Global organizations challenges, opportunities, and the future

The issue of how economic, cultural, and political forces together affect the growth and tioning of global organizations could not be more critical in today’s highly complex and dynamic

ADVANCED PRAISE FOR GLOBAL ORGANIZATIONS

“Bhagat, McDevitt, and Baliga have undertaken a monumental task with this volume addressing the diverse and complex chal-lenges and opportunities that confront companies and more gen-eral organizations as they confront the globalization demands of the 21st century What I found especially effective is the unique interdisciplinary perspectives that frame the discourse and the dynamics that companies must address as they increasingly cross national and collective boundaries for the conduct of their operations.”

— Arie Y Lewin, Editor-in-Chief, Management

and Organization Review

“This is an extremely timely book The issue of how economic,

cultural, and political forces together affect the growth and tioning of global organizations could not be more critical in today’s highly complex and dynamic business environments The book is a tour-de-force, covering a wide range of topics pertinent

func-to global organizations which provide critical insights infunc-to nizations of the 21st century Combining vivid examples from many cultures with rigorous research, this book provides a com-prehensive and accessible understanding of the complex issues

facing multinational and global organizations It is a must read for scientists and practitioners and all of us who want to understand the future of global organizations.”

— Michele J Gelfand, Professor and Distinguished Scholar-Teacher, University of Maryland, College Park

“Organizations operating in different geographical contexts in the world today are confronted with many challenges In addition to dealing with recent developments in the economic and political arena, they are required to implement the latest information tech-nologies and continuously restructure the organization in order

to fit their strategies to the evolving structure Bhagat, McDevitt, and Baliga provide a comprehensive approach to these issues in this book, which is a must read for global business scholars and practitioners in all parts of the world This book is also going to be very helpful to researchers, graduate students, and international executives wishing to gain a multi- dimensional prospective on the functioning of global organizations.”

— Oded Shenkar, Professor and Ford Motor Company Chair in International Business, Ohio State University

“Over the years, two fundamental counteracting forces have shaped the nature of international business The same counteract-ing forces have been revisited by many authors in terms such as

‘standardization vs adaptation’ (1970s), ‘globalization vs tion’ (1980s), ‘global integration vs local responsiveness’ (1990s), and ‘aggregation vs adaptation (vs arbitrage)’ (2000s) Terms have changed, but the quintessence of the strategic dilemma that multinational companies face today has not changed and will probably remain unchanged for years to come These issues are no longer an either/ or issue Bhagat, McDevitt, and Baliga describe that forward- looking, proactive firms have the ability and willing-ness to develop new organizational strategies to accomplish both

tasks simultaneously for the 21st century It is a welcome read for those executives and researchers interested in executing organiza-tional transformation

— Maasaki Kotabe, Washburn Chair Professor of International Business and Marketing, Temple University

“Global Organizations addresses important issues affecting the

functioning of global and multinational organizations in today’s complex and dynamic environments The book recognizes mul-tiple factors in addition to the crucial influence of cultural differ-ences on organizational functioning It provides critical insights for global organizations facing the difficult and complex issues involved in operating in diverse geographical and cultural envi-ronments The authors draw on their years of teaching, research, and consulting experience to address both theoretical and practi-cal issues with a sense of breadth and depth.”

— Nancy J. Adler, S. Bronfman Chair in Management,

McGill University

“In today’s world where globalization has been regularly tioned by politicians, business leaders and populations in general,

ques-Global Organizations makes the case that globalization is not only

a crucial part of the business reality but also can be managed tively, if organizational leaders understand the issues involved The authors demonstrate that global organizations provide a fer-tile ground in understanding how cultures, organizational prac-tices, and global mindset would propel businesses to be not only competitive but also responsible citizens of the world.”

effec-— Huseyin Leblebici, Merle H. and Virginia Downs Boren Professor of Business Administration, College of Business, University of Illinois

Global Organizations

1

Oxford University Press is a department of the University of Oxford It furthers

the University’s objective of excellence in research, scholarship, and education

by publishing worldwide Oxford is a registered trade mark of Oxford University Press in the UK and certain other countries.

Published in the United States of America by Oxford University Press

198 Madison Avenue, New York, NY 10016, United States of America.

© Oxford University Press 2017

All rights reserved No part of this publication may be reproduced, stored in

a retrieval system, or transmitted, in any form or by any means, without the

prior permission in writing of Oxford University Press, or as expressly permitted

by law, by license, or under terms agreed with the appropriate reproduction

rights organization Inquiries concerning reproduction outside the scope of the

above should be sent to the Rights Department, Oxford University Press, at the

address above.

You must not circulate this work in any other form

and you must impose this same condition on any acquirer.

Library of Congress Cataloging- in- Publication Data

Names: Bhagat, Rabi S., 1950– author | McDevitt, Annette S. | Baliga, B. Ram.

Title: Global organizations : challenges, opportunities, and the future /

Rabi S. Bhagat, Annette S. McDevitt, B. Ram Baliga.

Description: New York, NY : Oxford University Press, [2017]

Identifiers: LCCN 2016038611 | ISBN 9780190241490 (jacketed hardcover : alk paper) Subjects: LCSH: International business enterprises— Management. |

Management— Cross- cultural studies | Organizational behavior—Cross- cultural studies | International trade.

To Professor Jagdish N. Sheth, Charles Kellstadt Professor

of Marketing at Goizueta Business School of Emory University, and Jeffery Pfeffer, Thomas D. Dee Professor of Organizational Behavior at the Stanford Business School.

1. Global Organizations in a Changing World 1

2. Economic and Political Geography 35

3. Global Strategies and the Organization 77

4. Structuring the Global Organization 121

5. Outsourcing, Offshoring, and Innovation 143

6. Technology Transfer and Organizational Knowledge Management 161

7 Cultural Variations and the Global Organization 189

8. Global Mindset and the Global Organization 233

9. Developing Effective Global Organizations: The Future 269

About the Authors 291

Author Index 297

Subject Index 303

Scholars have suggested that one of the major phenomena of the 20th century was the increasing internationalization of businesses across the globe And this phenomenon has continued to gain prominence in the 21st century In fact, managers’ decisions to enter international markets today are perhaps their most important strategic decisions And firms all across the globe are now participating in “global markets” and what has become known as the “global economy.”

In the last two decades, we have seen profound changes in tional markets and economies For example, the national economies have become more interdependent, the emerging economies have become more important, and there are significantly larger numbers of multina-tional firms competing in international markets These changes exemplify the growing impact of globalization The extent of globalization is repre-

interna-sented by the fact that of the 10 largest firms in Fortune’s 2016 Global 500,

four are home based in Asia, three in Europe, and three in the United States

The nature of the competitive landscape reflects these changes as well For example, the amount of competition has increased in most major markets across the globe Of course, although international markets pres-ent opportunities for growth and enhanced returns for many firms, higher levels of competition and the complexities of operating in different cul-tures and different political and institutional environments create height-ened challenges for these firms and their managers To deal with the often

x Foreword

significant competition and rivalry, managers search for ways to enhance the efficiencies of their operations, hence more outsourcing and offshor-ing Managers also search for new sources of competitive advantage, often through innovation These challenges increase the need for effective tech-nology transfer and effective management of knowledge flows throughout the organization

Interestingly, the recent emphasis on protectionist policies as reflected

in the vote on Brexit in the UK might seem to suggest a pullback from globalization Yet, the economic interconnectedness and increasing dependence on resources from sources outside the home country suggest otherwise Rather this approach likely signals that global organizations have to customize their operations and products more to local interests while remaining competitive globally

For all of these reasons, we need to better understand how to tively manage global organizations To be effective, managers of global organizations must develop and use a global mindset, and understand and appreciate the nuances of different cultures Managers of global organi-zations must understand the unique economic and political attributes of countries and regions around the world as well as their interdependen-cies And, given the recent changes, these managers must also learn how their organizations can simultaneously satisfy global challenges and local demands Therefore, I am very pleased to introduce this book to you The authors address these critical and complex issues facing global organiza-tions and provide essential knowledge for the successful management of global organizations

effec-Michael A. Hitt Endowed Chair Professor in Strategic Management

and Global Entrepreneurship Mays Business School, Texas A&M University

FOREWORD

Global organizations are everywhere There are over 63,000 subsidiaries

of multinational and global corporations and 850,000 foreign ies directly employing around 100 million people in various geographi-cal regions around the world The trend of cross- border transactions of goods, services, information, and people has greatly intensified since the 1980s And now with the evolution of the BRIC nations (Brazil, Russia, India, and China), the environments of global organizations have changed

subsidiar-in remarkable ways

Global organizations must engage in continuous economic, political, social, and cultural transactions with their environments in distinct geo-graphical regions of the world And, in the process, they should also care-fully examine the various learning opportunities, which are complex Such opportunities are likely to be high when the environment of the global organizations is characterized by increasingly sophisticated and demand-ing customers who would force the organization to not only meet but also exceed the highest standards for quality, cost, cycle time, and a variety

of other attributes As the organization strives to meet higher standards

to compete globally, the nature of innovations that are undertaken also improves along with the products and services that are offered

An interdisciplinary perspective is necessary in order to understand the complexities of the environmental forces that impinge on the global orga-nization While the economic forces are clearly very important, modern global organizations must deal with the dynamics of integrating complex

manage-This book is meant for advanced masters classes in professional MBA and executive MBA courses It presents interesting information and research findings concerning the challenges and opportunities that con-front global organizations in the 21st century.

I am confident that professional and executive MBA students and ars who are interested in learning more about the functioning of organiza-tions that conduct their businesses across dissimilar nations and cultures will find this book to be of immeasurable value

schol-Rajiv Grover Dean, Chair of Excellence Sales and Marketing Fogelman College of Business and Economics

The University of Memphis

on this book Later in the spring of 2014, the business school of Hanzhou University in China extended me an offer to teach a course on global busi-ness and specifically use the chapters of the book that we were writing at the time.

I am grateful to Professor Jeffery Pfeffer of the Stanford Business School and to the senior associate dean Madhav Rajan for facilitating my stay at the faculty housing of Stanford University Also my thanks to Gang Zheng, chairman of the Department of Management of Hangzhou Business School

in Shanghai for enabling me to spend some time in China I learned a great deal from the faculty of Stanford Business School regarding the com-plex issues confronting multinational and global organizations regardless

of their national origin I am also grateful to Professor Jagdish Sheth of the Emory Business School for numerous insights into the functioning of the global marketplace and global organizations that I have received from many interactions with him for the past 30 years

xiv Acknowledgments

The provost of the University of Memphis, Dr.  Karen Weddle- West; the dean of the Business School, Dr. Rajiv Grover; and the associate dean Thomas R. Miller were instrumental in providing the sabbatical during the summer of 2013, for which I am grateful During the past 40 years

of my academic life, spent in several universities in the United States,

UK, China, Japan, India, Australia, France, Brazil, South Korea, Russia, Poland, and Czechoslovakia, and other countries, I have been fortunate to learn a great deal from our colleagues in the various universities of these countries During the numerous conversations with these colleagues it became clear that they do not necessarily use the US- based perspective in analyzing the various complex issues confronting global organizations In fact the forces affecting the development of global organizations and glo-balization are best understood and interoperated from distinct national and cultural perspectives of the various nations in the World Trade Organization (WTO)

My visit to Novgorod State University, in Russia in 2009, was especially enlightening in the sense that I learned some of the deep- rooted values of the eastern European cultures, which can facilitate as well as impede the progress of globalization I thank the German- Marshall fund for making

my visit to Russia possible Taken together, the collective visits of three of

us in various countries of the world have helped us develop some insights that are not easily discussed in the research literature on global organiza-tions These insights have been helpful in developing the various chapters

in the book In more specific terms, what we learned is that scholars of globalization and policy makers use different theories to describe “glo-balization” and operationalize the term itself to mean different things

We have incorporated the various facets that today’s global organizations must deal with in order to not only function adequately but also remain effective in the short and long term

My family and friends in Tennessee have been most supportive during the time I was working on the book with my two colleagues In addition

to my wife, Ebha, and daughter, Priyanka, I also thank my elder ter, Monika Bhagat- Kennedy, and my son- in- law, Timothy F. Kennedy, for

daugh-Acknowledgments xv

their encouragement and support during the 3 years I was working on the book It was also a delightful experience to have some interactions with our granddaughter Vidya, who is only 2 years old but was most pleasant and inspiring over the phone I am also grateful for the encouragements

I received during the year 2015 from Dr. William T. Smith, chairman of the Department of Economics, and Dr. Balaji Krishnan, director of the master’s program in our college of business

Our friends Jayu and Arun Wagh provided much encouragement ing the 2 years I was quiet busy working on the book From a distance of over 500 miles I was encouraged to apply a rigorous perspective to com-plete the book by a great colleague and friend, Dr. R. Chandrasekaran

dur-of Dallas, Texas, and by Dr.  Vijay Marathe dur-of Cary, North Carolina

My cousin Ratan Bhagat, my sister- in- law Nimoo Bhagat, and my aunt Usha Bhagat also provided a great deal of encouragement to complete the book on time Mr S. P Krishnamurthy, who is a global entrepreneur

in the Dallas– Fort Worth area provided many insights into the tioning of global organizations Thanks to all of you for your sustained encouragement

func-We were fortunate to be able to use the computer resources at both the University of Memphis and Stanford University in Palo Alto, California

We also thank our editor, Abby Gross, and associate editor, Courtney McCarroll, at Oxford University Press of New York, for their sustained encouragement throughout the endeavor

Rabi S. Bhagat Memphis, Tennessee

I would like to thank the University of Memphis for allowing me to be a part of their institution— one that is comprised of dreamers, thinkers, and doers In particular, I would like to thank Dr. Chuck Pierce and Dr. Robert Taylor of the department of management for their continued support and for affording me many opportunities

Annette S. McDevitt Memphis, TN

xvi Acknowledgments

I would like to acknowledge the insights provided by many corporate executives and students that I  have worked with over the past three decades Their contribution has been invaluable in my understanding the foundations of global strategy and its consequences in a nuanced fashion The challenges they face in dealing with these issues far exceed mine in teaching and writing about them

B Ram Baliga Wake Forest University

INTRODUCTION

Globalization, which has made major economic, social, cultural, and even political changes in many parts of the world, has been a central thesis in the latter part of the 20th century The effects of globalization on the vari-ous facets of the developing and developed world are many, and the debate continues regarding its positive and negative impacts Several research monographs on the causes and consequences of globalization have been published during the past two decades There seems to be a consensus among scholars, leaders of major multinational and global corporations, and political leaders of the countries in the global economy that globaliza-tion has been a positive development that has transformed many parts of the developing world after World War II

The world, in the best of circumstances, is marked by intense petition, uncertainty, and instability, and is not an easy place to manage the smooth transition to capitalistic or market form of economy from the developing and socialist forms International organizations like the International Monetary Fund (IMF), the World Trade Organization (WTO), and the World Bank have certainly helped the cause of globaliza-tion in many parts of the world But many persistent problems remain and need to be examined carefully before one can assume that globalization has largely been a successful phenomenon of the 20th and 21st centuries

com-At the time of this writing, major geopolitical events are occurring (i.e., Brexit, June 2016) that have consequences for globalization It is difficult

to predict the overall scope and outcome of such events

of all types in different parts of the world With the passing of each decade,

it seems clearer that senior managers and members of top management teams must have comprehensive knowledge of their own industries in which they compete as well as other industries with which they interact Learning how to conduct businesses across national borders and cultures has become of crucial significance in all industries in all of the major trading nations of the world As worldwide presence becomes a neces-sity rather than a choice, an increasing number of organizations and their

leaders are asking the question: How do we interpret and grow the ongoing globalization of our organization and our industry? While it is difficult to

steer the direction and the growth of an industry, whether it is biles, steel, software, hardware, packaged foods, and so forth, it is relatively easier to understand the nature of the forces influencing the organizations

automo-in which we function We take the position that automo-in order for global nizations to succeed, they must understand the nature of globalization in the industries in which they operate

orga-The global organization of the 21st century is faced with many tainties in a complex and ever- changing environment Management of cross- border operations has to deal with a greater range of economic, social, political, cultural, and technological challenges In addition, these challenges are both complex and dynamic in nature Past success does not necessarily indicate that the organization will be successful in dealing with future challenges We provide a discussion of the mechanisms that global organizations must understand and implement in their contexts in order

uncer-to deal with these challenges It is our hope that this book provides a set

of well- grounded theoretical perspectives for understanding the nature

of opportunities, challenges, and the future of global organizations in the 21st century

1929 and now sells its products in all countries on this continent It also happens to be the continent’s largest employer, with 65,000 employees and

160 plants Its market share in Africa and in the Middle East (where the market is projected to grow more rapidly in the near future) is 29%, which adds up to 9.1 billion liters of various beverages a year

One might think of Coca- Cola as a quintessential American company with its branding and products present in virtually all parts of the globe In reality, it is a vast global company, operating in 206 countries with bottling facilities in places like Ramallah, the West Bank, and Iraq In an inter-

view (October 31, 2010) with Fareed Zakaria of CNN, the host of Global Positioning Square (GPS), a popular program on global economic and

social issues, Muthar Kent, the CEO of Coca- Cola, noted that mately 80% of Coca- Cola’s revenues were generated outside the United States, and that a greater percentage of its employees is non- US Kent proudly noted, “We are a global company that happens to be headquar-tered in Atlanta, USA.”

approxi-2 G L O B A L O R G A N I Z AT I O N S

In the 21st- century global marketplace, large US, European, and Asian global companies are thriving IBM, Caterpillar, Coca- Cola, Google, Microsoft, Apple, Intel, Federal Express, BMW, SAP, Toyota, Nissan, Tata Consulting, Wipro, and others operate across numerous nations and cul-tures These companies are truly global organizations generating a large percentage of their revenues from worldwide operations in diverse and ever- changing environments Some of the Standard & Poor (S&P) listed companies generate almost half of their profits outside the United States However, we are beginning to witness a historic transformation which, though in its early stages, has the potential to significantly change the world of multinational and global organizations During much of the 20th century, the term “developed world” meant primarily countries of the West (namely the United States, Canada, western Europe, Australia, New Zealand, and Japan) However, this changed rapidly with the growth of emerging economies from East and Southeast Asia and South America— namely, Brazil, Russia, India, and China— collectively known as the BRIC countries (O’Neill, 2001), with China poised to become the largest economy (on a purchasing power parity [PPP] basis) in 2025 Along with these BRIC countries, there are other nations (e.g., South Africa, Nigeria, Mexico, and Turkey) that are engaged in large- scale changes in infrastruc-ture and are poised for significant economic growth Called “breakout nations” (Sharma, 2012), these countries are adding another chapter in the history of globalization As a result of the participation of these BRIC countries and breakaway nations, the share of the global economy has declined from a high of 60% at the beginning of the 21st century to about 40% today In addition, Africa, whose contribution to the world economy was less than 5% in 2001, has seen its share of the global economy increase

as a result of the rise of some countries with some of the highest growth rates (e.g., South Africa, Nigeria, Ghana, and Kenya)

According to forecasts made by Goldman- Sachs (2002), the three est economies in the world in 2025 will be the United States, China, and Japan, in that order India, Germany, Russia, United Kingdom, France, and Brazil will be among the top 10 Contrast this with the forecast for

larg-2050, when the three largest economies of the world are projected to be

Global Organizations in a Changing World 3

China, followed by a closely matched United States, with India somewhat behind The only European countries that are forecast to be ranked in the top 10 are the UK and Germany in 9th and 10th place, respectively, and only four current G- 8 countries make the Goldman- Sachs top 10 list

Recently, China has been experiencing some economic difficulties (The Economist, “The World in 2016”), but it still remains the second- largest

economy of the world

The growth of emerging market economies stands in stark contrast to the assertion made by the Nobel laureate Gunnar Myrdal (1962) that the economic future of the world would be controlled by the multinational and global organizations of the West The rise of China and India, which comprise one- third of the world population, has indeed been one of the most prominent economic developments of the 21st century (Jacques, 2009; Sheth, 2008; Zakaria, 2012) These developments precipitated a significant shift in the balance of global economic power and alignment

of global markets, which has significant implications for global zations and their managers regardless of their countries of origin With substantial foreign direct investment flowing toward BRIC and breakout nations, a majority are shifting from state- directed economies (developed during colonial times and Marxist orientation) to market- driven ones Managers of global organizations have to reorient their operations in line with institutional systems and cultures of these emergent economies Management techniques and systems such as flat organizations with sub-stantial decision- making authority delegated to personnel closer to the customer interface, which work well in the context of the Western nations, either do not work well in these economies or have to be substantially modified (Steers, Sanchez- Runde, & Nardon, 2010)

organi-Our focus in this book is to understand the developments of the past three decades in a comprehensive fashion and provide guidelines for global organizations and global managers We commence our journey by describing the emergence and evolution of multinational enterprises in a historical perspective According to the estimates of the United Nations (UN), the total number of multinational enterprises exceeds 65,000 operating both in their home countries and abroad After the 2010– 2011

4 G L O B A L O R G A N I Z AT I O N S

session, the market capitalization of these firms was over $16 trillion— about a quarter of the total global gross domestic product (GDP) In addi-tion, the foreign affiliates generated value of over $8 trillion— more than one- tenth of the global GDP and one- third of world exports (Bartlett & Beamish, 2014) Not all multinational enterprises (MNEs) and their global operations are large, but all large global organizations operate across dis-similar nations and cultures and in distinct geographical locales

THE EVOLUTION OF GLOBAL ORGANIZATIONS

There are several competing ways to conceptualize globalization and its effects on the global marketplace and related consequences (Schaeffer, 2003).The UN has offered its definition of MNEs, as these companies have grown in size and importance after World War II In 1973, it defined an MNE as an organization that controls assets, factories, mines, sales offices, and other operations in two or more companies Later in 1984, it changed the definition to include organizations (1) that operate in two or more countries regardless of the legal identity and the forms of activities in the countries; (2) that operate under a system of decision- making that allows them to function with coherent policies and consistent strategies through one or more decision- making centers; and (3) in which the cross- border operations are highly interconnected by ownership or otherwise so that one or more of them is able to exercise significant economic, organiza-tional, and strategic influences over the activities of others The importance

of sharing valued organizational knowledge resources and responsibilities

is also one of the major functions of the global organization

The Organization for Economic Cooperation and Development (OECD) defines the MNE as a global organization that engages in foreign direct investment (FDI) and owns or controls important economic and financial activities including technological developments in many coun-tries Most MNEs are likely to have multiple facilities around the world and own a majority stake in advanced globalized countries in North America, Europe, and in the Pacific Rim countries As alluded to earlier, MNEs

Global Organizations in a Changing World 5

derive a substantial portion of their revenues from foreign operations through subsidiaries that are coordinated through a common strategic vision, drawing from a significant pool of resources and knowledge They are also likely to have foreign nationals and expatriates on their senior management teams and corporate boards These MNEs are also known

as multinational corporations (MNCs) or global corporations (GCs) The objective of this chapter is to describe the evolution of these global organi-zations in a changing world From this point on, we adopt the term “global organizations” to represent MNEs, MNCs, and GCs

A closer look at this definition suggests the pivotal importance of both strategic and organizational integration of various activities along many

dimensions An active and coordinated management of operations is the

distinctive defining attribute that characterizes global organizations.Economic historians who have been studying globalization for a long period suggest that globalization has passed through three distinct phases Phase I involved spreading of economic activities across dissimilar nations and cultures from the 1400s through the early 1590s During this phase, various nations were trying to establish economic and political relation-ships with other nations in which they were actively engaged in trade During the second phase (17th and 18th centuries), several of the coloniz-ing nations of Europe (the UK, France, Germany, Holland, Portugal, and Spain) tried to divide the rest of the world as colonies and actively encour-aged trade and related economic transactions It is during this phase that many well- known multinational corporations (e.g., the British East India Company) were born, and they began to expand their operations across the colonized nations— an example being the British Commonwealth countries Phase III— the current phase— coincided with the Industrial Revolution in Europe and began with the advent of the 20th century and involved moderate- to- large globalization of economic, social, and politi-cal operations beyond the colonized nations to include numerous dissimi-lar nations and cultures from the West This Phase III has been intensified during the 21st century and continues unabated after the development of the BRIC economies and other breakaway nations We discuss these issues

in chapter 2

6 G L O B A L O R G A N I Z AT I O N S

At the worldwide level, globalization is understood as the aggregate level of economic interdependence among various countries— the ideal state of globalization occurs with the abolition of political barriers to eco-nomic integration, lowered costs of transportation, access to advanced technological innovations, and computer- mediated communication.Before describing the motivation for these global organizations to expand internationally, it is useful to distinguish between domestic and international businesses Domestic businesses operate primarily in the home country and may grow to become international by slow expansion, opportunism, and pure luck Consider Procter & Gamble, McDonalds, Starbucks, and so forth These companies were founded in the United States and operated as domestic entities but are now considered global organizations, conducting their businesses across dissimilar nations and cultures of the world In a similar fashion, the French company Danone started as a domestic company manufacturing bottles and various glass products in 1966 but changed into a pan- European organization and then into a fully developed global organization at the beginning of the 21st cen-tury with operations in Europe, the United States, Asia, Latin America, and Africa Most companies become international and global slowly, but for some others, it happens early These firms may not operate from any home base and may not necessarily have brick- and- mortar- based sub-sidiaries Called “born- global firms,” these organizations function by establishing virtual start- up sites, bringing together a network of strategic partners and alliances and advanced technological knowledge They also are known to make use of outsourcing activities These virtual operating global organizations may have headquarters in a certain country, but most

of their operations and transactions occur outside the home country and

on a worldwide basis

Returning to the difference between domestic business and global business, it must be noted that they work in different environments and have distinctive methods of conducting their businesses, including coor-dination of various operations Unlike domestic business, international business is performed in foreign countries with dissimilar national and cultural practices They also have their unique economic conditions,

Global Organizations in a Changing World 7

priorities, and institutional and legal environment More importantly, international businesses encounter political risks and a great deal of vola-tility in the global economic and political landscapes Managers of global organizations need to be familiar with the fiscal and monetary policies of the countries in which they conduct their businesses Changes in infla-tion, currency exchange fluctuations, and changes in laws on taxes and repatriation of profits are some of the factors that have to be monitored

on an ongoing basis because they can drastically affect the profitability of overseas business units Global businesses are also required to implement innovative practices in developing new products and services on an ongo-ing basis in order to stay competitive in the ever- changing economic and social areas

RATIONALE FOR GOING GLOBAL

Before describing the various constraints for the evolution and ing of global organizations, it is important to take a closer look at the motivation of these enterprises for expanding their businesses across the world The factors that drive globalization of organizations, regardless of their countries of origin, emerge from the economic, social, political, and institutional forces that exist at a given point in time Consider the follow-ing factors that encourage cross- border economic transactions— these are also known as globalization drivers:

• Among the earliest factors that encouraged companies to invest

abroad was the need to secure key supplies For example, aluminum

producers needed a supply of bauxite, which could not be easily obtained in Western countries Companies producing tires for automobiles went to countries where they could develop rubber plantations Oil and gas companies needed to open operations in the Middle East, Venezuela, Nigeria, and others During the early decades of the 20th century, Alcoa, Goodyear, Anaconda Copper, Standard Oil, and Shell were among the largest MNEs

8 G L O B A L O R G A N I Z AT I O N S

• The second strong driver for globalization is related to market- seeking tendencies This factor is particularly strong among those

companies that have some intrinsic advantage pertaining to their brands, technology, pricing, and novelty Taken together, these factors provide a strong motivation for enhancing their competitive advantage over domestic and other foreign competitors in overseas markets Customers around the world are demanding higher- quality products with lower prices And iPhones, Blackberries, Toyotas, BMWs, and McDonalds are preferred by customers in the global marketplace not because they are American, Japanese, or German, but because they are globally branded Consumers in rich, highly developed, developing, and emerging economies demand the latest in technologies, luxuries, products, and services, and they often learn more about the latest products and services that go beyond local distributors through e- commerce These market- seeking tendencies are enhanced

by increasing economies of scale (which make the incremental

cost of producing additional products or services rather low and

highly competitive), substantial investments in R&D operations in various countries of the world, shortening of product life- cycles, and development of efficient global supply- chain networks.

• Another major factor that encouraged globalization of economic

activities was the need to acquire low- cost factors of production

With declining tariff barriers in the 1960s, in the United States and many Western European countries, the cost of labor represented a major difficulty, because the products faced a competitive disadvantage with imports from East and Southeast Asia In order to deal with this difficulty, a number of companies including consumer electronics, household appliances, and watch- making established offshore operations to produce components or even assembly of the complete product For example, General Electric (GE) moved the production of its lamp plant where it manufactured light bulbs from Virginia to China, and GE Healthcare, one of GE’s most strategic businesses,

Global Organizations in a Changing World 9

invested in three world- class R&D operations in India And,

at the turn of the century, it also started manufacturing advanced CT imaging systems in facilities known as the Jack Welch Technology Center in Bangalore (India) Availability of highly qualified technical and managerial personnel in many countries also facilitates expansion of global operations The BRIC countries (Brazil, Russia, India, and China) and the former members of the Soviet Union have highly skilled and educated workforces who can work for much lower wages than is the norm

in the advanced globalized countries such as the United States,

UK, Germany, and other countries of the European Union (EU)

• Along with the cost of labor, the availability of low- cost capital

(often through investment subsidies of the local government and related organizations) is also a strong driver for going global Consider the case of General Motors (GM), which expanded its basic assembly operation in Brazil to a fully integrated facility that is now the company’s fourth most important R&D facility globally Increasingly, global organizations are encouraging development of innovative practices and advanced technological knowledge for designing cutting- edge products and services— not only in their home countries but also in leading R&D facilities located in various geographic locations Increased globalization

of financial markets and economies of the nations that are highly interdependent have made access to capital markets much easier than was the case at the beginning of the 20th century While this trend may have some adverse consequences, as was seen during the 1998 Asian economic currency crisis and more recently

in 2008, the fact is that globalization of financial markets and increased interdependence of the globalized, globalizing, and emergent economies have strongly facilitated the expansion of MNEs to evolve into global organizations

• Technological improvement related to communication technology and computer- mediated communication is one of the most

important facilitators of global businesses The parallel

10 G L O B A L O R G A N I Z AT I O N S

development in the transportation industry and in communication technology has had significant impacts in lowering the cost of shipping of products on a global scale Innovative services can

be offered to global customers at a fraction of the cost because of dramatically lower cost of communication through computer- mediated technologies (i.e., Internet, e- mail, GPS, etc.) Cairncross

(1997) emphasized this development, in The Death of Distance, as a

major factor in enabling multinational enterprises to spread their global operations New ideas are spreading faster across borders, and developing countries and emerging markets have immediate access to important information that was once available only to the citizens of the globalized and rich economies In numerous ways, the improvement of communication technologies mediated

by advanced computing techniques is profoundly liberating and democratic and offers great potential for the spread of multinational businesses in dissimilar geographical regions of the world Because of the capacity of such advanced technologies to enable connectivity and collaboration among professionals from

different countries, it is now possible to separate the performance

of some activities from where they are managed— thus, drastically

reducing cost A good example concerns the performance

of cardiac surgery in a hospital in New Delhi, India, with simultaneous consultation from a leading cardiac surgery team of Mayo Clinic Hospital in Rochester, Minnesota (US), via computer- mediated communication

• Global business, as we defined it earlier, includes all business

activities including creation and transfers of goods, services, technological know- how, skills, information, resources, and people across dissimilar nations and cultures in the world

Multinational enterprises are not the only parties interested

in the proper development and sustenance of global business

operations Other entities that play crucial roles are international institutions and regional trade agreements such as the World

Trade Organization (WTO), the World Bank, the International

Global Organizations in a Changing World 11

Monetary Fund (IMF), the UN, and many nongovernmental organizations (NGOs) The various bilateral and regional trade agreements such as the North American Free Trade Agreement (NAFTA), the EU, the US– Central American Free Trade Area (CAFTA), the Association of Southeast Asian Nations (ASEAN), and most recently, the Trans- Pacific Partnership (TPP) are developments during the past three decades that have profoundly altered the nature of economic and trade- related transactions These institutions reflecting agreements regarding regional and cross- border trade among countries are brought about by these entities They are designed to facilitate and oversee the conduct of trade and international business operations around the world It is safe to say that without the facilitating effects

of the WTO and of regional trade agreements, it would be challenging for multinational enterprises to function globally The rules of these trade blocs are developed over long periods

of negotiation that takes place in different countries, as the need

to oversee new developments arises As necessary, these global institutions and trade agreements facilitate the cross- border flow

of goods, services, and other resources produced by multinational enterprises The most important among these agreements is the WTO, which is entrusted by over 180 member- countries to oversee the conduct of trade practices around the world and deal with unfair and corrupt practices of nations that do not follow the WTO guidelines Rules and regulations for international trade and investment that the WTO oversees and regulates include the areas

of agriculture, intellectual property, services, fair competition, and subsidies of national governments to the various industries The WTO, EU, NAFTA, CAFTA, ASEAN, and the recently developed TPP facilitate the growth of markets on a worldwide scale and make it easier for multinational enterprises to interpret the specific nature of trade agreements and related institutional arrangements, which can enhance their present market share and future market potential

12 G L O B A L O R G A N I Z AT I O N S

DIFFERENCES AMONG COUNTRIES

AND GLOBAL ORGANIZATIONS

The rationale for going global is to take advantage of the similarities across national borders and cultures However, it is also critical to address the differences that exist among the countries and will continue

to exist because of the persistence of several factors called distances by

Ghemawat (2007) He emphasizes that we recognize the current reality

of the global economy as a state of semiglobalization According to the

framework proposed by Ghemawat, effective cross- border strategies will need to focus on both similarities and differences across countries, since the state of semiglobalization will continue to exist in both the short and the long term The CAGE framework comprises four broad components of distance that are relevant for the conduct of global

businesses:  cultural, administrative, geographic, and economic These

four components, as Ghemawat suggests, are highly intertwined For example, it is difficult to imagine countries that are close to each other

on the dimension of administrative distance— say part of a free- trade area (such as the ASEAN trade bloc)— unless they also are close geo-graphically, economically, and culturally These distances create cost and risks for industries and therefore have profound implications for the development of global organizations in terms of opportunities and challenges Regardless of some overlap among these four dimensions,

it is useful to distinguish among them because they provide different contexts for the evolution of global organizations in the 21st century

In the following sections we describe these four dimensions of tance, addressing them in the following order: economic, administra-tive, geographic, and cultural This order of presentation is preferred because of their relative importance for the evolution of global orga-nizations in the highly interconnected and semiglobalized world The economic distance between the countries involved in the international transactions of global organization plays the most important role, fol-lowed by administrative distance, geographic distance, and cultural distance

dis-Global Organizations in a Changing World 13

Economic Distance

This dimension refers to the differences that affect cross- border economic activities through various economic indicators (such as per capita income and the size of the economy and its growth) and the economic institutions Rich and highly globalized countries engage in more cross- border economic activities relative to their economic size than do the less developed countries and emergent economies Other important indicators of economic distance include the productivity of the agricultural sector, quality and abundance of natural resources, relative ease of access to capital, and more importantly, advances in infrastructure (to include not only roads and railways but also communication systems throughout the entire country), technology, and information The leading global firms of the 21st century are actively looking

to do business with those countries that provide highly advanced sources of technological knowledge and related advances It is important to note that economic transactions between the developed nations and between devel-oped and developing nations are also associated with performance of dif-ferent economic functions that are crucial for the evolution of the global organization Economic transactions between rich and poor nations often

involve arbitrage, in which the firm makes every attempt to match supply

and demand functions, not only within national markets but also across them, by distinguishing the value chains globally Of all the four differences among countries in the CAGE framework, economic arbitrage is clearly

of paramount importance Global organizations use administrative, graphic, and cultural differences as sources of arbitrage— the combination

geo-of these differences depends on the nature geo-of specific business transactions that emerge in the industries in which the global firm is aspiring to be a market leader

Administrative Distance

The administrative distances between countries that are highly relevant for the evolution of global organizations encompass laws of the nation,

14 G L O B A L O R G A N I Z AT I O N S

policies of the government, and the role of various institutions that emerge during the historical and political evolution of nations International rela-tionships between nations including being sponsors of various economic treaties and members of trade associations, and other large international regulatory agencies (i.e., WTO, IMF, World Bank) provide the important foundations for developing relationships with countries In addition, the national laws are mandated or enforced by the government Attributes of administrative distance and related political processes and institutions that affect cross- border economic activity include colonial ties (such as between the UK and the commonwealth countries such as Canada and Australia), membership in the same regional trade bloc (i.e., NAFTA, CAFTA, ASEAN), and the use of common currency Ghemawat (2007) reports that colonizer– colony links can have profound effects on increas-ing the volume of cross- border trade— sometimes nearly threefold, even though the formal links are no longer in existence and expired decades ago Spain, which had colonized most of Latin America, has directed a significant portion of FDI to the Spanish- speaking former colonies— at

10 times the rate of Latin America’s share of world FDI from 1997– 2001 The point is that administrative commonalities that are historically rooted

in the colonizer– colony relationships that were formally terminated in the 19th or 20th centuries greatly reduce the effects of geographic differ-ence on the evolution of cross- border trade and the global firm Unilateral actions taken by the nations engaged in cross- border transactions can increase administrative distance in the form of increased tariffs, prefer-ential treatment to the domestic company, and restricting entry to some sectors of the economy (i.e., through acts of protectionism) deemed cru-cial for the country’s defense, agricultural, and related sectors Lack of fair, legal, and institutional mechanisms also encourages bribery and corrup-tion in countries that do not have administrative structures in line with their ambitions for globalization Global organizations belonging to the OECD, for example, abide by domestic prohibitions on bribery (reflected

in such regulations as the Foreign Corrupt Practices Act in the United States) but routinely confront such issues in countries whose admin-istrative distance is considerably higher compared with their national

Global Organizations in a Changing World 15

standards Outdated and often ineffective regulations dealing with health, safety, environmental standards, and labor union– related issues impede the functioning of cross- border trade and evolution of multinational and global organizations

Geographic Distance

Even to a novice observer of global business activities, the role of graphic distance is obvious However, what is not clear is that even though geographic distances between countries can surely affect cross- border economic activity with some human interventions such as devel-opment of superior infrastructure and technologically sophisticated logistics, such distances are beginning to diminish in most industries Geographic distance is more than just sheer physical distance between the capitals of two trading nations, for example, Washington, DC, and Beijing Related attributes include the presence or absence of a common land border, differences in time zones and climates, access to waterways that facilitate international navigation, topography, and even distances within the countries (i.e., between Toronto and Vancouver) In assessing the effects of geographic distance, it is also important to consider techno-logical advances such as the countries’ transportation and communica-tion infrastructures, which reduce the effects of distance It is impossible

geo-to remove the effects of distance on cross- border transactions ing products that have a low value- to- weight or value- to- bulk ratio (i.e., cement, brick, and steel) and that are fragile (i.e., glass products, per-ishable foods) Global organizations that focus on providing services are also affected by this dimension if the regional and local governments tend

involv-to get involved in the corporate governance of subsidiaries Subsidiaries located close to the home country are likely to be affected less compared with the ones located more distantly There are strong implications for involvement of local governments and other nongovernmental agencies

in the operations of the subsidiaries, and the dimension of distance plays

an important role

16 G L O B A L O R G A N I Z AT I O N S

In addition to trade involving heavy physical goods, intangible ucts, and services, the cross- border flows of capital also tend to decrease

prod-as the geographic distance between the economic centers of the countries increases A closer examination of this phenomenon (capital after all is not

a physical good and is not subject to sheer distances between countries) reveals that the sophistication of information, the infrastructure, and the number of branches of multinational and global banks account for much

of the dampening effects of cross- border flow of equities In other words,

if a country does not have a significant level of information infrastructure (measured by the telephone density) and also lacks independent branches

of global and multinational banks, then it is likely to suffer significantly from lack of capital flow and FDI Cairncross (1997) predicted that new ideas would spread faster, leaping geographic boundaries, and the devel-oping countries and emergent economies would have immediate access to information that was restricted to the advanced countries of the global-ized world However, Ghemawat (2007) advocates a different point of view via the CAGE framework He notes that geographic distance can indeed have a dampening effect on investment and trade flows Continuous inno-vations in information networks, knowledge management systems, and transportation infrastructure of various kinds must be kept in mind when examining the impact of geographic distance on both cross- border eco-nomic transactions and the evolution of global organizations

Cultural Distance

This dimension is concerned with the predominant patterns of beliefs, attitudes, values, and behaviors that characterize the functioning of a group, community, organization, or a nation Ghemawat (2007) refers to those attributes of a society that are sustained by long- term (often over a long period of time) interactions among people in the various communi-ties of the nations Culture is not sustained by the state, nor is the state its enforcer However, the economic, political, and social institutions of a nation and the various customs that it has valued for a long time reflect

Global Organizations in a Changing World 17

the fundamental cultural values of the nation Language is an important attribute of culture— it is essential for a group of people to speak the same language and dialect in order to preserve the cultural traditions that they develop in a geographical region of the world Communication consists

of not only the spoken word but also unspoken (nonverbal) tion Each of these forms of communication conveys information— both explicit and subtle— that reflects the nature of culture For example, the Arab countries have cultural traditions that are profoundly different from those of the western European countries and the United States Not only Arabic is a rather different language but also the patterns of communica-tion among Arabs are distinctively different from those among Europeans, Americans, and other countries Take China as another example: despite its rise to the second- largest economy of the world, a large majority of international business transactions are difficult to conduct in China because of stark differences in languages— along with the official language

communica-of Mandarin, there are regional differences in language and dialects Cultural differences that strongly affect global businesses include differ-ences in ethnicity, religion, and the meaning of authority and power in the context of both work organizations and society, and, perhaps more impor-tantly, a lack of trust and reciprocity, and sometimes the absence of social institutions that prevent abuses of market and political power Official and unofficial forms of corruption that act as major hurdles in interna-tional and global business operations are often products of cultural values and scripts that remain unchanged As an example, the tolerance of the Chinese society for intellectual property rights/ copyright infringement is probably a reflection of a Confucian principle that encourages duplication and dissemination of wisdom without acknowledging the appropriate source Contrary to popular beliefs, copyright infringement was a prob-lem in the Chinese context even before the current era of globalization For example, Merriam- Webster found that a local Chinese publisher had already begun publishing a bilingual dictionary in China and began dis-tributing its own unauthorized version in 1920 Countries with a highly authoritarian political structure and leadership (i.e., Communist or highly Socialist in orientation), such as North Korea, Cuba, Venezuela, and other