International Business, 3rd Edition by Michael Geringer, Jeanne_SOLUTIONS MANUAL

SOLUTIONS MANUAL International Business 3rd Edition by Michael Geringer and Jeanne McNett

TABLE OF CONTENTS Module 1 The Challenging Context of International Business Module 2 International Trade and Investment Module 3 Sociocultural Forces Module 4 Sustainability and Natural Resources Module 5 Political Forces That Affect Global Trade Module 6 Intellectual Property Rights and Other Legal Forces Module 7 Economic and Socioeconomic Forces Module 8 The International Monetary System and Financial Forces Module 9 International Competitive Strategy Module 10 Organizational Design and Control Module 11 Global Leadership Issues and Practices Module 12 International Markets: Assessment and Entry Modes Module 13 Marketing Internationally Module 14 Managing Human Resources in an International Context Module 15 International Accounting and Financial Management

Solution Manual for International Business, 3rd Edition Geringer Chapter 1-13 Chapter 1

Module 1: The Challenging Context of International Business Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix 01-1

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Connect Activities

Your Content Summary This module provides an overview of international business (IB) and some of the ways that IB differs from domestic business, including the three environments of IB: domestic, foreign, and international. Although the kinds of forces are the same in the domestic and foreign environments, their values often differ and changes in the values of the foreign forces can be at times more difficult to assess. In addition to providing a brief review of the history of IB, the module discusses the internationalization of business in recent decades and the driving forces that are leading firms to internationalize their operations. The increasing internationalization of business requires managers to have a global perspective gained through experience and education. Because global competition continues to increase at a rapid pace, both in terms of trade and foreign direct investment, we also present key arguments for and against the globalization of business, helping to foster a more balanced view on this important topic.

Learning Objectives LO 1-1

Show how international business differs from domestic business.

LO 1-2

Describe the history and future of international business.

LO 1-3

Discuss the dramatic internationalization of business.

LO 1-4

Identify the kinds of drivers that are leading firms to internationalize their operations.

LO 1-5

Compare the key arguments for and against the globalization of business.

Key Terms and Definitions controllable forces (p. 6)

Internal forces that management administers to adapt to changes in the uncontrollable forces

domestic environment (p. 6)

All the uncontrollable forces originating in the home country that surround and influence the life and development of the firm

economic globalization (p. 17)

The tendency toward an international integration and interdependency of goods, technology, information, labor and capital, or the process of making this integration happen

environment (p. 5)

All the forces influencing the life and development of the firm 01-2

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exporting (p. 12) foreign affiliate (p. 6)

The transportation of any domestic good or service to a destination outside a country or region A company controlled by another company that is located in a foreign land, and this control may be exercised by a variety of means, both those involving stock ownership and those involving nonownership mechanisms

foreign business (p. 5)

The operations of a company outside its home or domestic market

foreign direct (FDI) (p. 12)

Direct investments in equipment, structures, and organizations in a foreign country at a level sufficient to obtain significant management control; does not include mere foreign investment in stock markets

investment

foreign environment (p. 6)

All the uncontrollable forces originating outside the home country that surround and influence the firm

importing (p. 12)

The transportation of any good or service into a country or region, from a foreign origination point

international business (p. 4)

Business that is carried out across national borders

international company (IC) (p. 5)

A company with operations in multiple nations

international environment (p. Interaction between domestic and foreign environmental forces, as well as interactions between the foreign 7) environmental forces of two countries multinational corporation (p. A corporation that owns or controls the production of goods or services in at least one nation outside its home 10) nation An enterprise made up of entities in more than one nation, multinational enterprise (p. operating under a decision-making system that allows a 11) common strategy and coherent policies self-reference criterion (p. 8)

Unconscious reference to your own cultural values when judging behaviors of others in a new and different environment

uncontrollable forces (p. 5)

The external forces that management has no direct control over

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 1- Show how international business differs from domestic 1 business  Introduction 

I.

What Is International Business and What Is Different about It? 

The Influence of External and Internal Environmental Forces



The Domestic Environment



The Foreign Environment



The International Environment

Key Terms:  international business 

foreign business



international company (IC)



environment



uncontrollable forces



controllable forces



domestic environment



foreign environment



international environment



self-reference criterion

Introduction

A. Our lives are fundamentally intertwined with international business (IB), and all managers need to have a basic knowledge of IB in order to meet the growing challenges of global competition.

II.

What Is International Business and What Is Different About It?

1. IB is business that is carried out across national borders, including international trade, foreign manufacturing, and the growing service industries.

2. Foreign business refers to the operations of a company outside its home or domestic market.

3. An international company is a company with operations in multiple nations.

4. IB differs from domestic business because firms operating across borders must deal with forces of three kinds of environments—domestic, foreign, and international.

5. Although firms that only operate within the domestic environment must essentially be concerned with the domestic environment, no domestic firm is entirely free from foreign or international forces due to the potential for competition from foreign imports or foreign competitors setting up operations in the firm‘s domestic market.

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A. The Influence of External and Internal Environmental Forces Environment includes all forces influencing the firm, both external and internal.

External forces, commonly called uncontrollable forces, are those forces outside the firm that management has no direct control over, including: a. competitive b. distributive c. economic d. financial e. socioeconomic f. labor g. sociocultural h. political i. legal j. technological k. physical Internal forces, called controllable forces, are the forces that management does have some control over, such as factors of production and activities of the organization.

Changes in an external force, such as the political force associated with the expansion of the European Union (EU), can affect all of the controllable forces of firms that do business in or with the 28 EU nations.

B. The Domestic Environment 1. All the uncontrollable forces originating in the home country that surround and influence the firm‘s life and development.

Even if a domestic force, it can still affect foreign operations, such as when a domestic labor strike disrupts the supply of parts to a company‘s assembly operations in another nation.

C. The Foreign Environment 1. All the uncontrollable forces originating outside the home country that surround and influence the firm.

The same forces as those in the domestic environment, except they occur outside the firm‘s home country. a. Although forces in the domestic and foreign environment are identical, their values often differ widely and can even be completely opposed to each other. b. Foreign forces are frequently difficult to assess, especially for legal and political forces. c. The forces are often interrelated. Although this can happen also for domestic 01-5

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settings, in foreign situations the kinds of interaction that occur and the outcomes that result may differ.

D. The International Environment 2. Consists of interactions between the domestic environmental forces and the foreign environmental forces, as well as interactions between the foreign environmental forces of two countries.

International organizations whose actions affect the international environment are also properly part of the international environment, such as worldwide bodies (e.g., World Bank), regional economic groupings of nations (e.g., European Union), and organizations bound by industry agreements (e.g., OPEC).

Decision-making is more complex in the international environment; managers in a home office overseeing subsidiaries in 10 different nations must consider not only domestic forces but also the influence of 10 foreign national environments, both individually and collectively since there may be some interaction.

Self-reference criterion is another common cause of added complexity of foreign environments. a. Due to managers‘ unfamiliarity with other cultures, some managers will ascribe to others their own preferences and reactions. b. Unconscious reference to a manager‘s own cultural values is probably the biggest cause of international business blunders. c. In IB, the international manager has three choices in deciding what to do with a concept or technique employed in domestic operations: (a) transfer it intact, (b) adapt it to local conditions, or (c) not use it overseas. d. Relationships among the different IB environments are shown in Figure 1.1.

LO 1-2 Describe the history and future of international business. 

III.

Key Terms:

Is Internationalization of Business a New Trend, and Will It Continue?

Is Internationalization of Business a New Trend and Will It Continue?

A. Although IB is a relatively new discipline, it is not a new business practice 1.

Phoenician and Greek merchants traded abroad well before the time of Christ. a. Expansion of agricultural and industrial production in China stimulated the emergence of an internationally integrated trading system, with China as the world‘s leading manufacturing country for about 1,800 years, until Britain replaced it around 1840. b. Emergence of international trading extensively impacted other areas of human life, such as politics, arts, agriculture, industry, and public 01-6

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health. c. The Ottoman Empire‘s emergence before 1300, ultimately spanning Europe, North Africa, and the Middle East, profoundly influenced emerging trade routes for people, goods, money, animals, and microorganisms, raised the cost of Asian trade for Europeans, and drove a search for sea routes to Asia, including expeditions that discovered the Americas. d. In 1600, Great Britain‘s British East India Company began establishing foreign branches throughout Asia, and other nations soon imitated in an effort to exploit trade opportunities for national advantage. e. In 1602, the Dutch East India Company was formed to engage in colonial activities in Asia and open ocean trade routes to that region. f. By the end of the 1600s, Ships commissioned by European trading companies traveled regularly to Asian markets via governmentprotected trade routes linking the Atlantic, Indian, and Pacific oceans, bringing valuable cargoes back to Europe in the hope of gaining significant profits. g. The 17th and 18th centuries have frequently been termed the ―age of mercantilism‖ because the power of nations depended directly on the sponsorship and control of merchant capital operating internationally, which expanded under the direct subsidization and protection of national governments. h. A number of multinational companies existed in the late 1800s, such as Singer Sewing Machine, J&P Coats, Ford Motor Company, and Bayer. i. The level of intracompany trade of multinationals in 1930, as a percentage of overall world trade, may have exceeded the proportion at the beginning of the 21st century. j. While most multinationals are based in developed nations, there has been a recent surge in the number arising in emerging economies. k. The rapid urbanization of populations combined with industrialization in the emerging markets is quickly shifting the world‘s economic center of gravity from Europe and the Americas and back to Asia, as shown in Figure 1.2.

LO 1-3

Discuss the dramatic internationalization of business. 

Key Terms:

The Growth of International Firms and International Business



transnational corporation





foreign

Expanding

Number

of

International

direct

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Companies 

investment (FDI)

Foreign Direct Investment and Exporting Are Growing Rapidly



exporting



importing

IV. The Growth of International Firms and International Business 1.

Expanding Number of International Companies

2.

The number of international companies is expanding rapidly.

3.

Multinational corporations are enterprises made up of entities in more than one nation, operating under a decision-making system that allows a common strategy and coherent policies.

4.

It is estimated that there are more than 103,000 MNEs with 900,000 foreign affiliates.

5.

Multinationals account for about half of world trade.

6.

In 2018, the 100 largest nonfinancial MNEs accounted for $15.5 trillion in assets, $9.4 trillion in annual sales, and had 17.5 million employees.

7.

The assets of the 400 largest state-owned firms exceed $45 trillion in 2018, equivalent to 50% of the world‘s global domestic product.

8.

Affiliates of foreign companies are an increasingly important element in industrial and economic life in many nations. Although these affiliates can be perceived as a threat to the autonomy of governments, policies and attitudes toward foreign investment have markedly liberalized in recent years in both developed and developing nations.

9.

Although critics may compare multinational companies‘ revenues with gross national income, these comparisons inaccurately compare the relative value added of companies versus countries.

10. Foreign Direct Investment and Exporting Are Growing Rapidly 11. Foreign direct investment (FDI) refers to the direct investments in equipment, structures, and organizations in a foreign country at a level sufficient to obtain significant management control; it does not include mere foreign investment in stock markets. a. The world stock of outward FDI was $34.6 trillion in 2020, five times larger than in 2020.

12. Exporting is the transportation of any domestic good or service to a destination outside a country or region, while importing is the transportation of any good or service into a country or region from a foreign origination point.

13. Merchandise exports grew from $2 trillion in 1980 to $3.5 trillion in 1990, 01-8

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$6.5 trillion in 2000, $15.3 trillion in 2010, and $19.5 trillion in 2018.

14. Service exports worldwide grew at a more rapid pace than merchandise exports, from $396 billion in 1980 to $6.1 trillion in 2019.

15. Figure 1.3 shows the growth in outward FDI and in services and merchandise exports from 1990 to 2019.

LO 1- Identify the kinds of drivers that are leading firms to Key Terms: 4 internationalize their operations.  What Is Driving the Internationalization of Business? o Technological Drivers o Market Drivers o Cost Drivers o Political Drivers o Competitive Drivers V.

What Is Driving the internationalization of Business?

A. Five major kinds of drivers, all based on change, are leading international companies to internationalize their operations: technological, market, cost, political, and competitive drivers.

B. Technological Drivers 1.

Advances in computers and communications technology permit an increased flow of ideas and information across borders, enabling customers to learn about foreign goods and enhancing potential for international business. a. Smaller companies may find barriers reduced for being able to communicate and serve customers abroad. b. Computer-based communication may enhance virtual integration, allowing firms move the location of various activities to other parts of the world that are more attractive.

C. Market Drivers 1.

As firms internationalize, they also become global customers. a. Firms may go abroad to protect business in their home market, so that foreign suppliers do not replace them with customers. b. Mature home country markets may encourage companies to consider nations with rising GDP/capita, population growth, and higher rates of GDP growth.

D. Cost Drivers 01-9

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1.

Improved economies of scale, shared costs of research and development, investment incentives, and so forth.

E. Political Drivers 1.

Trends toward the unification and socialization of the global community, such as preferential trading arrangements that group several nations into a single market, combined with the progressive reduction of barriers to trade and foreign investment by most governments and the privatization of much of the industry in former communist nations have encouraged firms to internationalize activities to gain access to these new, larger markets. a. Potential protectionism by host country markets, including import barriers, may encourage exporters to invest in production facilities in the importing nation.

F. Competitive Drivers 1.

New competitors from developing nations, entry of foreign firms into a company‘s home market, access to supplies, and entry into downstream activities to preserve markets for product.

LO 1-5 Compare the key arguments for and against the Key Terms: globalization of business.  economic globalization  What Is Globalization and What Are the Arguments for and Against the Globalization of Business? 

Concerns With Globalization



Arguments Supporting Globalization

VI. What Is Globalization and What Are the Arguments for and Against the Globalization of Business?

A. Globalization has implications across broad ranges of activity, such as social, environmental, historical, geographic, cultural, technological, and political.

B. Most common definition of globalization is economic globalization—the tendency toward an international integration and interdependency of goods, technology, information, labor and capital, or the process of making this integration happen.

C. There are many strong feelings about globalization, and it is important to understand the key considerations in the debate.

D. Concerns With Globalization 1.

While many critics concede that globalization increases the size of the pie, they also claim that globalization is accompanied by a broad array of injurious social implications. a. Globalization has produced uneven results across nations and people.

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b. Export-led growth has failed to materialize in several places; Latin America, for example, has not replicated Asia‘s success despite efforts to liberalize, privatize, and deregulate its economies, and sub-Saharan Africa has received only limited benefits. c. The recipe for achieving economic development through opening of world markets is neither easy to do nor universal in its outcomes. d. The gap between rich and poor in the world has increased due to globalization, according to critics, though the evidence is not clear in this regard. e. Globalization has had deleterious effects on labor and labor standards. f. Companies can more readily move to other nations with lower standards and costs, in a ―race to the bottom.‖ g. Multinationals investing in developing nations may contribute to higher wages, improved standards, faster job creation, and enhanced R&D. h. Some host countries may feel that lower standards are necessary in order to enhance competitiveness and improve prospects for investment and economic development. i. Globalization has contributed to a decline in environmental and health conditions. j. Increased air, water, and ground pollution along the Mexico–U.S. border due to production facilities built there and migration of workers to take jobs in these plants. k. Some rules on international trade may result in the weakening of environmental standards in order to comply with these new rules, such as allowing higher polluting Mexican trucks to haul freight on U.S. highways. l. Businesses may have an incentive to move their highest polluting activities to nations with the least rigorous environmental regulations or lower risk of liability. m. Economic growth fostered by globalization may help generate and distribute additional resources for protecting the environment and better technologies and best practices for use in developing nations.

2.

Globalization reduces national sovereignty. a. Nations become dependent on other nations for critical resources, technologies, or manufacturing capacity. b. This concern was manifest in the COVID-19 pandemic in which countries faced shortages of key medical equipment and 01-11

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pharmaceuticals.

3.

Arguments supporting globalization a. Free trade enhances socioeconomic development.

One of the few propositions on which almost all economists agree is that free trade is the best strategy for advancing the world‘s economic development. b.

Data show a clear and definitive link between liberalization of trade and economic growth, across a broad range of measures such as poverty, education, health, and life expectancy. c. Countries that have rejected globalization are among the most impoverished countries in the world. i. Free trade promotes more and better jobs. d. Expanded trade is linked with the creation of more and better jobs.

Between 1991 and 2020, about 42 million more nonfarm jobs were created than destroyed in the United States, an increase of 40%. e. Openness to trade may cause some sectors to not be competitive and some jobs will be lost, but trade creates new jobs and they tend to be better than the old ones. f. The key is not to block change but to manage the costs of trade adjustment and to support the transition of workers to more competitive employment.

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Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice: Are You Really Buying American?

This MiniCase explores the issue of the origin of products and brands and the companies that own them. From bumper stickers to tee shirts, the slogan ―Buy American‖ has become a common refrain from some American consumers. What does it mean to buy American? Is the Honda Accord made in Marysville, OH, any less American than the Nike Air athletic shoe made in China? What about that Dodge Ram truck? Nothing is more American than a pickup truck, but Dodge is now controlled by Netherlands-based Stellantis. The globalization of markets has created cross-border investments linking the workers and consumers of the world to one another in a way that was unimaginable 50 years ago. This serves as a starting point for a stimulating class discussion, which might be expanded through discussion questions such as: ―Is there such a thing as an ‗American made product‘?‖ and ―As a consumer, are you more patriotic when you purchase an American-made product?‖ This assignment gives students an opportunity to consider what is a domestic versus what is a foreign product of brand, as well as whether and how such a distinction really has meaning in the modern day world that they live in.

1. Should it matter to consumers whether the companies that make their products are based in the consumers’ home country or not? Explain your rationale.

Answers are likely to vary quite a bit on this question. Many students will exhibit patriotism and nationalistic zeal, emphasizing the importance of having a strong domestic economy in order to create the jobs, developmental opportunities, and other elements that they perceive to be critical to national prosperity and identify. Other students may argue that all countries and their workers should have an opportunity to achieve success and that those who are most efficient or effective at designing, building, distributing, and selling should be the ones to benefit. Some students may argue that efficient utilization of resources within a market-based system will require that certain jobs or tasks be located in other countries, and indeed that win-win outcomes are likely if barriers to international efficiency can be reduced or eliminated. The variety of positions that are likely to be presented can provide the basis for a lively discussion or even debate within the classroom and provide a strong link to the concepts of internationalization of businesses, economic globalization, and the need for IB skills among all students and managers.

2. Why has there been almost no negative backlash among Americans to the flood of foreign investment into their country?

This question can prove to be difficult for some students to answer. On one hand, students may note that the United States is a major investor in foreign nations and therefore cannot be overly protectionist when investments also go the other direction. Other students may argue that people have increasingly come to terms with the notion that it is a global marketplace and that foreign investment and ownership of domestic companies and brands by foreign-based firms is the new normal. Yet other students may question the assumption, arguing that there is a strong level of discomfort or even opposition to the level of foreign investment in the United States, and perhaps even expand on the risks that such investment creates to the sovereignty of the country and its potential for economic prosperity.

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Global Debate: Is the “Bottom of the Pyramid” a Market Worth Serving?

Professor C. K. Prahalad popularized the term ―Bottom of the Pyramid‖ to refer to the approximately 3 billion people who survive on less than $2 per day, where basic survival needs are just barely met. Prahalad suggested that this large mass of humanity should be viewed as having tremendous market potential with untapped purchasing power, if only appropriate ways were found to service them. In addition to being a large market for multinationals, serving these consumers could benefit them and help alleviate poverty. However, although the absolute number of such consumers might be large, critics questioned whether the economics associated with serving these consumers would prove to be sufficiently compelling, and whether a profitoriented focus on the world‘s most impoverished people was appropriate from an ethical perspective, especially when marketing products that might be viewed as lower priority for health and development, for example.

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for or against, and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups or else assign perspectives and conduct an in-class debate and discussion.

1. Do you think the base of the pyramid represents an attractive and appropriate market for multinational corporations? Why or why not? For which products or services might this market be most appropriate?

The answer to this question will vary, and it is intended to help people think through the issue.

Certainly, students are likely to focus on products that are basic needs, such as those related to food, clothing, shelter, education, and health care. While there may be a tendency to look at very low-priced items, there may be some discussion about exceptions to this. For example, products associated with water treatment (e.g., filtration systems) might have somewhat high costs relative to daily income levels, but they might have substantial benefits when allocated across long periods of usefulness. Similarly, although cell phones might be expensive on an initial basis, they may be justifiable due to the broad range of potential uses and benefits that they may provide to the user and their family and other key stakeholders.

2. If customers at the base of the pyramid could be convinced to allocate some of their meager income to products such as cigarettes, alcoholic beverages, or cosmetics, would it be socially responsible for multinationals to pursue such opportunities? Why or why not?

This question raises an issue that almost always generates strong opinions and a variety of perspectives. Some students may feel that these products are luxuries for people at the base of the pyramid, or perhaps that they are fundamentally undesirable products not only for the base of the pyramid but perhaps for all humans. The potentially addictive nature of products such as cigarettes and alcohol raises additional concerns, from a social responsibility standpoint, since it can exploit inherited or other tendencies to become reliant on such substances. Other students will often raise the notion of allowing people to make their own choices about what represents the best options for them to spend their meager resources, and that effort to discourage or regulate such commercial efforts is inappropriate. Exploring the variety of perspectives and 01-14

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allowing the debate to blossom can yield a rich and insightful learning experience for the participants.

Get That Job! From Backpack to Briefcase: Lily DeNoma in Arequipa, Peru: Go Abroad to Gain New Perspectives Lily DeNoma describes her experience working as a volunteer in Peru for 7 weeks, the challenges she faced, and how this experience benefited her.

Online and Hybrid: Virtual teams discuss DeNoma‘s recommendation for an international experience related to their own career development and their ability to understand and adapt to life in another culture, particularly one that is quite different from one‘s home culture. Share conclusions with class, either online or in a face-to-face setting.

Face-to-Face: Students evaluate their own career strategy in light of DeNoma‘s recommendation for an international experience.

1. According to DeNoma, what benefits are gained by engaging in a foreign experience?

DeNoma discussed how the experience gave her new perspectives on how to confront any obstacle, and to be optimistic when facing challenges. Her foreign experience better prepared her for the challenges of domestic internships and taking leadership positions on campus.

2. How do you think DeNoma overcame the many challenges she described while working in Peru?

Students will have various answers to this question, and many may draw on their own experiences going abroad or as foreign students. Some may discuss culture shock and overcoming it. Stress the importance of a positive attitude and a willingness to be flexible in your perspectives when working in a foreign country.

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End of Module Exercises Critical Thinking Questions 1. Business is business, and every firm has to find ways to produce and market its goods.

Why, then, might managers be unable to successfully apply the techniques and concepts they have learned in their own country to other areas of the world?

The answers to this question may vary. Some techniques and concepts can be applied to operations in other nations. However, the differences among the environmental forces often require that these techniques are altered, and in some cases, they cannot be used at all.

2. Give examples to show how an international business manager might manipulate one of the controllable forces in answer to a change in the uncontrollable forces.

Students will come up with any number of examples such as: 

If a law is passed limiting the number of foreigners who may be employed in the firm (legal force), management will have to make the appropriate changes in the company‘s personnel (controllable force).



If a new highway is built (physical force), the manager may have to make changes in the firm‘s physical distribution system (controllable force) to reach the new market created by the highway.

3. Although forces in the foreign environment are the same as those in the domestic environment, they operate differently. Why is this so?

The kinds of forces in the two environments are identical, but they operate differently because: 

Their values frequently differ widely and sometimes are diametrically opposed.



Changes are often difficult to assess. A manager from a country where laws are vigorously enforced may take literally a new law passed where law enforcement is less rigorous.



Many times, forces are interrelated so that even though the values of a force may be the same in two markets, values of other forces may be different. The resulting interactions then would not be similar.

4. Why, in your opinion, do the authors regard the use of the self-reference criterion as ―probably the biggest cause of international business blunders?‖ Can you think of an example?

Answers may vary on this question, but when a situation familiar to the manager arises, there is a tendency to respond without analyzing the reasons from another cultural viewpoint, especially if it is something they have dealt with successfully before. The nearly automatic response is conditioned by the manager‘s experience in their own culture. Thus, the manager would give the local personnel director a list of job descriptions for which the firm needs to fill and let the director do the job. The manager probably would not stop to think that the personnel director‘s extended family needs work and as a result, these people may be hired even over others whose skills better match the job descriptions. Ricks‘ International Business Blunders is full of 01-16

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examples. Many of the famous ―horror‖ stories regarding overseas business failures are directly attributable to a failure to analyze the situation from the point of view of the local culture.

5. Discuss some possible conflicts between host governments and foreign-owned companies.

International firms have grown in size and number. As a result, they have become increasingly significant in the economies of many nations. Governments have found that important segments of their industry have come under the control of foreigners whereas previously local citizens were the principal owners. This has led to a fear the absentee owners may follow policies that are in conflict with government objectives. This fear is heightened by the knowledge that headquarters can and does control their affiliates much more closely than previously.

6. ―A nation whose GNI is smaller than the sales volume of a global firm is in no position to enforce its wishes on the local subsidiary of that firm.‖ Is this statement true or false?

Please explain your rationale.

The comparison of total sales to GNI is similar to comparing apples with oranges. The subsidiary must obey a nation‘s laws or run the risk of legal action or even expropriation. Admittedly, a global or multinational firm does have some bargaining power in some instances that a purely local firm would not have. It can threaten to leave the country, which will reduce the number of jobs available and the earning of foreign exchange if it is exporting from that country. The important factor is that a firm with operations in various countries permits management to be flexible in choosing where it wants to produce and supply other subsidiaries and markets. Sales of the subsidiary, not the entire firm, could have some bearing if they indicate that the affiliate is significant within the local economy.

7. What examples of globalization can you identify within your community? How would you classify each of these examples (as international investment, international trade, other)?

This question will have varying answers. Recent consolidation in music, supermarket, banking, aerospace, and publishing industries will yield ample examples of globalization.

8. Why is there opposition to globalization of trade and integration of the world’s economy? Is there a way the debate can move beyond a simplistic argument for or against globalization and toward how best to strengthen the working of the global economy in order to enhance the welfare of the world and its inhabitants? What might this require?

Answers will vary, but essentially, the pro-globalization debate centers on free trade and its benefits. The opposition points to three areas where globalization‘s effects have been problematic: The gains have been unevenly distributed among developed and developing nations, globalization reduces labor and safety standards, and its impact on the environment is harmful. One could argue that these two approaches are not actually in opposition, but that trade requires management as it globalizes. The second part of the question requires a student evaluation and answers may vary substantially due to differences in training, ideology, and other factors.

9. You have decided to take a job in your hometown after graduation. Why should you study international business?

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The answers will vary but no matter where a person is, they cannot be entirely free from the impact of international business. Foreign firms can create competition for your hometown company. Exchange rates can cause local prices for imported goods to become more or less competitive. Ask a salesperson who works for a local Toyota (or Mercedes) dealer if they felt the impact of the more expensive yen (or euro). If the hometown firm cannot compete with imports, you can lose your job. What you learn in the international business course will make you a more knowledgeable citizen.

10. How can international issues, such as COVID-19, demonstrate arguments both for and against globalization?

Some students will probably take the side of the need to have all of the key components for personal protective gear and vaccines made within the country. Other students may ask why any one country should protect itself against a pandemic at the expense of the lives of people in other countries. Ask students that if we wanted to be ready for any emergency, how do we know what things should only be made locally? It is not practical, nor even possible, to make everything within a single country, and trying to do so would only impoverish the nation that attempts to. If it is known exactly what is needed (such as face masks), ask students to compare making the supply chain completely within a country to stockpiling the needed product, which are made wherever in the world is the least expensive. What would be the best option for a small nation, such as Belgium or Panama?

11. How could certain skills, like critical thinking, teamwork, and problem-solving, be learned differently through an international internship or other work experience versus through a domestic internship or other work experience?

Students will give a variety of answers, but most will relate to the value of learning additional cultural perspectives and being able to apply those perspectives to daily problems in ways that would not likely be learned from a domestic internship. Students who have spent time abroad or who are foreign students may be able to give specific examples of this. globalEDGE Research Task Exercise 1 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > ―country of choice‖), each country‘s profile page will be displayed individually from where ―Indices‖ subsection of countries can be accessed on the left column menu. The indicators in the ―KOF Working Paper‖ can be found by searching the indicator keywords. For example, the number of McDonald‘s restaurants and the number of IKEA stores are used to calculate the cultural globalization indicator.

Search Phrase: KOF Index of Globalization Resource Name: KOF Index of Globalization Resource Link: https://globaledge.msu.edu/global-insights/by/country

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Exercise 2 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > United States), each country‘s profile page will be displayed individually from where ―Statistics,‖ ―Economy,‖ and ―Trade Statistics‖ subsection of countries can be accessed on the left column menu.

Search Phrase: by Country Resource Name: Global Insights by Country Resource Link: https://globaledge.msu.edu/global-insights/by/country MiniCase: The COVID-19 Pandemic: Temporary Hiccup or Permanent Change for International Business?

This MiniCase explores the impact of the COVID-19 pandemic on international business. In order to protect their citizens from the virus, many nations closed their borders to both people and to trade. The United Nationals predicted foreign investment decreases of 30%–40% from 2020 to 2021. The pandemic has led to many international firms to look at reworking their supply chains to minimize reliance on foreign partners. Nationalistic sentiment and increased government involvement in the economy has fueled this. Firms in emerging markets are predicted to face the most difficulty in the recovery process, whereas developed countries are expected to rapidly adapt and recover. Firms have had to adopt digital strategies to replace international travel, and these new technologies may have a permanent place in the future of international business.

1. In your opinion, could COVID-19 lead to a reversal of globalization? If so, what might the implications of this reversal be for international businesses?

Answers will likely relate to reworking the supply chain so that as much as possible is made in the home country in an effort to be better prepared for the next pandemic. Ask students to consider vaccine research and production. Would international research be affected if the designs for new vaccines can simply be sent over the internet to a production facility? This industry would not likely be significantly affected. Would vaccine production be affected? This business might see nations set up local production facilities to ―protect‖ a future supply. But who pays for these facilities when there are no major pandemics? Can small vaccine production facilities compete on price against large facilities, such as existed before and during the pandemic?

2. In what ways might international business companies make use of technology and digitalization to adapt to the new work environment impacted by COVID-19 and create new business opportunities?

Students will probably point to the use of video technologies to replace meetings, educational and training sessions, and assisting with diagnostic work. Many of them may have become proficient with these technologies because they have had to use them at school or the university.

Some international business might happen faster if video calls can be used instead of in-person visits. Ask students how video meetings might work with cultures that have depended on 01-19

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personal relationships for conducting business. Once travel returns to pre-pandemic levels, will they continue using video meetings, or will they return to in-person meetings?

3. Which sectors of business activity are likely to be the slowest to rebound from the effects of COVID-19, and why?

Students will probably mention travel and tourism as the slowest to rebound because of direct restrictions from governments trying to reduce the spread of the virus. Ask them how they feel about international travel and if they would be comfortable traveling anywhere once vaccinated, or if other things need to be in place before they are willing to travel abroad. What will need to happen before tourism rebounds completely? Will international business travel fully rebound, or will video calls replace most of that travel?

Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available at http://bit.ly/MHEIBVideo. The Impact of Globalization board is rich and varied and is updated monthly.

See www.wsj.com/video/why-tesla-is-betting-big-in-china-with-a-shanghaigigafactory/50D3AD38-2836-4CA9-B6BF-88AF0A24326E.html for a video of why Tesla decided to build a factory in China. globalEDGE and the Academy of International Business provide links to a number of organizations that offer videos about international business. You can find these links at https://aib.msu.edu/resources/videodepositories.asp.

YouTube has many international business-related videos in its collection. For example, you can find a 31-min video on How Beneficial is World Trade at https://youtu.be/xRJZWfqWcs0?list=PL9E6D9764746EA546.

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for hybrid and online courses.

1. International Business Project One popular team exercise is to prepare a foreign market assessment and entry business plan, which can be done on a stand-alone basis or in multiple stages during the international business course. While the project could be done individually, we have tended to assign them to teams of three to five students to help promote diversity of perspectives and to spread the workload.

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Objective: To create a foreign market entry business plan for taking an American consumer product into a foreign country.

Project Outline: 1.

Size of market (demographics, socioeconomic state, urban/rural).

2.

Sociocultural acceptance of product—Is adaptation necessary?

3.

Legal/bureaucratic environment (imports, local manufacture, taxation).

4.

Competition in market.

5.

Economic and political climate for foreign business.

6.

Methods for marketing and distribution.

7.

Managerial and labor climate.

8.

Financial viability (profit margin, currency translation, profit repatriation).

Project Report: The report may essentially cover all topics in the outline plus an executive summary, introduction (country and product), and recommendations. The report will be wordprocessed, about 20 pages (double-spaced) and will have an Appendix that contains exhibits and a complete bibliography of sources. Examples are maps of the country, tables, and charts.

Project Presentation: The project may be presented to the class either through a taped session posted online (most appropriate for online classes) or through face-to-face presentation to the class (more appropriate for hybrid or face-to-face sessions). Thirty minutes will typically be allotted to each team, including 15–20 min for presentation followed by question and answer.

Each member of the team will typically participate in the presentation and for online submission, it may make sense to tape each individual‘s section separately to keep the file size manageable.

Teams should develop appropriate visual supports for their presentations (e.g., PowerPoint slides, video segments from YouTube, flipcharts).

2. Debate on Globalization Conduct a debate on issues in support of and opposing globalization. The text hints at a range of issues regarding the pros and cons of globalization, which can serve as a starting point for a stimulating debate and class discussion on globalization. Consider assigning students to ―for‖ and ―against‖ positions and ask them to research their positions and provide a clear and compelling argument in favor of their assigned role, with these positions either presented in written form to serve as a base for an online debate or presented orally through a video clip posted on the class learning platform or directly in a face-to-face context. Using these differing positions as a starting point, you can follow up with an online or in-person discussion. For example, ask students to discuss how they view globalization and the reasons for their views.

Potential discussion questions can include: ―Discuss the benefits of globalization and the concerns regarding the globalization of markets as outlined in the module? Are you concerned with the internationalization of markets? If so, why?‖ or ―If international business is not a new topic, what about the globalization of international business is new? What are the roots of globalization? Is globalization accelerating? Why or why not?‖ or ―How have you benefited personally or been negatively impacted by the forces of globalization? Please be specific in your 01-21

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response.‖ A summary of the class discussion would offer an appreciation of the many issues related to globalization and the many views on this complex issue in which we are all involved.

3. American Brands Following up on the IB in Practice, ―Are You Really Buying American?‖ ask students to research other American brands and businesses that are owned by foreign companies. They might be surprised who really owns what in the United States and how brand identification and ownership may be different. You might stimulate some of this discussion by putting the following companies/brands onto individual PowerPoint slides and asking students to identify the nationality of the owners of the brand, providing a good basis for discussing the internationalization of business in our everyday lives. a. 7-Eleven Stores (owned by Seven and I Holdings Co. of Japan) b. Chesebrough-Pond (Vaseline) (owned by Unilever of the Netherlands) c. Maybelline cosmetics (owned by L‘Oreal of France) d. Diesel clothing (produced by Diesel S.p.A. of Italy) e. Aquafresh toothpaste (GlaxoSmithKline plc of the United Kingdom) f. Baby Ruth candy bars (produced by Ferrero of Italy) g. Holiday Inn motels (owned by InterContinental Hotels Group plc of the United Kingdom) h. Arrowhead water (owned by Nestle of Switzerland) i. Columbia Pictures motion picture studios (owned by Sony of Japan) j. Arco gasoline (owned by BP of the United Kingdom) k. Nerds candy (owned by Ferrero of Italy) l. Popsicle frozen treats (owned by Unilever, a British-Dutch multinational) m. Random House (owned by Bertelsmann of Germany) n. Ralston Purina pet foods (owned by Nestle of Switzerland) o. Motel 6 (owned by Accor of France) p. Pinkertons (owned by Securitas AB of Sweden) q. Ban deodorant (owned by Kao Corporation of Japan) r. RCA Records (owned by Sony of Japan) s. Thinkpad laptop computers (owned by Lenovo of China) t. Norelco electric shavers (owned by Philips of the Netherlands) Supplemental Activities Case Studies 01-22

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Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Harvard Cases ―Planet Starbucks (A)‖ details efforts made by Starbucks to act in a socially responsible manner and the pressures placed on the Starbucks Coffee company by the anti-globalization movement. ―Environment and International Trade‖ describes the conflicts present between environmental values and international trade as manifested in various multilateral treaties and institutions, such as GATT, NAFTA, and the European community. ―Worker Rights and Global Trade: The U.S.–Cambodia Bilateral Textile Trade Agreement‖ examines the political and economic dimensions of the campaign to improve workers‘ rights around the world, through inclusion of labor standards in international trade agreements and with a specific focus on the U.S.–Cambodia Textile Trade Agreement. The latter agreement was the first to link increased access to U.S. markets with improvements in working conditions in an exporting nation.

Controversial Issues 1. Global Debate: Is the ―Bottom of the Pyramid‖ a Market Worth Serving?

This box feature described earlier in this module‘s instructor guide provides an excellent foundation for debating some of the issues raised in the text.

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against), and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups or else assign perspectives and conduct an in-class debate and discussion.

2. Debate on Globalization The debate on globalization elements described earlier in this module‘s instructor guide provides an excellent foundation to lever the content from the text‘s discussion of this topic into a lively and insightful debate among the class participants. Conduct a debate on issues in support of and opposing globalization. The text hints at a range of issues regarding the pros and cons of globalization, which can serve as a starting point for a stimulating debate and class discussion on globalization. Consider assigning students to ―for‖ and ―against‖ positions and ask them to research their positions and provide a clear and compelling argument in favor of their assigned role, with these positions either presented in written form to serve as a base for an online debate or presented orally through a video clip posted on the class learning platform or directly in a face-to-face context. Using these differing positions as a starting point, you can follow up with 01-23

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an online or in-person discussion. For example, ask students to discuss how they view globalization and the reasons for their views. Potential discussion questions can include: ―Discuss the benefits of globalization and the concerns regarding the globalization of markets as outlined in the module? Are you concerned with the internationalization of markets? If so why?‖ or ―If international business is not a new topic, what about the globalization of international business is new? What are the roots of globalization? Is globalization accelerating? Why or why not?‖ or ―How have you benefited personally or been negatively impacted by the forces of globalization? Please be specific in your response.‖ A summary of the class discussion would offer an appreciation of the many issues related to globalization and the many views on this complex issue in which we are all involved.

Online and Hybrid: Virtual teams can be assigned to take different perspectives to argue for or against globalization, and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students can be assigned to take different perspectives to argue for or against globalization and then they can be asked to argue their positions within an in-class debate and discussion.

3. Current Events A focus on current events that are relevant to the module‘s topics is a good way to bring home the concepts, review their application, and build news-review habits. Ask everyone to come prepared with an article for every meeting. If a meaningful percentage of the final grade is allocated to discussion (10–15), motivation is there. Devote 5 min at the beginning of class to discussion of current events. Recent relevant current events include the ongoing controversy in the United States about whether free trade agreements such as USMCA or the trade ―war‖ with China and other nations will promote domestic job creation and improved economic prosperity, or whether they send jobs abroad and harm American workers and the overall economy.

Depending on the online interface, this activity may be done in chat forums (Blackboard) or discussion boards, before class begins. This activity also works well in large lecture classes.

Teaching Suggestions 1. Students find the definitions in this chapter helpful. Stress that building, understanding, and correctly using the terms associated with international business helps them move toward understanding and being able to articulate IB‘s complexity. This will assist them in comprehending and being able to perform effectively within a world that is increasingly international in its context and forces.

2. Focusing on the boxed material and the case study will help students achieve the objectives of the chapter. Answers for both the boxed material and case studies are provided in this module‘s Instructor Guide.

3. The Critical Thinking Questions at the end of the module will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the 02-24

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collect assignments at random and assign a grade; (2) occasionally give some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) have students hand in assignments and give credit for work submitted; and (4) call on students at random to answer specific questions (giving a small number of points for correct answers or counting this as part of participation).

4. Guest lecturers willing to discuss the challenges presented by the rapidly changing aspects of international business, such as by discussing the pace of change in their own industry, are a way to underscore the importance of the information in this module. Possible guests include: 

Personnel managers who staff the overseas subsidiaries and international divisions for a local firm to talk about job possibilities.



Retired executives who have worked as expatriates.



Bankers from the international division of a local bank. Often, they share leads to firms in your area that are engaged in international business.



Executives from a local international or multinational firm.



You might also be able to contact a foreign exchange student in advance and ask them to discuss the nature of their home country and some of the differences that they have observed here.

5. Students tend to be aware marginally of their consumer-level dependence on international business. To arouse their early interest in the importance of this course, we use one or more of the student involvement exercises listed in the following section. 

Start the course by asking students this question: ―If I snapped my finger (snap your finger) and every piece of clothing we are wearing today that was NOT manufactured in the United States disappeared, how we would be dressed?‖ The obvious answer is ―naked.‖ Then move into a discussion of our dependence on foreign manufactured goods as a segue into your orientation for this course.



Hold up a common object such as a lead pencil. Where do the materials come from?

Rubber comes from the Far East, the copper and tin from which the brass ferrule is made may come from Chile and Malaysia respectively, and so forth.



Ask if anyone in class is influenced by international business. The response is often negative, except for foreign students. This can open up a discussion to show our dependence on imports (smartphones, tablets, laptop computers, Blu-ray, Flat Screen HDTVs, clothing, food and beverages, cars, etc.), outsourcing, and foreign direct investment. For example, foreign ownership of grocery chains in the United States has grown significantly in recent years (e.g., Trader Joe‘s, Stop & Shop, Aldi, Food Lion, Hannaford).

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Assignment Type

Title What is International Business?

Topic(s) Why Study International Click and Drag Business?

Drivers of Globalization The Globalization Debate

Drivers of Click and Drag Globalization The Globalization Click and Drag Debate

Growth of International Business

What Is Click and Drag Globalization?

Is the Future of Globalization in Doubt?

Video Case

The Globalization Debate/Drivers of Globalization

Learning Objective(s)

AACSB Accreditation Tagging

Bloom’s Taxonomy

01-01; 01-02

Analytical Thinking

Understand

01-03; 01-04 01-05

Analytical Thinking Analytical Thinking

Understand Understand

Reflective 01-02; 01-03 Thinking Understand Reflective Thinking/Know ledge Application/An alytical Remember/Und 01-05 Thinking erstand

Connect Activities 1. What Is International Business?

Activity Summary: In this click and drag activity, boxes of general characteristics are matched to the correct international business term.

How to Use Activity: For online and hybrid classes, assign this as part of the module‘s homework. For an in-class assignment, divide the class into small groups and have them do the assignment as a team. Monitor the team discussions to clarify any confusing terms. Or have students do this individually and then in class discuss any choices that were confusing and why.

2. Drivers of Globalization Activity Summary: This is a click and drag activity in which boxes of international activities and implications for business are placed beside one of the five driving forces of globalization.

How to Use Activity: This can be assigned for homework. For an in-class assignment, divide the class into small groups and have them do the assignment as a team. After the teams have completed the assignment, discuss the answers with the entire class.

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International Business, 3e

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3. The Globalization Debate Activity Summary: This is a click and drag activity in which arguments related to globalization are dragged to the corresponding issue. Then students are to indicate whether the argument is for or against globalization.

How to Use Activity: For online and hybrid classes, assign this as part of the module homework.

For an in-class assignment, divide the class into small groups and have them do the assignment as a team. Walk around the class to listen to what the teams are discussing and use that to launch into a broader discussion on the topic.

4. Growth of International Business Activity Summary: In this click and drag activity, general characteristics on the left are dragged to the corresponding driver of globalization on the right.

How to Use Activity: This can be assigned as part of the module homework. Have in-class teams to this during class. After the teams have completed the assignment, discuss the answers with the entire class.

5. Is the Future of Globalization in Doubt?

Activity Summary: This video case shows a short interview that discusses forces, especially in the United States and the United Kingdom, that are pushing against globalization. Then, they answer one or more multiple-choice questions on the topic.

How to Use Activity: Have students do this individually for online courses. In face-to-face classes, have students do this before class and then discuss the issues related to globalization.

Have students vote if they think that globalization will expand or shrink in the next 10 years.

Then have students discuss why they voted the way they did.

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

Module 2: International Trade and Investment Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers Global Debate IB in Practice Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

Your Content Summary This module provides an overview of trends and theories regarding international trade and foreign direct investment. International trade and foreign direct investment have grown dramatically over recent decades. Although new trading and investment patterns are emerging, developed nations tend to trade with and invest in other developed nations, not in developing countries. Much trade is conducted based on regional trade partners and bilateral or multilateral trade agreements. Trade theories attempt to explain why nations trade with each other.

Mercantilists believed that trade should be a vehicle for accumulating gold and other precious minerals. Adam Smith, displeased with mercantilist ideas, showed that a nation could acquire what it does not produce by means of free, unregulated trade. A nation could gain most by producing only goods that it could produce with less labor than other nations. Ricardo carried Smith‘s argument a step farther by proving that a country that was less efficient in the production of all goods could still gain from trade by exporting those products in which it was less inefficient. Newer trade theories are also discussed, including differences in resource endowments, overlapping demand, international product life cycle, economies of scale and the experience curve, and national competitive advantage from regional clusters.

The traditional approach to international involvement was to begin with exporting, then setting up foreign sales companies and finally, where the sales volume warranted, establishing foreign production facilities. Increasingly, because countries have liberalized trade restrictions and IT has made communication instantaneous, companies are becoming involved in trade and FDI for many reasons. International investment theory attempts to explain why foreign direct investment occurs. Product and factor market imperfections as well as strategic behavior help explain foreign investment patterns and help explain why firms primarily from oligopolistic industries may develop advantages not open to indigenous companies. The internalization theory states that international firms will seek to invest in a foreign subsidiary rather than license their superior knowledge to receive a better return on investment used to produce the knowledge. Dynamic capabilities theory suggests that successful international investment requires firms to have an ability to dynamically create, sustain, and exploit unique knowledge or resources over time.

There is a brief description of the Eclectic Theory of International Production.

Learning Objectives LO 2-1

Describe the magnitude of international trade and how it has grown.

LO 2-2

Identify who participates in trade.

LO 2-3

Distinguish among the theories that explain why certain goods are traded internationally.

LO 2-4

Describe the size, growth, and direction of foreign direct investment.

LO 2-5

Explain several of the theories of foreign direct investment.

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Key Terms and Definitions absolute advantage (p. 39)

A nation‘s ability to produce more of a good or service than another country for the same or lower cost of inputs

comparative advantage (p.

44)

When one nation is less efficient than another nation in the production of each of two goods, the less efficient nation has a comparative advantage in the production of that good for which its absolute disadvantage is less

cross-border acquisition

The purchase of an existing business in another nation

(p. 54) currency devaluation (p. 45)

A reduction in the value of a country‘s currency relative to other currencies

direct investment (p. 50)

The purchase of sufficient stock in a firm to obtain significant management control

dynamic capability theory (p.

Theory that for a firm to successfully invest overseas, it must have not only ownership of unique knowledge or resources, but also the ability to dynamically create, sustain, and exploit these capabilities over time

56)

eclectic theory of international production (p. 56)

Theory proposing that for a firm to invest in facilities overseas, it must have three kinds of advantages: ownership specific, location specific, and internalization

economies of scale (p. 48)

The predictable decline in the average cost of producing each unit of output as a production facility gets larger and output increases

exchange rate (p. 45)

The price of one currency stated in terms of another

experience curve (p. 48)

The rising scale on which efficiency improves as a result of cumulative experience and learning

greenfield investment (p. 54)

The establishment of new facilities from the ground up

internalization theory (p. 55)

Theory that to obtain a higher return on investment, a firm will transfer its superior knowledge to a foreign subsidiary that it controls, rather than sell it in the open market 02-30

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international product life cycle (IPLC) (p. 46)

A theory explaining why a product that began as a nation‘s export eventually becomes its import

mercantilism (p. 38)

An economic philosophy based on the belief that (1) a nation‘s wealth depends on accumulated treasure, usually precious metals such as gold and silver and (2) to increase wealth, government policies should promote exports and discourage imports

monopolistic advantage theory (p. 55)

Theory that foreign direct investment is made by firms in industries with relatively few competitors, due to their possession of technical and other advantages over indigenous firms

national competitiveness (p. 49)

A nation‘s relative ability to design, produce, distribute, or service products within an international trading context while earning increasing returns on its resources

oligopolistic industry (p. 55)

An industry with a limited number of competing firms

overlapping demand (p. 46)

The existence of similar preferences and demand for products and services among nations with similar levels of per capita income

perfect competition (p. 39)

A market situation in which there is a sufficiently large number of well-informed buyers and sellers of a homogeneous product, such that no individual participant has enough power to determine the price of the product, resulting in a marketplace that is efficient in production and allocation of products

portfolio investment (p. 50)

The purchase of stocks and bonds to obtain a return on the funds invested

product differentiation (p. 46)

Unique differences producers build into their products with the intent of positively influencing demand

resource endowment (p. 45)

The land, labor, capital, and related production factors a nation possesses

strategic behavior theory (p.

55)

Theory suggesting that strategic rivalry between firms in an oligopolistic industry will result in firms closely following and imitating each other‘s international investments in order 02-31

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International Business, 3e

Instructor Guide to Module 2

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to keep a competitor from gaining an advantage trade deficit (p. 38)

The amount by which the value of imports into a nation exceeds the value of its exports

trade surplus (p. 38)

The amount by which the value of a nation‘s exports exceeds the value of its imports

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 2-1

Describe the magnitude of international trade and how it has grown. 

Introduction



International Trade

Key Terms:

o Volume of International Trade o How Evenly Has Trade Grown? o Which Nations Account for the Most Exports and Imports?

II.

Introduction A. In this module, two topics are examined that relate directly to exporting and production in foreign countries: (1) international trade, which includes exports and imports, and (2) foreign direct investment.

III.

International Trade

A. Volume of International Trade 4.

The volume of international trade in goods and services was $4 trillion in 2000 and was six times that level by 2019.

5.

Trade in physical goods accounted for $19.1 trillion of the $25 trillion in 2019, while trade in services was $5.9 trillion.

6.

While smaller in absolute terms, trade in services has grown faster in the past 20 years than has merchandise trade.

7.

Nearly 60% of global output is now destined for international trade.

B. How Evenly Has Trade Grown?

8.

The proportion of exports from North America, Latin America, Africa, and the Middle East has decreased since 2003.

9.

The proportion of merchandise exports from Asia has increased by over 30% since 2003, with China accounting for over 84% of the increase.

10. Rapid expansion of international trade has helped transform nations such as Singapore, Taiwan, and South Korea from poverty in the 1950s to developed country standards of living, and 500 million Chinese have been lifted out of poverty by China‘s trade-driven policies.

11. Although the EU‘s share of world merchandise trade decreased by nearly 17% since 1983, 02-33

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

the expansion of the EU to 28 member countries kept this decline from being even larger.

12. All regions and essentially all primary world nations experienced an absolute increase in the dollar volume of their services exports, though the proportion of world exports of commercial services from Latin America, the EU, Africa, and the Middle East has declined since 2005.

13. The rapid increase of world exports in the past 40 years demonstrates that exporting is a viable growth strategy and one that can benefit exporting nations by creating jobs for their citizens.

C. Which Nations Account for the Most Exports and Imports?

14. Table 2.1 shows the ranking of the world‘s 10 leading exporters and importers of merchandise and services.

15. The top exporters and importers are generally developed countries, though China ranks in the top 5 for each list and India in the top 10 for imports and exports of services.

16. The 10 largest exporters and importers collectively account for over 50% of the world‘s exports and imports.

LO 2-2 Identify who participates in trade. 

Key Terms:

Direction of Trade o The Increasing Regionalization of Trade



trade deficit



trade surplus

o Major Trading Partners: Their Relevance for Managers o Major Trading Partners of the United States IV.

Direction of Trade A. A major portion of exports from developing nations go to developed countries, but this proportion has been declining, from 72% in 1970 to about 43%. Less than half of exports from developed countries go to other industrialized nations.

V.

The Increasing Regionalization of Trade

A. World Trade is dominated by exchanges within, not between, geographic regions.

17. About half of exports from North American nations went to other nations in North America.

18. A little more than half of Asian nations‘ exports were to other Asian nations.

19. Over 80% of exports from European nations went to other European nations.

20. Regionalization of trade is reinforced by the development of expanded regional trade associations and agreements such as ASEAN, Mercosur, the EU, and USMCA. 21. There are more than 300 regional trade agreements in operation worldwide and the share of world trade they account for increased from 37% in 1980 to over 70% by 2020.

B. Growth of exports into developing country markets and corresponding growth from developing 02-34

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

countries to developed countries are due in part to developing nations‘ increased ability to export manufactured goods but also due to growing intrafirm trade among international companies‘ affiliates around the world.

VI.

Major Trading Partners: Their Relevance for Managers

C. Advantages of focusing attention on a nation that is already a sizable purchaser of goods from the would-be exporter‘s country include: 22. Business climate in the importing nation is relatively favorable.

23. Export and import regulations are not insurmountable.

24. There should be no strong cultural objections to buying that nation‘s goods.

25. Satisfactory transportation facilities have already been established.

26. Import channel members are experienced in handling import shipments from the exporter‘s area.

27. Foreign exchange to pay for the exports is available.

28. A government may encourage its importers to buy from the countries that buy their exports.

VII.

Major Trading Partners of the United States

D. Figure 2.2 shows the major trading partners of the United States.

29. The top 10 accounted for 64% of U.S. exports and 69% of U.S. imports in 2019.

30.

Mexico and Canada are major trading partners, sharing a common border with the United States and being partners in the USMCA.

31. Seven of the top 15 nations the U.S. imports from have remained on the list over the past 50 years.

32. Rankings of America‘s trading partners are rapidly changing. Asian nations, like China, have become increasingly important, yet challenging, trade partners for both exports and imports.

33. Between 1991 and 2019, China rose from sixth to first place in exports to the United States and to third place as an importer of U.S. goods, albeit with a substantial trade deficit for the United States.

E. Many Asian countries are becoming major importers of American goods because: 1. Their rising standards of living enable their people to afford more imported products, and export earnings provide foreign exchange to pay for imports.

2. They are purchasing large amounts of capital goods to further their industrial expansion.

3. They are importing raw materials and components to assemble into subassemblies or finished goods to subsequently export, often to the United States.

4. Their governments, sometimes under pressure from the U.S. government, have sent buying missions to the United States. to seek products to import.

02-35

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

F. New international business opportunities can be identified by examining trade statistics from various governmental sources.

LO 2-3

VIII.

Distinguish among the theories that explain why certain goods areKey Terms: traded internationally.  mercantilism  Explaining Trade: International Trade Theories  absolute advantage o Mercantilism  perfect competition o Theory of Absolute Advantage  comparative o Theory of Comparative Advantage advantage o How Exchange Rates Can Change the  exchange rate Direction of Trade  currency o Some Newer Explanations for the Direction devaluation of Trade  resource o Summary of International Trade Theory endowment 

overlapping demand



product differentiation



international product life cycle (IPLC)



economies of scale



experience curve



national competitiveness

Explaining Trade: International Trade Theories A. International trade is large in volume and growing and is also critical to the economic performance of most nations. International trade theory attempts to answer the question, ―Why does this trade occur, both overall and between particular nations?‖ B. Mercantilism 34. One of the first economic doctrines.

35. Central idea—precious metals were viewed as the only source of wealth and nations could accumulate these precious metals by exporting more goods than they import.

36. Governments should control foreign trade to ensure a favorable trade balance.

C. Theory of Absolute Advantage 02-36

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

37. Adam Smith (The Wealth of Nations—1776) attacked mercantilism and said that to trade in order to accumulate gold and other precious metals was foolish. By means of free, unregulated trade, a nation could acquire what it did not produce.

38. He stated that a nation should produce only those goods in which it was most efficient (country specialization). The surplus could be traded to obtain the products that could not be produced advantageously.

39. Ask: ―What are the limits within which both countries are willing to trade?‖ Discuss these topics: Terms of Trade (Ratio of International Prices) and Gains from Specialization and Trade to further explain Absolute Advantage Theory.

40. Use the examples in the text to explain Absolute Advantage Theory in depth.

D. Theory of Comparative Advantage 41. David Ricardo (1817) showed that if a nation were less efficient in the production of two products, it could still gain from international trade if it were not equally less efficient in the production of both goods.

42. Smith‘s and Ricardo‘s theories considered labor as the only important factor in calculating production costs and no thought was given to the possibility of producing the same goods with different combinations of factors.

43. Use the examples in the text to explain Comparative Advantage Theory in depth.

G. How Exchange Rates Can Change the Direction of Trade 44. Traders must know a price in domestic currency to determine if is better to produce locally or import.

45. Exchange rate is the price of one currency stated in terms of the other.

46. Countries can regain a competitive position through currency devaluation.

47. Use examples from the text to explain Exchange Rates.

H. Some Newer Explanations for the Direction of Trade 48. Differences in Resource Endowments 49. Some countries have more abundant resources than others, which can result in different opportunity cost of producing these resources and bringing them to market.

50. Difference in resource endowments suggests that developed countries would more likely trade with developing countries rather than other developed countries with similar factor endowments.

51. Overlapping Demand 2. Consumers‘ tastes, preferences, and their nation‘s per capita income affect market demand in any country.

3. Customers in countries with similar levels of per capita demand will demand similar goods and services.

02-37

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

4. Unlike the theory of comparative advantage, overlapping demand theory does not specify the direction a given good will go.

52. International Product Life Cycle (IPLC) Developed by Raymond Vernon, this theory addresses the role of innovation in trade patterns by explaining why a product that begins as a nation‘s export may eventually become its import.

5. Figure 2.3 illustrates the evolution of this life cycle.

6. The IPLC may have less relevance for ―born global‖ companies and under conditions of increased international competition and short product life cycles.

53. Economies of Scale and the Experience Curve Economies of scale refer to the predictable decline in the average cost of producing each unit of output as a production facility gets larger and output increases.

7. Experience curve effects may also decrease production costs due to cumulative experience and learning.

8. These concepts can help explain a nation‘s ability to become a low-cost producer even without an abundance of resources like labor or minerals.

54. National Competitive Advantage From Regional Clusters National competitiveness results from a country‘s ability to complete the functions necessary to drive a product/service to market and while increasing ROI: design, produce, distribute, and service.

9. Alfred Marshall explained that many industries or firms cluster together geographically because of three reasons: i. Advantages gained from pooling a common labor force. ii. Gains attained from the development and pooling of specialized labor which can be coordinated with the needs of buyers. iii. Benefits gained from the sharing of technological information and corresponding enhancement of the rate of innovation.

10. Porter‘s Diamond Model of National Advantage (Figure 2.4) identifies four variables that will have an impact on local firms‘ abilities to use a country‘s resources to gain competitive advantage: i. Demand conditions, the nature of domestic demand within the country. ii. Factor conditions, the level and makeup of production infrastructure. iii. Availability of related and supporting industries such as suppliers and support services. iv. The firm‘s strategy, structure and strategic rivalry, including the organization and management style of the firm, level of domestic competition, and barriers to 02-38

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

market entry. v. Porter also claimed that competitiveness could be affected by government and chance.

I. Summary of International Trade Theory J. International trade theory shows that nations will attain a higher level of living by specializing in goods for which they possess a comparative advantage and importing those for which they have a comparative disadvantage.

LO 2-4

Describe the size, growth, and direction of foreign direct investment. 

Key Terms:

Foreign Investment



portfolio investment



direct investment

o Portfolio Investment o Foreign Direct Investment (FDI) o Does Trade Lead to FDI? IX.

Foreign Investment A. Divided into two components: (1) portfolio investment and (2) direct investment. The distinction between these two has begun to blur, particularly with growing size and number of international mergers, acquisitions, and alliances.

B. Portfolio Investment 55. Not directly concerned with the control of a firm but to gain ROI. 56. Nonresidents owned American stock and bonds with a value of $8.0 trillion in 2020.

Americans owned $11 trillion in foreign securities in 2020.

C. Foreign Direct Investment (FDI) 57. The Outstanding Stock of FDI (Figure 2.5) The book value of all FDI worldwide was nearly $34.6 trillion at the beginning of 2020.

11. The United States is the largest investor nation, with $7.7 trillion invested abroad, over three times the FDI of the next largest investor, the Netherlands.

12. The proportion of FDI accounted for by the United States declined by 44% in the past 20 years; the proportion accounted for by the EU declined by 4%, despite the inclusion of additional member countries. Developing countries increased their proportion of FDI, from 1% in 1980 to 22% in 2020.

58. Annual Outflows of FDI Outflows often fluctuate substantially across years, due to factors such as level of economic growth within and across nations and regions of the world.

13. Outflows hit a historical high in 2000—$1.16 trillion, more than 3.25 times the 02-39

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

level in 1995. Global economic slowdown in late 2000 resulted in subsequent decline in annual FDI flows to under $498 billion in 2002, then increasing to $2.17 trillion in 2007 before another economic slowdown resulted in a decline to $1.18 trillion in 2019. FDI outflows increased again thereafter, averaging over $1.43 trillion per year from 2010 through 2019.

14. The volume of outward FDI from developing nations in 2019 was 29 times the level in 1990; the proportion of outward FDI worldwide from developing nations increased from under 5% in 1990 to over 28% in 2019.

15. The vast proportion of outward FDI, about two thirds, comes from developed nations.

16. Much of outward FDI is associated with global mergers and acquisitions, because: i. U.S. corporate restructuring put underperforming businesses and assets on the market. ii. Foreign companies want rapid access to U.S. advanced technology. iii. Foreign firms felt that access to the lucrative U.S. market would be more successful through acquiring known brand names rather than promoting unknown foreign brands. iv. Increased international competition, including pursuit of economies of scale, led to restructuring and consolidation of many global industries and acquisition of firms in major markets like the United States.

59. Annual Inflows of FDI Industrialized nations invest and trade with one another, but this proportion has declined in recent years: from an average of 76% for 1998–2002 to 58% for 2015– 2019.

17. FDI flowing into developing countries was seven times larger in 2000 than 1990 and tripled again by 2019, although the proportion of FDI funds flowing to these nations fluctuates widely.

18. Asia has seen a dramatic increase in FDI inflows in recent years, accounting for over 56% of all investments not directed at the United States and the EU during 2017–2019.

60. Level and Direction of FDI Difficult to accurately determine present value of foreign investments, but if a nation continues to receive growing amounts of FDI, its investment climate must be favorable and the political forces of that country are attractive.

19. If there is political instability and low levels of FDI inflow, little investment will occur.

D. Does Trade Lead to FDI? 61. Historically, FDI followed foreign trade because trade costs less and has less risk than FDI 02-40

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

and business can be expanded in smaller, controllable increments rather than incurring large investments and larger risk. A firm would start exporting by using agents and then set up an export department with foreign sales personnel as business expanded.

62. However, FDI can now lead to trade. Significant changes in today‘s global business environment make FDI a possible first step into international trade.

LO 2-5 Explain several of the theories of foreign direct investment. 

Key Terms:

Explaining FDI: Theories of International Investment



greenfield investment



cross-border acquisition



monopolistic advantage theory



oligopolistic industry



strategic theory



internalization theory



dynamic theory



eclectic theory of international production

o Monopolistic Advantage Theory o Strategic Behavior Theory o Internalization Theory o Dynamic Capabilities Theory o Eclectic Theory of International Production

X.

behavior

capability

Explaining FDI: Theories of International Investment A. Accepted theories to explain FDI: FDI can either be greenfield investment, where new facilities are built from the ground up, or cross-border acquisition, the purchase of existing business facilities in another nation. Strategic motives for FDI include finding new markets, accessing raw materials, accessing new technologies or managerial expertise, achieving production efficiencies, enhance political safety of firm‘s operations, or respond to competition.

B. Monopolistic Advantage Theory 1. This theory is based on the premise that FDI is made by firms in oligopolistic industries possessing technical and other advantages over indigenous firms. These advantages could be economies of scale, superior technology, or superior knowledge of marketing, management, or finance, giving the MNE competitive advantage over local firms.

C. Strategic Behavior Theory 1. In oligopolistic industries, where there is a limited number of competing firms, the actions of 02-41

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

one firm can strongly affect the performance of others in that industry, so firms closely follow and imitate each other‘s international investments to keep a competitor from gaining an advantage.

D. Internationalization Theory 1. To obtain a higher ROI, a firm will transfer its superior knowledge to a foreign subsidiary and not sell it in the open market. Firms transfer knowledge across borders without it leaving the firm.

E. Dynamic Capabilities 1. Ownership of specific knowledge or resources is necessary but not sufficient enough for success in FDI, but firm must also develop distinctive competitive advantages to complement their knowledge or resources.

F. Eclectic Theory of International Production 1. This theory states that for a firm to invest overseas, it must possess three types of advantages: a. Ownership specific—tangible and intangible assets not available to competitors but can be transferred abroad (e.g., a recognizable brand name). b. Location specific—foreign market offers economic, social, or political advantages which will let the firm exploit its ownership specific advantages (market size, tariff or nontariff barriers, or transportation cost advantages) c. Internalization—firms have choice as to the way to enter foreign markets, ranging from arm‘s length market transactions to hierarchy via a wholly owned subsidiary. It is in the firm‘s interest to exploit ownership specific advantages through internalization in those situations where either the market does not exist or it functions inefficiently.

2. Eclectic Theory (also referred to as OLI Model) explains MNEs‘ choice of foreign production facilities.

G. The common factor for all three of these theories is that FDI is typically made by large, research-intensive firms in oligopolistic industries and is the reason why these companies find it profitable to invest overseas.

02-42

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice: Are Trade Deficits Good or Bad for a Country?

Arguing that trade balances are akin to a scorecard on international competitiveness, President Donald Trump suggested that the existence of trade deficits indicates the United States is losing in trade and is a major problem that needs fixing. Are trade deficits necessarily bad for a country?

A trade surplus does not necessarily indicate that a country is positioned for strong economic growth. Japan maintained a significant trade surplus every year from 1981 to 2010, but averaged less than 1% annual growth during the last 20 years of that time period.

Most economists do not consider trade deficits to be inherently bad or good. At its simplest, a trade deficit indicates that a country is purchasing more products or services from other countries than it sells to those countries. What happens in such a situation? There would have to be a corresponding flow of capital to make up the difference in trade, such as investments in stocks, bonds, currency, or companies. Essentially, the deficit in trade would have to be ―paid for‖ by a surplus of inflows of foreign investment.

Trade balances are affected by a variety of macroeconomic factors, including the relative strength of countries‘ currencies, their rates of saving and investment, their relative rates of growth, and tax policies. Alternatively, a strengthening national currency can cause foreign-made products—for example, cars, food, or clothing—to be more affordable relative to domestically produced products. An increase in consumption of cheaper foreign-made products might help raise the standard of living in a country, giving its citizens access to a broader range of more competitively priced goods and services. Yet, these foreign-made goods might contribute to a loss of jobs in domestic industries impacted by growing imports, although such an outcome is not guaranteed.

Whether a trade deficit creates more or fewer jobs depends on what the country with the deficit does with the inflows of capital. Is the money being invested in activities with long-lasting economic returns, such as better roads and ports, new factories and machinery, and improved worker education? Is it helping to reduce the cost of debt, allowing money to be redirected to other value creating activities? Or does the money fuel unsustainable bubbles in housing or financial markets, high levels of consumer spending fueled by access to low-cost debt, or excessive public expenditures?

Online and Hybrid: Assign questions to be prepared in virtual teams and submitted as a team assignment or submitted individually and then discussed in a blog or group discussion site.

Face-to-Face: Students develop responses to the questions in class in teams/groups 1. Why might a country be concerned about the level of its trade deficit?

Although many might think that a trade deficit is always bad, one must look deeper to know if the trade deficit is truly bad for the country. A trade deficit causes a greater inflow of capital into the country. If that capital is invested in ways that will grow the economy, then the trade deficit does no harm. If it used to raise the price of real estate, company stocks, or consumer spending, 02-43

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

then it might be bad for the country.

2. What actions should a country encourage or discourage in order to minimize potential concerns about a trade deficit?

A country should make sure that the capital flowing into the country as a result of the trade deficit is used for investments that can grow the economy. Infrastructure, R&D, and education are examples of investments that could have a positive impact on an economy. Such an inflow may lower interest rates for consumers, but a country should discourage simple increased consumer spending. The increased capital could feed a bubble in real estate or financial markets.

Governments should do what they can to avoid such bubbles.

Global Debate: Comparative Advantage: Should Service Jobs Be Offshored to India?

This Global Debate box provides an overview of the use of outsourcing as a way for multinational corporations to improve profitability through comparative advantage offered by markets where the cost of labor is significantly less than in the home country of a multinational.

However, this simple lesson in economics is quite controversial and serves as a starting point for a stimulating class discussion on such topics as: 

What are the profit motives for outsourcing? What advantages other than profit can be gained by outsourcing?



How should a company manage outsourcing?



How can outsourcing impact (help or hurt) a company‘s corporate image?



Is there a potential for an ―upward creep‖ where low-level, low-skill tasks start to move upward into higher skilled, higher level jobs being outsourced? What impact can this shift have on home country jobs? On host country jobs?



Is there a risk of a country losing its innovative edge if higher skilled jobs are outsourced?



Will outsourcing cause a shift in the home country‘s workforce by creating new job opportunities to replace those being outsourced?

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against), and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups or else assign perspectives and conduct an in-class debate and discussion.

1. Can a company gain advantages besides profit by offshoring? If so, what are they? If not, why not?

The answer to this question will vary, and it is intended to help people think through the issue.

Certainly, students are likely to focus on the profit motives as a key driver, and many times their responses will relate at least in part to profit-based drivers. However, by probing on this topic it 02-44

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International Business, 3e

Instructor Guide to Module 2

Geringer, McNett, Ball

may be possible to extract comments about enhancing the capabilities of a company, through expanding into new and attractive markets or incorporating a more diverse workforce with different ideas (e.g., on how to design or manage a product or process). Offshoring may enable the firm to be more competitive when faced with new or existing competitors who also have operations abroad in lower cost locations. Companies may also offshore activities in order to help disperse risks such as those associated with currency fluctuations, differences in economic growth rates within and across regions, shortages of home country labor, or political risk factors.

To the extent that offshoring might also help to promote economic and social development in other nations, a company might feel that offshoring enables them to enhance their reputation and to engage in meaningful, socially responsible investment activity intended to enhance human welfare. Of course, outsourcing can also bring challenges for companies. By moving activities abroad, it may expose the company to loss of capabilities (e.g., going from experienced workers located close to each other to workers located in distant locations), challenges managing different workforces and institutional contexts, challenges with logistics of globally dispersed operations, and so forth. Offshoring may damage a company‘s reputation in the home country, due to strikes or other responses to moving jobs away. Many companies find that moving activities to a foreign location where labor costs are lower may expose them to a higher level of overall costs, due to factors such as increased transportation costs, increased uncertainty in logistics and scheduling, exposure to a range of political, and economic and other risks.

2. Does a company face ethical considerations in deciding whether to offshore activities?

Why or why not?

This question raises an issue that almost always generates strong opinions and a variety of perspectives. Some students may feel that companies have a primary responsibility to maximize their returns to shareholders, so going abroad to a lower cost location may be argued to be the ethical responsibility of managers. Some students may also argue that failure to be costcompetitive on key dimensions of the company‘s activities, especially when faced with competitors who have lower cost structures, may put the entirety of the company‘s operations at risk: ―it is better to sacrifice a portion of the home country business for the benefit of the overall operations‖ might be the theme here. Other students will often raise the notion of the harm that a company may cause to workers and their communities when their jobs and associated activities are moved from the home country to another host country. Exploring the variety of perspectives and allowing the debate to blossom can yield a rich and insightful learning experience for the participants.

3. What might be the long-term implications of offshoring, from the perspective of the home country? The host country?

This question also raises issues that almost always generates strong opinions and a variety of perspectives. Some students may feel that the home country is being hollowed out, with jobs, knowledge, and growth opportunities moving abroad to where costs are lower. In some cases, this can be argued to be a ―race to the bottom,‖ as companies seek those places where lax health or environmental standards, weak labor protection, and other factors will enable the weakest and most inexpensive and powerless to be exploited, with corresponding damage to the stakeholders in the home country. This could also be argued to be an initial step toward an ―upward creep,‖ where low-level, low-skill tasks that are offshored can start a process whereby higher skill jobs 02-45

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International Business, 3e

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will subsequently be outsourced as host country labor builds competencies. Other students will often raise the notion of moving low value-added jobs abroad, thereby enhancing the competitiveness of the overall company and creating the opportunity to create new, better jobs in the home country. Students may very well link some of this discussion to the theoretical perspectives of the module, whereby international companies develop and exploit dynamic capabilities in order to gain international advantage. Students might also argue that going abroad may enable the company to access new, better resources, capabilities, growth opportunities, and other advantages that can enhance the company‘s long-term competitiveness, as well as enhance the benefits flowing back to the home country through the success of companies headquartered within its borders. Exploring the variety of perspectives and allowing the debate to blossom can yield a rich and insightful learning experience for the participants.

When examining this perspective from the host country, some students may suggest that it is essential for economic and social development that the host country encourage foreign investment and/or job creation associated with bringing in offshored jobs. These jobs can help promote economic growth, transfer knowledge and skills, and provide the foundation for a virtuous cycle of enhanced opportunities for more and better job prospects and the benefits that accompany them. Others might argue that the ―race to the bottom‖ syndrome may cause countries to try to undercut each other, through less rigorous health or environmental practices or lax enforcement, or through devaluation of their currency or economic mercantilist behavior, in order to attract the offshored jobs. In so doing, this may stunt rather than promote the economic and social well-being of the host countries, according to these perspectives.

Get That Job! From Backpack to Briefcase: Mark Haupt: A Central California-Based International Career Mark Haupt discusses how he developed a career in international business while still living in California. He discusses his preparation for international travel and gives advice for those that are interested in going abroad or working with others abroad.

Online and Hybrid: Virtual teams evaluate Haupt‘s advice for their own career development and their ability to work with people from another culture, particularly one that is quite different from one‘s home culture. Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own career strategy in light of Haupt‘s example.

1. What do you think of Haupt’s goal to be involved in international business while living in California instead of abroad? What kinds of international jobs would require living in the United States and what kinds would require living abroad? What qualifications would be the same and what would be different for domestic-based and foreign-based jobs?

Student responses will vary, but some may think that you must live abroad to have an international job, rather than living in your home country. Small companies often cannot afford international locations, so they need to have employees based in the home country that travel abroad for sales, marketing, sourcing, and production. These jobs can lead to international posting when the companies grow larger. Companies that engage in international projects (such 02-46

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as infrastructure development and construction) often need people for international assignments that last a few months to a few years. Government jobs, such as with the U.S. State Department, have many careers that have foreign postings. Whether one is based in the home country or abroad, international business requires an understanding and sensitivity to other cultures and their business environments. However, being posted abroad increases the need to learn the local language to be able to work with locals.

2. What do you think of Haupt’s efforts to prepare himself for international trips? Is there anything else he should do? What does it mean to ―assume nothing‖ about international encounters?

Students will have various answers depending on their own experiences or those that they know who travel. Other things one might do in preparing for a trip is to research more about the culture, especially related to business meetings, meals, tipping, and so forth. Many people have different routines to adjust to new time zones, including some very interesting ones. These often include getting as much sun as possible upon arriving in the new location, staying awake until the nighttime, taking sleeping pills on the flight over, and eating lots of pasta. ―Assuming nothing‖ is often much easier said than done because we are often not aware of what we are assuming, and double checking every word and action is not feasible. Haupt‘s advice to go over something twice is especially useful for any agreed plan or action. Otherwise, be attuned to things that do not seem to go as you expected and then inquire into the cultural or other reasons for the differences. As you gain experience you will become more and more comfortable engaging people from different countries and cultures.

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End of Module Exercises Critical Thinking Questions 1. Discuss and explain how international trade in merchandise and services has changed over the past two decades and what the major trends are. What future trends can you speculate about? How might this information be of value to a manager?

The answers to this question may vary. The introductory vignette, ―Firms invest overseas, but they also export,‖ shows how exports of both goods and services have grown since 2000. Except for a significant drop in 2009, and a slight decline during the 2000–2003 period, both associated with a worldwide economic slowdown and mainly affecting demand for goods, the curve has basically been continuously upward sloping. The text also states that services growth has been greater on a percentage basis in recent decades than has the growth of goods exports. The growth in export demand is attributable to global competition, liberalized trade policies of various national governments, and advances in technology, among other factors, and the two slowdowns shown in Figure 2.1 suggests that the growth in goods and services exports is likely to continue, except during periods of significant worldwide economic slowdown. This trend will also be encouraged by international companies as they not only develop markets in foreign locations but also establish increasingly international supply chains. As the text discusses, most of the trade has been occurring within regional trade agreements, rather than on a global basis per se. Certain areas, particularly Asia, have exhibited an increasing proportion of world trade. Although developed countries have historically dominated international trade, we also see that an increasing portion of world trade involves developing countries, both as sources and as destinations for trade. This information will be of value to managers who want to serve international companies as customers, as well as in identifying which areas within and across regions might be more or less likely to experience an increase in trade.

2. Where do merchandise exports come from, and where do they typically go? How and why has this been changing over time, and do you think these trends are likely to continue?

Why or why not? Why might this information be valuable to a marketing analyst?

The answers to this question may vary. More than half the exports from developing nations go to developed nations, but this proportion has been declining, from 72% in 1970 to about 43% by 2015. About two thirds of exports from developed countries go to other industrialized nations.

Trade is dominated by exchanges within, rather than between, geographic regions, reinforced by expanded regional trade associations and agreements. Indeed, about 70% of world trade in 2013 was accounted for by trade involving countries who are partners in regional trade agreements.

There may be differences of opinion about whether these trends will continue. Proliferation of regional trade agreements may suggest continued growth in regional trade. Interregional trade agreements that occur between Europe and some of the former colonies around the world, or the proposed Transpacific Partnership between Australasia and the Americas, may create a basis for increased regional trade. The internationalization of supply chains by international companies may also promote continued growth in trade, as companies ship products among their international affiliates as well as to international customers. Some may argue that the pendulum may swing back from international trade, due to protectionism, costs of transportation, and so forth, although evidence suggests that growth of trade tends to be associated with economic and 02-48

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social benefits for countries that have liberalized their trade policies. A marketing analyst could find the information about not merely the level of trade but the regionalization of trade and the internationalization of supply chains to be valuable when identifying where to focus efforts for market development or expansion.

3. Describe mercantilism, and explain why some call it a poor approach to promoting economic development and prosperity. Given the criticisms, why do some countries continue to rely on practices based on mercantilism?

Mercantilism is an economic philosophy based on the belief that (1) a nation‘s wealth depends on accumulated gold and (2) to increase wealth, government policies should promote exports and discourage imports. As a means of promoting economic development and prosperity, mercantilism has a poor record. Mercantilism views trade as a zero-sum game with one specific winner. It has been proven that the markets, not the government, should determine the direction, volume, and composition of world trade.

4. Explain Adam Smith’s theory of absolute advantage. What are the potential limitations of this theory for helping policy makers when making decisions related to international trade? How does Ricardo’s theory of comparative advantage differ from the theory of absolute advantage?

According to Adam Smith‘s theory of absolute advantage, each nation should specialize in producing the goods it can produce most efficiently. Some of them can be exported to pay for imports of goods that can be produced more efficiently elsewhere. Ricardo showed that even though a nation did not hold an absolute advantage in producing any good, it could still trade with another with advantages for each as long as the less efficient nation was not equally less efficient in producing both goods. Absolute advantage may have some limited value for policy makers, especially when a country does not have a condition of absolute advantage, or where its absolute advantage may erode or disappear over time due to developments elsewhere, such as devaluation of currency, economies of scale that emerge in other nations, and competitive declines in one or more areas of advantage within a regional competitive cluster.

5. ―Sending service jobs to low-cost nations, such as India, is good for America.‖ What are the arguments in support of such an assertion? Under what circumstances might such an assertion be viewed as false?

The answers to this question may vary. For example, there may be situations in which a country does not have, or cannot maintain, competitive advantage in one or more activities. By outsourcing these activities to another country that might have advantage, it may allow the company to avoid this competitive disadvantage and to make the remaining activities more competitive globally, thereby enhancing prospects for the company and its various stakeholders.

These outsourcing efforts may promote international trade and even open new or expanded market opportunities abroad for American companies, both in the country where activities are being outsourced to, and perhaps elsewhere as well. On the other hand, outsourcing may result in job losses that cannot be quickly and fully replenished through the creation of other jobs, due to the different skills required and the time needed to acquire such skills. Job losses may also result in the loss of domestic competencies, and result in a continuing migration of increasingly skilled jobs from America to the foreign locations, especially if the destination nations have the policies 02-49

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and competencies to acquire and enhance their human capital or otherwise enable the development of internationally competitive regional clusters.

6. Name some products that you believe have passed through the four stages of the international product life cycle. Try to identify industries or products for which the international product life cycle still helps explain international trade and investment. Can you identify industries or products for which this concept does not apply?

The answers to this question may vary. Microwave ovens and athletic shoes are two examples of products that have passed through the four stages of the international product life cycle. Other examples include ships, automobiles, and computer chips, the latter two being sectors where the life cycle process appears to still be occurring. Students might identify sectors where the IPLC does not apply, such as those where transportation poses a barrier to locating operations abroad (e.g., due to extreme perishability) or where government-driven barriers to trade inhibit the movement of production across borders (e.g., due to national security or other policy priorities).

7. Use Porter’s diamond model of national advantage to explain why an emerging market such as Indonesia would be expected to experience great difficulty in achieving global competitiveness in a new industry sector such as smartphones or hybrid electric–gasoline automobile engines.

An emerging market such as Indonesia would be expected to experience great difficulty in achieving global competitiveness in a new industry sector such as ―smart‖ cell phones or hybrid electric–gasoline automobile engines because: (a) The nature of demand conditions would be unlikely to include the most sophisticated and demanding customers, who would pressure companies to produce high-quality, innovative, competitively viable products. (b) Factor conditions are likely to be deficient, since these new sectors are likely to depend on highly skilled, highly educated workforces, advance communication systems, the most advanced design and production equipment, and so forth. (c) Related and supporting industries are likely to be deficient, since an emerging market is unlikely to have strong computer hardware and software industries, venture capital markets, a pool of highly experienced entrepreneurs and business people in similar or related advanced sectors, and so forth. (d) The extent of domestic competition is likely to be limited due to the emerging nature of the market, hindering the beneficial competitive rivalry that is key to innovation and success. (e) There could be beneficial government policies oriented toward nurturing new industry sectors, and an emerging market could, by chance, achieve a breakthrough in technology or design. However, in the absence of the above four factors, it will be difficult for competitors from the emerging market to sustain this position long term, especially in the face of vigorous competition from competitors in nations with stronger profiles on the above factors.

8. What are the possible explanations for the observed decline in the proportion of FDI accounted for by the United States and Japan? What are the implications of such a decline?

Do you expect that this decline will continue in the future? Why or why not?

The answers to this question may vary quite a bit across students. The United States only accounts for about 5% of the world‘s population, and Japan only about half that much. Therefore, as economic development occurs around the world, it can be expected that more wealth and other resources will be built up within industrially developed and newly industrialized nations. This 02-50

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enhanced wealth and desire for international competitiveness is likely to encourage multinational companies from emerging and newly industrialized nations like the BRICs (Brazil, Russia, Indonesia, China), Mexico and South Korea to expand their investments abroad in order to build globally viable scale and scope. Much of this investment will likely be made via mergers and acquisitions, as companies try to acquire brands, technology, and other capabilities to enhance international competitiveness. While the percentage of FDI accounted for by the United States and Japan may decline, that does not mean that the absolute level of outstanding stock of FDI will decline. Indeed, as global competition continues to escalate, it is likely that the overall level of FDI worldwide will increase over time. On the other hand, some students may suggest that globalization may reverse course over time, due to environmental, political, military, or other factors, and they may also suggest that the emergence of China and other countries as major economic forces will erode the scale and importance of developed countries in global trade and investment. They may even suggest that either the absolute level of global FDI will decline, or that the United States and Japanese (and perhaps European, as well) proportions will shrink as the power of developed countries wanes and the power of emerging markets grows. This can be an interesting discussion to have within class.

9. How has the level and direction of FDI changed over the past two to three decades, both overall and in terms of annual outflows and inflows? What might explain why these changes have occurred? Why would this information be of relevance to managers?

The answers to this question may vary. The proportion accounted for by the United States has declined by over one third during the past 20 years, although the United States still accounts for more than three times the level of the next largest investor. The European Union‘s proportion of FDI has increased, but that is at least partially due to the enlargement of the EU through adding new member countries. Developing nations have dramatically increased their proportion of FDI, growing from 1% in 1980 to over 22% in 2018, largely reflecting the increasing internationalization that has occurred in emerging markets such as China, Mexico, Brazil, India, and other nations. Overall, as shown in Figure 2.5, the level of FDI worldwide has continued to rise significantly over the past 38 years. Increasing internationalization of competition, economic liberalization (especially in emerging markets), growth in the international financial markets, developments in technology and transportation, and the development of regional trade and investment agreements, among other factors, have favored this growth in FDI, both in absolute level and in the sources and destination of investments. This information is of great potential value to managers, in terms of identifying potential sources of new or increased competition (or collaboration) as well as new sources of supply or of customers.

10. According to theories presented in this module, why might companies engage in foreign direct investment rather than international trade?

The answers to this question may vary. Each of the trade theories presented in this chapter offer an explanation for why companies engage in foreign direct investment, because each of the theories helps to explain why production costs differ across national borders or how competitive responses are necessary in a globalized economy. However, in some cases there may not be sufficient market mechanisms in place to protect a company‘s assets (e.g., inability to protect a company‘s intellectual assets if it tries to license its technology to a foreign company to serve international market opportunities) or to enable the company to adequately capture the value of 02-51

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its competencies. The Eclectic Theory discusses factors that might be relevant to this argument.

In addition, it might be argued that corporations, especially those in oligopolistic industries, may engage in foreign direct investment in order to imitate or counterbalance the actions of their international competitors.

The answers to this question may vary. Some techniques and concepts can be applied to operations in other nations. However, the differences among the environmental forces often require that these techniques are altered and in some cases, they cannot be used at all. globalEDGE Research Task Exercise 1 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > ―country of choice‖), each country‘s profile page will be displayed individually from where ―Indices‖ subsection of countries can be accessed on the left column menu.

Search Phrase: Indices Resource Name: Global Insights by Country Resource Link: https://globaledge.msu.edu/global-insights/by/country Exercise 2 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > ―country of choice‖), each country‘s profile page will be displayed individually from where ―Economy,‖ ―Statistics,‖ and ―Trade Statistics‖ subsections of countries can be accessed on the left column menu.

Search Phrase: by Country Resource Name: Global Insights by Country Resource Link: https://globaledge.msu.edu/global-insights/by/country MiniCase: Brazil: A Global Competitor in Information Technology Outsourcing?

This MiniCase explores the issue of outsourcing and how countries may compete to be the destination for outsourced activities. The specific example is of Brazil and how it has emerged as an alternative to countries such as India, China, or various Central or Eastern European nations for the outsourcing of sophisticated IT activities. Brazil has an advanced telecommunications and network services infrastructure, sometimes rated above those of nations such as India or China.

Brazil has a large base of jobs in the IT sector and a strong tradition of producing competent graduates from engineering schools. Brazil‘s banking sector is highly automated and a dynamic 02-52

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marketplace for IT software and support services, helping to encourage domestic demand for advanced IT services. Brazilian wage rates are significantly below those in the United States, and recent devaluations of the real, Brazil‘s currency, may further enhance the country‘s competitiveness in this regard. With lower employee turnover rates and attractive levels of total operating costs, as well as less time zone difference than found for European or Asian outsourcing countries, Brazil can be attractive for real-time services. Brazilian culture and business practices also tend to be more similar to those in the United States than may be the case for China, for example.

1. Use the theories of international trade and investment in this module to help explain Brazil’s intentions and actions regarding the international information technology sector.

Answers are likely to vary quite a bit on this question. Students may refer to absolute or comparative advantage theories to show why Brazil is a superior site to the United States (absolute advantage), and to other potential offshoring sites (e.g., China, India), based on labor cost, labor quality, and other factors. Students may refer to Porter‘s diamond model to show how Brazil has developed a cluster that has internationally competitive competencies, enabling it to compete effectively with other sites internationally. Some students might refer to Linder‘s theory of overlapping demand, arguing that the culture and business practices are similar, but this would probably be an incorrect application of the theory as Linder refers to countries with similar income levels and Brazil and the United States are quite different. Students might use resource endowment theory, arguing that Brazil has an ample supply of talented IT specialists and engineers, helping to compensate for shortages in the United States. Some students might even use the international product life cycle (IPLC) to explain the situation, arguing that advanced IT services often begin in a lead market such as the United States, get exported from the United States, and then as skills develop abroad there may be replacement of export market supply from the lower cost foreign sites (displacing U.S. exports of these services) and ultimately replacing these services in the United States as well. Strategic behavior theory, for example, might help explain why firms from the United States or elsewhere might set up operations to exploit the talented, low-cost labor available in Brazil, in order to service U.S. demand in a more cost competitive manner. Dynamic capabilities theory might also suggest that firms might invest in Brazil in order to participate in the development and exploitation of cost competitive centers of excellence in emerging markets such as Brazil. The variety of positions and theoretical perspectives that are likely to be presented can provide the basis for a lively discussion or even debate within the classroom and provide a strong link to the concepts of internationalization of businesses, economic globalization, and offshoring.

2. What recommendations would you give to the Brazilian government and its outsourcing industry in order to improve their prospects for success in building a strong international competitive position in the information technology outsourcing business?

This question can prove to be difficult for some students to answer, and there can be a range of alternative responses. Policy actions might be taken to enhance the absolute advantage of Brazil versus the United States, through continued investment in skilled labor, or encouragement of economies of scale and experience curve benefits, for example. Monetary policy may also be managed so that the Brazilian currency, the real, is kept at a lower valuation and therefore Brazilian labor is quite inexpensive versus U.S. labor, and perhaps versus labor costs in China or 02-53

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India or elsewhere as well. Providing evidence of political and economic stability might also make Brazil a more attractive offshoring location versus other emerging markets. Emphasis on the similarities of culture, business practices, and time zone, among other factors, might also help to encourage potential customers to consider Brazil as a more attractive location for offshoring, versus other locations that may be more geographically or culturally distant.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available at http://bit.ly/MHEIBVideo. The International Trade Theory board is rich and varied and is updated monthly, as is the Foreign Direct Investment board.

See www.pbs.org/newshour/show/euro-greece-2 for a discussion of ―will falling euro end up boosting Europe‘s economy‖ to discuss how currency fluctuations affect international competitiveness of nations.

The video on ―World Bank: Let Africa Trade With Africa‖ helps to highlight regional trade opportunities as well as potential growth of trade between developing countries (rather than between developing and developed countries); this video can be found at: www.youtube.com/watch?v=4f9aZrWdnFc&feature=youtu.be.

The video ―How Currency Choices ‗Made in China‘ have Big Impact on U.S. Economy,‖ at www.youtube.com/watch?v=pXH-Up2sB24&feature=youtu.be, helps to highlight currency fluctuations and economic mercantilism.

The video ―India Economy to Overtake China But Many Still in Poverty,‖ at www.bbc.com/news/world-asia-india-31668217, discusses issues of economic growth and social welfare.

MapsofWorld.com has an interesting series of facts and discussion about international trade, which you can find at www.mapsofworld.com/answers/tag/trade. globalEDGE and the Academy of International Business provide links to a number of organizations that offer videos about international business. You can find these links at https://aib.msu.edu/resources/videodepositories.asp.

YouTube has many international business-related videos in its collection. For example, you can find a 31-min video on How Beneficial Is World Trade at https://youtu.be/xRJZWfqWcs0?list=PL9E6D9764746EA546.

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for hybrid and online courses.

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1. Investment Inducements Ask the students to check advertisements in The Wall Street Journal, the Financial Times, and New York Times, for ads in which investment inducements are offered by foreign governments.

Similar ads also appear in The Economist, Business Week, and Fortune. Students can also search the web to find such inducements for various countries. What kinds of inducements are offered?

Does your city and state offer foreign firms inducements to invest in your area? How successful have they been in attracting foreign FDI into your state, region, or local area?

2. Importing and Exporting Services Students typically understand that products are exported and imported because of their tangible nature and the benefits derived through their consumption are apparent. The import and export of services are more difficult for students to grasp. Have students research this and explain their findings. Have them rank the volume of U.S. services‘ imports and exports, the countries, and the top 10 types of services involved. Have them do the same for an EU and an Asian country and compare their findings. Then, have them answer the question, ―Why export services?‖ 3. Trade Theory Activity You can check the students‘ comprehension of trade theory through the following activity: This is the output of cigars and calculators for countries A and B. Output/Man/Day Country:

A

B

Calculators:

6

2

Cigars:

20

10

Country A: Calculators:

$30 6 calculators

Cigars:

$30 20 cigars

Country B: Calculators:

120 pesos 2

Cigars:

120 pesos 10

=

$5/calculator

=

$1.50/cigar

=

60 pesos/calculator

=

12 pesos/cigar

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a. Would it be advantageous for B and A to trade? b. What would be the range of values within which trading of cigars for calculators would make economic sense? 

Answer: 3-1/3 cigars/calculator to 5 cigars/calculator

c. Total production costs per day are $30 in A and 120 pesos in B. If the exchange rate is 10 pesos in B = $1 in A, will trade still place in the same direction as for Part A? Converting to dollars: Country:

A

B

Calculators:

$5/Calcul ator

$6/cal cul ato r

Cigar s:

$1.50/cig ar

$1.20/ cig ar

d. What change must be made in the exchange rate to change the flow of trade?  Answer: (1) If rate goes to 12 pesos = $1, calculator will cost $5 in B, which is the same price as in A, so based on price alone, B will not import from A. B can still sell cigars to A because their price has improved and gives them a greater price advantage.

(2) If the rate goes to 8 pesos = $1, then B‘s cigars will cost A $1.50 and B will lose its price advantage. Calculators in B will cost $7.50 to produce. e. If rate goes to 8 pesos or even 7 pesos = $1, will B sell any cigars to A?  Answer: They probably will if their cigars taste better or are handmade, if A‘s are machine made. Cigars, like most products, are not bought purely on the basis of price.

Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

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Harvard Cases ―Free Trade Vs. Protectionism: The Great Corn-Laws Debate‖ examines the conflict that arose between those advocating free trade and those advocating protectionism in 19th-century Britain.

The Corn Laws were a series of acts that protected British agricultural interests for nearly 200 years, and the decision on whether to repeal the acts had significant implications for industrialists and landowners. There is also an abridged version available. ―Yue Yuen Industrial (Holdings) Limited: (A) Making 200 Million Pair of Shoes a Year and Growing‖ describes the industry for outsourcing shoes by companies such as Nike and Adidas.

Yue Yuen has become the largest contract footwear maker in the world, five times larger than its next largest competitor. The case allows students to understand the decisions for offshoring parts of a company‘s value chain, such as manufacturing, and the challenges that a company faces in not only achieving competitiveness as an offshore supplier but being able to remain competitive as the environment changes over time. This is a University of Hong Kong case distributed by Harvard. ―Background and Agreements on Foreign Direct Investment‖ provides a brief history of foreign direct investment, including various conflicts, issues associated with FDI-related legal frameworks, and international agreements and principles for resolving FDI-related disputes. It can provide a useful basis for discussing the ―whys‖ and ―hows‖ of FDI. This is a Harvard case. ―Foreign Direct Investment in China‖ examines the role that FDI has played in China in helping that nation to achieve rapid economic growth since 1978. This is a University of Hong Kong case distributed by Harvard.

Controversial Issues 1. Global Debate: Comparative Advantage: Should the United States be Sending Service Jobs to India?

This boxed feature described earlier in this module‘s instructor guide provides an excellent foundation for debating some of the issues raised in the text.

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against), and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups or else assign perspectives and conduct an in-class debate and discussion.

2. Debate on Whether Deficits Are Good or Bad for a Country Drawing from the content in the IB in Practice box, ―Are Trade Deficits Good or Bad for a Country?‖ you can ask students to take opposing perspectives to argue that trade deficits mean lost jobs and a weak economy that cannot produce products that other countries want, as well as arguments that accompanying investment can be used to improve the country‘s competitiveness 02-58

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Instructor Guide to Module 3 3 Instructor Guide to Module

and increase the standard of living.

Online and Hybrid: Virtual teams can be assigned to take different perspectives to argue if trade deficits are good or bad, and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students can be assigned to take different perspectives to argue the pros and cons of trade deficits and then they can be asked to argue their positions within an in-class debate and discussion.

3. Current Events A focus on current events that are relevant to the module‘s topics is a good way to bring home the concepts, review their application, and build news-review habits. Ask everyone to come prepared with an article for every meeting. If a meaningful percentage of the final grade is allocated to discussion (10–15), motivation is there. Devote 5 min at the beginning of class to discussion of current events. Recent relevant current events include the ongoing controversy in the United States about whether free trade agreements such as USMCA or the Trans-Pacific Partnership will promote domestic job creation and improved economic prosperity, or whether they send jobs abroad and harm American workers and the overall economy. Depending on the online interface, this activity may be done in chat forums (Blackboard) or discussion boards, before class begins. This activity also works well in large lecture classes.

Teaching Suggestions 1. Students often are unaware of the rapid growth of international trade, so we discuss Figure 2.1 in class. We point out that there have been numerous changes in trade relationships as Table 2.1 illustrates. Most students believe that the major trade direction is between developed and developing nations (exchanging raw materials for finished goods). Figure 2.2 shows the major trading partners of the United States, which shows that there are several Asian trading partners in addition to the traditional European and USMCA trade partners among the key export markets for U.S. goods, as well as for imports into the United States.

2. The material on Theories of International Trade is somewhat difficult for many students and it is easy to lose their interest when discussing theories from the 17th century. We emphasize in class that there are good, practical reasons for knowing the essentials as we have also emphasized in the text. We recommend that you go slowly in discussing comparative advantage.

If you whip through it, you will probably lose most of the class. We commonly ask a student to come to the board and create a table to explain the theory and we give them all of the help required. We came across a short haiku-like summary of comparative advantage that might help students get the general idea: Do what you do best and trade the rest.

3. We find it advantageous to follow the discussion of comparative advantage with the example in which we introduce money because the students learn quickly about the importance of exchange rates and they are better prepared when we examine the financial markets.

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Instructor Guide to Module 3 3 Instructor Guide to Module

4. Generally, students are surprised to learn that the U.S. share in total foreign investment is still as large as it is (see Figure 2.5). They often believe that China‘s share is largest, due to all of the press that China‘s growth has received and the number of Chinese firms that have entered foreign markets through acquisitions. Do you want to see how many read the assignment? Ask them which country has the largest share of foreign direct investment (Answer: the United States).

5. The Global Debate box, ―Comparative Advantage: Should Service Jobs Be Offshored to India?,‖ is generally a good way to generate many different perspectives on globalization, offshoring, and the movement of jobs to foreign locations.

6. We often find it useful to use the international product life cycle, illustrated in Figure 2.3, to stimulate discussion. We ask questions such as, ―Can you identify any products or services that have completed the IPLC?‖ ―Can you identify any products or services which are still in the early stages of the IPLC but that you would expect to continue evolving along the lines of this model? Can you explain why you expect this evolution to occur and the implications for business managers?‖ 7. You may be interested in discussing the IB in Practice box, ―Are Trade Deficits Good or Bad for a Country?‖ Many students think that a trade deficit is automatically bad and that a trade surplus is good. This section explains what happens when there is a trade deficit and when it can be good for a country.

8. Guest lecturer who could contribute to the material in this module would be: 

Someone in the technical department of a multinational to talk about licensing and contract manufacturing arrangements that the firm has with overseas licensees.



Product manager of the international division of a multinational who should be knowledgeable about licensing and all the means for entering a market. Such a person can also explain why the firm went overseas.



Financial person in the international division who can discuss the points mentioned in Questions 1 and 2 plus the ROI obtained from these arrangements.



Representatives from a foreign-owned subsidiary in your area. Ask them to tell the class what motivated their company to come to the United States and your area.



If you have an economic development department in your state that is active in attracting foreign investors, you may be able to get a representative to explain to the class what it does to attract foreign investors and what foreign investors are looking for. Your chamber of commerce director of economic development may have had visits from foreign company representatives that they are willing to share.



If you are in an area with foreign consuls, you might invite a member of the consulate to discuss their government‘s policy with respect to trade restrictions and economic development, especially as it affects foreign investment in that country. The representative could also be asked about that government‘s efforts to promote foreign trade.

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available, what Learning Objectives they help reinforce/assess.

AACSB Learning Accreditation Bloom’s Title Topic(s) Objective(s) Tagging Taxonomy Anal y ti c al T h i n k Volume and i Direction of n International Trade Case Analysis Overview of Trade 02-01; 02-02; 02-04 g Remember Refle ct i v e T h i n k International i Trade Trade Theories and n TheoriesClick and Drag Their Implications 02-03 g Understand Anal y ti c al T h i Exporting, n Licensin Theories of Foreign k g, or FDI Case Analysis Direct Investment 02-04; 02-05 i Apply Assignment Type

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n g

International Trade Click and Drag International Trade

02-01; 02-02

Refle ct i v e T h i n k i Remember/Underst n g and

Connect Activities 1. Volume and Direction of International Trade Activity Summary: This case analysis activity describes an undergraduate business student learning about important trade partners for the United States. It is then followed by multiplechoice questions.

How to Use Activity: For online and hybrid classes, assign this as part of the module‘s homework. For an in-class assignment, have the students do this individually before class and then discuss the answer. This can then be used to launch into further discussion about the volume and direction of trade.

2. International Trade Theories Activity Summary: This is a click and drag activity in which general characteristics of international trade theories are matched to the theory that it is most associated with.

How to Use Activity: This can be given for individual work at home for online or live classes.

For live classes, have students do this in teams in class. Walk around to the various teams to answer any questions that arise. Then lead a general class discussion, focusing on those theories that the individual groups struggled with.

3. Exporting, Licensing, or FDI Activity Summary: This is a case analysis activity in which students are asked to decide whether exporting, licensing, or foreign direct investment strategies would be the most appropriate for the situation.

How to Use Activity: The multiple-choice questions are broad and can be used as the basis for a 03-62

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short written assignment to be done at home. For live classes, have students discuss this case in groups and report to the rest of the class the key points they discussed.

4. International Trade Activity Summary: This is a click and drag activity in which boxes of statements about international trade are matched to the correct term.

How to Use Activity: For online and hybrid classes, assign this as part of the module‘s homework. For an in-class assignment, divide the class into small groups and have them do the assignment as a team. Monitor the team discussions to clarify any confusing terms. Or have students do this individually and then in class discuss any choices that were confusing and why.

Module 3: Sociocultural Forces Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues 03-63

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Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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Your Content Summary This chapter examines culture and how it affects the conduct of business. We look at how cultures reveal themselves through their aesthetics, religion, material culture, language and communication, and social organization. We then introduce and explain four frameworks that can be used to analyze culture. These frameworks are useful in helping to build an ability to observe cultural differences and predict their possible influence on activities related to business. We then explore the importance of a global mindset for international managers and briefly review the MapBridge-Integrate (MBI) model for addressing cultural issues in organizations. The module concludes with a section on the limitations of frameworks to predict cultural behavior.

Learning Objectives LO 3-1

Describe what culture is.

LO 3-2

Identify the ways culture affects all business activity.

LO 3-3

Describe how culture shows itself.

LO 3-4

Describe four frameworks for analyzing culture.

LO 3-5

Describe the global mindset and the MBI model.

LO 3-6

Discuss cautions for using cultural frameworks in business.

Key Terms and Definitions achievement versus ascription (p. 85)

What a person does contrasted with who a person is

aesthetics (p. 70)

A culture‘s sense of beauty and good taste

communitarianism (p. 84)

Belief that the group is the beneficiary of actions

context (p. 79)

The relevant environment

cultural paradox (p. 88)

Contradictions in a culture‘s values

ethnocentricity (p. 66)

The belief that your own culture is superior to other cultures

global mindset (p. 88)

Involves an openness to diversity along with an ability to synthesize across diversity

material culture or artifacts (p.All human-made objects 73) 03-65

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monochonic (p. 79)

Having to do with linear time, sequential activities

neutral versus affective (p. 84) The withholding of emotion contrasted with its expression particularist (p. 84)

Conditions in which context determines what concepts apply

polychromic (p. 79)

Having to do with simultaneous activities, multitasking

specific versus diffuse (p. 85) Life divided into public and private spheres contrasted with life undifferentiated. universalist (p. 84)

Conditions in which concepts apply to all

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 3-1

XI.

Describe what culture is.

Key Terms:



Introduction





What Is Culture and Why Is It Important?

ethnocentricity

Introduction a. Need for international managers to recognize that ―our way‖ is not the only way or even the best way.

XII.

What Is Culture and Why Is It Important?

The sum total of the beliefs, rules, techniques, institutions, and artifacts that characterize human populations (Anthropologist).

Culture is learned, interrelated, with shared patterns mutually constructed through social interaction, and defines the boundaries of different groups.

Ethnocentricity is a common response to cultural difference.

K. International managers can learn to avoid ethnocentric responses.

L. Hall: Lifetime in a culture or extensive training program, including study of culture and language.

M. Factual knowledge of culture, culture frameworks, language, experience. Experience is critical.

N. Realize that there are other cultures. This sounds simple, but is not.

LO 3-2 Identify the ways culture affects all business activity. 

Key Terms:

Culture Affects All Business Functions o Marketing o Human Resources o Production and Procurement o Accounting and Finance o Preferred Leadership Styles

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XIII.

Culture Affects All Business Functions b. Marketing O. Variations in attitudes and values across markets often require different marketing mixes to reach potential customers.

P. Many costly errors, especially in product design, advertising, and pricing.

Q. Must remember that we don‘t know what we don‘t know. c. Human Resources R. Which is rewarded, the individual or group? Achievement or social role?

S. How is authority understood? Is manager a patron first among equals? d. Production and Procurement T. How change is understood?

U. Culture affects plant layout (linear assembly line vs. more group-oriented patterns) V. How does firm acquire resources? Based on social relationships or price? e. Accounting and Finance W. Accounting controls rest of assumptions about people‘s basic nature.

X. Tight controls suggest lack of trust.

Y. Loose controls suggest people will act honestly when not closely monitored.

Z. Example of U.S. expatriate paying taxes—in NY and Italy. f. Preferred Leadership Styles 1. Varies by culture.

2. Paternalistic? Heroic? Focused on group or individual?

LO 3-3 Describe how culture shows itself. 

Key Terms:

How Culture Shows Itself o Aesthetics



aesthetics



material culture or artifacts

o Religion o Material Culture o Language o Societal Organization o Special Focus: Gift Giving in Business XIV.

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g. Aesthetic AA.

A culture‘s sense of beauty and good taste.

BB.

Expressed in many areas—art, drama, music, folklore, dance.

CC.

Applies to bodies as well (weight, tattoos, etc.).

DD.

Incorrect use of folklore in marketing offends public.

EE. Marlboro Man in the United States and Chile FF. Che Guevara GG.

Pampers‘ use of stork/peaches

HH.

Folklore conveys a package of connotations and emotions—powerful

h. Religion (Figure 3.1) II. Responsible for many attitudes and beliefs that influence human behavior.

JJ. Knowledge of religion‘s basic tenants in markets is useful.

KK.

Ethnocentric beliefs can be quite strong in religions.

a. Christianity: One god, killed by Roman Empire officials, came back to life and ascended into heaven. b. Islam: 7th century CE, one god (Allah) whose will is revealed through the Qur‘an and messengers. c. Hinduism: Oldest of major world religions, began in India, ethically good life achieved through self-discipline, sharing of wealth, adherence to the Vedas (scriptures). d. Buddhism: Founded between 6th and 4th centuries BCE in India, based on teachings of Siddhartha Gautama. Earthly life is the cause of human suffering and nirvana is reached when we escape the reincarnation cycle and become enlightened. e. Judaism: Began around 1900 BCE, believes in one god who acts in human history.

Enslaved by foreign powers, Jews were freed by God‘s power acting through figures such as Abraham, Moses, and David. i. Material Culture i.

All the human-made objects of a culture. Concerned with how people make things, who makes what, and why.

j. Language (Figure 3.2) LL. Most obvious and distancing cultural distinction is language.

MM. Nonverbal communication also reveals a lot about social interactions and values, especially in High Context cultures (Hall). a. Gestures and their meanings vary among cultures.

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b. Spatial relationships may differ greatly (closed door in the United States suggests privacy, in Germany, closed is normal). c. Conversational distance varies by culture, gender, and level of closeness. d. Speaking patterns, conversational rules, and sequencing differ by culture. k. Societal Organization 1. The institutionalized structures of social relationships—kinship/free association.

2. Kinship is the family, and its definition and closeness vary by culture, with the extended family important in some cultures, less so in others.

3. Free association may be formed by other commonalities—such as age, gender, shared interests. Social media represent evolving forms of free associations. l. Special Focus: Gift Giving in Business 1. An often confusing practice across cultural borders 2. A way to acknowledge interrelationships and social obligations (Mauss).

3. The exchange of gifts creates a social bond that requires you to be a giver, receiver, and holder of an obligation.

4. Learn the patterns of the relevant cultures.

LO 3-4

Describe four frameworks for analyzing culture.

Key Terms:



Culture Frameworks



context

o Hall‘s High and Low Context



monochronic

o Kluckhohn and Strodtbeck‘s Cultural Orientations Framework



polychronic



universalist



particularist



communitarianism



neutral versus affective



specific versus diffuse



achievement versus ascription

o Hofstede‘s Six Dimensions o Trompenaars‘s Seven Dimensions

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XV.

Culture Frameworks m. Remember that your own culture functions as a reference point, and the frameworks are just the beginning, the tip of the iceberg. n. Frameworks are sophisticated stereotypes. o. Hall‘s High and Low Context 1. High Context (HC): Much of the communication is conveyed by the context (Japan, China, many other Asian, Latin American, African cultures). Social ties are longstanding and close, communication tends to be implicit and indirect.

2. Low Context (LC): Most of the communication is carried in words (the United States, Canada, other Anglo cultures, Germany, Scandinavian cultures). Social ties are of shorter duration, communication is explicit.

3. See Figures 3.3 and 3.4.

4. LC cultures tend to be monochronic, with time linear, tangible, and divisible. HC cultures tend to be polychronic, with several activities going on at once.

Kluckhohn and Strodtbeck‘s Cultural Orientations Framework 1.

Classification system for cultures based on five universal problems: a. What relationship should people have to nature? That is, how should they think about their activities with regard to nature? b. What sorts of relationships should exist among individuals? c. What are the preferred forms or modes of human activity? d. What is the best way to think about time? e. What is the basic nature of humans?

(See Table 3.2)

2.

Builds on Hall‘s work.

Hofstede‘s Six Dimensions 1.

Unlike Hall and Kluckhohn and Strodtbeck, Hofstede‘s framework is empirical.

2.

Individualism–Collectivism a. Measures the degree people of the culture are integrated into groups. b. Individualist cultures include the United States, Canada, UK, the Netherlands, Australia, New Zealand. c. Collectivist cultures include China, Japan, West and East Africa, Ecuador, Guatemala, Indonesia.

NN.

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20. The extent to which members of a culture expect power to be distributed unequally and accept that it is.

21. Similar to inequality, but defined from below, and suggests the inequality is endorsed by followers as well.

22. Small power distance countries include the United States, Austria, Israel, Denmark, Republic of Ireland, Sweden, Norway, Canada, Germany.

23. Large power distance countries include Malaysia, the Philippines, India, West African countries, India, Singapore.

OO.

Uncertainty Avoidance A society‘s level of comfort with uncertainty.

24. Describes man‘s search for truth, since it describes how a culture conditions its members to feel in unstructured situations.

25. Strong uncertainty avoidance cultures include Greece, Portugal, Japan, France, Spain, South Korea.

26. Weak uncertainty avoidance cultures include Jamaica, Singapore, Sweden, Denmark, the United States, Canada, Norway, Australia.

PP. Masculinity–Femininity a. Describes the distribution of roles between the sexes. b. The assertive pole of masculine and the caring one feminine. c. The dimension is about the gap in gender roles. In a feminine culture, there is less variation between the gender roles. d. Masculine cultures include Japan, Austria, Venezuela, Italy, the Philippines. e. Feminine cultures include Sweden, Norway, Denmark, Costa Rica, the Netherlands, Finland.

QQ.

Indulgence versus Restraint a. Describes a culture‘s tendency to allow relatively free gratification of desires or to suppress them through strict social norms. b. Indulgence strong in Americas and Western Europe. c. Restraint strong in Eastern Europe, Middle East, Asia.

RR.

Pragmatic versus Normative (modification of earlier Confucian Dynamism) a. Measure of how people deal with the unexplainable in their lives. b. In normative societies, strong desire to explain and know the Truth (Venezuela, Mexico, Colombia). c. In pragmatic societies, ultimate understanding is not so much a concern as to live a virtuous life in an environment where truth is contextual. Saving and 03-72

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perseverance are important (France, China, Japan).

Trompenaars‘s Seven Dimensions SS. Like Hofstede‘s framework, Trompenaars‘s work is based on data. Unlike Hofstede‘s, his dimensions describe observable behavior.

TT. Universalism versus Particularism (Rules vs. Relationships) a. Addresses whether rules or relationships regulate behaviors. b. Universalist cultures apply rules across the board (Anglo cultures [U.S. Foreign Corrupt Practices Act]). Rules are more important than relationships. c. Particularist cultures consider context when they apply rules. Relationships are more important than rules.

UU.

Individualism versus Communitarianism a. Whether people plan their action with reference to individual or group benefits. b. Similar to Hofstede‘s individualism–collectivism dimension and Kluckhohn and Strodtbeck‘s relationship value.

VV.

Neutral versus Affective (Unemotional vs. Emotional) a. Addresses how members of a culture express emotion. b. Neutral cultures tend to withhold emotional expression (UK, Japan). c. Affective cultures are emotionally expressive (Mexico, Italy).

WW.

Specific versus Diffuse a. Describes how a culture differentiates between private and public/work life. b. Specific cultures make distinctions between work and private life relationships (the United States). c. Diffuse cultures carry work relationships over to other areas of life (East Asia) (see Table 3.4).

XX.

Achievement versus Ascription a. Describes the basis for valuing the individual. b. Ascription cultures value a person based on who they are, family lineage, age, or other attributes. c. Achievement cultures value what the person does; they are meritocracies.

YY.

Attitudes Toward Time a. Where is the primary focus (past, present, future)? East Asian cultures tend to be past-focused, while U.S. economic culture tends to be present-focused.

The EU cultures tend, in some aspects, to be future-focused, seeing a better 03-73

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world evolving. b. Are actions sequential (monochronic) or synchronous (polychromic)? Low context cultures (Hall) tend to be monochronic, while high context cultures tend to be polychromic.

ZZ. Attitudes Toward the Environment a. Do we try to live in harmony with nature or try to control it? Similar to Kluckhohn and Strodtbeck‘s relationship to nature. b. In internal direction cultures, people believe they control nature. c. In external direction cultures, people believe that the natural world controls them and they need to work with their environment.

LO 3-5 Describe the global mindset and the MBI model.  XVI.

When Does Culture Matter? The Global MindSet

Key Terms: 

global mindset

When Does Culture Matter? The Global MindSet A. A global mindset helps to figure out how culture matters in specific situations. It matters all the time, but in different ways at different times.

1. Global mindset is an openness to diversity and an ability to synthesize across diversity.

2. Creates a willingness to deal with complexity and is enhanced by experiences in different cultures.

B. Map-Bridge-Integrate (MBI) model can help manage across cultures and develop a global mindset in that it helps synthesize across cultures.

AAA. Mapping is identifying the cultural differences and understanding them.

BBB. Bridging is communicating across these differences and building awareness of shared values.

CCC. Integrating is managing the differences.

LO 3-6 Discuss cautions for using cultural frameworks in business.  Going Forward: Cultural Paradoxes and a Caution  XVII.

Key Terms: 

cultural paradox

Rules of Thumb for Managers Doing Business Across Cultures

Going Forward: Cultural Paradoxes and a Caution A. As your tacit knowledge of culture builds, you‘ll encounter paradoxes or times when your expectations, based on the frameworks, are contradicted by experience.

1. U.S. culture individualistic, yet the United States has world‘s highest rate of charitable 03-74

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giving.

2. People in Costa Rica, a high context culture, prefer automated tellers to real/people tellers.

3. Japanese have low tolerance for ambiguity, while the United States has high tolerance for it. Yet U.S. contracts are specific, while Japanese contracts are vague.

4. Awareness of paradoxes suggests that you are building your knowledge of cultures.

They are complex systems, and our knowledge of them lags reality.

5. Frameworks are only an aid. They are at best sophisticated stereotypes.

XVIII.

Rules of Thumb for Managers Doing Business Across Cultures A. Do your homework and be prepared when you approach a foreign market. Find a mentor, know history, folklore, some of language, read local papers, and so on.

B. Slow down. Low context people may be seen as hurried, unfriendly, arrogant, and untrustworthy in high context markets.

C. Establish trust. U.S. business-style relationships may get you nowhere.

D. Understand the importance of language.

E. Respect the culture. You are a guest. You are the foreigner. Manners matter.

F. Understand the components of culture, surface and deep. Look below the surface.

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Engagement and Application Boxed Text Discussion Questions With Suggested Answers When in Rome, Should You “Do as the Romans Do” . . . and Feel Comfortable about It? The issue here is to what degree you follow local practices when these practices may violate cultural or moral values of your home culture. Should a Saudi woman studying in the United States localize and not cover her hair? Should an American in Amsterdam feel comfortable following local drug laws? In business, do you follow local approaches to tax law in Italy or report taxable income as you would in your home country? Do you avoid hiring women and transferring home country women to Saudi Arabia, where the sexes do not work publicly together?

Online and Hybrid: Virtual teams work out guidelines on when to adapt and when to resist adaptation. Present to class, either online or in face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups.

1. Are all actions that conform to local customs morally defensible? Explain your reasoning.

The answer to this question will vary, and it is intended to help people think through the issue. For someone with a strong external locus of control, acceptance of local custom even when it conflicts with their own, might be tempting. Going to the extremes is useful here. Would you prosecute a clerk who stole $100 in a country that punishes thievery by taking the hand from the thief‘s arm?

In a country where hiring family is normal, would you follow U.S. HR practice?

2. If the competitive environment includes legally marginal activities, and you can distance yourself from those activities, should you follow them in order to compete successfully?

This question gets to the issue of using outside agents to keep the U.S. company in compliance with the Foreign Corrupt Practices Act and other areas of liability. Fortunately, many corporations will have explicit rules prohibiting this temptation.

3. Recommend an approach to resolving ethical issues in the international arena.

One approach would be the MBI model, using locals and home country people. Another might be that the corporation has anticipated these events and has provided a procedure.

Global Debate: How to Address Cultural Differences When Selecting International Managers This global debate presents a MiniCase in which an American pharmaceutical firm is negotiating with an Indian firm to do business together. The American firm assigns an Indian employee to be their lead in the venture but is unaware of his caste and how that might affect the relationship with the Indian company. The founder and CEO of the Indian company is from the Brahmin caste, which is the highest, and the appointed liaison from the U.S. company is a Dalit, which is the lowest caste. Once the founder of the Indian company finds out that the appointed liaison from the U.S. company is a Dalit, the negotiations become very formal and stall.

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online or in face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups.

1. How important is it to adjust business practices to conform with local traditions and expectations in other nations? Should factors such as a person’s social status be weighted more heavily than education and job performance in deciding who is selected for a position?

Students will probably quickly make the distinction that many types of traditions and expectations are innocuous and there is no harm in following them to please customers. But many students will be hesitant to comply with expectations that would discriminate based on social status, race, or gender. An important question to ask students is at what point do you decide not to do business with a company or even in a country?

2. What would you recommend that Simpson do, and why?

This question relates directly to Trompenaars‘ universalism versus particularism dimension of culture. Universalists believe that one set of rules should apply to all people, all the time, whereas particularists believe that the context of the situation should dictate the set of rules that apply.

Americans tend to be universalists and many American students will feel that the Indian attitude about casts has no place in modern companies and that the Indian firm should learn to ―deal with‖ the Dalit liaison or the American firm should find another partner. Particularists would likely respond that to keep the customer happy, another person should be found that would not upset the Indian company‘s executives.

IB in Practice: Cultural Misunderstandings Engulf BP’s Disaster British Petroleum‘s Deepwater Horizon Oil Rig exploded on April 20, 2010, in the Gulf of Mexico, killing 11, injuring many, and allowing oil to gush from the wellhead for 3 months. This was the largest oil spill recorded to date, with a release of 4.9 million barrels of oil. The cleanup was well organized and massive, with 1,074 miles of coastline contaminated. Many of the problems BP encountered may be explained as a result of poor understanding of cultural differences between the UK and United States.

Online and Hybrid: Assign questions to be prepared in virtual teams and submitted as a team assignment.

Face-to-Face: Students develop responses to the questions in class in teams/groups.

1. Do you think the U.S. public’s response to the disaster would have been different had the company been more localized, for example, with a U.S. PR firm and U.S. executives?

With localized involvement at higher levels in the organization, including a U.S. PR firm and an American running the recovery efforts, the U.S. public‘s response could have been quite different.

Hayward‘s lack of emotional connection to the U.S. public can be attributed to a lack of understanding of the American culture and how it differs from British culture in subtle but important ways.

2. Do you think that BP should have had someone like Dudley in charge of the response from the beginning? Why or why not?

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Dudley would have better understood what Americans needed to hear from BP in order to trust that the recovery program would be effective.

3. What role may our common use of English have played in BP’s decisions to have CEO Hayward manage the public aspect of the recovery?

That Hayward‘s language was English may have given him a false sense that he understood what was going on in his environment. Remembering that we don‘t know what we don‘t know is difficult to do, especially in crises, when we want to understand our environment quickly and accurately, so that we can address the crisis effectively.

Get That Job! From Backpack to Briefcase: Mallory Wedeking: Attitude Is Everything!

Mallory Wedeking describes her beginning international experience, the challenges she faced, and how she overcame them.

Online and Hybrid: Virtual teams evaluate Wedeking‘s advice for their own career development.

Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own career strategy in light of Wedeking‘s advice.

1. What does Mallory mean, ―Attitude is everything!?‖ She means that how you deal with mistakes constitutes your attitude toward your new environment. See your mistakes as a chance to learn rather than as major failures; that is what matters most. People can sense your sincerity and authenticity, regardless of your mistakes.

2. Would you consider taking her advice and beginning with an international internship or volunteer position?

Students will have various answers to this question, depending on their readiness to take that first step (if indeed they are not already involved) into international experience.

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End of Module Exercises Critical Thinking Questions 1. Drawing on Hall’s high and low context, describe some of the communication issues that might well arise when an Arab manager in a global company who has spent his career in the Middle East is sent on temporary assignment to Germany for a year to integrate there a process developed in one of the Middle East production facilities.

Because the Saudi is likely to be used to long-term relationships, his expectations for subtle communication may be unfulfilled with the German need for explicitness. This may be understood as insulting, rude, and lacking sensitivity. In addition, the Saudi will have strong boundaries between insider and outsider, whereas the Germans will be more likely to have weak boundaries in this regard. The task-centered rather than relationship-centered proclivities of the Germans may come across to the Saudi as cold, uncaring, and focused on profit rather than people. One good guess is that the Saudi is likely to feel lonely, misunderstood, and among a nation of uncaring people.

2. Your company has a policy of no gift giving or accepting. You are representing the company in negotiations in China for design of a multiphased manufacturing facility.

Discuss the role of gift giving you might expect in a culture such as China and how you plan to approach this issue.

The gift giving will be very common. Remember that gift giving creates a mutual obligation: you give, you get, and you have an obligation to respond. This functions as a way to get to know the other and build trust. It would probably be a mistake to stick to the corporate no-gift policy. Learn about the gift-giving etiquette and discuss how to address this with company ethics and other appropriate personnel.

3. You are a Mexican who has just accepted a short-term assignment in Ireland. What are some of the expectations you may have about Irish behavior, drawing on Hofstede’s cultural dimensions?

The first challenge is to get the data correct. Ireland is PD 28, UA 35, I 70, M 68, P 24, I/R 65.

The abbreviations are taken from the horizontal axis in Table 3.3. Mexico‘s data are PD 81, UA 82, I 30, M 69, P 24, I/R 97. The second is to read them in the right way. Beginners often invert them. Given the gaps, we can posit that behaviors relating to PD, UA, I, and I/R would be areas on which to focus. Then, we need to look at possible issues from a Mexican point of view. The Irish might appear casual and disrespectful of upper management, given their low PD score. On UA, Ireland‘s score indicates a much higher tolerance for ambiguity and uncertainty. That could appear to the Mexican as poor planning and indecisiveness. The I scores suggest that the Irish might seem self-concerned, self-obsessed, and not caring about the group to the Mexican. I/R would suggest the Mexican might see the Irish as lacking self-discipline. It‘s a good idea to remember that these are simply sophisticated stereotypes, but the Mexican expat will know that when he sees these characteristics, he may be dealing with culture rather than individual behavior and that it might be a good idea for them to put interpretations of the behavior on hold until experience leads to a better understanding of the culture.

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4. If you had the choice of sending either a U.S. or Mexican businessperson to Japan for a 3year assignment, and both were equally qualified, why might sending the Mexican offer less risk on the culture side?

Both Mexico and Japan are high context, while the United States is low context. Both Mexico and Japan have high PD and UA, are more communal than individualistic, and are masculine. In these areas, the United States is at the other end of the spectrum.

5. How could Trompenaars’s universalism–particularism dimension be helpful in sorting out confusion over ethical behavior in a company’s international division?

This dimension helps us understand how rules are applied. In particularist cultures, application takes into account the context, so the rules are not always followed. The opposite is true in universalist cultures: The rule is always followed. So one thing this dimension helps us to understand is the variance that occurs in the application of laws in particularist cultures. To someone from a universalist culture, this varying application may appear to be hypocrisy or corruption.

6. Give a short description of an example of Trompenaars’s achievement–ascription dimension.

The answers will vary, but the ascription will present recognitions that are a result of family standing, social standing, and so on, that is, who the individual is. The achievement example will be a result of what the individual has done.

7. If you were advising a French colleague on her first work assignment to your home culture, and she asked you what aspects of the material culture she should pay attention to, what advice would you give her?

This question will have varying answers. The critical issue is that an understanding of material culture be presented.

8. Choose a nationality of foreign worker that is found in your home environment and suggest what culture-related difficulties such a worker may experience in your culture.

Answers will vary, but this application question will show an ability to apply parts of several of the frameworks. For example, a Japanese worker is likely to prefer a hierarchy, little ambiguity, respect, and a focus on group rather than individual. None of those are the norm in the U.S. workplace.

9. How do you evaluate your own global mindset levels?

The answers will vary but students should show an understanding of what the global mindset is and offer experiences to support that those capabilities have been internalized.

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globalEDGE Research Task Exercise 1 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > Italy), ―Culture‖ page of Italy can be accessed on the left column menu.

The link to the Kwintessential Language and Culture Specialists will be available on the culture page.

Search Phrase: Italy Resource Name: Kwintessential Language and Culture Specialists Resource Link: https://globaledge.msu.edu/countries/italy/culture Exercise 2 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > ―country of choice‖), each country‘s profile page will be displayed individually from where ―Culture‖ page of countries can be accessed on the left column menu.

Open ―Culture Crossing‖ in a new window and click on ―Meetings‖ and ―Gift Giving‖ links under the ―Business‖ header.

Search Phrase: by country Resource Name: Culture Crossing Resource Link: https://globaledge.msu.edu/countries/chile/culture MiniCase: Who Will Staff Up the China Operations?

This MiniCase explores an HR challenge frequently encountered in international assignments.

Several people want the assignment to China. The task is to choose the candidate who is most likely to do the best for the company. This assignment gives students an opportunity to apply the culture frameworks in the selection process as well as to think about what is best for the firm in the long and short term.

1. Drawing on the cultural dimensions that we have reviewed, along with your business knowledge, whom would you recommend for the position?

Each of the candidates brings advantages to this position. In terms of culture experience, Tom is probably in the weakest position as Gunther and Firdaus both have stronger backgrounds. As for whose cultural background would be most appropriate for China, Firdaus probably is in the strongest position here. In terms of a global mindset, Guenther has the anthropology experience and Firdaus the cultural transition experience, while Tom‘s background suggests his global mindset may be the least developed of the three. Sending a single male would place Tom in China without support, while Firdaus‘ husband is ready to relocate with her. We don‘t know Guenther‘s family situation. Well-developed reasoning rather than a correct answer is the key to a successful 03-81

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response to this question.

2. What would be your reasoning for this choice?

This question addresses which of the factors would be most significant in making the assignment.

Among the considerations are the cultures and how they might clash or offer compatibility, the long-term benefits to the company, and the most appropriate candidate in terms of likely global mindset and family support. Other considerations may also come into play.

3. Whom would you suggest for a backup candidate, if the first selection declined the position?

Again, reasoning rather than a specific answer is the key here.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text.

We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available at http://bit.ly/MHEIBVideo. The Differences in National Culture board is rich and varied and is updated monthly.

See ―'OMG! Meiyu‘ Introduces China to American Slang, Idioms and Jay-Z‖ for an American introducing Chinese to American Slang.

Also available at www.youtube.com/watch?v=y6hE5XzqfhQ. The U.S. State Department‘s Foreign Service Institute has resources on culture training at www.state.gov/bureaus-offices/under-secretary-for-management/foreign-service-institute. These resources can be used for a career development strategy assignment.

View the Integration Training www.youtube.com/watch?v=at7srdUiRfM.

Cross-cultural

View the IndoSense video Culture www.youtube.com/watch?v=OTwBEITmUJU.

Shock

and

communications

video

at

International

Business

at

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for hybrid and online courses.

1. Cultural Analysis Prepare a cultural analysis for a specific country, using the basic frameworks in the chapter. The assignment is to describe the culture of an assigned country the student is likely to know little about. The short report (two to three pages) is to be used by the company team that is preparing to spend 2 months on site in the country to evaluate a market entry. Students can draw on the module‘s material and do additional research. Small teams are appropriate for this assignment. In a face-to-face class, the reports can be presented for feedback from the class or the reports can be circulated using a class website. In hybrid and online classes, teams can share their write-ups and then respond to feedback, using video chat or other interface technologies. (Time: 15 min per report and feedback when presented; time out of class for hybrid and online classes; preparation time 2–4 hr)

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2. Cultural Artifact This cultural artifact exercise may not be possible in some settings. If possible, ask each student to bring an example of a food or goods item from their cultural heritage to share in class. (Before this assignment is made, survey the class for food allergies.) Have them explain its cultural meanings, the traditions that surround it, when serving/using it may be appropriate and inappropriate, and so on. Link the item, how and when it is used, and its context to the culture.

This exercise is a good way to get a substantive discussion on cultural values going, since it establishes a cultural context. This is best used for a face-to-face class, but a hybrid or online class could be done virtually, using another cultural artifact, such as a craft or clothing design.

3. Name as Cultural Artifact Ask students to break into groups of five and explain why they have the first name they do. Then report back to class with a list of the different ways names have been chosen for them. If your classroom setting/online course does not allow for group work, explain either in small groups or have students individually share with the class why they have the first name they do. Keep a list on the board, and help students see similarities and differences. This is a good icebreaker early in the semester, and it gets students involved in the course ideas. It also generates data about high context/low context cultures and attitudes toward the past and family, so discussion can link to them. This exercise is especially effective if there are immigrant, second generation, and/or foreign class members.

4. Experiential Exercise There are a number of experiential exercises that work well to bring home the nature of culture.

BaFa BaFa, Randömia, and Blue Eyes, Brown Eyes among them. Although they take time, they are well worth it. You might consider doing BaFa BaFa as a special out of class activity.

Ordering a few pizzas for the debrief session seems to work well. BaFa BaFa is available from Simulation Training Systems, in a special edition for schools and charities for $329 (www.simulationtrainingsystems.com/schools-and-charities). Randomia is available from its developers, Grovewell, at www.grovewell.com/leadership-training/randomia-simulation, for $60.

Blue Eyes, Brown Eyes was developed by Jane Elliot and can be viewed at www.pbs.org/wgbh/frontline/film/class-divided. These exercises are for face-to-face classes.

Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Ivey Cases

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―Dave Shorter and Bob Chen‖ describes a work situation in which communication is misunderstood based on cultural assumptions. ―Johannes van den Bosch‖ consists of a series of emails between two global managers, one high context and the other low.

The Ellen Moore series describes international challenges faced by Ellen Moore in Bahrain, Korea, and Canada. ―Blue Ridge Spain‖ describes the dissolution of a joint venture between an American multinational and a Spanish agricultural conglomerate. Issues deal with strategy, career development, ethics, and cultural norms.

Controversial Issues 1. Global Debate: When in Rome, Should You ―Do as the Romans Do‖ . . . and Feel Comfortable About It? This debate draws on the Global Debate in the module and explores the question, ―When in Rome, should you „Do as the Romans Do‟?‖ It focuses on the issue of complying with the norms and expected social and cultural behaviors when a guest in another country. This serves as a starting point for a stimulating class discussion on such topics as: 

Does one conform?



To what degree is one expected to conform?



What are the risks of not conforming?



What do you do if host country expectations to conform make you break your home country’s law?

Divide the class into pro and con teams and have them prepare to defend their assigned position.

Have the teams choose three presenters. A coin toss can decide which side goes first. Allocate each side 4 min for their initial presentation of their position in the debate. Then they have 3 min to refute the opposition‘s presentation. And a final minute to conclude. The winner is determined by paper ballot from the class members in the audience. (Paper ballots help to correct for team allegiances.) This is a face-to-face class exercise.

2. Current Events A focus on current events that are relevant to the module‘s topics is a good way to bring home the concepts, review their application, and build news-review habits. Ask everyone to come prepared with an article for every meeting. If a meaningful percentage of the final grade is allocated to discussion (10–15), motivation is there. Devote 5 min at the beginning of class to discussion of current events. Discuss topics of culture controversy. Linkage to international business issues can be made in the areas of child labor, prison labor, gender separation, hiring practices, tax payment behavior, bribes, and many other issues. Depending on the online interface, this activity may be done in chat forums (Blackboard) or discussion boards, before class begins. This activity also 03-85

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works well in large lecture classes.

Teaching Suggestions 1. This chapter is very important to students‘ understanding of the importance of culture in international business. It is a fundamental issue for international managers, so you will find it woven into the other modules, as well.

2. Focusing on the boxed material and the case study will help students achieve the objectives of the module. Answers for both the boxed material and case studies are provided in this module‘s instructor guide.

3. The Critical Thinking Questions at the end of the module will help in understanding chapter content, and Connect offers a way to hold them accountable. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collect assignments at random and assign a grade; (2) occasionally give some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) have students hand in assignments and give credit for work submitted; and (4) call on students at random to present on specific questions (giving a small number of points for correct answers or counting this as part of participation).

4. Guest lecturers on culture are a way to underscore the importance of the information in the culture chapter. Possible guests include: 

An anthropologist who can present some interesting aspects of cultural differences.



A manager with overseas experience could recount some interesting experiences in adjusting to the local culture.



A retired State Department employee who worked overseas.



Someone who served in the Peace Corps might have interesting observations.



Faculty colleagues from other countries.

5. A good way to start this module is to have students relate their own experiences with different cultures. They could be from travel abroad, from encounters with people of different backgrounds in their community, church, classes, and so on. Or, if they are foreign, how they experience being in your class and attending your college or university. Setting this question up ahead with a foreign student will give the student time to think about their response. When discussing culture responses, you may want to include the student‘s emotional response to the situation as well as the situation itself, such as ―How did you feel about this experience?‖ 6. To cover such a vast subject as culture in the short time available is impossible. Students who become very interested in this area might be encouraged to explore an anthropology course. Our aim is to help students realize that there are cultural differences and that international business 04-86

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executives must be aware of them and work with them. We emphasize that business plans must be examined from a cultural point of view.

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title

Assignment Type

Geert Hofstede‘s Big Idea Case Analysis Determi nants of a Cult ure Click and Drag Cultural Fram ewor ks: Fro m Beiji ng to Free port Case Analysis High and Low Cont ext Click and Drag

Be Awa re of Cult ural Nua nces Video Case

Topic(s) Social Cult ure

AACSB Learning Accreditation Objective(s) Tagging

03-06

What Is Cult 03-01; 03-02; ure?

03-03

Bloom’s Taxonomy

Remember/Understa Knowledge nd/Apply/Analy Application ze

Analytical Thinking

Understand

Hofsted e‘s Fra me wor k 03-04 Reflective Thinking Understand Culture Fra me Diversity/Refle wor ctive Understand/App ks 03-04 thinking ly/Diversity What Is Cult ure? /Cul ture Fra me Diversity/Communi wor 03-01; 03-02; cation/Analytica Understand/Apply/A ks 03-05 l Thinking nalyze 04-88

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Connect Activities 1. Geert Hofstede’s Big Idea Activity Summary: This case analysis describes several employees that work for a French firm.

In each question, students are presented with a situation from the firm and asked to choose an individual that best fits with one of Geert Hofstede‘s dimensions of culture.

How to Use Activity: With four different questions for the case, this works well as a set of questions from which one is randomly picked for an online assignment. For a live class, give this assignment before or during class and ask small groups of students to discuss their answers among themselves. Then ask students about any questions that were unclear or confusing. This allows the instructor to tailor the class discussion to areas that are unclear to students in a way that increase their interest in the topic.

2. Determinants of a Culture Activity Summary: This click and drag activity asks students to match examples to the appropriate cultural dimension, in terms of aesthetics, religion, material culture, language and communication, and social organization.

How to Use Activity: This can be assigned to be done individually for both online and live classes. After completing the assignment, have small in-class teams come up with additional examples for each cultural element. Have a representative from each team present to the rest of the class their additional examples and why they belong to a particular category.

3. Cultural Frameworks: From Beijing to Freeport Activity Summary: This is a case analysis with three multiple-choice questions that relate to the following cultural frameworks: Hall‘s high and low context, Hofstede‘s dimensions, and Trompenaars‘ dimensions.

How to Use Activity: With three different questions for the case, this works well as a set of questions from which one is randomly picked for an online assignment.

4. High and Low Context Activity Summary: This click and drag activity provides a list of general characteristics that contain either high context or low context characteristics.

How to Use Activity: For an in-class assignment, divide the class into small groups and have them do the assignment as a team. Monitor the team discussions to clarify the difference of high and low context as needed. Or have students do this individually and then in class discuss any choices that were confusing.

After completing the assignment, have small in-class teams come up with additional examples for 04-89

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each category. Have a representative from each team present to the rest of the class their additional examples and why they belong to a particular category.

5. Be Aware of Cultural Nuances Activity Summary: In this video case, an international lawyer discusses the need to be aware of cultural nuances. Students then answer one or more multiple-choice questions on the topic.

How to Use Activity: This can be done individually for both internet courses and face-to-face courses. In face-to-face classes, have students do this before class and then discuss the issues about cultural nuances in class. If you have international students in your class or if you have students with international experience, ask them to share examples of challenges with cultural nuances.

Module 4: Sustainability and Natural Resources Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities 04-90

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Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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Your Content Summary This chapter reviews sustainability and how it affects the conduct of business. We look at frameworks used to describe and analyze sustainability and then summarize ways sustainability can be measured in the business context. We then introduce and explain the characteristics of environmentally sustainable business. The stakeholder model is a useful way for businesses to implement sustainability throughout its areas of impact. The second part of the chapter looks at natural capital, the collection of basic resources a business uses to as fundamental resources.

Geographical features and energy resources are the critical aspects of natural capital that we review.

Learning Objectives LO 4-1

Describe environmental sustainability and its potential influence on business.

LO 4-2

Describe frameworks for sustainability.

LO 4-3

Summarize ways to measure sustainability achievements.

LO 4-4

Identify the characteristics of environmentally sustainable business.

LO 4-5

Describe how the stakeholder model can help businesses achieve sustainability.

LO 4-6

Describe how geographical features of a country or region contribute to natural capital.

LO 4-7

Outline nonrenewable and renewable energy options available and their potential impacts on business.

Key Terms and Definitions biomass (p. 120)

A category of fuels whose energy source is photosynthesis, through which plants transform the sun’s energy into chemical energy

Carbon Disclosure Project (CDP) (p. 102)

Organization that provides reporting frameworks for greenhouse gas emissions and water use

carbon footprint (p. 102)

A measure of the volume of greenhouse gas emissions caused by a product’s manufacture and use

climate (p. 114)

Meteorological conditions, including temperature, precipitation, and wind, that prevail in a region An organization that provides a framework for reporting environmental and climate change information with rigor comparable to the standards used for financial reporting

Climate Disclosures Standards Board (p. 102)

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concentrating solar thermal power (CSP) (p. 120)

A system using mirrors or lenses to collect sunlight for heating water that powers an electrical generator

cradle-to-cradle (C2C) design model (p. 100)

A closed-loop design that recycles and reuses products

Desertification (p. 111)

Permanent transformation of habitable or arable land to desert State in which the demands placed upon the environment by people and commerce can be met without reducing the capacity of the environment to provide for future generations

environmental sustainability (p.

98)

geothermal power (p. 120)

Power from heat stored in the earth

Global Reporting Initiative (GRI) (p. 101)

Sustainability reporting framework developed among stakeholders

heavy oil (p. 117)

Oil that does not flow easily, presently sourced from oil sands and oil-bearing shale

inland waterway (p. 113)

Waterway that provides access to interior regions

life cycle assessment (LCA) (p.

An evaluation of the environmental aspects of a product or service throughout its life cycle

99) natural capital (p. 108)

Natural resources such as air, land, and water that provide us with the goods and services on which our survival depends

natural resources (p. 115)

Anything supplied by nature on which people depend

nonrenewable energy (p. 115)

Energy that comes from sources that cannot be replenished, such as the fossil fuels—petroleum, coal, and natural gas—and nuclear power

rare earths (p. 124)

Seventeen elements used in defense and technology applications

renewable energy (p. 115)

Energy that comes from sources that are naturally replenished, such as sunlight, wind, and water flow

shale (p. 117)

A fissile rock (capable of being split) composed of laminated layers of claylike, fine-grained sediment

solar photovoltaic power (PV) (p. 120)

Power based on the voltage created when certain materials are exposed to light

stakeholder theory (p. 107)

An understanding of how business operates that takes into account all identifiable interest holders 04-93

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Sustainability Accounting Standards Board (SASB) (p. 102) topography (p. 110)

A

nonprofit organization developing a 77-standard framework to enable companies to explain sustainability and its financial impact The surface features of a region

triple bottom-line accounting (3BL) (p. 107)

An approach to accounting that measures the firm’s social and environmental performance in addition to its economic performance

United Nations Global Compact (p. 101)

A voluntary reporting scheme for businesses that covers critical areas affecting the conduct of international business—human rights, labor, the environment, and anticorruption efforts

water footprint (p. 102)

A measure of the amount of water used in a product’s manufacture and use

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 4-1 Describe environmental sustainability and its potential influence Key Terms: on business.  environmental sustainability  Sustainability in the Business Context XIX.

Sustainability in the Business Context DDD. Maintaining something.

EEE. Brundtland Commission drafted a widely accepted definition of sustainable development: it ―meets the needs of the present without compromising the ability of future generations to meet their needs.‖ FFF.

Requires us to change the way we manage everything.

GGG. Systems concept: Local and global at the same time.

63. Need to think about present and future, simultaneously.

64. Need to think about ecological, economic, and social systems.

HHH. Early efforts involved business operations.

65. Resulted in conservation and savings.

66. Then businesses moved to the value chain, and then to the larger picture with the supply chain.

LO 4-2

Describe frameworks sustainability 

Key Terms:

Systems for Achieving Sustainability



life cycle assessment (LCA)



cradle-to-cradle (C2C) design model

o Life Cycle Assessment o Cradle-to-Cradle Design XX.

Life Cycle Assessment III. Evaluates the environmental impact of product/service throughout its life cycle.

JJJ. Such ―product stewardship‖ leads organizations to be concerned about the entire life of their product.

KKK. Example of pencil illustrates the profound change in organizational thinking influenced

by LCA. LLL. Involves the cumulative impact of product, can lead to reductions and savings of: 04-95

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67. Environmental footprint.

68. Cost structure.

69. Potential carcinogens in inputs, processes, and wastes.

70. Patagonia example: One T-shirt required 700 L of water with industrially produced cotton. Company switched to organic cotton, which requires less water.

XXI.

Cradle-to-Cradle Design MMM. Design should close production loop.

71. Resources used in production are recycled and reused as part of the design.

72. System cycles all materials and generates no toxic wastes (waste = food).

NNN. Identifies two components: 73. Technical nutrients, inorganic and synthetic, so reusable.

74. Biological nutrients, organic and decompose.

75. Example: Petroleum-based carpet manufactures (interface, etc.) reprocess technical nutrients (old carpets) to produce new product.

LO 4-3

Summarize ways to measure sustainability achievements. 

Tools for Measuring Sustainability

Key Terms: 

United Nations Global Compact



Global Reporting Initiative (GRI)



Carbon Disclosure Project (CDP)



carbon footprint



water footprint

o United Nations Global Compact o Global Reporting Initiative (GRI) o Carbon Disclosure Project (CDP) o Footprinting

XXII.

Tools for Measuring Sustainability I.

Criteria for measurement and comparison of the effects of our actions.

OOO. Measurement tools must measure across different sectors (comparability test). See website for examples www.sustainabilityreports.com.

PPP.

United Nations Global Compact: framework for voluntary annual reporting.

QQQ. Global Reporting Initiative (GRI): organization of stakeholders who have collaborated to develop GRI framework.

RRR. Carbon Disclosure Project (CDP): Nonprofit that provides reporting frameworks for sustainable water use and reduction of greenhouse gas emissions, including carbon emissions reporting.

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76. Over 85% Fortune Global 500 report to CDP. 77. Becoming standard framework for supply chain reporting.

SSS.

Footprinting

78. Carbon footprint: volume of greenhouse gas emissions associated with product, throughout life cycle. Complicated calculation.

79. Water footprint: amount of water used in a product‘s manufacture and use.

Complicated because we use water locally but discharge it globally.

TTT. Reporting sustainability efforts a. Reporting of sustainability efforts is receiving increasing attention due to the difficulty of distinguishing between companies that are truly engaged in pro-sustainability activities and those that just pretend to do so (greenwashing).

LO 4-4 Identify the characteristics of environmentally sustainable business. Key Terms:  Characteristics of Environmentally Sustainable Business o Limits as Part of the Sustainability Context o Interdependence as Part of the Sustainability Context o Equity in Distribution as Part of the Sustainability Context XXIII.

Characteristics of Environmentally Sustainable Business

XXIV.

Limits as Part of the Sustainability Context UUU. Environmental resources (water, soil, air) are exhaustible.

VVV. Examples in extractive industries: Freeport-McMoRan in Papua New Guinea.

WWW. Recognizes ecological and social issues with local tribes. Negative example: Shell Oil in Niger Delta.

XXV.

Interdependence as Part of the Sustainability Context XXX. Sustainable practices create complex interdependence among ecological, economic, and social systems.

YYY. These interrelationships are often difficult to predict.

80. Fracking has caused social problems in rural parts of the United States.

ZZZ. Outsourcing decisions often have unanticipated social effects—children‘s education, subcontractor issues with pollution, safety.

XXVI.

Equity in Distribution as Part of the Sustainability Context AAAA. of gains.

For interdependence to work, there cannot be vast differences in the distributions

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BBBB. Interdependence requires business model that allocates value added over a wide array of stakeholders.

CCCC. Vast inequities lead to social disruption and violence.

DDDD. chain.

One approach is to pursue backward integration to gain control over supply

EEEE. Palmisano of IMB: We need to abandon the corporate colonial model for one that is globally integrated, where high levels of trust operate among all stakeholders.

LO 4-5 Describe how the stakeholder model can help businesses Key Terms: achieve sustainability  stakeholder theory  The Stakeholder Model for Sustainable Business  triple bottom-line accounting (3BL) XXVII.

The Stakeholder Model for Sustainable Business FFFF. Stakeholder model contrasts with traditional input–process–output model and exclusively profitability-focused economic approach.

GGGG. Theory developed by R. Edward Freeman calls for managers to consider the network of tensions caused by competing internal and external demands that surrounds the business.

HHHH. Stakeholder approach forces managers to examine the underlying values and principles of the business and to articulate them.

IIII.

All stakeholders have a voice in this network of relationships.

JJJJ. Examples of businesses that pursue an approach consistent with stakeholder theory include Johnson & Johnson, eBay, Google, Lincoln Electric.

KKKK.

Triple Bottom-Line accounting a way to share business data with stakeholders.

LLLL. Measures economic (traditionally measured), social, and environmental data.

MMMM. Does not allow for comparisons across companies because measurements, especially social and environmental areas are not standardized.

LO 4-6 Describe how geographic features of a country or region contribute Key Terms: to natural capital.  natural capital  Geography: Describing Our Natural Capital  topography o Location: Political and Trade Relationships



inland waterway

o Topography



climate

o Climate XXVIII.

Geography: Describing Our Natural Capital 04-98

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I. XXIX.

XXX.

Natural capital—Natural resources that provides us with goods and services we need for survival.

Location: Political and Trade Relationships I.

Major cities are often located on trade routes.

II.

Major trading partners often border each other.

Topography I.

Mountains can often divide people, cultures, and languages.

II.

Deserts and tropical forests also often divide groups of people.

III.

Bodies of water attract people and facilitate transportation. i. Before railroads, inland waterways were a major means of transportation.

XXXI.

Climate I.

Climate limits what people can do.

II.

Tropical nations are challenged with no constraints on the growth of weeds, insects, birds, and parasites.

LO 4-7 Outline nonrenewable and renewable energy options available Key Terms: and their potential impacts on business.  natural resources  Natural Resources  renewable energy

XXXII.



Nonrenewable Energy Sources





nonrenewable energy

Renewable Energy Sources



shale



Nonfuel Minerals



heavy oil



biomass



solar photovoltaic power (PV)



concentrating solar thermal power (CSP)



geothermal power



rare earths

Natural Resources I.

Anything supplied by nature on which people depend.

II.

Renewable energy are naturally replenished.

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XXXIII.

Nonrenewable Energy Sources NNNN.

These cannot be replenished.

OOOO.

Petroleum—crude oil.

81. Cheap.

PPPP. Many industrial applications, including plastics, fertilizers.

QQQQ. 1960s.

Estimates of world oil reserves are uncertain. Peak oil discovery thought to be in

RRRR. Conventional and unconventional sources (shale, heavy oil).

SSSS. Nuclear Power 82. Clean (no contribution to climate change) but not safe.

TTTT. Despite safety issues, growth area.

UUUU.

Coal

83. Pollutes heavily, but global consumption growing.

XXXIV.

VVVV.

The United States has world‘s largest recoverable coal reserves.

WWWW.

Natural gas—low pollution, growing fuel source.

Renewable Energy Sources XXXX. Growth in sector has outpaced growth in fossil fuels in the United States and European Union.

YYYY.

Wind power now a mainstream electricity source.

ZZZZ. Biomass 84. Relies on photosynthesis.

AAAAA.

Ethanol reduces food crop acreage.

BBBBB.

Solar photovoltaic power (PV)

85. Based on voltage created when certain materials exposed to light.

CCCCC.

Fastest growing renewable power technology.

DDDDD.

Concentrating solar thermal power (CSP)

86. Uses mirrors or lenses to collect sunlight that heats water.

EEEEE.

Different technology than PV, growing plants in the United States, Spain.

FFFFF.

Geothermal power

87. Source is heat stored in the earth.

GGGGG.

Growing in Turkey, Iceland, Philippines, some in the United States.

HHHHH.

Ocean Energy 04-100

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88. Sun‘s heat on water and mechanical energy of tides and waves.

IIIII.

Least mature of alternative energy sources.

JJJJJ. Established in France, UK; growing in China, India, the United States.

KKKKK.

Hydropower

89. Moving water to generate power.

XXXV.

LLLLL.

Largest alternative power source.

MMMMM.

Both large- and small-scale applications (China, Ethiopia, rural Africa).

Nonfuel Minerals I.

Rare earths—China controls 95%.

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Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice: Europe Leads the Way: Why the European Union Gets It on Environmental Issues This box directly addresses the gaps on progress on environmental issues between the European Union and the United States. It offers explanations ranging from culture to demographics, including the precautionary principle and varying assumptions about the purpose of business.

Online and Hybrid: Assign questions to be prepared in virtual teams and submitted as a team assignment Face-to-Face: Students develop responses to the questions in class in teams 1. Do you think Europe’s approach to toxic substances could work in the United States? Why or why not?

This question asks the student to analyze application of the precautionary principle in the United States. Among the approaches answers might include an exploration of the cultural assumptions behind the principle in comparison with cultural assumptions found in the United States such as individualism, pragmatism, and general assertions about American values. The United States “If it ain’t broke, don’t fix it” approach is another, less theoretical one. Answers may also explore various assumptions about the purpose of business in a social context.

2. Drawing on what you know about culture, do you think it helps to explain the EU’s approach to environmental issues? Explain your reasoning.

This question gives the student an opportunity to apply some of the culture frameworks to an understanding of the gap in environmental thinking between the United States and European Union and evaluate the general approach. For many students, this may be a new approach.

Generalizing, EU countries are less individualistic than the United States and place higher social responsibility on business. This may be cultural or based on demographics, as the article suggests, or a combination of both.

Global Debate: Is the United States Exit From the Paris Climate Accord a Smart Move?

This debate centers around the Paris Accord and the exit of the United States from that accord.

The Paris Accord is a worldwide agreement to limit carbon emissions. The intent is to limit global warming to 2 °C or 3.6 °F. But many critics say that the limit is too high. Critics also say that the accord does not give specific penalties for countries that do not meet their goals. It also calls for developed nations to contribute $100 billion annually to poorer nations by 2020 to help them to reduce their carbon emissions. In 2017, President Trump announced the exit of the United States. from the Paris Accord citing the inability to stem rising temperatures despite all of the efforts outlined in the accord. However, President Biden indicated that he would move to have the United States rejoin the Paris Accord.

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Online and Hybrid: Virtual teams can discuss this issue as blog posts.

Face-to-Face: Students can have an in-class debate on the topic.

1. How might the relationship between more developed countries and less developed countries be impacted by working toward a common goal but with vastly different requirements?

Answers will vary, but one key issue is that less developed countries have fewer financial resources to invest in alternative energy systems that do not emit carbon. More developed nations have emitted massive quantities of carbon while they became more developed. Should less developed countries be allowed to do the same, or should they be required to move to less carbon emission along with developed countries? Taking the approach that everyone must make the change now might seem to less developed countries as unfair, whereas allowing them more time to change may anger developed countries as unfair to them.

2. Would it have been worth the time to specify what is expected of each country and put in place ramifications if these goals are not accomplished or attempted?

Students will likely have many different ideas about this. Some may feel that very specific penalties should be given in the accord in order to encourage compliance. However, how would such penalties be enforced on nations? Other students might suggest that if you make the penalties too severe, no one would sign the accord for fear of missing their targets and having to pay onerous penalties. But without penalties, what is the incentive to comply with the accord‘s goals?

3. How important are specific actions steps to achieve a like-minded project?

As with the question above, some students may feel that specific action steps are necessary to meeting the accord‘s goals. Others might feel that just getting nations to agree on the problem is the major accomplishment of the accord and that specific steps can be specified later.

4. Was it the correct decision by the United States to withdraw from the Paris Accord? Why or why not?

This may result in a spirited discussion in class. Those in favor of staying in the accord might point out the catastrophes fueled by global warming. They might also point out that more developed nations obtained their status through the burning of fossil fuels and so they now have a responsibility to take the lead in reducing carbon emissions and helping poorer nations to do the same. Those in favor of leaving the accord might cite concerns about negative impacts on the economy for changing away from fossil fuels before new technology is economical. They might also point to critics that claim that the goals of the accord are not enough to avoid the major problems with global warming and propose that the departure of the United States might spur dialogue to create a new, more effective accord.

Get That Job! From Backpack to Briefcase: Jeremy Capdevielle: Sustainability Work in Ecuador Jeremy Capdevielle took the plunge into international work by setting out on a half-year journey 04-103

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of exploration once he finished his undergraduate degree in entrepreneurship. He worked to save money for his trip and once he decided where to go—Panama, to begin—he went there and found jobs teaching English, while he worked on his Spanish. When he moved on to Ecuador, he began volunteer work with Great Aves.

Online and Hybrid: Virtual teams evaluate Capdevielle’s advice for their own career development. Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own career strategy in light of Capdevielle’s advice.

1. Would Jeremy Capdevielle’s approach be one that you might follow? Explain.

This approach, to just go and take advantages of opportunities along the way, may be difficult for some students who need more structure and have not learned to be comfortable with ambiguity.

2. Evaluate Jeremy’s advice to ―challenge assumptions, observe the things that give you joy, and continually ask yourself—What do I love to do and how can I align this with a life that provides for what I need?‖ This approach may be seen as “typically American” by non-American students. It may well resonate with many American students.

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End of Module Exercises Critical Thinking Questions 1. Comment on the assertion that the business of business is to generate profit and that to pay attention to sustainability is to be taken off strategy by a passing fad.

This understanding of business is more commonly found in the United States than in other developed nations. It derives from the economist Milton Friedman, who argued that social issues and philanthropy should not be a concern of business. Rather, the priority should be to generate the most profits while operating within legal guidelines. Hence, it is known as the “bottom-line” approach.

2. Show through examples how the practice of sustainable business is both local and global.

Small-scale local sustainable agriculture is affected by the larger systems of which it is a part, for example, water shortages, global weather patterns, distribution systems. Any sustainable initiative, such as sustainable inputs, will be affected by larger market systems. For example, the use of recycled plastic bottles in the manufacture of upmarket plastic goods will have to deal with larger recycling efforts and their distribution systems. Low carbon emissions in France, due to its reliance on nuclear power, will create a cleaner environment, but this will be affected by greenhouse gas emissions in China and India.

3. Drawing on your own consumption patterns, describe the difference between cradle-tograve and cradle-to-cradle design approaches.

Cradle-to-grave design of a tee shirt involves the growing of cotton, the material’s and shirt’s manufacture, it wearing, and then its use as a cleaning cloth, and finally, its grave in the landfill.

Cradle-to-cradle design would involve the inputs, manufacture, first-level consumption (my wearing it), and then its designed return for reuse as part of another garment.

4. Why is it challenging to measure how successfully a business is practicing sustainability?

To be most meaningful, the measures have to be able to serve as a basis for comparisons. That is, the platforms have to meet comparability test. Note that 3BL does not meet this criterion.

Designing a platform that can function across sectors is difficult, since it involves many variables.

Successful platforms include the Global Reporting Initiative, the Global Compact, and the Carbon Disclosure Project.

5. Explain how the stakeholder model applies to a specific sustainable business in your community or one you have learned about in the business press or a class discussion.

This question asks for an application of the stakeholder model to a specific business. One application might be to solar and wind power installations, illustrated by the lengthy and wideranging public meetings held by the business in preparation for their license applications.

Another example: a local trash hauling business consults with the public, many local not-forprofit organizations, and town governments to solicit evaluations, including ways they can better serve their constituencies.

6. Of the 47 nations the UN identifies as the least developed in the world, 17 are landlocked.

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How might being landlocked slow a country’s development? Remember that Switzerland is landlocked yet it won the America’s Cup sailing competition in 2005, as you think through this question.

Being landlocked may be a transportation challenge, especially if the goods the nation produces are large and of low value. Switzerland is an interesting example because it copes with being landlocked and having to deal with mountainous terrain. So it has focused on dense, high value for weight exports, such as cheese, chocolate, and watches.

7. Should we be investing in new technologies to access oil and other fossil fuels, or should all our efforts go toward facing the inevitable decline of the fossil fuels? Explain your reasoning.

This question solicits the student’s judgment. Similar to the Global Debate issue in this module, it asks them to evaluate new technology applications to fossil fuel extraction. Although it suggests an either–or response, the more thoughtful ones will comment on the exploration of new technologies applied to fossil fuels along with a commitment to develop sustainable energy sources.

8. The safeguard and care of natural capital should be the responsibility of the government and not be left to private ownership. Agree or disagree with this assertion, explaining your position.

The underlying question here is, should we rely on government control and law to protect our natural capital, or is it also a private responsibility as well? Since private ownership of natural capital (land, including fragile ecosystems, water, and mineral rights) could influence the quality of our natural capital, it seems a combination would be among the stronger responses.

9. “Of course we’ll have to transfer to renewable fuels sooner or later, but why should my company travel that route now? We don’t need to be a first adopter or pay the first-mover price. There’s plenty of oil left for us to stay the way we are for quite a while.” Agree or disagree with this strategy, explaining your reasoning.

Being an innovation lagger does have its advantages, and here the student has an opportunity to explain why being a follower has advantages. It may be less costly, you may avoid the errors involved in innovation, you follow rather than lead the market, and you have the chance to copy successful approaches.

10. How does the stakeholder model help support the practice of sustainable business?

Stakeholder theory forces a business to address underlying values and principles. It “pushes managers to be clear about how they want to do business, what kind of relationships they want and need to create with their stakeholders to deliver on their purpose.” Stakeholder theory also gives all stakeholders a voice and suggests that the tensions among them can be balanced. Profit is then a result of value creation rather than the primary driver in the process, and business becomes a network of relationships in the larger social context and the responsibilities that develop from them.

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globalEDGE “Global Insights” is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > “country of choice”), each country’s profile page will be displayed individually from where “Statistics” page of countries can be accessed on the left column menu.

Indicators such as the oil and natural gas production, consumption, and proved reserves, as well as population of countries and international trade volumes of energy items can be used for discussions.

Search Phrase: by country Resource Name: Global Insights by Country Resource Link: https://globaledge.msu.edu/countries/austria/statistics Exercise 2 Japan for Sustainability (JFS) website can be found using the search term “sustainability in Japan” at http://globaledge.msu.edu/Reference-Desk. This resource is found under the globalEDGE categories of “Japan” and “Social Responsibility”.

Search Phrase: Sustainability in Japan Resource Name: Japan for Sustainability (JFS) Resource Link: http://globaledge.msu.edu/global-resources/resource/851 globalEDGE Categories: “Japan” and “Social Responsibility” MiniCase: The BlueGreen Alliance: A New Way of Sustainability Thinking BlueGreen Alliance is a growing collaboration of U.S. unions and environmental organizations that have collaborated to work on environmental and employment problems that are directly linked. They aim to build a cleaner and fairer economy.

1. Is the BlueGreen Alliance a partnership of convenience, or does it have the potential to build a new way of approaching sustainability, with limits, interdependence, and equity?

BlueGreen Alliance is not a partnership of convenience, since, at least initially, they were opposed on many issues. Yet they did find common ground, and focusing on that, grew.

Certainly, it is a collaboration that has educated many in all organizations. And it may help all to see that recognizing limits, interdependence, and equity is good for all. This is an opinion question, yet the possibility of a new way of thinking has been begun.

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2. Unions may prefer protectionist measures to preserve jobs. Do you think this policy can fit a sustainable approach? Why or why not?

A protectionist approach, favoring domestic producers over foreign producers does not initially seem to involve equity or interdependence. So one approach to this opinion question would be to point that out and conclude that a protectionist approach is not compatible with a sustainable approach. One might also argue that support of local jobs that may involve protectionism would be a way to set limits and insure that equity at the local level exists. What matters in the answer to this question is a recognition that a sustainable approach involves limits, interdependence, and equity.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions We recommend these videos be assigned for viewing outside of class. To motivate students, they could be included on quizzes or in other assessments, or thoughtful answers to in-class discussion questions on the videos could be awarded bonus points.

Use the PBS video ―The Lexicon of Sustainability‖ as an introduction. This is more effective as an out-of-class activity to be discussed in class. Video is available at www.pbs.org/video/lexicon-sustainability-what-lexicon-sustainability.

Have students explore ―How Geography and Climate Shaped Early Greek Life‖ and discuss in class, exploring the role of trade. Video is available at http://study.com/academy/lesson/howgeography-climate-shaped-early-greek-life.html. ―Filling the Fossil Fuel Gap‖ offers a good introduction to the fossil fuel crisis. See www.discovery.com/tv-shows/other-shows/videos/powering-the-future-filling-the-fossil-fuelgap.

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for hybrid and online courses.

1. Sustainability Sustainability and green business have become increasingly important issues globally at the same time that these concepts have been popularized and adopted by popular culture. Assign small teams (five students) to explore in discussion whether the popularization of environmentally friendly, sustainable, green ideas contributes to the growth of sustainability, substitutes marketing for sustainability, or has no effect on it whatsoever. In face-to-face classes, this exercise may be an outside assignment with report backs of 3 min in class. In online classes, the discussion can take place in chat rooms, if available, and then the report backs could be shared summaries from each group, posted for classmates‘ comments and evaluations.

2. Geography Hand out a copy of a European, South American, or Asian map showing only the country geographic borders to small teams (five or fewer students). The task is to fill in country and capital names on the map, as though it were a quiz. This is a good way to begin a face-to-face class or to use those last few minutes well. The point of this exercise in a face-to-face class is to assess geographic knowledge and then to discuss how to improve it. This exercise could be used

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online as a drag and drop exercise. Or it could be done via video chat with one map and the instructor coordinating the labeling.

3. Renewable Energy Assign small teams (five or fewer) to research the growth of sustainable business in the renewable energy sector of specific countries. Choose several countries from advanced, moderately developed, and less developed groups. Once the teams have done their basic research, ask them to coordinate with the other teams that have been researching countries with similar level economies to see if these are similarities in their findings. The smaller teams then report their findings in 5-min mini presentations to the class, if face-to-face. If online or hybrid, the reports are shared though postings and class members are asked to reflect on the findings in a one-page comment.

Supplemental Activities 1. Porter’s Diamond Model Applied to Geography Ask teams (five or fewer) to distinguish between basic factors, those a country inherits (mountains, no natural resources, etc.) and advanced factors, those a country can mold (labor, infrastructure) for a specific, assigned country. Teams report back so the class can learn from their shared work.

Explain or review for students Porter‘s theory of Competitive Advantage (Porter‘s Diamond) Summary follows.

Michael Porter presents four ways a country‘s economic environment affects its competitive position, and its geography is tied to each: 

demand conditions



factor conditions



related and supporting industries



firm strategy, structure, and rivalry

Teaching Suggestions 1. Environmental sustainability is an area for which some students have great passion. This emotional response can be explored in discussion and connected to the same issues beyond personal consumption, on local, regional, and global levels.

2. Many of our students took their last geography course in junior high school. We have to begin where they are. Thus, the text uses ample maps.

3. Student interest is aroused when we show them geography‘s influence on the other external forces. A discussion of the effects of geography on the Swiss economy might be a good way to begin discussion of this chapter. (Mountainous and landlocked, Switzerland has developed high value, high density, and low value exports such as chocolate, cheese, and watches to address the constraints of its natural endowment.)

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4. Initiate a discussion to illustrate the importance of monitoring developments in natural resources in different parts of the world. Present this statement in class: ―International businesspeople, unless they are in the business of refining minerals or petroleum, have no need to concern themselves with world developments in natural resources.‖ After a discussion around this faulty assertion that focuses on how natural resources affect business, you might explore the strategic issues presented by rare earths, with China‘s control of them.

5. The Critical Thinking Questions at the end of the module will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collect assignments at random and assign a grade; (2) occasionally give some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) have students hand in assignments and give credit for work submitted; and (4) call on students at random to answer specific questions (giving a small number of points for correct answers or counting this as part of participation).

6. Invite a colleague from the geography department to talk to your class on the subject of geography‘s influencing trade and economic development. Or locate a local marketing executive to share with your class their experiences of having worked in countries such as Colombia, China, Brazil, Spain, Switzerland, or countries with deserts in the Middle East. They will be able to share a number of interesting experiences based on the country‘s geography.

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Learning Objective(s)

AACSB Accreditation Tagging

Environme ntal Sustain ability

040 1

Analy ti c a l T h i n k i n g

Und e r s t a n d / A p p l y

Sustainability: Mark's Decision

Case A na lys is

Environme ntal Sustain ability

040 2 ; 0 4 0 4 ; 0 4 0 5

Analy ti c a l T h i n k i n g

Appl y

Characteristics of Environm entally Sustainabl e Business

Click an d Dr ag

Sustainabili ty in the Busines s Contex

040 1 ; 0 4

Analy ti c a l T

Rem e m b e r

Title

The Interesting Influence of Geographical Features

Assignment Type

Click an d Dr ag

Topic(s)

Bloom’s Taxonomy

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Instructor Guide to Module 5 t

Measuring Environm ental Sustainabi lity

Click an d Dr ag

Sustainabili ty in the Busines s Contex t

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h i n k i n g / R e fl e c ti v e T h i n k i n g Analy ti c a l T h i n k i n g / R e fl e c ti v e

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/ U n d e r s t a n d

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Instructor Guide to Module 5

T h i n k i n g

VW Says It’s Going FullSteam Ahead on Electric Models

Video Ca se

Sustainabili ty in the Busines s Contex t

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Instructor Guide to Module 5

o g y

Connect Activities 1. The Interesting Influence of Geographical Features Activity Summary: This click and drag activity lists this five different locations and asks students to match specific geographical characteristics to those locations.

Activity Summary: For an in-class assignment, divide the class into small groups and have them do the assignment as a team. Monitor the team discussions to help fill in any background information as needed. Or have students do this individually and then in class discuss any choices that were confusing and why.

2. Sustainability: Mark’s Decision Activity Summary: This case analysis describes a business owner who is considering adding a wind turbine to generate electricity. Students are then asked to analyze the case from the point of view of the stakeholder model.

How to Use Activity: For an in-class assignment, have student teams prepare a brief analysis using the stakeholder model and have each team give a 5-min presentation to the entire class.

For online classes, make this a written assignment for each student.

3. Characteristics of Environmentally Sustainable Business Activity Summary: In this click and drag activity, students choose from a list of three terms and match them to statements about environmental sustainability.

How to Use Activity: This can be assigned as an online activity for both live and online classes.

Do this in class in small groups, discuss anything that was unclear, and then use this to lead into a broader class discussion on the topic.

4. Measuring Environmental Sustainability Activity Summary: In this click and drag activity, students are asked to match the tools for measuring environmental sustainability with the description.

How to Use Activity: Have students complete this assignment individually at home or in small groups in class. Then in class ask small groups to design a tool for measuring environmental sustainability. How likely would governments adopt such a tool?

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Instructor Guide to Module 5 5. VW Says It’s Going Full-Steam Ahead on Electric Models

Activity Summary: This is a video case that interviews Juergen Stackmann from Volkswagen about the company’s goals to shift to electric cars. After watching the video, students then answer one or more multiple-choice questions about Volkswagen’s electric plans.

How to Use Activity: This can be done individually for both internet courses and face-to-face courses. In face-to-face classes, have students do this before class and then discuss issues about VW’s electric plans in class. You can ask students why people might like to buy or not to buy electric cars. Then ask them whether the reasons they give would be the same or different in other countries.

Module 5: Political Forces That Affect Global Trade Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers Global Debate IB in Practice Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues Term Paper or Project Topics Teaching Suggestions 05-116

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Instructor Guide to Module 5 Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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Instructor Guide to Module 5

Your Content Summary This module looks at political forces that may affect international business. It discusses government ownership of business and reasons for both nationalization and privatization. The value of government stability is presented, including the importance of private business receiving protection by the government. Country risk assessment is then presented with an example from The Economist in Figure 5.3. The chapter concludes with a discussion on trade. This includes a presentation of some details about various tariff and nontariff barriers with arguments both in favor and against these policies.

Learning Objectives LO 5-1

Describe the goals of nationalizing and privatizing business.

LO 5-2

Explain government protection and stability and their importance to business.

LO 5-3

Describe the role of country risk assessment in international business.

LO 5-4

Explain the political motivations for government intervention in trade and the major types of government trade restrictions.

Key Terms and Definitions ad valorem duty (p. 150)

compound duty (p. 150)

An import duty levied as a percentage of the invoice value of imported goods A combination of specific and ad valorem duties

countervailing duties (p. 150)

Additional import taxes levied on imports that have benefited from export subsidies

country risk assessment (CRA) (p. 142)

An assessment of a country‘s economic situation and politics to determine how much risk to employees, property, and investment exists for the firm doing business there

cybercrime (p. 141)

Any illegal internet-mediated activity that takes place in electronic networks

dumping (p. 148)

Selling a product abroad for less than the cost of production, less than the price in the home market, or less than the price to third-party countries

instability (p. 136)

Characteristic of a government that cannot maintain itself in power or that makes sudden, unpredictable, or radical 05-118

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Instructor Guide to Module 5 policy changes nationalization (p. 134)

The taking of private property by a government to make it public

nontariff barriers (NTBs) (p.

152)

All forms of discrimination against imports other than import duties

orderly marketing arrangements (p. 153)

Formal agreements countries

privatization (p. 135)

The selling of government-owned property to the private sector

quotas (p. 152)

Numerical limits placed on specific classes of imports

specific duty (p. 150)

A fixed sum levied on a physical unit of an imported good

stability (p. 136)

Characteristic of a government that maintains itself in power and whose fiscal, monetary, and political policies are predictable and not subject to sudden, radical changes

subsidies (p. 149)

Financial contributions, provided directly or indirectly by a government, that confer a benefit, including grants, preferential tax treatment, and government assumption of normal business expenses

tariffs (p. 150)

Taxes on imported goods for the purpose of raising their price to reduce competition for local producers or stimulate local production

terrorism (p. 138)

Unlawful acts of violence committed for a wide variety of reasons

variable levy (p. 150)

An import duty set at the difference between world market prices and local government-supported prices

voluntary export restraints (VERs) (p. 152)

Export quotas imposed by the exporting nation

between

exporting and

importing

Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

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LO 5-1 Describe the goals of nationalizing and privatizing business. 

Key Terms:

Governments and the Ownership of Business o Nationalization: Why Governments Get Involved



nationalization



privatization

o Privatization: Why Governments Sell Businesses XXXVI.

Governments and the Ownership of Business A. Most types of government own businesses, not only those with socialist-leaning or centralized economies, or Communist ones.

B. U.S. government owns Export–Import Bank Farm Credit Bureau, Tennessee Valley Authority, St. Lawrence Seaway, Gallaudet Univ., and so on.

C. Nationalization: Why Governments Get Involved 1. Motivations are varied.

2. Belief that government can better manage businesses that provide public goods—health care, education, and national defense.

3. Nationalization is motivated by belief that government can manage a public good or necessity better than can the private, profit-driven sector. a. Extract more money from business for the public good. b. Increase profitability. c. Enact political goals (the United States with AIG and GM).

D. Privatization: Why Governments Sell Businesses 1. To gain more efficiency in business operations.

2. To raise money (British Royal Mail, defense sectors).

3. Change in political climate/philosophy (Chile).

4. Outsourcing trend similar to privatization, although government retains equity. (the United States, UK).

5. Major privatizers include the United States, UK, China, Chile, Brazil, and Angola.

LO 5-2 Explain government protection and stability and their importance Key Terms: to business.  stability  Government Stability and Protection  instability  Stability: Issues With Lack of Peace and Predictability  terrorism  Protection From Unfair Competition  cybercrime  Protection From Terrorism, Cybercrime, and Other Threats 05-120

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LO 5-3 Describe the role of country risk assessment in international Key Terms: business.  country risk assessment (CRA)  Country Risk Assessment and Countermeasures to Threats XXXVII.

Government Stability and Protection 1. Business prospers when there is a stable government with policies that do not change or change slowly.

2. A stable government can maintain itself in power and hold to predictable fiscal, monetary, and political policies.

3. Embassies and consular offices are how a country helps protect its citizen when abroad.

They can help with: a. Information about political risks. b. Monitor nationals imprisoned abroad. c. File protests to the foreign government on behalf of its citizens.

NNNNN.

Stability: Issues With Lack of Peace and Predictability

1. Unstable governments can present challenges to business that range from inability to ensure peace to a pattern of unpredictable changes.

2. Unexpected changes sometimes come because of government guidelines that have a wide latitude in their interpretation and are inconsistently applied.

OOOOO.

Protection From Unfair Competition

1. Governments tend to protect the economic interests of their citizens over those of foreigners.

2. Unfair international competition is minimized through national laws, negotiations between governments, and efforts of institutions such as the World Trade Organization.

PPPPP.

Protection From Terrorism, Cybercrime, and Other Threats

1. Terrorism: unlawful acts of violence committed to achieve a variety of objectives. a. Includes airplane hijackings, suicide missions, assassinations, kidnappings, and bombings. b. Several organizations rank countries by their level of terrorism risk.

2. Kidnapping: often targets international managers as well as tourists. a. An estimated 80% of kidnappings are not reported to government authorities. b. Ransoms are often used as a source of funding for terrorist organizations. c. Many governments and aid organizations claim not to pay ransoms because in the long term it only encourages further kidnapping and pays for terrorism.

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Instructor Guide to Module 5 3. Piracy: hijacking and kidnapping on the seas.

a. This continues to be a concern mainly in Africa and Asia but has recently increased in Latin America and the Caribbean. b. Many ships have installed defensive hardening including razor wire, electric fences, and high-pressure water hoses.

4. Cybercrime: any illegal internet-mediated activity that takes place in electronic networks. a. Because cybercrime is borderless, no one government or legal system can control it. b. Companies‘ expanded use of mobile devices and cloud storage increases their vulnerability to cybercrime. c. Preventative measures include firewalls, antivirus programs, monitoring, testing, and behavioral countermeasures.

XXXVIII.

Country Risk Assessment and Countermeasures to Threats QQQQQ. Country risk assessment (CRA) assesses: 1. Economic and political dimensions.

2. Role of home country.

3. Time required for investment and nature of business. a. Green key operation versus extraction sector business. b. Kidnap, ransom, and extortion (KRE) insurance. c. See Figure 5.3.

RRRRR.

Available countermeasures include:

1. Know country and region so risk assessment is realistic.

2. Outsourced skills as needed to cope with crisis.

3. Train for daily living skills (evasive driving, avoidance of routine, hardened cars).

LO 5-4 Explain the political motivations for government intervention in Key Terms: trade and the major types of government trade restrictions.  dumping  Government Intervention in Trade  subsidies  Reasons for Restricting Trade  countervailing duties o Provide for National Defense  tariffs o Impose Sanctions  ad valorem duty o Protect an Infant or Dying Industry  specific duty o Protect Domestic Jobs  compound duty 05-122

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Instructor Guide to Module 5 o Ensure Fair Competition



variable levy

o Retaliate



nontariff barriers (NTBs)



quotas



voluntary export restraints (VERs)



orderly marketing arrangements



Tariff Barriers



Nontariff Barriers o Quantitative Barriers o Voluntary Export Restraints o Nonquantitative Nontariff Barriers

XXXIX.

Government Intervention in Trade SSSSS.

Cost of goods increases, born by consumer usually.

TTTTT.

Trade flows and economic efficiency are reduced.

90. This is the case with agricultural tariffs, which are common, in order to protect domestic farmers. d. The United States 4.9%, EU 12.7%, Mexico 45%, Switzerland 47.6%, Norway 133.6%.

91. WTO goals hampered by agricultural trade barriers.

XL.

Reasons for Restricting Trade UUUUU.

Provide for National Defense

92. Protect industries vital to security.

93. Arguments weak (economists say) and call on patriotism to gain emotional advantage.

VVVVV.

Impose Sanctions

94. Goal to inflict economic damage, punish, or encourage change of behavior.

95. Sanctions seldom achieve goal of forcing change and create collateral damage.

96. Sanctions give the market to international competitors.

WWWWW.

Protect an Infant or Dying Industry

97. Give infant industries a chance to grow and build comparative advantage.

98. Slow down impacts on labor of a dying industry—time for retraining, movement of capital into other sectors.

XXXXX.

Protect Domestic Jobs

99. Cheap foreign labor argument is misleading, since labor only a portion of cost, and wages only a portion of labor. Also productivity levels are relevant.

100. Labor–cost component not a function of only wage rates. Mexican productivity rates (GDP per hour) is $ 20.50; the United States is $69.60.

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Instructor Guide to Module 5 YYYYY.

Ensure Fair Competition

101. Import duty to bring costs of imports up to cost of domestic goods.

102. Unfair advantage (technology, lower tax rates, lower labor costs).

103. Protects least efficient domestic producer; creates windfall profits for efficient producers; increases costs to consumers.

ZZZZZ.

Retaliate

104. Sought by producers from government to respond to tariffs they face abroad.

105. For example, the United States response to EU ban on hormone-treated beef.

106. Response to dumping (predatory, social, environmental).

107. Response to subsidies (such as those received by U.S. sugar producers).

XLI.

Tariff Barriers AAAAAA. Import duties levied to raise the selling price of imports to reduce competition for domestic producers.

BBBBBB.

Smoot Hawley Tariff Act in United States contributed to depression.

CCCCCC.

Three types:

108. Ad valorem duty—percentage of invoice (the United States 6% on flavor extract imports).

109. Specific duty—fixed sum for specific units.

110. Compound duty—combination of ad valorem and specific duties.

111. Variable levy used to guarantee import and domestic products‘ prices match.

112. Nuisance tariffs have low rates but administrative challenges (French review of Japanese VCRs in Poitiers).

XLII.

Nontariff Barriers DDDDDD.

All discrimination against imports other than import duties.

EEEEEE.

Quantitative nontariff barriers—Quota or numerical limit.

113. Voluntary Export Restraint (VER)—quota imposed by exporting government.

114. Orderly marketing arrangements—formalized VER. FFFFFF.

Nonquantitative nontariff barriers:

115. Direct government participation in trade.

116. Customs and other administrative procedures.

117. Standards.

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Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice: Raising Barriers to Foreign Firms: The United States Threatens a Ban on China‟s TikTok The United States and China have had a rocky relationship in the past decade regarding technology advancements, especially with online services. Strict Chinese cybersecurity regulations, including censorship rules have made it difficult for American firms such as Google, Facebook, and Twitter to compete successfully in China. These restrictions have helped Chinese firms such as WeChat and TikTok to flourish. The U.S. government became concerned that the Chinese government could access and leverage information about U.S. citizens, and so in 2020 President Trump launched executive orders against WeChat and TikTok. In response, TikTok negotiated a deal that gave Walmart and Oracle a combined 20% ownership in a new company to serve the U.S. market.

Online and Hybrid: Questions may be assigned to be prepared and submitted by teams.

Face-to-face: Students are assigned to prepare responses to the questions in teams, either for discussion submission or for presentation in class by calling on a team to respond.

1. Do you agree that it is appropriate for the U.S. government to ban a foreign-owned application like TikTok from operating in the United States unless it sold its operations to a U.S.-based company? Why or why not?

Some students will feel that the actions were appropriate because they were a response to Chinese actions that favored their own companies over U.S. firms. Others will raise concerns about what the Chinese government would do with direct access to all of the social media from Americans that could one day hold key positions in government or corporations. Creating a separate U.S.-based company could reduce that threat. But other students may feel that the executive order went too far and that requiring an online firm to be based in the United States is not only against free trade, it would not solve the problem of Chinese access to the information.

2. Since certain Chinese tech companies, such as ByteDance and Tencent, flourished in their domestic market as a result of bans or restrictions on foreign tech companies operating there, how could a similar outcome result in the United States if TikTok was banned?

Most students will point to the reduced competition for Facebook, Twitter, and Instagram and how their services would grow to fill in the gap left by TikTok and WeChat. Others may question how successful a ban could be if these are services offered over the internet that can be accessed from anywhere in the world.

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Global Debate: Sugar Subsidies: Sweet for Producers but Sour for Food Manufacturers and Consumers?

Sugar is the most trade-distorted commodity on the world market. Both the EU and the United States protect their domestic sugar producers. In the United States, the protection amounts to a subsidy of $1.5 million per year for every protected job. Businesses reliant on sugar have been leaving the United States able to access their sugar supply at world prices, which is not permitted in the protected U.S. markets.

Online and Hybrid: Questions may be assigned to be prepared and submitted by teams. Stringent feedback will help to make these actual team exercises.

Face-to-face: Students are assigned to prepare responses to the questions in teams, either for discussion submission (Blackboard) or for presentation in class by calling on a team to respond.

1. Should sugar continue to be a protected commodity? Why or why not?

This question‘s response rests on the cogency of the argument. U.S. consumers pay usually more than twice the world market price for their sugar, and thus, higher prices for sugar-intense goods.

Free markets would be more in line with the U.S. cultural values. Sugar farmers are a small part of the agricultural sector and would take the hit and be forced to adjust to worldwide efficiencies or find something else to farm.

The protection for sugar is political and has been a part of U.S. trade policy since 1789. So it is an entrenched practice. For this practice, sugar users have been paying. There would be an adjustment required were the United States to move to the global market, and that may have a political price that politicians, who influence the trade policy, may not be willing to pay.

2. Should the U.S. consumer continue to fund protection for U.S. sugar farmers? Why or why not?

Most responses to this question may well lead toward nonprotection, because such trade distortions are funded by consumers, they protect the U.S. farmers‘ inefficient operations, and they increase business costs. All of the standard arguments for protection could support an argument that U.S. sugar farmers should be protected.

IB in Practice: Trade as a Political Weapon: Sanctions for Russia‟s Annexation of Crimea The major international response to Russia‘s 2014 occupation of Crimea was to use trade sanctions. For example, the United States froze the assets of specific companies and banned high-technology trade with Russia. In addition, individuals close to President Putin were targeted through travel bands and seizure of their assets. FDI into Russia declined and Russian citizens had to pay more for imported goods that were available. Yet the sanctions seemed to only increase support for the Kremlin among Russians.

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discussion submission or for presentation in class by calling on a team to respond.

1. Were punitive sanctions against Russia an appropriate response? Did they accomplish what was hoped for? Why or why not?

One way to look at this is the outcome, which seemed to only make the Russian people more supported of such aggressive actions. Therefore, some students might suggest that a military response should have been considered to make sure the Russian people would disapprove of Putin‘s invasion. Others might respond that any military action could have spilled over into other arenas with dire consequences for the West. Trade action can clearly signal the West‘s displeasure with the invasion without risking an escalating war.

2. What ―carrots‖ might have been used in response to Russia’s actions regarding Crimea?

How might the outcomes have been different if this approach had been attempted?

Combined with the threat of lost trade, the West could have offered preferential long-term contracts for oil and gas products from Russia in exchange for withdrawal from Crimea. If the ―carrot‖ is made lucrative enough, then Russian leadership might be enticed to take the ―carrot‖ in exchange for returning Crimea to Ukraine.

Get That Job! From Backpack to Briefcase: Angela Schmitz: Develop Experience by Traveling and Working Abroad Angela Schmitz spent a summer working in an AIESEC exchange where she spent 8 weeks working for Acción Humana in Guatemala. She did graphic design tasks including website management and creating flyers and posters. She also taught classes in English. The cultural differences in the work culture were challenging to her. She worked in a room next to her boss‘s home and was sometimes asked to watch her boss‘s baby. Meetings started hours after the stated time, and she struggled speaking Spanish. But she gained skills in communication, project planning, and completing successful work in a very difficult environment. This led to her landing other internships and jobs in her career.

Online and Hybrid: Questions may be assigned to be prepared and submitted on an individual basis.

Face-to-Face: Students are assigned to prepare responses to the questions individually. This is a self-development/career development exercise, so no need to share. Discussion would be helpful.

1. If you have had cross-cultural experiences, have you encountered challenges similar to Angela Schmitz? How have you addressed them? Or, if you have not faced this situation, how do you anticipate that you would address them?

This question asks for self-reflection, so answers will differ. Students may apply what they have learned about culture here.

2. Would you consider an international internship, traineeship, or volunteer position to build your global mindset? Share your strategy for developing your international management skills.

Most students will have begun to think through these questions and will be able to share their developing strategy. For those who have not begun this process, this question can serve to 05-127

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motivate them. Discussion in class can be helpful, since, for many students not raised in an internationally minded environment, such a first step can be challenging.

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End of Module Exercises Critical Thinking Questions 1. Why might a government-owned firm have an unfair advantage over privately owned companies?

A government owned firm may have advantages over private firms in the areas of government support, taxes, reduced costs of inputs, and subsidies, all of which could lead to lower costs.

Also, government-owned firms may have government-legislated monopolies. They also may have preferential treatment by the government.

2. Why do countries that are committed to open market and capitalism have publicly owned enterprises?

One reason is to provide citizens access and control over basic services, such as health care and education. Government ownership can also provide reliable services such as national defense, protection against corruption, and placement of social goals ahead of profit. These are all reasons that virtually every government has some ownership of business.

3. When they accept foreign assignments, how can expatriates prepare for risks associated with such an assignment?

There are several approaches an expats can take to prepare for the risk involved in their foreign assignment. First step is to know the country well. Know where you are unlikely to be safe.

Understand the major issues, the hot-button issues. Second, learn the language, at least to some degree. Third, get professional training for safety. Fourth, use common sense. Do not, for example, dress like an American (U.S.-brand sports shoes, baseball cap, etc.) in public. Use all the resources available (embassy, local expat network) to learn about how to be safe.

4. If you were responsible for developing your company’s international strategy, what role would country risk assessment play?

Country risk assessment would be an important early criterion in the development of any international strategy. Depending on the time horizon of the investment and its basic nature. The financing of exports would be the least risky venture, whereas something in the extraction sector would be more risky, given its capital intense operations and longer time horizon. CRA would be central to any choice of location. I would use information from many sources to assess CRA, including commercial companies that focus on CRA. 5. Although different countries have different levels of risks, how could there be benefits from conducting business in or with a high-risk country, and how could there be drawbacks from conducting business in or with a low-risk country?

Higher risks means that many firms will not participate in that market. That leaves less competition for those that do, and that can mean higher profits. Low-risk countries, like the United States, often attached many firms, which increases competition. This increased competition may reduce potential profits.

6. Why could carrying cheese as you drive across the border from the United States into Canada be risky behavior?

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high tariffs. If you were to not declare the cheese and be found out, you could face fines and its confiscation. The protection is a NAFTA carve-out.

7. It seems that free, unrestricted international trade, in which each nation produces and exports products for which it has a comparative advantage, will enable everyone to have a higher level of living. Why, then, does every country have import restrictions?

This seems a contradiction. Almost all nations belong to the World Trade Organization and have committed to moving toward free trade. Yet the reality suggests that each nation would prefer to be the last to embrace free trade. Each wants to benefit from protection for as long as is possible, despite the benefits of free trade to citizen consumers. The political influence of those arguing for trade restrictions is inordinately strong. In the United States, the agricultural lobby is, for example, small, targeted, focused, and quite effective. Such groups may include labor unions and local communities fighting to keep a plant open to avoid losing jobs, an industry trade association arguing that its members produce a product necessary for national defense. It is important that we, as future international business leaders, understand the damage trade restrictions cause long-term and attempt to minimize the short-term damage and pain international trade can cause through job loss.

8. A protectionist argument for the defense industries suggests that since we need them, we must protect them from import competition by placing restrictions on competitive imports.

Is there an alternative to trade restrictions that might make more economic sense to consider in this case?

One alternative is to use government subsidies to the specific industries instead of using trade barriers. That route would avoid the harm caused by trade barriers (including increased costs to consumers, decreased efficiency in the protected sector) and still support an industry deemed necessary.

9. Governments assert that their safety standards for food imports are important to ensure that their citizens not be harmed by unsafe foods. Comment on how such a concern may be a nontariff barrier.

Standards for food imports are a nontariff barrier because they operate to protect domestic producers. One example is with prescription drugs. Yes, safety is involved. Drug imports from Canada are also prohibited. This protects U.S. retail pricing, which is considerably higher, an example of a nontariff barrier.

10. Almost all governments are on guard against dumping. Why would a government be opposed to its citizens or businesses being able to obtain products at lower costs?

Dumping is a competitive pricing strategy that may attempt to take market share away from domestic producers and other competition. Yes, it may be better for consumers short term in that prices would be lower. But it could well drive domestic producers out of business, reduce competition, and then consumers would be left with a market that has little competition. One example is the Chinese dumping of solar panels in the United States, which has driven several domestic producers out of the market.

11. A union leader in the auto industry argued, ―Workers are paid $20 an hour in the United States but only $4 in Taiwan. Of course we can’t compete. We need to protect our 05-130

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jobs from cheap foreign labor.‖ What are some possible problems with this statement?

Wage costs are only a fraction of labor costs, and labor costs are only part of the overall cost of production. This argument does not take into account marginal tax rates, worker productivity, and transportation cost—the actual amount of the wage cost that is actually labor.

12. There are two general classifications of a nation’s import duties: tariff and nontariff barriers. Which would be more difficult for a business in consumer products to factor into its export pricing?

Nontariff barriers are more difficult to assess, and the nonquantitative barriers such as standards and customs procedures the most difficult of all because they may be not easily predicted and may be based on an individual agent‘s judgment. One example is the USDA requirement that school lunches have American-produced food. Another is the French customs processing point for Japanese-imported VCRs in Poitiers. globalEDGE Research Task Exercise 1 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > ―country of choice‖), each country‘s profile page will be displayed individually from where ―Risk‖ page of countries can be accessed on the left column menu.

Search Phrase: by country Resource Name: Global Insights by Country Resource Link: https://globaledge.msu.edu/countries/argentina/risk Exercise 2 Market Potential Index (MPI) is available under the ―Tools and Data‖ tab on the top menu. The rankings can be accessed by clicking on the ―View MPI Table‖ button on the page. The indicators (measures) used are listed both on this pop-up table and on the main MPI landing page.

Search Phrase: Market Potential Index Resource Name: Market Potential Index Resource Link: https://globaledge.msu.edu/mpi MiniCase: Chocolate: Is Your Treat the Result of Unfair Labor and the Exploitation of Child Labor?

Most of the world‘s chocolate comes from Côte d‘Ivoire and Ghana, both of which have plantations that employ children who are not free to leave, may not attend school, and are not protected during dangerous labor such as the application of pesticides. The Côte d‘Ivoire also is 05-131

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described as having active child slavery, as a result of human trafficking. Because chocolate beans are combined from various West African nations during export to developed nations where they are processed, most commercial products use cocoa/chocolate from them.

1. Should labor practices in another country be a relevant consideration in international trade? Why or why not?

This question offers an opportunity for students to reason through the ethical issues and the business realities of child labor. One approach is to position the late economist Friedman‘s position on social responsibility of business (the fiduciary responsibility to shareholders to achieve the best possible business results within a legal framework) against a broader notion of the social responsibility of business, such as the stakeholder theory.

From a pragmatic view, the internet and increased monitoring of corporate activities by watchdog groups, including the UN suggests that consumers may demand greater levels of social responsibility. Rather than face boycotts, trade sanctions, and certification requirements, businesses may want to meet consumer expectations for social responsibility before such responsibility becomes legislated.

2. With regard to trade products such as cocoa, what options are available to governments, businesses, and consumers for dealing with practices such as child labor or slave labor in other countries? What are the implications associated with each of these options?

Governments can establish trade boycotts and certification requirements. These approaches carry compliance costs to the business and slow down or constrain the movement of supplies. They could also increase the cost of the raw materials.

Businesses can self-regulate, and this approach could create a win-win situation. The child labor situation could be addressed over time, to include child education and training. Product costs would increase, but consumers are willing to pay these costs.

Consumers can show their support for humane work conditions through fair trade organizations and their own shopping and consumption patterns.

3. How would international trade theorists view the Fair Trade movement?

The Fair Trade movement could be understood as an international subsidy to farmers from their consumers. The subsidy depends on the farmers‘ following certain social, environmental, and labor practices.

Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available at http://bit.ly/MHEIBVideo. The Political Economy of International Trade and Investment board is 05-132

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Instructor Guide to Module 5 rich and varied and is updated monthly.

Watch target pulling out of Canada, as reported https://uk.news.yahoo.com/video/target-pulling-canada-155725318.html.

by

BBC

at

USA Today‘s video reviewing the trade and political relationship between the United States and Cuba, ―The U.S. and Cuba: Trade, Politics and the People,‖ can be seen at http://www.usatoday.com/videos/news/politics/2015/06/14/71208250.

Team Exercises 1. Country Risk Exercise In small teams (up to five members), ask students to prepare a country risk assessment or a regional risk assessment for an assigned area or country and, then, evaluate the prospects for foreign direct investment. This assignment is best done outside of class to allow for research, with report backs in class, short presentations such as 5-min executive summaries, so that students can learn from one another‘s work. The purpose of the assignment is to get students thinking in specific terms of all the variables that go into risk assessment.

In a hybrid or online class, student teams can share their reports on discussion board or other collaboration software.

Information from these reports can be used in a quiz to prompt student focus.

2. Team Research on Nationalization Assign small student teams the task of researching examples of nationalization, both with and without compensation, including the benefits the nationalizing government sought and the actual outcomes. If the format is face-to-face, report backs can be shared in class. In online and hybrid courses, a collaboration tool can be used to share findings.

3. Research on the Effect of Lobbying on Government Trade Positions Public advocacy organizations influence the actions of governments in their positions on trade through lobbying and campaign contributions. Ask small teams to present an analysis of the influence one of these powerful organizations exerts on trade, in the form of a 5-min presentation. You can assign the organizations to reflect current political trade issues. They might include the U.S. Chamber of Commerce, energy companies such as DuPont and Exxon, the American Bankers Association, Monsanto, the American Sugar Alliance, ADM, and agricultural lobbyists. This assignment can be modified to take into account the collaboration software available in all of the course formats.

Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around 05-133

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$3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Ivey Cases ―Solartron C‖ focuses on expatriate adjustment in Africa. The company has a government development contract and is having trouble with its engineers. Underlying the case is the issue of the governmental relations between donor and recipient. ―Harley Davidson India‖ is a market entry case and addresses political issues. ―Huawei Enters the United States‖ follows Huawei‘s entry into the United States, including the political challenges this Chinese company faces.

Controversial Issues 1. Country Risk Assessment After a discussion of CRA, based on the readings, ask students to discuss which types of business would be most and least vulnerable to political risk.

Here is a brief outline of one possible approach to this discussion question, one that would work well as an in-class team assignment.

Most Vulnerable 

General Reasons: long-term nature, high capital investment, high-profile, strategic nature of industry, high work force involvement.



Activities: mines, oil fields, oil refineries, heavy equipment manufacturers, automobile manufacturers.

Least Vulnerable 

General Reasons: short-term nature, low capital investment, low-profile, nonstrategic industry, low work force involvement.



Activities: banks, cosmetic manufacturers, personal hygiene products manufacturers, hotels.

High Profile 

Employ nationals, operate under a local name.

2. Relations With Cuba Diplomatic relations with Cuba have recently been reestablished and U.S. sanctions placed on this island nation presently are under review. Discussion of the Cuban sanctions, including their effectiveness, can support student understanding of how sanctions operate and who pays for them.

To some degree, sanctions were effective in meeting the political needs of lobbying efforts launched by Cubans who emigrated to the United States. But overall, their costs have been paid

by U.S. businesses and their stockholders, since Cuban consumers received exports from other 05-134

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nations. If the agenda was to encourage a change in government in Cuba, that has not been effective at all. Usually, sanctions impose costs both of the sanctioning country and the one sanctioned.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 1. Rather than a term paper on a specific module, we recommend that a term paper on a country, perhaps in the form of a market-entry assignment, would be more effective, since it would integrate all of the modules.

2. Review of nationalizations effected during the last 10 years and their impact and assessment.

3. Review of sanctions and their effectiveness.

4. Collection and comparison of examples of government stability and instability within the same level of development.

5. Exploration of some of the ways defenses against terrorism have impacted businesses.

Teaching Suggestions 1. This chapter is very important to students‘ understanding of the political forces that affect businesses. Most instructors will stress the chapter content in lectures by using the ―Lecture Outline and Notes.‖ 2. We encourage a review of current events and application of the module‘s topics at the beginning of class. Venezuela and Bolivia are good sources of current event topics on material in this module.

3. The Critical Thinking Questions at the end of the module will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collect assignments at random and assign a grade; (2) occasionally give some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) have students hand in assignments and give credit for work submitted; and (4) call on students at random to answer specific questions (giving a small number of points for correct answers or counting this as part of participation).

4. Guest lecturers could include political science, economics, and history professors who work in the area of economic thought. Managers from local businesses that have been affected by trade tariffs and sanctions may also be interesting sources of the inside story for students. Talk with 05-135

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the export managers at local businesses. We were heartened to find that they loved our invitation and were able to share an on-the-ground perspective with our students.

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title Political Forces That Affect Global Trade

Assignment Type Click and Drag

Evaluating Click and Country Risk Drag Why Government Click and s Intervene Drag International Trade Restrictions Mini Case Trump Deal With Mexico Targets Exchange Rates Video Case

Topic(s) Nationalization and Privatization of Business Managing Political Risk and Differences Government Intervention in Trade Government Intervention in Trade

Government Intervention in Trade

Learning Objective( s)

AACSB Accreditatio n Tagging

Bloom’s Taxonomy

05-01

Knowledge Application

Apply

05-03

Analytical Thinking

Understand

05-04

Analytical Understand/An Thinking alyze

05-04

Analytical Thinking

Analyze

05-04

Reflective Thinking

Remember

Connect Activities 1. Terminology in Practice Activity Summary: This click and drag activity asks students to select the correct term that corresponds to the real-life example.

How to Use Activity: This works well as an in-class assignments for small groups. After the teams have completed the assignments, ask about any points that were not clear and discuss those with the class. This allows you to tailor the discussion to each class. This can also be done individually as an internet assignment. Consider current events that may apply to this activity and discuss in class.

2. Evaluating Country Risk Activity Summary: In this click and drag activity, students are asked to select boxes that describe various types of risk and to place them in the column for either economic risk or political risk.

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How to Use Activity: If done before class, ask teams of students to think of additional examples of risks and to place them in the correct categories. Have them present their additions to the class and explain why they were identified with a particular type of risk.

5. Why Governments Intervene Activity Summary: In this click and drag activity, students match actions of government interventions with their arguments.

How to Use Activity: This activity can be done individually at home or in class in small teams.

If done in class, discuss any matches that were unclear or for which there was disagreement in a group. Have in-class teams come up with an additional example for each argument and present to the class. Consider current events that may apply to this activity and discuss in class.

Module 6: Intellectual Property Rights and Other Legal Forces Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues 06-138

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Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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Your Content Summary The purpose of this chapter is to alert the students to the size and complexity of legal problems facing international business. They should be aware that there are potential legal problems about which they should consult experts. We begin with an overview of the three types of legal systems: civil, common, and religious. Following a brief review of the rule of law, we then discuss the specifics of international law, include extraterritoriality, contracts, and litigation. We then go over intellectual property rights and Incoterms. We finish the module with specific national legal forces.

Learning Objectives LO 6-1

Describe the three types of legal systems.

LO 6-2

Describe the rule of law and its sources.

LO 6-3

Discuss the general legal concerns in global business.

LO 6-4

Identify methods to protect intellectual property.

LO 6-5

Discuss the standardization of laws among nations.

LO 6-6

Describe the impacts of the national-level legal forces in the areas of competition, trade, tort, ethics, and accounting.

Key Terms and Definitions antitrust (p. 177)

Laws that prevent inappropriately large concentrations of power and its abuse through price-fixing, market sharing, and monopolies

arbitration (p. 170)

A dispute resolution process agreed to by parties in lieu of going to court, in which one person or a body makes a binding decision

competition laws (p. 177)

Another term for antitrust law, used by the European Union and other countries

copyright (p. 174)

Exclusive legal rights of authors, composers, creators of software, playwrights, artists, and publishers to publish and dispose of their work.

extraterritorial application of

A country‘s attempt to apply its laws to nonresidents and 06-140

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laws (p. 167)

foreigners, and to activities that take place beyond its borders

Foreign Corrupt Practices Act (FCPA; p. 183)

U.S. law that prohibits payments to foreign government officials in order to receive special treatment

Incoterms (p. 176)

Predefined commercial terms established International Chamber of Commerce

intellectual property (IP; p.

171)

A creative work or invention that is protectable by patents, trademarks, trade names, copyrights, and trade secrets

litigation (p. 170)

Legal proceeding conducted to determine and enforce particular legal rights

patent (p. 171)

A government grant giving the inventor of a product or process the exclusive right to manufacture, exploit, use, and sell that invention or process

private international law (p.

167)

Law that governs relationships between individuals and companies that cross international borders

product liability (p. 179)

A standard that holds a company and its officers and directors liable and possibly subject to fines or imprisonment when their product causes death, injury, or damage

public international law (p.

167)

Law that governs relationships between governments

strict liability (p. 180)

A standard that holds the designer or manufacturer liable for damages caused by a product without the need for a plaintiff to prove negligence in the product‘s design or manufacture

tort (p. 179)

An injury inflicted on another person, either intentionally or negligently

trademark (p. 173)

A shape, color, design, phrase, abbreviation, or sound used by merchants or manufacturers to designate and differentiate their products

trade name (p. 171)

A name used by a merchant or manufacturer to designate and differentiate its products

trade secret (p. 175)

Any information that a business wants to hold confidential

by

the

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Agreement between countries, also known as convention, compact, and protocol

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 6-1 Describe the three types of legal systems. 

Key Terms:

Types of Legal Systems o Civil Law o Common Law o Religious Law

XLIII.

Types of Legal Systems 2. Civil Law 1. Based on codification, derived from ancient Roman law, most widespread.

2. Napoleonic law (France), German civil law.

3. Court not a forum; judge questions parties to establish truth, then law applied.

3. Common Law 1. Relies on previous court decisions and interprets statutes and regulations.

2. Law evolving, precedents play an important role.

3. Court is adversarial (England, former colonies) and defendant presumed innocent until proven guilty.

4. Religious Law 1. Religious document or source the basis of law.

2. Shariah in some Moslem countries; Halakha informs law of Israel.

3. Combination of religious law and another system may be followed (Pakistan, Thailand).

LO 6-2 Describe the rule of law and its sources. 

Key Terms:

International Legal Forces



public international law



private international law



treaty

o Rule of law o What Is International Law? o Sources of International Law XLIV.

International Legal Forces 1. Rule of Law 06-143

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118. Laws followed, court rulings fair; alternative to decisions made by ruling elite/political dictatorship.

119. Hong Kong versus Shanghai: 120. HK has advantage due to reliability of legal system.

121. World Bank Index scores China 45, HK 94.

2. What Is International Law? Rules nations have agreed to follow.

Creates stability for relationships that span legal systems. a. Public—between nations (e.g., rights of nations, diplomatic relations). b. Private—between individuals or firms (e.g., international contract).

3. Sources of International Law Treaties between nations. a. Bilateral and multilateral. b. Include compacts, conventions, protocols, and customs. c. Many sponsored by UN; WTO also active in this area.

LO 6-3 Discuss the general legal concerns in global business. 

General Legal Concerns in Global Business

Key Terms: 

Extraterritorial application of laws



arbitration



litigation

o Extraterritoriality o Performance of Contracts 

United Nations Solutions



Arbitration

o Litigation XLV.

General Legal Concerns in Global Business 1. Extraterritoriality 1. This application of law beyond geographic borders and to nonresidents outside of country is problematic for firms, especially with employment law.

2. Also found in tax, environmental, human rights, and antitrust law.

3. Problematic when conflicts between home and host country law.

2. Performance of Contracts 1. Dispute resolution and decisions by international forums cannot be enforced.

2. UN solutions available. a. UN Convention on the international Sale of Goods (CISG) specifies rights of 06-144

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seller and buyer. b. Most countries have ratified—applied automatically.

3. Arbitration Alternative favored by many outside the United States, who dislike U.S. court system.

Quicker, less expensive, and more private than litigation.

4. Litigation a. Can be complicated and expensive. a. U.S. discovery process (sharing of facts) may be seen as intrusive. b. It is public, costly, and lengthy. b. Establishing jurisdiction can be difficult. c. Bhopal example. d. Choice of law and choice of forum clauses in contract are helpful.

LO 6-4 Identify methods to protect intellectual property. 

Key Terms: 

intellectual property (IP)

o Trademarks



patent

o Trade Names



trademark

o Copyrights



trade name

o Trade Secrets



copyright



trade secret

Intellectual Property Rights o Patents

XLVI.

Intellectual Property Rights 1. Intellectual property is creative work, and their rights are their legal protection.

Agreed to by international treaties.

WTO‘s Trade-Related Aspects of Intellectual Property Rights (TRIPS); World Intellectual Property Organization (WIPO); proposed Anti-Counterfeiting Trade Agreement (ACTA; Table 6.1).

2. Types of protection: Patent—country-specific, with different approaches to protection.

27. Global Intellectual Property Center of U.S. Chamber of Commerce has developed IP Index to measure country-based progress (Figure 6.2).

28. UN efforts to reduce lengthy patents, especially in pharmaceuticals.

29. Patent trolls and pirates attempt to steal patent rights.

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3. Trademarks—mark that is reserved for company‘s sole use. a. Protection‘s length varies by country, usually 10–20 years + renewals. b. Madrid Agreement, administered by WIPO. c. Standardized within the European Union.

4. Trade names—used to identify and differentiate products. a. Protected under WIPO, TRIPS. b. Burberry plaid, Dove, Fairy Liquid.

5. Copyrights—exclusive legal rights of authors, composers. a. New area is computer software and internet-based distribution. b. Napster‘s successful Metallica challenge.

6. Trade secrets a. Any information not generally known to the public that a business wishes to keep confidential. b. Most common type of IP protection. c. Advantages include no public filing that shares innovation with the government, no registration process, less costly than patent.

LO 6-5 Discuss the standardization of laws among countries.  XLVII.

Standardizing Laws Around the World

Key Terms: 

Incoterms

Standardizing Laws Around the World 1. Business flows better when there is standardization of laws or harmonization.

2. Many initiatives, some have been successful.

Incoterms, developed by the International Chamber of Commerce, are almost universally accepted (Table 6.2).

3. Practice on Documentary Credits is also well accepted.

4. Similar tax law in the United States and the European Union.

5. International commercial arbitration is widely accepted among most nations, along with enforcement of awards.

6. UN Convention on the International Sale of Goods (CISG) and other UN-negotiated agreements have led to some harmonization.

7. UNCITRAL, ISO, ITU, IEC.

LO 6- Describe the impacts of the national-level legal forces in the Key Terms: 6 areas of competition, trade, tort, ethics, and accounting.  competition laws  Some Specific National Legal Forces  antitrust laws o Competition Laws  tort 06-146

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o Trade Obstacles



product liability

o Tort Law



strict liability

o Miscellaneous Laws



Foreign Corrupt Practices Act (FCPA)

o Foreign Corrupt Practices Act o Accounting Law XLVIII.

Some Specific National Legal Forces 1. Tremendous variation.

2. Local counsel may be costly but necessary (Disney in Paris).

3. Competition Laws (or antitrust laws) To prevent price fixing, market sharing, and monopolies.

4.

5.

6.

7.

In the United States, per se concept—activities illegal, regardless of effect (injury).

Legal cartels in the European Union (no consumer harm) illegal in the United States.

U.S. law regards consumers first; the European Union looks to rivals‘ objections.

Japanese antitrust law modeled on the United States; cultural value of harmony influences its application.

8. The United States tries to impose its antitrust law extraterritorially. Many issues result.

9. Trade Obstacles They have financial, political, and legal impacts.

10. Standards, language (France), high tariffs, long quarantines.

11. The United States uses tariffs, quotas, ―voluntary‖ trade agreements to control imports.

12. Tort Laws In the United States, such personal harms/damages may result in large money awards, unlike in other countries.

13. Product liability in the United States involves responsibility of corp. officers in the United States, resulting in high liability insurance.

14. Strict liability concept holds company responsible for harm, even when no negligence in design/manufacture.

15. In liability cases, non-U.S. courts do not award punitive damages.

16. In Japan, with limited discovery, liability plaintiff must prove design/manufacturing negligence.

17. In the United States, lawyers take cases on contingency-fee basis. Outside the United States, losing plaintiff may be assessed defendant‘s legal costs.

18. Miscellaneous Laws Know the local law so it doesn‘t surprise you.

19. Law of home country plays no role in foreigner‘s arrest.

20. Foreign Corrupt Practices Act Prohibits bribes to government officials and transparency in accounting transactions.

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21. Elevates ethical standards in international business (see Table 6.4).

22. May create comparative disadvantage for U.S. companies.

23. Does not prohibit grease.

24. Has set the model for OECD, UN, the European Union, and UK anti-bribery efforts and legislation.

25. Accounting Law Sarbanes-Oxley Act (SOX) in response to worldwide scandals, sets higher standards for boards, management, and accounting firms.

26. Harmonization between rest of the world‘s accounting standards (IFRS) and U.S. GAAP underway. Missed initial target of 2015 and deadline has been moved back, but significant progress made.

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Engagement and application Boxed Text Discussion Questions With Suggested Answers IB in Practice: Managing Personal Data: The European General Data Protection Regulation The European Union has made a significant statement regarding who owns your personal data in the implementation of the General Data Protection Regulation (GDPR), which became law in 2018. It addresses how data on individuals can be obtained, stored, processed, or otherwise used, and it requires safeguards to protect that data. Any company that does business in the European Union, even if just a single online customer, must comply with this regulation.

Online and Hybrid: Assign questions to be prepared in virtual teams and submitted as a team assignment.

Face-to-Face: Use the questions as the basis for a team/group in-class assignment (5 min) after they have been reviewed outside of class. They may also be used as homework assignments, written or in preparation for discussion. Their use on quizzes and exams reinforces their preparation.

1. What implications might the GDPR have even for small companies or nongovernmental organizations such as charities or churches that have a limited online presence and that are not based in the European Union?

The main idea to discuss is the cost of compliance for small companies and organizations compared to the value of a presence in the European Union. What options do they have? They could refuse to do business with anyone from the European Union. Perhaps there are third-party services that can help with compliance for a reasonable fee? Could their online presence be moved to a third-party platform that includes GDPR compliance as part of their service?

2. Do you think that this extraterritorial application of the European Union laws to companies operating in other nations should be allowed? Why or why not?

Some students may suggest that living in an online world means that there are no physical boundaries so extraterritoriality is a natural thing. If this is proposed, ask where this will end.

Should every country be allowed to act extraterritorially? How do you comply with all of these laws? What if the laws conflict (such as keeping data private vs. giving a particular government full access)?

If extraterritoriality is opposed, ask how to define a territory in an online world. Is it the county where the firm is headquartered? Where the servers are? Where the customer is? What is to stop a firm from moving headquarters to avoid onerous laws?

Global Debate: The WTO and U.S. Dolphin-Safe Tuna Labeling: A Threat to National Sovereignty?

The WTO has ruled that U.S. dolphin-safe tuna labeling violates WTO trade rules. The reasoning is that this voluntary labeling, which communicates to the public that the tuna is not caught using a fishing technique called purse seining, a netting approach that kills many dolphin while netting the lower swimming tuna, is a technical barrier to trade. Given the labeling, the U.S. public 06-149

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prefers dolphin-safe tuna. The label was created by an Act of Congress to safeguard dolphin, and, again, is voluntary. The plaintiffs in the case, Mexican tuna fishing companies, are free to export their catch to the United States. The response to the WTO ruling is one of concern, because government regulations and practices related to political and social ends are often implemented through trade-related measures. This goes to the argument that the WTO and other international organizations infringe on national sovereignty.

Online and Hybrid: Virtual teams can be assigned these questions for submission and evaluation.

Face-to-Face: In a team or individually, students can be asked to develop responses to the questions and then discuss them.

1. Do you think the WTO should be able to prohibit labeling that provides information of potential value to consumers? Why or why not?

This is an opinion question that solicits a judgment. Its quality will depend on its support.

Responses may draw on nontariff barriers, which is what the dolphin-friendly tuna labeling program apparently functions as. The initial case seems like an overreach by the WTO, but considered in terms of nontariff barriers, their action is more understandable. That the labeling is voluntary then becomes a red herring.

2. Should the WTO ensure that the science behind local laws and regulations is sound and not a cover for protectionism? If so, how could it do so?

The WTO could ask the parties to explain their rationale for laws and regulations that may appear to be trade barriers to those affected by them. There is always the possibility of unintended consequences, and legislators would want to modify their legislation to avoid such consequences. In the case of the Mexican tuna, nothing is stopping the Mexicans from meeting the fishing requirements for dolphin-friendly fishing.

3. Some people have argued that member-nations give up national sovereignty rights by joining the WTO and allowing it to make decisions that are not in the best interest of a particular nation, especially since many WTO meetings are not open to the public. Do you agree with this interpretation and, if so, what could be done to address the situation?

Meetings held to work on complex trade negotiations by their very nature of compromise and open discussion, cannot meet their objectives if they are open to the public. Representatives need to be trusted to conduct negotiations and explain the process to their constituents. Some people do see this closed process as a sacrifice of national sovereignty, and to a degree, it may be.

Especially in a complex world where sustainability is a shared goal, interdependence is to be expected. Increased citizen education about these processes and the good they generate may be one approach forward. Another is to learn to live with the tension, clearly articulating principles and values, per the stakeholder approach.

Get That Job! From Backpack to Briefcase: Mackenzie Perry: Business and Culture in London Mackenzie Perry completed two study abroad programs in London while studying international business in college. While in London she furthered her knowledge of day-to-day customs, history, mannerisms, relationships, and so on. She had the following three recommendations: (1) be adaptable, (2) be prepared but open minded, and (3) stay engaged.

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Online and Hybrid: Virtual teams consider how Perry‘s advice might be valuable for them individually when they travel or live abroad. Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own experiences abroad or experience they may have abroad in light of Perry‘s advice.

1. Mackenzie Perry used her study abroad experience to focus on fine arts rather than business. Would such an approach work for you?

This question asks for self-reflection, so answers will differ. Some students would want to keep their focus on just business, while others will want to branch out. There is nothing wrong with students just focusing on business for their study abroad; but for those that are interested in art, history, or another field, this example shows that studying other fields for short study abroad programs can be valuable too.

2. Consider Perry’s advice. How would you apply this in your career?

This is another self-reflection question, so students will give a variety of answers. Ask students to imagine scenarios abroad that illustrate the value of Perry‘s advice.

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End of Module Exercises Critical Thinking Questions 1. How might knowing a country’s type of legal system (civil, common, religious) be helpful?

Understanding the basic assumption on which the system rests helps to understand how people think about the law in general, their legal relationships, and the sources of stability for them. In a civil law system, people are likely to rely on rules and regulations to achieve stability. In a common law system, people are likely to rely on precedent and interpretation for that stability.

Religious law systems suggest reliance on religious documents or their interpretation by religious leaders.

2. Does the concept of the rule of law (not the laws themselves) have the same meaning in different countries?

The rule of law describes that the legal system is based on laws rather than on the judgments of a ruling elite or political dictators. So, yes, the rule of law concept would have the same meaning in different countries. The rule of law indicates that property and civil rights will be protected.

That meaning would be influenced by culture, though. For example, the late Lee Kuan Yew, Singapore‘s admired former prime minister, led the development of Singapore through a pragmatic combination of the rule of law and top-down management. He noted that democracy, resting on the rule of law, was not the only way forward.

3. Since there is no international police or military force to back up international law, does it have any power? Why or why not?

International law is an institution whose power is based on norms that have been developed to guide behavior among nations and their citizens. So, although it does not have police or military power, it has the power of shared norms and values. Nations that sign treaties generally want to follow them. These agreements work for everyone and facilitate relations at the international level. This question asks students to think through some of the possible difference between force-back behavior and norm-back behavior.

4. What objections could other countries have to extraterritorial application by one country of its laws in territories beyond its borders?

Extraterritorial application of laws may violate a nation‘s sovereignty, contradict a nation‘s laws, and cause uncertainty for business. In some cases, nations may apply their law to nonresident noncitizens as well. For example, the United States is willing to hear cases of alleged violation of international law, including human rights violations. Tax law is another area where the United States applies its laws well beyond its borders, to citizens and some noncitizens (permanent residents or green card holders) as well.

5. Would you consider plagiarism an intellectual property right violation? Explain your reasoning.

This is meant to encourage students think about misuse of sources in terms of copyright protection. Plagiarism is clearly a form of IP violation if the material plagiarized is protected by copyright since it uses the ideas of another without credit.

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6. Does national culture influence the meaning of intellectual property? That is, in a culture where community is stressed, rather than the individual, would you expect intellectual property rights to be defined differently than in a culture where individualism is strong?

Culture influences the ways people think about everything, so it could reasonably be expected to influence the meaning of IP. In cultures with strong oral traditions and strong communal values, IP belongs to the community rather than to the individual. This is a thought question with no correct answer. This response is one possibility.

7. You are a human resource manager for a U.S. company working in Saudi Arabia, with Saudi and American employees. All U.S. companies are required to follow U.S. Equal Employment Opportunity law. In Saudi Arabia, women usually do not work in public, and the genders do not mix in public. How would you explain to your Saudi employees that you have to follow U.S. law?

This is one of those situations where law and social custom are in direct opposition. One approach to this explanation would be to distinguish U.S. women from Saudi women and use culture as the basis for the difference. But this may lead to claims of inequality. Most Saudis in your workforce are likely to be cosmopolitan and have global mindsets since they have probably studied abroad and traveled.

8. Why do understandings of appropriate limits to competition differ among nations?

This question goes to culture and its influence on notions of commerce. In communal cultures, competition tends to be reduced and the market may be allocated to increase efficiency. We see the differences in approach to competition between Japan and the United States as an example.

Also, the differences between the European Union and the United States, whose per se concept of protection for the individual consumer results in greater competition.

9. Is product liability a legal concept that is standardized across nations?

No, product liability varies greatly across nations. In the United States, product liability provides the consumer the most protection and is an added burden to business. A connection to culture may be made.

10. Why would accounting law convergence across nations be a valuable achievement?

Convergence of accounting law would be easier for businesses because they would not have to meet two standards if they list in the United States and another location. It would also set the foundation for one large financial market, which would be beneficial for business and investors. globalEDGE Research Task Exercise 1 Export Tutorials is available under the ―Reference Desk‖ tab on the top menu. Information about the CCC Mark can be found under the ―Government Regulations‖ subheader in the second question about the foreign regulations and certification.

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Search Phrase: Export Tutorials Resource Name: Export Tutorials Resource Link: https://globaledge.msu.edu/reference-desk/export-tutorials Exercise 2 Aerospace Industry Market Potential Index is available on the MPI page under the ―Tools and Data‖ tab on the top menu. Once on the MPI page, scroll down and check the right-hand column menu to find the industry-specific MPIs. The rankings can be accessed by clicking on the ―View MPI Table‖ button on the page. The indicators (measures) used are listed both on this pop-up table and on the main Aerospace Industry Market Potential Index landing page.

Search Phrase: Aerospace Industry Market Potential Index Resource Name: Aerospace Industry Market Potential Index Resource Link: https://globaledge.msu.edu/industry-mpi/mpi/10/aerospace MiniCase: Determining Country of Jurisdiction for International Business Disputes A new California exporter has been asked by a large Italian buyer to change their customary choice of law and choice of forum to Italy.

1. You are the CEO of the California company, and you very much want this large export order. You are pleased with the service your law firm has given, but you know it has no international experience. What are the various forms of dispute resolution available to your California company? What are the advantages and disadvantages of each for your company?

In addition to California courts for dispute resolution, you could consider Italian courts. Once you understand why your customer does not want any litigation to occur in California, you might also consider suggesting arbitration. It may be that your customer wants to avoid U.S. courts because they are public and move slowly. They also can be costly, while arbitration might meet your customer‘s needs.

2. You must decide whether to only use California law for settling litigation or allow the foreign customer’s home nation as the venue for litigation. Would your decision be different if the customer were from China? From Russia? From the United Kingdom?

Why or why not?

You may well decide to change the law and place of litigation to Italy since it is a rule of law country and courts are respected. If China were the possible choice for law and litigation, you might want to consult lawyers with experience on which you could draw before making that decision. The same holds for Russia. The UK would be in the same category as Italy.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection http://bit.ly/MHEIBVideo.

of

international

business

videos

is

available

at

The United Nations Web TV maintains a library of international law videos on current topics under discussion. For example, a UN forum judge summarizes the problems and current issues related to fisheries at http://webtv.un.org/topics-issues/global-issues/women/watch/judge-paikitlos-on-the-international-legal-regime-of-fisheries/2621146139001. In addition to providing current international legal information and a discussion of the relevant issues, this series helps students see how the UN actually works.

The U.S. Chamber of Commerce Global intellectual Property Center recognizes international and U.S. organizations that have contributed to IP protection.

See www.theglobalipcenter.com/ip-champions-2018.

The Stanford Law School series on international law, Stanford‘s Program in Law and Society, looks at the WTO in ―How the WTO Shapes Regulatory Governance.‖ The series is rich in resources for a closer look at issues of international law.

See www.youtube.com/watch?v=P7jUz9ivy-Q. Team Exercise These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for hybrid and online courses.

1. Sanctions on Russia After Russia occupied Crimea in Spring 2014, the United States and the European Union applied trade sanctions, initially to a group of leaders close to President Putin and then to the country.

This illustrates the political use of trade sanctions as an alternative to a military response. They were to serve as a warning that continued land occupation would be addressed seriously.

After a discussion of current Russian sanctions, in the form the class format suggests, ask students to discuss the following question in small groups and then share their answers with the larger class.

How might the imposition of sanctions affect businesses of the sanction-imposing countries, those in the European Union and the United States?

Payments originating in Russia may not be possible. This would affect banks, bond-holders, and other holders of debt, including exporters. The same would hold for transfers into Russia, which would affect multinationals sourcing their Russian activities from outside of Russia.

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2. Review Antitrust Law Applications Prepare a review of recent applications of antitrust law in the European Union, the United States, and other countries. Comment on their differences, linking to culture, if possible. Also note how they have affected businesses. This research is to be shared with the class in short presentations.

If online or hybrid, the presentation may be made using course collaboration tools. Short in-class or discussion board presentations may be made, depending on class format and scheduling constraints.

3. Research on International Applications of Product Liability Law Research examples of the application of product liability law in various countries, in small groups. Report back in class or in an online collaboration forum, as class format suggests.

4. Research Contract Law in the United States, the European Union, China, and Russia Outline the major differences in contract law in these countries and how businesses may need to modify their ways of doing business to adjust to these differences. Share findings with class, either in short presentations or online forums, as class format and course scheduling suggest.

5. Patent and Trademark Exercise Research the specifics of patent and trademark protection in the United States, China, and Kenya, along with notable recent cases. Report back to class, either in short presentations or online forums, as class format and course scheduling suggest.

6. Comparison of the United States and UK Legal Systems A comparison of differences between the United States and UK legal systems may interest students.

1. England has a split legal profession with barristers and solicitors.

2. England has no jury for civil court actions.

3. England allows no contingent fee arrangements.

4. Award of costs to the winner in civil litigation.

5. Pretrial discovery is more restricted in England Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Ivey Cases ―Hopax A‖ describes how a Taiwanese company competed with 3M in global markets.

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―Man B&W Diesel A/S—Managing Licensees in a Globalized World‖ focuses on a successful ship engine license business model and developing concerns about IP rights in China.

Controversial Issues Home Country Law Abroad Extraterritorial application of home-country laws has its pros and cons. For example, the U.S. government holds foreign subsidiaries of U.S. companies to U.S. employment law for U.S. nationals working in the foreign location. What are the advantages and disadvantages for the host country and for the foreign company? For host country employees and home country employees?

The U.S. government has also required foreign companies with which it has contracts or who operate in the United States to follow specific U.S. laws such as the sanctions on Cuba and Iran.

Consider the pros and cons of such requirements.

Other countries also extend their legal jurisdictions beyond their borders.

Assign research on this issue so that a discussion/debate can be held and students come prepared to argue for and against this practice. Depending on the class format, such a debate can be in class, on a discussion board, or using a collaboration tool. Credit can go toward class participation.

Teaching Suggestions 1. This chapter is very important to students‘ understanding of the legal forces that affect businesses. Most instructors will stress the chapter content in lectures by using the ―Lecture Outline and Notes.‖ 2. We encourage a review of current events and application of the module‘s topics at the beginning of class. Russia, Venezuela, and China are good sources of current event topics on material in this module.

3. The Critical Thinking Questions at the end of the module will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collect assignments at random and assign a grade; (2) occasionally give some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) have students hand in assignments and give credit for work submitted; and (4) call on students at random to answer specific questions (giving a small number of points for correct answers or counting this as part of participation).

4. Guest lecturers could include international lawyers and law professors. Managers from local export businesses that have worked through choice of law and choice of forum clauses for their international contracts may also be interesting sources of the inside story for students. Talk with export managers at local businesses. We were heartened to find that they loved the invitation and were able to share an on-the-ground perspective with our students.

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Instructor Guide to Module 7

Instructor Guide to Module 7

Geringer, McNett, Ball

Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title Javabucks in China International Legal Forces What's the Right Thing to Do?

Types of Legal Systems

Assignment Type Video Case Click and Drag Case Analysis

Click and Drag

Topic(s)

Learning Objective( s)

AACSB Accreditati on Tagging

Intellectual Property 06-04; 06-05; Analytical Rights 06-06 Thinking International Legal Reflective Forces 06-02; 06-03 thinking General Legal Concerns in Reflective Business 06-03; -6-06 Thinking Analytical Thinking/Re Three Types of flective Legal Systems 06-01; 06-05 Thinking

Bloom's Taxonomy Understand Understand

Understand

Remember/ Understand

Connect Activities 1. Javabucks in China Activity Summary: This video case shows a hypothetical scenario in which a foreign-owned coffee shop opens in China but faces trademark issues from another Chinese coffee shop.

How to Use Activity: Have students do this individually for internet courses. In face-to-face classes, have students do this before class and then discuss intellectual property issues presented in the video.

In groups or individually, have students take a local business (such as a restaurant, mechanic shop, dry cleaners) and discuss possible IP problems if they were to expand to China, and what they should do to prevent them.

2. Legal Forces Activity Summary: This is a click and drag activity in which legal systems are matched with particular characteristics.

How to Use Activity: This works well as an in-class assignments for small groups. After the teams have completed the assignment, ask about any points that were not clear and discuss those with the class. This allows you to tailor the discussion to each class. This can also be done individually as an internet assignment.

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Consider current events that may apply to this activity and discuss in class after students have completed the assignment.

3. What’s the Right Thing to Do? Activity Summary: In this case analysis, Mary is in Thailand and is having difficulty getting her weaving machinery through customs. The customs agent suggests that she pay him a bribe, but she is worried about breaking the Foreign Corrupt Practices Act. How to Use Activity: With five different questions following the case, this works well as a set of questions from which one is randomly picked for an online assignment. This also makes for a great in-class discussion. Have students do this before class and then discuss the concept of grease payments and whether or not it applies here. In the discussion, give additional examples and have the class determine if it is a grease payment or not.

4. Types of Legal System Activity Summary: In this click and drag activity, students match actions of one of the three main legal systems (civil, common, and religious) with specific characteristics.

How to Use Activity: This can be done individually or in groups. For a class discussion, have teams complete this assignment, then give additional examples of characteristics and ask students what type of legal system it would fall under and why.

Module 7: Economic and Socioeconomic Forces Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task 07-159

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Instructor Guide to Module 7

Instructor Guide to Module 7

Geringer, McNett, Ball

MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Lecture Controversial Issues Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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Instructor Guide to Module 7

Instructor Guide to Module 7

Geringer, McNett, Ball

Your Content Summary This module provides an overview of economic and socioeconomic forces in the international business environment. The assessment and forecasting of economic conditions is a regular activity for most firms. When a firm enters foreign markets, the task is more complex because of the number of economies involved.

Managers of all the functional areas in the firm are interested in the size and rate of change of various economic and socioeconomic factors. Some of the economic dimensions are GNI (which has replaced GNP for most organizations), GNI/capita, purchasing power parity (PPP), the size of the underground economy, economic growth rate, income distribution, personal consumption expenditures, and unit labor costs. The principal socioeconomic dimensions are total population, age distribution, and population density and distribution. Publications and websites of the international agencies, governments, and banks as well as business publications are all sources of this kind of information.

Learning Objectives LO 7-1

Explain the purpose of economic analyses.

LO 7-2

Compare different categories of countries, based on levels of national economic development.

LO 7-3

Outline the dimensions used to describe the economy and their indicators.

LO 7-4

Discuss the socioeconomic dimensions of economies and the indicators used to assess them

Key Terms and Definitions Atlas conversion factor (p.

200)

The arithmetic mean of the current exchange rate and the exchange rates in the 2 preceding years, adjusted by the ratio of domestic inflation to the combined inflation rates of the euro zone, Japan, the United Kingdom, and the United States

developed economies (p. 197)

A classification for high-income industrialized nations, which have high living standards and the most technically advanced developed infrastructure

developing economies (p.

196)

A classification for the world‘s lower income nations, which have less technically developed infrastructures and lower living standards

discretionary income (p. 206)

The amount of income left after paying taxes and making essential purchases 07-161

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Instructor Guide to Module 7

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disposable income (p. 206)

After-tax personal income

emerging market economies (p. 197)

Economies with per capita incomes in the low to middle range that are in a transition toward developed status

foreign environment (p. 195)

All the uncontrollable forces originating outside the home country that surround and influence the firm

GINI index (p. 205)

A measure of the degree to which family income within a country is distributed equally

gross domestic product (GDP; p. 196)

The total monetary value of all goods and services produced within a nation

gross national income (GNI; p. 196)

The total value of all income generated by the residents of a nation, including both the domestic production of goods and services and income from abroad

income distribution (p. 205)

A measure of how a nation‘s income is apportioned among its people

international environment (p.

195)

Interaction between domestic and foreign environmental forces or between sets of foreign environmental forces

population density (p. 216)

A measure of the number of inhabitants per area unit (inhabitants per square kilometer or square mile)

population distribution (p.

216)

A measure of how the inhabitants are distributed over a nation‘s area

purchasing power parity (PPP)

A means of adjusting the exchange rates for two currencies so the currencies have equivalent purchasing power

(p. 200) rural-to-urban shift (p. 216)

The movement of a nation‘s population from rural areas to cities

underground economy (p.

201)

The part of a nation‘s income that, because of unreporting or underreporting, is not measured by official statistics

unit labor costs (p. 208)

Total direct labor costs divided by units produced

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Instructor Guide to Module 7

Instructor Guide to Module 7 vertical integration (p. 211)

Geringer, McNett, Ball

The production by a firm of inputs for its own manufacturing processes

Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 7-1 Explain the purpose of economic analyses. 

XLIX. L.

International Economic Analyses

Key Terms: 

foreign environment



international environment

Introduction: In this module, the critical economic and socioeconomic forces that shape business opportunities around the world are examined.

International Economic Analyses 27. Economic analyses for multinationals are more complex than those for a purely domestic firm because there are many economies to consider instead of just one, there are interactions between them, and values are highly divergent.

28. Management requires economic data and socioeconomic data.

122. Analysts use data from governmental and international organizations (e.g., World Bank, International Monetary Fund) and private economic consultants (e.g., Business International, Economist Intelligence Unit) and industry associations.

123. The purpose of economic analyses is to assess the overall outlook for the economy and the impact of economic changes on the firm.

124. Figure 7.1 illustrates how a change in a single economic factor can affect all major functions of the company. The discussion is illustrated with a forecast of an increase in employment in a particular market and its impact on marketing, finance, production, and so forth.

125. Firms entering overseas markets have more complex economic analyses because managers operate in two new environments: foreign and international.

30. Foreign environment includes all uncontrollable forces originating outside the home country that surround and influence the firm.

31. International environment includes interactions between domestic and foreign environmental forces or between sets of foreign environmental forces when an affiliate in one country does business with customers in another.

126. Policies designed for economic conditions in one market may be unsuitable for conditions in another.

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127. Besides monitoring foreign environments, analysts must stay informed of actions taken by trading blocs (e.g., Mercosur, ASEAN, and the European Union).

128. International economic analyses should provide economic data on both actual and prospective markets.

As part of the competitive forces assessment, many companies monitor the economic conditions of nations in which major competitors are located because changing conditions can strengthen or weaken competitors‘ ability to compete in world markets.

32. Collection of data and preparation of reports are usually the responsibility of the home office, but foreign subsidiaries and field representatives are expected to contribute heavily to studies of their markets.

33. Data from areas where the firm has no local representation can usually be less detailed and are generally available from national and international agencies.

LO 7-2 Compare different categories of countries, based on levels of Key Terms: national economic development.  gross domestic product (GDP)  Levels of Economic Development

LI.



gross national income (GNI)



developing economies



developed economies



emerging market economies

Levels of Economic Development 29. A nation‘s level of economic development affects all aspects of business conducted there.

30. A common basis for assessing economic development is gross national income (GNI), the total value of all income generated by the residents of a nation, including both the domestic production of goods and services and income from abroad. The World Bank categories countries based on level of GNI/capita, using the following for fiscal 2020: High-income economies: GNI/capita of $12,375 or more.

129. Middle-income economies: GNI/capita of over $1,026 but less than $12,375.

Upper middle-income economies have GNI/capita of over $3,996 but less than $12,375.

34. Lower middle-income economies have GNI/capita of over $1,026 up to $3,995.

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130. Low-income economies: GNI per capita of $1,026 or less 131. Figure 7.2 shows the nations of the world based on GNI/capita 31. Another classification of economic development distinguishes developed from developing economies, with low- and middle-income economies referred to as developing economies, but there is no universally agreed-upon criterion for distinguishing between developed and developing.

Developing economies are frequently characterized as industrialized or postindustrial, service-based nations that are economically advanced, with established infrastructures and high income/capita that supports a high living standard.

132. Developing economies are lower income nations, less technically developed, and with more diversity among them than among developed nations (see Table 7.1).

133. Most people live in middle-income countries, sometimes referred to as emerging market economies. They have per capita income in the low to middle range, and are in a transition toward developed status (e.g., China, India).

LO 7-3 Outline the dimensions used to describe the economy and their Key Terms: indicators.  purchasing power parity (PPP)  Dimensions That Describe the Economy and Their Relevance for International Business  Atlas conversion factor  Measuring the Size of an Economy 

Gross National Income (GNI)



GNI per Capita



Converting GNI to a Common Currency and Purchasing Power Parity

 



underground economy



income distribution



GINI index

Modifying GNI with the Atlas Conversion Factor



disposable income



discretionary income

Accounting for the Underground or Informal Economy



unit labor costs



vertical integration



Economic Growth Rate



Income Distribution



Private Consumption



Unit Labor Costs



Other Economic Dimensions

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LII.

Dimensions That Describe the Economy and Their Relevance for International Business To estimate market potentials and provide input to the other functional areas of the firm, managers require data on the sizes and rates of change of a number of economic and socioeconomic factors. Socioeconomic data provide information about the number of people, and the economic dimensions tell us whether they have purchasing power.

LIII.

Measuring the Size of an Economy 32. Gross National Income (GNI) A measure of the total value of all income generated by the residents of a nation, including both domestic production of goods and services and income generated from abroad, mainly through dividends and interest payments, minus similar payments made to other countries.

134. Most international organizations prefer GNI to gross domestic product (GDP) for measuring the value produced in an economy because GDP only measures the market value of goods and services produced in a nation in a particular year.

33. GNI per Capita A country‘s GNI divided by its population.

135. A higher value is usually linked to a more advanced economy, though growth rate may be more important to marketers because a high growth rate indicates a fast-growing market.

136. Need to use this figure with some caution, since government economies must impute monetary values for goods and services not sold in the marketplace, such as food grown for personal consumption and items bartered.

34. Converting GNI to a Common Currency and Purchasing Power Parity To compare GNI requires conversion to a common currency, using an exchange rate.

137. Goods often have different prices in different nations.

138. Purchasing Power Parity (PPP) is a means of adjusting exchange rates for two currencies so the currencies have equivalent purchasing power.

139. The example on page 201 illustrates how this is done, and Table 7.2 provides GNI/Capita at nominal and PPP based rates for selected countries.

140. The IB in Practice box assesses PPP using the Big Mac Index.

35. Modifying GNI with the Atlas Conversion Factor A technique developed to reduce the impact of exchange rate fluctuations.

141. The arithmetic average of the current exchange rate and the exchange rate in the two preceding years, adjusted by the ratio of domestic inflation to the combined inflation rates of the euro zone, Japan, the UK, and the United States.

142. Incomes measured by Atlas conversion factor are generally more stable over 08-166

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time.

36. Accounting for the Underground or Informal Economy Some national income is not measured by official statistics because it is under or unreported.

143. This underground economy includes undeclared production of legal and illegal goods and services, their corresponding activities (e.g., money laundering), and concealed income in kind (barter).

144. Higher income tax levels and increased government red tape tends to create a bigger underground economy.

145. Figure 7.3 shows estimated underground economies of various nations.

37. Economic Growth Rate Seasoned managers supplement measures of an economy‘s absolute size with measures of economic growth rates.

146. Table 7.3 shows emerging and developing countries grew two to three times faster than did developed countries in most of the years 2014–2020.

147. Rapid and rising economic growth rates suggest consumer demand, and likelihood of increased trade and foreign direct investment.

38. Income Distribution Wealth is not usually evenly spread, so there is need to know how national income is distributed among a nation‘s people, called income distribution.

148. The GINI index, an additional measure, measures the degree to which family income is distributed equally, with a lower score indicating more equal distribution.

149. Analysis of income distribution data shows that: Income is generally more evenly distributed in richer nations.

35. Income redistribution proceeds very slowly, so older data are still useful.

36. Income inequality increases in early stages of development and reverses in later stages.

37. Both relatively even and relatively uneven income distribution can suggest market opportunities.

39. Private Consumption Disposable income refers to consumers after-tax personal income.

38. Discretionary income is disposable income less essential purchases and tax.

39. Table 7.5 shows private consumption expenditures for five high-income and five low-income economies, using PPP equivalents.

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40. Knowledge of personal consumption is enhanced by measures such as the ownership of goods (e.g., automobiles, cell phones) and the consumption of key materials (e.g., energy).

150. Unit Labor Costs Total direct labor costs/units produced.

41. Low or slowly rising unit labor costs may indicate opportunity to lower production costs and may indicate locations of new competition in world markets.

42. Changes in wage rates may cause companies to change their international sources of supply.

43. Three reasons for changes in labor costs: i. Compensation—hourly compensation tends to vary more widely than wages because of differences in fringe benefits. ii. Productivity—gains in productivity may reduce the impact of higher compensation. iii. Exchange rates.

44. Figure 7.4 shows selected nations‘ hourly compensation costs, 2000–2016.

151. Other Economic Dimensions Large and growing international debts of middle- and low-income nations cause problems for their governments and for multinational firms (Table 7.7 shows some major international debtors among developing nations).

45. Large foreign debts may hinder access to foreign currency to pay for imports billed in foreign currency, if such currency is being used to pay foreign debt, hindering access to raw materials, spare parts, and other inputs.

46. High debt may cause governments to impose price controls, cut government spending, and impose wage controls, sometimes encouraging political crises.

47. Scarcity of foreign exchange may hinder companies trying to export products to such nations, as indebted governments may impose import restrictions to conserve their foreign exchange for repayment of debt.

LO 7-4 Discuss the socioeconomic dimensions of economies and the Key Terms: indicators used to assess them.  population density  Socioeconomic Dimensions of the Economy and  population Their Relevance for International Business distribution o Total Population  rural-to-urban shift o Age Distribution 08-168

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o Population Density and Distribution o Other Socioeconomic Dimensions LIV.

Socioeconomic Dimensions of the Economy and Their Relevance for International Business Socioeconomic data provide information about the number of people in a country or market.

40. Total Population Most general indicator of potential market size.

152. Figure 7.5 shows 10 countries with largest projected populations in 2050 and current population.

153. Population size alone is a poor indicator of market potential, except for a few low-priced products.

154. Where GNI increases faster than population, probably an expanding market.

41. Age Distribution Because few products are purchased by everyone, marketers must identify segments of the population more apt to buy their goods.

155. Distribution of age groups within populations varies widely, but developing countries generally have younger populations than do industrial countries, due to higher birthrates.

156. Developing countries represent 84% of the world‘s total population.

157. Many forces are responsible for reduction in birthrates, but declining birthrates in many developed countries is cause for concern in those nations in terms of future prosperity, workforce size, ability to support social security systems, and similar considerations.

158. Figure 7.6 shows percentages of Elderly (over 65) in the population of selected countries, for 2019 and projected for 2035 and 2050.

42. Population Density and Distribution Population density refers to the number of inhabitants per area unit, such as per square mile.

Densely populated areas tend to make product distribution and communications simpler and less costly.

48. Should know how populations are distributed (e.g., urban versus rural; impact of geographic features such as mountains and waterways).

159. Especially in developing countries, there is an evident rural-to-urban shift as people move to cities for higher wages and more conveniences.

In 2008, for the first time half of the world‘s population was living in cities; this is expected to increase to 60% by 2030.

49. Table 7.8 indicates that the greatest urban shifts are occurring in low- and 08-169

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middle-income countries.

43. Other Socioeconomic Dimensions Increase in the number of working women may produce a larger labor supply, and also result in larger family incomes, a greater market for convenience goods, a need to alter promotional methods, and perhaps changes in production processes, employee facilities, and human resource policies.

160. Data on a country‘s divorce rate may indicate formation of single-parent families and single-person households.

161. In many nations, important ethnic groups may require special consideration by both marketing and human resource managers.

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Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice: Using the Big Mac Index to Assess PPP The Economist magazine presents an interesting application of PPP theory through its ―Big Mac Index,‖ which substitutes a Big Mac for the basket of goods economists have traditionally used.

The index calculates the exchange rate at which a Big Mac in other countries costs what it does in the United States. The index collects data on the current price of Big Mac sandwiches at McDonald‘s restaurants around the world. Comparing these prices based on current exchange rates with the PPP-based price of a Big Mac provides an indication of whether a particular currency is overvalued or undervalued. The figure in this box shows the overvaluation and undervaluation of national currencies using the implied exchange rate, based on the market price of the Big Mac. The Economist claims that its Big Mac index performs pretty well over the long run. Of course, when using this index, we must remember that the price of a Big Mac represents more than a basket of tradable goods, the situation PPP theory describes. For example, the service we receive with our Big Mac cannot be traded, nor can McDonald‘s brand image. Despite this, the index is a helpful way to obtain a quick sense of relative currency values and where they may be heading.

The latest Big Mac index and actual prices can be found at www.economist.com/news/2019/07/10/the-big-mac-index.

Online and Hybrid: Assign questions to be prepared in virtual teams and submitted as a team assignment, or submitted individually and then discussed in a blog or group discussion site.

Face-to-Face: Students develop responses to the questions in class in teams/groups.

1. Under what conditions might an index based on the pricing of Big Mac sandwiches be most useful in understanding whether a particular currency is overvalued or undervalued?

When might such an index perform poorly?

Answers here might vary, but some students might suggest that this would be most appropriate when comparing countries that are relatively similar to the United States in income and level of development. In contrast, there may be students who argue there are countries where cultural or religious factors, the level of economic development, or other variables might suggest that Big Macs are not as likely to reflect relative currency value, appropriate use of discretionary income, or comparable element within a typical ―basket of goods‖ for consumers. You can use these comments to probe more deeply into which economic or socioeconomic factors might be most likely to influence this. For example, in some emerging markets, dining at a McDonald‘s might be considered to be a luxury item relative to dining in a more traditional local restaurant. In addition, exchange rates are likely to be impacted by factors such as export dependency of a nation and could encounter situations where prices fail to achieve parity for many years, while a Big Mac is more reflective of shorter term market driven forces. Other factors such as valueadded taxes, wage costs, trade restrictions might also interfere with the extent to which a Big Mac index accurately reflects the valuation of a particular country.

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2. UBS Wealth Management Research has used the Big Mac index as a basis for assessing the purchasing power of an average worker in a particular country. In this regard, they identify the amount of time an average worker in a nation would have to work in order to earn enough money to buy a Big Mac. How might information such as this be of value to businesspeople?

Again, answers may vary on this question. Some students might find this to be a very interesting and useful measure, indicating relative levels of disposable income within a society and indicating the market potential for basic consumer goods (e.g., toothpaste, shampoo) as well as for more expensive items (e.g., iPods or packaged cereals). Other students might suggest that an assessment based on average worker pay may not provide much usefulness in the absence of data regarding how broadly or narrowly incomes vary around the average. A low average pay might mask the presence of a substantial portion of the population that has discretionary income many times the amount suggested by the average level of pay, a situation that might suggest an attractive market for more expensive consumer goods.

Global Debate: What Is the Best Way to Measure a Nation‟s Development: Income or Quality of Life?

This Global Debate provides an overview of different perspectives on how to assess the extent of a nation‘s development, contrasting traditional measures of economic development with one based on human development, as created by the United Nations Development Program. This contrast in perspectives serves as a starting point for a stimulating class discussion.

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against) and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups or else assign perspectives and conduct an in-class debate and discussion.

1. Which approach to measuring development do you think would be most useful for international managers to follow in assessing a potential market’s level of development?

The answer to this question will vary, and it is intended to help people think through the issue of what constitutes an appropriate measure of development. Certainly, students are likely to focus on economic factors since these reflect traditional measures and concepts of income, growth, economic standard of living, and so forth. Some students may argue that it may be easier to accurately measure the relative development of a country when using variables such as GNI, GNI/capita, and so forth since they may be easier to quantify and compare across a range of nations. However, by probing on this topic it may be possible to extract comments about what is important and whether efforts focused on improvements to the overall human condition might be more important than merely emphasizing traditional output-based measures. In addition, outputbased measures may ignore externalities such as the degradation of the natural environment, restriction on religious or social freedoms, exposure to pathogens or carcinogens that may reduce 08-172

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the length or quality of life, and other factors. Students might suggest that material wealth of a nation is of limited value if it compromises the quality of life of the people living there, and that measures such as the length and quality of citizens‘ lives, education and the opportunities it provides, and access to healthy food, clean air and water, adequate medical care, and other resources associated with a decent standard of living. A lively debate can be generated, especially if the class evidences variation in terms of nationalities, ideologies, and similar variables.

2. Do you agree or disagree with former U.S. attorney and presidential candidate Robert F. Kennedy’s assertions that an approach to understanding development that relies on market data is not really what we need to know to understand our development as people (and markets)? Defend your answer.

This question raises an issue that almost always generates strong opinions and a variety of perspectives. Some students may feel that. Some students may also argue that economic development generates the resources (e.g., income) that can be expended on the various products, services, and activities that individuals value. They may also suggest that, without economic development and the various activities that underlie economic growth, a nation‘s people may confront the harsh reality of limited opportunities for improved living standards, as there is a strong correlation between economic development and various measures of the quality of life. Other students will often raise the notion that there may be diminishing marginal returns from economic development, particularly once a certain standard is reached, and that economic development may result in nations competing against each other and hindering the relative ability of some peoples to achieve improved life options. Exploring the variety of perspectives and allowing the debate to blossom can yield a rich and insightful learning experience for the participants.

As some point in the discussion, it may be useful to use the following excerpt from Robert Kennedy‘s 1968 speech, in which he stated that, ―the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.‖ This excerpt can help to stimulate additional discussion and debate.

3. If you were the manager of a subsidiary of an international company and you were asked by the host-country government to justify your proposed investment in a production plant based on human development needs, what arguments could you provide to help support your position?

This question also raises issues that almost always generate strong opinions and a variety of perspectives. Students might argue from an economic development standpoint that a production plant may help to provide jobs, income, skill enhancement, and other benefits that can improve the quality of life of employees, their families, and their communities. They might also argue that successful construction and operation of such a plant may enhance the real and perceived international competitiveness of a country, perhaps encouraging further foreign direct investment 08-173

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into or exports out of the country, which may also enhance the nation‘s overall standard of development. Students might also argue that the plant will generate benefits such as tax dollars for investment in roads, schools, hospitals, and other valuable infrastructure. It might also be argued that the managerial practices that the company brings to its production plant will be of a high level and help to establish a benchmark for other companies, local and foreign funded, to strive for. These and similar comments may be expected from students, and it can be useful to hear ―what ifs‖ from other students. Indeed, it might be useful to either assign or to identify one or several individuals in the class who can take the role of devil‘s advocate, questioning the assumptions underlying the presumed benefits associated with the plant.

Get That Job! From Backpack to Briefcase: Rory Burdick: Career Launch in International Rory Burdick began working in start-ups and took an opportunity that required 24-hr availability to get an assignment with an international dimension. That allowed him to build his credibility in international. From there, he networked and learned about an opportunity at Google. Once in Google, he continued to network to get assignments to build his international profile.

Online and Hybrid: Virtual teams evaluate Burdick‘s advice for their own career development.

Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own career strategy in light of Burdick‘s advice.

1. Rory Burdick’s approach was to take a difficult initial assignment in order to get into international, and from there, to build his expertise. Would such an approach work for you?

This question asks for self-reflection, so answers will differ. Some students would not think about taking an assignment that required 24-7 availability. At least learning about Rory‘s experience gives them one model.

2. Burdick’s experience also suggests that networking is an important part of career development. Describe your networking strategy.

Most students will have encountered information and perhaps even training on networking as a career development strategy. Discussion about the nuts and bolts of networking can be helpful, especially for students preparing to take their first job and move on from university life.

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End of Module Exercises Critical Thinking Questions 1. What impacts do economic forecasts have on a firm’s functional areas? If management learns from the economic analysis of country A that wage rates are expected to increase by 10% next year, which functional areas of the firm will be concerned? Why will this be of concern to management?

The answers to this question may vary. As the text discusses, a change in just one economic factor such as wage rates can affect all of the major functions of the company. For example, the production manager might assess whether this rise in wage rates causes Country A to no longer be competitive on some or all products or services, in comparison with other nations where the company has operations or potential operations. The production manager may also decide to implement changes that might be able to improve productivity or reduce demand for labor, in order to limit the negative effective of this wage increase. A purchasing manager may consider whether or not suppliers from Country A might experience pressure to raise prices on products or services supplied to the company. The marketing manager may consider whether this increase in wage rates might increase the company‘s costs and require prices to be increased, and the manager might have to consider how a price increase will impact demand for the company‘s products and services. At the same time, the marketing manager might see a 10% wage increase as an opportunity for consumers to have more disposable income and will probably enable a new group of customers to buy their products, possibly causing sales forecasts to be increased (and thus impacting production, in terms of the volume of output and the level of workers, material and equipment required). The personnel manager might consider what effect countrywide wage increases might have on union contract negotiations, and if there is expected to be increased demand for workers the personnel managers may consider how many employees need to be hired. The financial manager will have to determine whether additional capital will be needed in the short term for working capital (materials, inventory) or investment in production equipment.

2. When might a country’s level of economic development mislead a marketer?

The answers to this question may vary. The overall level of economic development, typically assessed through measures such as GNI per capita, do not provide a direct indication about how income is distributed across the population. It is quite possible that a country with a relatively high level of GNI per capita may have a substantial portion of the population that lives in poverty and would therefore not be able to readily afford luxury goods that might otherwise be considered appropriate for a ―rich‖ developed country. Correspondingly, it is quite possible that a country with a relatively low level of GNI per capita might have an important segment of the population that has a high level of disposable income and might therefore be an appropriate target segment for luxury items. In addition, knowing the current classification of a country‘s economic development does not give an indication about whether the country‘s economy is growing or might be in recession, thus impacting demand for items such as consumer durables.

3. What might the differences between economically developing and developed nations mean to an international company considering entry into a foreign market?

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Table 7.1 provides an overview of typical characteristics of developed and developing countries, highlighting the differences in terms of income, standard of living, production techniques, and so forth. Clearly, there tends to be much more diversity within the population of developing nations than among developed countries. The extremes between countries at the lower end of the economically developing continuum and the emerging market economies can yield quite profoundly different contexts. An international company considering entry into a foreign market could examine these differences in order to understand what differences might exist in terms of products or services that might be in demand in countries at different levels of economic development, what production techniques might be more or less appropriate to utilize, the extent to which skilled labor may be available, potential instability in political and legal institutions and practices, adequacy of basic infrastructure (transportation, communication, education, health care, etc.), and so forth. In addition, economically developing nations may have very different levels of growth and fluctuations in growth, another important consideration when considering foreign market entry.

4. Why should managers of international companies be concerned about purchasing power parity?

Purchasing power parity rates tend to evidence more stability than do market rates, which may fluctuate substantially over rather short time periods. Purchasing power parity helps to capture differences based on nontraded goods and services, which tend to be lower in price in lower income nations than in high income nations (e.g., taxis, haircuts, labor intensive services such as construction or domestic work). So a PPP-based assessment helps to take into account these differences and thus provides a more realistic assessment of the overall welfare of consumers in different nations. This can be critical for managers who are considering, for example, whether demand for certain goods or services might be sufficient in a market that might have a low GNI per capita but a much higher level on a PPP basis.

5. What is the value of using data on GNI per capita and population density when analyzing the attractiveness of an economy? What limitations or potential problems can arise when using these data in an analysis?

The answers to this question may vary. For example, higher levels of GNI per capita are generally associated with more advanced economies, and products and services demanded within advanced economies may differ substantially from those demanded in low income nations. GNI per capita may also give an indication into costs of doing business in a country, such as facilities and labor, which can influence an economy‘s attractiveness for investment. Population density may give an indication of how easy it might be to promote and distribute a product or service to a large portion of a nation‘s population, as well as indicating needs that might differ for urban dwellers compared to those living in rural areas.

On the other hand, both GNI per capita and population density are arithmetic means and may conceal important concentrations of populations and fail to disclose the presence of a sizable segment with high (or low) incomes. Calculation of GNI per capita requires a nation‘s economists to estimate monetary values for the various goods and services that are not sold in the marketplace, and this informal economy may constitute a significant portion of the overall economy of a nation without being accurately captured within the GNI per capita data. GNI per 08-176

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capita also does not provide an indication of how much or how rapidly the economy is growing, nor how much disparity there is within the population in terms of the distribution of income. A high-income nation might still have a substantial subset of its population that is living within much more modest levels of income, and a low-income nation might still have a significant segment that has a large level of disposable income. GNI per capita may also not reflect accurately the level of discretionary income in an economy, which may vary due to different levels of costs of essentials and taxes across nations. Population density figures on their own do not provide an indication of the extent to which some of the urban population lives in slums versus more economically well off contexts, with the social, economic, and other challenges and opportunities that are associated with such demographics. Both parameters need to be the starting point of research with further analysis of income distribution and population distribution.

6. What social, political, and economic conditions might signal the existence of a large underground economy, and why should managers pay heed to such signals?

The answers to this question may vary. As noted in the text, nations with high levels of taxation and substantial amounts of bureaucratic red tape often experience underreporting or nonreporting of income and other aspects of an underground economy. Countries with weak institutions for supporting market-based business activities may find that the level of barter activity is substantial. To the extent that legal and political institutions do not have the ability to effectively police the adherence to tax payment rules by individuals and businesses that may also result in higher levels of underground economy. The existence of drug gangs, people trafficking networks, or other groups that flout local laws may contribute to higher levels of underground activity. Managers should pay heed to such signals because it may give insight into the extent to which economic data accurately reflect the level of economic activity overall, as well as the level and distribution of income within the overall population of a nation. The existence of a substantial underground economy may also provide useful information about the level to which the rule of law is present in a nation, and to which a nation will be able to generate sufficient levels of tax-generated revenues in order to meet their budgetary demands, manage levels of foreign currency, invest adequately in infrastructure, and other aspects that can impact the overall attractiveness of a nation as a place to do business.

7. Why is income distribution important to marketers in international companies? What might be the attraction and concerns associated with relatively even distribution of income, and with highly uneven income distribution, and how might this assessment be impacted based on the level of the economy’s economic development?

Income distribution is important because that provides an indication of the level of purchasing power and the types of products or services that might be most demanded for those segments of the population at different income levels. Indeed, some economies have large portions of their populations living at subsistence levels of income while other segments of the economy have relatively high levels of disposable income. Many emerging markets exhibit more unequal distribution of income in their early stages of development, a situation that tends to reverse at later stages of development. Knowledge of income distribution can identify how large the populations are within subsistence, low income, middle income, or high income segments of an economy, and how the sizes of these segments might be changing over time. A country with an increasing level of economic development may evidence the emergence of a substantial middle 08-177

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class with disposable income and the ability to buy goods and services beyond those of a basic level, as well as having an upper class with substantial capability for consumption of luxury goods, for example. Countries with large segments of people living at subsistence levels might represent markets that are more appropriate for basic consumer items. Tables 7.4 and 7.5 can provide useful information for students as they make these analyses and comparisons.

8. The staff economist of a large multinational with a Turkish subsidiary has given the firm’s chief financial officer a report on Turkey’s foreign debt situation, as shown in Table 7.7. What concerns might the chief financial officer have?

The answers to this question may vary quite a bit across students. Table 7.7 shows that Turkey has seen a continuing increase in the level of international debt, growing from $19 billion in 1980 to $406 billion in 2016, meaning that 2016‘s debt was 2,136% of the level of debt in 1980.

The chief financial officer might view this with some alarm, as it suggests that Turkey may encounter a situation where an increasing proportion of the GNI will have to be directed toward payments of principal and interest on that debt, redirecting this income from other essential investments needed for further economic growth. It is possible that Turkey might find itself unable to issue further debt or, especially if interest rates rise, the country may find that it can no longer service existing debt, raising the risk of default. The country may find itself short of foreign currency reserves, causing it to impose controls on imports or on the repatriation of profits by foreign investors. High and potentially unsustainable levels of debt may cause the country‘s currency to lose value, which may reduce the amount of disposable income of the population and hinder demand for nonessential products and services. Tax rates may also need to be increased to generate monies to service debt, which may reduce growth and income as well as possibly encouraging growth of the underground economy. These and other concerns are likely to be raised by students and the implications of these concerns for a multinational corporation could be the basis of an interesting class discussion.

9. What are the positives and negatives for each potential dimension used to measure economy size (i.e., GNI, PPP)? Why would an economist use these different measures to estimate economic size?

Some answers might include (1) GDP: Good idea of the industrial activity inside of a country but a poor measure for the intellectual property of a nation. (2) GNI: Good measure for overall size of a country‘s economic activity but not the best measure for a local industrial base. (3) PPP: Useful to convert GDP and GNI numbers when considering local operations (like setting up a McDonald‘s), but not as useful when considering exporting to the country. (4) Atlas conversion factor: Valuable for considering long-term investments in a county, but if there are major changes in a country (such as a revolution) the current PPP numbers might be more valuable. (5) Underground economy: When considering consumer products, this could be a useful adjustment to a country‘s official statistics. This would not be so valuable if the government itself is a customer or if you are selling to specific industries that do report their income to the government.

(6) Income distribution and GINI index: Useful when selling expensive consumer products to determine the size of the market that can afford a particular product or service. Not as valuable for selling basic commodities or infrastructure development. (7) Disposable income: Good for considering consumer products that everyone buys but not useful for luxury products or industrial products. (8) Discretionary income: Useful for luxury items and services but not for 08-178

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everyday items or industrial products. (9) Unit labor costs: Useful when considering locating labor-intensive work to a country (such as sewing) not so helpful when the work has a low-labor content, compared to capital (such as highly automated systems). (10) Population density and population distribution: Valuable for consumer industries that require heavy advertising and intensive distribution. Not very valuable for industrial products and services that are sold to a few large buyers in a country.

10. Explain why household expenditures among product categories might differ between developed and developing nations. Why do developing nations spend more on transportation and communication, health care, and so on, but developed nations spend more on food and beverages?

Students will probably realize that families must first use their income to cover their need for food, clothing, shelter, transportation, communication, and health care; and in poor nations, they would then they have little left for luxuries. Developed nations have much more discretionary money, so they often indulge in eating out, or enjoy expensive beverages.

11. What implications might the rural-to-urban shift in developing countries have for international companies?

The answers to this question may vary. Some students may suggest that as more people move from rural areas to urban areas, there will be a corresponding increase in the need for expanded housing, food, transportation, education, health care, and other infrastructure and services, which could create opportunities for international companies. The size of the workforce will increase, which may make it easier to find workers for production activities, particularly in terms of unskilled or semiskilled workers. Of course, other students may suggest that, depending on the rate at which it occurs, rapid urbanization may also overwhelm urban areas, creating political, social, environmental, economic and other challenges and the potential for unrest or other problems. This could impact the relative attractiveness of countries as they undergo the rural-tourban shift in their population. globalEDGE Research Task Exercise 1 The quickest way to reach this section would be to search globalEDGE using the phrase by Classification. The economic indicator comparisons can be accessed by visiting each of the country groups listed on this page (emerging, frontier, and mature markets).

Search Phrase: by Classification Resource Name: by Classification Resource Link: https://globaledge.msu.edu/global-insights/by/econ-class Exercise 2

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Aerospace Industry Market Potential Index is available on the MPI page under the ―Tools and Data‖ tab on the top menu. Once on the MPI page, scroll down and check the right-hand column menu to find the industry-specific MPIs. The rankings can be accessed by clicking on the ―View MPI Table‖ button on the page. The indicators (measures) used are listed both on this pop-up table and on the main Aerospace Industry Market Potential Index landing page.

Search Phrase: Aerospace Industry Market Potential Index Resource Name: Aerospace Industry Market Potential Index Resource Link: https://globaledge.msu.edu/industry-mpi/mpi/10/aerospace MiniCase: The Impact of an aging population on manufacturing ability and competitiveness This MiniCase explores a situation where a fictious Japanese company that wishes to grow but is having trouble attracting young Japanese working to its factory due to the aging population. The nature of the work makes it very difficult for older workers to do these jobs. The company must decide how to proceed.

1. Explain the different options for manufacturing available to Fuyu Vision.

The options are rather limited. (1) The company could try to raise wages to attract more young workers. (2) The company could move operations offshore to a country with a much younger workforce. (3) It could increase the automation of the factory to make it feasible to use older workers.

2. What types of benefits could each option provide for the company (economic, productivity-wise, etc.)?

(1) This option would raise costs for labor but would benefit from higher productivity among the Japanese workers. (2) This has the advantage of lower wages and plenty of young workers, but the expected productivity is much lower. (3) This would allow the company to keep operations in Japan, while expanding production.

3. What types of internal changes might the company need to make if it were to implement the different manufacturing options available (closing existing plants, startup costs or investments for offshoring, layoffs, etc.)?

(1) The first option does not require any changes, although it does increase costs. (2) The second option presents the company with challenges for closing factories in Japan and the resulting layoffs, plus all of the challenges to build a factory abroad and to train a new workforce. This would have large startup costs, but would save money over the longer run with lower wages. (3) The third option would require restructuring the operations to eliminate many of the physical jobs that are difficult for older workers. This would result in significant costs and take some time to work out new operations.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available at http://bit.ly/MHEIBVideo. The Political Economy of International Trade and Investment board is one source that an instructor may find useful tools in. The content is rich and varied, and it is updated monthly.

The video ―India Economy to Overtake China but Many Still in Poverty,‖ at http://www.bbc.com/news/world-asia-india-31668217, discusses issues of economic growth and social welfare.

The video on ―Big Mac Index—explained‖ provides a cartoon-based explanation of the Big Mac Index; this video can be found at: https://youtu.be/hzyhZWZue7E. The video ―Hollenbeck on Big Mac Index,‖ found at https://youtu.be/7QR2D4IGArs, has Frank Hollenbeck explaining the theory behind PPP. The World Bank video, ―Harnessing Urbanization for Growth and Poverty Alleviation,‖ at https://youtu.be/nTAlOxqKYNo, helps to explain the increased urbanization of populations, especially in the developing nations, and how that can contribute to reduction in poverty. globalEDGE and the Academy of International Business provide links to a number of organizations that offer videos about international business. You can find these links at https://aib.msu.edu/resources/videodepositories.asp.

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for use in hybrid/flipped classroom and online courses.

1. Country Experts We have had good response from students when we have asked them to choose a country and become a specialist on it. You can assign this as a term project and also ask for short periodic verbal reports during the term. Have the students pick a country or region and research economic and socioeconomic information about that particular country or region. To enhance this exercise, assign students a product and ask the students to evaluate the success of that product considering the economic and socioeconomic data they uncovered. The material in this module is a good place to start.

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2. The Effect of Economic and Socioeconomic Changes on Managers Assign various kinds of changes in the economic and socioeconomic dimensions and ask the students to prepare a report to top management as to the expected effects of these changes on all the functional areas of the firm. To add realism, this exercise can be assigned as a continuation of Exercise 1.

3. Labor Compensation Cost Many the European Union countries have low or even declining birth rates. Consider labor compensation cost discussed in the module, and the information in Figure 7.4. Have the students discuss the implications for the European Union countries and businesses in the next 25 years.

4. Labor Costs Around the World Many students believe the labor costs in the United States are the highest in the world. Ask students to examine the information in Figure 7.4. Have the students explain how a country like Norway or the United States can remain competitive over time, particularly in competition with labor compensation costs in Brazil, Mexico, and Greece. When contemplating where to locate production facilities, what other factors must an international business manager contemplate beyond just labor compensation costs?

5. Economic Turmoil Students are probably aware of recent economic turmoil in countries like Brazil, Venezuela, Sudan, Spain, or Greece. Have the students pick one of these countries, or another appropriate country that has suffered from social and political challenges due to economic turmoil, and research the events and outcomes. What was the root cause of the economic turmoil and what was the eventual outcome of this economic chaos (or what do they think the eventual outcome will be)? How did international businesses respond to the situation?

6. GNI Have students consider that they are working in the marketing department for an international company that is analyzing market opportunities within the European Union. For the most recent year for which data are available, what are the five European Union member countries with the highest real gross national income (GNI) per capita? For the same year, what are the five member countries with the lowest real GNI per capita? Find similar data for the European Union members from 5 years earlier. Which country has had the highest percentage increase in GNI per capita? Which has had the lowest?

Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

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Harvard Cases ―Wal-Mart in China 2012‖ examines Wal-Mart‘s challenges in competing successfully in the diverse and changing economic and socioeconomic environment that China represents. ―Celtel Nigeria: Toward serving the rural poor (A)‖ describes the efforts by Celtel Nigeria to serve the rural poor. It provides detailed demographic and socioeconomic information, helping to highlight the material from this module. Nigeria presents a situation that contrasts Celtel‘s relative success in serving Nigerian cities and larger towns, and the differences it confronts in serving the massive but undertapped market in rural areas where reliable electricity service is not present, theft and vandalism of expensive communications and generators is a problem, and the payment system and financial infrastructure is inadequate. ―Estimating Demand in Emerging Markets for Kodak Express‖ provides an opportunity for students to take the perspective of an executive who must estimate demand for Kodak Express outlets in various developing nations, using a range of economic, socioeconomic and demographic data about the nations.

Controversial Issues 1. Global Debate: What Is the Best Way to Measure a Nation's Development: Income or Quality of Life?

This boxed feature described earlier in this module‘s Instructor Guide provides an excellent foundation for debating some of the issues raised in the text. This Global Debate provides an overview of different perspectives on how to assess the extent of a nation‘s development, contrasting traditional measures of economic development with one based on human development, as created by the United Nations Development Program. This contrast in perspectives serves as a starting point for a stimulating class discussion.

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against), and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups or else assign perspectives and conduct an in-class debate and discussion.

2. Debate on Whether India or China Will Be the First to Achieve Developed Nation Status Drawing from the content in the introductory vignette, ―Two Emerging Asian Superpowers: The China-versus-India Development Race,‖ you can ask students to take opposing perspectives to argue that India or China has economic, demographic, institutional, or other resources and attributes that will give them an advantage, or a disadvantage, in their relative efforts to achieve sustained development and become developed nations. Stereotypes and biases can be useful for raising issues that could subsequently be explored in more depth.

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Online and Hybrid: Virtual teams can be assigned to take different perspectives to argue for or against the likelihood that either China or India might achieve developed country status ahead of the other nation (or perhaps whether either country will be able to achieve such status, from the perspective of some cynics). You could ask the teams to conduct research in support of their perspective, examining economic, socioeconomic, and other data to identify trends and considerations impacting the level and rate of development that can be achieved over time. These assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: As with the online and hybrid assignment, students can be assigned to take different perspectives to argue for or against India or China emerging first as a developed country, and then they can be asked to argue their positions within an in-class debate and discussion.

3. Current Events for Sources of Culture Controversy A focus on current events that are relevant to the module‘s topics is a good way to bring home the concepts, review their application, and build news-review habits. Ask everyone to come prepared with an article for every meeting. If a meaningful percentage of the final grade is allocated to discussion (10–15), motivation is there. Devote five minutes at the beginning of class to discussion of current events. Recent relevant current events include economic crises in various developed or developing nations that can influence the country‘s level of development (e.g., Greece, the Ukraine, Venezuela, Brazil, Russia, or Sudan), health epidemics (e.g., Ebola), the graying of populations (e.g., Germany, Sweden, Japan, China), or immigration situations that could results in significant movements of people into, or out of, nations or regions (e.g., Syria, Central America, Afghanistan). Depending on the online interface, this activity may be done in chat forums (Blackboard) or discussion boards, before class begins. This activity also works well in large lecture classes.

Teaching Suggestions 1. Students often are unaware of the broad impacts on a company from changes in economic variables. It can be useful to pick one or two recent events—such as currency devaluation or a nation‘s high level of international debt—and then have students discuss whether and how such events might impact an international company operating inside or considering entry into a particular nation. To broaden participation and understanding, such discussion might begin by having students discuss the issue within a small group and then have the groups present and discuss their ideas within the class as a whole. Figure 7.1 can be used as a starting point or as a way of helping to organize ideas on a white board.

2. The material on Levels of Economic Development can be a useful base for generating a discussion. We discuss the concepts in this section as well as Figure 7.2 that shows the countries of the world based on per capita GNI, and ask the students to discuss how relevant these distinctions are, including how they may be valuable for international managers and what limitations they might involve. We tie in Table 7.1 and discuss how they may provide useful insight for international managers. We then conclude this discussion by including the material 08-184

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from the Global Debate box, ―What Is the Best Way to Measure a Nation's Development: Income or Quality of Life?‖ and generally have an invigorating discussion about what ―development‖ really means or should mean, what dimensions should be examined, and how to measure it.

3. We find it useful to conduct a discussion of how the various measures of an economy‘s size can be useful for international managers. For example, we discuss the usefulness of GNI and GNI per capita for helping to identify or rule out markets for potential products, a discussion that can be enhanced if several different specific products are discussed (e.g., toothpaste, MacBook Air laptops, Harley Davidson motorcycles, Levi‘s jeans). A discussion of the limits of these measures can also be useful, helping the students to think about what additional or alternative measures might be used for assessing market attractiveness. This can then evolve into either a larger discussion of the various economic analysis measures, or a discussion that also begins to incorporate socioeconomic or other dimensions.

4. Generally students do not fully understand the Purchasing Power Parity concept. We find it useful to put together scenarios (such as presented in the text, about Thailand versus the United States), combined with the IB in Practice box, ―Using the Big Mac Index to Assess PPP,‖ to help them understand what PPP is and how it may be useful for international managers when assessing markets.

5. Students often find the topic of the underground economy and informal markets to be interesting, although often they do not seem to fully understand the extent of such activities. We find it useful to use Figure 7.3 as a starting point and then to ask students to list the kinds of activities that might make up such an economy. We discuss the relevance of knowing roughly how large such a market is, such as what it means for disposable income, for products and services demanded, and so on, as well as what it might tell us about the context of the country (e.g., taxes, poverty, legal and other institutions).

6. We often find it useful to discuss the distribution of income in an economy, how it varies across nations, and the implications of different distributions. Table 7.4 is a useful tool for such discussion. We ask students to identify how having information on differences in distribution of income might be useful for an international manager and what products or services might be most impacted if income distribution is relatively even or if it is highly uneven.

7. It can be interesting to have a class discussion on the impacts of different age distributions within nations. Figure 7.6 provides a useful starting point for such a discussion. Asking students about why an economy would have a higher or lower proportion of elderly in its population can be a useful early discussion topic, as is the question of why the United States has a much lower proportion of elderly than comparable developed countries such as Germany and Japan (e.g., high rates of inward migration), or why China has such a high proportion of elderly than is the case with other developing nations (e.g., one child policy). Discussion of the implications of a high proportion of young people (e.g., workforce, products for setting up initial households and families) can be useful here.

8. Guest Lecturer possibilities: Some people who could contribute to the material in this module would be: 08-185

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

Someone involved in planning or economic analysis in a multinational firm.



The international trade specialist from your U.S. Department of Commerce office will have economic data available and should be able to show how firms use it. You may want to save this person for the chapter on exporting, however.



If you don‘t send your class to take a guided tour with the reference librarian, you might ask them to give a short presentation to the class about the resources available for conducting economic and socioeconomic analyses. Usually, they are willing since the students will be better prepared when they go to the library.

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title Evaluating Country Attractiveness

Assignm ent Type

Topic(s)

Click and Socioeconomic Country Drag Attractiveness Dimensions that Describe the Economy and their Japan's Economic Video Relevance for Malaise Case International Business Understanding the Environment in Economic Click and International Economic Analyses Drag Analyses Three Levels of Economic Case Levels of Economic Development Analysis Development

Learning Objective(s )

AACSB Accreditatio n Tagging

Bloom's Taxonomy

07-02; 0704

Analytical Thinking

Apply

07-03; 0704

07-01

Analytical Thinking Analytical Thinking/ Reflective Thinking

Understand/Re member

07-02

Knowledge Application

Understand

Analyze

Connect Activities 1. Evaluating Country Attractiveness Activity Summary: This is a click and drag activity in which economic indicators are matched to their corresponding dimension of an economy.

How to Use Activity: This works well as an in-class assignments for small groups. After the teams have completed the assignment, ask about any points that were not clear and discuss those with the class. This allows you to tailor the discussion to each class. This can also be done individually as an internet assignment.

2. Japan’s Economic Malaise Activity Summary: This is a video case in which students watch a short video and answer one or more questions about it.

How to Use Activity: Have students do this individually for internet courses. In face-to-face classes, have students do this before class and then discuss the issues around Japan‘s economic decline.

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In groups or individually, have students compare Japan‘s economic indicators with the United States or another country. What indicators are similar and what are different?

Have student groups propose policies for Japan to reignite economic growth. Have these groups present in class and discuss the details of these proposals with the whole class.

3. Understanding the Environment in Economic Analyses Activity Summary: In this click and drag activity, students match the environment type (foreign or international) with the corresponding force.

How to Use Activity: This can be done individually or in groups. For a class discussion, have teams complete this assignment, then give additional examples of forces and ask students what environment type it would fall under and why.

4. Three Levels of Economic Development Activity Summary: This case analysis gives a bulleted list of reports from the International Monetary Fund and provides three different sets of multiple-choice questions for students to answer.

How to Use Activity: With three different questions for the same case, this works well as a set of questions from which one is randomly picked for an online assignment.

Module 8: The International Monetary System and Financial Forces Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions 08-188

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globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

Your Content Summary This chapter reviews the international monetary system, how it developed, today‘s system, exchange rate movements, the financial forces that governments can exert and with which managers must contend, and the significance of balance of payments.

Learning Objectives LO 8-1

Describe the international monetary system‘s history.

LO 8-2

Describe today‘s floating currency exchange rate system, including the IMF currency arrangements.

LO 8-3

Describe the factors that influence exchange rate movement.

LO 8-4

Discuss financial forces governments can exert.

LO 8-5

Explain the significance of the balance of payments to international business decisions.

Key Terms and Definitions arbitrage (p. 234)

The process of buying and selling instantaneously to make profit with no risk

ask price (p. 233)

Lowest priced sell order currently in the market

balance of payments (BOP)

Record of a country‘s transactions with the rest of the 08-189

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(p. 241)

world

Bank for International Settlements (BIS; p. 230)

Institution for central bankers; operates to build cooperation in order to foster monetary and financial stability

bid price (p. 233)

Highest priced buy order currently in the market

Bretton Woods system (p.

225)

The international monetary system in place from 1945 to 1971, with par value based on gold and the U.S. dollar

efficient market approach (p.

236)

Assumption that current market prices fully reflect all available relevant information

fiscal policies (p. 234)

Policies that address the collecting and spending of money by the government

Fischer effect (p. 234)

The relationship between real and nominal interest rates: The real interest rate will be the nominal interest rate minus the expected rate of inflation

fixed exchange rate (p. 225)

Exchange rate regime in which the currency‘s value is tied to the value of another currency or gold

floating exchange rates (p.

227)

Exchange rates determined by supply and demand that allow currency values to float against one another

forward currency market (p.

232)

Trading market for currency contracts deliverable 30, 60, 90, or 180 days in the future

forward rate (p. 232)

The exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days

fundamental approach (p.

236)

Exchange rate prediction based on econometric models that attempt to capture the variables and their correct relationships

gold standard (p. 224)

A monetary system that defines the value of its currency in terms of a fixed amount of gold

international Fischer effect (p. 234)

Concept that the interest rate differentials for any two currencies will reflect the expected change in their exchange rates 09-190

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intervention currency (p.

232)

A currency used by a country to intervene in the foreign currency exchange markets

Jamaica Agreement (p. 227)

The 1976 IMF agreement establishing flexible exchange rates among IMF members

law of one price (p. 234)

Concept that in an efficient market, like products will have like prices

monetary policies (p. 234)

Government policies that control the amount of money in circulation and its growth rate

par value (p. 225)

Stated value

purchasing power parity (PPP; p. 234)

The amount of adjustment that must be made in the exchange rates for two currencies in order for them to have equivalent purchasing power

random walk hypothesis (p.

236)

Assumption that the unpredictability of factors suggests that the best predictor of tomorrow‘s prices is today‘s prices

reciprocal currency (p. 232)

In FX, using the dollar as the base currency, a currency that is quoted as dollars per unit of currency instead of in units of currency per dollar

reserves (p. 225)

Assets held by nation‘s central bank, used to back up government liabilities

special drawing rights (SDR) (p. 226)

An international reserve asset established by the IMF; the unit of account for the IMF and other international organizations

spot rate (p. 232)

The exchange rate between two currencies for delivery within two business days

technical analysis (p. 236)

An approach that analyzes data for trends and then projects these trends forward

Triffin paradox (p. 226)

A problem in which a national currency that is also a reserve currency will eventually run a deficit, leading to lack of confidence in the reserve currency and a financial crisis 09-191

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vehicle currency (p. 232)

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A currency used as a vehicle for international trade or investments

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 8-1 Describe the international monetary system‘s history. 

LV. I.

Key Terms: 

gold standard

o The Gold Standard



Bretton Woods system

o The Bretton Woods System



fixed exchange rate

o The Central Reserve/National Currency Conflict



par value



reserves



Triffin paradox



special drawing rights (SDRs)

The International Monetary System: A Brief History

The International Monetary System: A Brief History The Gold Standard 44. Established in Britain 1717, Newton, from silver standard.

45. Simplicity is at core of its appeal.

46. Government does not have monetary flexibility.

II.

The Bretton Woods System 47. Allies set up monetary systems at end of WWII, including IMF and World Bank.

48. Fixed rate exchange system, with gold-backed U.S. dollar as standard.

49. Supported trade growth into 1960s, but growing international trade required a more flexible system.

50. Triffin paradox—U.S. deficit due to dollar‘s use as reserve currency.

51. SDR as an intermediary currency.

III.

Central Reserve/National Currency Conflict 52. Reserve currency effects national currency, leading to deficit.

53. SDR a way to avoid this result.

LO 8-2

Describe today‘s floating currency exchange rate system, Key Terms: including the IMF currency arrangements.  floating exchange rates  The Floating Currency Exchange Rate System  Jamaica Agreement 09-193

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o Current Currency Arrangements



Bank for International Settlements (BIS)

o The Bank for International Settlements I.

The Floating Currency Exchange Rate System 1. U.S. left the gold system in response to growing deficit.

2. Free floating system emerged (Jamaica Agreement).

I.

Current Currency Arrangements 54. IMF recognizes eight arrangements, vary in degree of flexibility.

55. Have no currency and use the currency of another nation.

56. Peg currency to value of another currency.

57. Manage a floating currency.

58. Maintain a freely floating currency.

II.

The Bank for International Settlements 59. The BIS operates as intermediary.

60. Central bankers‘ central bank.

LO 8-3

Describe the factors that influence exchange rate movement. 

Key Terms: 

vehicle currency

o Fluctuating Currency Values



intervention currency

o Why Foreign Currency Exchange Occurs



reciprocal currency

o Exchange Rate Quotations and the FX Market



spot rate

o Causes of Exchange Rate Movement



forward currency market



forward rate



bid price



ask price



monetary policies



fiscal policies



law of one price



arbitrage



Fischer effect



international Fischer

Financial Forces: Fluctuating Currency Values

o Exchange Rate Forecasting

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effect

II.

Financial Forces: Fluctuating Currency Values

I.

Fluctuating Currency Values



purchasing power parity (PPP)



efficient market approach



random walk hypothesis



fundamental approach



technical analysis

A. After the Bretton Woods monetary system, many major currencies freely fluctuated against each other.

B. The value of a currency was dependent on supply and demand for that currency as determined by markets.

C. Currency fluctuations have a major impact on corporate decisions such as whether to import or manufacture locally.

II.

Why Foreign Currency Exchange Occurs 61. Buyers want to purchase in own currency, so sellers assume risk as part of their offering.

62. Risk of movement may be substantial, as freely floating currencies can shift considerably.

III.

Exchange Rate Quotations and the FX Market 63. Reciprocal is a currency that is quoted as dollars per unit (using dollar as base currency) of currency instead of in units of currency per dollar.

64. Spot rate is rate for exchange within two business days.

65. Forward rate is for a contract deliverable in a specified time in the future (30, 60, 90 days).

66. Bid is highest priced buy order, while ask is lowest priced sell order.

IV.

Causes of Exchange Rate Movement 67. Many variables—inflation, supply and demand, productivity, labor costs, political situation, government‘s monetary policy, balance of payments, and so on—no clear theory of FX movement yet exists.

68. There are some parity relationships that rest on the law of one price that help us understand exchange rate movement.

A. Interest rate parity: Interest rates vary to take into account varying rates of inflation, the 09-195

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Fischer effect.

B. International application: The interest rate differentials for any two currencies will reflect the expected change in their exchange rates.

C. Purchasing Power Parity (PPP), an application of the law of one price: Currency exchange rates between two currencies should equal the ratio of the price levels of their commodity baskets (The Economist‟s Big Mac Index).

V.

Exchange Rate Forecasting 69. Efficient market approach: assumption that current market prices reflect all available information.

70. Random Walk Approach: assumption that the unpredictability of the factors that influence exchange rates suggests that the best predictor of tomorrow‘s prices are today‘s prices.

71. Fundamental approach: prediction based on economic models that attempt to capture the variables and their correct relationships.

72. a. Technical analysis: approach analyzes data and projects these trends forward.

LO 8-4

Discuss financial forces governments can exert. 

Key Terms:

Financial Forces Governments Can Exert o Currency Exchange Controls o Taxation o Inflation and Interest Rates

III.

Financial Forces Governments Can Exert

I.

Currency Exchange Controls 73. Governments can control currency exchange of their currency and other currencies within their borders.

74. Convertible and nonconvertible currencies.

75. Motivation is to manage foreign reserves.

76. With currency controls, exchange rates usually above open market rates.

II.

Taxation—financial as well as legal force.

77. Effective tax management can yield a competitive advantage.

78. Three major types of taxes: A. Income—direct tax on corporations and individual income.

B. Value-added—really a sales tax, and collected at each step of value added, then credited back on earlier payments.

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C. Withholding tax—indirect tax on passive income.

79. Management techniques involve profit shifting (often through transfer pricing) and inversion (moving to a lower tax environment).

III.

Inflation and Interest Rates 80. Inflation-sustained increase in prices.

81. Determines real cost of borrowing in capital markets.

82. Rising rates encourage borrowing.

83. Inflated currencies tend to weaken—interest rates rise with inflation.

LO 8-5

Explain the significance of the balance of payments to Key Terms: international business decisions.  balance of payments (BOP)  Balance of Payments o BOP Accounts o Deficits and Surpluses in BOP Accounts

IV.

Balance of Payments 84. A record of a country‘s transactions with the rest of the world.

85. What balance of payments shows: a. Flows of capital in and out of country. b. Demand for the currency, hence a comparison of imports (flows out) and exports (flows in).

I.

BOP Accounts 86. Tracked in double-entry bookkeeping form.

87. Each international exchange of assets is recorded with a debit (outward flows of funds) and credit side (inward flows of funds).

88. Three major accounts: A. Current account tracks goods—tangibles, known as trade balance, services-intangibles, unilateral transfers (gifts, aid, migrant worker earnings).

B. Capital account tracks financial assets and liabilities, direct investment, portfolio investment, short-term capital flows (credit when resident sells stock to nonresident).

C. Official reserves—gold imports and exports.

II.

Deficits and Surpluses in BOP Accounts A. Current account deficit may mean economic problems (inflation, low productivity, inadequate savings) OR that demand into the country (Treasury bills, investment property) 09-197

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exceeds outward flows (as in the United States).

B. To give meaning to a deficit, you need to look at the total picture.

Engagement and application Boxed Text Discussion Questions With Suggested Answers IB in Practice: G7 Foreign Exchange Intervention After the 2011 earthquake and tsunami that hit Japan, the yen strengthened considerably. That seemed illogical because you would expect a country facing a disaster of such huge proportions to have a weakening currency. Not only was the economy seriously damaged but the nuclear disaster added to the challenges for Japan. The yen strengthened on speculation that Japan‘s foreign businesses would repatriate money to assist in Japan‘s recovery. This led to a G7 intervention in order to make the yen‘s movements orderly and to reverse the strengthening. This intervention was successful.

1. With a natural disaster, why would we expect a country’s currency to weaken?

There would be reduced demand for the currency since economic effects of the disaster would reduce production and thus, exports.

2. Why were the G7 so quick to intervene?

The disorderly trading pattern in the yen, caused by currency trader speculation, could have led to financial instability at the global level. The hard currency financial markets (dollar, yen, euro, pound sterling) are reasonably integrated, so what happens in one affects the others.

Global Debate: Fixed FX Rates, Perhaps Hooked to Gold, or Floating Rates, Hooked to Faith?

The global debate issue here is on whether foreign exchange rates should be fixed or floating.

The box contains the key arguments for both approaches.

1. If the SDR were used, would a viable fixed-rate regime be possible or not?

The SDR could operate the way the dollar did in the Bretton Woods system, but instead of being tied to gold, it would be tied to the basket of trade-weighted currencies on which the value of the SDR rests. So it seems that this might be a possibility.

2. Given the inclusion of the SDR, outline the pro and con arguments for a fixed-rate regime.

Pro A fixed rate system in theory could use the SDR as its basis. This would impose monetary discipline on governments.

Fixed rates would eliminate exchange rate risk, which would be beneficial for exporters and importers.

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A fixed rate system would reduce the role psychology plays in the FX markets in a free-floating system.

Con It is questionable whether any government in a fixed rate system could handle the massive amounts of foreign exchange required by increases in the trade volume. FX exceeds many countries‘ reserves.

A fixed-rate system would reduce governments‘ control of their monetary policy.

Fixed rates would impact the economy considerably—inflation, interest rates.

Get That Job! From Backpack to Briefcase: Cameron Mauzy: Internationalizing Through Learning a Language and Immersing Abroad The box explores how Cameron Mauzy‘s love for studying Chinese led him into majoring in international business and doing two trips to China; one to study the Chinese language and another for an internship. His language studies included an immersion program in which he spoke with native speakers every day. His internship in Shanghai, China was for Dare to Dream, where he was the only intern from the United States. Mauzy‘s takeaways from his experience include learning to be flexible in a foreign environment and becoming confident in overcoming challenges that come with an unfamiliar environment.

1. Cameron Mauzy was constantly being put in situations where he did not have all the answers and had to overcome challenges related to being in a foreign environment. How do you think you would do in a similar situation?

Many students will be hesitant to engage in a foreign experience because of this description. This is a good opportunity to tell students that people have been overcoming challenging foreign experiences for thousands of years, and that they can do it too.

2. Mauzy said that after his experience abroad, dealing with problems in his home country felt much easier. Why is that? Do you think you would have the same experience?

Students will probably come up with the simple answer that he has a new perspective on life because of his time abroad. But push students to dive deeper and explain why this is so. Students that spend time in developing countries often return with heartfelt gratitude for simple things such as drinking water from the tap and hot showers, such that other problems seem small and manageable by comparison. Even students that spend time in other developed countries where they need to learn a new language and new customs, returned armed with the confidence that having overcome those great challenges, they can more easily deal with what now appears as lesser problems back home.

End of Module Exercises Critical Thinking Questions 1. Are people who argue today for a return to the gold system simply nostalgic or do they have a point?

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The gold system has an appealing simplicity, but it may not be ready to handle the complexities and scale of the present international trade and FX markets. This is, though, an opinion question, so reasoning is the key.

2. Was the Bretton Woods system bound to fail? Why or why not?

This question goes to the Triffin Paradox. The Bretton Woods system supported substantial international trade growth during the 1950s and 1960s. Other countries changed their currency‘s value against the dollar and gold, while the U.S. dollar remained fixed. This meant that the United States, in order to satisfy the growing demand for reserves, since countries would hold dollars as a proxy for gold, had to run a balance-of-payments deficit. In the United States the flow of dollars out was greater than the flow in; the demand on dollars for holding outside the country was greater than those that flowed in as a result of export sales. The deficit was financed partly by use of the U.S. gold reserves, which shrank and partly by incurring liabilities to foreign central banks. By 1971, the Treasury held only 22 cents‘ worth of gold for each US$ held by those banks. Economist Robert Triffin pointed out that such a deficit would eventually inspire a lack of confidence in the reserve currency, which would lead to a financial crisis. That is, the more dollars foreigners held, the less confidence they had in the currency. Known as the Triffin paradox, that is exactly what happened when, after trade deficits in the late 1960s, President Charles De Gaulle pushed the Bank of France to redeem its dollar holdings for gold. Eventually, in 1971, President Nixon suspended the dollar‘s convertibility into gold. That was the end of the Bretton Woods system. So, yes, success led to failure of the system.

3. You are on a business trip from Portugal to the United States for 90 days, and you have a per diem expense account of 400 euros, no receipts required. This per diem is advanced to you before the trip (36,000 euros). You deposit it into your checking account and use your Portuguese (euro) credit card to cover your costs while in the United States. After the first 2 weeks of your trip, the dollar weakens against the euro by 15%. What ethical dilemma might this currency fluctuation present for you? How will you handle it?

The dilemma is over what rate to use as the base of the calculation. Who should benefit from the exchange rate movement in the euro‘s favor, the traveler or the firm? There are arguments for the firm (it's their money and they are covering costs) and for the traveler (good luck on the rate movements). Probably the best approach would be to ask the accounting department how to treat the difference Let‘s assume a hypothetical euro 1 = US$ exchange rate. If the dollar devalues by 15% the new exchange rate is Euro 1 = US$ 1.15× The employee puts euro 36,000 in her European Bank. This was good for US$36,000, which was the budgeted amount of dollars needed to cover expenses. At the end of the stay the credit card company will convert the US$36,000 by dividing by 1.15, the new exchange rate (assume no transaction costs for simplicity). This will yield euro 36,000 × /1.15 or euro 31,304. The employee has ―made‖ euro 4,696!

4. If all nations used the SDR, what might the impact be on business?

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The impact on business would be to greatly reduce risk because there would be no exchange rate fluctuation. Governments, though, would lose control of their monetary systems, which would be difficult for many governments. That is why the likelihood of a common currency is slim in the near future.

5. Your firm is generating considerable revenues in a country that suddenly imposes exchange controls prohibiting the purchase of foreign currency within the country and the export of currency. What are some of the issues you will want to discuss with your regional finance staff?

You have a problem with repatriation of profits generated in that currency and with recouping your capital. What can you do? You can pay for all expatriate and visitor expenses in the local currency that is blocked. You can negotiate with the government for credits in foreign currency for exports of your products to third countries. You can buy other local products and export them. Pepsi once shipped vodka out of Russia in a tanker to deal with this sort of issue.

6. Your U.S. firm is about to sign a contract to supply services to a bank in Beijing, with an up-front payment agreement of 50%. Do you want this payment in U.S. dollars? Why or why not?

If you get paid U.S. dollars today, you are out of the ―exchange rate gain/loss‖ risk game. This is the conservative approach of many companies who are not in financial services. If your ―crystal ball‖ says that the US $ is bound to depreciate against the Chinese currency, an unlikely event, then you may well specify payment in Chinese yuan and wait. You may get more US $ at the end of next year. Of course, there are cash flow implications to getting paid later and time value of money implications as well, both of which suggest payment today.

7. While the U.S. Federal Reserve has been slashing interest rates, the European Central Bank is holding interest rates steady. Could this policy difference have influenced the relative strength of the dollar against the euro? Why or why not?

Yes, if broader economic and political conditions stay more or less the same, the Euro will continue strengthening against the dollar. Higher interest rates in the euro zone will attract more buyers to the currency.

8. Your Boston-based company earned 54% of its profits from Germany and France. Given your answer in Question 7, are you happy today? Why or why not?

Yes, I am happy because I will be earning more dollars for my euro profits. Assuming the profit stream in euros meets my operating expectations, then I can record much higher dollar profits in Boston.

9. Your Munich-based company earns 64% of its revenues from high-precision auto component exports to the United States. You need to expand manufacturing capacity, and the U.S. market has great growth potential for your product. Your raw materials could be sourced in either location relatively easily and with no cost advantage in either. Given your answer in Question 7, where would you be most likely to add capacity, in Germany or the United States? Why? 09-201

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You would add capacity in the United States. Key inputs like labor and land will continue to be more attractive in the United States given the strength of the euro. The initial capital expenditure is lower in euro terms and the cost of producing your cars in the United States will be lower.

Also, you will be saving on transportation costs. In the longer term, you will have a manufacturing base on both sides of the Atlantic and can spread your exposure to economic risk.

If the euro were to continue to strengthen against the dollar, you could start exporting your cars back to Europe. If the direction is the other way, you can add to your U.S. supply of finished product by exporting from Europe.

10. Why should managers regularly monitor the balance of payments of the countries in which their business operates?

When management of an IC realizes that the balance of payments of a country where it is doing business is in deficit, they should review the balance of payments accounts and, if the deficit suggests monetary issues, be alert for government measures to correct the deficit. There are a number of those measures that could affect the company‘s operations. Some of them are currency controls, import controls, export stimuli, currency devaluation, or restrictive monetary or fiscal policies.

globalEDGE Research Task Exercise 1 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > ―country of choice‖), each country‘s profile page will be displayed individually from where ―Indices‖ page of countries can be accessed on the left column menu.

Students will need to use the Financial Secrecy Index on this page to answer the question.

Search Phrase: Financial Secrecy Index Resource Name: Financial Secrecy Index Resource Link: https://globaledge.msu.edu/countries/germany/indices Exercise 2 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > ―country of choice‖), each country‘s profile page will be displayed individually from where ―Indices‖‟ page of countries can be accessed on the left column menu.

Students will need to use Corruption Perceptions Index on this page to answer the question.

Search Phrase: Corruption Perceptions Index Resource Name: Corruption Perceptions Index Resource Link: https://globaledge.msu.edu/countries/germany/indices 09-202

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MiniCase: SDR Exchange Risk This MiniCase looks at the lending of the Asian Development Bank and its loan process. All of its loans are made in SDR. 1. Why would the ADB hold SDR instead of dollars or euros?

Because the SDR‘s value is based on a basket of currencies, it is somewhat hedged against currency fluctuation. Seeking that security may be the motivation of the ADB. This question gives students an opportunity to become more familiar with the SDR. 2. What are the currency amounts that make up the SDR? This question asks for the weighting of the currencies that compose the SDR, the pound, yen, euro and dollar.

These weightings are found at: www.imf.org/en/news/articles/2015/09/14/01/49/pr15543. They are dollar: 41.73%, euro: 30.93%, renminbi: 10.92%, yen: 8.33%, and pound sterling: 8.09%.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available at http://bit.ly/MHEIBVideo. The Foreign Exchange Market board is rich and varied, updated monthly.

See ―Out of the Ashes (Rebuilding the International Monetary System),‖ posted by the IMF, at www.youtube.com/watch?v=s2OeN-im044. ―Making Sense of SDRs‖ was uploaded by the IMF and offers a good introduction to the SDR. See www.youtube.com/watch?v=67hNp-vsFew. Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for hybrid and online courses.

1. Islamic Financial Institutions Many students are not aware of the difference between Islamic financial institutions and other financial institutions. Assign small teams (five students) to research Islamic financial institutions, having each team focus on one topic. By dividing the topics, you can have all students focused on aspects of Islamic finance and then share their knowledge in brief class or discussion board presentations. Material from these presentations may be included in exams or quizzes. Here are suggested topics: 

Summarize the history and religious basis of Islamic finances, including its purpose.



Summarize how Islamic financial institutions support trade.



Review the growth of Islamic banking and explain this phenomenon.



Review the role of women in Islamic banking.



Discuss the size and impact of Islamic banking.



Discuss nonbank institutions that play a role in Islamic finance.



Discuss where Islamic finance institutions play the largest roles and offer explanations.



Describe the specific techniques Islamic banking uses.



Discuss the contributions Islamic banking has made in developing countries.

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2. Chinese Devalue the Yuan The Chinese economy is the second largest in the world, yet its government controls the exchange rate for its currency. This strategy costs China more in their imports, and they import heavily in the energy sector. Why were they willing to take a devaluation at this time? Discuss this question in small groups (five students) and report back on your findings. Teams will report back to the class either in class or via collaboration tools, depending on the class format. (In case you are wondering—yuan is the name of a currency unit, while renminbi is the name of the currency system.)

3. Inflation Rates by Country Assign small groups a country whose inflation rates they are to research. Good sites are www.cia.gov and www.imf.org. Then ask them to list ways their findings would affect international business decisions regarding that country. Report back to the class or using an online collaboration tool to share findings with class members.

Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Harvard Cases ―Debt and Development in Jamaica‖ describes the economic development problems faced by Jamaica over most of the past half-century. This case allows students to explore the complicated economic difficulties faced by Jamaica, which remains burdened by a self-reinforcing set of interrelated factors, including high public debt, a sluggish private sector, an inefficient public sector, poverty, and crime, among others. ―Can the Eurozone Survive?‖ covers the sovereign debt crisis that took Greece by storm in 2010 and spread to other European markets, Ireland and Portugal, with Spain and Italy next in line.

The European financial system became strained. Banks were found to be undercapitalized and began to ration credit to the economy. The European Central Bank intervened to provide liquidity to the system in order to avoid a credit crunch. Can the eurozone survive the storm? ―Brazil‘s Enigma: Sustaining Long-term Growth‖ reviews the past decade in Brazil, when becoming a leading world economic power appeared certain. An expanding middle class and commodity boom fueled economic growth, with GDP growth hitting 7.5% in 2010. Yet, the high cost of conducting business in Brazil, known as ―Custo Brasil,‖ was hurting domestic manufacturing, and incoming foreign investments threatened to overwhelm Brazilian markets.

Under President Dilma Rousseff, economic growth stagnated, and Brazil struggled to find the best balance between reducing inflation, maintaining a flexible exchange rate, and improving the 09-205

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competitiveness of Brazilian exports.

Controversial Issues Inversions Still Have Their Appeal The U.S. Treasury restrictions tightened merger rules that went into effect recently, which make it more difficult for U.S. companies to access their overseas cash unless it is taxed at U.S. rates and tightens the conditions under which a merger can be an inversion. Inversions were once an esoteric tax loophole, but in the past few years have come to be used more frequently as a way to reduce tax rates. Essentially, they allow companies to lower their corporate tax rates by buying foreign companies. Here‘s how it works: the company either sets up or buys another company in a country with a lower corporate tax rate and then calls the new country home. Essentially, nothing moves. The company simply moves its legal address outside the United States. Then the company can move some of their profits to the new company and lower their tax rates. U.S. corporate rates tend to be higher than those in many other countries. For example, UK rates are around 20%, while U.S. rates are almost 40%, before tax credits. The average tax rate in 2010 among the 10 most profitable U.S. companies was 25.4%, according to Forbes (www.forbes.com/2011/04/13/ge-exxon-walmart-apple-business-washington-corporatetaxes.html). So inversions lower tax rates and yet, the company still operates in the United States, enjoying conditions supported by the taxes of other businesses and individuals.

Despite the Treasury clampdown, U.S. businesses continue to practice inversions as a part of their corporate tax strategy. There were 14 inversions completed in 2014 and many are planned as of mid-2015, including Coca Cola Enterprises (a bottler and distributor) and CF Industries, both to the UK. 

What is meant by an inversion deal?



Another way to look at inversions is that they are examples of the benefits of globalization. Companies are simply exploiting a comparative advantage. Evaluate this viewpoint.



A recent The Economist article suggests that U.S. tax law is what has to change and that until it does, U.S. cash-rich companies abroad (who do not pay U.S. taxes until profits are repatriated) will be targets for acquisition by non-U.S. companies. Evaluate this perspective.

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Teaching Suggestions 1. This chapter is very important to students‘ understanding of the importance of the international monetary system and financial forces in international business.

2. Focusing on the boxed material and the case study will help students achieve the objectives of the chapter. Answers for both the boxed material and case studies are provided in this Instructor Guide.

3. The Critical Thinking Questions at the end of the module will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collect assignments at random and assign a grade; (2) occasionally give some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) have students hand in assignments and give credit for work submitted; and (4) call on students at random to answer specific questions (giving a small number of points for correct answers or counting this as part of participation).

4. Guest lecturers on the financial forces that affect management are a way to underscore the importance of the information in this module. Possible guests include 

An economist who can speak to exchange rate volatility and its effects.



A financial manager with experience in financial management would recount some interesting experiences in addressing financial forces.



A retired IMF or Treasury employee whose work included some of the issues addressed in this module.



Someone who served in the Peace Corps might also have interesting observations about financial forces and economic development.



Faculty colleagues from other countries.

5. Students who view themselves as not strong in math may mistakenly think that this will be a difficult chapter for them. The material is presented stressing the underlying concept to assist such students.

6. To cover such a vast subject as financial forces and the monetary system in the short time available is impossible. Students who become interested in this area might be encouraged to explore an international finance course. Our aim is to help students realize that there are financial forces and that international business managers must be aware of them and work with them.

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Connect tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title The Evolution of the Global Monetary System Understanding Exchange Rates Predicting Exchange Rate Movements The Balance of Payments (BOP) Explained Talk of a Weak Dollar Has Divided Opinions at Davos

Assignment Type

AACSB Learning Accreditation Bloom's Objective(s) Tagging Taxonomy

Click and Drag

Topic(s) The History of the Global Monetary System 08-01 Fixed versus Floating Exchange Rate Systems 08-02; 08-03 Different Exchange Rate Regimes 08-02; 08-03

Click and Drag

Balance-ofPayments

Video Case

Financial Forces Governments Can 08-03; 08-04; Exert 08-05

Click and Drag Click and Drag

08-05

Analytical Thinking

Understand

Analytical Thinking

Apply

Analytical Thinking

Understand

Reflective Thinking Knowledge Application/ Analytical Thinking

Apply

Remember/ Understand

Connect Activities 1. The Evolution of the Global Monetary System Activity Summary: This is a click and drag activity in which students match descriptions to the monetary policy event.

How to Use Activity: This can be given as an online assignment or as an in-class assignments for small groups. For live classes, have teams complete the assignments, then ask about any points that were not clear and discuss those with the class. This allows you to tailor the discussion to each class.

2. Understanding Exchange Rates Activity Summary: In this click and drag activity, students assign descriptions to the correct currency arrangement. More than one description can be assigned to an arrangement.

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How to Use Activity: This works well as an in-class assignments for small groups. After the teams have completed the assignments, ask about any mistakes that teams made and discuss those items with the entire class. This can also be done individually as an internet assignment.

3. Predicting Exchange Rate Movements Activity Summary: In this click and drag activity, students match various predictors of exchange rates to one of two categories: long-range predictors or short-range predictors.

How to Use Activity: This activity can be done individually at home or in class in small teams.

4. The Balance-of-Payments (BOP) Explained Activity Summary: This is a click and drag activity in which students have a selection of international transactions they need to match to the correct BOP account (capital account, current account, or financial account).

How to Use Activity: This is an area that some students seem to struggle to understand. If students work this in groups, either online or in class, they can help each other understand the concepts. If done before class, discuss any item that were confusing to students. Then give additional examples and ask students to assign them to the proper category.

5. Talk of a Weak Dollar Has Divided Opinions at Davos Activity Summary: This is a video case in which members of the World Economic Forum in Davos discuss whether the dollar‘s decline is a benefit to the U.S. economy or not. Students then answer several multiple-choice questions to test their understanding.

How to Use Activity: Have students do this individually for internet courses. In face-to-face classes, have students do this before class and then discuss the issues about the international impact of a weaker dollar.

Module 9: International Competitive Strategy Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers 09-209

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IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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Your content Summary This module provides an overview of strategic considerations that international companies must take into account when competing within an international business environment. In the global marketplace, a company must be able to quickly identify and exploit opportunities wherever they may occur. To do this effectively, managers must fully understand why, how, and where they intend to do business, now and over time. Managers need to have a clear understanding of their company‘s mission and vision and an understanding of how they plan to compete with other companies. In order to meet these challenges, managers need to understand their company‘s strengths and weaknesses along with those of their competitors. They must also be able to identify opportunities and threats. Strategic planning provides valuable tools for helping managers address these global challenges.

International strategy is concerned with the way firms make fundamental choices about developing and deploying scarce resources internationally. International strategy involves decisions that deal with all of the various functions and activities of a company, not merely a single area such as marketing or production. To be effective, a company‘s international strategy needs to be consistent among the various functions, products, and regional units of the company as well as with the demands of the international competitive environment. The goal of international strategy is to achieve and maintain a unique and valuable competitive position, both in a nation as well as globally, a position that has been termed ―competitive advantage.‖ This suggests that the international company either must perform different activities than its competitors, or else perform the same activities but in different ways. In attempting to develop competitive advantage, a company‘s managers are forced to make choices regarding what to do, and what not to do, now and over time. Different companies make different choices, and these choices have implications for each company‘s ability to meet the needs of customers and to create a defensible competitive position internationally. Without adequate planning, managers are more likely to make decisions that do not make good sense competitively, and the company‘s international competitiveness may be harmed. Many global and multinational companies have instituted formal worldwide strategic planning to identify opportunities and threats, formulate strategies to handle them, and stipulate the means to finance them. Global strategic planning provides a formal structure in which managers analyze the firm‘s external environments, analyze the firm‘s internal environments, define the company‘s business and mission, set objectives, quantify goals, and formulate strategies and tactics to achieve them. Operating managers do the planning and with the assistance of their planning staff.

Learning Objectives LO 9-1

Explain international strategy, competencies, and international competitive advantage.

LO 9-2

Describe the global strategic planning process and its components.

LO 9-3

Describe the features of a strategic plan.

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LO 9-4

Discuss the time horizon, organizational level, and different methods of strategic planning.

LO 9-5

Outline new directions in strategic planning.

Key Terms and Definitions bottom-up planning (p. 268)

Planning process that begins at the lowest level in the organization and continues upward

budget (p. 266)

An itemized projection of revenues and expenses for a future time period

competitive advantage (p. 252) The ability of a company to achieve and maintain a unique and valuable competitive position both within and nation and globally, generating higher rates of profit than its competitors competitive strategies (p. 259)

Action plans to enable organizations to reach their objectives.

contingency plans (p. 264)

Plans for the best- or worst-case scenarios or for critical events that could have a severe impact on the firm

explicit knowledge (p. 255)

Knowledge that is easy to communicate to others via words, pictures, formulas, or other means

international strategy (p. 252)

A plan that guides the way firms make choices about developing and deploying scarce resources to achieve their international objectives

iterative planning (p. 268)

Repetition of the bottom-up or top-down planning process until all differences have been reconciled

knowledge management (p.

255)

The practices that organizations and their managers use for identifying, creating, acquiring, developing, dispersing, and exploiting competitively valuable knowledge

mission statement (p. 256)

A broad statement that defines the organization‘s purpose and scope

policies (p. 266)

Broad guidelines issued by upper management to assist lowerlevel managers in handling recurring issues or problems

procedures (p. 266)

Guides that specify ways of carrying out a particular task or 09-212

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activity sales forecast (p. 265)

A prediction of future sales performance

scenarios (p. 263)

Multiple, plausible stories about the future

strategic planning (p. 252)

The process by which an organization determines where it is going in the future, how it will get there, and how it will assess whether and to what extent it has achieved its goals

tacit knowledge (p. 255)

Knowledge that an individual has but that is difficult to express clearly in words, pictures, or formulas and is therefore difficult to transmit to others

top-down planning (p. 268)

Planning process that begins at the highest level in the organization and continues downward

value chain (p. 254)

A set of interlinked activities that add value to the final product or service

value chain analysis (p. 254)

An assessment conducted on the chain of interlinked activities of an organization or set of interconnected organizations, intended to determine where and to what extent value is added to the final product or service

values statement (p. 256)

A clear, concise description of the fundamental values, beliefs, and priorities expected of the organization‘s members, reflecting how they are to behave with each other and with the company‘s customers, suppliers, and other members of the global community

vision statement (p. 256)

A description of the company‘s desired future position if it can acquire the necessary competencies and successfully implement its strategy

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 9-1

Explain international strategy, competencies, international competitive advantage.

and

Key Terms: 

international strategy



Introduction





competitive advantage

What Is International Strategy, and Why Is It Necessary?



strategic planning

o Why Plan Globally?

V.

What Is International Strategy, and Why Is It Necessary?

89. International strategy is concerned with the way firms make choices about developing and deploying scarce resources internationally. Strategy must be consistent among the company‘s various functions, products, and regional units (internal consistency) and with the demands of the international competitive environment (external consistency).

90. The goal of international strategy is to achieve competitive advantage. Competitive advantage is the ability of a company to achieve and maintain a unique and valuable competitive position both within a nation and globally, generating higher rates of profit than its competitors.

91. To create long-term competitive advantage, a company must develop competencies that: 162. Create value for which customers are willing to pay.

163. Are rare.

164. Are difficult to imitate or substitute for.

165. Allow the firm to be organized to fully exploit the competitive potential of these competencies.

92. The challenge for international companies is that resources are always scarce, there are many alternatives for using these scarce resources (e.g., which nations to enter?), and these alternatives are not equally attractive. Managers make choices regarding what to do, and what not to do, now and over time. Different companies make different choices with implications for each company‘s ability to meet customer‘s needs and create a defensible competitive.

VI.

Why Plan Globally?

A. Strategic planning is the process by which an organization determines where it is going in 09-214

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the future, how it will get there, and how it will assess whether and to what extent it has achieved its goals.

2. Formal global strategic planning provides managers a way to identify opportunities and threats, formulate strategies to handle them, and stipulate how to finance their implementation. Plans provide for consistency of action among the managers.

3. Strategic plans help ensure decision makers have a common understanding of the business, the strategy, the assumptions behind the strategy, the external business environment pressures, and their own direction.

4. Strategic plans promote consistency of action among the firm‘s managers worldwide and encourage them to consider the ramifications of their actions in the firm‘s other geographic and functional areas.

5. Strategic planning is also intended to increase the likelihood of strategic innovations, promoting the development, capture, and application of the new ideas needed to succeed in a challenging competitive environment.

6. Strategic planning continues to be among the most commonly used management tool among global executives, and it is the tool with one of the highest reported levels of satisfaction.

LO 9-2

Describe the global strategic planning process and its components. 

Key Terms: 

value chain

The process of Global Strategic Planning



value chain analysis

o Step 1: Analyze Domestic, International, and Foreign Environments



o Step 2: Analyze Corporate Controllable Variables

knowledge management



tacit knowledge



explicit knowledge



mission statement



vision statement



values statement



competitive strategies



scenarios



contingency plans



Knowledge as a Controllable Corporate Resource

o Step 3: Define the Corporate Mission, Vision, and Values Statements o Step 4: Set Corporate Objectives o Step 5: Quantify the Objectives o Step 6: Formulate the Competitive Strategies 

Home Replication Strategy



Multidomestic Strategy



Global Strategy 09-215

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 

Geringer, McNett, Ball

Transnational Strategy

Regional Strategies for Competing Globally 

Standardization and Planning in Strategy Formulation



Using Scenarios in Strategy Formulation



Contingency Planning as Part of Strategy Formulation

o Step 7: Prepare Tactical Plans VII.

The Process of Global Strategic Planning (Figure 9.1) 1. The process provides a formal structure for (1) analyzing a firm‘s external environments, (2) analyzing a firm‘s internal environments, (3) defining a company‘s business and mission (4) setting corporate objectives, (5) quantifying goals, (6) formulating strategies, and (7) making tactical plans.

A. Step 1: Analyze Domestic, International, and Foreign Environments Managers must know what the present force values are and where they appear to be going, and to develop and implement appropriate responses to any changes in key environmental forces.

166. Environmental, social, and business trends are more critical to strategy than in the past 5 years. However, few companies react to them.

B. Step 2: Analyze Corporate Controllable Variables Includes a situational analysis and a forecast. Various functional areas will provide input to the planning staff, who will prepare a report for the strategy planning committee. The committee wants to know where the company is heading, what are its strengths and weaknesses, and so on.

167. Management often conducts a value chain analysis, which considers three key questions: 50. Who are the company‘s target customers?

51. What value does the company want to deliver to these customers?

52. How will this customer value be created?

168. Value chain analysis focuses on the third question. The goal is to enable management to determine the set of activities that will comprise the company‘s value chain, including which activities the company will do itself and which will be 09-216

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outsourced.

169. Management must consider where to locate various value chain activities and to examine linkages among the activities in the value chain. Linkages must be examined across activities within the company and manage relationships with external entities (suppliers, distributors, or customers) within and across nations.

170. The desired outcome is identification and establishment of a superior set of wellintegrated value chain activities and linkages. This system will permit the company to effectively and efficiently develop, produce, market, and sell the company‘s products and services to the target customers and create the basis for global competitive advantage.

171. A simplified value chain is given in Figure 9.2.

C. Knowledge as a Controllable Corporate Resource In a highly competitive, rapidly changing, knowledge-intensive economy, companies achieve competitive advantages through leveraging organizational knowledge across national boundaries.

172. Companies face ongoing challenges of creating mechanisms that will systematically and routinely identify opportunities for developing and transferring knowledge throughout international operations, and for ensuring that subsidiaries are willing and able to both share what they know and to absorb knowledge from other units of the company. This process is referred to as knowledge management.

173. Since much valuable knowledge is tacit (known well by the individual but difficult to express verbally or document), systems are needed to convert tacit knowledge into explicit, codified knowledge and then make this knowledge accessible quickly and effectively to other employees that need it. It is often necessary to establish facilities in other international locations to gain access to required knowledge.

D. Step 3: Define the Corporate Mission, Vision, and Values Statements These broad statements communicate to the firm‘s stakeholders what the company is and where it expects to go. Some firms have all three statements; others combine two or more. a. Mission Statement defines the firm‘s purpose and scope.

Vision Statement describes the desired future position, what it hopes to accomplish if it can acquire needed competencies and successfully implement its strategy.

53. Values Statement is clear, concise description of the fundamental values, 09-217

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beliefs, and priorities of the organization‘s members.

E. Step 4: Set Corporate Objectives Objectives direct the firm‘s course of action, maintain it within the boundaries of the stated mission, and ensure its continuing existence.

F. Step 5: Quantify the Objectives If objectives can be quantified, they should be. Firms frequently do have nonquantifiable or directional goals.

7. Step 6: Formulate the Competitive Strategies Managers will formulate alternative competitive strategies and corresponding action plans that seem plausible, taking into consideration the directions of external forces and the firm‘s strengths, weaknesses, opportunities, and threats.

174. Companies competing internationally confront two opposing forces: (1) reduction of costs and (2) adaptation to local markets. a. To be competitive, firms must do what they can to lower costs per unit so customers will not perceive their products or services as being too expensive. This results in pressure for some of the company‘s facilities to be located in places where costs are low, as well as developing products that are highly standardized.

Managers must respond to local pressures to modify products to meet local market demands where they do business. This pressures the company to differentiate strategy and product offerings from nation to nation, reflecting differences in distribution channels, governmental regulations, cultural preferences, and similar factors. Modifying products and services for the specific local market requirements is costly.

175. As a consequence of the two opposing pressures, reduction of costs and local adaptation, companies have five basic strategies for competing internationally: Home Replication Strategy, Multidomestic Strategy, Regional Strategy, Global Strategy, and Transnational Strategy. a. As suggested in Figure 9.3, the strategy that would be most appropriate for the company, overall and for various activities in the value chain, depends on the amount of pressure the company faces to adapt to local markets and achieve cost reductions.

Home Replication strategy centralizes product development strategy in the home country, and after differentiated products are developed in this 09-218

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home market, they are transferred abroad to capture additional value. i. This strategic choice is best if there is weak pressure for local responsiveness and cost reductions. This can cause high operating costs because of duplicate manufacturing facilities across markets served.

176. Multidomestic Strategy is used when there is strong pressure to adapt products or services for local markets. Decision making is decentralized to allow the company to modify its products and to respond to changes in local competition and demand.

By tailoring products for specific markets, companies may charge higher prices.

Local adaptation increases cost structure. The company will have to invest in additional local capabilities and knowledge. Adapting products too much may take away the distinctiveness of a company‘s products. Local adaptation may change over time. The cost and complexity of coordinating a range of different strategies and product offerings across national and regional markets can be high.

177. Global strategy is used when there is strong pressures for reducing costs but limited pressure to adapt products for local markets. Many operations are standardized and centralized.

178. Transnational strategy is used when a company confronts simultaneous pressure for cost effectiveness and local adaption. The company‘s assets and capabilities will be based where it is most beneficial for each specific activity, neither highly centralized nor widely dispersed.

179. Regional strategy is used by firms that focus most of their operations in a single region, such as Europe or North America.

180. Determine which activities should be globalized and which should be localized.

181. Develop scenarios, which are multiple plausible stories about possible future conditions. These integrate key certainties and uncertainties and present these ideas in a useful and comprehensive manner.

182. Develop contingency plans, which are plans for the best- or worst-case scenarios or for critical events that could have a severe impact on the firm.

8. Step 7: Prepare tactical plans. These are the specific, short-term means for achieving the strategic goals.

LO 9-3

Describe the features of a strategic plan.

Key Terms:

 Strategic Plan Features and Implementation Facilitators



sales forecast



budget

o Sales Forecasts and Budgets 09-219

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o Facilitation Tools for Implementing Strategic Plans 

Policies



Procedures



policies



procedures

o Performance Measures VIII.

Strategic Plan Features and Implementation Facilitators A. Sales forecasts and budgets these are two prominent features of the strategic plan. They are both a planning and a control technique.

IX.

Sales Forecast and Budgets A. Sales forecast—a prediction of future sales performance.

B. Budget—an itemized projection of revenues and expenses for a future time period.

X.

Facilitation Tools for Implementing Strategic Plans A. Policies are broad guidelines issued by upper management to assist lower level managers to handle recurring problems.

B. Procedures describe how certain activities will be carried out, thus ensuring uniform action throughout the firm.

XI.

Performance Measures A. Three ways to measure if a strategy is proceeding successfully or needs modification: Success in obtaining and applying required resources.

183. Effectiveness of company‘s personnel performance.

184. Progress toward achieving mission, vision, and objectives in a manner consistent with the company‘s stated values.

LO 9-4

Discuss the time horizon, organizational level, and different methods of strategic planning. 

Key Terms: 

top-down planning

Kinds of Strategic Plans



bottom-up planning

o Time Horizon



iterative planning

o Level in the Organization o Methods of Planning 

Top-Down Planning



Bottom-Up Planning



Iterative Planning 09-220

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XII.

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Kinds of Strategic Plans A. Time Horizon Short, medium, and long term.

185. Time horizon will vary according to the age of the firm and the stability of its market.

B. Level in the Organization Each organizational level of the company will have its level of plan.

If firm has four organizational levels (Figure 9.4), there will be four levels of plans.

Each will be more specific and for a shorter time frame than it is at the level above.

C. Methods of Planning Top-Down Planning: corporate headquarters develops and provides guidelines. a. Disadvantages: restricts initiative at lower levels and shows insensitivity to local conditions. b. Advantages: headquarters should be able to formulate plans that ensure optimal use of firm‘s resources.

186. Bottom-Up Planning: lowest levels inform top management of what they expect to do. a. Advantage: those responsible for attaining the goals are formulating them. b. Disadvantage: no guarantee that the sum total of the goals will coincide with those of headquarters.

187. Iterative Planning: (Figure 9.4) combines aspects of bottom-up and top-down planning.

LO 9-5

Outline new directions in strategic planning. 

Key Terms:

New Directions in Planning o Who Does Strategic Planning? o How Strategic Planning Is Done o Contents of the Plan

I.

New Directions in Planning A. Strategic planning, particularly in the more traditional bureaucratic form still practiced in 09-221

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some corporations, has been described as a calendar-driven ritual, not an exploration of the company‘s potential.

B. This traditional strategic planning approach commonly consists of a company‘s CEO and the head of planning getting together to devise a corporate plan, which is then handed to the operating people for execution.

This approach assumes the future will be similar to the present, even if there is evidence to the contrary.

188. Not surprisingly, the resulting strategic planning documents often fail to be implemented successfully.

189. Increasingly, the old process is being replaced by a strategic management approach, which combines strategic thinking, strategic planning, and strategic implementation and which is increasingly recognized as a fundamental task of line management, rather than the job of specialized planners in staff positions.

C. Who Does Strategic Planning?

Senior operating managers, not CEO and planning staffs.

190. Frequently these teams include members ranging from junior staff members who have shown the ability to think creatively to experienced veterans who will ―tell it like it is.‖ 191. New approach often includes interaction with such parties as important customers, distributors, suppliers, and alliance partners, in order to gain firsthand experience with the firm‘s markets. Other important stakeholders such as governments and activists (social, environmental, and political) are also relevant influences, if not necessarily direct participants.

D. How Strategic Planning Is Done Less structured format and a shorter document.

192. Top management generally accepts fact that a good strategic planning process must allow ideas to surface from anywhere and at any time.

193. Objectives and strategies are intertwined, as are tactics and strategy. If the planning team is unable to come up with suitable tactics to implement a strategy, it must alter the strategy. If strategies cannot be formulated to enable the firm to reach the objective, the objective must be changed.

E. Contents of the Plan Concerned with issues, strategies, and implementation and with incorporating creative, 09-222

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forward-looking ideas essential to competitive success within changing and uncertain international environment.

194. Staying competitive demands long-term perspective to strategic decision-making and resource allocation decisions.

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Engagement and application Boxed Text Discussion Questions With Suggested Answers Global Debate: Google’s Values and Strategy Versus Opportunity in China This is an excellent feature because students know Google and should be aware that it as an MNC of the highest order. This also gives excellent examples of the impact of international situations and dynamically changing environmental factors on implementation of strategic plans and how firms must rapidly change their plans in response to local market conditions. It also brings in the related issues of corporate mission and values as drivers of strategic plans.

This situation is continuing to unfold as this book goes to press, developing as the external and competitive forces change. Discussion can be initiated through questions such as, ―Did Google make a good decision to leave China? What do you think?‖ or ―Did Google make the right decision to return to China? Why or why not?‖ An update on developments related to the position of Google and other companies in China can lead to a discussion of how rapidly the changing global market environment has impacted an organization your students know. This discussion could serve as an introduction to international competitive strategies.

Online and Hybrid: A classroom discussion option is to assign individuals, groups, or the class as a whole to examine the evolving situation in China with respect to market access, censorship, and related issues, both with respect to Google and more generally. The students‘ findings can provide a strong basis for discussion or debate on these emerging issues. Virtual teams can be assigned questions and submit their work as a group. Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against) and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups or else assign perspectives and conduct an in-class debate and discussion.

1. What might have been the implications if Google stayed in China’s internet search engine market in 2010? Would that have harmed Google’s reputation and performance elsewhere in the world?

The answer to this question will vary, and it is intended to help people think through the issue of how corporate values and strategy are intertwined with political, economic, and competitive challenges. Some students may argue that if Google had stayed in China, it would have been subject to criticism for hypocrisy and may also have destroyed consumer trust elsewhere in the world through behavior that violated norms or expectations of privacy, freedom from censorship, and the protection of personal data. Other students might argue that by staying in China, Google may have had an opportunity to help shape and evolve practices in that country and perhaps have been a champion for change. It is also common for students to assert that adapting to local conditions and demands is just one of the requirements for a firm that wishes to compete in international markets, and that it would be naïve to think otherwise. These competing perspectives can make for a lively debate and, properly managed, it can produce substantive depth and insight, opening students up to the harsh reality of melding national and corporate values and wellbeing.

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2. What could be the implication of Google’s reentering the Chinese search engine market?

Will it hurt or hinder the company’s ability to compete successfully in other parts of the world?

This question raises an issue that almost always generates strong opinions and a variety of perspectives. China has the largest number of internet users of any nation in the world, and gaining or losing access to that population has implications. In addition, Google‘s key competitors remained in the Chinese market despite Google‘s decision to leave in 2010, which may have given those competitors opportunities that Google chose to bypass. Chinese competitors may also have had the opportunity to more readily develop competencies and scale due to the absence of Google from their domestic market. On the other hand, Google‘s decision to exit the Chinese market has garnered goodwill from some quarters, particularly those who might oppose censorship or other restrictions on freedom of speech and openness of the internet. It is possible that this may cause some customers to switch to Google from competing firms that might be viewed as having less desirable business practices, and to cause some customers to be even more loyal to Google. However, returning to China could undo this goodwill. The different perspectives can again allow this to generate an interesting and insightful discussion among class participants.

3. Overall, do you think Google made a good decision to leave China in 2010? Why or why not?

This question will fundamentally vary based on students‘ perspectives regarding issues such as those raised in the preceding two questions. Discussion of short- and long-term costs and benefits could be explored, as well as perhaps asking students to break into groups to develop alternative scenarios for Google.

IB in PRACTICE: Preparing International Strategies Requires Thinking About the Future The focus of this feature is to explain the importance of scenarios, how they are used, and how they are developed. Many students gloss over the concept of scenarios without appreciating their value for international firms. Spending time with a class discussion or project on scenarios will help students to remember the concept and implement it in firms where they may work.

Online and Hybrid: Have students pick a large international firm and write a scenario for a major external event. For example: What would Apple do if a trade war with between the United States and China doubled the cost of importing their products made in China? Or what would Dole do if a drought wiped out 90% of their banana supply from Central America?

Face-to-Face: Give in-class teams different situations, like those mentioned above, and have them work out scenarios for those firms. Encourage them to use the internet to look up key information about the firms. Have each team present to the class.

1. How might the development of scenarios enhance an international company’s performance?

Answers will vary. Some students may comment on how firms that use scenarios will know what to do right away when a major event happens. Their competitors will have to figure out what to do and lose precious time. Other students may go further and discuss that firms that are serious 09-225

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about using scenarios will have already put resources in place and coordinated alternative plans with suppliers and clients so that if the scenario must be engaged, the impact will be far less than for those firms that never studied scenarios.

2. What drawbacks could result if an international company decided to use scenarios as part of its international strategic planning?

Student answers will vary. Some things to consider are the resources needed to engage scenario planning. A small international firm may not have the resources to, for example, find a second supplier in a country other than China. Some entrepreneurs may find it easier for a startup to terminate the company if a disaster strikes and then start up another company that is better adapted to the new environment. However, once a company passes the startup phase, more resources become available for scenario planning and the firm has more value to protect.

Get That Job! From Backpack to Briefcase: Ella Michelich in Romania: Keep an Open Mind When Entering a New Culture This box explores Ella Michelich‘s time abroad in Romania working for an educational summer camp for young children. She spoke no Romanian and had many challenges during her 6-week tour, but she kept an open mind and did not accept anything as weird, only different. She returned to school in the United States more confident in herself and her ability to adapt. She is now considering joining the Peace Corps so she can apply what she learned and push herself further to be a global citizen.

Online and Hybrid: Virtual teams evaluate Michelich‘s philosophy that nothing is weird, only different. How might this help one adapt to another culture? Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own career in light of spending some time abroad as Michelich did.

1. How would spending time in a country like Romania benefit someone’s career, even if they never return to that country for work?

Most students will talk about how the experience and confidence gained in adapting to and working in a new culture can be transferred to any other new cultural experience.

2. Michelich talked about keeping an open mind and not looking at things as weird only different. How might this be useful in a new cultural setting?

Students will have various answers to this question, depending on their experience with other cultures as well as their own self-awareness and self-confidence. Some will recognize that this is a healthy attitude that can assist in successfully working in another culture. Having a positive attitude can make a big difference in cross-cultural settings. Those with foreign experience can share examples of things that might at first be considered weird but are really just different and are not particularly bad or good.

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End of Module Exercises Critical Thinking Questions 1. What is international strategy? Do you think it is useful for companies to take the time and effort to prepare international strategies if they are in rapidly changing competitive situations with high levels of uncertainty? Why or why not?

The answers to this question may vary. International strategy is concerned with the way firms make fundamental choices about developing and deploying scarce resources internationally. The goal of international strategy is to achieve competitive advantage and that is why it is important.

Strategy has to be dynamic and adaptive, in order to enable the firm to make decisions that are appropriate for a changing, uncertain environment. Even if there is uncertainty, that does not mean that all aspects and decisions relevant to strategy are equally uncertain and unknowable.

Rather, by using strategic planning tools, including scenario analysis, strategic decision makers may be able to more thoroughly and effectively understand the relevant dimensions and interrelationships among the various forces in the company‘s environments, to better identify strategic alternatives and their implications, and to better anticipate and plan for (or at least respond to) changes when they occur.

2. Why don’t companies use the same strategic planning processes for their international business activities as for their domestic operations?

The answers to this question may vary. Strategic planning at the domestic level is less complex than strategic planning at the international level due to the different environments that are involved with international business.

3. Suppose competitor analysis reveals that the U.S. subsidiary of your firm’s German competitor is about to broaden its product mix in the U.S. market by introducing a new line against which your company has not previously had to compete in the home market? Your environmental analysis shows that the U.S. dollar is expected to weaken relative to the euro, making U.S. exports relatively less expensive in Germany. Do you recommend a defensive strategy, or do you attack your competitor in its home market? How will you implement your strategy?

Probably, your company will want to step up its activity in the home market of your German competitor to distract its attention somewhat from the American market. You will be sending signals to the German competitor that an attack in your home market will be answered by increased activity in its home market. Because it appears that the dollar will continue to be strong against the mark, it appears that trying to compete in the German market by exporting to it may not be feasible. Your competitor already has a plant in the United States. Your company needs to think seriously about setting up production facilities in Germany.

4. You are the CEO of the Mesozoic Petrochemical Company and have just finished studying next year’s plans of your foreign subsidiaries. You are pleased that the African regional unit’s plan is so optimistic because that subsidiary contributes heavily to your company’s income. But OPEC is meeting next month to discuss whether its member countries should reduce production in order to raise the international price of petroleum.

Should you ask your planning committee, which meets tomorrow, to construct some 09-227

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scenarios? If so, what about?

You had better construct a scenario about what OPEC might do with respect to supplying crude to Israel. Will Arabian members try to persuade OPEC members to reduce their supplies to Israel (political pressure to force Israel to negotiate with the PLO)? Is there a possibility of war or at least increased terrorist activities? How strong is Iran‘s influence on OPEC? 5. What are the main strengths and weaknesses of each of the competitive strategies: home replication, multidomestic, regional, global, and transnational? What challenges arise under each approach in terms of building and leveraging knowledge that can yield competitive advantage, and what can companies do to enhance the effectiveness of their knowledge management efforts under each approach?

Strengths of the home replication strategy are that it can be a good way to capture additional value from foreign markets by moving out home-developed products. It is also relatively easy to control since it is centralized. The weakness is that if there is strong pressure for local responsiveness, competitors that customize will have an advantage.

A multidomestic strategy has strengths when there is strong pressure to adapt products or services for local markets. Decision making is more decentralized to allow the company to modify its products and to respond to changes in local competition and demand, giving an edge versus global strategies. By tailoring products for specific markets, the company may be able to charge higher prices. Because this strategy requires the company to adapt products to different markets around the globe, they will need higher awareness in culture, language and understanding the socioeconomic situation, which can be expensive and harm international competitiveness. The company will often have to invest in additional local facilities and people, to gain access to locally responsive capabilities, knowledge, channels, and so forth. Adapting products too much may also take away the distinctiveness of a company‘s products. The extent of local adaptation may change over time, making it difficult to maintain a competitive advantage. The cost and complexity of coordinating a range of different strategies and product offerings across national and regional markets can be substantial.

Strengths of a global strategy are when a company faces strong pressures for reducing costs and limited pressure to adapt products for local markets. Strategy and decision making can be centralized, to promote consistency and to allow the company to offer efficiently produced, standardized products and services. Value chain activities are often located in only one or a few areas, to help achieve economies of scale and cost control. Close coordination and integration of activities across products and markets, and development of efficient logistics and distribution capabilities help reduce costs. Weaknesses of global strategies are that they may confront challenges such as limited ability to adjust to changes in customer needs across national or regional markets, increased transportation and tariff costs from exporting products from centralized production sites, and the risks of locating activities in a centralized location. The lack of appeal to specific needs of people due to income difference, preferences, as well as cultural value system, means that not all people can have the same taste or ability to afford standardized products or services.

The strengths of a regional strategy include the potential value to be derived from thinking of international strategy within the context of a region-by-region perspective, rather than merely a 09-228

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nation-by-nation versus a global basis. To the extent that an international company‘s market position varies substantially across regions, strategies may also need to vary by region in order to accommodate the differing competitive circumstances that confront the company. Yet, even when management consider the appropriate strategy to use within each region, it may be useful to consider the relative extent of pressure for local adaptation versus pressure to reduce costs.

A transnational strategy has strengths when a company simultaneously confronts pressures for cost effectiveness and local adaptation and when there is a potential for competitive advantage from simultaneously responding to these two divergent forces. The location of a company‘s assets and capabilities will be based on where it would be most beneficial for each specific activity, giving a basis for competitive edge. Achieving and maintaining an optimal balance in locating activities is a challenge, however. Management must ensure that the comparative advantages of the locations of their various value chain activities are captured and internalized, now and over time. The complexity of strategic decisions, and the supporting structures and systems of the organization, will be much greater with a transnational strategy.

6. If predictions are difficult to make accurately when there are high levels of uncertainty and change, why would scenario analysis have value? Aren’t scenarios likely to be inaccurate under such circumstances?

The answers to this question may vary. As noted in the text, scenario analysis is a what—if planning approach that allows for strategic contingency thinking. It can be valuable for companies that confront high level of uncertainty or the potential for discontinuous events in their operating environment. By anticipating such events and their potential impacts, companies can help to identify and incorporate external and internal factors that may normally not be considered relevant but that have influence on the future. It is this anticipation and advance discussion that can add value to a company in terms of being prepared for uncertain futures, rather than an ability to predict the future. A limitation of scenario analysis is that managers may encounter difficulty in realizing that their assumptions based on past experience may no longer apply, and they may encounter difficulty in envisioning future, different contexts and implications.

7. What strategic issues arise as a firm considers whether and how to transfer internationally the unique skills, and associated products, that result from the distinctive competencies it has developed in its home country?

One of the major strategic issues that arises when a firm considers the transfer of a skill or product resulting from a distinctive competency in its home country is, how quickly can the product or skill be imitated? Can it be easily reversed-engineered and copied, and then brought to the market at a lower price? Other issues include where to manufacture and how to distribute.

8. Your firm has used bottom-up planning for years, but its subsidiaries’ plans take different approaches to goals and assumptions—even their time frames are different. How can you, the CEO, get them to agree on these points and still solicit their individual input?

The answers to this question may vary across students, but this is a situation for iterative planning. Give them some broad goals and time frames from headquarters and then ask them to present their plans within these constraints. Possibly, the process will have to be repeated once 09-229

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again before the subsidiaries and headquarters are in agreement. The challenges associated with coming to agreement may be raised by students and the implications of these concerns for a multinational corporation could be the basis of an interesting class discussion.

9. How can you apply the concepts of strategic planning to your own life, such as for getting a job or a better job? Which, if any, of the strategic planning approaches would not be applicable for you, and why?

The answers to this question may vary. Many students may not initially realize the personal relevance of strategic planning tools and techniques, but through contemplation and discussion, they may realize that they are already practicing some of this, albeit not necessarily in the most thorough and effective manner. Students have to be able to conduct external environmental analysis to be able to understand which careers might be in demand, what is necessary in order to be able to succeed in such a career, and the options available for getting the training and experience needed. Internal analysis is important in order to understand one‘s strengths and weaknesses, likes and dislikes, and areas that might be able to be modified. Depending on how they perceive the intent of each, students probably will see the relevance of personal mission, vision and values statements, and the importance of setting objectives and metrics for assessing whether and to what extent they are making appropriate progress toward achieving these objectives. Formulation of personal strategies will be evident to most students, albeit perhaps not within the context of the five types of strategy listed in this module. Students might understand the tradeoffs associated with pressures to adapt their approaches within different settings or contexts, as well as the potential value of scenarios and contingency plans. Tactical plans should be evident to students, and indeed some may recognize that they have a tendency to be more tactical than strategic in some of their personal and career choices. College students often have personal experience with forecasting expenses and budgeting, sometimes with painful experience curves. The concepts of policies and procedures may also be clear to some students, such as how they allocate time to school and extracurricular activities, boundaries they set with regard to what must be done (or not done), and how, under different contexts (e.g., how to behave in classes or with professors vs. what might be done with close friends; what might be done or not done on Facebook or Tinder or LinkedIn or other social media sites). Students usually see that they utilize personal performance measures and have plans with various time horizons as well. It can be interesting, however, to push a bit on which of the modules strategic planning elements would be least applicable to students, and why. This could prove to yield some interesting and potentially illuminating discussions and insights. globalEDGE Research Task Exercise 1 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > China), the country profile page will be displayed from where Risk page can be accessed on the left column menu.

Search Phrase: China 09-230

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Resource Name: China Resource Link: https://globaledge.msu.edu/countries/china/risk Exercise 2 globalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, U.S. states, and industries can be found. When navigated as described in the exercise (i.e. globalEDGE > Global Insights > by Industry > Industry of choice). The concentration of the industry can be found on the ―Introduction‖ page and the companies are listed on the ―Corporations‖ page.

Search Phrase: by Industry Resource Name: by Industry Resource Link: https://globaledge.msu.edu/global-insights/by/industry MiniCase: The Globalization of Walmart This MiniCase provides an opportunity for students to examine the globalization efforts of the world‘s largest retailer, Walmart. The MiniCase examines Walmart‘s internationalization process, including some of the failures and challenges that the company experienced as it expanded from the United States. Because of their familiarity with the company, students typically are interested in this MiniCase and are excited to discuss it in class.

1. Why has Walmart viewed international expansion as a critical part of its strategy?

Walmart had overpowered its domestic competitors and established a dominant position in the U.S. retail industry, but by the 1990s, it was facing limits to growth in its domestic market and had to begin looking abroad for medium- and long-term growth opportunities.

2. What did Walmart do to enable the company to achieve success in Latin America and China?

Wal-Mart‘s entrance into Latin America involved substantial differences on a range of cultural, economic, and political dimensions, so Walmart chose to initially enter via a joint venture with a local partner that had strong local expertise. Walmart learned from its Mexican partner and subsequently increased its ownership to a majority equity position. The company then entered Brazil with a joint venture in which Walmart had a 60% ownership position. In Mexico, Brazil and Argentina, Walmart entered markets in a phased, learning-focused manner and in growing markets that lacked dominant, existing multinational competitors. Walmart also attempted to be sensitive to cultural, economic, and political differences when entering the Chinese market, and it adjusted quickly when mistakes were made, contributing to its initial success in that country.

3. What should Walmart do—or not do—to help ensure that the company achieves success in India?

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This question can have a range of alternative responses. Walmart‘s success in India will require the company to continue to be aware of, and responsive to, the many changes that are occurring in this large, complex, and rapidly developing nation. New competitors, different cultural contexts, challenging and sometimes nontransparent government policies are but a few of the issues that Walmart will have to navigate in its efforts to successfully expand in this market.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text.

We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available at http://bit.ly/MHEIBVideo. The Strategy in the International Business board is one source that an instructor may find useful tools in. The content is rich and varied, and it is updated monthly.

The video ―Target pulling out of Canada,‖ at https://uk.news.yahoo.com/video/target-pullingcanada-155725318.html, provides an interesting assessment of a well-known retailer‘s failure to perform at a satisfactory level in an international market, even one that is typically viewed as very similar on many economic, cultural, and other dimensions.

The video, ―Samsonite Sees Opportunities in Brands in Korea, Europe,‖ at www.bloomberg.com/news/videos/2015-03-17/samsonite-sees-opportunities-in-brands-in-koreaeurope, provides an interesting interview and analysis of how a company will analyze the external environments to identify which markets might be attractive for competing. globalEDGE and the Academy of International Business provide links to a number of organizations that offer videos about international business. You can find these links at https://aib.msu.edu/resources/videodepositories.asp.

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for use in hybrid/flipped classroom and online courses.

1. International Strategy We have had good response from students when we have asked them to analyze a company, either of their own choice or one assigned to them, and to identify the company‘s international strategy and how it has evolved over time. You can assign this as a significant graded project and also ask for a verbal report or presentation in class, to help stimulate learning by peers as well as interesting comparisons (the latter can be particularly likely if students are analyzing different firms from the same industry, for example; such as Apple and Samsung). The material in this module is a good place to start their analyses.

2. Corporate Objectives Assign students to identify corporate objectives of one or several international companies, including ones from other nations, and then try to identify how they are quantifying these objectives. These analyses can be shared in class to help initiate a discussion on setting and measuring the attainment of corporate objectives. An interesting alternative on this is to have each team analyze two or three different firms that are from different nations but competing in 09-233

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the same industry or segment, so that they can try and see how the companies might differ in how they see the market or how they differ in their way of defining, competing within, or capturing the market.

3. Scenario Analysis Scenario analysis is an interesting concept for students but difficult in practice. One technique we have used is to have the students conduct an analysis of a segment such as oil extraction or smart phones. A discussion of the segment can be completed in class and then individual teams can be asked to identify and develop different, nonoverlapping scenarios, which can then be presented and discussed in class. We often ask each team to identify how likely they think that their scenario will be to occur, and it is not uncommon that students will feel that their scenario is quite likely to happen, perhaps due to their better understanding of the factors and relationships associated with this scenario. The result is that, among four or five teams in a class for example, their combined ―likelihood assessment‖ may exceed 200%! Since this tendency to identify with one‘s own alternative is something that also happens in the real world, it is useful to explore with the students why and how this outcome tends to occur (e.g., groupthink), and what an organization can do to help prevent such bias within its strategic planning efforts.

4. International Problems Many students enjoy discussion of socially responsible and values-based orientation by leaders and companies, so we have found it interesting to have students identify one or several instances where companies have encountered situations internationally (e.g., labor problems in a supply chain, quality problems among products) and to analyze the evolution of the problem and how companies dealt with it over time. For example, recent examples might include textile companies‘ use of subcontractors in Bangladesh, where substandard working conditions and facilities led to tragic loss of life among workers; or Volkswagen‘s activities with diesel engines for automobiles, where the company used software to generate false emissions readings during environmental testing and thus to misrepresent the amount of pollutants being produced by their vehicles. Sharing these analyses in class can produce a spirited discussion about how to develop values statements and then to ensure that the company behaves in a manner consistent with those values.

Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Harvard Cases ―Philips versus Matsushita: The competitive battle continues,‖ examines the evolution of international strategies and competencies of two firms battling in the same sector, showing how 09-234

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each was able to develop and leverage capabilities to achieve international success through different mixes of local responsiveness versus global standardization. ―Globalization of CEMEX‖ describes how the Mexican company, CEMEX, has been able to grow into a major international competitor in the cement business, earning higher profit levels than other competitors from developed countries. It highlights how an international company can position itself strategically so that it benefits from its broad portfolio of international operations, serving as a valuable example of why firms will decide to pursue a strategy of globalization. ―Unilever as a ‗Multi-local Multinational‘ 1945–1979‖ provides a discussion about the development of a global multinational through pursued of a multidomestic strategy, as well as highlighting some of the political and commercial challenges that faced various country subsidiaries.

Controversial Issues 1. Global Debate: Google’s Values and Strategy Versus Opportunity in China This boxed feature described earlier in this module‘s Instructor Guide provides an excellent foundation for debating some of the issues raised in the text, including issues about competitive advantage and values statements.

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against) and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups, or else assign perspectives and conduct an in-class debate and discussion.

2. Discussion of Scenario Planning Drawing from the content in the IB in Practice box, ―Preparing International Strategies Requires Thinking about the Future,‖ you can ask students to take opposing perspectives to argue about the usefulness of scenario planning as an effective tool within international strategic planning, as well as the challenges that are likely to arise when a company attempts to develop realistic, nonoverlapping scenarios of the future.

Online and Hybrid: Virtual teams can be assigned to take different perspectives to argue for or against the use of scenario planning, or the practical challenges of implementing the process within a company. Teams could also be assigned to develop alternative scenarios for a company or industry, such as oil and gas, smart phones, or electric vehicles. You could ask the teams to conduct research in support of their perspective, and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: As with the online and hybrid assignment, students can be assigned to take different perspectives as noted above, and then they can be asked to argue their positions within 09-235

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an in-class debate and discussion.

3. Current Events A focus on current events that are relevant to the module‘s topics is a good way to bring home the concepts, review their application, and build news-review habits. Ask everyone to come prepared with an article for every meeting. If a meaningful percentage of the final grade is allocated to discussion (10–15), motivation is there. Devote 5 min at the beginning of class to discussion of current events. Recent relevant current events include Volkswagen‘s global controversy about using software to produce misleading reports during environmental emissions testing. Depending on the online interface, this activity may be done in chat forums (Blackboard) or discussion boards, before class begins. This activity also works well in large lecture classes.

Teaching Suggestions 1. This chapter is a ―big picture‖ chapter and students tend to feel comfortable with its material.

This is a good place to draw on what students may have learned in any earlier strategy or related courses. At the same time, this is a conceptually complex chapter, so use of the figures and examples is helpful. Examples of strategic challenges abound in current business news. It can be useful to pick one or two recent events (e.g., rapid change in oil prices, currency devaluations, unexpected technology-related failure) and then have students discuss whether and how such events might impact the strategic planning efforts of an international company operating in that industry or closely associated with the industry or activity.

2. Analyze the relationship between where certain types of decisions are made and the overall business strategy. Then move to why decisions are best made where they are. (Contrast, e.g., retail level international banking with a retail clothing chain.)

3. Analyze an international corporation through Internet research to identify the company strategy. Give examples of how strategy is being implemented.

4. The Critical Thinking Questions at the end of the module will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collect assignments at random and assign a grade; (2) occasionally give some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) have students hand in assignments and give credit for work submitted; and (4) call on students at random to answer specific questions (giving a small number of points for correct answers or counting this as part of participation).

5. Guest Lecturer possibilities: 

Management faculty could speak on scenario analysis or various aspects of strategic planning.



Executives from international businesses could describe their strategy-building process.

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Someone experienced in international business planning from the local business community would be a good outside speaker.

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title International Strategic Planning Methods International Competitive Strategies

International Competitive Strategy

Bloom's Taxonomy

09-04

Knowledge Application/ Analytical Thinking

Remember/ Understand /Apply

09-01; 0902

Analytical Thinking

Understand

The Process of and Global Strategic Planning

09-02

Analytical Thinking

Understand

The Global Strategic Planning Process

09-02

Analytical Thinking

Understand

09-02, 0903, 09-05

Analytical Thinking/ Knowledge Application/ Reflective Thinking

Remember/ Understand / Analyze

Case Analysis Click Drag

The Global Strategic Click Planning Process Drag Choosing Strategy

AACSB Learning Accreditatio Objective(s) n Tagging

Assignment Type

Topic(s)

Kinds of Strategic Plans Overview and International Strategy

a Case Analysis

Video Case

of

Choosing an International Business Strategy

Connect Activities 1. International Strategic Planning Methods Activity Summary: This case analysis presents a fictitious company called Big Mart and gives various scenarios and then asks multiple-choice questions related to business strategy.

How to Use Activity: With different questions for the same case, this works well as a set of questions from which one is randomly picked for an on-line assignment. Have students do one question before class, then in class assign them to small groups and have each group do another question. This can then lead to a class discussion on business strategy.

2. International Competitive Strategies 10-238

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Activity Summary: In this click and drag assignment, students assign boxes that describe general characteristics of strategies to the appropriate international competitive strategy. More than one description can be assigned to a strategy.

How to Use Activity: This works well as an in-class assignments for small groups. After the teams have completed the assignments, ask about any mistakes that teams made and discuss those items with the entire class. This can also be done individually as an internet assignment.

3. The Global Strategic Planning Process Activity Summary: In this click and drag activity, students match the steps of the Global Strategic Planning Process to descriptions of those steps.

How to Use Activity: This can be done individually at home or in class in small teams.

4. Choosing a Strategy Activity Summary: This is a case analysis that discusses a fictitious company that has a localization strategy. Each question discusses various aspects of international competitive strategies.

How to Use Activity: This can be assigned as an online assignment.

5. International Competitive Strategy Activity Summary: This activity is important because, to understand international competitive strategy, students of international business must be able to assess and determine the many external and internal contributing factors that affect corporate decisions in product development and product extension. Such assessments allow those involved in strategic planning to make informed decisions about products, markets, and product development.

How to Use Activity: This can be assigned as an online assignment.

Module 10: Organizational Design and Control Your Content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement & Application 10-239

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Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues Teaching Suggestions Connect Tools for Assessment or Learning Connect Content Matrix Connect Activities

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Your Content Summary Organizational design is closely aligned with an organization‘s strategy and approach to operation. For international business, firms may (1) have an international division, (2) be organized by product, function, or region, or (3) have a mixture of them (hybrid form such as matrix). A matrix form tries to attain a balance between product and regional expertise, but its disadvantages have led some firms to use a matrix overlay in combination with the traditional product, regional or functional form. Managers are now examining two developing organizational forms, the virtual corporation and the horizontal corporation.

Because the operations of an IC are far flung around the world and because events in one country may affect the entire enterprise, two needs are information and control.

When decisions must be made which affect more than one unit of the IC, balance must be struck between the interests of the parent company, the subsidiary companies, and the enterprise as a whole.

Control, decisions, and measurements are easier when the subsidiary is 100% owned than when it is less than 100% owned or when an independent joint venture company is involved. In a JV, control capability can be supported by maintaining control over necessary technology, staffing the key positions, providing the capital and marketing the product.

A focus on reporting issues (financial, technological, political and economic) concludes the module.

Learning Objectives LO 10-1

Explain why the design of organizational structure is important to international companies.

LO 10-2

Identify the various organizational dimensions managers must consider when selecting organizational structures.

LO 10-3

Explain how decision making is allocated between parent and wholly owned subsidiaries in an international company.

LO 10-4

Discuss how an international company can maintain control of a joint venture or of a company of which it owns less than 50% of the voting stock.

LO 10-5

List the types of information an international company‘s units around the world need to report to the parent company.

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Key Terms and Definitions affiliates (p. 288)

Companies controlled by other companies, but less-thanmajority owners may exercise control by a variety of means, both those involving stock ownership and those involving nonownership mechanisms

horizontal corporation (p.

287)

A form of organization characterized by lateral decision processes, horizontal networks, and a strong corporate-wide business philosophy

hybrid corporation (p. 282)

A structure organized by more than one dimension at the top level

international division (p. 279)

A division in the organization that is at the same level as the domestic division and is responsible for all nonhome‒country activities

matrix organization (p. 283)

An organizational structure composed of one or more superimposed organizational structures in an attempt to mesh product, regional, functional, and other expertise

matrix overlay (p. 284)

An organization in which top-level divisions are required to heed input from a staff composed of experts of another organizational dimension in an attempt to avoid the doublereporting difficulty of a matrix organization but still mesh two or more dimensions

organizational design (p. 278)

A process that determines how a company should be organized to ensure its worldwide business activities are integrated in an efficient and effective manner

organizational structure (p.

277)

The way an organization formally arranges its domestic and international units and activities, and the relationships among these components

reengineering (p. 285)

Redesigning organizational structure, hierarchy, business systems, and processes in order to improve organizational efficiency

strategic business unit (SBU) (p. 284)

A self-contained business entity with a clearly defined market, specific competitors, the ability to carry out its business mission, and a size appropriate for control by a single manager

subsidiaries (p. 288)

Companies controlled by other companies (known as parent companies) through ownership of enough voting stock to elect a majority of the voting members on the company‘s board of directors

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transfer pricing (p. 291)

Pricing established for transactions between members of the enterprise

virtual corporation (p. 285)

An organization that coordinates economic activity to deliver value to customers using resources outside the traditional boundaries of the organization

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 10-1 Explain why the design of organizational structure is important Key Terms: to international companies.  organizational design  Introduction  XIII.

How Does Organizational Design Impact International Companies?

Introduction A. Organizations exist to enable a group of people to effectively coordinate their collective activities and accomplish objectives.

1. Organizational structure is the way an organization formally arranges its domestic and international units and activities and the relationships among these components.

2. A company‘s structure helps determine where formal power and authority will be located within the organization.

3. Creating and developing the structure of an international company (IC) over time are fundamental tasks of senior management.

4. Management also need to structure activities within their area of responsibility in a manner consistent with the company‘s overall structure.

XIV.

How Does Organizational Design Impact International Companies?

9. Organizational design is a process that determines how a company should be organized to ensure its worldwide business activities in an efficient and effective manner.

1. As suggested in Figure 10.1, structures and systems must be consistent with each other, with the environmental context in which the organization is operating, and with the strategy the company is using.

2. The size of the organization and the complexity of its business operations also influence its organizational design.

3. The structure of an IC must be able to evolve over time to respond to change and efficiently and effectively reconfigure the way its competencies and resources are integrated within and across the IC‘s various units.

4. Structure follows strategy, but the reverse is also true.

5. Organizing normally follows planning. In designing the organizational structure, management faces two concerns: (1) finding the most effective way to take advantage of specialization of labor and (2) coordinating a firm‘s activities to enable it to meet its overall objectives.

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6. Organizational design concerns: a. Finding the most effective way to departmentalize for efficiencies from specialization of labor. b. Coordinate departmental activities to meet overall objectives. c. Four dimensions to consider in designing the IC: i.

Product and technical expertise.

ii.

Geographic expertise.

iii.

Customer expertise.

iv.

Functional expertise.

LO 10- Identify the various organizational dimensions managers must Key Terms: 2 consider when selecting organizational structures.  international division  Evolution of the International Company Structure  hybrid organization o International Division Structure  matrix organization o International Product Structure  matrix overlay o Geographic Region Structure  strategic business unit o Global Functional Structure (SBU) o Hybrid Organizational Structures  reengineering o Matrix Organizations



virtual corporation

o Matrix Overlay



horizontal corporation

o Strategic Business Units o Current Organizational Trends 

Reengineering



Virtual Corporation



Horizontal Corporation

o Requirements for the Future of International Companies XV.

Evolution of International Company Structure 10. Companies often enter foreign markets by exporting, then forming sales companies and finally setting up production facilities.

11. International Division Structure 1. As its foreign involvement changes, the firm‘s organization often changes. Each domestic product division may be responsible. When firm begins to invest overseas, it might form an international division that often is organized on a regional basis 11-245

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(Figure 10.2).

2. Use of an international division structure can result in conflicts within the firm.

3. Challenges of managing the international division effectively as the size of this division and the range of products, markets, and activities increase can be substantial, causing rising inefficiency.

4. As the company‘s overseas operations increase in importance and scope, ICs often eliminate international divisions in favor of worldwide organizational structures based on product, region, function, or customer classes. At second, third and still lower levels, these four characteristics provide the basis for subdivisions.

5. Figure 10.3 illustrates the international structure stages of typical evolution of IC structures.

6. Management that makes these changes will realize: a. Greater capability to develop competitive strategies to confront global competition. b. Lower production costs thorough worldwide standardization and manufacturing realization. c. Enhanced technology transfer and resource allocation.

12. International Product Structure 1. The product division (Figure 10.4) is responsible for global line and staff operations.

Each division has regional experts.

2. This organizational form avoids duplication of product experts common in a company with an international division; it creates a duplication of area experts.

3. Some firms have a group of regional experts in an international division that advises the product divisions but has no line authority over them.

13. Geographic Region structure 1. These firms put responsibility for all activities under area managers who report directly to the CEO (Figure 10.5).

2. This form is used for both multinational and global companies. It is popular with companies that manufacture products with low or stable technological content that require strong marketing ability, and also by firms with diverse products, each having different product requirements, competitive environments, and political risks.

3. The disadvantage of an organization divided into geographic regions is that each region must have its own product and functional specialists; although duplication of area specialists is eliminated, duplication of product and functional specialists is necessary.

4. Production coordination across regions presents challenges, as does global product planning. To address these, ICs often place specialized product managers on the 11-246

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headquarters staff. Although these managers have no line authority, they do provide input to corporate decisions concerning products.

14. Global Functional Structure (Figure 10.6) 1. Few companies organized by function at top level.

2. Narrow and highly integrated product mix is common to this form.

15. Hybrid Organizational Structures 1. Hybrid organizations use a mixture of organizational forms at the top level (Figure 10.7).

2. Such combinations are often the result of a regionally organized company having introduced a new and different product line that management believes can best be handled by a worldwide product division.

3. A mixed structure may also be used when an IC is selling to a sizable, homogeneous class of customers.

16. Matrix organizations 1. Evolves from management‘s attempt to mesh product, regional and functional expertise while maintaining clear lines of authority.

2. In an organization of two dimensions, such as area and product (Figure 10.8), both the geographic area managers and the product managers will be at the same level, and their responsibilities will overlap. Note that the country managers are responsible to both the area managers and the product-line managers.

3. Disadvantages of the matrix form and its multiple reporting relationship have kept most worldwide companies from adopting it.

17. Matrix Overlay 1. The matrix overlay is an organization in which top-level divisions are required to heed input from a staff composed of experts of another organizational dimension in an attempt to avoid the double-reporting difficulty of a matrix organization but still mesh two or more dimensions.

2. The matrix overlay attempts to address the problems of the matrix structure by requiring accountability of all functions in the organization while avoiding the management complications of a pure matrix structure.

18. Strategic Business Units (SBUs) 1. An organizational form in which product divisions are defined as if they were distinct, independent businesses makes use of strategic business units (SBUs), selfcontained business entities, each with a clearly defined market, specific competitors, the ability to carry out its business mission, and a size appropriate for control by a single manager.

2. Most SBUs are based on product lines.

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3. If a product must be modified to suit different markets, a worldwide SBU may be divided into a few product/market SBUs serving various markets or groups of countries.

19. Current Organizational Trends 1. Reengineering 54. Reengineering involves redesigning organizational structure, hierarchy, business systems, and processes in order to improve organizational efficiency.

55. Reengineering is often accompanied by a significant reduction in middle management staff, restructuring of work processes across functional departments, and improvement in the speed and quality of strategy execution.

2. Virtual corporation A virtual corporation, also called a network corporation or a modular corporation, is an organization that coordinates economic activity to deliver value to customers using resources outside the traditional boundaries of the organization; it relies to a great extent on third parties to conduct its business.

56. Outsourcing once was used for downsizing and cost reduction, but now companies are using it to obtain specialized expertise they don‘t have but need in order to serve new markets or adopt new technology.

57. The virtual corporation permits greater flexibility than other corporate structures. Virtual corporations form a network of dynamic relationships that allows them to take advantage of the competencies of other organizations in order to respond rapidly to changing circumstances.

58. Disadvantages include the potential to reduce management‘s control over the corporation‘s activities; networks are vulnerable to the opportunistic actions of partners, including cost increases, unintended ―borrowing‖ of technical and other knowledge, and departure from the relationship at inappropriate times.

59. For employees, virtual organization may replace the security of longterm employment and ever-increasing salaries with the insecurity of a global market.

3. Horizontal Corporation A form of organization characterized by lateral decision processes, horizontal networks, and a strong corporate-wide business philosophy.

60. In many companies, teams are drawn from different departments to solve a problem or deliver a product.

61. The horizontal organization has been characterized as ―anti-organization‖ 11-248

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because its designers are seeking to remove the constraints imposed by the more conventional organizational structures. Employees worldwide create, build, and market the company‘s products through a carefully cultivated system of interrelationships.

62. Proponents claim lateral relationships spark innovation and new product development and place more decision-making responsibility in the hands of middle managers and other skilled professionals, who do not have to clear each detail with higher-ups.

63. The objective of the horizontal organization form is to substitute cooperation and coordination, which are in everyone‘s interest, for strict control and supervision. Pursued effectively, this approach can help develop international communities of skilled workers that create and exploit valuable intangible assets.

20. Requirements for the Future of International Companies 1. Managers will make greater use of the dynamic network structure that breaks down major functions of the firm into small companies coordinated by a small-sized headquarters organization. Business functions such as marketing and accounting may be outsourced. Firms must learn how to be large and entrepreneurial.

2. Small is not better; focused is better.

LO 10-3 Explain how decision making is allocated between parent and Key Terms: wholly owned subsidiaries in an international company.  subsidiaries  Where Decisions Are Made in Wholly Owned  affiliates Subsidiaries  transfer pricing o Standardization of the Company‘s Products and Equipment o Competence of Subsidiary Management and Headquarters‘ Reliance on It o Size and Age of the IC o Headquarters‘ Willingness to Benefit the Enterprise at the Subsidiary‘s Expense o The Subsidiary‘s Frustration With Its Limited Power 21. Where Decisions Are Made in Wholly Owned subsidiaries 22. Every successful company uses controls to put its plans into effect and to evaluate and reward or correct executive performance. An element of controls is whether decisions are made by the parent company, the subsidiaries, or by a combination.

1. Subsidiaries are companies controlled by other companies (known as parent companies) through ownership of enough voting stock to elect a majority of the 11-249

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voting members on the company‘s board of directors.

2. Affiliates are companies controlled by other companies, but less-than-majority owners may exercise control by a variety of means, both those involving stock ownership and those involving nonownership mechanisms.

23. Standardization of the company‘s products and equipment 1. For profit reasons, subsidiaries may favor product and equipment designed specifically for the market and conditions of the host country.

2. The parent company may prefer product and equipment be standardized in order to multiply source options and simplify procurement and maintenance.

24. Competence of Subsidiary Management and Headquarters‘ Reliance on It 1. With greater confidence, more decisions will be delegated or left to subsidiaries.

2. Moving subsidiary managers into parent operations or into other subsidiaries widens the executives‘ knowledge of the system and knowledge of each other.

3. Moving parent managers into subsidiaries widens their knowledge of subsidiary problems to which the parent might not be sensitive otherwise.

4. Transferring managers gives them opportunity to learn HQ policies and problems if implementing policies at subsidiary level firsthand.

5. HQ needs to understand host country‘s conditions and relies on subsidiary managers for information.

6. The greater the distance between HQ and subsidiary, HQ relies more on subsidiary manager information.

25. Size and Age of the IC 1. As the company grows, it can hire more specialists, experts, and experienced executives. The longer a company has been an IC, the more likely it will have a number of experienced executives who will have served abroad and will have knowledge of company policies and will have developed confidence with international activities. More decisions will tend to be made at parent headquarters.

2. At the same time, delegation and decentralization allow for local adaptation, so there may be a tension in this area.

26. Headquarters‘ Willingness to Benefit the Enterprise at the Subsidiary‘s Expense 1. A small loss for a subsidiary can result in a greater gain for the total IC and HQ makes this decision.

2. HQ may move production factors from one country to another to gain financial or competitive advantage; subsidiary management is not thrilled with loss of control.

3. When deciding which subsidiary gets an order for goods, HQ decides on a number of factors including cost, operational issues, financial factors, and governmental pressure.

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4. If one market is too small for economies of scale, HQ may have specific countries make a single component(s) that all other markets can use; this demands greater HQ coordination and control.

5. HQ decides price and profit allocation to the subsidiary that contributes most to overall IC profitability and will get to book the profit.

6. Transfer pricing is the price for transactions between members of the same enterprise.

27. The Subsidiary‘s Frustration With Its Limited Power An objective of all businesses is to obtain and keep able, loyal executives. If subsidiary managers are not allowed to make important decisions, regarding their operations, they may resign or become hostile toward HQ. LO 10- Discuss how an international company can maintain control of a Key Terms: 4 joint venture or of a company in which it owns less than 50% of the voting stock. 

Where Decisions Are Made in Joint Ventures and Subsidiaries Less Than 100% Owned o Loss of Freedom and Flexibility o Control Can Be Had Even With Limited or No Ownership

28. Where Decisions Are Made in Joint Ventures and Subsidiaries Less Than 100% Owned A. Control is not as easy as it is with a 100%owned subsidiary. The other shareholders or joint venture partner may make it difficult or impossible for the parent or other partner to make the sort of decisions mentioned above. There are ways to exercise some control over subsidiaries owned less than 100%.

B. Loss of Freedom and Flexibility 1. If shareholders outside the IC control the affiliate, they can block efforts of IC headquarters to move production factors away, fill an export order from another affiliate or subsidiary, and so on. HH 2. If outside shareholders are a minority and cannot directly control the affiliate, they can bring pressures on the IC to prevent it from diminishing the affiliate‘s profitability for the enterprise‘s benefit.

3. A local joint venture partner is unlikely to agree with measures that penalize the venture for the IC‘s benefit.

C. Control Can Be Had Even With Limited or No Ownership 1. With less than 50% of the voting stock and even with no voting stock, an IC can 11-251

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have control through: A management contract.

64. Control of the finances.

65. Control of the technology.

66. Putting people from the IC in important executive positions.

LO 10- List the types of information an international company‘s units Key Terms: 5 around the world need to report to the parent company. 

Reporting o Financial Reporting o Technological Reporting o Reporting About Market Opportunities o Political and Economic Reporting

29. Reporting 30. For controls to be effective, all operating units of an IC must provide headquarters with timely, accurate, and complete reports.

31. Financial Reporting 1. Parent HQ must know the existence and size of a surplus to determine its best use across the range of options: the subsidiary generating the surplus, another subsidiary or affiliate, or at the parent company.

C. Technological Reporting 1. New technology is constantly being developed in different countries, and the subsidiary or affiliate operating in such a country is likely to learn about it before IC headquarters.

2. If HQ finds the new technology potentially valuable, it can gain competitive advantage by being the first to contact the developer for a license to use it.

D. Reporting About Market Opportunities 1. Affiliates may spot new or growing markets for some product of the enterprise.

E. Political and Economic Reporting 1. Economic and political conditions in local markets need to be continually monitored and reported to HQ for quick response or changes as needed.

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Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice: Working in a Global Virtual Organization The focus of this box feature explores the work practices of Automattic, a firm based in San Francisco that hires and manages employees without their ever coming into the office. Although many firms have employees work from home, few have gone as far as Automattic, which has 1,200 employees who work in 77 countries.

1. What do you think might be the greatest strengths and weaknesses of working in a virtual organization like Automatic?

Answers here might vary, but some students might suggest that a virtual organization approach would allow the company to be flexible and responsive, allowing employees to go to where the greatest need may be. It can reduce costs of brick-and-mortar office space and also allow employees to have great flexibility of where they wish to live (e.g., which might be of great value to those employees who might not want to relocate on a longer term basis to wherever a national or regional office might be located.), which might allow the company to hire and retain extraordinary talent in comparison with more traditional companies. Of course, there can also be weaknesses, as many students might note. It could be more difficult to build and maintain strong social cohesion within an organization where people have limited or irregular opportunities to interact in person. Coordinating a dispersed workforce could also be challenging, as would ensuring that employees remain focused and committed on work-related matters. It might create challenges for coordinating activities and building relationships with other stakeholders as well, due to the lack of continuous physical presence in a particular location. There could be challenges with determining taxation policies for the company and its workers, as some communities may attempt to tax based on where your ―work‖ is conducted, since a typical employee might work in multiple locations and many of those sites could be quite a distance from the employees personal ―home‖.

2. Based on Automattic’s success, why might companies like IBM choose the traditional face-to-face hiring process and in-office structure? What differences among the companies could be attributed to this?

Student responses will vary, but some things to discuss include: The rich information flow that comes from face-to-face meetings, especially when working on difficult problems. More control over people that might otherwise not work a full week, especially in jobs that cannot be easily broken into manageable assignments, such as research and creative work. However, others might suggest that these firms could be stuck in their old ways and do not know how to manage a virtual work force. Research workers, of which IBM and HP have many, often benefit from working near colleagues that can help with problems or suggest directions to take based on their varied expertise. If Automattic can easily divide its work into clear assignments, then it might be better suited for a virtual organization.

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3. Would you enjoy working in a virtual organization like Automattic? Why or why not?

Again, answers may vary on this question. Some students might suggest that they would enjoy the freedom and stimulation of being able to work in multiple locations, to be able to self manage many of the dimensions of their work lives, and to be able to have a broad and changing mix of colleagues to work with. Other students might note that this would create a very different cultural setting, changing the nature of work relationships, job design, and other dimensions. It is worthwhile here to explore whether there would be certain personality types that might best adapt and thrive in a virtual organization, or whether certain types might find it much less fulfilling. There can also be discussion about whether this ―fit‖ might vary based on personal circumstances or stage in one‘s career.

Global Debate: Should Companies Be Allowed to Profit From International Transfer Pricing?

Transfer pricing in international companies has recently received increasing attention in the business and popular press, and this Global Debate is intended to help shed some light on why transfer pricing has become the focus of so much attention. The discussion provides a vignette of a hypothetical company that is using transfer pricing to alter its corporate tax bill by over $500 million per year. This brief scenario provides an interesting base to explore a range of different financial, political, ethical, and other issues associated with a management decision such as transfer pricing practices, and can allow the discussion to consider these issues from a variety of different perspectives.

Online and Hybrid: A classroom discussion option is to assign individuals, groups, or the class as a whole to examine the evolving issue of transfer pricing and how the practice impacts various stakeholder groups. The students‘ findings can provide a strong basis for discussion or debate on these emerging issues. Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against) and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups, or else assign perspectives and conduct an in-class debate and discussion.

1. If you were a shareholder in BigSoft, would you support the company’s approach to transfer pricing? Why or why not?

The answers to this question will vary, and it is intended to help people think through the issues from various perspectives. From a perspective of strict shareholder value maximization, shareholders would generally welcome an option that will decrease tax bills and increase profits to the company and shareholders, so that would suggest support for this approach. However, some students might argue that this approach is potentially illegal or at least it is not consistent with the intention of law and practice, and that the company is therefore risking damage to its reputation and long term maximization of value to shareholders by trying to ―work the system‖ to its advantage and to the detriment of other stakeholders (such as the citizens of BigSoft‘s home country). These competing perspectives can make for a lively debate and, properly 11-254

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managed, it can produce substantive depth and insight, opening students up to the harsh reality of melding national and corporate values, financial theory, and related issues and concerns.

2. If you represented the government of Ireland, would you support BigSoft’s approach to transfer pricing? Why or why not?

This question raises an issue that almost always generates strong opinions and a variety of perspectives. In general, the government of Ireland would support this approach, as it may help to attract companies, jobs, and investment into Ireland, thereby benefitting the government and its people on an overall basis. However, many countries in the EU have criticized Ireland for adopting policies that may benefit Ireland to the detriment of other countries, such as by creating a competitive ―race to the bottom‖ in terms of offering taxation policies that are more attractive to corporations. This beggar-thy-neighbor approach could produce a backlash against Ireland on a variety of levels, which could have negative implications for Ireland and its stakeholders. The different perspectives can again allow this to generate an interesting and insightful discussion among class participants, especially as they contemplate what actions might be able to be initiated to convince Ireland to change their practices, and the implications if attractive alternatives are not available.

3. If you represented the U.S. government, or the government of one of the other nations in Europe, would you support BigSoft’s approach to transfer pricing? Why or why not?

As suggested above, the U.S. government and governments of the other nations in Europe would generally not be supportive of this approach, as it deprives them of tax revenues that might otherwise be used to help them better serve their own stakeholders.

Get That Job! From Backpack to Briefcase: Eduardo Rangel: Growth in International Through Experience This box explores Eduardo Rangel‘s decision to study international business and to gain international experience through an extended internship in China, due to his recognition of the strategic value of learning more about this important emerging economy. He preceded his overseas work with an extended immersion language program and familiarization with the country, in an effort to help mitigate the effects of culture shock. Despite these efforts, he still experienced some of the challenges associated with living and working in another culture, and the importance of altering his perspective on the situation in order to be able to function optimally.

After graduating from university, he chose to deepen his experience base by returning the China for an additional 2 years of work, language acquisition, and cultural familiarization. He concludes his discussion by providing recommendations to students interested in living and working abroad, including the value of having a clear objective and plan for what you hope to achieve from your international experience.

Online and Hybrid: Virtual teams evaluate Rangel‘s advice for their own career development and their ability to understand and adapt to life in another culture, particularly one that is quite different from one‘s home culture. Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own career strategy in light of Rangel‘s advice.

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1. How would you evaluate Eduardo Rangel’s efforts to understand and integrate effectively within Chinese culture? How can such efforts help him to achieve his objective of immersing within and understanding other cultures?

Students will have various answers to this question, depending on their experience with other cultures as well as their own self-awareness and self-confidence. Rangel chose to study and work in China for a 9-month internship, intrigued by the opportunity to immerse within a very different culture. He arrived 3 months early so that he could take an intense Mandarin language course as well as travel within the country and help to deal with the potential of culture shock. When he did begin to experience the typical symptoms of culture shock, he was able to recognize them and seek assistance from a professor, which many students will view as an appropriate and constructive choice. He emphasizes the importance of being patient, and about the value of experiential learning and relationship building, in order to understand and perform more effectively within a different culture. He also emphasizes the value of having a plan regarding what you want to accomplish from the international experience, to help keep one‘s focus and motivation. Some students might find Rangel‘s approach to immersing in another culture to be an exciting notion, and certainly one that will force them to quickly advance in their knowledge of the language and culture of the host country. Other students might express less self-confidence about being able to adjust successfully. Asking students whether they have had a similar experience themselves and exploring the benefits they may have perceived and lessons they learned, as well as anecdotes about difficulties they encountered, can contribute to a robust discussion.

2. Rangel emphasizes the importance of relationship building and how experiential learning in this regard can be invaluable to personal and professional success. Do you agree with this assertion? Why or why not? What do you think of his recommendations for addressing this challenge?

Students will have various answers to this question, depending on their experience with other cultures as well as their own self-awareness and self-confidence. He emphasizes the value of clarifying one‘s goals before going abroad. By explicitly identifying what you hope to achieve, be it language fluency, cultural awareness and understanding, relevant business-related experience, and so forth that can provide the foundation for identifying the approaches that might be most valuable, the experiences that can be sought out, and techniques that may enhance the likelihood of success. In this regard, Rangel wanted to learn the language and the culture, so he devoted time and energy toward learning the language and gaining an appreciation for the country through personal travel; he was patient about making progress and impacting behaviors and decisions; and he emphasized devoting time to building relationships with his peers and bosses (a task enhanced, perhaps, by his investment in language training). It can be useful to explore with the students what ideas they would have for best achieving a goal of developing language skills while abroad, versus what would be different if one‘s goal was focused more on learning business-related skills and experience. Rangel‘s encouragement to be patient, interactive, and clear regarding personal objectives should resonate with many students as being appropriate and desirable actions.

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End of Module Exercises Critical Thinking Questions 1. Why is organizational structure an important issue for international companies?

Organizational structure integrates the organization. It is the way jobs are grouped and their reporting relationships established. It also provides information conduits for the data needed for decision-making.

2. What are the main strengths and weaknesses of using an international division as part of a company’s organizational structure? Under what circumstances might such a structure be an appropriate choice for a company?

An international division takes control of the IC‘s international involvement. After beginning with an international division, most companies move on to organize their international activities based on product, function, classes of customer, or region. The international division structure is limited in its ability to deal with complexity of doing business internationally. At the same time, some large companies, such as Walmart, use an international division to organize their international involvement.

3. Compare and contrast geographic and product structures for international companies.

Geographic structures bring marketing issues such as distribution and localization to the fore, whereas product structures lend a focus to product development. The points of comparison are in specialists. Product structures have regional expert duplication, and geographic structures have product and functional expert duplication.

4. Your company’s matrix isn’t working; decisions are taking too long, and it seems to you that instead of best solutions, you’re getting compromises. What can your company’s CEO do to address this problem?

Set up an organization based on product or region and install a matrix overlay. Establish a group of regional experts at headquarters if your new organization is based on product. Make clear to the product managers that the regional experts will have input to the product decisions.

5. You are the CEO of Mancon Incorporated, and you have just acquired Pozoli, an Italian small-appliance maker (electric shavers, small household and personal care appliances). It has been in business for more than 40 years and has manufacturing plants in Italy, Mexico, Ireland, and Spain. Its output is sold in more than 100 markets worldwide, including the United States. Your company is now organized into two product groups—shaving and personal care—along with an international division at the top level. How are you going to include Pozoli in your organization? Explain your rationale.

The answers to this question may vary. You could break up Pozoli and put its product divisions in the Mancon divisions Pozoli is already a multinational that has been in business for years. Its brand names are well known all over the world. Probably better to locate the entire company in the international division unless this division‘s job is only to handle exports for the two product groups. If so, either you need to change the international division‘s thrust or establish Pozoli as a separate division on the same level as the international division and the two product divisions.

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6. It is obvious that in formulating new strategies, management may uncover a need to change its organization. Can you describe some situations in which the reverse may be true?

The answers to this question may vary. The reverse is instead of strategic planning driving change, another force drives organizational change. Let‘s say the firm makes an acquisition whose business is significantly different from the present businesses. New expertise is needed.

Perhaps the company is entering new markets and needs regional expertise it doesn‘t have now.

An important customer changing a JIT or synchronous production could force the firm to change also as Ford, GM, Campbell and many others have required their major suppliers to do. This alone could require the firm to make numerous changes in the organization.

7. In choosing whether decisions will be made by the parent company or by its subsidiaries, what should management consider when equipment and products are standardized worldwide? What about when they are tailored to individual national circumstances and markets?

If the subsidiary‘s market is large and different enough, it may make economic sense to design and produce equipment and products for that one market. Management of the subsidiary would probably make those decisions. Otherwise, it may be more economic to standardize on a worldwide basis. Such standardization could save on procurement, training, and maintenance costs. It could give the organization a choice of sources; if one subsidiary had difficulties, the product could be furnished by another subsidiary.

8. Regarding issues of control in an international company: a. What are some decisions that could result in detriment for a subsidiary but greater benefits for the enterprise as a whole?

The answers to this question may vary across students, but decisions to channel business through a low tax country subsidiary rather than a high tax country sub, or decisions based on capacity utilization or production costs to let one subsidiary bid for a contract while forbidding others to complete. b. In such circumstances, where will the decision be made—at IC headquarters or at the affected subsidiary?

Such decisions would most likely be made at IC headquarters.

9. What measures can be utilized to control subsidiaries that are less than 100% owned by the firm, or joint-venture partners in which the firm has no ownership?

The answers to this question may vary. The company can exercise control if it is providing necessary ingredients such as money, technology, management skill, production management, or sales distribution.

10. Some companies use the same control systems for each unit or operation worldwide.

For example, Starbucks, Kentucky Fried Chicken, or McDonald’s apply the same rigid quality controls throughout all aspects of their organizations, even as they expand internationally. Why would a company impose rigorous corporate quality standards, regardless of the country in which it operates? What modifications in these quality 11-258

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standards, if any, should the company permit because of differences across nations or regions of the world? Why is the company allowing these modifications to occur?

Companies might implement rigorous quality standards, regardless of country of operation, if they are developing standardized products for global markets. There may also be a preference to standardize because it is easier for the headquarters‘ personnel to be able to oversee and understand international operations when activities are done in the same manner everywhere the company operates. The decision on whether to permit modifications to quality standards will depend on consideration of a number of different factors, including the specific circumstances in different countries (such as legal and regulatory differences), the company‘s international strategy, analysis of competitors, and the nature and extent of potential subsidiary detriment, among other factors. Adjustments might be considered due to factors such as the impact of differences in language, regulations, profit potential, competence of subsidiary managers, and the size and age of the IC. 11. How might different government policies affect where companies choose to locate their headquarters, subsidiaries, manufacturing locations, and other organizational units and activities?

Companies will look for benefits that governments might offer, such as: tax reductions, tax credits, free land, subsidies for constructions, favorable access to resources or markets, and so on. Many companies will play one country against another in negotiations to get a better deal.

Then the ―winning‖ country or state will get the plant or other facilities. globalEDGE Research Task Exercise 1 Search for ―global manufacturing competitiveness‖ in globalEDGE. The results will take you to the Indices of the countries where the Global Manufacturing Competitiveness Index (GMCI) is listed. Use the external link to visit the source and click on the ‗Regional Clusters‘ link on the first interactive graph displayed on the landing page. Doing so will list the Asia-Pacific countries in the rank order. Clicking on the country flags will display more information Search Phrase: Global Manufacturing Competitiveness Resource Name: Global Manufacturing Competitiveness Index (GMCI) Resource Link: https://globaledge.msu.edu/countries/germany/indices Exercise 2 GlobalEDGE ―Global Insights‖ is where profiles of trade blocs, countries, the U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Industry > ―Industry of choice‖).

Search Phrase: by Industry 11-259

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Resource Name: by Industry Resource Link: https://globaledge.msu.edu/global-insights/by/industry MiniCase: Eleconnect, Inc.—Must It Reorganize?

This minicase provides an opportunity for students to examine a situation in which the internationalization of a company has raised issues of the appropriate organizational structure to design and implement in order to enhance the prospects for continued success.

1. How should the company be organized to handle the new foreign production facilities?

How can Connect All reduce the time needed to bring new designs to market?

Students will have various ideas and organizational structures for Connect All, Inc. One option is for the president to restructure the company into a matrix overlay. The structure of the company could include product divisions with an international division on staff. All decisions must require the International Division to be notified about all proposed product changes and given an opportunity to discuss them with the appropriate product division. The International Division and the product division must be in agreement in matters affecting sales outside the United States.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available http://bit.ly/MHEIBVideo. The content is rich and varied, and it is updated monthly.

at

You might find it valuable to use the video, ―What Is a Matrix Organization Structure,‖ at https://youtu.be/mCHUkLLSXt4. In it, Kevan Hall, CEO of Global Integration and author of ―Making the Matrix Work,‖ defines what a matrix organization structure is, and what makes it different and challenging.

An interesting lecture by Nick Kitchen on organizational structure and design, which also includes the role of globalization and international factors, can be found in the video, ―Introduction to Organizational Structure and Design,‖ at https://youtu.be/NxJvS92uCus. The video on ―Managing in a Global Economy: Organization in International Business,‖ found at https://youtu.be/rvNYIW7tTZk, includes discussion of various international organizational structures, including network and virtual organizations. It also addresses issues of standardization, coordination, control, and related topics associated with this module.

GlobalEDGE and the Academy of International Business provide links to a number of organizations that offer videos about international business. You can find these links at https://aib.msu.edu/resources/videodepositories.asp.

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for use in hybrid/flipped classroom and online courses.

1. Decisions, Decisions We have had good response from students when we have asked them to analyze why certain types of decisions should be made by the IC parent company while others should be made by the subsidiary and other IC units. You can assign this as a verbal report or presentation in class, to help stimulate learning by peers as well as interesting comparisons. The material in this module is a good place to start their analyses.

2. Operating Environment Key Elements Assign students to identify key elements of the operating environment of one or several international companies in a key industry, such as oil and gas, automobiles, or clothing, including ones from other nations, as well as the strategies being pursued by the companies.

Then you can ask the students to identify how these elements of the operating environment and 11-261

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strategy are affecting the way these organizations are structuring their activities, with particular emphasis on understanding how and why there may be differences in the organizational structures being used. These analyses can be shared in class to help initiate a discussion on the design of organizational structures in international business.

3. Reporting Information Have students report on the types of information that needs to be reported by IC units to the parent, as well as on appropriate sources of the information that will be reported. You can have different teams examine different industries or sectors, in an effort to identify whether and how the information needs may vary and the implications of these differences.

4. Analyze an IC Have students analyze an IC to identify its organizational structure, strategic control issues and methods used in the company. The merger of high end Daimler-Benz and the more popularpriced Chrysler, Toyota and its recent (2010/2011) automobile recalls, or Volkswagen and its recent (2015) issues with diesel engine emission software, are examples of potential topics.

Sharing these analyses in class can produce a spirited discussion about how international environment, competitive strategy, and organizational structures and control systems can often create challenging situations for IC management.

Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Harvard Cases ―United Cereal: Lora Brill‘s Eurobrand Challenge,‖ examines the strategic and organizational challenges faced by the European organization of a large multinational cereal company as it struggles to identify the best was of structuring and coordinating the introduction of its new cereal within Europe. ―Bella Healthcare India‖ describes the challenges faced by subsidiary management in Bangalore, India, as they attempt to coordinate product development efforts with parent company units in the United States. A range of strategic, technical, cultural, and organizational factors are introduced, providing for a rich discussion of how to effectively structure and control activities between headquarters and subsidiaries. ―Philips versus Matsushita: The competitive battle continues,‖ examines the evolution of international strategies and structures of two firms battling in the same sector, showing the challenges of developing, leveraging, and evolving the organizational structures and strategies of 11-262

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IC within a changing international competitive context, including balancing organizational design with pressures for local responsiveness versus global standardization.

Controversial Issues 1. Global Debate: Should Companies Be Allowed to Profit from International Transfer Pricing?

The boxed element described earlier in this module‘s Instructor Guide provides an excellent foundation for debating some of the issues raised in the text, including issues about transfer pricing.

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against) and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups, or else assign perspectives and conduct an in-class debate and discussion.

2. IB in Practice: Working in a Global Virtual Organization This boxed element described earlier in this module‘s Instructor Guide can be an interesting tool for generating discussion and debate. We find that students often have a broad range of perspectives regarding the nature of work within a virtual organization and whether, how, and to what extent they would find such an experience to be enjoyable and rewarding, both personally and professionally.

Online and Hybrid: Virtual teams can be assigned to take different perspectives to argue for or against the issue of whether it would be enjoyable and rewarding to work in a virtual organization, or the practical challenges of such a work environment. You could ask the teams to conduct research in support of their perspective, perhaps including interviewing people who are currently employed in such an organization, and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: As with the online and hybrid assignment, students can be assigned to take different perspectives as noted above, and then they can be asked to argue their positions within an in-class debate and discussion.

3. Current Events for Sources of Content on Organizational Design-Related Controversy A focus on current events that are relevant to the module‘s topics is a good way to bring home the concepts, review their application, and build news-review habits. Ask everyone to come prepared with an article for every meeting. If a meaningful percentage of the final grade is allocated to discussion (10‒15), motivation is there. Devote 5 min at the beginning of class to discussion of current events. Recent relevant current events include Volkswagen‘s global controversy about using software to produce misleading reports during environmental emissions testing and how 11-263

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company management might have been able to more effectively structure and control activities to prevent such a debacle from occurring. Depending on the online interface, this activity may be done in chat forums (Blackboard) or discussion boards, before class begins. This activity also works well in large lecture classes.

Teaching Suggestions 1. This module involves what can be abstract, ―big picture‖ content, so helping learners appreciate the nature and influence of design and control decisions within international companies can provide them with a new approach to thinking about business. The use of the figures and examples is helpful. Examples of organizational design challenges abound in current business news, including decisions of companies to re-organize (e.g., the opening vignette on Mondalez and Kraft; Alcoa‘s proposal to split into two companies, one based on traditional aluminum production and the other based on value-added aluminum products). It can be useful to pick one or two recent events and then have students discuss whether and how such events might impact the organizational design and control decisions of an international company operating in that industry or closely associated with the industry or activity.

2. Analyze the relationship between where certain types of decisions are made within the organization and the overall business strategy a firm is using internationally. Then move to why decisions are best made where they are. (Contrast, e.g., retail level international banking with a retail clothing chain.)

3. To point out the importance for an IC to control activities of its units and efforts around the world, review the control issues Nike faced in its outsourcing, with child labor and worker abuse (e.g., can search this on the Web). Similarly, it is possible to discuss a variety of other companies that have encountered control issues with their own or their suppliers‘ operations, such as Apple‘s recent challenges arising from worker complaint, suicides, and other issues in its Chinese supplier, Foxconn Technology Group.

4. Guest Lecturer possibilities. Some people who could contribute to the material in this module would be: 

Your school‘s management and organization people could speak on control and information.



Executives from ICs located near you could add to those subjects.



Virtual organizations may be described by local IC managers, or you might bring such speakers in ―virtually‖ through the use of technology-mediated tools such as Skype, Adobe Connect, FaceTime, or the like.

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title Alternative Organizational Structures for International Companies Organizational Design: Potential Merger of Hershey and Cadbury Control in Whollyand Jointly-Owned Subsidiaries Control, Decision Making, and Reporting International Business Reporting

Assignment Type

Topic(s)

Click and Drag

Overview of Organizational Structure and Design

Case Analysis

Forms Available for Structuring International Companies Where Decisions are Made in Joint Ventures and Subsidiaries less than 100% Owned

Case Analysis

Reporting Information

Click and Drag

Organizational Design and Control

Case Analysis

Learning Objective( s)

AACSB Accreditati on Tagging

Bloom's Taxonomy

10-02

Reflective Thinking

Understand

10-03; 1004

Analytical Thinking

Understand

10-03; 1004

Analytical Thinking

Understand

of 10-05

10-05

Analytical Thinking Analytical Thinking; Reflective Thinking

Understand

Remember; Understand

Connect Activities 1. Alternative Organizational Structures for ICs Activity Summary: This is a click and drag activity in which students must match boxes of general characteristics with the appropriate organizational structure.

How to Use Activity: This can be given as an online assignment or as an in-class assignments for small groups. For live classes, have teams complete the assignments, then ask about any points that were not clear and discuss those with the class. This allows you to tailor the discussion to each class.

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2. Organizational Design: Potential Merger of Hershey and Cadbury Activity Summary: In this case analysis, Hershey is considering bidding for Cadbury because Hershey‘s sales are mostly from the United States and Cadbury is highly internationalized.

How to Use Activity: This can be given as an online assignment. Have students do this before class and then discuss issues around a merger of Hershey and Cadbury.

3. Control in Wholly- and Jointly-Owned Subsidiary Activity Summary: This is a case in which Global Wirecom, Inc is considering a joint venture with a patterner in Thailand. Because of Thai law, GWI can only control 49% of the JV. How to Use Activity: Assign this to be completed online and have Connect randomly assign a question for the case. For a face-to-face class, have students complete this before class, answer any questions about the assignment, then launch into a general discussion about international joint ventures.

4. Control, Decision Making, and Reporting Activity Summary: In this case analysis, students are presented with a company that has an order to make widgets in one country to sell in another. Costs and tax rates for each country are given and students are asked several multiple-choice questions regarding transfer pricing.

How to Use Activity: This works well as an in-class assignment for small groups. Have teams do different questions and write their work on a white board. Once done, have each team explain their math to the class. This can also be done individually as an internet assignment.

5. Reporting in International Business Activity Summary: This is a click and drag activity in which students match boxes about types of information with the type of report an international affiliate would use to communicate the information to headquarters.

How to Use Activity: This activity can be done individually at home or in class in small teams.

If done in teams in class, ask if there were any questions about the assignment and discuss these with the class.

Module 11: Global Leadership Issues and Practices Your content Summary Learning Objectives 11-266

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Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers Global Debate IB in Practice Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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Your Content Summary International companies require a new type of leader in order to compete successfully in a complex and dynamic global environment. These global leaders need to not only be proficient in terms of their business acumen, but to also evidence an array of additional skills. They must be able to envision the nature and direction of change that is occurring within and across markets of the world and the implications of these changes for the company‘s strategy. They must evidence cultural understanding and adaptability, rather than being constrained by experiences only within their home country and culture. They must be able to understand, work with, and inspire individuals from a range of nations and cultures to create new technologies, businesses, and organizations.

This module examines what a global mind-set entails and then discusses what global leadership is, how it differs from domestic leadership, and why global leadership matters. The challenges of finding global leaders with the appropriate set of skills is addressed, as well as what competencies are required for effective global leadership. The module addresses the selection and development of effective global leaders, including how competencies are assessed, models for developing global leaders, and a discussion of how global leadership competencies are developed. The module also examines issues associated with leading global teams, including how global teams differ from traditional teams and the implications of these differences. We also discuss the management of performance in global teams, and some of the opportunities and challenges associated with leading global change.

Learning Objectives LO 11-1

Discuss the importance of creating a company ―global mind-set.‖

LO 11-2

Describe what distinguishes the practice of global leadership from domestic leadership.

LO 11-3

Identify the competencies required for effective global leadership.

LO 11-4

Distinguish among the approaches for selecting and developing effective global leaders.

LO 11-5

Describe global team leadership skills.

LO 11-6

Identify some of the challenges of leading global change.

Key Terms and Definitions global mind-set (p. 304)

A set of ideas and attitudes that combines an openness to and an awareness of diversity across markets and cultures with a propensity and ability to synthesize across this diversity

global team (p. 316)

A team characterized by a high level of diversity, 11-268

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geographic dispersion, and virtual rather than face-toface interaction leadership (p. 305)

The behaviors and processes required for organizing a group of people in order to achieve a common purpose or goal

social loafing (p. 319)

Tendency of some people to put forth less effort when they are members of a group

team norms (p. 317)

Legitimate, shared standards against which the appropriateness of behavior can be evaluated

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 11-1 Discuss the importance of creating a company ―global mind- Key Terms: set.‖  global mind-set  Introduction  XVI.

The Global Mind-Set

Introduction 32. Lindsay Levin‘s Quest for International Leaders, in the opening vignette, discusses one person‘s quest to determine what it means to be a responsible business in a shared and increasingly complex, ambiguous and interconnected world, and the implications for effective management.

195. Most organizations do not have the leaders they need for such challenges.

196. A key requirement for such leaders is a global mind-set.

33. The Global Mind-Set Intellectual intelligence, including business acumen.

197. Global emotional intelligence, including self-awareness, cross-cultural understanding, cultural adjustment, and cross-cultural effectiveness.

198. Developing a cadre of managers and a company culture that embrace a global mind-set is a key challenge for global leaders.

LO 11-2

Describe what distinguishes the practice of global leadership from domestic leadership. 

Key Terms: 

Leadership

Global Leadership: What It Is and Why It Matters o How Global Leadership Differs from Domestic Leadership o The Challenge of Finding Global Leaders with the ―Right Stuff‖

XVII.

Global Leadership: What It Is and Why It Matters 34. Leadership is not the same a management, though they overlap.

Warren Bennis distinguished between leaders and managers.

67. The leader innovates; the manager administrates.

68. The leader develops; the manager maintains.

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69. The leader challenges the status quo; the manager accepts it.

70. The leader has a long-range perspective; the manager has a short-term perspective.

71. The leader asks ―what?‖ and ―why?‖; the manager asks ―how?‖ and ―when?‖ 72. The leader‘s eye is on the horizon; the manager‘s eye is always on the bottom line.

73. The leader originates; the manager imitates.

74. The leader inspires; the manager controls.

35. How Global Leadership Differs from Domestic Leadership Four dimensions of complexity: multiplicity, interdependence, ambiguity, and dynamism.

199. Globalization increases both internal and external complexities.

200. Project GLOBE found that people in different nations had some similar and many dissimilar understandings of the traits of leaders; the largest number of leadership traits were contingent on cultural context (see Table 11.1 for a summary).

201. Global leadership is the same but different in kind from domestic leadership.

36. The Challenge of Finding Global Leaders with the ―Right Stuff‖ Globalization not only creates many new business opportunities, it also creates opportunities for a new breed of leaders who can operate in an increasingly globalized world.

202. In addition to proficiency in business, they must have cultural understanding and adaptability and be able to work with and inspire individuals from a range of nations and cultures.

203. Such leaders can come from anywhere in the world.

LO 11- Identify the competencies required for effective global Key Terms: 3 leadership.  XVIII.

What Competencies Are Required for Effective Global Leadership?

What Competencies Are Required for Effective Global Leadership 37. Asperian Global identified 5 abilities for a successful global leadership assignment: See differences.

204. Make connections.

205. Adjust.

206. Integrate and lead change.

207. Localize.

38. Mintzberg and others identified a range of roles for a global leader, including monitor, 11-271

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spokesperson, liaison, leader, negotiator, innovator, decision maker, and change agent.

39. Scholars at the Center for Creative Leadership suggest global leaders are more challenged in the areas of emotional stability, ability to learn, and decision-making and negotiating roles than are domestic leaders, due to the impact of cultural differences.

40. Project GLOBE researchers concluded that a global mind-set, cultural adaptability and flexibility, and tolerance for ambiguity are attributes global leaders need in order to be effective.

41. Alan Bird identified three categories of competencies of global leaders (see Table 11.2): Those needed to manage the business.

208. Those needed to manage people and relationships.

209. Those needed to manage the self.

42. The five-level Pyramid Model of Global Leadership (Figure 11.2) identifies a progression of skills required for effective global leadership: Bottom level is a baseline of necessary global knowledge.

75. Next level includes four threshold traits: humility, integrity, inquisitiveness, resilience.

76. Level 3 includes attitudes and orientations affecting the way global leaders perceive and interpret their world.

77. The fourth level includes interpersonal skills that enable global leaders to effectively cross cultures.

78. Level 5 includes system skills that enable global leaders to effectively influence people and systems inside and outside the company.

LO 114

Distinguish among the approaches for selecting and developing effective global leaders. 

Key Terms:

Selecting and Developing Effective Global Leaders o Assessing Global Leadership Competencies o Models for Developing Global Leaders

 XIX.



The Global Leadership Expertise Development (GLED) Model



The ―Right Stuff‖ Model

Tools and Techniques for Developing Global Leadership Skills

Selecting and Developing Effective Global Leaders 11-272

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43. Assessing Global Leadership Competencies Many assessment instruments have been developed.

210. Choice of instrument depends on context.

44. Models for Developing Global Leaders The Global Leadership Expertise Development (GLED) Model (Figure 11.3). i. Emphasis on process by which expertise developed.

211. The ―Right Stuff‖ Model (Figure 11.4) i. Match between leader‘s skills and abilities and the firm‘s needs.

45. Tools and Techniques for Developing Global Leadership Skills Non-linear process comprised of diverse experiences.

212. Skills necessary to deal effectively with complex, ambiguous, high-level challenges.

213. The goal of the leadership development process is to develop global leadership skills experientially through transformational experiences.

LO 11- Describe global team leadership skills.

5  Leading Global Teams

Key Terms: 

global team

o Leading Teams



team norms

o Complexity for Teams in the Global Context



social loafing

o Global Team Leadership and Culture o Virtual and Geographically Dispersed Teams o Performance Management in Global Teams XX.

Leading Global Teams 46. Leading global teams is a complex activity.

High level of diversity.

214. Geographic dispersion.

215. Virtual environment.

216. Differences from traditional teams (see Table 11.3).

47. Leading teams includes three main activities: Establishing the team.

217. Coaching team members.

218. Setting team norms.

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48. Complexity for Teams in the Global Context Increased multiplicity.

219. Increased ambiguity.

220. Increased interdependence.

49. Global Team Membership and Culture Global team leaders must manage basic conditions of team performance—organization, social processes, and task processes—as well as issues accompanying the international context.

221. Cultures influence how people think about defining and managing roles and identifying acceptable communication and conflict resolution norms.

222. Global teams must explicitly address their communication and conflict norms.

223. One way to understand the various cultures of team members is to use the map-bridgeintegrate (MBI) model.

Mapping lets team members discuss their differences and similarities.

79. Bridging allows team members to communicate about the differences and establish how they will work with one another and includes decentering and avoiding blame.

80. Integration is the process of managing the various differences so team members begin to understand the expectations and assumptions of their peers, as well as their backgrounds and skills.

50. Virtual and geographically dispersed teams Communication through technology.

224. Value of including face to face communication on regular basis.

51. Performance Management in Global Teams Failures linked to ineffective reward and recognition strategies.

225. Team-based rewards can encourage social loafing.

226. Five areas to consider when establishing a balance of team and individual rewards: The nature of the task.

81. Stability of team membership.

82. National cultures of team members.

83. Labor laws affecting employee compensation.

84. Available reward options.

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Identify some of the challenges of leading global change. 

Key Terms:

Leading Global Change o Change Models o Change and Culture

XXI.

Leading Global Change 52. Change Models Kurt Lewin model: unfreeze, change, refreeze.

227. John Kotter‘s eight-step model.

228. Change is not an orderly, sequential process, because it rests on human behavior.

53. Change and Culture Attitude toward change is influenced by culture.

229. Driving change requires ability to communicate across cultural borders.

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Engagement and Application Boxed Text Discussion Questions With Suggested Answers Global Debate: Are Global Leadership Positions What Corporations and Women Have Been Waiting for?

The focus of this box feature explores the extent to which women occupy (or not) senior management positions in large companies, as well as differences in the typical skills and attributes of female versus male global leaders. The discussion highlights the case that women are proportionally underrepresented among top management, including in Fortune 1,000 companies. At the same time, women evidence different leadership styles than men tend to exhibit, and the traits typically represented by women may be more consistent with the skills and attributes associated with effective global leaders. As a result, the apparent discrepancy between desired attributes and level of representation for women provides the basis for an interesting and often intensely debated discussion, and can allow the discussion to consider these issues from a variety of different perspectives.

Online and Hybrid: A classroom discussion option is to assign individuals, groups, or the class as a whole to examine the evolving issue of the traits of effective global leaders, the extent to which women tend to exhibit these traits, and the relative dearth of women within the upper echelons of corporations. The students‘ findings can provide a strong basis for discussion or debate on these issues. Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against) and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups, or else assign perspectives and conduct an in-class debate and discussion.

1. The research findings suggest that women might be better suited than men for the challenges of global leadership. Yet how could this be true, given the small number of women occupying executive leadership positions?

The answers to this question will vary, and it is intended to help people think through the issues from various perspectives. It is not uncommon for some students to suggest that there is a strong gender bias evidenced within corporations, be if from the boards of directors, senior executives, or broader social norms, and that this bias not only creates a glass ceiling for capable women candidates but may also impact the performance of such companies. Others may argue that merely looking at proportions of women executives may not reveal other factors contributing to that outcome, and common arguments may include a tendency for women to take time away from the workforce to raise families, greater pressure on or interest by women to multitask a range of variables beyond mere workplace issues, differences in the level of training, cultural factors that might impact the desire as well as the ability of women to move up within organizational hierarchies, and so on. It is almost guaranteed that efforts to create a debate by encouraging students to prepare and defend different positions such as these will result in a lively discussion. Properly managed, it can produce substantive depth and insight, opening students up 12-276

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to the harsh reality of whether or to what extent women may be encountering different barriers or opportunities toward advancement in international corporations, and the potential implications for women and for corporations.

2. What options might be available for increasing the level of women’s participation in global leadership positions?

This question raises an issue that almost always generates strong opinions and a variety of perspectives. Some students may point to the appropriateness of establishing an affirmative action approach to redress the gender-based imbalance. Others might emphasize the importance of education and cultural change. It is common for students to raise the value of strong, effective role models as a basis not only to inspire high-quality women executives to persevere in their efforts to achieve and excel in global leadership roles, but also to serve as examples to encourage corporations, their boards, and their shareholders to actively encourage the development of competent women leaders. Indeed, to the extent that women embody attributes more attuned to global leadership performance, and to the extent that companies and their practices inhibit the development and advancement of such talent, it can be expected that talented women may choose to pursue opportunities in other organizations and thereby deprive a company of high competence talent, with the corresponding performance implications within a competitive global marketplace. This sort of discussion can prove to be full of engagement and interesting insight.

3. Are there certain industries, nations, or other contexts in which it would be inappropriate or undesirable to have women as leaders? Why or why not?

This question can raise interesting issues for discussion and debate. Some students may suggest that women might be inappropriate as executives in nations or industries where women traditionally have had subordinate or otherwise limited roles, using such logic as the inability or potential problems women may have in communicating and performing well within such contexts (e.g., cultures where women and men are kept separate; cultures where traditional male domination may result in a women being ostracized or ignored.). However, some students may refer to literature that notes that women tend to have the networking, empathy, and other skills that might allow them to overcome or perform effectively within these potentially challenging contexts. Indeed, various researchers have noted that expatriate women may be treated differently than host country women within business contexts, thereby creating the potential for them to perform effectively and perhaps to excel in ways that a male may not be able to. Because many students might fall prey to stereotypes or may not have thought deeply about such issues previously, this sort of discussion and debate—particularly if tied into outside research to support arguments—can produce substantive insight among the students.

IB in Practice: Volunteer Assignments Build Global Leadership Skills The focus of this box feature explores the use of volunteer assignments as a means of enhancing students international leadership skills, especially when they may not have prior international experience or positions with international responsibilities. Asking questions such as, ―Why would a company allow employees to take volunteer assignments in international corporate social responsibility programs, paid by the employer?‖, or ―What goals would be achieved by 12-277

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promoting such participation?‖, will serve as a starting point for class discussion on the use of volunteer assignments as a means of developing global leadership skills.

Online and Hybrid: Assign questions to be prepared in virtual teams and submitted as a team assignment, or submitted individually and then discussed in a blog or group discussion site.

Face-to-Face: Students develop responses to the questions in class in teams/groups.

1. Why would a company allow employees to take volunteer assignments in international corporate social responsibility programs, paid by the employer?

Answers here might vary, but some students might suggest that companies would use such postings in order to retain employees who feel a strong affinity for corporate social responsibility, or to help develop such values and skills in their employees. These experiences may also help to develop a range of skills in employees, such as self-reliance, a tolerance for uncertainty and ambiguity, cross-cultural communication skills, and so forth. Of course, a key objective can be to give employees an opportunity to gain valuable experience in leadership within an international or cross-cultural context, and thereby develop or refine their global leadership skills. Caliguri discusses five key features that should be associated with development of responsible global leadership skills. It can be valuable to explore these features, what they involve, and why they might be important to the development of global leadership skills.

2. How could you, as a student, identify volunteer assignments that might enhance your ability to develop global leadership skills and what could you do to gain the most value from such an assignment if you obtained it?

Again, answers may vary on this question. Some students might suggest that they could directly contact existing organizations such as nonprofits or other nongovernmental organizations to identify appropriate opportunities. Other students might emphasize the potential of using the internet or their personal and professional networks to identify potential organizations or projects to work with. It can be useful to identify the range of different contexts or activities that might fit within this general category of volunteer assignments, in order to help stretch students‘ perspectives and help them break free of the constraints that their own narrow base of personal experience might suggest to them. There can be lively discussion about the range of tactics that students might use in order to enhance the learning they achieve, including activities and preparations done pre-departure, activities and preparations engaged in while abroad, and activities to complete upon return. These can include coursework, independent reading, language and cultural training, establishment of personal goals and monitoring systems, keeping a journal, utilizing one or more mentors in the home or host environments, and so forth.

Get That Job! From Backpack to Briefcase: Renée Osaigbovo: Studying International Business Was the Catalyst The box explores Renée Osaigbovo‘s decision to study international business and how that led to spending a year in Thailand on an internship for AIESC. Living in Thailand put her outside of her comfort zone and immersed her into a different way of being, but she feels that those were the best years of her life. She recommends taking advantage of international opportunities. For 12-278

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those that choose to live a globally minded life, she recommends leaning into it fully.

Online and Hybrid: Virtual teams evaluate Osaigbovo‘s advice to take advantage of international internships and relate it to their own career development. Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own career strategy in light of Osaigbovo‘s advice.

1. What do you think Osaigbovo meant by fully leaning into a global mindset? How would this make a difference compared to someone not fully engaged?

Students will have various answers to this question, depending on their experience with other cultures as well as their own self-awareness. Most will talk about being serious about an international experience and not giving up at the first sign of culture shock. Those that have some international experience may talk about what it is like to work through culture shock and the reward of experiencing another culture. Osaigbovo writes that the grass isn‘t greener on the other side, but it is green where you water it. This indicates that overcoming the initial challenges with a new culture and way of living are worth the effort.

2. Osaigbovo’s family is from Nigeria, but she completed her internship in Thailand, which has a very different culture. Is it important where you do an international internship? If you could choose, where would you go?

Some students will want to go to developed countries such as in Europe or Japan. Others many just have a list of countries that they do not want to go to. Still others may have unique reasons for desiring to go to a particular country. Regardless of the location of the international experience, it will provide a good opportunity to learn what culture is by experiencing many things that are taken as granted that actually are very different in other countries. This experience can prepare a student for learning to manage and thrive in another culture, even if it is very different.

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End of Module Exercises Critical Thinking Questions 1. How can a student with no international experience work on global mind-set, and why is it important to do so?

Global mindset is defined as ―one that combines an openness to and awareness of diversity across cultures and markets with a propensity and ability to synthesize across this diversity.‖ It has been argued that global mindset has two key components: (1) intellectual intelligence, which includes business acumen, and (2) global emotional intelligence, which includes self-awareness, cross-cultural understanding, cultural adjustment, and cross-cultural effectiveness. These two components provide the foundation for the global behavior skills that comprise a person‘s global leadership style. Companies need managers with these capabilities, in order to effectively perform in an increasingly complex, interrelated, and global environment, and a student who is able to develop such skills is likely to have a broader array of interesting opportunities in his or her career. Developing such a mind-set can involve a range of coursework, study abroad, international internships (e.g., AIESEC), volunteer activities, and so forth, with an emphasis on enhancing the transformational processes that help to develop the global skills and capabilities comprising a global mindset. The GLED model and the ―right stuff‖ models help to highlight the skills and experiences that wouldl be valuable in this regard.

2. Are good managers also good leaders? Why or why not?

Leadership is not the same thing as management, although there is overlap between the two concepts. Warren Bennis differentiated between the two concepts, including the following distinctions: 

The leader innovates; the manager administrates.



The leader develops; the manager maintains.



The leader challenges the status quo; the manager accepts it.



The leader has a long-range perspective; the manager has a short-term perspective.



The leader asks ―what?‖ and ―why?‖; the manager asks ―how?‖ and ―when?‖



The leader originates; the manager imitates.



The leader inspires; the manager controls.

As these distinctions suggest, because the actions of managers differ from those of leaders, being a good manager does not guarantee that one will be a good leader.

3. A coworker jealous of her friend’s work travel claimed that leadership is just leadership and there is no need to make global leadership a separate category requiring additional training and development. Agree or disagree, explaining your position.

The leadership competencies associated with leadership in domestic settings are also relevant to leadership within global contexts. However, global leaders confront different contexts than do leaders who operate domestically. Globalization introduces additional challenges for companies, 12-280

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including the development of managers who have the ability to understand and operate in the worldwide business environment and to provide a global perspective on leadership of their organizations.

Scholars have identified four overlapping dimensions of complexity that are relevant to globalization and the challenge confronting global leaders: (1) multiplicity (the geometric growth in the volume and nature of issues that must be dealt with by global leaders), (2) interdependence (although dispersed geographically, the different units of the company are systematically linked to each other rather than being isolated and are increasingly dependent on external organizations), (3) ambiguity (the challenge of dealing with information that lacks clarity and incorporates both quantitative and qualitative dimensions, hindering the understanding of causeand-effect relationships), and (4) dynamism (the international system itself is constantly changing). These differences suggest the need for additional and/or different training and development activities in order to develop global leadership competencies.

4. Develop a short scenario in which a global leader needs to take three different types of roles.

Responses may vary here, depending on what types of roles the student identifies. The following represent some role options that might be raised. Henry Mintzberg and other researchers have identified a range of such roles, including: 

Monitoring (e.g., scanning environments, seeking information, monitoring different units of the company)



Spokesperson (e.g., advocating and representing the company, communicating and disseminating information to and with different levels of stakeholders inside and outside the organization)



Liaison (e.g., networking, coordinating, spanning boundaries within and across organizations)



Leader (e.g., motivating and coaching individuals and teams, building and maintaining corporate culture)



Negotiator (e.g., making deals, managing conflict)



Innovator (e.g., seizing opportunities, generating new ideas, promoting a vision for the company)



Decision maker (e.g., troubleshooting, making decisions)



Change agent (e.g., taking action, developing and implementing change plans for the company)

The broad range of duties of global leaders suggests that such individuals require a complex mix of competencies in order to be effective in their duties. Among the many studies that have examined these competencies, a survey conducted by the Corporate Leadership Council identified the following six skills that were considered the most important for global leaders: 

Adaptability across cultures 12-281

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

Capability to develop individuals from and across diverse cultures



Global strategic thinking



Ability to establish business in new markets



Capability for building global teams



Competency in interacting with local political interests

5. Given what you have learned in this module, would you say that leaders in the international context are born or made? That is, can we train people to be global leaders?

The answers to this question may vary. Students might suggest that some people may have personal attributes that make them more likely to effectively develop and exercise the skills and attributes associated with global leadership. However, this module identifies a range of attributes that are associated with global leaders and it appears that many of these elements may be able to be developed and refined through training and experience, suggesting that global leaders may be ―made‖ rather than merely ―born.‖ Models of leader development such as the GLED model and the ―right stuff‖ model give indications of what and how a company or candidate may attempt to develop the desired skills and abilities.

6. Compare and contrast the GLED model and the ―right stuff‖ model of leadership development.

The answers to this question may vary. Both GLED and the Right Stuff models speak to the issue of global leadership development. GLED focuses on the individual‘s development, whereas the Right Stuff model factors in the strategic needs of the firm.

The GLED model is a conceptual model designed for developing the expertise of global leaders, the GLED model (Figure 11.3) emphasizes the process by which expertise is developed. This model includes antecedents for the development of global leaders and their expertise, divided among four categories: individual characteristics, cultural exposure, global education, and project novelty. The level of global leadership expertise is hypothesized as being determined collectively by four dependent variables: cognitive processes, global knowledge, intercultural competence, and global organizing expertise. The model asserts that the relationship between outcome measures and antecedents will be mediated by a transformational process. This transformational process is comprised of the set of experiences, interpersonal encounters, decisions, and challenges related to the global leader‘s expertise, and this process is asserted to be the primary cause of the different levels of global leadership expertise that are observed among leaders with global responsibilities.

The ―Right Stuff‖ model (Figure 11.4) is focused on an outcome of developing global leaders that have the ―right stuff‖ in terms of what they have learned and what they are able to do as leaders for the firm. Producing leaders with the ―right stuff‖ is the result of interaction and partnership between the leader and the organization. The basic talent of the candidates being developed, combined with their developmental experiences and the context in which these experiences occur will help to produce the ―right stuff‖ in terms of the global leader‘s skills and capability.

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7. What are some things that an aspiring global leader might be able to do to develop his or her global leadership skills?

Development of global leadership skills is a nonlinear process comprised of a set of diverse experiences. Differences in the background and attributes of leadership candidates, as well as the companies and contexts in which they work, suggest that development efforts must be considered on an individualized basis and should consider a variety of different developmental tools and techniques. Global leaders will require strong training in business fundamentals, including international business. A robust comprehension of history, geography, and political science, among other topics, can be invaluable for enhancing understanding and performance within different international settings, as can training in language and culture.

8. Describe global teams and comment on what makes them more challenging than teams with members from a single nation.

The answers to this question may vary across students, but global teams have members in multiple locations in more than one country. Further, they have several dimensions that add to their complexity. These additional dimensions include members from different national cultures whose locations are in different time zones, different available communication technologies, and different corporate and economic contexts in which their members are being embedded (see Table 11.3). Global teams are characterized by high levels of diversity, geographic dispersion, and virtual rather than face-to-face interaction.

9. Explain the elements that lead to the increased complexity of globalization.

The answers to this question may vary, but scholars have identified four overlapping dimensions of complexity that are relevant to globalization and the challenge confronting global leaders: (1) multiplicity (the geometric growth in the volume and nature of issues that must be dealt with by global leaders), (2) interdependence (although dispersed geographically, the different units of the company are systematically linked to each other rather than being isolated and are increasingly dependent on external organizations), (3) ambiguity (the challenge of dealing with information that lacks clarity and incorporates both quantitative and qualitative dimensions, hindering the understanding of cause-and-effect relationships), and (4) dynamism (the international system itself is constantly changing). Global leadership includes all that domestic leadership requires and more.

10. How might national culture affect readiness to change? Give an example.

In addition to meeting the basic conditions of team performance, that have to do with the team‘s organization, social processes, and task processes, team leaders face a far more complex context.

A major part of this context is culture. Diverse team members bring different cultural expectations to the team environment. Culture controls how the team members even think of the team at deep levels. (Is the team a family? A tribe? A collection of friends? A sports team?)

Addressing these differences in connection with the notion of culture can lead to superior performance. Researchers have pointed out, though, that the inclination in diverse teams is to suppress differences and focus on what team members have in common. People have differing ways to think about how roles are defined and managed and what acceptable communication and conflict resolution norms are, depending on their cultural values.

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11. Many international companies have increased their use of remote work practices, particularly in the wake of the COVID-10 pandemic. How might the challenges facing a global remote team differ from those of a domestic remote team? What are the implications for the set of skills and behaviors that a successful global remote team leader would require?

Many national cultures struggle to work with others outside of a face-to-face situation. Although in the United States major business deals could be concluded over the phone or through email, other cultures required an in-person meeting to complete such a deal. The transition to remote work with video calls has been much easier for cultures, such as in the United States, that are low context, whereas high context cultures often struggle. International managers and leaders must engage in bridging to help those that struggle with remote work due to cultural norms. To do this, leaders must understand the cultural norms of the people on their teams, assess the challenges that they may face in a remote, online environment, and help them to become productive and effective without requiring in-person meetings. globalEDGE Research Task Exercise 1 GlobalEDGE ‗Global Insights‘ is where profiles of trade blocs, countries, the U.S. states, and industries can be found. When navigated as described in the exercise (i.e., globalEDGE > Global Insights > by Country > China), China‘s profile page will be displayed from where ―Culture‖ page can be accessed on the left column menu. Open ―Culture Crossing‖ in a new window.

Search Phrase: China Resource Name: Culture Crossing Resource Link: https://globaledge.msu.edu/countries/china/culture Exercise 2 The quickest way to reach this section would be to search globalEDGE using the phrase ―by Classification‖. Once on the landing page of the section, both of the countries are listed in the emerging markets groups. Risk comparison can be done on the ―Risk Comparator‖ page available through the left-hand menu.

Search Phrase: by Classification Resource Name: by Classification Resource Link: https://globaledge.msu.edu/econ-class/emerging-markets/risk MiniCase: Justin Marshall: A Failed Global Leadership Opportunity?

This minicase provides an opportunity for students to examine a situation in which a young 12-284

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manager who has performed well in a domestic context is offered the opportunity to extend his earlier success within an international context, but with performance that was not as outstanding.

1. What might explain Justin’s failure to perform well in his new leadership role as the head of the Asia-Pacific division?

Justin‘s focus on the Asia-Pacific division‘s turnaround seems to have been limited to the technical analysis side of the process. There is no mention of his global mindset skills. This suggests he did not factor in culture as he tried to drive the change, and used the same approach that had been successful for him in the United States.

The departures of his key executives after the second quarter suggests that there were communication issues with his direct reports, and they did not feel comfortable discussing their concerns with him. The evidence suggests that Justin did not take culture into account as he tried to drive change. There is also no evidence that Compcorp did anything to develop his global leadership skills.

2. What might Compcorp have done to increase prospects for Justin’s successful performance? What might Justin himself have done to enhance the likelihood of success in his new assignment and to help avoid derailing an otherwise highly promising career in Compcorp?

Compcorp could have used the GLED model to develop Justin, or the Right Stuff model, which would have included the company‘s needs with Justin‘s development. Development of global leadership skills is a nonlinear process built up from a set of diverse experiences. Considering Justin‘s background suggests that short term expatriate assignments and mentoring by expats might have been helpful to him. Perhaps training such as the kind suggested by Aperian Global would have had an impact, as well. Clearly the company assumed that because Justin could drive change in the United States, he would be able to do it in the Asia-Pacific division. We have no sense of what Justin knew about the history and culture of his new area. Nor apparently did he speak any Asian languages.

Justin could have studied language and culture on his own if the company would not provide it.

He could have requested short term foreign assignments, visited other successful international managers in the field, met with such people outside the company, as well. He could have undertaken to build his global mindset.

Unfortunately, Justin apparently was not aware of the relevance of a global mindset, not was his company. The implications of this oversight, for him and for Compcorp, could be quite substantial.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available http://bit.ly/MHEIBVideo. The content is rich and varied, and it is updated monthly.

at

An interesting video discussion by LeadershipTV on ―What Makes a Global Leader?‖ can be found at https://youtu.be/_pMGJ9KJvBU. The video on ―Global Leadership in the 21st Century with Lloyd Blankfein and John Sexton,‖ has Lloyd Blankfein, chairman and CEO of Goldman Sachs, discussing the issue of global leadership and what it involves. It can be found at https://youtu.be/NImM2OeQdtc.

Kevin Hall, CEO of Global Integration, discusses ―Five Barriers to Global Leadership‖ in a video addressing specific challenges of leading in a global environment. It can be found at https://youtu.be/jxa64YFyL_o.

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for use in hybrid/flipped classroom and online courses.

1. Effective Global Leaders We have had good response from students when we have asked them to analyze what they think are the most important attributes or experiences necessary in order to perform as an effective global leader. We often ask them to work in small groups to identify the three or four aspects that they think are most important, and why, and then to share the results of their discussion with the class. This makes for a very lively small group discussion, and once the different groups‘ findings are shared, there is a good base for further discussion and exploration. The discussion can then be extended by asking students how they could best develop these skills or gain these experiences as undergraduates.

2. Good Leaders in Other Countries Assign students to discuss whether and to what extent a good leader in one country or culture would, or would not, be a good leader in another country is a good basis for discussion, particularly if the instructor pushes the students to explain why the leader would, or would not, be effective in another context. To focus the discussion, it might be useful to identify specific countries, such as whether a manager effective in the United Satates might be effective in China, or whether a manager effective in Brazil would be effective in Germany. This can focus the discussion and enhance the progress that students can make in assessing these issues. Combining some of this discussion with information from Hofstede‘s cultural framework or similar content 12-286

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can also prove useful.

3. Business, People, and Self-Competencies Have students discuss, first in small groups and then in large groups, the best options available for them in order to develop the business, people, and self-competencies listed in Table 11.2.

This can help students envision paths by which they can enhance their global leadership potential while still students. Using the Get That Job! From Backpack to Briefcase vignette with Chad Henry (or similar vignettes from other modules) can supplement this discussion.

4. Gender in Global Leadership Have students discuss whether and to what extent women or men might be better as global leaders, and under what contexts this might vary. This discussion might be extended by discussing why women tend to be underrepresented in senior executive positions, especially in large global companies where global leadership skills might be most critical to organizational development and performance.

Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Harvard Cases ―People Operations at Mozilla Corporation: Scaling a Peer-to-Peer Global Community,‖ examines the challenges of managing a geographically distributed team of staff and volunteers around the world, distributed decision-making, and delegated leadership. It highlights some of the challenges in such an innovative, talent-centric organization, including compensation, onboarding and team norms, and personnel development. ―Pierre Frankel in Moscow (A): Unfreezing Change‖ describes the challenges faced by a young and upcoming French manager who is sent to Moscow to help turn around the company‘s Russian subsidiary. The case describes initial steps taken in his first 3 months on the job, preparing the subsidiary for change, and highlights the limited tangible benefits observed to date.

He must now consider how he might unfreeze the situation and produce substantive organizational change.

Ivey Cases ―LG Group: Developing Tomorrow‘s Global Leaders,‖ examines the evolution of the Korean LG Group and its efforts to dramatically increase global sales. In order to accomplish this objective, the company must supplement its leadership with approximately 1,400 new global leaders and 12-287

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LG‘s Chairman must determine what attributes these new global leaders should have and how to develop them.

Controversial Issues 1. Global Debate: Are Global Leadership Positions What Corporations and Women Have Been Waiting For? This boxed element described earlier in this module‘s Instructor Guide provides an excellent foundation for debating some of the issues raised in the text, including issues about the appropriateness of women as global leaders and reasons for the low proportion of such leaders in major international companies.

Online and Hybrid: Virtual teams can be assigned questions and submit their work as a group.

Alternatively, virtual teams can be assigned to take different roles or perspectives to argue for (or against) the argument that women are equally qualified (or even superior) for global leadership assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups, or else assign perspectives and conduct an in-class debate and discussion.

2. IB in Practice: Volunteer Assignments Build Global Leadership Skills This boxed element described earlier in this module‘s Instructor Guide can be an interesting tool for generating discussion and debate. We find that students often find it interesting, and perhaps even puzzling, that companies would pay their employees to work as volunteers in other organizations involved with international corporate social responsibility programs. The instructor can stimulate a broad range of perspectives regarding the nature of such positions and organizations, how an employee‘s experience of working in such an organization would be of value to an international company, whether paying an employee to engage in such work would be an appropriate use of corporate resources, and whether taking on such a position would be a wise career move for an employee.

Online and Hybrid: Virtual teams can be assigned to take different perspectives to argue for or against the practice of sending employees to work in international corporate social responsibility programs as volunteers. You could ask the teams to conduct research in support of their perspective, perhaps including interviewing people who are currently employed in such an organization, and these assignments can be submitted as a group and then opened up to discussion and debate on an online class discussion site or blog, or presented and debated in a face-to-face setting.

Face-to-Face: As with the online and hybrid assignment, students can be assigned to take different perspectives as noted above, and then they can be asked to argue their positions within an in-class debate and discussion.

3. Current Events for Sources of Content on Global Leadership A focus on current events that are relevant to the module‘s topics is a good way to bring home the 12-288

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concepts, review their application, and build news-review habits. Ask everyone to come prepared with an article for every meeting. If a meaningful percentage of the final grade is allocated to discussion (10‒15), motivation is there. Devote 5 min at the beginning of class to discussion of current events. Recent relevant current events include Volkswagen‘s global controversy about using software to produce misleading reports during environmental emissions testing and how company leaders might have been able to more effectively structure and control activities to prevent such a debacle from occurring. Depending on the online interface, this activity may be done in chat forums (Blackboard) or discussion boards, before class begins. This activity also works well in large lecture classes.

Teaching Suggestions 1. This module involves a topic that everyone is likely to understand on at least a conceptual level, but that many or most students will have limited direct experience with, so helping learners appreciate the nature the global leader‘s role and required skills can provide them with a new approach to thinking about leadership. Highlighting the difference between domestic and global leadership, and between leadership and management, can be particularly valuable for generating learning and insight. The use of the models and examples from the module is helpful. Examples of the importance of developing global leadership skills and the challenges confronted by global managers abound in current business news. It can be useful to pick one or two recent events and then have students discuss whether and how such events might impact the performance of an international company operating in that industry or closely associated with the industry or activity.

2. Analyze the similarities and differences associated with leading traditional teams and global teams. Then move to the implications of differences in terms of what needs to be done, why, and how, and therefore the different skills that a global leader might need in order to be successful in such a situation.

3. The issue of women serving as global leaders is almost guaranteed to draw the interest of students, so discussing statistics about the prevalence of women as leaders in international corporations, as well as the relative fit between typical traits of female versus male leaders and the requirements of global leadership positions, can help to stimulate discussion and exploration of the material. Having students do research on the topic prior to class and then report back to the class can be valuable for stimulating deeper discussion. Exploring how culture and other institutional forces might impact the likelihood of women moving into global leadership roles can also be insightful for students, particularly if students are assigned to research different cultures and the extent to which women are accepted as leaders.

4. Guest Lecturer possibilities. Some people who could contribute to the material in this module would be: 

Administrators from the United Nations or other nongovernmental organizations.



Executives from international divisions of major companies, who can discuss the leadership challenges they face within and across different nations.

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You might bring such speakers in ―virtually‖ through the use of technology-mediated tools such as Skype, Adobe Connect, FaceTime, or the like.

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Connect Tools for Assessment of LEARNING Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title

Assignment Type

Topic(s)

Learning Objective(s )

Global Mindset

SelfAssessment

Creating a Global Mindset

11-01; 1104

Click and Drag

Global Leadership Issues

11-02

Click and Drag

Global Leadership Effectiveness

11-03

Click and Drag

Leading Global Teams/Leading Global Change

11-05

Case Analysis

Developing Effective Global Leaders

11-03

Global Leadership Styles Global Leadership Pyramid

Leading Teams

Global

Competencies for Effective Global Leadership

AACSB Accreditatio n Tagging Analytical Thinking Analytical Thinking/ Reflective Thinking Analytical Thinking/ Reflective Thinking Analytical Thinking/ Reflective Thinking Knowledge Application/ Analytical Thinking

Bloom’s Taxonomy Analyze

Remember/ Understand

Remember/ Understand

Remember/ Understand

Remember/ Analyze

Connect Activities 1. Global Mindset Activity Summary: This is self-assessment activity in which students are asked several questions about what is needed to have a global mindset. There is no single write or wrong answer to each question. This activity works best if students are required to write up a couple of paragraphs to summarize and discuss their answers.

How to Use Activity: For a face-to-face class, have small group answer these questions together and then present their conclusions to the rest of the class. Discuss any difference among the groups with the whole class.

2. Global Leadership Styles Activity Summary: This is a click and drag activity in which students must match boxes of 12-291

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managerial traits with their corresponding leadership style and country cluster.

How to Use Activity: This can be given as an online assignment or as an in-class assignments for small groups. For live classes, have teams complete the assignment, then ask about any points that were not clear and discuss those with the class. This allows you to tailor the discussion to each class.

3. Global Leadership Pyramid Activity Summary: In this click and drag activity, students match boxes of leadership traits with the appropriate level in the Pyramid of Global Leadership.

How to Use Activity: This activity can be done individually at home or in class in small teams.

If done in teams in class, ask if there were any questions about the assignment and discuss these with the class.

4. Leading Global Teams Activity Summary: This is another click and drag exercise. In this click and drag activity, students drag boxes of characteristics related to work into one of two columns: one for traditional teams and one for global teams. More than one characteristic goes into each column.

How to Use Activity: This can be assigned to be completed online. For a face-to-face class, have students complete this before class, answer any questions about the assignment in class, and then give students other characteristics and have them decide which type of team it would apply to and why.

5. Competencies for Effective Global Leadership Activity Summary: In today‘s competitive world, it is critical for global leaders to develop relevant skills to effectively manage resources, projects, and processes. There are a number of competencies required for a global leader to perform successfully, and those differ from that of a domestic leader.

How to Use Activity: This can be assigned to be completed online. For a face-to-face class, have students complete this before class, answer any questions about the assignment in class, and then discuss what other requirements might be added to the list.

Module 12: International Markets: Assessment and Entry Modes Your Content 12-292

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Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and Application Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions Team Exercises Supplemental Activities Controversial Issues Teaching Suggestions Connect Tools for Assessment of Learning Connect Content Matrix Connect Activities

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Your Content Summary This chapter introduces a screening process to assist in the analysis and assessment of foreign markets based on environmental forces. This process consists of an examination of the forces in succession and the elimination of countries or markets at each step. There is a smaller number of prospects to consider at each of the succeeding stages. It is important that there are fewer countries to consider at each stage because the difficulty of obtaining information increases at each stage. We cover both country screening and segment screening. Often the commitment resources are so great that managements will require primary research in the market. Obtaining these data is more difficult than it is in the home country because of cultural problems and technical difficulties. Examples of the cultural problems are low level of literacy, language, barriers, and distrust of strangers.

Learning Objectives LO 12-1

Review the steps of market screening and techniques for environmental analysis.

LO 12-2

Discuss the value of trade missions and trade fairs.

LO 12-3

Describe some of the problems market researchers encounter in foreign markets.

LO 12-4

Explain international market-entry methods.

Key Terms and Definitions big data (p. 342)

The massive sets of data, both structured and unstructured, that businesses are collecting, which can be analyzed with advanced data analysis methods such as predictive analytics or user behavior analytics to provide valuable insights into consumer needs and trends

cluster analysis (p. 334)

Statistical technique that divides objects into groups based on similarity

contracted manufacturing (p.

345)

An arrangement in which one firm contracts with another to produce products to its specifications

country screening (p. 330)

A screening that uses countries as the basis for market selection

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environmental scanning (p.

330)

A procedure in which the firm scans the world for changes in the environmental forces that might affect it

franchising (p. 344)

A form of licensing in which one firm contracts with another to operate a business under an established name according to specific rules

joint venture (p. 345)

A cooperative effort among two or more organizations that share a common interest in a business undertaking

licensing (p. 344)

A contractual arrangement in which one firm grants access to its patents, trade secrets, or technology to another for a fee

management contract (p. 345)

An arrangement by which one firm provides management to another firm

market factors (p. 333)

Economic data that correlate highly with market demand for a product

market indicators (p. 333)

Economic data used to measure relative market strength of countries or geographic areas

market screening (p. 330)

A modified version of environmental scanning in which the firm identifies desirable markets by eliminating the less desirable ones

segment screening (p. 330)

A screening that uses market segments, a within-country analysis of groups of consumers, as the basis for market selection

social desirability bias (p. 341)

The respondent‘s desire to please that leads to answers designed to please the interviewer rather than reflect the respondent‘s true beliefs or feelings

strategic alliance (p. 345)

Collaboration with competitors, customers, and/or suppliers that may take nonequity or equity form

trade fair (p. 340)

A large exhibition at which companies promote the sale of their products

trade mission (p. 339)

A market visit by businesspeople and/or government officials (state or federal) in search of business opportunities 12-295

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trend analysis (p. 333)

Statistical technique used to estimate future values by successive observations of a variable at regular time intervals that suggest patterns

turnkey project (p. 343)

An export of technology, management expertise, and possibly capital equipment where a contractor agrees to design and erect a plant, supply the process technology, provide the production inputs, train the operating personnel, and, after a trial run, turn the facility over to the purchaser

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 12- Review the steps of market screening and techniques for Key Terms: 1 environmental analysis.  market screening  Market Screening Approaches and Techniques  environmental o Initial Screening—Basic Needs Potential scanning

XXII.

o Second Screening—Financial and Economic Forces



country screening

o Third Screening—Political and Legal Forces



segment screening

o Fourth Screening—Cultural Forces



market indicators

o Fifth Screening—Competitive Forces



market factors

o Final Selection of New Markets



trend analysis

o Segment Screening



cluster analysis

Market Screening Approaches and Techniques (See Figure 12.1) B. Application of environmental scanning, but narrower.

C. Conducted at the country or segment level to eliminate potential markets.

XXIII.

First Screening—Basic Needs Potential D. Influenced by climate, geography, and natural resources.

E. Some needs easy to assess (industrial goods); others more difficult, especially when desires (chocolate).

F. Data include imports, local production.

XXIV.

Second Screening—Financial and Economic Forces A. Trends in inflation, currency exchange, interest rates, credit availability, paying habits, rates of return on similar investments.

B. Four techniques useful: 1. Market indicators: measures relative market strength.

2. Market factors: data that correlate highly with demand for product.

3. Trend analysis: statistical technique to measure future values.

4. Cluster analysis: statistical technique that divides objects into groups based on similarity.

XXV.

Third Screening—Political and Legal Forces 12-297

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A. Barriers to entry: import/export barriers, limits on foreign ownership, limits on repatriation of earnings.

B. Stable government policies (different from government stability).

XXVI.

Fourth Screening—Cultural Forces I.

Difficult because culture is subjective and interpretive.

II.

A recent development involves examination of social media influencers.

XXVII.

Fifth Screening—Competitive Forces A. Review of competitors.

B. May need to review by subcultures (Brazilian markets in Japan).

XXVIII.

Final Selection of New Markets A. Personal visit a good idea.

B. Collection of data may be necessary (consumer products).

XXIX.

Segment Screening I.

Across nationalities based on age, income, psychographics. Segments must be: 1. Definable—so they can be measured.

2. Large—worth the effort (3D printer manufacturing changes this).

3. Accessible.

4. Actionable—able to implement the four Ps. 5. Capturable—we need to be able to compete.

LO 12-2 Discuss the value of trade missions and trade fairs. 

XXX.

Trade missions and Trade Fairs

Key Terms: 

trade mission



trade fair

Trade Missions 54. To seek out market opportunities.

55. Often with government or Chamber of Commerce support.

XXXI.

Trade Fairs 56. Exhibits at which companies promote their goods. (Frankfurt Book Fair, Paris Air Show, Hanover CeBIT show.)

57. Often organized by governments.

58. Source of marketing leads plus competitive intelligence.

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XXXII.

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Describe some of the problems market researchers encounter Key Terms: in foreign markets.  social desirability bias  Research in the Local Market and as Practiced  Big data

Research in the Local Market and as Practiced 59. Home country research methods used, may need to be adapted to local conditions.

60. Cultural problems may be present.

1. Language-related issues: translation and back-translation, many languages in one country.

2. Low levels of literacy—limits mail surveys.

3. Who should be interviewed—may be difficult to determine decision-maker.

4. Respondent may try to please researcher—social desirability bias.

61. Availability of online data bases and big data increasing.

LO 12- Explain international market-entry methods.

4  What Methods Are Available for Entering Foreign Markets? o Nonequity Modes of Entry o Equity-Based Modes of Entry

XXXIII.

What Methods Are Available for Entering Foreign Markets?

XXXIV.

Nonequity Modes of Entry

Key Terms: 

turnkey project



licensing



franchising



management contract



contracted manufacturing



joint venture



strategic alliance

62. Exporting—little investment and low level of risk.

63. Turnkey project—contractor designs and erects plant, supplies process technology and production inputs, staffs and trains. When up and running, turned over to purchaser.

May involve licensing with royalty payments.

230. May lead to IP issues.

64. Licensing—used in technology, fashion. Some firms resist due to IP issues.

65. Franchising—licensing with more control, a specific set of rules (fast food, hotels, UPS, 12-299

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real estate).

66. Management contract—use in hotel, airline sectors.

67. Contracted manufacturing—firm contracts to produce goods to specification.

XXXV.

Equity-Based Modes of Entry 68. Wholly owned subsidiary.

69. Joint venture—cooperative effort to share business undertaking, drawing on expertise.

(Alliance may be a kind of JV, or may be nonequity.)

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Engagement and Application Boxed Text Discussion Questions With Suggested Answers Global Debate: Should Africa be the Next Priority Market for International Companies?

The focus of this debate is about the growth and future prospects of the Sub-Saharan market.

This market currently includes over one billion people, but, because of high birth rates, is expected to exceed 2.2 billion by 2050. Many of the countries in the region enjoy an economic growth rate of 4‒6% annually. The World Bank predicts that most of the nations in the region will achieve ―middle income‖ status by 2025 with a combined GDP of $29 trillion by 2050. This growth in both population and income might make international firms consider having a significant presence in the region. However, these nations are fraught with problems that will cause firms to be careful in entering the region. Many of the nations suffer from severe poverty, low levels of education, inadequate housing, underdeveloped transportation infrastructure, lack of clean water or adequate sanitation, and weak legal systems with a history of corruption. These opportunities and challenges provide ample debate as students consider corporate strategies.

1. What might make Sub-Saharan Africa an attractive market for entry by international companies? Which types of firms or products might be expected to do best? Why? Answers to these questions will vary, but most students will point to the population and economic growth of the region as the main attraction to international companies that wish to sell their goods or services to an ever-larger market. As these nations grow, they will likely invest heavily in improved infrastructure, which will benefit firms that supply this market. But as percapita income grows, there will also be increased demand for consumer products.

2. What arguments could be made for why Sub-Saharan Africa would not represent an attractive market for entry by international companies? Explain your reasoning.

Students will likely present many different examples to illustrate this. Corruption could present a minefield of problems for the U.S. companies that must comply with the Foreign Corrupt Practices Act. Even consumer product companies could suffer from inconsistent customs practices and inadequate infrastructure caused by corruption. Low education levels may make it hard for firms to get the skilled labor they need to build and operate their factories, computer networks, and software applications.

IB in Practice: Uniqlo Tries to Succeed in U.S. Fashion Clothing Market This section is about the Japanese fast-fashion company Uniqlo. Although they are the biggest apparel chain in Asia with about 1,900 retail sites, they have struggled in the U.S. market with two unsuccessful attempts and a small presence today. They first tried to enter the U.S. market in 2005 with stores in three different suburban New Jersey shopping malls, but those stores were closed 2 years later. Then they tried a store in New York‘s trendy SoHo district with several more that soon followed. But they ended up closing most of those stores. Some of the challenges of Uniqlo‘s products include concerns that the clothing is designed for Asian body types and that the styles do not appeal to Americans. There is also competition from other fast-fashion retailers like H&M, Zara, and Forever 21, as well as from online retailers like Amazon. Uniqlo clothing is 12-301

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generally of higher quality than these competitors, but they are having trouble getting consumers to know that. At the end of 2020, Uniqlo had 54 stores in the United States, but the brand is still relatively unknown outside of major urban areas.

1. What should Uniqlo’s strategy be for the U.S. market?

Student answers will vary, but they will quickly come to the suggestion that they make clothing that is more suited to the typical American consumer. With clothing that is generally higher quality than its competitors, another strategy that might be suggested is to emphasize the higher quality in their marketing.

2. If Uniqlo were to design products specifically for the U.S. market, it would reduce their economies of scale and harm their profitability. How should Uniqlo overcome this?

Students will come up with a variety of answers for this. One suggestion might be to hire the U.S.-based designers and to take a loss in the U.S. market until sufficient scale can be reached.

Others might suggest reaching out to the Asian market in the U.S. first, before trying to conquer the mainstream American market.

Get That Job! From Backpack to Briefcase: Sarah Wartinger in Peru: Embracing the Challenges of New Environments The focus of this box explores Sarah Wartinger‘s challenges as she goes through culture shock during an internship in Peru. Even though she spent a semester abroad in Costa Rica and spoke Spanish, her experience in Peru was quite different and she experienced severe culture shock. To overcome this, she took moments of mindfulness throughout the day in which she would focus on the now.

1. Sarah Wartinger talks about getting culture shock despite learning the language and having spent a semester in Costa Rica. Can you prepare so that you avoid culture shock, or is it inevitable when you live abroad?

Students will have various answers to this question, depending on their experience living with other cultures as well as their own self-awareness and self-confidence. Wartinger worked in Peru, but her experience was as a student in Costa Rica. This led to a very different routine than she was used to, and this was compounded by cultural details, food, and Spanish accents that are different in Peru compared to Costa Rica. But culture shock is a very individual experience. For some, Wartinger‘s experience in Costa Rica would have been enough to avoid significant culture shock in Peru, but for others returning to the same place in Peru a year or two later would cause culture shock again. Nevertheless, the more training and exposure one has to a culture and language before moving abroad, the less intense the culture shock will be.

2. Wartinger recommended taking moments of mindfulness and to focus on the now in order to work through her culture shock. Do you agree with this? Do you have an experience with culture shock? If so, what did you do to get over culture shock?

Student responses will vary. If you have foreign students or students that have lived abroad, have 12-302

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them share their culture shock experiences and what they did to overcome it. Some Americans living abroad mentioned meeting once a week with other Americans to speak in English and to eat at an American burger place as a way to ―rest‖ from acclimating to the local culture and to share tips and encouragement as they work their way through culture shock.

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End of Module Exercises Critical Thinking Questions 1. Select a country and a product that you believe your firm can market there. Make a list of the sources of information you will use for each screening.

Students will choose various products and countries. The goal of this exercise is to encourage them to review sources for desk research.

First screening: Climate, topography, natural resources, industry associations, specialized trade media, International Trade Administration, the U.S. Dept. of Commerce, and so on.

Second screening: Financial and economic forces as contained in data such as market indicators, market factors, trend analysis, cluster analysis.

Third screening: Political and legal forces, as analyzed by The Economist, other risk assessment agencies.

Fourth screening: Culture analysis via experienced marketers, culture analysts.

Fifth screening: Competitive forces at play in the market via demographic and market data.

Final selection: May require field study in the market.

2. What is the logic for the order of the screenings? Can you suggest a time when the order might change?

The suggested is based on the idea of performing the least difficult screening first. Successive screenings, which become more difficult, will deal with fewer countries. As for changes in order, one possible response is that as risk threats increase and become less obvious and less nationbased, the political screening may become more difficult.

3. A firm’s export manager examines the UN’s International Trade Statistics Yearbook and finds that the company’s competitors have begun to export. Is there a way the manager can learn to which countries the U.S. competitors are exporting?

The export manager can consult the U.S. Foreign Trade Highlights at the International Trade Administration site (www.ita.doc.gov).

4. Do a country’s imports completely measure the market potential for a product? Why or why not?

A country‘s imports don‘t completely measure market potential for many reasons: lack of foreign exchange, high prices, political pressures and others may be reasons. Furthermore, import data only show what the country has been importing: Sales from local production usually will be higher, meaning that the total potential may be much greater. In other cases, a ban on imports may have been lifted so that the entire situation has changed.

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5. What are three examples, either real or hypothetical, of political and legal barriers that may eliminate a country from further consideration?

Entry barriers, profit remittance barriers, unstable governments, or unstable policies would eliminate a country.

6. Trade missions are political junkets that get the taxpayer to fund a politician’s vacation.

Do you agree or disagree, and why?

The company representative who goes on a trade mission will learn firsthand about the market, meet important potential customers face to face, and make contacts with customers interested in representing the firm in the local market. The cost should be less than if the firm‘s representatives were to make the trip alone. The impact of a visit of various companies is greater than is the visit of just one. Moreover, embassy officials will give the trip advance publicity and will arrange for facilities and interviews. So, it may be a break from the usual routine, but it consists of long days, lots of learning, and lots of networking.

7. What are some of the complications that researchers may face when they collect primary data in a foreign market? Give examples.

Cultural problems may influence the researcher‘s work. Such problems may be several foreign languages, the difficulty of figuring out whom to interview, receiving wrong answers from respondents fearing the interviewer to be a tax assessor or the effect of social desirability bias, and various technical difficulties (up-to-date maps nonexistent, no or poor electricity and internet connection, etc.).

8. Consider the market segment screening method. Take a lifestyle segment—say, people who like do-it-yourself home decorating. How would the segment screening method suggest that you go about identifying potential foreign markets?

These consumers may reside in different countries and speak different languages but they have similar needs for the products and services related to DIY decorating. From this perspective age, income and psychographics (lifestyle) are essential means of identifying market segments. For example, do-it- yourself home decorators across many countries might have similar desires and lifestyles across cultures.

9. You are a consultant to the developers of the latest Spider-Man video game, responsible for telling the Gameloft CEO where the likely international markets are. What do you do?

The first thing one might do is look into the demographics of the countries, as the main target will be the younger generation. In this situation, we will be interested in estimating the market based on age, income and standard of living in the country. We will be interested in the availability of computers, and the degree to which computer games are already popular in that country. This is a situation where a survey over the internet might be useful. These steps should narrow the potential number of countries/markets to the more likely candidates. The analyst might then propose field trips to the target countries/markets in order to evaluate potential interest in the product.

10. What are the benefits of country screening in comparison to segment screening, and vice versa? When would a firm need to use one method or the other?

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Products and services that will have broad appeal, whether industrial or consumer, often work best with country screen because they could potentially be sold anywhere. Segment screen is best for products that appeal mainly to a certain class or group of people. Luxury goods often work better with segment screen for this reason.

11. Would certain screenings be unusable for some products/services or countries? Can you think of an example where one level of screening may be highly limited based on the product/service being sold or the country being analyzed?

The sociocultural screening is often difficult when introducing a new consumer product or service. It is just hard to tell how people in a particular country will react. Disney has had this problem with opening new parks. They thought that Japan‘s culture was too different from the United States and European stories in Disney‘s IP, so they hesitated in opening a park there, but when it was opened (through a franchise agreement with a Japanese firm) it was wildly successful. When opening the Disney park in Paris, the company thought that it would be very successful because so many of the stories originate in Europe, but the park suffered from low attendance and financial losses for many years.

12. Explain why businesses seeking franchise opportunities abroad should still conduct market entry research before agreeing to franchise deals with local partners.

A firm might think that because they have a local partner, they do not need to worry about doing any research. Not so! Many new franchise restaurants have failed in the United States, despite having local partners. Too often the local partners are from the same country as the franchisor, and although they may be successful in one type of business, they may know nothing about the local market in the new business. globalEDGE Research Task Exercise 1 Search for ―South Africa‖ in globalEDGE and on the introduction page click on the country commercial guide link listed under the ―Quick Links‖ subheader. The ―Selling US Products & Services‖ menu on the left hand of the commercial guide provides detailed information for further discussion.

Search Phrase: South Africa Resource Name: Country Commercial Guides Resource Link: https://globaledge.msu.edu/countries/south-africa Exercise 2 Market Potential Index (MPI) is available under the ―Tools and Data‖ tab on the top menu. The dimensions and indicators (measures) used are listed on the main MPI landing page.

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Search Phrase: Market Potential Index Resource Name: Market Potential Index Resource Link: https://globaledge.msu.edu/mpi MiniCase: Clotaire Rapaille: Charlatan or Code Breaker Extraordinaire in International Marketing Research?

This French market research guru and ―code-breaker‖ operates from upstate New York and provides businesses with psychological insight into various markets. These insights for a ―code‖ that will help markers better understand the market. Such archetypes capture essential, deep attitudes and values that motivate or inform buying decisions. Rapaille claims 50 of the Fortune 100 firms as clients.

Online and Hybrid: Virtual teams work out responses to the following questions. Present to class, either online or in face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups and report to the class on their outcomes.

1. Is Rapaille’s code system a short-cut code to understanding the complexities in culture and a way to make market research easier? Or is it a superficial hoax sold by a charlatan?

This is a question that solicits a judgment. The student has an opportunity to apply their knowledge about culture and psychology and make a decision about this approach.

2. As a manager, would you hire Clotaire Rapaille or his company to assist you in assessing and interpreting international market opportunities?

The answer builds from the first question. It also may lead to a discussion about either-or approaches, and how this particular approach to understanding a market may not be the exclusive source of understanding a market‘s culture.

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Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available http://bit.ly/MHEIBVideo. The Marketing board is rich and varied and is updated monthly.

at

The U.S. International Trade Administration‘s ―Export Experts: Gathering International Market Intelligence‖ delves into research on the exports side at www.youtube.com/watch?v=6niSh7cyB_A. View Market Research Videos‘ ―The www.youtube.com/watch?v=tJrJFuovm_Q.

Purposes

of

International

Research‖

at

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for hybrid and online courses.

1. Political Stability Research areas of the world that have lagged economically behind the rest of the world. Choose one country and further research how policy instability has affected the country‘s economic growth rates.

Small teams are appropriate for this assignment. In a face-to-face class, the reports can be presented for feedback from the class, or the reports can be circulated using a class website. In hybrid and online classes, teams can share their write-ups and then respond to feedback, using video chat or other interface technologies. (Time: 15 min per report and feedback when presented; time out of class for hybrid and online classes; preparation time 2‒4 hr.)

2. Key Terms Exercise: Meaningful Paragraph Choose five key terms from the end of the chapter and write a paragraph using them. Your use of the terms should demonstrate your comprehension of each term. The paragraph should not merely be a listing of the terms and their meanings. Rather, it should show a working knowledge of each term within an integrated meaningful paragraph.

3. Screening Exercise Assign small teams (up to five students) a product and three countries to screen as part of a market assessment. The work is done outside of class and then reported back to class, either in written form, to be shared on a collaboration site, or as short presentations. This assignment works with modifications for all class delivery formats.

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Supplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Ivey Cases ―Cadim: The China and India Real Estate Market Entry Decisions‖ and ―Cadim: China and India Real Estate Deals‖ cases describe the need for assessment of investment opportunities by Canada‘s largest pension fund management firm. This is a two case series with spreadsheets available for support. ―Alpes S.A.: A Joint Venture Proposal,‖ (A) and (B) describes the proposal to invest in Mexico

by Charles River Labs, a small, family-owned animal health company. The CEO does not support the JV and it must be funded by CRL. ―Kentucky Fried Chicken in China‖ weighs the KFC investment decision and follows its progress. This three-case series.

Controversial Issues 1. Marketing Gurus or Snake Oil Salesmen?

The MiniCase in this module describes Clotaire Rapaille‘s approach to marketing research, a far cry from a systematic methodology. The introductory vignette in this module describes InSites Consulting, another unusual marketing company that collects information through online consulting boards, discussion groups, online interviews, and social media listening. InSites has described five paradoxical trends among millennials that include Amortality, an antiaging trend that focuses on living longer and the rise in ―sportainment‖; Sharconomy, a sharing economy that includes MOOCs, Uber, AirB+B, and so on.; Cloaking, including closed groups on Facebook; the predictable consumer, based on online clues garnered from our searches; and Serindipity, a love of surprises and fear of being bored (thaasophobia). Along with these two firms are Trendwatchers and Faith Popcorn.

After exploring these sites and their contrarian approaches, explore in class or online discussion the validity of such approaches.

2. Current Events for Sources of Culture Controversy A focus on current events that are relevant to the module‘s topics is a good way to bring home the concepts, review their application, and build news-review habits. Ask everyone to come prepared with an article for every meeting. If a meaningful percentage of the final grade is allocated to discussion (10‒15), motivation is there. Devote 5 min at the beginning of class to discussion of current events. Recent relevant current events include the coming opportunity for 12-309

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the U.S. investment in Cuba and investment in developing economies. Depending on the online interface, this activity may be done in chat forums (Blackboard) or discussion boards, before class begins. This activity also works well in large lecture classes.

Teaching Suggestions 1. This module is very important to students‘ understanding of the process of market assessment in international business.

2. Focusing on the boxed material and the case study will help students achieve the objectives of the module. Answers for both the boxed material and case studies are provided in this Instructor Guide.

3. The Critical Thinking Questions at the end of the module will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collect assignments at random and assign a grade; (2) occasionally give some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) have students hand in assignments and give credit for work submitted; and (4) call on students at random to answer specific questions (giving a small number of points for correct answers or counting this as part of participation).

4. Guest lecturers on international marketing are a way to underscore the importance of the information in the market assessment module. Possible guests include: 

A market researcher who has conducted market entry assessments who can present some interesting ―battle stories‖ of marketing entry attempts.



A manager with overseas experience would recount some interesting experiences in implementing market entry.



A retired State Department employee who worked overseas who could describe some of the barriers foreign governments erect to protect their domestic production.



Someone who served in the Peace Corps might also have interesting observations.



Faculty colleagues from other countries.

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Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title Equity-Based Entry Modes Nonequity Modes of Market Entry International Market Screening

Learning Objective(s )

Assignment Type

Topic(s) Different Modes for Entering Foreign Case Analysis Markets 12-04 Click Drag Click Drag

Research in the Click Local Market Drag

AACSB Accreditation Bloom's Tagging Taxonomy Analytical Thinking

and Nonequity Modes of Analytical Market Entry 12-04 Thinking Environmental and Analysis and Analytical Market Entry 12-01; 12-03 Thinking Analytical Thinking/ and International Market Reflective Assessment 12-02; 12-03 Thinking

Understand

Understand

Understand

Analyze/ Understand

Connect Activities 1. Equity-Based Entry Modes Activity Summary: This case analysis discusses the efforts by China to develop an aerospace industry so that they can build and sell their own commercial aircraft.

How to Use Activity: This case has three different questions that can be assigned randomly. This works well for an online assignment. For face-to-face classes, assign this before class and discuss these issues in class.

2. Nonequity Modes of Market Entry Activity Summary: This is a click and drag activity in which students must match boxes of particular characteristics with the appropriate nonequity entry mode.

How to Use Activity: This can be given as an online assignment or as an in-class assignments for small groups. For live classes, have teams complete the assignment, then ask about any points that were not clear and discuss those with the class. This allows you to tailor the discussion to each class.

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3. International Market Screening Activity Summary: In this click and drag activity, students arrange boxes of the steps in the market screening process in the correct order.

How to Use Activity: This activity can be done individually online or in class in small teams.

4. Research in the Local Market Activity Summary: This is another click and drag exercise. In this one, students drag boxes of about aspects of the research process to either a column labeled ―Cultural Differences‖ or one named ―Technical Differences‖ as appropriate.

How to Use Activity: This can be assigned to be completed online. For a face-to-face class, have students complete this before class, answer any questions about the assignment in class, then give students other examples of aspects of research and have them decide which category it would apply to.

Module 13: Marketing Internationally Your content Summary Learning Objectives Key Terms and Definitions Content Outline Engagement and application Boxed Text Discussion Questions With Suggested Answers IB in Practice Global Debate Get That Job! From Backpack to Briefcase End of Module Exercises Critical Thinking Questions globalEDGE Research Task MiniCase Bonus Activities Video Suggestions 13-312

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Team Exercises Supplemental Activities Controversial Issues Teaching Suggestions Connect Tools for Assessment Learning Connect Content Matrix Connect Activities

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Your Content Summary This chapter examines international marketing. Although the marketing functions are the same for marketing domestically and internationally, the markets served vary greatly because of the differences among the environmental forces. There are advantages in the worldwide standardization of the marketing mix, but frequently environmental differences necessitate a modification of the domestic mix or the development of a new one. The extent of the change will depend on the type of product, the forces, and the degree of market penetration desired by management. Product, price, distribution, and promotional strategies are discussed in this context.

Learning Objectives LO 13-1

Discuss why international marketing managers may wish to standardize the marketing mix.

LO 13-2

Distinguish among the total product, the physical product, and the brand name.

LO 13-3

Compare the way consumer and industrial products and services are modified for international sale.

LO 13-4

Identify the product strategies that can be formed from three product alternatives and three kinds of promotional messages.

LO 13-5

Discuss some of the effects the internet may have on international marketing.

LO 13-6

Explain ―glocal‖ advertising strategies.

LO 13-7

Define pricing and distribution strategies.

Key Terms and Definitions advertising (p. 363)

Paid, nonpersonal presentation of ideas, goods, or services by an identified sponsor

corporate visual identity (CVI) (p. 355)

A firm‘s name, logo, slogan, graphics, color, and typeface that help identify the firm to consumers and other interested constituents

disintermediation (p. 376)

The unraveling of traditional distribution structures popularly called ―cutting out the middlemen‖

foreign national pricing (p.

374)

Policy that sets local pricing based on market forces in another country

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international pricing (p. 374)

Policy that sets prices of goods produced in one country and sold in another

marketing mix (p. 354)

A set of strategy decisions made about the product and its promotion, pricing, and distribution in order to satisfy the needs and desires of customers in a target market

programmed-management approach (p. 370)

A middle-ground advertising strategy between globally standardized and entirely local programs

promotion (p. 362)

Any form of communication between a firm and its publics , including advertising, public relations, sales promotions such as rebates and ―buy one get one,‖ and events and experiences, such as sponsoring events to both yield purchases in the short term and confidence in the firm in the long run

public relations (p. 372)

Various methods of communicating with the firm‘s publics to secure a favorable impression, rather than immediate sales

sales promotion (p. 371)

Any of the various activities, such as preparation of point-ofpurchase displays, contests, premiums, trade show exhibits, celebrity-embraced promotion, money-off offers, and coupons

total product (p. 355)

What the customer buys, including the physical product, brand name, accessories, after-sales service, warranty, instructions for use, company image, and package

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Content Outline The following section provides the flow of information using the Learning Objectives as a guide, Key Terms learners will need to take away from the course, and Lecture Notes to drive home teaching points.

LO 131

Discuss why international marketing managers may wish to standardize the marketing mix. 

Differences between Domestic and International Trade



The Marketing Mix

Key Terms: 

marketing mix



corporate visual identity (CVI)

o Standardize, Adapt or Start from Scratch?

XXXVI.

Differences between Domestic and International Trade 70. Marketing functions the same, but country-level environmental forces (uncontrollable) vary widely (sociocultural, resource and environmental, economic, socioeconomic).

71. Controllable forces also vary across markets—distribution channels, taste and aesthetic preferences, pricing structure of markets.

XXXVII.

The Marketing Mix 72. Strategy decisions made about the product and its promotion, price, and distribution.

73. International marketing decisions: Can mix be standardized, adapted, or is a new mix required?

231. Standardization is less costly, allows for longer production runs (economies of scale and learning). Plus standardized corporate visual identity creates consistent image.

232. Adaptation often required. Marketing principle centers on needs of buyer, not seller.

Localization often practiced.

233. New mix might be required for significant local penetration.

LO 13- Distinguish among the total product, the physical product, and 2 the brand name.  XXXVIII.

Key Terms: 

total product

Product Strategies

Product Strategies A. Total product: physical product, brand name, accessories, after-sales service, warranty, instructions for use, company image, and package. Everything the consumer buys. (Figure 13.1) B. Physical product is the product itself, without packaging, branding.

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C. Brand name is part of the product‘s identity.

74. 1. Many opportunities for adaptation may be less costly than changing the physical product.

Examples are tonic water, a standardized physical product but localized total product.

Chocolate is a localized physical product. Nescafe is a localized physical product with standardized look and slogan.

LO 13- Compare the way consumer and industrial products and 3 services are modified for international sale. 

Key Terms:

Modifying Types of Products o Industrial Products o Consumer Products o Services o Foreign Environmental Forces

XXXIX.



Sociocultural Forces



Legal Forces



Economic Forces



Physical Forces

Modifying Types of Products 75. Product modification depends on type of product (Figure 13.2).

76. Industrial Products Require less adaptation than consumer products.

Sometimes necessary to meet legal requirements/standards (safety, health, emissions, noise).

234. Requirements may be trade barriers.

77. Consumer Products Often require more adaptation, except for luxury products.

One approach is to introduce standardized products to luxury segments and then push downward.

235. Social and cultural values become more distinct in lower economic strata.

236. Adaptation may not be necessary in physical product, but in its other aspects (Mars M&Ms in Bahrain).

78. Services—marketing less complex than marketing of consumer products, some adaptation

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for legal requirements may be necessary.

XL.

Foreign Environmental Forces 79. Sociocultural Forces Reflect consumer preferences.

Differences among approaches to washing clothes (French-top load, British-front load, Germans-extractors, Italians-slow speed spins).

237. Whirlpool‘s mistakes trying to standardize in Europe.

238. Colors, brand name connotations are significant.

80. Legal Forces Exert significant impact on marketing decisions.

Safety standards, food, pharmaceutical requirements.

239. Varying legal approaches—brand name in many countries belongs to first registrant, not the U.S. approach (order of use).

81. Economic Forces a. Affect pricing, packaging, production.

82. Physical Forces a. Such as climate and terrain often require adjustment in product and production.

LO 134

XLI.

Identify the product strategies that can be formed from three Key Terms: product alternatives and three kinds of promotional messages.  promotion  Promotional Strategies  advertising o Advertising 

Global and Regional Advertising



Global and National Advertising



Media Availability

Promotional Strategies 83. Market same product everywhere (same message: Avon; different message: Honda).

84. Adapt the physical product for foreign markets (same message: Lever Bros. in Japan; adapted message: Tang, Kraft).

85. Design a different physical product: same, adapted or different message (same message:

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manual washing machine; different message: lower tech machines).

XLII.

Advertising 86. Tends to change the least among the promotional messages.

87. Cultural dimensions play a role in these preferences.

Directness versus indirectness (United States. vs. Japan).

240. Comparison—banned in most countries.

241. Humor does not translate well.

242. Gender roles—what is appropriate differs by culture.

243. Explicitness—cultures have different tolerance levels.

244. Sophistication varies by culture.

245. Popular versus traditional culture varies.

246. Information content versus fluff.

88. Global and regional advertising increasingly used due to: Cost savings.

247. Quality more easily achieved.

248. Brand image on regional level.

249. Regionalization.

250. Easily transmitted.

251. Economies of scale.

LO 13-5

Discuss some of the effects the internet may have on international marketing. 

Key Terms:

Media Availability and internet Advertising o Type of Product o Foreign Environmental Forces

XLIII.

Media Availability and Internet Advertising 89. Advantages the internet brings to marketing: 1. Reaches an affluent, accessible audience.

2. Cheap.

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3. Less heavily regulated.

4. Interactive, which increases customization.

5. Good way to reach specific audiences.

XLIV.

Type of Product 90. Industrial and luxury goods—supports standardization.

91. Capital goods: supports standardization (Caterpillar, GE). Bridging is communicating across these differences and building awareness of shared values.

92. Consumer goods: if low-priced, consumed in the same way and bought for the same reasons, supports standardization.

XLV.

Foreign Environmental Forces 93. Positioning product as foreign or local major decision.

94. Many brands appeal to segments across markets.

Translations may be required, packaging modifications made.

252. Global product with local brands may be result of mergers.

LO 136

Explain ―glocal‖ advertising strategies. 

Key Terms: 

programmedmanagement approach

o Sales Promotion



sales promotion

o Public Relations



public relations

Neither Purely Global nor Purely Local o Personal Selling

XLVI.

Neither Purely Global nor Purely Local 95. Glocal advertising—movement toward middle of standardized-localized spectrum on advertising.

96. Gillette organizes advertising in regional clusters.

97. Programmed management approach regionalizes marketing objectives, subsidiaries put together marketing campaigns.

XLVII.

Personal Selling 98. Depends on type of product, funds available, cost, available media.

99. Widely used in industrial sales.

100.

Internet may be useful, depending on the building of trust.

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XLVIII.

XLIX.

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101.

Many businesses that use personal selling follow the home market model.

102.

Staffing may be challenging.

Sales Promotion 103.

Displays, couponing, contests, premiums, trade shows.

104.

Face cultural constraints (space, appropriate and meaningful promotions).

Public Relations 105.

Overlooked tool in many international markets.

106.

May be help during periods of public criticism in international markets.

LO 13- Define pricing and distribution strategies.

7  Pricing Strategies

Key Terms: 

foreign national pricing

o Foreign National Pricing



international pricing

o International Pricing



disintermediation

o Standardized Pricing



Distribution Strategies o Standardizing o Foreign Environmental Forces

L.

Pricing Strategies 107.

Complex process because pricing influences other aspects of the firm, including profits.

108. Pricing strongly influenced by culture (sale concept undercuts quality concept in Britain and Japan).

109.

Standardized Pricing

Foreign pricing is based on the forces in a foreign market. Reflects cost differentials across borders. May use price skimming to recover development costs or penetration, to establish product in new market.

253. International pricing for exports, good produced in one country and sold in another.

D. Foreign National Pricing Cost differentials vary across borders.

E. International Pricing Sets prices for goods produced in one country and sold in another.

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Internet information is making price comparison easy and may lead to a world price.

LI.

Distribution Strategies 110.

Get product to international market and then distribute locally within it.

111.

Standardizing Distribution a. Subsidiaries usually design local distribution channels; decisions tend to be longterm. b. Standardizing distribution locally may not be a realistic expectation due to local conditions; start with home model and change as necessary (McDonalds uses franchisers).

112.

Foreign Environmental Forces a. Disintermediation is the unraveling of traditional distribution structures, cutting out the middleman, and often combines internet sales with quick delivery.

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Engagement and Application

Boxed Text Discussion Questions With Suggested Answers IB in Practice: Ikea Adapts to Enter the Indian Market This section is about Ikea‘s entry into the India market. The company spent a decade planning for this entry and in 2018 opened its first store, which is located in the city of Hyderabad. Ikea is taking their time to learn the Indian market and make important adjustments to their usual operations. For example, their furniture is designed to be assembled by their customers at home, but Indians prefer to buy assembled furniture. So, Ikea has set up a team of 150 employees to assemble furniture on the spot.

1. If India is such a low-income country, why would they prefer to have their furniture assembled, even though it would cost more?

Students may give a variety of answers, but this ultimately comes down to the relative cost of labor and capital. Compared to developed countries, India has a relatively low cost of labor. So, for an average India customer, the cost of the labor to assemble the furniture is low compared to the cost of the furniture itself. Whereas in developed countries the relatively high labor costs makes it appealing for customers to save those costs by assembling it themselves in their spare time.

2. Ikea is a very different type of furniture store than what is typical for India. Do you think they will be successful?

Student answers will vary, but some will point out that Ikea is trying to adjust to the local culture and will ultimately be successful. Others may question if Ikea will ever be able to obtain the volume and efficiencies they need to be profitable with the combination of very low incomes and poor infrastructure in India.

Global Debate: Entering Cuba: Pipe Dream or Real Opportunity?

The global debate here is on the ongoing transition in trade relations between the U.S. and Cuba, now that relations are beginning to normalize. Although many of the U.S. firms have started to do business in Cuba (including airlines and hotels) new restrictions have been put in place by the Trump administration that may make it difficult for the U.S. firms to invest in Cuba.

1. Should the U.S. marketers continue to gear up for trade with Cuba, or adopt a go-slow approach and wait for the political situation to clarify? Defend your answer.

The arguments for a go-slow approach include uncertainty, slow pace of change, recognition of the cultural values of Cuba, what has happened in history between the United States and Cuba.

Arguments for a quick gear-up center on building forward with locals, exploiting an opportunity, helping Cubans grow and modernize, being there first and building long-term relationships, firstmover advantages. The risk would be high. The government may be the best customer in Cuba initially and those involved in the tourist sector.

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2. Does Cuba present sufficient opportunities to foreign exporters? Why or why not?

The market size in Cuba may be small, but there are needs in some areas that have been left unfilled for many years. At the same time, until the economy grows, Cubans may not have the ability to purchase.

3. What problems could the political climate in Cuba give the U.S. exporters or investors?

There may be significant government intervention such exchange restrictions, limitations on repatriation of profits, requirements for local ownership and even the distant possibility of nationalization. In addition, there may be significant negative responses to American firms. This suggests that moving forward with a local partner may be a good idea.

Online and Hybrid: Virtual teams work out guidelines on when to adapt and when to resist adaptation. Present to class, either online or in face-to-face setting.

Face-to-Face: Students develop responses to the questions in class in teams/groups.

Get That Job! From Backpack to Briefcase: Danielle Demaria: International Experience Can Bring Impactful Work and Lifelong Relationships The focus of this box discusses Danielle Demaria‘s love for travel and how she decided to major in international business to have the opportunities to travel abroad and work with people from other cultures. She participated in an internship in Peru where she helped an NGO that promoted growth and development of low-income towns by creating new libraries in areas with minimal resources. She found the experience rewarding and came back with new friends that she will have for life.

Online and Hybrid: Virtual teams evaluate Demaria‘s advice for their own career development, particularly as it relates to working with people from other cultures. Share conclusions with class, either online or in face-to-face setting.

Face-to-Face: Students evaluate their own career strategy in light of Demaria‘s advice.

1. What do you think of the nature of the international work that Demaria was involved in?

Would this sort of activity be interesting and fulfilling to you? Why or why not?

Students will have various answers to this question, depending on their training, interests, and experience with other cultures. Demaria chose to work in Peru because she wanted to develop her Spanish language skills and experience other cultures.

2. What do you think of Demaria’s advice to be as brave as you can? When would this be good to follow and when would it not be?

Students will have various answers to this question. Many will discuss overcoming the fear of traveling and living in a new place or learning a new language where there are often no English speakers to help. However, there are dangerous locations, such as war zones, which should be avoided. You can discuss the Department of State‘s travel advisories, which are found at https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories.html.

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End of Modoule Exercises Critical Thinking Questions 1. Former Louis Vitton CEO Yves Carcelle says, ―One to two thousand people is all you need. You can’t judge by average income—average doesn’t mean anything.‖ Although he was speaking about the luxury goods market, do you think his comments about averages apply to other segments of the market as well? Why or why not?

Since the industrial market and the luxury market have many similarities, if the pricing is significant, this generalization may apply to the industrial goods market as well. Personal selling would be important in both markets and there would be little need for localization or adaptation.

2. What future do you see for global advertising?

With the internet‘s increasing role in advertising, global advertising is likely to be increasingly important.

3. What advantages and disadvantages may result from standardizing the marketing mix worldwide?

Standardizing marketing mixes can lead to important cost savings. Logistics and acquisition of inputs are simplified. Standardized pricing enables important worldwide customers to be charged the same price no matter from where they are sourced. A disadvantage is that the marketing mix will not respond to local characteristics, and thus leave an opening for a competitor who chooses to localize.

4. As people become more educated and living conditions improve, do their product preferences become more similar? Why or why not?

The higher the economic level of the market, the more consumer product preferences become similar across markets. Lifestyles are shaped by international media increasingly among affluent strata, while lower economic levels tend to be more insular.

5. Under what conditions would a glocal approach not be useful?

Some goods do not require localization. Among them would be industrial goods and luxury goods. With these items, a local approach would not add value to the consumer. For example, an industrial machine or a Gucci bag, neither would benefit from localization. The buyer wants the globally standardized product. The same may be said increasingly for firms such as Starbucks, McDonald‘s, and other franchises. Yes, some of the promotional elements may need to be localized, but the product the consumer wants is a standard one.

6. Assume you are a consultant to Sony, shortly before the introduction of the PlayStation.

What advice would you give Sony about making the device attractive to various foreign customers?

The technical elements of the game will be standardized, yet there are significant areas where adaptation will be needed. Some of the areas that may need adaptation are related to language,

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Instructor Guide to Module 13

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content (acceptable expression, such as clothing and the use of profanity), price of the package, appropriate background music, and so on.

7. What cultural problems might you encounter in introducing the search and discovery application Foursquare in foreign markets?

Foursquare is an activity recommendation and evaluation tool based on data collected through cell phones. One issue could be that people do not want to have their evaluations made public or their name linked to a location. Also, will people volunteer evaluations? Are they using their cell phones for this? Does it violate their since of privacy? Are there other barriers such as transmission cost, cell phone usage rates, and so on?

8. Candy Crush Saga is a simple game with 2.73 billion downloads and more than 1 trillion rounds of the game played since its launch, but only about 16% of its fan base is in the United States. What elements of Candy Crush Saga do you think appeal to consumers from many different cultures?

Candy had an appeal across cultures.

9. Do you think the rise in digital ads, which have increased as a result of the COVID-19 pandemic, will change how brands can message their products in different regions?

Digital ads are able to make use of a tremendous amount of data on those that might see them. It is relatively easy to target specific languages and geographic areas, even down to neighborhoods.

Since in many countries a specific ethnicity is connected with a specific language or location within a country, advertising can be adjusted for each target group. Advertising can be even more precisely targeted through the use of data collected on each individual.

10. Under what circumstances would it be too expensive for a company to adjust its products or messages when expanding into a new market?

Certainly, a company must compare expected sales with the cost of modification. If the market is just too small to recuperate the costs of modification, then the best decision is to just export the current product to the country. For example, a company might consider modifying its speed boats to sell at Lake Titicaca, which has an altitude of 12,000 ft., so that the engines run better in the thin air. But if the market is so small that they would only sell a few there each year, it is not worth the expense to make the modifications. For another example, industrial products are often used very similarly all over the world, so modifying messages for each local market might not make a significant difference in sales. Consider a company that sells large cranes used to construct buildings over four stories tall. Most sales are probably done directly with salespeople and may be just a few a year to a particular country. A reworked messages that is adapted to the local culture may not make a difference in sales and could cost more than the usual profits from that market.

globalEDGE Research Task 13-326

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International Business, 3e

Instructor Guide to Module 13

Geringer, McNett, Ball

Exercise 1 Search for ―China‖ in G and go to the introduction page. On the left, click on the ―Resources‖ page and review the resources listed.

Search Phrase: China Resource Name: China Website: https://globaledge.msu.edu/countries/china/resources Exercise 2 Search for ―Country Brand Index‖ on GlobalEDGE and open the external link of ―FutureBrand: Country Brand Index.‖ Search Phrase: Country Brand Index Resource Name: FutureBrand: Country Brand Index Website: https://globaledge.msu.edu/global-resources/resource/2182 MiniCase: Will Dollar Shave Club‟s Edginess Work Abroad?

This minicase describes how Michael Dubin successfully launched Dollar Shaving Club with the use with an edgy video campaign. The company was bought by Unilever, a British‒Dutch consumer goods multinational, in 2016. Now there are plans to expand into the European market.

1. View one or more of DSC’s videos online. Did you find the videos funny?

Uncomfortable? Offensive? Please explain your reaction.

Many of the U.S. students may find these types of commercials funny, but it is important that they think through why they find them funny. Student responses will vary.

2. Do you think Dollar Shave Club’s approach will be successful in international markets?

Why or why not? What changes, if any, do you think the company would have to make in order to enhance its success in international markets?

These ads might be successful in some markets that have similar cultures to the United States, but in other markets it may be insulting or rude. If you have foreign students or students that have lived abroad, ask them their opinions of the ads and what changes they suggest.

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International Business, 3e

Instructor Guide to Module 13

Geringer, McNett, Ball

Bonus Activities This section provides you with support of your course above and beyond what is found in the text. We have developed these resources to support your course, to support your traditional, hybrid, online, or flipped class.

Video Suggestions McGraw Hill‘s collection of international business videos is available at http://bit.ly/MHEIBVideo. The International Marketing board is rich and varied and is updated monthly.

Kraft‘s video on the Oreo cookie ―Kraft Marketing Oreos Globally‖ explores their global positioning of this popular product. See it at www.youtube.com/watch?v=75NpeAN-z4k.

View the ―Subway Story: International Expansion‖ video at www.youtube.com/watch?v=WJOEZGI50B8.

View Clayton Christensen‘s disruptive innovation being applied in India in ―chotukool,‖ at www.innosight.com/impact-stories/chotokool-case-study.cfm.

Team Exercises These may be done individually or in groups or teams, either in or out of class, for later class presentation. Some are also appropriate for hybrid and online courses.

1. Social and Cultural Values as They Relate to Economic Strata Ask small groups to discuss why they think marketers tend to find greater dissimilarities in social and cultural values as they move down economic strata in all countries, regardless of the country‘s level of development. Have groups report back. This can also be done online, using collaboration tools.

2. Technology Creates Homogeneous Markets Theodore Levitt, in his book, The Marketing Imagination, predicted that technology would create homogeneous markets. Evaluate his prediction in small teams and report back to the class. This exercise can also be done online, using collaboration tools. To make the exercise more substantive, assign the chapter Marketing Myopia, which also appeared as a Harvard Business Review article (https://hbr.org/2004/07/marketing-myopia).

3. Localize Global Inter Presence In small teams (five students) discuss ways a global internet presence can be localized. You might begin by checking out businesses that have multiple country-specific sites. Report back to class, developing a larger set of localization options for an internet presence. This exercise can be modified to complete online using collaboration tools.

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International Business, 3e

Instructor Guide to Module 13

Geringer, McNett, Ball

Suplemental Activities Case Studies Case studies that focus on intercultural issues and their effects in business environments are available through Ivey Publishing and Harvard Business School. Ivey‘s catalog is available for browsing (www.iveycases.com); the cases are downloadable for review, and pricing is around $3.75. Harvard Business Publishing (https://cb.hbsp.harvard.edu/cbmp/pages/home) requires an account and offers downloadable review copies for educators. The case prices begin at $7.50.

Ivey Cases ―Israeli Wines in China: Reaching for New Heights‖ describes the need for Golan Heights Wines, which is trying to exploit the vast Chinese wine market, to establish a strong brand identity. Golan Heights has established its distribution in China, but sales are sluggish because Chinese prefer European wines, particularly French wines. The distributors and vendors did not push Israeli wines, either. ―Genicon: A Surgical Strike into Emerging Markets‖ describes a market assessment process for this laparoscopic surgery equipment manufacturer as the firm tries to decide which new markets to enter.

Controversial Issues 1. Some Multinationals on the Defensive There is a group of organizations that regularly attack consumer product multinationals because, the charge is that their advertising and promotion establish consumer desires rather than satisfy consumer needs. The role of fashion and makeup establish unrealistic notions of attractiveness.

Empty calorie food is promoted as an indulgence the consumer deserves. Specifically, the most frequent complaints are: 

False wants and too much materialism. People are judged by what they own rather than who they are.



Producing too few social goods. There needs to be more of a balance between social (public) and private goods.



Cultural pollution. Constant assaults on privacy by advertising and noise clutter.



Too much political power. Companies do promote and protect their own interests.

Ask students to review some of the criticism (www.knowthis.com) outside of class. Then discuss their position on the criticism of advertising and promotions. This can be modified to complete online using collaboration tools.

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International Business, 3e

Instructor Guide to Module 13

Geringer, McNett, Ball

Teaching Suggestions 1. This chapter is very important to students‘ understanding of the importance of international marketing. Marketing is a fundamental issue that influences other aspects of international business, so you will find it woven into the other modules, as well.

2. Focusing on the boxed material and the case study will help students achieve the objectives of the chapter. Answers for both the boxed material and case studies are provided in this Instructor Guide.

3. Guest lecturers on culture are a way to underscore the importance of the information in the culture chapter. Possible guests include: 

A marketing executive can share insights on how the firm plans and controls its international advertising campaigns.



A headquarters marketing staff member of an international firm can discuss the company policy on international standardization of the marketing mix. They will have some good ―war stories‖ about campaigns that made it and those that failed because of environmental differences.



Faculty colleagues from other countries can share observations on critical differences in markets and how they influence the total product and its promotion.

4. A good way to start this module is to have students who have studied abroad and foreign students relate their own experiences with marketing differences such as branding, product use, total product, and so on. Setting this contribution up ahead with a foreign student will give the student time to compose a thoughtful response.

5. Robert F. Hartley‘s Marketing Mistakes and Successes provides some interesting examples of marketing errors.

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International Business, 3e

Instructor Guide to Module 13

Geringer, McNett, Ball

Connect Tools for Assessment of Learning Connect Content Matrix For every chapter, please refer to the Connect Content Matrix to see what application exercises are available and what Learning Objectives they help reinforce/assess.

Title

Assignment Type

Overcoming Cultural Barriers to Selling Tampons

Case Analysis

Push or Pull Promotion Strategy

Case Analysis

Pricing Strategy Volkswagen‘s Jurgen Stackmann on the New Jetta, Atlas, and Electric Cars

Click and Drag

Topic(s) Differences Between Domestic and International Trade Factors That Influence International Advertising and Promotion Strategies Elements That Influence International Pricing Strategies

Video Case

Differences Between Domestic and International Marketing

AACSB Learning Accreditation Objective(s) Tagging

Bloom's Taxonomy

13-01

Analytical Thinking

Apply

13-04

Analytical Thinking

Understand

13-07

Analytical Thinking

Understand

13-02/ 13-03/ 13-04

Analytical Thinking/ Reflective Thinking

Remember/ Analyze

Connect Activities 1. Overcoming Cultural Barriers to Selling Tampons Activity Summary: This is a case analysis about Procter & Gamble‘s efforts to sell Tampax® tampons in Latin America.

How to Use Activity: With four different questions for the same micro case, this works well as a set of questions from which one is randomly picked for an online assignment. Have students do this before class and then discuss issues with marketing products that are associated with cultural taboos. Ask the class if they can think of other products that might clash with taboos in other 13-331

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International Business, 3e

Instructor Guide to Module 13

Geringer, McNett, Ball

countries. If none come to mind, discuss food taboos, such as eating beef among Hindus or drinking alcohol among Muslims.

2. Push or Pull Promotion Strategy Activity Summary: In this case analysis, students are told that they are given the assignment to promote a fast-moving consumer good and then asked multiple-choice questions related to push and pull strategies.

How to Use Activity: With five different questions that can be asked related to the topic, these can be randomly assigned for an online assignment.

3. Pricing Strategy Activity Summary: This is a click and drag activity in which boxes that describe different policies and practices related to pricing are to be matched to one of three columns that are represent price strategies: Price Discrimination, Strategic Pricing, and Regulatory Influence.

How to Use Activity: This works well as an in-class assignments for small groups. After the teams have completed the assignment, ask about any points that were not clear and discuss those with the class. This allows you to tailor the discussion to each class. This can also be done individually as an internet assignment.

4. Volkswagen’s Jurgen Stackmann n the New Jetta, Atlas and Electronic Cars.

Activity Summary: This activity is important because understanding the many components and decisions of international marketing is vital in the study of in the study of international business.

Consumer‘s wants can vary substantially from one culture to the next. Evaluating each market and its demands are necessary to be successful. In international marketing you must be able to determine if your company‘s marketing plans are performing effectively, with a minimum of errors. In order to do this, your marketing team will need to evaluate each market, and understand it‘s demand. Such market appraisals guide international marketing managers to make informed decisions about, product design, promotions, pricing, and distribution.

How to Use Activity: This can be completed at home for an online class. For live classes have students complete this before class, then in class answer any questions and ask students to break out into small groups and do a similar analysis for other particular product/country combinations.

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