with foreign-invested firms in

your home market, or perhaps even selling and investing overseas Alternatively,

you may find yourself working for a foreign-owned firm, your domestic employer

acquired by a foreign player, or your unit ordered to shut down for global

consoli-dation Any of these is a likely scenario, because approximately 80 million people

worldwide—including 18 million Chinese, six million Americans, and one million

British—are employed by foreign-owned firms Understanding how global business

decisions are made may facilitate your own career in such firms If there is a

stra-tegic rationale to downsize your unit, you want to be prepared and start polishing

your résumé right away In other words, it is your career that is at stake Don’t be

the last in the know!

In short, in this age of global competition, “how do you keep from being

Bangalored or Shanghaied” (that is, having your job being outsourced to India

or China)?12 To avoid the fate humorously portrayed in Figure 1.5, a good place to

Figure 1.5 Jobs Outsourced

Source: Harvard Business Review, 2012, April: 34.

start is to study hard and do well in your IB course Also, don’t forget to put this course on your résumé!

1-3 A Unified Framework

Global business is a vast subject area It is one of the few courses that will make you appreciate why your university requires you to take a number of seemingly unrelated courses in general education We will draw on major social sciences, such as economics, geography, history, political science, psychology, and sociology We will also draw on a number of business disciplines, such

as strategy, finance, and marketing The study of global business is thus very interdisciplinary It is quite easy to lose sight of the forest while scrutinizing various trees or even branches The subject is not difficult, and most students find it to be fun The number-one student complaint (based on previous student feedback) is that there is an overwhelming amount of information

Honestly, this is also my number-one complaint as your author You may have to

read and learn this material, but I have to bring it all together in a way that is understandable and in a (relatively) compact book that does not go on and on and on for 900 pages

To make your learning more focused, more manageable, and (hopefully) more fun, in this section we will develop a unified framework (shown in Figure 1.6) This will provide great continuity to facilitate your learning Spe-cifically, we will discipline ourselves by focusing on only one most fundamen-

tal question and two core perspectives A fundamental question acts to define

a field and to orient the attention of students, practitioners, and scholars in a

certain direction Our “big question” is: What determines the success and ure of firms around the globe?13 To answer this question, we will introduce only

fail-two core perspectives throughout this book: (1) an institution-based view and (2) a resource-based view.14 The remainder of this section outlines this framework

Learning Objective

Articulate one fundamental

question and two core

perspectives in the study of

Institution-based view:

Formal and informal rules of the game

Figure 1.6 A Unified Framework for Global Business

1-3a One Fundamental Question

What is it that we do in global business? Why is it so important that practically all

students in business schools around the world are either required or recommended

to take this course? While there are certainly a lot of questions to raise, a relentless

interest in what determines the success and failure of firms around the globe serves

to focus the energy of our field Global business is fundamentally about not

limit-ing yourself to your home country It is about treatlimit-ing the entire global economy as

your potential playground (or battlefield) Some firms may be successful

domesti-cally but fail miserably overseas Other firms successfully translate their strengths

from their home markets to other countries If you were expected to lead your

firm’s efforts to enter a particular foreign market, wouldn’t you want to find out

what drives the success and failure of other firms in that market?

Overall, the focus on firm performance around the globe defines the field of

global business (or IB) more than anything else Numerous other questions and

topics all relate in one way or another to this most fundamental question

There-fore, all chapters in this book will be centered on this consistent theme: What

de-termines the success and failure of firms around the globe?

1-3b First Core Perspective: An Institution-Based View15

An institution-based view suggests that the success and failure of firms are enabled

and constrained by institutions By institutions, we mean the rules of the game

Doing business around the globe requires intimate knowledge about both formal

rules (such as laws) and informal rules (such as values) that govern competition in

various countries If you establish a firm in a given country, you will work within

that country’s institutional framework, which consists of the formal and informal

institutions that govern individual and firm behavior Firms that do not do their

homework and thus remain ignorant of the rules of the game in a certain country

are not likely to emerge as winners

Formal institutions include laws, regulations, and rules For example,

Hong Kong’s laws are well-known for treating all comers, whether from

neighbor-ing mainland China (whose firms are still technically regarded as “non-domestic”)

or far-away Chile, the same as they treat indigenous Hong Kong firms Such equal

treatment enhances the potential odds for foreign firms’ success It is thus not

sur-prising that Hong Kong attracts a lot of outside firms Other rules of the game

discriminate against foreign firms and undermine their chances for success India’s

recent attraction as a site for FDI was only possible after it changed its FDI

regula-tions from confrontational to accommodating Prior to 1991, India’s rules severely

discriminated against foreign firms As a result, few foreign firms bothered to show

up, and the few that did had a hard time For example, in the 1970s, the Indian

gov-ernment demanded that Coca-Cola either hand over the recipe for its secret syrup,

which it does not even share with the US government, or get out of India Painfully,

Coca-Cola chose to leave India Its return to India since the 1990s speaks volumes

about how much the rules of the game have changed in India

Informal institutions include cultures, ethics, and norms They also play an

important part in shaping the success and failure of firms around the globe For

example, individualistic societies, particularly the English-speaking countries such

as Australia, Britain, and the United States, tend to have a relatively higher level of

entrepreneurship as reflected in the number of business start-ups Why? Because the act of founding a new firm is a widely accepted practice in individualistic societ-ies Conversely, collectivistic societies such as Japan often have a hard time foster-ing entrepreneurship Most people there refuse to stick their neck out to found new businesses because it is contrary to the norm.16

Overall, an institution-based view suggests that institutions shed a great deal

of light on what drives firm performance around the globe.17 Next, we turn to our second core perspective

1-3c Second Core Perspective: A Resource-Based View18The institution-based view suggests that the success and failure of firms around the globe are largely determined by their environments This is certainly correct Indeed, India did not attract much FDI prior to 1991 and Japan does not nurture

a lot of internationally competitive start-ups because of their institutions However, insightful as this perspective is, there is a major drawback If we push this view

to its logical extreme, then firm performance around the globe would be entirely

determined by environments The validity of this extreme version is certainly tionable

ques-The resource-based view helps overcome this drawback While the

institution-based view primarily deals with the external environment, the resource-institution-based view focuses on a firm’s internal resources and capabilities It starts with a simple observa-

tion: In harsh, unattractive environments, most firms either suffer or exit However, against all odds, a few superstars thrive in these environments For example, despite the former Soviet Union’s obvious hostility toward the United States during the Cold War, PepsiCo began successfully operating in the former Soviet Union in the 1970s (!) Most of the major airlines have been losing money since September 11,

2001 But a small number of players, such as Southwest in the United States, Ryanair

in Ireland, and Hainan Airlines in China, have been raking in profits year after year In the fiercely competitive fashion industry, Zara has been defying gravity (see In Focus 1.2) How can these firms succeed in such challenging environments? What is special about them? A short answer is that PepsiCo, Southwest, Ryanair,

Hainan, and Zara must have certain valuable and unique firm-specific resources and

capabilities that are not shared by competitors in the same environments

Doing business outside one’s home country is challenging Foreign firms have

to overcome a liability of foreignness, which is the inherent disadvantage that foreign

firms experience in host countries because of their non-native status.19 Just think about all the differences in regulations, languages, cultures, and norms Think about the odds against Mahindra & Mahindra when it tried to eat some of John Deere’s lunch in the American heartland (see the Opening Case) Against such significant odds, the primary weapons that foreign firms such as Mahindra &

Mahindra employ are overwhelming resources and capabilities that can offset their

liability of foreignness.20 Today, many of us take it for granted that the best-selling car in the United States rotates between the Toyota Camry and the Honda Civic, that Coca-Cola is the best-selling soft drink in Mexico, and that Microsoft Word

is the world’s number-one word-processing software We really shouldn’t Why?

Because it is not natural for these foreign firms to dominate non-native markets

These firms must possess some very rare and powerful firm-specific resources and capabilities that drive these remarkable success stories and are the envy of their rivals around the globe This is a key theme of the resource-based view, which

Liability of foreignness

The inherent disadvantage that

foreign firms experience in host

countries because of their

non-native status.

Zara is one of the hottest fashion chains Founded

in 1975, Zara’s parent, Inditex, has become a

lead-ing global apparel retailer Since its initial public

of-fering (IPO) in 2001, Inditex quadrupled its sales (to

$19.1 billion or €13.8 billion) and profits It doubled the

number of its stores of eight brands, of which Zara

contributes two-thirds of total sales Zara succeeds

by first breaking and then rewriting industry rules—

also known as industry norms

Rule number one: The origin of a fashion house

usually carries some cachet However, Zara does not

hail from Italy or France—it is from Spain Even within

Spain, Zara is not based in a cosmopolitan city like

Barcelona or Madrid It is headquartered in Arteixo,

a town of only 25,000 people in a remote corner of

northwestern Spain that a majority of this book’s

readers would have never heard of Yet, Zara is active

not only throughout Europe, but also in Asia and North

America As of 2012, the total number of stores is

over 4,200 in 64 countries Zara stores occupy some

of the priciest top locations: Champs-Elysées in Paris,

Ginza in Tokyo, Fifth Avenue in New York, Galleria in

Dallas, and Huaihai Road in Shanghai

Rule number two: Avoid stock-outs (a store

run-ning out of items in demand) Zara’s answer?

Occa-sional shortages contribute to an urge to buy now

With new items arriving at stores twice a week,

experienced Zara shoppers know that “If you see

something and don’t buy it, you can forget about

coming back for it because it will be gone.” The

small batch of merchandise during a short window

of opportunity for purchasing motivates shoppers to

visit Zara stores more frequently In London,

shop-pers visit other stores an average of four times a

year, but frequent Zara 17 times a year There is a

good reason to do so: Zara makes about 20,000

items per year, about triple what Gap does “At Gap,

everything is the same,” says one Zara fan, “and

buying from Zara, you’ll never end up looking like

someone else.”

Rule number three: Bombarding shoppers with

ads is a must Gap and H&M spend on average 3%

to 4% of their sales on ads Zara begs to differ: It

devotes just 0.3% of its sales to ads The high traffic

in the stores alleviates some needs for advertising in the media, most of which only serves as a reminder

to visit the stores

Rule number four: Outsource Gap and H&M

do not own any production facilities However, sourcing production (mostly to Asia) requires a long lead time, usually several months Again, Zara has decisively deviated from the norm By concentrating (more than half of) its production in-house (in Spain, Portugal, and Morocco), Zara has developed a super-responsive supply chain It designs, produces, and delivers a new garment to its stores worldwide in a

out-mere 15 days, a pace that is unheard of in the industry The best speed the rivals can achieve is two months

Outsourcing may not necessarily be “low cost,” cause errors in prediction can easily lead to unsold in-ventory, forcing retailers to offer steep discounts The industry average is to offer 40% discounts across all merchandise In contrast, Zara sells more at full price and, when it discounts, it averages only 15%

be-Rule number five: Strive for efficiency through large batches In contrast, Zara intentionally deals with small batches Because of its flexibility, Zara does not worry about “missing the boat” for a season When new trends emerge, Zara can react quickly More interestingly, Zara runs its supply chain like clock-work with a fast but predictable rhythm: Every store places orders on Tuesday/Wednesday and Friday/Saturday Trucks and cargo flights run on established schedules—like a bus service From Spain, shipments

Zara Deviates from Industry Norms

focuses on how winning firms acquire and develop such unique and enviable resources and capabilities and how competitor firms imitate and then innovate in

an effort to outcompete the winning firms

1-3d A Consistent Theme

Given our focus on the fundamental question of what determines the success and failure of firms around the globe, we will develop a unified framework by organiz-ing the material in every chapter according to the two core perspectives, namely, the institution-based and resource-based views With our unified framework—an innovation in IB textbooks—we will not only explore the global business “trees,” but also see the global business “forest.”

1-4 What Is Globalization?

Globalization, generally speaking, is the close integration of countries and peoples

of the world This abstract five-syllable word is now frequently heard and debated Those who approve of globalization count its contributions to include greater eco-nomic growth and standards of living, increased technology sharing, and more extensive cultural integration Critics argue that globalization undermines wages

in rich countries, exploits workers in poor countries, grants MNEs too much power, and destroys the environment So, what exactly is globalization? This section out-lines three views on globalization, recommends the pendulum view, and introduces the idea of semiglobalization

1-4a Three Views on Globalization

Depending on what sources you read, globalization could be

a new force sweeping through the world in recent times

a long-run historical evolution since the dawn of human history

a pendulum that swings from one extreme to another from time to time

An understanding of these views helps put the debate about globalization in perspective First, opponents of globalization suggest that it is a new phenomenon

The close integration of

coun-tries and peoples of the world.

reach most European stores in 24 hours, US stores in

48 hours, and Asian stores in 72 hours Not only do

store staff know exactly when shipments will arrive,

regular customers know it too, thus motivating them

to check out the new merchandise more frequently

on those days, which are known as “Z days” in some

cities

Zara has no shortage of competitors Why has no

one successfully copied its business model of “fast

fashion”? “I would love to organize our business like

Inditex [Zara’s parent],” noted an executive from Gap,

“but I would have to knock my company down and rebuild it from scratch.” This does not mean Gap and other rivals are not trying to copy Zara The question is how long it takes for rivals to out-Zara Zara

Sources: Based on (1) BusinessWeek, 2009, 100 best global brands, September 28: 44-60; (2) BusinessWeek, 2006, Fashion conquis- tador, September 4: 38-39; (3) Economist, 2012, Fashion forward,

March 24: 63-64; (4) K Ferdows, M Lewis, & J Machuca, 2004,

Rapid-fire fulfillment, Harvard Business Review, November: 104-110;

(5) www.zara.com.