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GLOBAL BUSINESS

Fourth Edition

Mike W. Peng, Ph.D. Jindal Chair of Global Business Strategy

University of Texas at Dallas Fellow, Academy of International Business (2012)

Decade Award Winner, Journal of International Business Studies (2015) The Only International Business Textbook Author Listed in

The World’s Most Influential Scientific Minds (2015)

Australia ● Brazil ● Mexico ● Singapore ● United Kingdom ● United States

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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest.

Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version.

Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Printed in the United States of America Print Number: 01 Print Year: 2015

Global Business, Fourth Edition Mike W. Peng

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WCN: 02-200-203

To Agnes, Grace, and James

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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

iv

Preface ix

About the Author xiv

Part 1 Laying Foundations 1

Chapter 1: Globalizing Business 2

Chapter 2: Understanding Formal Institutions: Politics, Laws, and Economics 34

Chapter 3: Emphasizing Informal Institutions: Cultures, Ethics, and Norms 64

Chapter 4: Leveraging Resources and Capabilities 96

Part 1 PengAtlas 120

Part 1 Integrative Cases 126

Part 2 Acquiring Tools 147

Chapter 5: Trading Internationally 148

Chapter 6: Investing Abroad Directly 180

Chapter 7: Dealing with Foreign Exchange 208

Chapter 8: Capitalizing on Global and Regional Integration 236

Part 2 PengAtlas 266

Part 2 Integrative Cases 272

Part 3 Strategizing Around the Globe 295

Chapter 9: Growing and Internationalizing the Entrepreneurial Firm 296

Chapter 10: Entering Foreign Markets 318

Chapter 11: Managing Global Competitive Dynamics 342

Chapter 12: Making Alliances and Acquisitions Work 372

Chapter 13: Strategizing, Structuring, and Learning Around the World 402

Part 3 PengAtlas 432

Part 3 Integrative Cases 436

Part 4 Building Functional Excellence 455

Chapter 14: Competing on Marketing and Supply Chain Management 456

Chapter 15: Managing Human Resources Globally 482

Brief Contents

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Brief Contents v

Chapter 16: Financing and Governing the Corporation Globally 508

Chapter 17: Managing Corporate Social Responsibility Globally 536

Part 4 PengAtlas 562

Part 4 Integrative Cases 566

Glossary 585

Name Index 595

Organization Index 604

Subject Index 607

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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

vi

Preface ix

About the Author xiv

Part 1 Laying Foundations 1

Chapter 1: Globalizing Business 2

What Is Global Business? 4

Why Study Global Business? 10

A Unified Framework 13

What Is Globalization? 18

Global Business and Globalization at a Crossroads 22

Organization of the Content 25

Chapter 2: Understanding Formal Institutions: Politics, Laws, and Economics 34

Understanding Institutions 37

What Do Institutions Do? 39

An Institution-Based View of Global Business 40

Political Systems 44

Legal Systems 46

Economic Systems 50

Debates and Extensions 51

Management Savvy 55

Chapter 3: Emphasizing Informal Institutions: Cultures, Ethics, and Norms 64

Where Do Informal Institutions Come From? 66

Culture 67

Cultural Differences 71

Ethics 78

Norms and Ethical Challenges 82

Debates and Extensions 83

Management Savvy 86

Chapter 4: Leveraging Resources and Capabilities 96

Understanding Resources and Capabilities 98

Resources, Capabilities, and the Value Chain 101

From SWOT to VRIO 105

Debates and Extensions 108

Management Savvy 112

Part 1 PengAtlas 120

Part 1 Integrative Cases 126

1.1 Indigenous Reverse Innovation from the Base of the Pyramid 126

1.2 The Future of Cuba 130

1.3 Political Risk of Doing Business in Thailand 132

1.4 An Institution-Based View of IPR Protection 134

1.5 Bank Scandals: Bad Apples versus Bad Barrels 138

1.6 Occidental Petroleum (Oxy): From Also-Ran to Segment Leader 140

1.7 Ostnor’s Offshoring and Reshoring 145

Part 2 Acquiring Tools 147

Chapter 5: Trading Internationally 148

Why Do Nations Trade? 150

Theories of International Trade 153

Realities of International Trade 164

Debates and Extensions 171

Management Savvy 173

Chapter 6: Investing Abroad Directly 180

Understanding the FDI Vocabulary 182

Why Do Firms Become MNEs by Engaging in FDI? 186

Table of Contents

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Table of Contents vii

Ownership Advantages 188

Location Advantages 189

Internalization Advantages 192

Realities of FDI 194

How MNES and Host Governments Bargain 197

Debates and Extensions 198

Management Savvy 201

Chapter 7: Dealing with Foreign Exchange 208

What Determines Foreign Exchange Rates? 210

Evolution of the International Monetary  System 219

Strategic Responses to Foreign Exchange Movements 223

Debates and Extensions 225

Management Savvy 229

Chapter 8: Capitalizing on Global and Regional Integration 236

Global Economic Integration 238

Organizing World Trade 240

Regional Economic Integration 244

Regional Economic Integration in Europe 246

Regional Economic Integration in the Americas 252

Regional Economic Integration in the Asia Pacific 254

Regional Economic Integration in Africa 257

Debates and Extensions 257

Management Savvy 259

Part 2 PengAtlas 266

Part 2 Integrative Cases 272

2.1 Brazil’s Quest for Comparative Advantage 272

2.2 Twelve Recommendations to Enhance UK Export Competitiveness 274

2.3 Would You Invest in Turkey? 281

2.4 The Myth Behind China’s Outward Foreign Direct Investment 284

2.5 The Korea-US Free Trade Agreement (KORUS) 288

Part 3 Strategizing Around the Globe 295

Chapter 9: Growing and Internationalizing the Entrepreneurial Firm 296

Entrepreneurship and Entrepreneurial Firms 298

Institutions, Resources, and Entrepreneurship 299

Growing the Entrepreneurial Firm 303

Internationalizing the Entrepreneurial Firm 305

Debates and Extensions 309

Management Savvy 312

Chapter 10: Entering Foreign Markets 318

Overcoming the Liability of Foreignness 320

Where to Enter? 321

When to Enter? 325

How to Enter? 327

Debates and Extensions 334

Management Savvy 336

Chapter 11: Managing Global Competitive Dynamics 342

Competition, Cooperation, and Collusion 345

Institutions Governing Domestic and International Competition 350

Resources Influencing Competitive Dynamics 353

Attack, Counterattack, and Signaling 356

Local Firms versus Multinational Enterprises 358

Debates and Extensions 360

Management Savvy 364

Chapter 12: Making Alliances and Acquisitions Work 372

Defining Alliances and Acquisitions 374

Institutions, Resources, Alliances, and Acquisitions 376

Formation of Alliances 383

Evolution and Dissolution of Alliances 385

Performance of Alliances 387

Motives for Acquisitions 388

Performance of Acquisitions 389

Debates and Extensions 392

Management Savvy 393

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viii Table of Contents

Chapter 13: Strategizing, Structuring, and Learning Around the World 402

Multinational Strategies and Structures 404

How Institutions and Resources Affect Multinational Strategies, Structures, and Learning 412

Worldwide Learning, Innovation, and Knowledge Management 417

Debates and Extensions 422

Management Savvy 424

Part 3 PengAtlas 432

Part 3 Integrative Cases 436

3.1 Farmacias Similares: Innovating in the Mexican Healthcare Industry 436

3.2 Wikimart: Building a Russian Version of Amazon 441

3.3 Business Jet Makers Eye China 444

3.4 The Antitrust Case on the AT&T– T-Mobile Merger 446

3.5 Teliasonera’s Alliances and Acquisitions in Eurasia 449

3.6 China Merchants Group’s Acquisition of the Newcastle Port 451

3.7 Japanese Multinationals in Emerging Economies 453

Part 4 Building Functional Excellence 455

Chapter 14: Competing on Marketing and Supply Chain Management 456

Three of the Four Ps in Marketing 459

From Distribution Channel to Supply Chain Management 464

Triple As in Supply Chain Management 465

How Institutions and Resources Affect Marketing and Supply Chain Management 468

Debates and Extensions 471

Management Savvy 473

Chapter 15: Managing Human Resources Globally 482

Staffing 484

Training and Development 488

Compensation and Performance Appraisal 490

Labor Relations 494

Institutions, Resources, and Human Resource Management 495

Debates and Extensions 499

Management Savvy 500

Chapter 16: Financing and Governing the Corporation Globally 508

Financing Decisions 511

Owners 512

Managers 514

Board of Directors 517

Governance Mechanisms As a Package 519

A Global Perspective 522

Institutions, Resources, and Corporate Finance and Governance 523

Debates and Extensions 526

Management Savvy 527

Chapter 17: Managing Corporate Social Responsibility Globally 536

A Stakeholder View of the Firm 539

Institutions, Resources, and Corporate Social Responsibility 546

Debates and Extensions 553

Management Savvy 554

Part 4 PengAtlas 562

Part 4 Integrative Cases 566

4.1 ESET: From a “Living-Room” Firm to a Global Player in the Antivirus Software Industry 566

4.2 Employee Retention and Institutional Change at PIGAMU 570

4.3 Sino Iron: Engaging Stakeholders in Australia 578

Glossary 585

Name Index 595

Organization Index 604

Subject Index 607

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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

ix

Preface

The first three editions of Global Business aspired to set a new standard for international business (IB) textbooks. They have been widely used in Australia, Austria, Brazil, Britain, Canada, China, Denmark, Egypt, France, Hong Kong, India, Indonesia, Ireland, Israel, Lithuania, Macau, Malaysia, Mexico, the Netherlands, Nether- lands Antilles, New Zealand, Puerto Rico, Russia, Slove- nia, South Africa, South Korea, Spain, Sweden, Switzer- land, Taiwan, Thailand, and the United States. Based on the enthusiastic support from more than 30 coun- tries, the first three editions achieved unprecedented success. Available in Chinese and Spanish, Global Busi- ness has also launched a European adaptation (with Klaus Meyer) and an Indian adaptation (with Deepak Srivastava). In short, Global Business is global.

The fourth edition endeavors to achieve even more. It continues the market-winning framework centered on one big question and two core perspectives, and has been thoroughly updated to capture the rapidly mov- ing recent research and events. Written for undergrad- uate and MBA students around the world, the fourth edition will continue to make IB teaching and learning (1) more engaging, (2) more comprehensive, (3) more fun, and (4) more relevant.

More Engaging As an innovation in IB textbooks, a unified frame- work integrates all chapters. Given the wide range of topics in IB, most textbooks present the discipline in a fashion that “Today is Tuesday, it must be Luxem- bourg.” Very rarely do authors address: “Why Luxem- bourg today?” More important, why IB? What is the big question in IB? Our unified framework suggests that the discipline can be united by one big question and two core perspectives. The big question is: What determines the success and failure of firms around the globe? To address this question, Global Business introduces two core perspectives—(1) the institution- based view and (2) the resource-based view—in all

chapters.1 It is this relentless focus on our big question and core perspectives that enables this book to engage a variety of topics in an integrated fashion. This pro- vides unparalleled continuity in the learning process.

Global Business further engages readers through an evidence-based approach. I have endeavored to draw on the latest research, as opposed to the latest fads. As an active researcher myself, I have developed the unified framework not because it just popped up in my head when I wrote the book. Rather, this is an extension of my own research that consistently takes on the big ques- tion and leverages the two core perspectives.2

Another vehicle to engage students is debates. Most textbooks present knowledge “as is” and ignore debates. But, obviously, our field has no shortage of debates. It is the responsibility of textbook authors to engage students by introducing cutting-edge debates. Thus, I have written a beefy “Debates and Extensions” section for every chapter.

More Comprehensive Global Business offers the most comprehensive and inno vative coverage of IB topics available on the market. Unique chapters not found in other IB textbooks are: Chapter 9 (entrepreneurship and small firms’ interna- tionalization), Chapter 11 (global competitive dynamics), and Chapter 16 (corporate finance and governance).

The most comprehensive topical coverage is made possible by drawing on the latest and most comprehensive range of the research literature. I have accelerated my own

1 On the integration of these two perspectives, see K. Meyer, S. Estrin, S. Bhaumik, & M. W. Peng, 2009, Institutions, resources, and entry strategies in emerging economies, Strategic Management Journal, 30(1): 61–80; D. Zoogah, M. W. Peng, & H. Woldu, 2015, Institutions, resources, and organizational effec- tiveness in Africa, Academy of Management Perspectives, 29(1): 7–31. 2 For the big question, see M. W. Peng, 2004, Identifying the big question in international business research, Journal of International Business Studies, 35(2): 99–108. For the institution-based view, see M. W. Peng, D. Wang, and Y. Jiang, 2008, An institution-based view of international business strategy: A focus on emerging economies, Journal of International Business Studies, 39(5): 920–936. For the resource-based view, see M. W. Peng, 2001, The resource- based view and international business, Journal of Management, 27(6): 803–829.

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x Preface

research, publishing a total of 30 articles after I finished the third edition.3 Some of these recent articles appear in top-tier outlets in IB, such as the Academy of Management Journal (2012), Journal of International Business Studies (2014 and 2016), Journal of Management Studies (2012, 2013, and 2015), Journal of World Business (2012, 2014, and 2015), and Strategic Management Journal (2013, 2015, and 2016). Writ- ing Global Business has also enabled me to broaden the scope of my research, publishing recently in top-tier jour- nals in operations (Journal of Operations Management), eth- ics (Journal of Business Ethics), entrepreneurship (Journal of Business Venturing and Entrepreneurship Theory and Prac- tice), and human resources (International Journal of Human Resource Management). In addition to my own work, I have also drawn on the latest research of numerous colleagues. The end result is the unparalleled, most comprehensive set of evidence-based insights on the IB market. While citing every article is not possible, I am confident that I have left no major streams of research untouched. Feel free to check the Name Index to verify this claim. (Unfor- tunately, a number of older references have to be deleted to make room for more recent research.)

Finally, the fourth edition of Global Business contin- ues to have a global set of cases contributed by scholars around the world—an innovation on the IB market. Virtually all other IB textbooks have cases written by book authors. In comparison, this book has been blessed by a global community of case contributors who are based in Australia, Austria, Canada, China, Mexico, and the United States. Many are experts who are located in or are from the countries in which the cases take place. For example, we now have a Mexico case penned by two Mexico-based authors (see Integrative Case on Farmacias Similares), and a China case written by a China-based author (see Integrative Case on Ostnor). This edition also features a Russia case contributed by the world’s top two leading experts on Russian manage- ment (see Integrative Case on Wikimart).

More Fun If you fear this book must be boring because it draws so heavily on latest research, you are wrong. I have used a clear, engaging, conversational style to tell the “story.” Relative to rival books, my chapters are shorter and more lively. Some earlier users commented that read- ing Global Business is like reading a “good magazine.” A large number of interesting anecdotes have been woven

into the text. Non-traditional (“outside-the-box”) ex- amples range from ancient Chinese military writings to mutually assured destruction (MAD) strategy during the Cold War, from LEGO toys to Tolstoy’s Anna Kar- enina. Check out the following fun-filled features that spice up the book:

The rebirth of the East India Company (Chapter 1 Opening Case)

Testing the Dell theory of peace in East Asia (Emerg- ing Markets 2.2)

LEGO’s secrets (Chapter 4 Opening Case) ANA: Refreshing the parts other airlines cannot

reach (In Focus 4.1) Why are US exports so competitive? (Chapter 5

Closing Case) One multinational versus many national companies

(In Focus 6.1) Sriracha spices up American food (Chapter 9 Open-

ing Case) Mickey goes to Shanghai (Chapter 10 Closing Case) Patent wars and shark attacks (Chapter 11

Opening Case) Is a diamond (cartel) forever? (In Focus 11.1) Can mergers of equals work? (In Focus 12.2) Marketing Aflac in the United States and Japan

(Chapter 14 Opening Case) Dallas versus Delhi (Chapter 15 Closing Case) High drama at Hewlett-Packard (HP) (Chapter 16

Opening Case) Professor Michael Jensen as an outside director

(In Focus 16.2) Global warming and Arctic boom (In Focus 17.1)

Finally, the PengAtlas allows you to conduct IB research using informative maps and other geographic tools to enhance your learning. In addition, a series of new videos enhance the multi-media, fun aspects of learning (see below).

More Relevant So what? Most textbooks leave students to figure out the crucial “so what?” question for themselves. In con- trast, I conclude every chapter with an action-packed section titled “Management Savvy.” Each section has at least one table (or slide) to summarize key learning points from a practical standpoint. No other IB book is so savvy and so relevant.

As a theme, ethics cuts through the book, with at least one “Ethical Dilemma” feature and a series of Critical

3 All my articles are listed at www.mikepeng.com and www.utdallas.edu /~mikepeng. Go to “Journal Articles.”

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Preface xi

Discussion Questions on ethics in each chapter. Finally, many chapters offer career advice for students. For example, Chapter 4 develops a resource-based view of the individual—that is, about you, the student. The upshot? You want to make yourself into an “untouchable,” some- one who adds valuable, rare, and hard-to-imitate capa- bilities indispensable to an organization. In other words, you want to make sure your job cannot be outsourced.

What’s New in the Fourth Edition? In addition to the completely updated content, the fourth edition has (1) created a new video package, (2) dedicated more space to emerging economies, (3) enhanced the quantity and variety of cases, and (4) drawn directly on the author’s consulting experience.

First, a new video package has been created that is tightly coupled with the content of the Opening and Closing Cases for every chapter. Instructors can ask students to watch such videos before class and answer questions online, or to watch videos as a way to open or close class sessions. In short, students can “watch TV” and gain knowledge.

Second, this edition builds on Global Business’ previ- ous strengths by more prominently highlighting emerg- ing economies. At least one Emerging Markets feature is launched in every chapter. Many of the Integrative Cases deal with emerging economies, such as Brazil, China, Cuba, Mexico, Russia, Slovakia, Thailand, and Turkey. Numerous in-chapter features (Opening/Closing Cases, In Focus, and Emerging Markets) deal with emerg- ing economies other than those mentioned previously, such as the Czech Republic, Greenland, Guinea, India, Kenya, Liberia, Nigeria, Poland, Senegal, Sierra Leone, South Africa, Taiwan, Tanzania, and the United Arab Emirates.

Third, in response to students’ and instructors’ enthu siasm about the wide-ranging and globally relevant cases in previous editions, the fourth edition has further enhanced the quantity and variety of cases. The variety has also been enhanced not only in terms of the geo- graphic diversity noted above, but also in terms of the mix of longer cases and shorter cases. In addition, I have pushed myself to more actively participate in case writ- ing. Finally, users of the online MindTap version of the product will have access to Media Cases that pair the Opening and Closing chapter cases with news articles from sources such as the New York Times, The Economist,

and other leading publications, as well as videos from sources such as the BBC and CBS and access to additional information from Business Insights. More information on the MindTap product is discussed later in this Preface.

Finally, I have directly drawn on my recent consult- ing experience to inject new insights. Chapter 1 Clos- ing Case (“Two Scenarios of the Global Economy in 2050”) is adapted from a major consulting engagement I …