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2

c h a p t e r

1Introduction: What Is

International Business?

Introduction: What Is

International Business?

1. What is international business?2. What are the key concepts in

international trade and

investment?

3. How does international business

differ from domestic business?

4. Who participates in international

business?

5. Why do firms pursue

internationalization strategies?

6. Why should you study

international business?

> A Day in the Global EconomyJulie Valentine is a college junior majoring in business. On a recent Saturday, shewent shopping at a local mall. First, she ordered a big breakfast, unaware that mostof her meal was imported from abroad: bacon from Spain, fruit from Costa Rica,juice from Brazil, French-branded yogurt, and bread made from wheat grown inArgentina. Julie then headed to the department store to buy a gift for her dad. Sheperused neckties with Italian and French brand names, and others made in China,Mexico, and Romania. She also considered electric shavers made by Braun (a Ger-man brand) and Philips (a Dutch brand). She eventually bought a Panasonic (a

Japanese brand). Next, she headed to the perfume counter, where she tried variousbrands, including Chanel (France), French Connection (UK), Eau de Gucci (Italy),and Shiseido (Japan).

Julie was dreaming of buying a laptop computer. At the electronics store, she

explored several models made in China, Ireland, Malaysia, and Taiwan. As shepassed a travel agency, she remembered that her spring vacation was just aroundthe corner and decided to consult her best friend Melissa. Whipping out her Nokiacell phone (a Finnish brand, but made in Hungary, Mexico, and South Korea), she

Learning Objectives

In this chapter, you will

learn about:

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reached Melissa. Melissa answered on her Motorola phone (a U.S. firm, but madein Malaysia and other Asian locations). The two chatted about their dream trip tothe beaches of southern Spain, considered Mexico, but decided they will probablyend up in Panama City, Florida. Julie looked at a blouse made in Vietnam, but hes-itated to purchase it because she had read that some products from southeast Asiaare made by child labor.

Julie left the mall and drove away in her Hyundai (a Korean brand, but made inChina). She was envious of Melissas car, a BMW (German, but made in the UnitedStates from Asian, European, and South African components). Over the followingweeks, Julie and her exchange-student friend, Anders (her favorite Norwegianimport), meet up several times at restaurants featuring food from various nations,including France, India, Lebanon, and Mexico. On Friday night, they watched the

latest movie in the Matrix series (made in Australia and the United States, financedby the Japanese) on a friends big-screen TV (a Dutch brand, but made in Indone-sia). Over dinner, Julie and Anders enjoyed pasta from Italy and shrimp from El Sal-vador, and chatted about their future. Julie was dreaming of an international career.

3

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4 Chapter 1 Introduction: What Is International Business?

International businessPerformance of trade and

investment activities by firmsacross national borders.

What Is International Business?

As you can see from the opening vignette, international business touches our dailyexperiences. International business refers to the performance of trade and invest-ment activities by firms across national borders. Since the most conspicuous aspect ofinternational business is the crossing of national boundaries, we also refer to interna-tional business as cross-border business. Firms organize, source, manufacture, market,and conduct other value-adding activities on an international scale. They seek foreigncustomers and engage in collaborative relationships with foreign business partners.While international business is primarily carried out by individual firms, govern-ments and international agencies also engage in international business transactions.1

Firms and nations exchange many physical and intellectual assets including products,services, capital, technology, know-how, and labor. In this book, we are concerned pri-marily with the international business activities of the individual firm.

While international business has been around for centuries, it has gainedmuch speed and complexity over the past two decades. Firms seek internationalmarket opportunities more today than ever before, touching the lives of billions ofpeople around the world. Daily chores such as shopping and leisure activitiessuch as listening to music, watching a movie, or surfing the Internet involve inter-

national business transactions that connect you to the global economy. Interna-tional business gives you access to products and services from around the worldand profoundly affects your quality of life and economic well-being.

The growth of international business activity coincides with the broader phe-nomenon of globalization of markets. The globalization of markets refers to theongoing economic integration and growing interdependency of countries world-wide. While internationalization of the firm refers to the tendency of companies tosystematically increase the international dimension of their business activities,globalization refers to a macrotrend of intense economic interconnectedness

between countries. In essence, globalization leads to compression of time andspace. It allows many firms to internationalize and has substantially increased thevolume and variety of cross-border transactions in goods, services, and capitalflows. It has also led to more rapid and widespread diffusion of products, technol-ogy, and knowledge worldwide, regardless of origin.

In practical terms, the globalization of markets is evident in several related

trends. First is the unprecedented growth of international trade. In 1960, cross-border trade was modestabout $100 billion per year. Today, it accounts for asubstantial proportion of the world economy, amounting to some $10 trillionannuallythat is, $10,000,000,000,000! Second, trade between nations is accompa-nied by substantial flows of capital, technology, and knowledge. Third is thedevelopment of highly sophisticated global financial systems and mechanismsthat facilitate the cross-border flow of products, money, technology, and knowl-edge. Fourth, globalization has brought about a greater degree of collaborationamong nations through multilateral regulatory agencies such as the World TradeOrganization (WTO) and the International Monetary Fund (IMF).

Globalization both compels and facilitates companies to pursue cross-borderbusiness activities and international expansion. Simultaneously, going interna-tional for a firm has become easier than ever before. A few decades ago, interna-tional business was largely the domain of large, multinational companies. Recentdevelopments have created a more level playing field that allows firms of any size

to benefit from active participation in international business. In this text, you willread about the international activities of smaller firms, along with those of largemultinational enterprises. In addition, where cross-border business was oncemainly undertaken by manufacturing firms, this is no longer the case. Companiesin the services sector are also internationalizing, in such industries as banking,transportation, engineering, design, advertising, and retailing.

Globalization of marketsOngoing economic integrationand growing interdependency ofcountries worldwide.

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What Are the Key Concepts in International Trade and Investment? 5

International trade Exchangeof products and services acrossnational borders; typically throughexporting and importing.

Exporting Sale of products orservices to customers locatedabroad, from a base in the homecountry or a third country.

Importing or Global sourcingProcurement of products or

services from suppliers locatedabroad for consumption in thehome country or a third country.

International investment Thetransfer of assets to anothercountry or the acquisition ofassets in that country.

International portfolioinvestment Passive ownershipof foreign securities such asstocks and bonds for the purposeof generating financial returns.

We will study the globalization of markets in greater detail in Chapter 2. Letsnow review key concepts and trends associated with international business aspracticed by firms.

What Are the Key Concepts in InternationalTrade and Investment?

The most conventional forms of international business transactions are interna-tional trade and investment. International trade refers to an exchange of prod-ucts and services across national borders. Trade involves both products (mer-chandise) and services (intangibles). Exchange can be through exporting, anentry strategy involving the sale of products or services to customers locatedabroad, from a base in the home country or a third country. Exchange can alsotake the form ofimporting, or global sourcingthe procurement of products orservices from suppliers located abroad for consumption in the home country ora third country. Therefore, exporting is an outbound activity, while importing isan inbound flow of products and services. Both finished products and interme-diate goods, such as raw materials and components, are subject to importingand exporting.

International investment refers to the transfer of assets to another country, orthe acquisition of assets in that country. These assets include capital, technology,managerial talent, and manufacturing infrastructure. Economists refer to suchassets asfactors of production. With trade, products and services cross national bor-ders. With investment, by contrast, the firm itself crosses borders to secure owner-ship of assets located abroad.

The two essential types of cross-border investment are portfolio investmentand foreign direct investment. International portfolio investment refers to thepassive ownership of foreign securities such as stocks and bonds for the purposeof generating financial returns. It does not entail active management or controlover these assets. The foreign investor has a relatively short-term interest in theownership of these assets. Foreign direct investment (FDI) refers to an interna-tionalization strategy in which the firm establishes a physical presence abroadthrough acquisition of productive assets such as capital, technology, labor, land,plant, and equipment. It is a foreign-market entry strategy that gives investorspartial or full ownership of a productive enterprise dedicated to manufacturing,marketing, or research and development activities. Firms usually have a long-term plan to invest such resources in foreign countries.

The Nature of International Trade

Exhibit 1.1 contrasts the growth of total world exports to the growth of totalworld gross domestic product (GDP) since 1970. GDP is the total value of prod-ucts and services produced in a country over the course of a year. The growth ofexport activity by nations has continued to outpace the growth of domestic pro-duction during the last few decades, illustrating the fast pace of globalization. Infact, world exports grew more than thirty-fold during this period, while worldGDP grew more than tenfold. This difference is in part due to advancedeconomies such as Canada and Japan now sourcing many of the products that

they consume from low-cost manufacturing locations such as China and Mexico.For example, although the United States once produced most of the products thatit consumes, today it has become much more dependent on imports. Rapid inte-gration of world economies is fueled by such factors as advances in informationand transportation technologies, the decline of trade barriers, liberalization ofmarkets, and the remarkable economic growth of emerging market countries.

Foreign direct investment

(FDI) An internationalizationstrategy in which the firmestablishes a physical presenceabroad through acquisition ofproductive assets such as capital,technology, labor, land, plant, andequipment.

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1970

100

1,000

2,000

Index:1970

=1

00

3,000

4,000

1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Exports

GDP

Exhibit 1.1 Comparing the Growth Rates of World GDP and World ExportsSOURCE: International Monetary Fund, World Economic Outlookdatabase, April 2006 (www.imf.org).

Exhibit 1.2 identifies the leading nations involved in the exporting andimporting of products (but not services) that is, international merchandisetrade. Panel (a) shows the total value of products traded in billions of U.S. dollars.Panel (b) shows the annual value of products traded as a percentage of eachnations GDP. While the United States is the leading country in terms of theabsolute value of total merchandise trade, trade accounts for only 19 percent of itsGDP. In contrast, merchandise trade is a much larger component of economic

activity in countries such as Belgium (167 percent), the Netherlands (117 percent),and Germany (59 percent). These percentages show that some economies are verydependent on international trade relative to the value of all goods and servicesproduced domestically. The same is true for countries such as Singapore, HongKong, South Korea, and Malaysia, because trade accounts for more than 100 per-cent of their GDPs. These countries are known as entrept economies because theyimport a large volume of products, some of which they process into higher value-added products, and some they simply re-export to other destinations. For exam-ple, Singapore is a major entrept, or depot, for petroleum products received fromthe Middle East, which it then exports to China and other destinations in Asia.

The Nature of International Investment

Of the two types of investment flows between nationsportfolio investment andforeign direct investmentwe are concerned primarily with FDI, because it is the

ultimate stage of internationalization, and encompasses the widest range of inter-national business involvement. FDI is the foreign entry strategy practiced by themost internationally active firms. Companies usually engage in FDI for the longterm, and retain partial or complete ownership of the assets they acquire.

Firms undertake FDI for a variety of strategic reasons, including: (1) to setup manufacturing or assembly operations, or other physical facilities; (2) to

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400 800 1200 16000 2000

Belgium

Canada

Netherlands

Italy

United Kingdom

France

China

Japan

Germany

United States

(a) Total annual value of products trade (exports + imports) in billions of U.S. dollars

40 80 120 1600

China

United States

Japan

Italy

United Kingdom

France

Canada

Germany

Netherlands

Belgium

(b) Total annual value of products trade (exports + imports) as a percentage of nations GDP

Exhibit 1.2 Leading Countries in International Merchandise TradeSOURCE: World Trade Organization (www.wto.org); data for 2005.

open a sales or representative office or other facility to conduct marketing or dis-tribution activities; or (3) to establish a regional headquarters. In the process, thefirm establishes a new legal business entity, subject to the regulations of the hostgovernment.

FDI is especially common among large, resourceful companies with substan-tial international operations. For instance, many European and U.S. firms haveinvested in China, India, and Russia to manufacture or assemble products, taking

advantage of low-cost labor and other resources in these countries. At the sametime, companies from these rapidly developing economies have begun to invest inwestern markets. For example, Indias Mittal Steel Co. acquired the Luxembourg-

based Arcelor SA in 2006, creating a $38 billion conglomeratethe worlds largeststeel company. Also, the Russian oil and gas firm Lukos recently established thou-sands of service stations in the United States and Europe.

Exhibit 1.3 shows the dramatic growth of FDI into various world regions sincethe 1980s. The exhibit reveals that the dollar volume of FDI has grown immenselysince the 1980s, especially into advanced (or developed) economies such as Japan,Europe, and North America. FDI inflows were interrupted in 2001 by the world-wide panic that ensued following the September 11 terrorist attacks in the UnitedStates, but the trend remains strong and, over time, is growing. Of particular sig-nificance is the growth of FDI into developing economies, nations with lowerincomes, less-developed industrial base, and less investment capital thanadvanced economies. Most of the developing economies are located in parts of

Africa, Asia, and Latin America. Despite poor income levels, developingeconomies collectively comprise a substantial and growing proportion of interna-tional trade and investment activities. The ability to invest in other countries pro-vides customers in both developing and advanced economies with a wider selec-tion of products and services at lower prices. Living standards of billions ofpeople are better because of international trade and investment activities.

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Services as Well as Products

Traditionally, international trade and investment have been regarded as thedomain of companies that make and sell productstangible merchandise suchas clothing, computers, and cars. Today, firms that produce services (intangibles)

are key international business players as well. Services are deeds, performances,or efforts performed directly by people working in banks, consulting firms,hotels, airlines, construction companies, retailers, and countless other firms inthe services sector. For instance, advertising for the Procter & Gamble productsthat you purchased may have been created by Saatchi & Saatchi, headquarteredin the United Kingdom. If you own a house, the mortgage may be underwritten

by the Dutch bank ABN Amro. Perhaps you eat lunch in a cafeteria owned bythe French firm Sodexho, which manages the food and beverage operations onnumerous university campuses. In the United States and several Europeancountries, travel and tourism are now the number one source of revenue fromforeigners.

International trade in services accounts for about one quarter of all interna-tional trade and is growing rapidly. In recent years, services trade has beengrowing faster than products trade. Exhibit 1.4 identifies the leading countriesin total international services trade, including both exports and imports. Panel

(a) shows the total annual value of services trade in billions of U.S. dollars.Panel (b) shows the total annual value of services trade as a percentage of eachnations GDP. As with products, larger advanced economies account for thegreatest proportion of world services trade. This is expected, because thesetend to be postindustrial, service-based economies. Compare the value of mer-

1980

0

200

400

600

800

1,000

1,200

1,400

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

World total

Advanced economies

Developing economies

Former Soviet Unionand South-East Europe

Exhibit 1.3 Foreign Direct Investment (FDI) Inflows into World Regions (in Billions of U.S.Dollars per Year)

SOURCE: UNCTAD (2005), World Investment Report, New York: United Nations (www.unctad.org).

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chandise trade in Exhibit 1.2 with the value of services trade in Exhibit 1.4 foreach country. Even though trade in services is rapidly rising, the absolute valueof merchandise trade is still several times larger than the value of servicestrade. One reason is that services face greater challenges and barriers in cross-

border trade than merchandise goods.Not all services can be exported. As examples, you cannot export the con-

struction work to build a house, repair work done on your car, or the experience ofeating a meal in a restauranteven though some services can be digitized andmoved across borders. Most services can be offered internationally only by estab-lishing a physical presence abroad through direct investment. Firms employ FDIto set up restaurants, retail stores, and other physical facilities, through which theysell trillions of dollars worth of services abroad every year.

There are numerous industries in the services sector with strong potential forinternationalization. The largest auction-based retailer on the Internet is eBay. Thefirm earned over 6 billion dollars in 2006, of which about 40 percent came frominternational sales. The company expects most future revenue growth will comefrom abroad. When developing its business in India, eBay acquired the Mumbai-

based e-retailer Baazee. This acquisition followed eBays expansion into China,Korea, and Europe.2 With more than 1 billion people, India is the worlds secondmost populous nation (China is the first, with 1.3 billion). There are an estimated40 million Internet users in India, compared with 132 million in China and 210

million in the United States. However, the number of Indian consumers who shoponline is growing rapidly.

Exhibit 1.5 illustrates the diversity of service sectors that are internationaliz-ingextending their reach beyond the countries where they are based. If you areconsidering a career in international business, keep these industries in mind.

0 100 200 300 400 500

Canada

China

Spain

Netherlands

Italy

Japan

France

United Kingdom

Germany

United States

(a) Total annual value of services trade (exports + imports) in billions of U.S. dollars

0 3 27242118151296

China

United States

Japan

Italy

Canada

France

Spain

Germany

United Kingdom

Netherlands

(b) Total annual value of services trade (exports + imports) as a percentage of nations GDP

Exhibit 1.4 Leading Countries in International Services TradeSOURCE: World Trade Organization (www.wto.org); data for 2005.

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The International Financial Services Sector

International banking and financial services are among the most internationally activeservice industries. The explosive growth of investment and financial flows beginningin the 1970s led to the development of capital markets worldwide. Much of thisgrowth is due to two factors: money flowing across national borders into portfolioinvestments and pension funds, and the internationalization of banks. The activitiesof banks and other financial institutions help increase economic activity in developingeconomies by increasing the amount of cheap, local investment capital, stimulatingdevelopment of local financial markets, and encouraging people to save money.

International banking is flourishing in such regions as the Middle East, wherethe return on equity in Saudi Arabia, for instance, exceeds 20 percent (as com-pared to 15 percent in the United States and much less in France and Germany).Citibank, Deutsche Bank, BNP Paribas, and other international banks are thriving

Representative RepresentativeIndustry Activities Companies

Architectural, Construction, electric ABB, Bechtel Group,

construction, power utilities, design, Halliburton, Kajima,and engineering services Philip Holzman, Skanskaengineering for airports, hospitals, AB

dams

Banking, Banks, insurance, Citigroup, CIGNA,finance, and risk evaluation, Barclays, HSBC,insurance management Ernst & Young

Education, Management training, Berlitz, Kumontraining, and technical training, Math & Reading Centers,publishing English language NOVA, Pearson, Elsevier

training

Entertainment Movies, recorded Time Warner, Sony,music, Internet- based Virgin, MGMentertainment

Information E-commerce, e-mail, Infosys, EDI, Hitachi,services funds transfer, data Qualcomm, Cisco

interchange, dataprocessing, networkservices, professionalcomputer services

Professional Accounting, advertising, Leo Burnett, EYLaw,business legal, management McKinsey, A.T. Kearney,services consulting Booz Allen Hamilton,

Cap Gemini

Transportation Aviation, ocean Maersk, Sante Fe, Portshipping, railroads, Authority of New Jersey,trucking, airports SNCF (French railroads)

Travel and Transportation, lodging, Carlson Wagonlit,

tourism food and beverage, Marriott, British Airwaysrecreation, travel onaircraft, ocean carriers,and railways

Exhibit 1.5Service Industry Sectors That AreRapidly InternationalizingSOURCE: International Trade Administration,

Washington, DC: U.S. Department of Commerce.

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because of high oil prices, a boom in consumer banking, and low taxes. NationalCommercial Bank, the biggest bank in the region, calculates that non interest-bearingdeposits comprise nearly 50 percent of total deposits in Saudi Arabia. Banks lendthis free money to companies and consumers at high margins. Banks bypassIslamic rules against paying interest by structuring loans as partnerships.3

How Does International Business Differfrom Domestic Business?

Firms engaged in international business operate in business environments character-ized by unique economic conditions, political systems, laws and regulations, andnational culture. For example, the economic environment of India differs sharplyfrom that of Germany. The legal environment of Saudi Arabia does not resemble thatof Japan. The cultural environment of China is very distinct from that of Canada. Notonly does the firm find itself in less familiar surroundings than it does domestically,it encounters many uncontrollable variablesfactors over which the firm has little con-trol. These factors introduce new or elevated types of business risks for the firm.

The Four Risks in InternationalizationInternationalizing firms are routinely exposed to four major types of risk, as illus-trated in Exhibit 1.6: cross-cultural risk, country risk, currency risk, and commercialrisk. The firm must manage these risks to avoid financial loss or product failures.

Cross-cultural risk refers to a situation or event where a cultural miscommuni-cation puts some human value at stake. Cross-cultural risk is posed by differences inlanguage, lifestyles, mindsets, customs, and/or religion. Values unique to a culture

How Does International Business Differ from Domestic Business? 11

Cross-cultural risk A situationor event where a culturalmiscommunication puts somehuman value at stake.

CommercialRisk

CountryRisk

Cross-CulturalRisk

Currency(Financial) Risk

Risks inInternational

Business

Cultural differences

Negotiation patterns

Decision-making styles

Ethical practices

Weak partner

Operational problems

Timing of entry

Competitive intensity

Poor execution of strategy

Currency exposure

Asset valuation

Foreign taxation

Inflationary and transfer pricing

Government intervention, protectionism,and barriers to trade and investment

Bureaucracy, red tape, administrative de lays, and corruption

Lack of legal safeguards for intellectual property rights Legislation unfavorable to foreign firms

Economic failures and mismanagement

Social and political unrest and instability

Exhibit 1.6 The Four Risks of International Business

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tend to be long-lasting and transmitted from one generation to the next. These val-ues influence the mindset and work style of employees and the shopping patternsof buyers. Foreign customer characteristics differ significantly from those of buyersin the home market. Language is a critical dimension of culture. In addition to facil-itating communication, language is a window on peoples value systems and livingconditions. For example, Eskimo languages have various words for snow whilethe South American Aztecs used the same basic word stem for snow, ice, and cold.When translating from one language to another, it is often difficult to find wordsthat convey the same meanings. For example, a one-word equivalent to aftertastedoes not exist in many languages. Such challenges impede effective communicationand cause misunderstandings. Miscommunication due to cultural differences givesrise to inappropriate business strategies and ineffective relations with customers.We examine cross-cultural risk in greater detail in Chapter 5.

Country risk (also known as political risk) refers to the potentially adverseeffects on company operations and profitability caused by developments in thepolitical, legal, and economic environment in a foreign country. Country riskincludes the possibility of foreign government intervention in firms business activ-ities. For example, governments may restrict access to markets, impose bureau-cratic procedures on business transactions, and limit the amount of earned incomethat firms can bring home from foreign operations. The degree of governmentintervention in commercial activities varies from country to country. For instance,Singapore and Ireland are characterized by substantial economic freedomthat is,a fairly liberal economic environment. By contrast, the Chinese and Russian gov-ernments intervene regularly in business affairs.4 Country risk also includes lawsand regulations that potentially hinder company operations and performance.Critical legal dimensions include property rights, intellectual property protection,product liability, and taxation policies. Nations also experience potentially harmfuleconomic conditions, often due to high inflation, national debt, and unbalancedinternational trade. We examine country risk in greater detail in Chapter 6.

Currency risk (also referred to asfinancial risk) refers to the risk of adverse fluc-tuations in exchange rates. Fluctuation is common for exchange rates, or the value ofone currency in terms of another. Currency risk arises because international transac-tions are often conducted in more than one national currency. When Frankfort,Michigan-based fruit processor Graceland Fruit, Inc. exports dried cherries to con-fectioneries in Japan, it will normally be paid in Japanese yen. When currencies fluc-tuate significantly, however, the value of the firms assets, earnings, and operatingincome can be reduced. The cost of importing parts or components used in manu-facturing finished products can increase dramatically if the value of the currency inwhich the imports are denominated rises sharply. Inflation and other harmful eco-nomic conditions experienced in one country may have immediate consequencesfor exchange rates due to the growing interconnectedness of national economies.We elaborate on country risk in Chapters 10, 17, and 19.

Commercial risk refers to the firms potential loss or failure from poorlydeveloped or executed business strategies, tactics, or procedures. Managers maymake poor choices in such areas as the selection of business partners, timing ofmarket entry, pricing, creation of product features, and promotional themes.While such failures also exist in domestic business, the consequences are usuallymore costly when they are committed abroad. For example, in domestic businessa company may terminate a poorly performing distributor simply with advancenotice. In a foreign market, however, terminating business partners can provecostly due to regulations that protect local firms. Marketing inferior or harmfulproducts, falling short of customer expectations, or failing to provide adequatecustomer service may harm the firms reputation and international performance.

The four types of international business risks are omnipresent; the firm mayencounter them around every corner. While these risks cannot be avoided, theycan be anticipated and managed. Experienced international firms conduct

Country risk Potentiallyadverse effects on companyoperations and profitabilitycaused by developments in thepolitical, legal, and economicenvironment in a foreign country.

Currency risk Risk of adversefluctuations in exchange rates.

Commercial risk Firmspotential loss or failure frompoorly developed or executedbusiness strategies, tactics, orprocedures.

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Who Participates in International Business? 13

research to anticipate potential risks, understand their implications, and takeproactive action to reduce their effects. In fact, this book is dedicated to providingyou, the future manager, with a good understanding of the risks as well as man-agerial skills and strategies to effectively counter them.

Some international risks are extremely challenging. An example is the EastAsian economic crisis of the late 1990s. Between January and July of 1998, the cur-rencies of several East Asian countries lost between 35 and 70 percent of theirvalue, leading to the collapse of national stock markets, deepening trade deficits,and suspension of normal business activity. Political and social unrest soon fol-lowed in Indonesia, Malaysia, South Korea, Thailand, and the Philippines. In all,the East Asian economic crisis generated substantial commercial, currency, andcountry risks. Nevertheless, some farsighted firms foresaw these challenges andproactively redeployed key resources to minimize their negative effects.

National differences require managers to formulate approaches tailored toconditions in each country where the firm does business. Differences typicallyrequire firms to substantially alter their products and services. For instance,Citibank varies its banking practices around the world; approaches for loaningfunds must conform to unique regulatory and cultural conditions from Africa, toAsia, to the Middle East. Nestl must alter the packaging and ingredients it usesfor the breakfast cereals that it sells abroad. For example, compared to NorthAmericans, Asians generally prefer less sugar in their cereals. McDonalds variesthe type of menu items that it sells in its restaurants around the world.

Who Participates in International Business?

What types of organizations are active in international business? Among the mostimportant arefocal firms, the firms that directly initiate and implement interna-tional business activity. Lets briefly highlight two types of focal firms in interna-tional business: the multinational enterprise (MNE) and small and medium-sizedenterprise (SME).

Multinational Enterprise (MNE)

Multinational enterprises (also known as multinational corporations) have histor-ically been the most important type of focal firm. A multinational enterprise is alarge company with substantial resources that performs various business activi-ties through a network of subsidiaries and affiliates located in multiple countries.One of the hallmarks of MNEs is that they tend to carry out R&D, procurement,manufacturing, and marketing activities wherever in the world it makes most eco-nomic sense. In addition to a home office or headquarters, the typical MNE ownsa worldwide network of subsidiaries. It collaborates with numerous suppliers andindependent business partners abroad (sometimes termed affiliates).

Typical MNEs include Caterpillar, Kodak, Nokia, Samsung, Unilever,Citibank, Vodafone, Carrefour, Bechtel, Four Seasons Hotels, Disney, DHL, andNippon Life Insurance. The most well-known multinational firms are ranked,

based on international sales revenue, in annual listings such as Fortune magazinesGlobal 500. In recent years, the largest MNEs are found in the oil industry (such asExxon Mobil, Royal Dutch Shell, and BP) and the automotive industry (GeneralMotors, Renault-Nissan, Toyota, and Ford), as well as retailing (Wal-Mart). Exhibit1.7 shows the geographic distribution of the worlds leading MNEs. The size ofeach circle is indicated by the total revenues of the MNEs headquartered in a par-ticular country, as ranked in Fortune Global 500. For example, the United Stateshosts 170 MNEs, whose combined revenues amount to $6,645 billion.

While MNEs are among the leading participants, international business is notthe domain of large, resourceful firms alone. Many small and medium-sizedenterprises (SMEs) participate as well. In the United States, an SME is a company

Multinational enterprise(MNE) A large company withsubstantial resources thatperforms various businessactivities through a network ofsubsidiaries and affiliates locatedin multiple countries.

Small and Medium-sizedEnterprise (SME) A companywith 500 or fewer employees inthe United States, although thisnumber may need to be adjusteddownward for other countries.

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with 500 or fewer employees, although this number may need to be adjusteddownward for other countries. In addition to being smaller players in their respectiveeconomies, SMEs tend to have limited managerial and other resources, and pri-marily use exporting to expand internationally. In most nations, SMEs constitute

between 90 and 95 percent of all firms.With the globalization of markets, advances in various technologies, and

other facilitating factors, more and more SMEs are pursuing business opportuni-ties around the world. SMEs account for about one third of exports from Asia andabout a quarter of exports from the affluent countries in Europe and North Amer-ica. In selected countries such as Italy, South Korea, and China, SMEs contributemore than 50 percent of total national exports.5

One type of contemporary international SME is the born global firm, a youngentrepreneurial company that initiates international business activity very early in itsevolution, moving rapidly into foreign markets. Born globals are found in advancedeconomies, such as Australia and Japan, and in emerging markets, such as China andIndia. One example is DLP, Inc., a leading manufacturer of disposable medical prod-ucts for heart surgery. DLP began international operations as a young firm, acquiringnearly a third of total sales from abroad. The founder spent much of DLPs early

years traveling around Europe and Asia, doggedly developing markets. From theirearliest days, born globals established much of their business activities overseas.The main difference between born globals and large MNEs is that born glob-

als internationalize at or near their founding, despite the scarce resources typicalof new firms. The emergence of born globals has been facilitated by informationand communications technologies, and globe-spanning transportation systemsthat make international trade easier for all firms.

Australia$175

(8)

Belgium$133

(4)

Brazil$115

(4)

Britain$1,528

(38)

Geographic Location and Revenues of

Top Multinational Enterprises, 2006

Canada

$285(14)

China$570

(20)

France$1,612

(38)

Germany

$1,648(35)

India$122

(6)

Italy$427(10)

Japan$2,334

(70)Mexico

$147

(5)

Netherlands$773(14)

Russia$158

(5)

South Korea$404

(12)

Spain$264

(9)Sweden$118

(6)

Switzerland$481

(12)United States

Revenue: $6,645 billionNumber of companies: (170)

Exhibit 1.7 Geographic Location of Multinational Enterprises, 2006SOURCE: Fortune, Fortune Global 500 (money.cnn.com/fortune).

Born global firm A youngentrepreneurial company thatinitiates international businessactivity very early in its evolution,moving rapidly into foreignmarkets.

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Who Participates in International Business? 15

International business requires specialized knowledge, commitment of resources,and considerable time to develop foreign business partnerships. How do SMEs suc-ceed in international business despite resource limitations? First, compared to largeMNEs, smaller firms are often more innovative, more adaptable, and have quickerresponse times when it comes to implementing new ideas and technologies and meet-ing customer needs. Second, SMEs are better able to serve niche markets around theworld that hold little interest for MNEs. Third, smaller firms are usually avid users ofnew information and communication technologies, including the Internet. Fourth, asthey usually lack substantial resources, smaller firms minimize overhead or fixedinvestments. Instead, they rely on external facilitators such as FedEx and DHL, as wellas independent distributors in foreign markets. Fifth, smaller firms tend to thrive onprivate knowledge that they possess or produce. They access and mobilize resourcesthrough their cross-border knowledge networks, or their international social capital.6

In each chapter, the feature entitled Global Trend profiles an important newdevelopment in international business. The first Global Trend features Diesel, anSME that eventually grew into a large firm.

>GLOBAL TREND

DIESEL S.p.A.: A Smaller Firms Smashing Success inInternational Markets

For the global youth culture,Diesels fashions are highly pre-ferred to other brands.

Founded in Italy in 1978, Dieselstarted out as an SME, and eventuallygrew to achieve annual sales of morethan $1 billion (U.S.), 85 percent ofwhich come from abroad. Diesel pro-

duces unusual but popular mens andwomens casual wear. Competingwith Donna Karan and Tommy Hil-figer, Diesel wear is futuristic. Itsjeans come in exotic shades andstyles. Diesel management sees theworld as a single, borderless macro-culture, and Diesel staff includes anassortment of personalities from allparts of the globe who create anunpredictable, dynamic vitality andenergy. The firm focuses on designand marketing, leaving the produc-tion of jeans to subcontractors.

Diesel is Europes hottest bluejeans brand, and has expanded itsdistribution to over 80 countriesthrough department stores and spe-cialty retailers, as well as some 200Diesel-owned stores from Paris toMiami to Tokyo. At over $100 a pair,

Diesel jeans are expensive for many,but controversial advertising haspropelled the company to hugeinternational success. The com-panys advertising has featuredsumo wrestlers kissing, a row ofchimpanzees giving the fascistsalute, and inflatable naked dolls in

a board meeting with a hugely over-weight CEO. Its ads poke fun atdeath, obesity, murder, and do-gooders. Some people in the UnitedStates see the prankish campaignsas politically incorrect. For instance,under pressure from activists, Dieselwithdrew ads that applauded smok-ing and gun ownership with sloganssuch as 145 cigarettes a day willgive you that sexy voice and winnew friends. Another ad featurednuns in blue jeans below the copy:Pure, virginal 100% cotton. Softand yet miraculously strong.

If Starbucks can charge severaldollars for coffee, then Diesel execu-tives believe they can persuade con-sumers to pay $108 for its jeans.Diesel was one of the first companiesto have a major Internet presence

(www.diesel.com), selling jeans via anonline virtual store. Diesels webadvertising is hip, with a powerful,market-friendly message that drivesits popularity to youth worldwide.The firm introduces some 1,500 newdesigns every 6 months, andemploys a multicultural team of

young designers who travel theglobe for inspiration and weave theirimpressions into the next collection.

Diesel is a classic success storyin international business by a smallerfirm. Its strategy is instructive forother marketers of jeans such as Kit-son, Lucky Brand, Mavi Jeans, and 7For All Mankind.

Sources: Diesels online Web site atwww.diesel.com; Edmondson, Gail. (2003).Diesel is Smoking But Can Its Provocative AdsKeep Sales Growth Hot?, Business Week, Feb-ruary 10, p. 64; Hoovers online Web site forWhirlpool Corporation, www.hoovers.com;Helliker, Kevin. (1998). Teen Retailing: The

Underground Taste MakersIs Diesel Apparela Bit Too Trendy for Its Own Good?, Wall StreetJournal, December 9, p. B1; OECD. (1997).Globalization and Small and Medium Enter-prises (SMEs). Paris: OECD; Sansoni, Sylvia.(1996). Full Steam Ahead for Diesel; Will ItsPricey Jeans and Outrageous Ads Succeed inthe U.S.? Business Week, April 29, pp. 5860.

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Non-governmental Organizations (NGOs)

In addition to profit-seeking focal firms in international business, there are numer-ous non-profit organizations that conduct cross-border activities. These include chari-table groups and non-governmental organizations (NGOs). They pursue special causes

and serve as an advocate for the arts, education, politics, religion, and research.They operate internationally to either conduct their activities or raise funds. Exam-ples of nonprofit organizations include the Bill and Melinda Gates Foundation andthe British Wellcome Trust, which support health and educational initiatives. CAREis an international non-profit organization dedicated to reducing poverty.

Many MNEs operate charitable foundations that support various initiativesworldwide. GlaxoSmithKline (GSK), the giant pharmaceutical firm, operates anumber of small country-based foundations in Canada, the Czech Republic,France, Italy, Romania, Spain, and the United States. GSK developed Barretstownin Ireland and LEnvol in France as residential camps where seriously ill childrencan have fun and develop self-confidence. GSK promotes healthy eating and exer-cise to Slovakian children living on urban housing estates; healthcare for homelessand abandoned children in Spain; and the integration of children with disabilitiesinto Russian society. GSK developed the Integrated Management of Childhood Ill-nesses initiative in Ethiopia, aiming to reduce childhood deaths from preventable

and treatable conditions such as malaria, measles, and malnutrition. In Vietnam,GSK supports the 500 Ethnic Midwives initiative to provide birthing support tocommunities in poor rural areas with limited access to health care services.

Why Do Firms Pursue InternationalizationStrategies?

Firms pursue internationalization strategies for a variety of reasons. Firms often havemore than one motive for international expansion. Some motives are strategic innature, while others are reactive. An example of a strategic, or proactive, motive is to

tap foreign market opportunities or acquire new knowledge. Anexample of a reactive motive is the need to serve a key customerwho has expanded abroad. Nine specific motivations include:

1. Seek opportunities for growth through market diversification. Sub-stantial market potential exists outside the home country. Manylarge and small companies, including Gillette, Siemens, Sony,and Biogen, derive more than half of their sales from abroad.When they diversify into foreign markets, firms can generatesales and profit opportunities that cannot be matched at home.Internationalization can also extend the marketable life of prod-ucts or services that have reached their maturity in the homecountry. One example is the internationalization of automaticteller machines (ATMs). The first ATM was installed outside anorth London branch of Barclays Bank in 1967. The machineswere next adopted in the United States and Japan. As the growthof ATMs began to slow in these countries, they were marketedthroughout the rest of the world. Today there are more than 1.5million ATMs worldwide, with one installed somewhere every

seven minutes or so.

2. Earn higher margins and profits. For many types of products andservices, market growth in mature economies is sluggish or flat.Competition is often intense, forcing firms to get by on slim profitmargins. By contrast, most foreign markets may be underserved

The drive for market diversifica-tion beyond London led to ATMsappearing throughout the world,including Japan.

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Why Do Firms Pursue Internationalization Strategies? 17

(typical of high-growth emerging markets) or not served at all (typical of develop-ing economies). Less intense competition, combined with strong market demand,implies that companies can command higher margins for their offerings. Forexample, compared to their respective home markets, bathroom fixture manufac-turers American Standard and Toto (of Japan) have found a more favorable com-petitive environment in rapidly industrializing countries such as Indonesia, Mex-ico, and Vietnam. Just imagine the demand for bathroom fixtures in the thousandsof office buildings and residential complexes that are going up from Shanghai toSingapore!

3. Gain new ideas about products, services, and business methods. International mar-kets are characterized by tough competitors and demanding customers with vari-ous needs. Unique foreign environments expose firms to new ideas for products,processes, and business methods. The experience of doing business abroad helpsfirms acquire new knowledge for improving organizational effectiveness and effi-ciency. For example, just-in-time inventory techniques were refined by Toyota andthen adopted by other manufacturers all over the world. Several of Toyotas for-eign suppliers learned about just-in-time practices from the Japanese firm, andthen applied those methods to their own manufacturing operations.

4. Better serve key customers that have relocated abroad. In a global economy, many

firms internationalize to better serve clients that have moved into foreign markets.For example, when Toyota opened its first factory in the United Kingdom, many

Japanese auto parts suppliers followed, establishing their own operations there.

5. Be closer to supply sources, benefit from global sourcing advantages, or gain flexibil-ity in the sourcing of products. Companies in extractive industries such as petro-leum, mining, and forestry establish international operations where these rawmaterials are located. One example is the aluminum producer Alcoa, whichlocates mining operations abroad to extract aluminums base mineral bauxitefrom mines in Brazil, Guinea, Jamaica, and elsewhere. In addition, some firmsinternationalize to gain flexibility from a greater variety of supply bases. Forinstance, Dell Computer has assembly facilities in Asia, Europe, and the Americasthat allow management to quickly shift production from one region to another.Compared to less agile rivals, this flexibility provides Dell with competitive advan-tagesa distinctive competency that provides the firm with superior competitivepositioning. In particular, it allows the firm to skillfully manage currency

exchange rate fluctuations.6. Gain access to lower-cost or better-value factors of production. Internationalizationenables the firm to access capital, technology, managerial talent, labor, and land atlower costs, higher-quality, or better overall value at locations worldwide. Forexample, some Taiwanese computer manufacturers have established subsidiariesin the United States to access low-cost capital. The United States is home tonumerous capital sources in the high-tech sector, such as stock exchanges and ven-ture capitalists, which have attracted countless firms from abroad seeking funds.More commonly, firms venture abroad in search of skilled or low-cost labor. Forinstance, the Japanese firm, Canon, relocated much of its production to China toprofit from that countrys inexpensive, productive workforce.

7. Develop economies of scale in sourcing, production, marketing, and R&D .Economies of scale refer to the reduction of the per-unit cost of manufacturing andmarketing due to operating at high volume. For example, manufacturing the

100,000th DVD player on a production line is always cheaper than manufacturingthe first one. By expanding internationally, the firm greatly increases the size of itscustomer base, thereby increasing the volume of products that it manufactures.On a per-unit-of-output basis, the greater the volume of production, the lower thetotal cost. Economies of scale are also present in R&D, sourcing, marketing, distri-

bution, and after-sales service.

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8. Confront international competitors more effectively or thwart the growth of competi-tion in the home market. International competition is substantial and increasing,with multinational competitors invading markets worldwide. The firm canenhance its competitive positioning by confronting competitors in internationalmarkets or preemptively entering a competitors home markets to destabilize andcurb its growth. One example is Caterpillars preemptive entry into Japan just asits main rival in the earthmoving equipment industry, Komatsu, was gettingstarted in the early 1970s. Caterpillars preemptive move hindered Komatsusinternational expansion for at least a decade. Had it not moved proactively to sti-fle Komatsus growth in Japan, Komatsus home market, Caterpillar would cer-tainly have had to face a more potent rival sooner.

9. Invest in a potentially rewarding relationship with a foreign partner . Firms oftenhave long-term strategic reasons for venturing abroad. Joint ventures or project-

based alliances with key foreign players can lead to the development of new prod-ucts, early positioning in future key markets, or other long-term, profit-makingopportunities. For example, Black and Decker entered a joint venture with Bajaj, anIndian retailer, to position itself for expected long-term sales in the huge Indianmarket. The French computer firm Groupe Bull partnered with Toshiba in Japan togain insights for developing the next generation of information technology.

At the broadest level, companies internationalize to enhance competitive advan-tage and to seek growth and profit opportunities. Throughout this book, we explorethe environment within which firms seek these opportunities, as well as discuss thestrategies and managerial skills necessary for achieving international business success.

Why Should You Study InternationalBusiness?

There are many reasons to study international business. We can examine the rea-sons from the perspectives of the global economy, the national economy, the firm,and you as a future manager.

Facilitator of the Global Economy and Interconnectedness

International business is transforming the world as never before. The decades fol-lowing the establishment of the General Agreement on Tariffs and Trade (GATT)

in 1947 witnessed unprecedented growth in interna-tional trade and investment. Companies focused moreand more on the mass production of products and ser-vices to meet insatiable world demand.

Since the 1980s, emerging markets provided new impe-tus to worldwide economic interconnectedness. Thesefast-growth developing economiessome two dozencountries including Brazil, India, China, and Polandareexperiencing substantial market liberalization, privatiza-tion, and industrialization, which are fueling global eco-nomic transformation. These emerging markets, locatedon every continent, are gradually breaking away from the

stagnation typical of developing economies. Collectively,the emerging markets are home to the largest proportionof world population and participate increasingly in for-eign trade. In the opening vignette, Julie sampled prod-ucts from several emerging markets, including Argentina,Hungary, and Mexico.

A young workforce in China andother emerging markets is caus-ing faster integration of theseeconomies with the rest of theworld.

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Why Should You Study International Business? 19

Along with market globalization, another megatrend, advances in technology,has also served to transform the global economy. The rise of information andcommunication technologies, as well as production and process technologies, hasdramatically reduced the cost of conducting business with customers locatedabroad. The Internet and e-commerce make international business increasinglyimperative for firms of all sizes and resource levels. Technological advances bothfacilitate, and are facilitated by, globalization. They allow globalization toprogress more rapidly. Globalization, in turn, accelerates the development of thelatest technologies.

Contributor to National Economic Well-Being

International business contributes to economic prosperity and standards of living,provides interconnectedness to the world economy and access to a range of valu-able intermediate and finished products and services, and helps countries usetheir resources more efficiently. Consequently, governments have become morewilling to open their borders to foreign trade and investment.

International trade is a critical engine for job creation. It is estimated thatevery $1 billion increase in exports creates more than 20,000 new jobs. In the

United States, cross-border trade directly supports at least 12 million jobs. Oneof every seven dollars of U.S. sales is made abroad. One of every three U.S.farm acres and one of every six U.S. jobs is producing for export markets. Gen-erally, exporting firms create jobs faster than nonexporting firms. Wages and

benefits for export-re lated jobs are better, on average, than those for nonex-porting jobs.7

There is a strong relationship between a nations level of prosperity and itsparticipation in cross-border trade and investment. International business is botha cause and a result of increasing national prosperity. It is helping to spreadnational prosperity and abundance beyond advanced economies into developingeconomies. Nations once suffering from economic stagnation are now increas-ingly prosperous. For instance, China, India, and Eastern European nations areactive international traders. The proportion of affluent citizens in these countriesis rapidly growing. In terms of material gain, households in many developingeconomies have recently experienced huge increases in the ownership of televi-

sions, refrigerators, and other mass-produced products. While these gains areattributable to various causes, the benefits of free exchange of products, services,capital, and technology among nations are paramount.

International trade and investment can alsohelp reduce poor economic conditions in develop-ing economies. The rapid economic growth ofemerging countries is stimulating solid gains inliving standards. Growing prosperity is accompa-nied by gains in literacy rates, nutrition, andhealth care. Trade and investment help to promotefreedom and democracy and may reduce the like-lihood of cross-border conflict. The world hasrecently entered a new era of international tension,sometimes accompanied by terrorism. Interna-tional business can help to limit such tension, by

reducing world poverty and increasing interac-tions that help soothe relations among nations.8

The development of the European Union(EU) is helping to raise living standards ofmillions of EU citizens, particularly in EasternEurope. The EU is making international trade

International trade is causingfaster diffusion of consumerproducts and brands.

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and investment much easier for European businesses. It is transforming Europeinto a new powerhouse in global trade.

Cross-border business also helps integrate world economies. The NorthAmerican Free Trade Agreement (NAFTA), launched in 1994, integrates theeconomies of Canada, Mexico, and the United States in a giant market of roughly450 million consumers. Multicountry collaboration in the automobile industryand other sectors created good-paying jobs and helped make Mexico one of thetop U.S. trading partners. Following NAFTAs launch, the volume of trade amongthe three countries increased dramatically, helping to improve living standards formillions of people. In Mexico, NAFTA led to substantially higher wages, bettersocial systems, and higher employment rates.9 Recently, a new accord waslaunched between the United States and Costa Rica, El Salvador, Guatemala, Hon-duras, Nicaragua, and the Dominican Republic. Known as the Dominican Repub-lic Central American Free Trade Agreement (DR-CAFTA), it promises to invigo-rate the economies of the member countries.

A Competitive Advantage for the Firm

To sustain a competitive advantage in the global economy, firms must readily par-ticipate in cross-border business and acquire the necessary skills, knowledge, andcompetence. Procter & Gamble sells shampoo, disposable diapers, and other con-sumer products in more than 150 countries. MTV broadcasts its programming insome 140 countries. Nestl sells its food and beverage products worldwide,obtaining nearly all its revenue from foreign operations. As these examples imply,going international offers countless opportunities for firms to increase revenue.Young companies can achieve substantial growth by targeting new markets andopportunities to earn additional profits. Foreign markets are likely to generatefavorable outcomes for the firm in terms of sales, profit margins, growth, and newknowledge.

In addition, firms can maximize the efficiency of their operations throughinternational business. Companies secure cost-effective factor inputs by establish-ing manufacturing in emerging markets like Brazil, Mexico, and Poland, or sourc-ing from foreign suppliers. For example, Microsoft cuts the costs of its operations

by having much of its software written in India. Renault achieves efficiency byassembling cars at low-cost factories in Romania.

International business also allows firms to access critical resources that maybe unavailable at home. It helps firms reduce the costs of new product develop-ment, after-sales service, and other critical business activities. Companies accessforeign sources of information and knowledge that provide the basis for futureR&D, improved production and administrative processes, and other innova-tions. Internationalization broadens the options for dealing with competitors,offering opportunities to make globally strategic moves and countermoves thathelp the firm compete more effectively with domestic and foreign rivals.10

An Opportunity for Global Corporate Citizenship

As firms increasingly venture into international markets, they need to learn howto become global citizens. Beyond delivering value-added products, technology,and other benefits to their customers, they need to be responsive to the needs ofother stakeholder groups, including the media, local communities, academics,and the nonprofit sector. In foreign markets, firms must try in earnest to meet localexpectations with respect to labor and environmental standards, accepted codes ofconduct, and the overall welfare of the society that hosts them.

As businesses operating in a host society, internationalizing firms are alwaysunder public scrutiny. Their actions are closely monitored and held to local ethical

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Why Should You Study International Business? 21

standards. Firms with iconic global brands suchas Coca-Cola, McDonalds, and Citibank are espe-cially conspicuous. When consumers or othergroups wish to express their discontent, say, withUnited States foreign policy, these firms may

become favorite targets of public protests. Actionsof internationalizing firms can also raise national-istic sentiments. For example, when the news ofUnited Arab Emirates-controlled firm Dubai PortsWorld winning a contract to operate some UnitedStates ports hit the media in 2006, the U.S. Con-gress acted swiftly to block the deal in response tostrong disapproval from the public.

Rather than being caught red-handed or offguard, firms are proactively developing sociallyresponsible policies and practices. For example,Starbucks recently announced that it will sellonly coffee from growers certified by the RainForest Alliance, a global nonprofit organization that promotes the interests of cof-fee growers and the environment. Such multinational enterprises as Philips,Unilever, and Wal-Mart have announced practices that would help to enforce sus-tainable development. McDonalds has announced that it will only purchase beeffrom farmers who meet special standards on animal welfare and environmentalpractices. The firm also recently implemented a global ban on growth-promotingantibiotics in the poultry that it purchases. McDonalds is now publishing thenutritional content of its products in all the markets it operates. Its outlets inBritain, Germany, Sweden, and Austria sell only organic milk.11 Clearly, interna-tionally active firms must embed corporate citizenship into their strategic deci-sions, as well as their ongoing processes and practices.

A Competitive Advantage for You

Julie, the student in the opening vignette, is touched every day by a variety ofinternational business transactions. She is considering a career in international

business because she is starting to grasp its growing importance. She is begin-

ning a path full of intrigue and excitement. While most international careers arebased in ones home country, managers travel the world and meet people fromvarious cultures and backgrounds. Traveling to countries such as Argentina,China, India, Poland, or South Africa can lead to exciting learning experiencesand provide challenges.

Managers rising to the top of most of the worlds leading corporationsAIG,ABB, Citigroup, Coca-Cola, Kellogg, McDonalds, Oracle, Nissan, and SAPhoned their managerial skills in international business. Working across nationalcultures exposed these managers to a range of enlightening experiences, newknowledge, novel ways of seeing the world, and various unusual challenges.Managers with extensive international experience are generally more confident,cosmopolitan, and better suited to meet the variety of challenges they mayencounter throughout their careers. In short, acquiring knowledge and manager-ial skills in international business is not only exciting, challenging, and fun, but itis also a unique professional development opportunity.

In this text you will learn more about the merits of gaining international busi-ness proficiency, through the experiences of people like you, in a special featurecalled Recent Grad in IB. Read about Ashley Lumb, a recent graduate who is enjoy-ing her early experiences in international business.

Conspicuous global brands suchas Coca-Cola are constantlyunder scrutiny.

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RECENT GRAD IN IB>

In Ashley Lumbs senior year incollege, a six-week studyabroad program to Europe

sparked a strong desire for aninternational career. Followinggraduation, she worked as a JuniorAnalyst at KPMG in London, whereshe gained technical training andanalytical skills. She wanted towork in the luxury goods industryin Europe and eventually took a 6-month contract job at Vins Sans

Frontieres. VSF enrolled Ashley inits wine courses at company head-quarters in the south of France.VSF imports wine from around theworld and sells it exclusively to pri-vate yachts along the Cote DAzur(French Riviera). Ashley gainedexperience in various innovativemarketing methods. For instance,VSF attends yacht trade fai rs andhosts wine tastings. The primarymethod for reaching the yachts,however, is by foot. VSFs market-ing reps like Ashley scour theports from San Remo, Italy, to St.

Tropez, France, daily, speakingwith yacht chefs, stewards, or cap-tains about wine and distributingwine catalogs.

Ashley next worked as an accountrepresentative for The Ultimate LivingGroup in Monte Carlo, Monaco. Thecompany caters to the corporate jetset that travels to Cannes for meetingsand conferences. The key event of theyear is the Cannes Film Festival.

Next, Ashley worked as a mar-keting associate at Made in Museum(MIM) in Rome, Italy. MIM specializesin the design, production, and deliv-

ery of authorized museum reproduc-tions. It markets jewelry, sculptures,mosaics, and Etruscan pottery. Ash-ley organized the products intogroups, and restructured the inven-tory and web site.

ChallengesThe decision to work abroad car-

ries some risks. After all, youreleaving much of what you knowbehind. Whats more, I was step-ping outside a clearly definedcareer path. The language barrierwas always present. The work wasalmost always in English, though Idid pick up Italian and a bit ofFrench through classes and immers-ing myself in the culture.

Whats Ahead?Id like to continue my path in thefashion magazine industry and work ina merchandising, special events, or

promotions capacity. Im also studyingFrench and eventually I would like toattend the graduate school ESSEC,Paris, to pursue an MBA program thatspecializes in international luxurygoods management.

Ashleys majors: Finance, Marketing,

and International business

Objectives:Adventure, internationalperspective, career growth, self-understanding, and the opportunity tolearn foreign languages

Internships during college: MerrillLynch

Jobs held since graduating:

Junior Analyst at KPMG, London,England

Marketing Representative, Vins SansFrontieres; Nice, France

Account Representative, The UltimateLiving Group: Monte Carlo, Monaco

Marketing Associate, Made in Museum:Rome, Italy

Advertising/Marketing Coordinator,Italian Vogue: New York, United States

22

ASHLEY LUMBWhile in Italy, Ashley developed

a passion for the fashion industry, soshe decided to move to New York.Before leaving Italy, Ashley took acourse at the prestigious PolimodaInternational Institute of Design andMarketing in Florence entitled Busi-ness and Marketing in the FashionIndustry. In New York, Ashley workedat the headquarters of fashion housesHermes and J. Crew. After two months,she leveraged the services of a bilingual

recruiting agency, Euromonde Inc., toland a job at Italian Vogue magazine inTimes Square to work as the U.S.advertising/marketing coordinator.

Ashleys Advice for anInternational BusinessCareerWorking abroad helped me sortthrough my career goals, asEurope offered a view into otherindustries that the United Stateslacked. I had the opportunity tosample different environments,and although they might seem farapart, I clearly saw a shared pas-sion for exceptional products anddynamism. Back in the UnitedStates, my international experi-ence is an impressive asset toprospective employers because itis valued as proof of ones ability tohandle challenging assignmentsand work with people from diversecultures and backgrounds.

Success FactorsThe two most important factors inworking abroad were hard work andnetworking. I had to cast a wide net

and meet a lot of people, send a lotof rsums, ask a lot of questions,and research the market. To keepmyself afloat between assignments, Iworked in jobs that were not quite asglamorous.

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23

CLOSING CASE

Home appliance maker Whirlpool Corporation, head-quartered in Benton Harbor, Michigan, generated over$19 billion in annual sales in 2006, an increase of 26 per-cent from the previous year. Key factors influencing thisperformance include the acquisition of the Maytag Cor-poration in 2006 and an increased global demand for itsbrands and innovative products. During the next severalyears, the company expects growth in Asia and LatinAmerica to be significantly higher than in North Americaand Europe.

Whirlpool employs more than 80,000 employees inover 60 manufacturing and technology centers world-wide. The firm manufactures washers, dryers, refrigera-tors, dishwashers, freezers, ranges, compactors, and

microwave ovens in 13 countries and sells them in 170others under brand names such as Whirlpool, Maytag,Magic Chef, Jenn-Air, Amana, KitchenAid, Kenmore,Brastemp, and Bauknecht. Whirlpool generates almost60 percent of its sales from North America, 25 percentfrom Europe, 15 percent from Latin America, and just 2percent from Asia.

International ExpansionAs the U.S. appliance market matured in the 1990s,Whirlpool faced intense domestic competition and moredemanding buyers, resulting in lower profit margins.Meanwhile, international market trade barriers fell, con-sumer affluence grew, and capitalism flourished. Man-agement realized that it could best deal with these

threats and opportunities by undertaking a systematicprogram of internationalization. As a result, Whirlpoolengaged in a series of moves over the next decade.

Whirlpool acquired the appliance business of Philipsin Europe, 65 percent of Italian cooling compressor man-ufacturer Aspera, and purchased Polands secondlargest appliance maker. In Eastern Europe, Whirlpoolcreated subsidiaries to sell and service appliances in Bul-garia, Hungary, Romania, Russia, Slovakia, and theCzech Republic.

In China, Whirlpool formed a joint venture to pro-duce air conditioners and established a corporate head-quarters and product development/technology center inShanghai. The company also opened regional offices inHong Kong, New Delhi, and Singapore. In Mexico,

Whirlpool acquired Vitromatic, a former joint venturepartner in Mexico. It also developed low-cost versions of

popular models to target customers in low-income mar-kets in Latin America, China, and India.

Three factors have driven this global expansion.First, Whirlpool sought to reduce its costs of R&D, man-ufacturing, and service by locating plants and otheroperations in lower-cost locations such as China, Mex-ico, and Poland. Second, flat to declining sales growth inthe United States pressured management to target salesin new markets abroad. Third, Whirlpool realized thefirms manufacturing and assembly operations wouldbenefit from a more global approach. Managementredesigned products with more standardized parts andramped up marketing to make Whirlpool a globally rec-ognized brand. The company integrated the activities of

regional subsidiaries so that Whirlpools most advancedexpertise in appliance technology, production, and dis-tribution could be shared with the firms divisions world-wide.

InnovationWhirlpool conducted an internal critical assessment inthe late 1990s. It became apparent that a consumerwalking into any appliance store anywhere in the worldwould witness a sea of white appliances with little dif-ferentiation, even between manufacturers. The industrybecame known as the white goods business. Con-sumers perceived the products as commodities, whichoffered little differential advantage and commandedever lower prices due to increasing competition.

In 1999, Whirlpool management launched a majorcampaign to differentiate the firms offerings by empha-sizing innovative, value-added products. In early 2000,Whirlpool enlisted 75 employees from almost every jobclassification and assigned them in groups to BentonHarbor, Italy, and Brazil. Training lasted nearly a year andwas conducted by an outside consulting group.

The next step was to get the rest of the global work-force involved. Whirlpool established an intranet site andcreated a do-it-yourself course in innovation. Throughout2001 and 2002 Whirlpools knowledge managementintranet site recorded up to 300,000 hits per month. Thecompany established a rating system to identify highpotential, innovative ideas. Since 2003, revenue hasquadrupled annually. Whirlpool estimates that the new

appliances in development from this system, once mar-keted, could produce $3 billion in annual sales, up from

Whirlpools Dramatic Turnaround Through

Internationalization

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projections of $1.3 billion in 2003. Whirlpool developedmicrowave ovens that can grill steaks, bake pizzas, orcome in the form of a drawer that slides out for easyaccess to large dishes. The firm invented a washer with abuilt-in sensor that detects the size of the load and auto-matically picks the water level, spin speed, and type ofwash cycle, essentially making all decisions for the user.

Local Preferences

Cross-regional R&D teams also collaborate on innova-tions to adapt offerings to meet local demands indiverse international environments. For example, due tovery different climates, Italians often line-dried theirclothing, while the Danes need to spin-dry their clothes.Capacity requirements vary greatly for refrigerators. TheSpanish care about capacity for meats, the British wantwell-constructed units, and the French are more con-cerned about the capacity for keeping fruits and vegeta-bles fresh. Germans are particularly concerned aboutenvironmental features, while child safety features arevery important to the Italians. In India, Whirlpool devel-oped a washing machine that delivers a higher level ofcleanliness for consumers who believe whiteness ofclothing expresses purity. The washers gentle hand-scrub movement and unique hot wash technologymaximize the effectiveness of laundry detergent.

Whirlpool has benefited immensely from interna-tional business. The firm is a leading example of howinternationalization can revive declining sales and opti-mize cost structures. It has developed international dis-tribution that reduces expenses, leading to higher prof-its, and has positioned itself to challenge competitors ona global scale. The firm has thrived through sensitivityand commitment to consumers in diverse cultural andeconomic settings around the world.

Growing Competitive Threat from Abroad

Yet not all is bright and sparkling on Whirlpools horizon.Haier, Chinas largest appliance maker, established a pro-duction base and a distribution center in South Carolina inthe United States. The firm also bought a six-story land-mark structure in New York, dubbed the Haier Building, tohouse its U.S. headquarters. The worlds fifth-largestkitchen appliance maker, Haier has captured nearly 20percent and 50 percent of the markets for window airconditioners and small refrigerators, respectively. Now itis expanding into full-size refrigerators. Haiers moves areespecially troubling given that Whirlpool generates verylittle of its sales from Asia, the worlds most populous

region, where Haier already has a strong presence.Ironically, Haiers South Carolina factory is creatingnew jobs in a state that witnessed a mass exodus of tex-

tile jobs to factories in China. South Carolina receivesforeign direct investment from various countries and ishome to four Japanese and 18 European facilities. Thesetrends show that globalization both benefits and posesnew threats to Whirlpools international ambitions.

As it struggles to remain a world-class player in a keyindustry, Whirlpool faces new challenges. Managementwants to expand sales in emerging markets whiledefending the home market from global rivals fromChina and elsewhere. The firm seeks to continue to lever-age and enjoy all the benefits of international business.

AACSB: Reflective Thinking, Analytic

Skills

Case Questions

1. What is the nature of Whirlpools domestic andinternational business environments? What types ofrisk does the firm face?

2. How can Whirlpool benefit from going interna-tional? What types of advantages can the firmobtain? What advantages acquired abroad can helpmanagement improve Whirlpools performance inits home market?

3. What actions has Whirlpool management taken toensure that the firm succeeds in local marketsthroughout the world? To what extent is the appli-ance business local/regional rather than global?

4. How can Whirlpool effectively compete with newrivals originating from low-cost countries, such asHaier from China? Should Whirlpools response dif-fer in its home and foreign markets? If so, how?

5. The Careers section at Whirlpools website(www.whirlpool.com/) advertises opportunitiesyou never knew existed . . . everywhere across theglobe. Visit the site and report on the types of jobsavailable at Whirlpool and the locations of thesepositions worldwide. What positions interest youmost? Would you like to work in Whirlpools interna-tional operations? Why or why not?

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