Chapter 7 - Global Management

Question 1

Global business

Answer 1

the buying and selling of goods and services by people from different countries

From the writer:
“The Timex watch on my wrist as I write this chapter was purchased at a Walmart in Manitoba. But since it was made in the Philippines, I participated in global business when I used my debit card at the Walmart in Winnipeg, which is a wholly owned subsidiary of Walmart USA. Walmart, for its part, had already paid Timex USA Group Inc., which in turn is owned by Timex Group B.V., a Dutch holding company (the corporate parent of several watchmaking companies around the globe, including Timex Group USA Inc.). Many of Timex Far East’s wristwatches are manufactured by TMX Philippines Inc. in Lapu-Lapu, the Philippines, which pays the company that employs the Filipino managers and workers who made my watch. That’s quite a story for a simple watch, but it’s one that illustrates today’s global environment.”

Question 2

Multinational corporations

Answer 2

corporations that own businesses in two or more countries

Question 3

Foreign direct investment

Answer 3

a method of investment in which a company builds a new business or buys an existing business in a foreign country

Question 4

trade barriers

Answer 4

government-imposed regulations that increase the cost and restrict the number of imported goods

Question 5

protectionism

Answer 5

a government’s use of trade barriers to shield domestic companies and their workers from foreign competition

Question 6

Governments have used two general kinds of trade barriers:

Answer 6

tariff and nontariff

Question 7

tariff

Answer 7

a direct tax on imported goods

Question 8

Nontariff barriers

Answer 8

nontax methods of increasing the cost or reducing the volume of imported goods

Question 9

There are five types of nontariff barriers:

Answer 9

quotas,

voluntary export restraints,

government import standards,

government subsidies, and customs
valuation/classification

Question 10

Because there are so many different kinds of nontariff barriers, they can be ______________ approach to shielding domestic industries from foreign competition.

Answer 10

Because there are so many different kinds of nontariff barriers, they can be an even more potent approach to shielding domestic industries from foreign competition.

Question 11

Quotas

Answer 11

limits on the number or volume of imported products

For example, because of strict quotas, yearly imports of raw sugar cane into Canada are limited. Since this is well below the demand for sugar in Canada, domestic Canadian sugar prices are much higher than sugar prices in the rest of the world.

Question 12

voluntary export restraints

Answer 12

voluntarily imposed limits on the number or volume of products exported to a particular country

The difference is that the exporting country rather than the importing country imposes restraints. Usually, however, the “voluntary” offer to limit exports occurs because the importing country has implicitly threatened to impose quotas. According to the World Trade Organization (WTO), however, voluntary export restraints are illegal and should not be used to restrict imports

Question 13

government import standards

Answer 13

standards ostensibly established to protect the health and safety of citizens but, in reality, often used to restrict imports

For example, the United States had banned the importation of nearly all Canadian beef. Ostensibly, the ban was to prevent transmission of mad cow disease (bovine spongiform encephalopathy, BSE), but the US government was actually using this government import standard to protect its own beef producers. Only after the WTO ruled that there was no scientific basis for the ban did the United States allow Canadian beef to be imported without restrictions.

Question 14

government subsidies

Answer 14

government loans, grants, investments, and tax deferments given to domestic companies to protect them from foreign competition

Not surprisingly, businesses complain about unfair trade practices when companies receive government subsidies. For example, Embraer, the Brazilian jet airplane manufacturer, is complaining about the “investment” provided to Bombardier, the Montreal-based Canadian jet manufacturer, of about $1 billion in late 2015 (and the new Trudeau government is expected to contribute more). That particular dispute has been ongoing; the WTO has ruled on it many times. Meanwhile, the Canadian taxpayer picks up the subsidy costs.

Question 15

customs valuation/classification

Answer 15

a classification assigned to imported products by government officials that affects the size of the tariff and imposition of import quotas

Classification is important because the category assigned by customs agents can greatly affect the size of the tariff and whether the item is subject to import quotas. For example, the Canadian Border Services Agency has several customs classifications for imported shoes. The tariff on imported leather or “nonrubber” shoes is about 10 percent, whereas the tariffs on imported rubber shoes, such as athletic footwear and waterproof shoes, are 20–84 percent. The difference is large enough that some importers try to make their rubber shoes look like leather, hoping to receive the nonrubber customs classification and, it follows, the lower tariff.

Question 16

General Agreement on Tariffs and Trade (GATT)

Answer 16

a worldwide trade agreement that reduced and eliminated tariffs, limited government subsidies, and established protections for intellectual property

Question 17

World Trade Organization (WTO)

Answer 17

the successor to GATT, the only international organization dealing with the global rules of trade between nations; its main function is to ensure that trade flows as smoothly, predictably, and freely as possible

Question 18

regional trading zones

Answer 18

areas in which tariff and nontariff barriers on trade between countries are reduced or eliminated

Question 19

regional trading zones - information

Answer 19

The largest and most important trading zones are in Europe (Maastricht Treaty), North America (North American Free Trade Agreement, or NAFTA), Central America (Central America Free Trade Agreement, or CAFTA-DR), South America (Union of South American Nations, or UNASUR), and Asia (Association of Southeast Asian Nations, or ASEAN, and Asia-Pacific Economic Cooperation, or APEC). Canada has just taken part in the new Trans-Pacific Partnership (TPP), the largest, most ambitious free trade initiative in history. It is a comprehensive, economic, strategic, and balanced agreement that will increase Canada’s foothold in Asia-Pacific, a region that is expected to comprise two-thirds of the world’s middle class by 2030, and one-half of global gross domestic product (GDP) by 2050.

Question 20

Europe’s Maastricht Treaty

Answer 20

a regional trade agreement between most European countries

Question 21

North American Free Trade Agreement (NAFTA)

Answer 21

a regional trade agreement between the United States, Canada, and Mexico

went into effect on January 1, 1994.

More than any other regional trade agreement, NAFTA has liberalized trade between countries so that businesses can plan for one market (North America) rather than for three separate ones (the United States, Canada, and Mexico). One of NAFTA’s most important achievements was to eliminate most product tariffs and prevent Canada, the United States, and Mexico from increasing existing tariffs or introducing new ones. Mexican and Canadian exports to the United States have doubled since NAFTA went into effect. US exports to Mexico and Canada have doubled, too, which is twice as fast as US exports to any other part of the world. Mexico and Canada now account for 32 percent of all US exports.

Question 22

Central America Free Trade Agreement (CAFTA-DR)

Answer 22

a regional trade agreement between Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States

went into effect in August 2005

Question 23

Union of South American Nations (UNASUR)

Answer 23

a regional trade agreement between Argentina, Brazil, Paraguay, Uruguay, Venezuela, Bolivia, Colombia, Ecuador, Peru, Guyana, Suriname, and Chile

Question 24

Association of Southeast Asian Nations (ASEAN)

Answer 24

a regional trade agreement between Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam

Question 25

Asia-Pacific Economic Cooperation (APEC)

Answer 25

a regional trade agreement between Australia, Canada, Chile, the People’s Republic of China, Hong Kong, Japan, Mexico, New Zealand, Papua New Guinea, Peru, Russia, South Korea, Taiwan, the United States, and all members of ASEAN, except Cambodia, Lao PDR, and Myanmar

Question 26

Consumers, Trade Barriers, and Trade Agreements - info

Answer 26

One reason why Canadians get more for their money is that the Canadian marketplace has been one of the easiest for foreign companies to enter. Some Canadian industries, such as agriculture, have been heavily protected from foreign competition by trade barriers but, for the most part, Canadian consumers (and businesses) have had plentiful choices between Canadian-made and foreign-made products. More important, the high level of competition between foreign and domestic companies that has created these choices has helped keep prices low in Canada. Furthermore, it is precisely the lack of choice and the low level of competition that has kept prices higher in countries that have not been as open to foreign companies and products. For example, Japanese trade barriers are estimated to cost Japanese consumers more than $100 billion a year and amount to a 51 percent tax on food for the average Japanese family.

Free trade agreements are important to consumers because they increase choices, competition, and purchasing power and thereby decrease what people pay for food, clothing, necessities, and luxuries. Accordingly, today’s consumers rarely care where their products and services come from.

Free trade agreements matter to managers because, as you’re about to read, while those agreements create new business opportunities, they also intensify competition, and addressing that competition is a manager’s job.

Question 27

Global consistency

Answer 27

when a multinational company has offices, manufacturing plants, and distribution facilities in different countries and runs them all using the same rules, guidelines, policies, and procedures

Question 28

local adaptation

Answer 28

when a multinational company modifies its rules, guidelines, policies, and procedures to adapt to differences in foreign customers, governments, and regulatory agencies

Local adaptation is typically more important to the local managers who are charged with making the international business successful in their countries; hamburgers don’t sell all that well in India, so the “Maharaja Mac” is made from a chicken patty.

Question 29

local adaptation - starbucks example

Answer 29

Because its French stores are nearly identical to its Canadian stores, Starbucks has never been profitable in France. As a result, says Parisian Marion Bayod, “I never go into Starbucks; it’s impersonal, the coffee is mediocre, and it’s expensive. For us, it’s like another planet.” Likewise, Parisian Laurent Pauzié says Starbucks stores “are only here to comfort tourists when they’re lost.” Canadian Kate Menzies, who lives in Paris, concedes that while Starbucks may not be popular for its coffee, it “is one of the few places with public toilets and free Wi-Fi in the city.” Starbucks, however, is now embracing local adaptation. Rather than offering strong coffee in paper cups as in Canada, its French stores will offer a lighter-tasting “blonde” espresso in glass coffee cups (because the French prefer to sit and drink) in larger redesigned stores with sumptuous wooden bars, bright chandeliers, and velvet couches, similar to traditional Parisian cafés. While Starbucks hopes these changes will attract French customers, spending tens of millions more to adapt its stores to French tastes may also sacrifice the cost effectiveness and productivity that make it profitable in Canada.

Question 30

exporting

Answer 30

selling domestically produced products to customers in foreign countries

It makes the company less dependent on sales in its home market and provides a greater degree of control over research, design, and production decisions.

Question 31

Though advantageous in a number of ways, exporting also has its disadvantages.

The primary disadvantage is…

Answer 31

that many exported goods are subject to tariff and nontariff barriers that can substantially increase their final cost to consumers.

Question 32

Though advantageous in a number of ways, exporting also has its disadvantages.

A second disadvantage is….

Answer 32

that transportation costs can significantly increase the price of an exported product.

For example, when the price of crude oil was approaching $150 a barrel, manufacturers who made everything from batteries to sofas to industrial parts started bringing manufacturing production from overseas back to Canada. Jeff Rubin, chief economist at CIBC World Markets in Toronto, said, “In a world of triple-digit oil prices, distance costs money.”

Question 33

There is a third disadvantage of exporting:

Answer 33

companies that export depend on foreign importers for product distribution.

If, for example, the foreign importer makes a mistake on the paperwork that accompanies a shipment of imported goods, those goods can be returned to the foreign manufacturer at the manufacturer’s expense.

Question 34

cooperative contract

Answer 34

an agreement in which a foreign business owner pays a company a fee for the right to conduct that business in his or her country

Question 35

licensing

Answer 35

an agreement in which a domestic company, the licensor, receives royalty payments for allowing another company, the licensee, to produce the licensor’s product, sell its service, or use its brand name in a specified foreign market

Question 36

Advantages to licensing

Answer 36

A key advantage of licensing is that it allows companies to earn additional profits without investing more money. As foreign sales increase, so do the royalties paid to the licensor by the foreign licensee. Moreover, it is the licensee, not the licensor, who invests in production equipment and facilities to produce the licensed product. Licensing also helps companies avoid tariff and nontariff barriers. Since the licensee manufactures the product within the foreign country, tariff and nontariff barriers don’t apply.

Question 37

Disadvantages to licensing

Answer 37

The biggest disadvantage associated with licensing is that the licensor gives up control over the quality of the product or service sold by the foreign licensee. Unless the licensing agreement contains specific restrictions, the licensee controls the entire business from production to marketing to final sales. Many licensors include inspection clauses in their licence contracts, but closely monitoring product or service quality from thousands of miles away can be difficult. An additional disadvantage is that licensees can eventually become competitors, especially when a licensing agreement includes access to important technology or proprietary business knowledge.

Question 38

franchise

Answer 38

a collection of networked firms in which the manufacturer or marketer of a product or service, the franchisor, licenses the entire business to another person or organization, the franchisee

For the price of an initial franchise fee plus royalties, franchisors provide franchisees with training, assistance with marketing and advertising, and an exclusive right to conduct business in a particular location. More than 400 companies franchise their businesses to foreign franchise partners. Overall, franchising is a way to enter foreign markets quickly.

Question 39

franchise - example

Answer 39

Customizing menus to local tastes is one of the primary ways that fast-food companies can succeed in international markets. With a 40 percent market share, 4,500 locations in more than 1,050 cities, and a new restaurant opening every 18 hours, KFC, which is part of Yum! Brands, is the most successful foreign restaurant chain in China, even outperforming McDonald’s, which has 16 percent of the market. Unlike McDonald’s, which largely sells the same food in China as it does in the United States, KFC China, which is run by Chinese managers hired by Yum! Brands, has focused on providing Chinese-flavoured dishes—such as the Dragon Twister, a chicken wrap with duck sauce, and tofu chicken rice—designed to reflect the spicy food found in China’s Sichuan province. And, while Chinese customers will find some Western menu items like chicken and corn on the cob, they’ll also find Chinese favourites like fried dough sticks, congee (rice porridge), preserved eggs, and other dishes that cater more to local tastes.

Question 40

franchising - information (advantages/disadvantages/culture)

Answer 40

Franchising has many advantages. However, franchisors face a loss of control when they sell businesses to franchisees who are thousands of kilometres away. And while there are exceptions, franchising success may be somewhat culture-bound. In other words, because most global franchisors begin by franchising their businesses in similar countries or regions (Canada is by far the first choice for American companies taking their first step into global franchising), and because 65 percent of franchisors make absolutely no change in their business for overseas franchisees, that success may not generalize to cultures with different lifestyles, values, preferences, and technological infrastructures.

Question 41

strategic alliance

Answer 41

an agreement in which companies combine key resources, costs, risk, technology, and people

Hewlett-Packard, the world’s largest electronics manufacturer, with a 28 percent share of the computer server market, and Foxconn, the Taiwanese firm that assembles some of the world’s most popular electronic devices, such as the iPhone and iPad, have formed a strategic alliance to co-develop large servers that can handle cloud computing and process “big data” for multinational firms.

Question 42

joint venture

Answer 42

a strategic alliance in which two existing companies collaborate to form a third, independent company

Question 43

joint venture - information

Answer 43

One advantage of global joint ventures is that, like licensing and franchising, they help companies avoid tariff and nontariff barriers to entry. Another advantage is that companies participating in a joint venture bear only part of the costs and risks of that business. Many companies find this attractive because it is expensive to enter foreign markets and develop new products.

Question 44

Global joint ventures are not without problems (information)

Answer 44

Because companies share costs and risks with their joint venture partners, they must also share profits. Also, managing global joint ventures can be difficult because they represent a merging of four cultures: the country and organizational cultures of the first partner and the country and organizational cultures of the second partner. Often, to be fair to all involved, each partner in the global joint venture will have equal ownership and power. But this can result in power struggles and a lack of leadership. Because of these problems, companies forming global joint ventures should carefully develop detailed contracts that specify the obligations of each party. This care is important because more than half of global joint ventures fail.

Question 45

wholly owned affiliates

Answer 45

foreign offices, facilities, and manufacturing plants that are 100 percent owned by the parent company

For example, Honda Canada Inc. and Honda of Canada Mfg. in Ontario are 100 percent owned by Honda Motor in Japan and celebrated 47 and 30 years, respectively, in Canada in 2016.

Question 46

The primary advantage of wholly owned businesses is…

Answer 46

The primary advantage of wholly owned businesses is that the parent company receives all of the profits and has complete control over the foreign facilities.

Question 47

The biggest disadvantage of wholly owned businesses is…

Answer 47

The biggest disadvantage is the expense of building new operations or buying existing businesses.

The payoff can be enormous if a wholly owned affiliate succeeds; but the losses can be immense if it fails because the parent company assumes all of the risk.

Question 48

Global new ventures

Answer 48

new companies that are founded with an active global strategy and have sales, employees, and financing in different countries

Question 49

There are several different kinds of global new ventures; all of them, though, share two factors.

Answer 49

First, the founders successfully develop and communicate their company’s global vision from inception.

Second, rather than going global one country at a time, new global ventures bring a product or service to market in several foreign markets at the same time.

Question 50

Purchasing power

Answer 50

a comparison of the relative cost of a standard set of goods and services in different countries

For example, a 600 mL bottle of Coke costs $3.79 in Oslo, Norway. Because that same Coke costs only $2.10 in Canada, the average Canadian would have more purchasing power than the average Norwegian.

Question 51

When conducting global business, companies should attempt to identify two types of political risk:

Answer 51

political uncertainty and policy uncertainty.

Question 52

Political uncertainty

Answer 52

the risk of major changes in political regimes that can result from war, revolution, the death of a political leader, social unrest, or other influential events

Question 53

Policy uncertainty

Answer 53

the risk associated with changes in laws and government policies that directly affect the way foreign companies conduct business.

Question 54

An _______________ is used when the political risks associated with a foreign country or region are viewed as too great.

Answer 54

An avoidance strategy is used when the political risks associated with a foreign country or region are viewed as too great.

Question 55

______ is an active strategy to prevent or reduce political risks.

Answer 55

Control is an active strategy to prevent or reduce political risks.

Firms using a control strategy lobby foreign governments or international trade agencies to change laws, regulations, or trade barriers that hurt their business in that country.

Question 56

________ involves using joint ventures and collaborative contracts such as franchising and licensing.

Answer 56

cooperation involves using joint ventures and collaborative contracts such as franchising and licensing.

Although cooperation does not eliminate the political risk of doing business in a country, it can limit the risk associated with foreign ownership of a business.

Question 57

cooperation - example

Answer 57

For example, a German company forming a joint venture with a Chinese company to do business in China may structure the joint venture contract so that the Chinese company owns 51 percent or more of the joint venture. Doing so qualifies the joint venture as a Chinese company and exempts it from Chinese laws that apply to foreign-owned businesses. However, cooperation cannot always protect against policy risk if a foreign government changes its laws and policies to directly affect how foreign companies conduct business.

Question 58

National culture

Answer 58

the shared values and beliefs that affect the perceptions, decisions, and behaviour of the people of a particular country.

Question 59

expatriate

Answer 59

someone who lives and works outside his or her native country.

When expatriates fail in overseas assignments, primarily it is because they find it difficult to adjust to linguistic, cultural, and social differences.

Question 60

_____________ and _____________ can reduce the uncertainty that expatriates feel, the misunderstandings that arise between expatriates and natives, and the inappropriate ways in which expatriates unknowingly behave when they travel to a foreign country.

Answer 60

Pre-departure language and cross-cultural training can reduce the uncertainty that expatriates feel, the misunderstandings that arise between expatriates and natives, and the inappropriate ways in which expatriates unknowingly behave when they travel to a foreign country.

Question 61

Three methods can be used to prepare workers for international assignments:

Answer 61

documentary training, cultural simulations, and field experiences.

Question 62

Documentary training

Answer 62

focuses on identifying specific critical differences between cultures.

For example, when 60 workers at Axcelis Technologies were preparing to do business in India, they learned that while North Americans make eye contact and shake hands firmly when greeting others, Indians, as a sign of respect, do just the opposite, avoiding eye contact and shaking hands limply.

Question 63

cultural simulations

Answer 63

workers practise adapting to cultural differences

After the workers at Axcelis Technologies learned about key differences between their culture and India, they practised adapting to those differences by role playing. Some Axcelis workers would take the roles of Indian workers, while other Axcelis workers would play themselves and try to behave in a way consistent with Indian culture. As they role played, Indian music played loudly in the background, and they were coached on what to do or not do. Axcelis human resources director Randy Longo says, “At first, I was skeptical and wondered what I’d get out of the class. But it was enlightening for me.”

Question 64

field experience simulation training

Answer 64

places trainees in an ethnic neighbourhood for three to four hours to talk to residents about cultural differences.

For example, an electronics manufacturer prepared workers for assignments in South Korea by having trainees explore a nearby South Korean neighbourhood and talk to shopkeepers and people on the street about South Korean politics, family orientation, and day-to-day living practices.