13 Dec International Connections Assignment In this first chapter youre learning how incredibly connected the world is today and what that means for everyone. Cultures, economies, business

1-1What Is Global Business?

1-1aDefining International Business and Global Business

1-1 Learning Objective

Explain the concepts of international business and global business, with a focus on emerging economies.

Traditionally,  international business (IB)  is defined as a business (firm) that engages in international (cross-border) economic activities. It can also refer to the action of doing business abroad. The previous generation of IB textbooks almost always takes the foreign entrant’s perspective. Consequently, such books deal with issues such as how to enter foreign markets and how to select alliance partners. The most frequently discussed foreign entrant is the  multinational enterprise (MNE) , defined as a firm that engages in  foreign direct investment (FDI)  by directly investing in, controlling, and managing value-added activities in other countries.  Of course, MNEs and their cross-border activities are important. But they only cover one aspect of IB—the foreign side. Students educated by these books often come away with the impression that the other aspect of IB—namely, domestic firms—does not exist. Obviously, this is not true. Domestic firms do not just sit around in the face of foreign entrants. They often actively compete and/or collaborate with foreign entrants in their markets. Sometimes, strong domestic firms have also gone overseas themselves. Overall, focusing on the foreign entrant side captures only one side of the coin at best.

There are  two key words in IB: international (I) and business (B).  However, many previous textbooks focus on the international aspect (the foreign entrant) to such an extent that the business part (which also includes domestic business) almost disappears. This is unfortunate, because IB is fundamentally about B (business) in addition to being I. To put it differently, the IB course in the undergraduate and MBA curricula at numerous business schools is probably the  only one with the word “business” in its title. All other courses are labeled management, marketing, finance, and so on, representing one functional area but not the overall picture of business. Does it matter? Of course! It means that your IB course is an  integrative course that can provide you with an overall business perspective (rather than a functional view) grounded in a global environment. Therefore, it makes sense that your textbook should give you both the I and B parts, not just the I part.

To cover both the I and the B parts,  global business  is defined in this book as business around the globe—thus, the title of this book is  Global Business (not IB). In other words, global business includes both

· (1)

international (cross-border) business activities covered by traditional IB books  and

· (2)

domestic business activities.

Such deliberate blurring of the traditional boundaries separating international and domestic business is increasingly important today, because many previously domestic markets are now globalized.

Consider the competition in college textbooks, such as this  Global Business book you are studying now. Not long ago, competition among college business textbook publishers was primarily on a nation-by-nation basis. The Big Three—Cengage Learning (our publisher, which is the biggest in the college business textbook market), Prentice Hall, and McGraw-Hill—primarily competed in the United States. A different set of publishers competed in other countries. As a result, most textbooks studied by British students would be authored by British professors and published by British publishers, most textbooks studied by Brazilian students would be authored by Brazilian professors and published by Brazilian publishers, and so on. Now Cengage Learning (under British and Canadian ownership), Pearson Prentice Hall (under British ownership), and McGraw-Hill (under US ownership) have significantly globalized their competition, thanks to the rising demand for high-quality business textbooks in English. Around the globe, they are competing against each other in many markets, publishing in multiple languages and versions. For instance,  Global Business and its sister books,  Global Strategy,  Global (paperback), and  International Business (an adaptation for the European market), are published by different subsidiaries in Chinese, Spanish, and Portuguese in addition to English, reaching customers in more than 30 countries. Despite such worldwide spread of competition, in each market—down to each school—textbook publishers have to compete locally. Since no professor teaches globally and all students study locally, this means  Global Business has to win adoption every class, every semester. Overall, it becomes difficult to tell in this competition what is international and what is domestic. Thus, “global” seems to be a better word to capture the essence of this competition.

1-1bGlobal Business and Emerging Economies

Global Business also differs from other books on IB because most of them focus on competition in developed economies. Here, by contrast, we devote extensive space to competitive battles waged throughout  emerging economies , a term that has gradually replaced the term “developing countries” since the 1990s. Another commonly used term is  emerging markets  (see PengAtlas Map 1). How important are emerging economies? Collectively, they command 48% of world trade, attract 60% of FDI inflows, and generate 40% FDI outflows. Overall, emerging economies contribute approximately 50% of the global gross domestic product (GDP).  In 1990, they accounted for less than one-third of a much smaller world GDP. Note that this percentage is adjusted for  purchasing power parity (PPP) , which is an adjustment to reflect the differences in cost of living (see  In Focus 1.1). Using official (nominal) exchange rates without adjusting for PPP, emerging economies contribute about 30% of the global GDP. Why is there such a huge difference between the two measures? Because the cost of living (such as housing and haircuts) in emerging economies tends to be lower than that in developed economies. For instance, US$1 spent in Mexico can buy a lot more than US$1 spent in the United States.

In Focus 1.1

Setting the Terms Straight

GDP, GNP, GNI, PPP—there is a bewildering variety of acronyms that are used to measure economic development. It is useful to set these terms straight before proceeding.  Gross domestic product (GDP)  is measured as the sum of value added by resident firms, households, and governments operating in an economy. For example, the value added by foreign-owned firms operating in Mexico would be counted as part of Mexico’s GDP. However, the earnings of non-resident sources that are sent back to Mexico (such as earnings of Mexicans who do not live and work in Mexico, and dividends received by Mexicans who own non-Mexican stocks) are not included in Mexico’s GDP. One measure that captures this is  gross national product (GNP) . Recently, the World Bank and other international organizations have used a new term,  gross national income (GNI) , to supersede GNP. Conceptually, there is no difference between GNI and GNP. What exactly is GNI/GNP? It comprises GDP plus income from non-resident sources abroad.

While GDP, GNP, and now GNI are often used as yardsticks of economic development, differences in cost of living make such a direct comparison less meaningful. A dollar of spending in Thailand can buy a lot more than in Japan. Therefore, conversion based on purchasing power parity (PPP) is often necessary. The PPP between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country’s currency will purchase the same volume of goods and services in the second country (see  Chapter 7 for details). According to the International Monetary Fund (IMF), the Swiss per capita GDP is US$81,276 based on official (nominal) exchange rates—a lot higher than the official US per capita GDP of US$53,001. However, everything is more expensive in Switzerland. A Big Mac costs US$6.83 in Switzerland versus US$4.80 in the United States. Thus, Switzerland’s per capita GDP based on PPP shrinks to US$53,977—only slightly higher than the US per capita GDP based on PPP of US$53,001 (the IMF uses the United States as a benchmark in PPP calculation, which does not change from the nominal number).

One of the most recent and probably most important debates concerns the size of the Chinese GDP. Calculations based on the nominal exchange rates would find China’s GDP to be 47% of the US GDP. But new calculations based on PPP released by the World Bank in 2014 reported China’s GDP to be 87% as large as the US GDP. Given that the Chinese economy grows a lot more quickly than the US economy, some experts believe that China may become the world’s largest economy by the time you read this book—as opposed to in the next decade or so (see the  Closing Case). Overall, when you read statistics about GDP, GNP, and GNI, always pay attention to whether these numbers are based on official exchange rates or PPP, which can make a huge difference.

Sources: Based on (1) Bloomberg Businessweek, 2014, Recognizing China’s clout, May 12: 14; (2) Economist, 2014, Calculating European GDP, August 23: 68–69; (3) Economist, 2014, The dragon takes wing, May 3: 65; (3) Economist, 2014, The Big Mac index, July 26: 61; (4) International Monetary Fund, 2014, Report for Selected Countries and Subjects (PPP Valuation of Country GDP), October, Washington, DC.

Of many emerging economies, Brazil, Russia, India, and China—commonly referred to as  BRIC —command more attention. With the addition of South Africa, BRIC becomes  BRICS . As a group, BRICS countries have 40% of the world’s population, cover a quarter of the world’s land area, and contribute more than 25% of global GDP (on a PPP basis). In addition to BRICS, other interesting terms include BRICM (BRIC + Mexico), BRICET (BRIC + Eastern Europe and Turkey), and Next Eleven (N-11—consisting of Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey, and Vietnam).

Does it make sense to group together as “emerging economies” so many countries with tremendous diversity in terms of history, geography, politics, and economics? As compared to developed economies, the label of “emerging economies,” rightly or wrongly, has emphasized the presumably homogenous nature of so many different countries. While this single label has been useful, more recent research has endeavored to enrich it. Specifically, the two dimensions illustrated in  Figure 1.1 can help us differentiate various emerging economies.  Vertically, the development of market-supporting political, legal, and economic institutions has been noted as a crucial dimension of institutional transitions. Horizontally, the development of infrastructure and factor markets is also crucial.

Figure 1.1

A Typology of Emerging Economies

Source: Adapted from R. Hoskisson, M. Wright, I. Filatotchev, & M. W. Peng, 2013, Emerging multinationals from mid-range economies: The influence of institutions and factor markets (p. 1297), Journal of Management Studies, 50: 1295–1321.

Traditional (or stereotypical) emerging economies suffer from both the lack of institutional development and the lack of infrastructure and factor market development. Most emerging economies 20 years ago would have fit this description. Today, some emerging economies still have made relatively little progress along these two dimensions (such as Belarus and Zimbabwe).

However, much has changed. A great deal of institutional development and infrastructure and factor market development has taken place. Such wide-ranging development has resulted in the emergence of a class of mid-range emerging economies that differ from both traditional emerging economies and developed economies. For example, the top-down approach to government found in China has facilitated infrastructure and factor market development. But China’s political and market institutions tend to be underdeveloped relative to physical infrastructure. Alternatively, India has strong political institutions supporting market institutions. While Indian government policy reforms have facilitated better market institutions and associated economic development, world-class physical infrastructure is lacking. In the middle area of  Figure 1.1, Brazil and Russia are examples, with democratic political institutions and some infrastructure and factor market development. Finally, some economies have clearly graduated from the “emerging” phase and become what we call “newly developed economies.” South Korea is such an exemplar country.

Overall, the  Great Transformation  of the global economy is embodied by the tremendous shift in economic weight and engines of growth toward emerging economies in general and BRIC(S) in particular.  Led by BRIC(S), emerging economies accomplished “the biggest economic transformation in modern economy,” according to the Economist.  In China, per capita income doubled in about ten years, an achievement that took Britain 150 years and the United States 50 years as they industrialized.  Throughout emerging economies, China is not alone. While groupings such as BRIC(S) and N-11 are always arbitrary, they serve a useful purpose—namely, highlighting the economic and demographic scale and trajectory that enable them to challenge developed economies in terms of weight and influence in the global economy.

Of course, the Great Transformation is not a linear story of endless and uniform high-speed growth. All BRIC(S) countries and most emerging economies have experienced some significant slowdown recently.  It is possible that they may not be able to repeat their extraordinary growth sprints of the decade between 1998 (the Asian economic crisis) and 2008 (the global financial crisis). For example, in 2007, Brazil accomplished an annual economic growth of 6%, Russia 8%, India 10%, and China 14%. In 2017, they would be lucky to achieve half of these enviable growth rates. However, it seems that emerging economies as a group are destined to grow both their absolute GDP and their percentage of world GDP relative to developed economies. The debate centers on how much and how quickly (or slowly) such growth will be in the future (see the  Closing Case).

1-1cBase of the Pyramid and Reverse Innovation

The global economy can be viewed as a pyramid ( Figure 1.2). The top consists of about one billion people with per capita annual income of US$20,000 or higher. These are mostly people who live in the developed economies in the  Triad , which consists of North America, Western Europe, and Japan. Another one billion people earning US$2,000 to US$20,000 per year make up the second tier. The vast majority of humanity—about five billion people—earn less than US$2,000 per year and comprise the  base of the pyramid (BoP) . Most MNEs focus on the top and second tiers and end up ignoring the BoP markets.  An increasing number of such low-income countries have shown a great deal of economic opportunities as income levels have risen. More Western MNEs, such as General Electric (GE), are investing aggressively in the BoP and leveraging their investment to tackle markets in both emerging and developed economies.

Figure 1.2

The Global Economic Pyramid

Sources: Adapted from (1) C. K. Prahalad & S. Hart, 2002, The fortune at the bottom of the pyramid, Strategy + Business, 26: 54–67; (2) S. Hart, 2005, Capitalism at the Crossroads, Philadelphia: Wharton School Publishing, 111.

One interesting recent development out of emerging economies is  reverse innovation —an innovation that is adopted first in emerging economies and then diffused around the world.  Traditionally, innovations are generated by Triad-based multinationals, with the needs and wants of rich customers at the top of the pyramid in mind. When such multinationals entered lower-income economies, they tended to simplify the product features and lower prices. In other words, the innovation flow is top-down. However, as Deere & Company found out in India, its large-horsepower tractors designed for American farmers were a poor fit for the different needs and wants of Indian farmers. Despite Deere’s efforts to simplify the product and reduce the price, the price was still too high in India. Instead, Mahindra & Mahindra brought its widely popular small-horsepower tractors that were developed in India to the United States and carved out a growing niche that eventually propelled it to be the world’s largest tractor maker by units sold.  (Mahindra & Mahindra is now so committed to the United States that it sponsors bull-riding tournaments in Texas.) In response, Deere abandoned its US tractor designs and “went native” in India, by launching a local design team charged with developing something from scratch—with the needs and wants of farmers in India (or, more broadly, in emerging economies) in mind. The result was a 35-horsepower tractor that was competitive with Mahindra & Mahindra not only in India, but also in the United States and elsewhere. In both cases, the origin of new innovations is from the BoP. The flow of innovation is bottom-up—in other words, reverse innovation.

Does this Mahindra & Mahindra tractor developed from a BoP market have potential elsewhere?

India Pictures RM/Dinodia Photos/Alamy Limited

The reverse innovation movement suggests that emerging economies are no longer merely low-cost production locations or attractive new markets (hence the term “emerging markets”). They are also sources of new innovations that may not only grow out of BoP markets, but also have the potential to go uphill to penetrate into the top of the global economic pyramid. For example, a Chinese start-up, Xiaomi, has recently dethroned Samsung and Apple in the smartphone market in both China and India, selling its smartphones for only US$100 (see  Emerging Markets 1.1). Relative to a feature-rich US$600 Apple iPhone or a US$500 Samsung Galaxy, a Xiaomi phone is merely good enough. It is 3G-capable and has a solid processor, a passable camera, and barely decent but expandable memory (8 GB), which can be expanded to 64 GB with cheap SD cards. But its performance is certainly more than 20% of an Apple or a Samsung. Thus, to customers in the BoP and beyond, Xiaomi’s reverse innovation delivers tremendous value relative to its price. In a Harvard Business Review article, Jeff Immelt, chairman and CEO of a leading practitioner of reverse innovation, GE, noted:

Emerging Markets 1.1

Fighting in and out of the Chinese Smartphone Industry

Commanding one-third of worldwide sales, China is now the largest smartphone market in the world. Not surprisingly, global leaders Samsung and Apple (in that order) sell a lot in China, which absorbs approximately 20% of their output. What is interesting is that six of the top eight vendors are Chinese firms, and that neither Samsung nor Apple is the volume leader. Competing intensely among themselves, the “Gang of Six” consists of computer king Lenovo, telecom equipment giants Huawei and ZTE, consumer electronics firms TCL and Coolpad, and red-hot start-up Xiaomi.

Which firm is the market leader by volume in China? Surprise: it is Xiaomi (pronounced “shee-owl-mee,” meaning “Little Rice”). In the second quarter of 2014, Xiaomi, which only sells online, dethroned Samsung to be the market champion by volume, with a 14% market share. Xiaomi’s secrets? From a resource-based view, plenty. Fast prototyping, with very short “launch-test-improve” cycles. Offering special software not available in other Android devices. Undercutting rivals with rock-bottom prices—US$100 for most Xiaomi models vis-à-vis Samsung’s high-end Galaxy smartphones that retail for US$500. Imitating leading brands—Xiaomi’s founder, Lei Jun, is famous for wearing Steve Jobs-style black T-shirts and jeans when showing off new models on stage. Overall, Xiaomi grew 240% in the second quarter of 2014, compared with the second quarter of 2013. Its extraordinary performance propelled it to become the fifth-largest smartphone player in the world—behind Samsung, Apple, Huawei, and Lenovo (in that order).

Chinese smartphone makers are naturally salivating about global markets. Xiaomi only sells 3% of its smartphones outside of China, Lenovo 16%, and Huawei 41%. They are likely to drive smartphones’ commoditization—a process of competition through which unique products that command high prices and high margins are no longer able to do so, thus becoming commodities. Just as in China, Xiaomi at US$98 apiece has rapidly become the market leader in India. But here is a catch from an institution-based view. As they increasingly venture outside China, similarities in design between Chinese brands and global leaders—and potential intellectual property (IP) infringement inside the devices—are likely to incur the wrath of Apple and Samsung. IP disputes, of course, are nothing unusual among smartphone giants. Apple and Samsung themselves fought nasty court battles for years. Xiaomi and other Chinese smartphone makers have armed themselves with Google executives and Silicon Valley lawyers seasoned at navigating the perilous waters between war and peace in IP. While the last page of Chinese smartphone makers’ story is not likely to be written any time soon, their performance will ultimately be driven by a combination of their technological and marketing capabilities and their institutional and legal savvy.

Sources: Based on (1) Bloomberg Businessweek, 2014, Samsung’s China problems come to India, October 27: 44–45; (2) Economist, 2014, Smartening up their act, October 25; (3) Forbes, 2014, China’s Xiaomi becomes world’s 5th largest smartphone maker, July 31; (4) T. Hout & D. Michael, 2014, A Chinese approach to management, Harvard Business Review, September; (5) South China Morning Post, 2014, Chinese companies drive commoditization of smartphone market, August 18; (6) Wall Street Journal, 2014, Xiaomi overtakes Samsung in China smartphone market, August 4; (7) P. Williamson & E. Yin, 2014, Accelerated innovation, MIT Sloan Management Review, summer.

To be honest, the company is also embracing reverse innovation for defensive reasons. If GE doesn’t come up with innovations in poor countries and take them global, new competitors from the developing world—like Mindray, Suzlon, Goldwind, and Haier—will … GE has tremendous respect for traditional rivals like Siemens, Philips, and Rolls-Royce. But it knows how to compete with them; they will never destroy GE. By introducing products that create a new price-performance paradigm, however, the emerging giants very well could. Reverse innovation isn’t optional; it is oxygen.

As advised by GE’s Immelt, today’s students—and tomorrow’s business leaders—will ignore the opportunities and challenges at the BoP at their own peril. This book will help ensure that you will not ignore these opportunities and challenges.

1-2Why Study Global Business?

1-2 Learning Objective

Give three reasons why it is important to study global business.

Global business (or IB) is one of the most exciting, most challenging, and most relevant subjects offered by business schools. Why study it?  Table 1.1 outlines three compelling reasons.

Table 1.1

Why Study Global Business?

· Enhance your employability and advance your career in the global economy · Better preparation for possible expatriate assignments abroad · Stronger competence in interacting with foreign suppliers, partners, and competitors, and in working for foreign-owned employers in your own country

First, you don’t want to be a loser. Mastering global business knowledge helps advance your employability and career in an increasingly competitive global economy. Take a look at the Opening Day Quiz in  Table 1.2. Can you answer all the questions correctly? If not, you will definitely benefit from studying global business.

Table 1.2

Opening Day Quiz

1. Which country made the shirt you are wearing?

· (A) China

· (B) Malaysia

· (C) Mexico

· (D) Romania

· (E) US

2. Which country made your mobile device?

· (A) China

· (B) Germany

· (C) Singapore

· (D) Taiwan

· (E) US

3. How many member countries does the G-20 have?

· (A) 20

· (B) 21

· (C) 22

· (D) 19

· (E) 18

4. Which city has the largest number of Fortune Global 500 company headquarters? (operational headquarters where top executives go to work, not place of registration)

· (A) Beijing

· (B) Hong Kong

· (C) London

· (D) New York

· (E) Tokyo

5. A 2,000-employee manufacturing plant is closing in a developed economy, and production is moving to an emerging economy. How many of the 2,000 jobs will the company keep?

· (A) 0

· (B) 5–10

· (C) 10–20

· (D) 20–30

· (E) 30–50

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

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