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Chapter 01 - Globalization and International Linkages

Chapter 1: Globalization and International Linkages

Learning Objectives and Chapter Summary

1. ASSESS the implications of globalization for countries, industries, firms andcommunities.

Globalizationthe process of increased integration among countriescontinues atan accelerated pace. More and more companiesincluding those from developingcountriesare going global, creating opportunities and challenges for the globaleconomy and international management. Globalization has become controversial insome quarters due to perceptions that the distributions of benefits are uneven anddue to global distribution of economic activities as illustrated by offshoring. Therehave emerged sharp critics of globalization from academics, NGOs, and the

developing world, yet the pace of globalization and integration continues unabated.

2. REVIEW the major trends in global and regional integration.

Economic integration is most pronounced in the triad of North America, Europe,and the Pacific Rim. The North American Free Trade Agreement (NAFTA) isturning the region into one giant market. In South America, there is an increasingamount of intercountry trade, sparked by Mercosur and the Andean Pact nations.Additionally, trade agreements such as the Central American Free TradeAgreement (CAFTA) and others are linking countries of the Western Hemispheretogether. In Europe, the expansion of the original countries of the European Union

(EU) is creating a larger and more diverse union, with dramatic transformation ofCentral and Eastern European countries such as the Czech Republic, Poland, andHungary. Asia is another major regional power, as reflected in the rapid growthshown not only by Japan, but also the economies of China, India, and otheremerging markets. Countries in Africa and the Middle East continue to facecomplex problems but still hold economic promise in the future. Emerging marketsin all regions present both opportunities and challenges for international managers.

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3. EXAMINE the changing balance of global economic power and trade andinvestment flows among countries.

Different growth rates are shifting demographics are dramatically altering thedistribution of economic power around the world. Notably, Chinas rapid growthwill make it the largest economic power in the world by mid-century, if not before.India will be the most populous country in the world, and other emerging marketswill also become important players. International trade and investment have beenincreasing dramatically over the years. Major multinational corporations (MNCs)have holdings throughout the world, from North America to Europe to the PacificRim to Africa. Some of these holdings are a result of direct investment; others arepartnership arrangements with local firms. Small firms also are finding that theymust seek out international markets to survive in the future. MNCs from emergingmarkets are growing rapidly and expanding their global reach. Theinternationalization of nearly all business has arrived.

4. ANALYZE the major economic systems and recent developments among countriesthat reflect those systems.

Different economic systems characterize different countries and regions. Thesesystems, which include market, command, and mixed economies, are represented indifferent nations and have changed as economic conditions have evolved.

The World of International Management: An Interconnected World

1. Summary:

The opening vignette discusses and highlights how social networks arerevolutionizing the way people and companies interact and communicate with eachother. Social networks like Facebook offer companies an inexpensive, yet highlyeffective means of reaching their target audiences across the globe. In fact, socialnetworks are rewriting the rules for marketing. Consumers today can quickly andeasily get information about products and services from trusted friends via socialmedia and bypass more traditional methods of gathering information. Companiesmust identify ways to adapt to, and capitalize on, this new marketing reality.

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2. Suggested Class Discussion

1. Students should be encouraged to discuss the impact of social media oninternational business and its implications for both consumers and companies.

2. Students should consider the pace of globalization as it pertains to social mediaand the pros and cons of the process.

3. Students should explore the different ways companies can use social media tosupport their international strategies and what companies must do to remaincompetitive in this rapidly changing environment.

3. Related Internet Sites:

Facebook: {http://www.facebook.com/facebook}

Chapter Outline with Lecture Notes and Teaching Tips

Introduction

1) International managementis the process of applying management concepts and techniques ina multinational environment and adapting management practices to different economic,political, and cultural environments.

2) The world of international management is changing rapidly, and one primary reason isbecause increased foreign investment and trade are bringing managers from one country into

ongoing contact with those in others.3) A multinational corporation is a firm that has operations in more than one country,international sales, and a nationality mix of managers and owners.

Teaching Tip:The trend towards investing in international markets has not gone unnoticedat many premier universities around the world. An organization called the Network ofInternational Business Schools {http://www.nibsnet.net/Default.aspx} Keywordsinternational business schools (2010) provides a forum for schools with internationalbusiness programs to discuss their curriculums. Consider visiting this website, and providingyour students some examples of how colleges and universities are integrating the realities ofglobalization into their business school curriculums.

Teaching Tip: Each year,Fortune magazine publishes a list of the 500 largest globalcorporations {http://money.cnn.com/magazines/fortune/global500/2010/}. In 2010, the tenlargest global (or multinational) corporations were: (1) Wal-Mart stores; (2) Royal DutchShell; (3) Exxon Mobil; (4) BP; (5) Toyota Motors; (6) Japan Post Holdings; (7) Sinopec; (8)State Grid; (9) AXA; (10) China National Petroleum.

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Globalization and Internationalization

Globalization, AntiGlobalization, and Global Pressures

1) Globalization is the process of social, political, economic, cultural, and technologicalintegration among countries around the world.

2) Outsourcingis the subcontracting or contracting out of activities to endogenousorganizations that had previously been performed by the firm.

3) Advantages of globalization include: lower prices, greater availability of goods, better jobs,and access to technology.

4) Offshoringis the process by which companies undertake some activities at offshore locationinstead of in their country or origin.

5) Disadvantages of globalization include: the off-shoring of jobs to low-wage countries,growing trade deficits, slow wage growth, a lack of responsiveness to the economic effects ofthe process, and the potential for a race to the bottom in which companies and countries

place downward pressure on wages and working conditions.

Global and Regional Integration

1) World Trade Organization (WTO) the global organization of countries that oversees rulesand regulations for international trade and investment. Various rounds of negotiations tookplace under the General Agreement on Tariffs and Trade (GATT):a) The December 1999 Battle in Seattle: protesters and developing countries who felt

their views were not considered disrupted the meeting.b) The November 2001 Development Round in Doha, Qatar: recognized the needs of and

impact on developing countries, but initiated little progress.

c) The September 2003 meeting in Cancun: 20+ developing countries, led by Brazil andIndia, attempted to press developed countries to reduce barriers to agricultural imports.

Teaching Tip: The WTO website {http://www.wto.org} provides a wide range of currentinformation about the WTO.

Teaching Tip: The GATT Agreement is available online in Adobe Acrobat format at{http://docsonline.wto.org}.

2) North American Free Trade Agreement (NAFTA) - A free trade agreement between theUnited States, Canada, and Mexico that has removed most barriers to trade and investment.

Teaching Tip: FAS Online supplies a large amount of information dealing with the NAFTA.The site is available at {http://ffas.usda.gov/info/factsheets/NAFTA.asp} (2010).

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3) TheFree Trade Agreement of the Americas (FTAA) a proposed free-trade agreementamong the 34 democratically governed countries of the Western Hemisphere.

4) TheEuropean Union (EU) - a unified market that in 2003 consisted of 15 nations including

Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece, Holland,Ireland, Italy, Luxembourg, Portugal, Spain, and Sweden. Ten countries: Cyprus, the CzechRepublic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joinedin 2004, and Romania and Bulgaria joined in 2007. The EU is better integrated as a singlemarket than either NAFTA or the allied Asian countries.

Teaching Tip: The EU maintains an excellent website at {http://www.europa.eu/}.

5) Japan - although Japan has experienced economic problems for about ten years, it continuesto be one of the primary economic force in the Pacific Rim. Japan recently has investedrelatively more in its own backyard than in any other part of the world.

Teaching Tip: As a way of demonstrating to your students how "global" the world hasbecome, consider showing them Yahoo Japan, which is the Yahoo search engine written inJapanese {http://www.yahoo.co.jp/} or Facebooks Japanese site {http://ja-jp.facebook.com/}.

6) Central and Eastern Europe, Russia, and the other republics of the former Soviet Union -these countries are still transitioning to market economies.

7) Latin America - economic activity in Latin America continues to be volatile. Despite thecontinuing political and economic setbacks these countries periodically experience, exportgrowth continue in Brazil, Chile, and Mexico. The CAFTA agreement between the U.S. andCentral American countries presents new opportunities for trade, investment, services, andworking conditions in the region.

Teaching Tip: Many Latin American countries are using the Internet to promote themselves.The website for Chile, which is available at {http://www.chileinfo.com}, is an excellentexample.

The Shifting Balance of Economic Power in the Global Economy

1) Economic integration and the rigid growth of emerging markets are creating a shiftinginternational economic landscape.a) Foreign direct investment (FDI) is the term used to indicate the amount invested in

property, plant, and equipment in another country.

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Teaching Tip: New York Times supplies a web page with current world businessarticles. This site can be found at{http://www.nytimes.com/pages/business/worldbusiness/index.html}

b) Global trade and investment continues to grow at a healthy rate, outpacing domesticgrowth in most countries.c) The United States is projected to remain the worlds largest economy as measure by GDP

and market exchange rates.

2) International trade and investment patterns the global recession had a significant effect onglobal trade and investment flows (see Tables 1-8, 1-9, and 1-10 in the text).a) In 2009, merchandise exports dropped 23% to $12.15 trillion, and commercial services

exports fell 13% to $3.31 trillion.b) EU Countries EU trade among members also declined in 2009. Exports and imports

between EU members were down over 20%.

c) Foreign investment and trade do not rely exclusively on MNCs exporting or setting upoperations locally. In some cases, it is far easier to buy a domestic firm.

Teaching Tip: International trade is not without controversy. Many labor groups, incountries all over the world, fear that imports cost domestic workers their jobs andthreaten their national sovereignty. Proponents of international trade argue that importsprovide consumers more choices and cost savings, and actually create domesticemployment because consumers can take the money that they save by buying imports andpurchase more domestically produced products. It is appropriate to point out these twosides of the issue to your students. Many websites are dedicated to the debatesurrounding these issues. An example is the site at {http://www.uswa.org}. The site issponsored by the United Steelworkers of America, and support's labor's point of view.

Global Economic Systems

1) The evolution of global economies has resulted in three main systems: a marketeconomy, a command economy, and a mixed economy.

Market Economy

1) Market economy exists when private enterprise reserves the right to own property andmonitor the production and distribution of goods and services while the state simply

supports competition and efficient practices.

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Command Economy

1) Command economy comparable to a monopoly in the sense that the organization, in thiscase the government, has explicit control over the price and supply of a good or service.

Mixed Economy

1) Mixed economy a combination of a market and command economy. While someaspects of this system include private ownership and the freedom and flexibility of thelaw of demand, other sectors are subject to government planning.

Economic Performance and Issues of Major Regions

Established Economies

1) North America: constitutes one of the three largest trading blocs in the world. Thecombined purchasing power of the United States, Canada, and Mexico is more than $12trillion.

2) The United States - U.S. MNCs have holdings throughout the world. At the same time,foreign MNCs are finding the United States to be a lucrative market for expansion.

Teaching Tip: Until a person has traveled internationally, it is hard to imagine what familiarAmerican products look after they have been modified for overseas markets. Against thisbackdrop, an entertaining website to show your students is entitled "The Coca Cola Bottles ofthe World" {http://www.coca-cola.com}. The site shows what Coke bottles look like in at

least a dozen foreign countries, and also explains how the bottles have been modified to fitlocal bottling and labeling requirements. Some of the countries featured include:Netherlands, Taiwan, Australia, Germany, Venezuela, and Hong Kong. Several Pepsi bottlesfrom around the world are also included.

3) Canada - Canada is the United States' largest trading partner, a position it has held for manyyears. The United States also has considerable FDI in Canada, more than in any othercountry except the United Kingdom.

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4) Mexico - By the early 1990s, Mexico had recovered from its economic problems of theprevious decade and become the strongest economy in Latin America. In 1994, Mexicobecame part of NAFTA, and it appeared to be on the verge of becoming the major economicpower in Latin America. Because of NAFTA, Mexican businesses are finding themselves

able to take advantage of the U.S. market by replacing goods that were previously purchasedfrom Asia.a) Maquiladora a factory, the majority of which are located in Mexican border towns, that

imports materials and equipment on a duty- and tariff-free basis for assembly ormanufacturing and re-export.

Teaching Tip: An excellent chart of the advantages of doing business in Mexico isavailable at {http://www.calpacifico.com/mexicoadvantajes.htm}. The site is maintainedby Cal Pacifico, a company that specializes in helping American firms establishmanufacturing operations in Mexico. The chart reports that the average productionworker compensation in Mexico in 2004, including benefits, was $2.50 per hour. This

compares with $23.17 in the U.S., $21.90 in Japan, and $32.53 in Germany. Somestudents may raise ethical issues when looking at these numbers. Is it ethical for anAmerican firm to pay Mexican workers only $2.50 per hour, even though that is thegoing rate in Mexico?

5) The EU: the ultimate objective of the EU is to eliminate all trade barriers among membercountries.

a) This economic community eventually will have common custom duties as well asunified industrial and commercial policies regarding countries outside of the union.

b) The challenge for the future for the EU is to absorb their Eastern neighbors, theformer communist block countries.

c) In 2009 and 2010, the stability of the EU was threatened when several membersincluding Greece, Portugal, Spain, and Ireland teetered on the brink of financialcollapse forcing a rescue package led by Germany and France.

6) Japan: during the 1970s and 1980s, Japan's economic success had been without precedent.In contrast, throughout the 1990s, the Japanese economy has endured a serious recession.a) Ministry of Trade and Industry (MITI) - a Japanese government agency that identifies and

ranks national commercial pursuits and guides the distribution of national resources tomeet these goals.

Teaching Tip: to learn more about MITI go to {http://www.meti.go.jp/english/}.

b) Keiretsus - an organizational arrangement in Japan in which a large group of verticallyintegrated companies bound together by cross-ownership, interlocking directorships, andsocial ties provide goods and services to end users.

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Emerging Economies

1) Central and Eastern Europe: Russias economy continues to grow as poverty declines andthe middle class expands. Direct investment in Russia, along with its membership in the

International Monetary Fund (IMF), is helping to raise GDP and decrease inflation, offsettingthe hyperinflation created from the initial attempt to transition to a market-based economy.

Teaching Tip: Current information about Russia can be obtained on a daily basis viaRussia Today, a service of the European Internet Network. The site is available at{http://www.russia.com}.

2) Other countries including Hungary, Poland, and the Czech Republic are also growing andattracting foreign investment. Albania is also beginning to make progress as a marketeconomy.

3) China: Chinas GDP has remained strong, maintaining 12 percent growth in 2007, and 11.5percent in 2009 despite the global recession. In the first quarter of 2010, GDP grew at ablistering 11.7 percent, raising concerns that the Chinese government had provided to muchliquidity during the recession.a) Trade relations between China and developed countries and regions, such as the United

States, and the EU, remain tense, and in 2010, China faced intense pressure from theglobal community to revalue its currency.

4) Other Emerging Markets of Asia: In addition to Japan and China, there are four otherwidely recognized economic powerhouses in Asia (see also Tables 1-12 and 1-13 in the text).a) South Korea In South Korea, the major conglomerate, called chaebols, are very large,

family-held Korean conglomerates that have considerable political and economic power.b) Hong Kong - Bordering southeast China and now part of the PRC (People's Republic of

China), Hong Kong has been the headquarters for some of the most successfulmultinational operations is Asia.

c) Singapore - Singapore is a major success story. Its solid foundation leaves only thequestion of how to continue expanding in the face of increasing internationalcompetition.

d) Taiwan Despite being hit hard by the economic downturn, Taiwan continues to growsteadily, and is now dominated by high tech industries.

e) Other countries in Southeast Asia including Thailand, Malaysia, Indonesia, and Vietnamare also showing string economic growth trends. The relatively large populations andinexpensive labor forces in these countries are attractive to international investors.

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5) India: With a population of about 1 billion and growing. India has traditionally had morethan its share of political and economic problems. Nonetheless, for a number of reasons,India is attractive to multinationals, and especially to U.S. and British firms.

Developing Economies on the Verge

1) South America: Countries in South America have experienced difficult economic problemsover the years. Although most have tried to implement economic reforms reducing theirdebt, periodic economic instability and the emergence of populist leaders have had an impacton the attractiveness of countries in the region.

a. Brazils economy has evolved into a flourishing system. Through 2009, GDPcontinued to rise, inflation decreased, and employment increased.

b. Chiles market-based economic growth has fluctuated between 3 and 6 percent overthe last decade, creating uncertainty in its future. Despite this, Chile attracts a lot offoreign investment.

c. Argentina has one of the strongest economies overall with abundant natural resources,a highly literate population, an export-oriented agricultural sector, and a diversifiedindustrial base; however it has suffered the recurring economic problems of inflation,external debt, capital flight, and budget deficits.

d. Another major development in South America is the growth of intercountry trade,spurred by the progress toward free market policies.

2) Middle East and Central Asia: Because most industrial nations rely, at least to somedegree, on imported oil, an understanding of this part of the world is important to the study ofinternational management.

3) Africa: Even though they have considerable natural resources, on the whole African nationsremain very poor and underdeveloped, and international trade is not a major source ofincome. Economic growth in the region is expected to strengthen in 2010 and 2011 (seeTable 1-11 in the text).

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The World of International Management - Revisited

Questions & Suggested Answers

1. What are some of the pros and cons of globalization and free trade?

Answer: Pros: lower prices, greater availability of goods, increased product andservice choices, better jobs, access to technology, improved competitiveness, andoverall economic growth. Cons: off-shoring of jobs to low-wage countries, growingtrade deficits, slow wage growth, lack of responsiveness to the economic, socialand environmental needs of developing countries.

2. How might the rise of social media result in closer connections (and fewerconflicts) among nations?

Answer: Social media are removing many traditional barriers between nationsbringing people and countries closer together. Through social media people fromaround the world are exposed to different cultures and political views, and haveaccess to information in a way never before imagined. This phenomenon can helpbreak down barriers between people and could even minimize the potential forconflicts between nations. Companies can use social media to circumvent nationallimitations on advertising that would have traditionally limited their ability tomarket products in certain nations, and exposure to new products and ideas viasocial media sites can support grass roots efforts for change in countries.

3. Which regions of the world are most likely to benefit from globalization and

integration in the years to come, and which may experience dislocations?

Answer: Answers may vary, but regions that are likely to gain include Asia,Central and Eastern Europe, and South America, at the expense of most developedcountries.

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Key Terms

ChaebolsEuropean Union

Foreign Direct InvestmentFree Trade Agreement of the AmericasGlobalizationInternational managementKeiretsuManagementMaquiladoraMinistry of International Trade and Industry (MITI)MNCNorth America Free Trade Agreement (NAFTA)Offshoring

OutsourcingWorld Trade Organization (WTO)

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Review and Discussion Questions

1. How has globalization affected different world regions? What are some of thebenefits and costs of globalization for different sectors of society (companies,

workers, communities)?

Answer: North America continues to constitute one of the largest trading blocs in theworld, with the United States leading international trade and investment, Canadabeing its largest trading partner. Mexico is one of the strongest Latin Americaneconomies, but still suffers from economic problems, as do many South Americancountries, some of which seem to be doing better than others (e.g., Chile, Argentinaand Brazil). European countries have been most successful in integrating theireconomies, with the top challenge being integrating their former communistneighbors in Central and Eastern Europe. Asian countries such as Japan, China, theFour Tigers, and South Asian Countries, once the worlds success examples at

various points in time, are now facing economic slowdown, with some showingbetter progress toward recovery than others. LDCs continue to face problems.

MNCs face the challenge of balancing the potential returns of investing in variouslucrative markets that are currently emerging, with the risks of political and economicinstability in these markets. Strategic decisions are currently being made beyondnational borders, taking into consideration the parameters of integrated economicblocs. Workers are primarily impacted by their own increased mobility(geographically and occupationally), as well as that of their organizations. Increasedrate of change and uncertainty necessitates a different skill set and continuouslearning. Increased global competition for jobs, especially from countries with lowerlabor costs, necessitates adaptation. Finally, the community primarily benefits interms of long term efficiencies and increased choices. However, communities willvary in the short-term factors they may face, which could include unemployment andsevere competition for their local industries.

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2. How has NAFTA affected the economies of North America and the EU affectedEurope? What importance do these economic pacts have for international managersin North America, Europe, and Asia?

Answer: NAFTA so far seem to be both bad news and good news. There is evidencethat it has caused a number of jobs and capital to shift from the more economicallyadvanced nations (particularly the U.S.) to Mexico. On the other hand, once Mexicogets back on its feet after its economic woes of recent years, there is evidence that, inthe long run, the agreement will benefit all North American nations because it willcreate increased efficiencies, more purchasing power, and overall a moreeconomically powerful North America. The EU has made significant progress overthe past decade in becoming a unified market. In 2003, the EU consisted of 15nations and has since, gained 12 additional nations. Not only have most trade barriersbetween members been removed, but a subset of European countries has adopted aunified currency called the euro. These economic pacts will force internationalmanagers to stay current on all trade regulations, economic activity, and status.Different economic systems characterize different countries and regions.

3. Why are Russian and Eastern Europe of interest to international managers? Identifyand describe some reasons for such interest.

Answer: Russia and Eastern Europe are of interest to international managers becausethey present an opportunity to get in on the "ground floor" so to speak. Even thoughthese countries have struggled with the transition to a market economy for severalyears, MNCs that are willing to take the substantial risks involved with operating inthese countries may find substantial rewards in years to come. However, investmentin Russia and Eastern Europe may not produce immediate returns. It may be years,perhaps even decades, before some investments become profitable.

4. Many MNCs have secured a foothold in Asia, and many more are looking to developbusiness relations there. Why does this region of the world hold such interest forinternational management? Identify and describe some reasons for such interest.

Answer: Asia has been of interest to MNCs because of the tremendous growth in thisregion in the last decade. Although the growth has begun to taper off in recent years,Japan, the Four Tigers (Hong Kong, Taiwan, Singapore, and South Korea), emergingSoutheastern Asian countries such as Malaysia, Indonesia, Thailand, and Vietnam,and especially China, continue to present numerous investment opportunities. A

large population base, relatively inexpensive labor, and natural resources have beenthe important reasons for investments in this region.

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5.

6.

Why would MNCs be interested in South America, India, the Middle East and CentralAsia, Africa, and the less developed and emerging countries of the world? WouldMNCs be better off focusing their efforts on more industrialized regions? Explain.

Answer: Each of these regions has its own characteristics, which may be attractive tocertain multinational corporations. South America has a trading bloc (MERCOSUR),India has a huge population base and considerable untapped potential, the Middle Easthas enough oil wealth to put it in the "borderline less developed country" category, andAfrica has a tremendous supply of natural resources. Of course all of these regions arebeset by some significant problems. Multinationals considering investment in the lessdeveloped and emerging countries must carefully weigh the risks and benefits ofoperating in these regions.

MNCs from emerging markets (India, China, Brazil) are beginning to challenge thedominance of developed MNCs. How might MNCs from North America, Europe, and

Japan respond to these challenges?

Answer: Many obstacles are faced by multinationals when attempting to enteremerging markets such as India, China, or Brazil. MNCs must continue to bepersistent when dealing with these governments. One response is to help thesecountries realize that foreign investments have a positive effect on the economy.Another alternative would be to threaten to invest the money into another economy.

Answers To The In-Chapter Quiz

1. c. Proctor & Gamble, a U.S.-based MNC that bought Gillette some years back

owns the Braun company.

2. d. BIC SA is a French company.

3. d. Tata Motors, a division of the India conglomerate the Tata Group, purchasedJaguar, Land Rover, and related brands from Ford in 2008.

4. a. Thomas SA of France produces RCA televisions.

5. a. Britains Grand Metropolitan PLC also sold the Green Giant product line to thePillsbury Company of the United States.

6. a. Godiva chocolate is owned by Cambell Soup, an American Firm.

7. b. Vaseline is manufactured by the Angl-Dutch MNC Unilever PLC.

8. d. Wrangler jeans are made by the VF Corporation based in the United States.

9. d. Holiday Inn is owned by Britains Bass PLC, recently renamed Six Continents.

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10. c. Tropicana orange juice was purchased by U.S.-based PepsiCo.

Internet Exercise: Franchise Opportunities At McDonalds

Website:www.mcdonalds.com

Suggestions for Using the Exercise

1. This exercise provides an excellent vehicle for explaining some of thechallenges involved in doing business overseas.

The reason that McDonalds relies so heavily on franchising, rather thanestablishing company owned stores overseas, hinges on the issue of control.

It would be very difficult to supervise and control the "managers" ofcompany owned stores in disperse geographic locations around the globe. Afranchisee, however, does not need as much control because he or she hasput his or her personal time and effort into the franchise. As a result, thefranchisee has a powerful incentive to work hard, and maintain the"McDonalds" quality of standards.

2. This exercise also provides an excellent opportunity to talk about the powerof global brand names. The McDonalds name (and golden arches) isrecognized around the world. Ask you students how long they think itwould take a new company to achieve the same name recognition and level

of familiarity worldwide that is enjoyed by McDonalds.

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Questions and Answers Following this Exercise

1. Will the fact that the euro has become the standard currency in the EU help orhinder a new McDonalds franchise in Europe?

Answer: The standardization of currency in the EU should help a new McDonaldsfranchise in Europe. Consumers throughout the EU would be able to go to aMcDonalds franchise without having to worry about converting currencies.

2. If there are exciting worldwide opportunities, why does McDonalds not exploitthese itself instead of looking for franchises?

Answer: Through this partnership the franchise will derive the financial rewards ofowning individual franchise outlets.

3. What is the logic in McDonalds expansion strategy?

Answer: McDonalds is seeking to expand their worldwide operations to increase itsmarket share and return on invested capital. Franchising allows the company toexpand its presence at minimal cost. Management wants to closely control theircorporate owned franchises as well as the individual franchise outlets around theglobe.

In The International Spotlight: India

Questions and Suggested Answers

1. What is the climate for doing business in India? Is it supportive of foreigninvestment?

Answer: The purpose of the first question in each of the "Spotlight" cases is for theinstructor to bring in current happenings in the country featured. The suggestedanswer below may be somewhat dated by the time you go over this in class but canbe used as part of your discussion and as a point of departure for new material.

India is one of the world's largest industrialized nations, as well as beingagriculturally self-sufficient. In recent years, however, India has been facingpolitical instability and domestic crisis.

Specifically, the population is growing at a rate of about two percent per year andrecent government attempts to control this population explosion have beenunpopular. As a result, the government's role has been more of public service,emphasizing birth control options.

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Within India, regional parties are challenging the government to delegate moreauthority to the states. Particularly troublesome is the unending terrorism, such asthe assassination of Indira Gandhi. Further, military challenges continue to faceIndia, such as the on-going boundary disputes with China, Pakistan, andBangladesh. Horrible earthquakes and floods also seem to periodically plague

India.

Although the standards of material well being of many Indian people haveincreased, employer-employee relations have generally worsened. Theunemployment rate is still quite high, and despite the directive "work hard or we'llfind someone who will," the Gross National Product growth rate continues tostagnate. However, India's traditional practices of protectionism and regulation thathave led to high prices and inferior goods are slowly being replaced by more liberaleconomic policies that allow for increased competition and the development ofcollaborative relationships with foreign firms. The Indian government nowrecognizes the importance of foreign investment in developing the economy, as

indicated by the huge increase in foreign direct investment in recent years,primarily due to the relaxation of restrictive rules. India's enormous marketpotential makes it an attractive target for foreign investment.

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2. How important is a highly educated human resource pool for MNCs wanting toinvest in India? Is it more important for some businesses than for others?

Answer: Highly educated human resources would be extremely important becauseit means that the MNC can draw on local talent to help staff and manage itsoperations, even high tech operations. If the work force were poorly educated, it islikely that total reliance might be placed on expatriate managers. Education is moreimportant in businesses where the work literally requires a formal education. Forexample, if a company needs engineers, technicians, or computer analysts, a highlyeducated work force is more important than if the company were interested insalesclerks or assembly line workers. India has such a highly educated pool.

3. Given the low per-capita income of the country, why would you still argue for Indiato be an excellent place to do business in the coming years?

Answer: India is likely to be an excellent place to do business in the coming yearsbecause its GNP is likely to increase more dramatically than that in other countries.Why? Because with its low wages, virtually untapped consumer market, andtremendously large population base, more and more MNCs will be attracted to thisarea of the world. This will result in more economic activity and, eventually, a risein per capita income.Notice how low wages are compared to similar jobs in the U.S., Japan, and WesternEurope. The big question mark surrounding India is its political stability, and itsongoing boarder disputes with Pakistan.

You Be the International Consultant: Here Comes the Competition

Questions and Suggested Answers

1. Is Europe likely to be a good area for direct investment during the years ahead?

Answer: Battered by competition from the U.S. and Japan, Europe is makingsweeping reorganizations, cross-border alliances, R&D investments, and isderegulating transportation, telecommunication and financial markets, all in aneffort to create a more competitive unified Europe. Europe is ripe for investment.The movement in this direction is evidenced by the dramatic rise in transnationaljoint ventures and minority stake acquisitions within the EU in the last few years.The big question mark for Europe is the unrest in the Balkan states and how thatunrest will affect the rest of the Continent, and the financial crises threatening thestability of Greece, Ireland, Portugal, and Spain.

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2. Why is so much foreign money being invested in U.S. manufacturing? Based onyour conclusions, what advice would be in order for the conglomerate?

Answer: Foreign investors have found virtually every U.S. industry enticing, buttheir primary investments are in America's newly restructured and newlycompetitive manufacturing sector. Helped by enormous investments in newtechnology, the devalued dollar, closing less efficient operations and focusing onnewer more efficient plants, computerization and improved quality and marketing,there has been a remarkable turnaround in American manufacturing in recent years.Foreign investment in manufacturing is expected to continue to increase in the nearfuture.

Foreign investors are attracted to low-tech merchandise such as tires, natural gas,and cement-products that cost too much to ship to the U.S. from overseas.Investments are also being made in chemicals and pharmaceuticals because it ischeaper to spread development costs over a huge customer base. In addition,foreign know-how can be applied in manufacturing. When the Japanese took overFirestone's failing plants in 1983, workers were only producing 600 tires a day.Through shift additions and retraining, they now profitably produce 3,100 tires aday.

Advice for the Conglomerate

European integration is inevitable - this initiative has some remaining major

hurdles, but for practical business purposes it will take place.Ignoring it will only put the firm further behind.

Start to assemble an international team with wide ranging experience in theworld arena.

Develop an information system that keeps one informed about political change

around the world and the implications for the firm.

Top management must be involved in getting ready. Do not assign these tasks

to subordinates.

Prepare for tougher competition from Europeans as they get better.

Opportunities may lie more in cost savings than in boosts to sales.

Bend over backwards to make the alliances work.

Do not wait too long to jump in - merger and acquisition prices are only going

to rise and the most desirable business partners will already be taken.

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3. If the conglomerate currently does not do business in Europe, what types ofproblems is it likely to face?

Answer: The conglomerate may find that the markets it is presently exporting to inEurope will be eroded as the Europeans get more competitive. This maynecessitate changes in plans and new strategies implemented.

With the development of the EU, European protectionism may result. Themultinational corporation not doing business in Europe may find it shut out due toquotas or barriers that it cannot deal with from the outside.

Firms doing business within the EU will have an accessible base of over 300million middle class consumers. If the conglomerate wants to take full advantageof this massive market, it needs to be located within one of the EU countries. Ifnot, it will find itself at a distinct disadvantage.

The management research firm could identify where exporting might becomedifficult. The firm can suggest strategies to combat erosion of the existing marketshare and assist in finding European firms available for acquisition or merger. Theconsulting firm can negotiate joint ventures or purchases if the conglomeratedecides to go in this direction. If it does decide to invest in Europe, the consultantshave international experts on staff with expertise in politics, finance, marketing,strategy and human resources management. These experts can assist the transitionfor the conglomerate.

Documents

Chap 00127