Daft12eIM - 04 - CH 04

58  Chapter 4
CHAPTER 4
MANAGING IN A GLOBAL ENVIRONMENT
CHAPTER OUTLINE
Are You Ready to Work Internationally?

I. A Borderless World
A. Globalization
B. Developing a Global Mindset
II. The Changing International Landscape
A. China, Inc.
B. India, the Service Giant
C. Brazil’s Growing Clout
III. Multinational Corporations
A. A Globalization Backlash
B. Serving the Bottom of the Pyramid
IV. Getting Started Internationally
A. Exporting
B. Outsourcing
C. Licensing
D. Direct Investing
V. The International Business Environment
VI. The Economic Environment
A. Economic Development
B. Economic Interdependence
VII. The Legal-Political Environment
VIII. The Sociocultural Environment
A. Social Values
B. Communication Differences
New Manager Self-Test: Are You Culturally Intelligent?
IX. International Trade Alliances
A. GATT and the WTO
B. European Union
C. North American Free Trade Agreement (NAFTA)
ANNOTATED LEARNING OBJECTIVES

After studying this chapter, students should be able to:
1. Define globalization and explain how it is creating a borderless world for today’s managers.
Globalization refers to the extent to which trade and investments, information, social and cultural
ideas, and political cooperation flow between countries. One result is that countries, businesses,
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part . ,
except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
59  Chapter 4
and people become increasingly interdependent. Globalization has been on the rise since the
1970s, and most industrialized nations show a high degree of globalization today. Business is
becoming a unified, global field as trade barriers fall, communication becomes faster and
cheaper, and consumer tastes in everything from clothing to cellular phones converge. For many
companies today, the only potential for significant growth lies overseas. The reality of today’s
borderless companies also means consumers can no longer tell from which country they’re
buying.
2. Describe a global mindset and why it has become imperative for companies operating
internationally.
Succeeding on a global level requires more than a desire to do business globally and a new set of
skills and techniques; it requires a global mindset. A global mindset is the ability of managers to
appreciate and influence individuals, groups, organizations, and systems that represent different
social, cultural, political, institutional, intellectual, and psychological characteristics. A manager
with a global mindset can perceive and respond to many different perspectives at the same time
rather than being stuck in a domestic mindset that sees everything from one’s own perspective.
People who have had exposure to different cultures develop a global mindset easily. One of the
best ways managers develop a global mindset is by engaging with people from different cultures.
It enables companies to see the world through a different lens.
3. Discuss how the international landscape is changing, including the growing power of China,
India, and Brazil.
Many companies today are going straight to China as a first step into international business.
Business is booming and U.S. and European companies are taking advantage of opportunities for
all of the various market entry strategies. Although outsourcing is probably the most widespread
approach to international involvement in China, the country is moving toward a consumer-driven
economy, with the fastest-growing middle class in history. Doing business in China has never
been smooth, and new regulations are making it even tougher. Despite the problems, China is a
market that can’t be ignored. Competition from domestic companies in China is also growing.
Whereas China is strong in manufacturing, India is a rising power in software design, services,
and precision engineering. With its large English-speaking population, India has numerous
companies offering services such as call-center operations, data-processing, computer
programming and technical support, accounting, and so forth.
Brazil continues to be one of the fastest-growing emerging economies in the world, even though
its economy slowed down in 2011. Brazil has large and growing agricultural, mining,
manufacturing, and service sectors. The country’s economy, already the 7th largest in the world,
is projected to move into fourth place by 2050. Brazil has a young, vibrant population, the
largest in Latin America, and a rapidly growing middle class population. The Brazilian
government has initiated major investments in the development of infrastructure such as
highways, ports, and electricity projects.
Managing in a Global Environment  60
4. Describe the characteristics of a multinational corporation
A multinational corporation typically receives more than 25 percent of its total sales revenues
from operations outside the parent’s home country. MNC’s have the following distinctive
managerial characteristics: they are managed as an integrated worldwide business system; they
are ultimately controlled by a single management authority that makes key, strategic decisions
relating to the parent and all affiliates; and their top managers are presumed to exercise a global
perspective. In a few cases, the MNC management philosophies may differ from that just
described. Additional generic strategies available are to be an ethnocentric company that places
emphasis on their home country, a polycentric company that is oriented toward the markets of
individual foreign host countries, or a geocentric company that is truly world oriented and favors
no specific country. In general, a multinational corporation can be thought of as a business
enterprise that is composed of affiliates located in different countries and whose top managers
make decisions primarily on the basis of global business opportunities and objectives.
5. Explain the bottom of the pyramid concept.
The bottom of the pyramid (BOP) concept proposes that corporations can alleviate poverty and
other social ills, as well as make significant profits, by selling to the world’s poorest people. The
term bottom of the pyramid refers to the more than four billion people who make up the lowest
level of the world’s economic “pyramid”, as defined by per capita income.
6. Define four common market entry strategies: exporting, outsourcing, licensing, and direct
investing.
 Exporting is considered to be low risk and low cost. The firm keeps its production
facilities in its home country and uses middlemen or foreign distributors to market its
products abroad..
 Global outsourcing, or offshoring, means engaging in the international division of labor

so that work activities can be done in countries with the cheapest sources of labor and
supplies. The most recent trend is outsourcing core processes such as auditing or
chemistry research.
 Foreign licensing requires a somewhat greater capital investment, and licensees are apt to
have better contacts and greater experience with marketing in their own countries. The
international firm also maintains some control over foreign production and marketing,
and will have some opportunity for direct contact with foreign producers and customers.
 A wholly owned subsidiary or joint venture is a direct investment that represents the
greatest costs and the greatest risks, but also the greatest potential return. The firm and its
managers are close to the market and may actually send managers to the foreign countries
to run the business in the host country.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part .
, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
61  Chapter 4
7. Indicate how dissimilarities in the economic, sociocultural, and legal- political environments
throughout the world can affect business operations.
Environmental factors that affect international business are similar to the task and general
environmental sectors described in Chapter 3. However, when comparing one country with
another, the economic, legal-political, and sociocultural sectors present the greatest difficulties.
The economic environment represents the economic conditions in the country where the
international organization operates. This part of the environment includes such factors as
economic development, infrastructure, resource and product markets, exchange rates, inflation,
interest rates, and economic growth. Economic environments in some countries can be quite
unstable, presenting a great deal of risk to companies operating within those countries.
The sociocultural environment includes a nation’s culture and social values. Culture consists of
the shared knowledge, beliefs, and values, as well as the common modes of behavior and ways
of thinking, among members of a society. Cultural factors are more perplexing than political-
legal and economic factors in foreign countries. Culture is intangible, pervasive, and difficult to
learn. It is absolutely imperative that international businesses comprehend the significance of
local cultures and deal with them effectively.
Businesses must deal with unfamiliar legal-political systems when they go international, as well
as with more government supervision and regulation. Some of the major legal-political concerns
affecting international business are political risk, political instability, and laws and restrictions.
8. Explain why it is important for managers to develop their cultural intelligence.
Developing cultural intelligence is imperative for managers doing business successfully abroad.
Many managers fail to realize that the values and behaviors that typically govern how business
is done in their own country don’t always translate to the rest of the world. American
managers in particular are regularly accused of an ethnocentric attitude that assumes their
way is the best way. Ethnocentrism refers to a natural tendency of people to regard their
own culture as superior and to downgrade or dismiss other cultural values. Ethnocentrism
can be found in all countries, and strong ethnocentric attitudes within a country make it
difficult for foreign firms to operate there.
A nation’s culture includes the shared knowledge, beliefs, and values, as well as the common
modes of behavior and ways of thinking among members of a society. Cultural factors
sometimes can be more perplexing than political and economic factors when working or
living in a foreign country
LECTURE OUTLINE
ARE YOU READY TO WORK INTERNATIONALLY?
American managers often display cross-cultural ignorance during business negotiations

compared to counterparts in other countries. This exercise helps students determine the extent to
which they are ready to participate in international negotiations.
I. A BORDERLESS WORLD Exhibit 4.1
A. Globalization
Globalization refers to the extent to which trade and investments, information, social and
cultural ideas, and political cooperation flow between countries. One result is that
countries, businesses, and people become increasingly interdependent. Globalization
provides a competitive edge at all stages of developing, manufacturing, and marketing
products, and domestic markets are saturated for many firms. The reality of today’s
borderless companies means consumers can no longer tell from which country they’re
buying (e.g., Japan’s Honda gets 65 percent of its parts for the Accord from the United
States and Canada, and General Motors (GM) makes the Chevrolet HHR in Mexico with
parts that come from all over the world).
Globalization has been on the rise since the 1970s, and most industrialized nations show
a high degree of globalization today. The KOF Swiss Economic Institute measures
economic, political and social aspects of globalization and ranks countries on a
globalization index. The most globalized countries are Belgium, Ireland, Austria, the
Netherlands, and Singapore.
B. Developing a Global Mindset Exhibit 4.2
A global mindset is the ability of managers to appreciate and influence individuals,

groups, organizations, and systems that represent different social, cultural, political,
institutional, intellectual, and psychological characteristics.
A manager with a global mindset can perceive and respond to many different perspectives
at the same time rather than being stuck in a domestic mindset that sees everything from
one’s own perspective.
Developing a global mindset requires managers who are genuinely curious and
inquisitive about other people and cultures, are open-minded and nonjudgmental, and can
deal with ambiguity and complexity without becoming overwhelmed or frustrated.
Discussion Question #5: Do you think it’s possible for someone to develop a global mindset if
they never live outside their native country? How might they do that?
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63  Chapter 4
II. THE CHANGING INTERNATIONAL LANDSCAPE
A. China Inc.
1. Many companies today are going straight to China as a first step into international
business. Business is booming and U.S. and European companies are taking
advantage of opportunities for all of the strategies discussed above. Outsourcing is
probably the most widespread approach to international involvement in China, but the
country is moving toward a consumer-driven economy, with the fastest-growing
middle class population.
2. Doing business in China has never been smooth, and new regulations are making it
tougher. Despite the problems, China is a market that foreign managers can’t afford to
ignore. Competition from domestic companies in China is also growing fast.
B. India, the Service Giant
1. Whereas China is strong in manufacturing, India is a rising power in software design,

services, and precision engineering. One index lists more than 900 business services
companies in India, which employ around 575,000 people. With its large English-
speaking population, India has numerous companies offering services such as call-
center operations, data-processing, computer programming and technical support,
accounting, and so forth. By 2020, India’s pharmaceuticals industry will likely
be a global leader.
C. Brazil’s Growing Clout
1. Brazil is another country that is gaining increasing attention of managers. Although

Brazil’s economic growth slowed, it is still one of the fastest-growing emerging
economies in the world, with large and growing agricultural, mining, manufacturing,
and service sectors. The country’s economy, already the seventh largest in the world,
is projected to move into fourth place by 2050. The Brazilian government has
initiated major investments in the development of infrastructure such as highways,
ports, and electricity projects.
2. The choice of Rio de Janeiro to host the 2016 Summer Olympics is also an
indication of Brazil’s growing clout in the international arena.
Discussion Question #2: Both China and India are rising economic powers. How might your
approach to doing business with China, a communist country, be different from your approach to
doing business with India, the world’s most populous democracy? In which country would you
expect to encounter the most rules? The most bureaucracy?
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III. MULTINATIONAL CORPORATIONS
The size and volume of international businesses are so large that they are hard to comprehend.
Although the term has no precise definition, a multinational corporation (MNC) typically
receives more than 25 percent of its total sales revenues from operations outside the parent’s
home country. MNCs also have the following distinctive characteristics:
 MNCs are managed as integrated worldwide business systems in which foreign affiliates
act in close alliance and cooperation with one another.
 MNCs are ultimately controlled by a single management authority that makes key
strategic decisions relating to the parent and all affiliates.
 MNC top managers are presumed to regard the entire world as one market for strategic
decisions, resource acquisition, and location of production, advertising, and marketing
efficiency.
Ethnocentric companies place emphasis on their home countries. Polycentric companies are
oriented toward the markets of individual foreign host countries. Geocentric companies are truly
world oriented and favor no specific country.
Discussion Question #6: Should a multinational corporation operate as a tightly integrated,

worldwide business system, or would it be more effective to let each national subsidiary operate
autonomously?
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A. A Globalization Backlash
1. As the world becomes increasingly interconnected, a backlash over globalization is

occurring. The loss of jobs as companies export work to countries with lower wages
is a primary concern.
2. Activists charge that globalization not only hurts Americans who lose their jobs but
contributes to worldwide environmental destruction and locks people into poverty. In
the end, it is not whether globalization is good or bad, but how business and
government can work together to ensure that global advantages are shared fairly.
3. Another growing trouble spot for managers is how overseas contractors and suppliers
treat their employees. Globalization increases the complexity because managers have
a hard time knowing with which firms they are doing business.
B. Serving the Bottom of the Pyramid
1. Although large, multinational organizations are accused of many negative

contributions to society, they also have the resources needed to do good things in the
world. The bottom of the pyramid (BOP) concept proposes that corporations can
65  Chapter 4
alleviate poverty and other social ills, as well as make significant profits, by selling to
the world’s poorest people. The term bottom of the pyramid refers to the more than
four billion people who make up the lowest level of the world’s economic “pyramid”
as defined by per-capita income.
2. Although the BOP concept has gained significant attention recently, the basic idea is
nothing new. Unilever has been working for many years to prevent the spread of
disease in poor areas of the world by introducing very inexpensive soap products to
the people there. In this way, the profit motive goes hand-in-hand with the desire to
make a contribution to humankind.
Discussion Question #3: Do you think it is realistic that BOP business practices can have a
positive effect on poverty and other social problems in developing countries? Discuss.
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IV. GETTING STARTED INTERNATIONALLY Exhibit 4.3
Organizations can become involved internationally in a couple of different ways. One way is
to seek cheaper sources of material or labor offshore, which is called offshoring or global
outsourcing. Another way is to implement market entry strategies such as exporting,
licensing, and direct investment. These market entry strategies represent alternative ways
to sell products and services in foreign markets.
A. Exporting
1. Exporting is a strategy in which the corporation maintains its production facilities

within the home nation and transfers its products for sale in foreign countries.
Exporting enables a company to market its products in other countries at modest
resource cost and with limited risk.
2. Exporting does entail numerous problems based on physical distances, government

regulations, foreign currencies, and cultural differences, but it is less expensive than
committing the firm’s own capital to build plants in host countries.
B. Outsourcing
1. Global outsourcing, or offshoring, means engaging in the international division of

labor so that work activities can be done in countries with the cheapest sources of
labor and supplies.
a. The most recent trend is outsourcing core processes such as auditing or chemistry
research.
C. Licensing
1. Licensing is a strategy in which the corporation (the licensor) in one country makes
certain resources available to companies in another country (the licensees). These
resources can include technology, managerial skills, and/or patent and trademark
rights that enable the licensee(s) to produce and market a product similar to what the
licensor has been producing.
a. Franchising is a special form of licensing that occurs when the franchisee buys a
complete package of materials and services, including equipment, products,
product ingredients, trademark and trade name rights, managerial advice, and a
standardized operating system.
D. Direct Investing
1. Direct investing is a strategy in which the corporation is involved in managing the

productive assets, which distinguishes it from other entry strategies that permit less
managerial control. The most popular form of direct investment is to engage in
strategic alliances and partnerships.
a. In a joint venture, a company shares costs and risks with another firm, typically
in the host country, to develop new products, build a manufacturing facility, or set
up a sales and distribution network.
b. A second option for direct investing is to create a wholly owned foreign affiliate,
over which the company has complete control. Direct acquisition of an affiliate
may provide cost savings over exporting by shortening distribution channels and
reducing storage and transportation costs.
c. The most costly and risky direct investment is a greenfield venture, which occurs
when a company builds a subsidiary from scratch in a foreign country. The
advantage is that the subsidiary is exactly what the company wants and has the
potential to be highly profitable. The disadvantage is the company has to acquire
all market knowledge, materials, people, and know-how in a different culture, and
mistakes are possible.
Discussion Question #4: Somnio, a start-up running shoe company in California, decided to
start selling its products around the world from the very beginning. In general terms, name
some of the challenges a start-up company such as Somnio might face internationally.
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67  Chapter 4
V. THE INTERNATIONAL BUSINESS ENVIRONMENT Exhibit 4.4
International management is the management of business operations conducted in more than

one country. The fundamental tasks of business management do not change in any
substantive way when a firm is transacting business across international borders; however,
managers will experience greater difficulties and risks when performing these management
functions on an international scale. The economic, legal-political, and sociocultural sectors
present the greatest difficulties in comparing one country to another.
VI. THE ECONOMIC ENVIRONMENT
A. Economic Development
1. Economic development differs widely among the countries and regions of the world,
and countries can be categorized as developing or developed countries. Developing
countries are referred to as less-developed countries (LDCs). The criterion
traditionally used to classify countries is per capita income. Most international firms
are headquartered in economically advanced countries; however, many companies are
investing in Asia, Eastern Europe, and Latin America.
2. Infrastructure refers to a country’s physical facilities support economic activities

such as transportation, energy producing facilities, and communications. Companies
operating in LDCs must contend with lower levels of technology and perplexing
logistical, distribution, and communication problems.
B. Economic Interdependence Exhibit 4.5
1. The recent financial crisis has made it abundantly clear just how economically
interconnected the world is. Although the recent crisis may seem atypical, savvy
international managers realize that their companies will probably be buffeted by
similar crises fairly regularly. The Asian financial crisis of 1997-1998 affected firms
in North America, Europe, and other parts of the world. More recently, Greece’s
inability to make payments on its debt sparked a panic that devalued the euro and
threatened the stability of financial markets worldwide.
Exhibit 4.6
2. Another reflection of economic interdependence is the fact that parts, supplies, and
labor for many companies come from around the world, which presents managers
with new challenges.
VII. THE LEGAL-POLITICAL ENVIRONMENT
A. Political risk is a company’s risk of loss of assets, earning power, or managerial control
due to politically -based events or actions by host governments. It includes government
takeovers of property and acts of violence directed against a firm’s properties or

employees.
B. Political instability refers to events such as riots, revolutions, civil disorders or

government upheavals that affect the operations of an international company. A
revolutionary wave of protests in the Arab world that began in the late 2010, known as
the Arab Spring, has created a tumultuous environment for businesses operating in the
region. Political risk and political instability remain elevated throughout the
Arab world, causing problems for both local and foreign organizations.
C. Government laws and regulations differ from country to country and present a challenge
for international firms.
Discussion Question #7: Why do you think many people are so frightened by globalization?
Based on what is occurring in the world today, do you expect the globalization backlash to grow
stronger or weaker over the next decade?
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VII. THE SOCIOCULTURAL ENVIRONMENT
A. Social Values
1. A nation’s culture includes the shared knowledge, beliefs, and values, as well as the
common modes of behavior and ways of thinking among members of a society. One
way managers can comprehend local cultures is to understand differences in social
values. American managers are regularly accused of an ethnocentric attitude that
assumes that the American way is the best way. Ethnocentrism is an attitude, which
means that people have a tendency to regard their own culture as superior and to
downgrade other cultures. Strong ethnocentric attitudes within a country make it
difficult for foreign firms to operate there. There are four dimensions of national
social value systems as well as other cultural characteristics that influence
organizational and employee working relationships.
a. Hofstede’s Value Dimensions Exhibit 4.7
 Power distance. High power distance means people accept inequality in

power among institutions, organizations, and people. Countries that value
high power distance include Malaysia, and the Philippines. Low power
distance means people expect equality in power. Countries that value low
power distance include Denmark, and Israel.
 Uncertainty avoidance. High uncertainty avoidance means that members of
a society feel uncomfortable with uncertainty and ambiguity and thus support
beliefs that promise certainty and conformity. Countries that value high
69  Chapter 4
uncertainty avoidance include Greece, Portugal, and Uruguay. Low

uncertainty avoidance means people have high tolerance for the unstructured
and unpredictable. Countries that value low uncertainty avoidance include
Singapore and Jamaica.
 Individualism and Collectivism. Individualism reflects a value for a loosely
knit social framework in which individuals are expected to take care of
themselves. Countries with individualist values include the United States,
Canada, and Great Britain. Collectivism is a preference for a tightly knit
social framework in which individuals look after one another and
organizations protect their members’ interests. Countries with collectivist
values are Guatemala, Ecuador, and Panama.
 Masculinity and Femininity. Masculinity stands for preference for
achievement, heroism, assertiveness, work centrality (with resultant high
stress), and material success. Societies with strong masculine values are
Japan, Italy, Mexico, and Germany. Femininity reflects the values of
relationships, modesty, caring for the weak, and quality of life. Countries
with feminine values include Sweden, Norway, Costa Rica and France. Both
men and women subscribe to the dominant value in masculine and feminine
cultures.
 A fifth dimension, long-term orientation and short-term orientation, was

developed later. Long-term orientation includes a greater concern for the
future and highly values thrift and perseverance. Short-term orientation is
more concerned with the past and the present and places a high value on
tradition and meeting social obligations.
2. GLOBE Project Value Dimensions Exhibit 4.8
a. Research by the GLOBE Project (Global Leadership and Organizational Behavior

Effectiveness) used data collected from 18,000 managers in 62 countries. They
collected data on nine dimensions.
 Assertiveness is the extent to which a society encourages toughness,

assertiveness, and competitiveness.
 Future orientation refers to the extent to which a society encourages planning
for the future over short-term results.
 Gender differentiation refers to the extent to which a society maximizes
gender role differences.
 Performance orientation is the extent to which a society places emphasis on
performance and rewards people for improvement.
 Humane orientation refers to the degree to which a society encourages and
rewards people for being fair, altruistic, generous, and caring.
b. GLOBE research provides a more comprehensive view of cultural similarities and

differences than Hofstede’s.
3. Social values have great influence on organizational functioning and management

styles.
Discussion Question #10: How might the social value of low versus high power distance
influence how you would lead and motivate employees? What about the value of low versus high
performance orientation?
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B. Communication Differences Exhibit 4.9
1. People from some cultures tend to pay more attention to the social context (social
setting, nonverbal behavior, social status) of their verbal communication than
Americans do.
a. In a high-context culture, people are sensitive to circumstances surrounding

social exchanges. People use communication primarily to build personal social
relationships; meaning is derived from context–setting, status, and nonverbal
behavior–more than from explicit words. High-context cultures include Asian
and Arab countries.
b. In a low-context culture, people use communication primarily to exchange facts

and information; meaning is derived primarily from words. Low-context cultures
tend to be American and Northern European.
NEW MANAGER SELF-TEST: ARE YOU CULTURALLY INTELLIGENT?
The job of a manager demands a lot, and before long, activities will include situations that will
test a manager’s knowledge of and capacity for dealing with people from other national
cultures.. This exercise will help students determine their capacity for dealing with cross-cultural
situation.
Discussion Question#9: Which style of communicating do you think would be most beneficial to
the long-term success of a U.S. company operating internationally—high-context or low-context
communications? Why?
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VIII. INTERNATIONAL TRADE ALLIANCES
A. GATT and the World Trade Organization
71  Chapter 4
1. The General Agreement on Trade and Tariffs (GATT), signed by 23 nations in 1947,
started as a set of rules to ensure nondiscrimination, provide clear procedures, settle
disputes, and encourage participation of LDCs in international trade. GATT and its
successor, the World Trade Organization (WTO), primarily use tariff concessions as
a tool to increase trade. Members agree to limit the level of tariffs they will impose
on imports from other members.
2. The World Trade Organization (WTO) was established by the 1986 to 1994
Uruguay round. As of July 2008, 153 countries were members of the WTO. As a
permanent membership organization, the WTO is bringing greater trade
liberalization in goods, information, technological developments, and services. The
WTO is also, however, partly responsible for a growing backlash against global
trade.
B. European Union Exhibit 4.10
1. European Economic Community, now called the European Union (EU), was formed
in 1957 to improve economic and social conditions among its members, and has
since expanded to a 27-nation alliance. The biggest expansion came in 2004 when
ten new members from southern and eastern Europe joined. Turkey has opened
negotiations. The goal of EU is to create a single-market system for Europe’s
millions of consumers, allowing people, goods, and services to move freely. The
most significant aspect is the EU’s monetary revolution and the introduction of the
euro, the single European currency that could eventually replace 27 European
currencies.
2. The economic crisis has revived national loyalties and cross-border resentments,
slowing the move toward a unified and cohesive “European identity.”
3. Small but vocal factions in several countries, including the United Kingdom,
are arguing that companies and citizens would be better off withdrawing from the
eurozone. Some analysts think a broad breakup of the eurozone is unlikely, but
eurozone economies are at a crossroads.
C. North American Free Trade Agreement (NAFTA)
1. NAFTA went into effect on January 1, 1994, and merged the U.S., Canada, and
Mexico into a single mega market. The agreement broke down tariffs and trade
restrictions on most agricultural and manufactured products over a 15-year period.
2. Opinions remained divided over the benefits of NAFTA; some call it a success and
others refer to it as a dismal failure. Advocates say that it has increased trade,
investment, and income and continues to enable all three countries to compete more
effectively with rival Asian and European firms.
Discussion Question #8: Two U.S. companies are competing to take over a large factory in the
Czech Republic. One delegation tours the facility and asks questions about how the plant might
be run more efficiently. The other delegation focuses on ways to improve working conditions
and produce a better product. Which delegation do you think is more likely to succeed with the
plant? Why? What information would you want to collect to decide whether to acquire the plant
for your company?
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Suggested Answers to End-Of-Chapter Discussion Questions
1. What specifically would the experience of living and working in another country contribute
to your skills and effectiveness as a manager in your own country?
Generally speaking, the global exposure of working in another country helps people develop
skills and networks that will grow over time and instills a greater level of sensitivity to
opportunities. More specifically, such exposure helps managers understand other cultures
and learn to work more effectively with them by learning about the social values of those
other cultures. This is increasingly more critical even in one’s own country, as the workforce
becomes more and more diverse. Also, because effective management styles differ from one
country to another, learning to work effectively in another country will make managers more
flexible in dealing with a variety of cultural and ethnic situations in the U.S.
2. Both China and India are rising economic powers. How might your approach to doing
business with China, a communist country, be different from your approach to doing business
with India, the world’s most populous democracy? In which country would you expect to
encounter the most rules? The most bureaucracy?
Doing business in China would be different than doing business in India because China has
new regulations and government policies that are making life hard for foreign companies in
all industries. Managers in China have to build relationships with local regulators and local
officials, and some firms have had problems getting paid. In fact, Chinese managers
withhold payments as a tactic in price negotiations because these organizations are not just
companies, but also political entities. Due to significant cultural differences, the Chinese
culture build relationships which count more than contract. On the other hand, numerous
companies see India as a major source of technological and scientific brainpower, and the
fact that India has a large English speaking population makes it a natural for U.S. companies
who want to outsource services.
73  Chapter 4
3. Do you think it is realistic that BOP business practices can have a positive effect on poverty
and other social problems in developing countries? Discuss.
The bottom of the pyramid (BOP) concept proposes that corporations can alleviate poverty
and other social ills, as well as make significant profits, by selling to the world’s poorest
people. The term bottom of the pyramid refers to the more than four billion people who
make up the lowest level of the world’s economic “pyramid”, as defined by per capita
income. An example of how bottom of the pyramid business practices can have a positive
effect on poverty and other social problems is Unilever’s (formerly Lever Brothers) efforts
over many years to prevent the spread of disease in poor areas of the world by introducing
very inexpensive soap products to the people there. Another example is Procter & Gamble’s
efforts to get people in developing countries to use diapers and feminine hygiene products
that sell at low prices. In these cases and others, companies positively impact the general
health of the population or even reduce disease by providing products at prices specifically
set to be affordable to those in very low per capita areas of the world.
4. Somnio, a start-up running shoe company in California, decided to start selling its products
around the world from the very beginning. In general terms, name some of the challenges a
start-up company such as Somnio might face internationally.
The basic management functions of planning, organizing, leading, and controlling are the
same whether a company operates domestically or internationally. However, managers will
experience greater difficulties and risks when performing these management functions on an
international scale. When operating on an international basis, it is important for managers to
give considerable thought to economic, legal-political and sociocultural factors. International
businesses get affected by the infrastructure and economic problems of the countries where
the business has to set up. Differing laws and regulations make doing business a challenge
for international firms. Managers working internationally should also guard against
ethnocentrism, which is the natural tendency among people to regard their own culture as
superior to others.
5. Do you think it’s possible for someone to develop a global mindset if they never live outside
their native country? How might they do that?
It is possible for someone to develop a global mindset even if they never live outside their
native county by understanding and appreciating differences in social values. People from
some cultures tend to pay more attention to the social context (social setting, nonverbal,
social status, etc.) of their verbal communication. For example, American managers working
in China have discovered that social context is considerably more important in that culture,
and they need to learn to suppress their impatience and devote the time necessary to establish
personal and social relationships.
6. Should a multinational corporation operate as a tightly integrated, worldwide business

system, or would it be more effective to let each national subsidiary operate autonomously?
Why?
There is no single correct answer to this question because arguments can be made both ways.
The answer depends partly on the goals and strategy of the multinational corporation.
Operating as an integrated, worldwide system means that the parent company and its foreign
affiliates work together to fulfill common business objectives. Such global integration allows
a multinational corporation to attain economies of scale in production and also to acquire
resources and component parts wherever in the world it is most advantageous to do so.
Operating as an integrated system is often associated with a globalization strategy and with a
decentralized decision-making process. The reason for going multinational is to gain the
advantage of operating in several countries simultaneously, which is often facilitated through
uniform policies as well as standard products and business practices. This approach can
produce cost savings and uniformly high-quality performance throughout the firm.
Letting each subsidiary operate autonomously means that subsidiaries are free to respond to
economic, political, and cultural conditions of the nation in which they are located.
Headquarters personnel are not likely to be familiar with conditions in each country or be
capable of quickly responding to changes in local conditions. The strongest argument in
favor of a decentralized organization that lets subsidiaries operate autonomously is the
diversity of environments that exist around the world. Autonomy also may reduce political
risk by overcoming the image of outside control.
7. Why do you think many people are so frightened by globalization? Based on what is
occurring in the world today, do you expect the globalization backlash to grow stronger or
weaker over the next decade?
Generally, it may be that people who are afraid of globalization think they will somehow
come out on the losing end as globalization runs its course. They may be frightened by the
sheer size and power of large multinational corporations, sensing that they are simply and
gradually losing all vestiges of control over their lives as these enormous organizations
become more and more powerful, driving the needs of society and the agendas of world
governments to an ever-greater extent.
More specifically, the globalization backlash may be primarily the result of public perception
that other countries benefit from free trade to a much greater extent than does the United
States. The dramatic loss of jobs resulting from expansion of outsourcing to other countries
has led to increasing public resentment. Managers and companies may face significant
public relations difficulties in response to outsourcing actions. Managers may even face the
outsourcing of their own jobs as up to 3.3 million mostly white-collar jobs shift from the U.S.
to low-wage countries by 2015. Interestingly, though, U.S. companies are also finding a
growing interest on the part of overseas companies in outsourcing to the U.S.
The backlash against globalization is likely to become stronger over the next decade as trade
agreements with India, China, and other countries continue to expand and MNCs become
larger and more powerful in an environment of minimal regulation.
8. Two U.S. companies are competing to take over a large factory in the Czech Republic. One
delegation tours the facility and asks questions about how the plant might be run more
efficiently. The other delegation focuses on ways to improve working conditions and produce
75  Chapter 4
a better product. Which delegation do you think is more likely to succeed with the plant?
Why? What information would you want to collect to decide whether to acquire the plant for
your company?
There is no clear answer to this question. The Czech Republic is a former communist-bloc
country and a newly emerging democratic economy, and its people have been used to
manufacturing facilities run by the government. The plant may need substantial
improvements in efficiency. On the other hand, the working conditions there may be in need
of substantial improvement as well, and product quality will be important to success.
It would be important to gather a great deal of information about each of the dimensions of
the economic, legal-political, and sociocultural aspects of the Czech Republic and, in
particular, the local area in which the plant is located.
9. Which style of communicating do you think would be most beneficial to the long-term success
of a U.S. company operating internationally—high-context or low-context communications?
Why?
It seems likely that high-context communications would be more beneficial to the long-term
success of a U.S. company operating internationally because the most rapidly developing
economies are in Asian and Arab countries, which tend to be high-context cultures. This may
present significant difficulties for American managers, most of whom are males from low-
context cultures.
10. How might the social value of low versus high power distance influence how you would lead
and motivate employees? What about the value of low versus high performance orientation?
Power distance refers to the extent to which accept inequality in power among institutions,
organizations, and people. Low power distance means that people expect equality in power.
In countries with low power distance, it will be important to show equality in both tangible
and intangible ways. Status symbols such as large offices or reserved parking spaces for
executives will cause problems among the workforce. Employees will expect to participate
in decision making and teamwork is likely to be an effective structure for the organization.
In a high power distance country, people will expect those at higher levels in the organization
to have certain perks and will also expect them to make the decisions.
A society with a high performance orientation places high emphasis on performance and
rewards people for performance improvements and excellence. Employees in a high
performance orientation society can be motivated by rewards for excellent performance and
by developing innovative ways to improve performance. A low performance orientation
means people pay less attention to performance and more attention to loyalty, belonging, and
background. Employees in low performance orientation societies can be motivated by the
perception that their managers and companies are loyal to them, and by the creation of a
‘family’ atmosphere within their companies. In addition, they are likely to go to great lengths
in their performance for managers who show an obvious interest in their employees as
individuals and fellow human beings.
Apply Your Skills: Experiential Exercise
What are Your Social Values?
A global environment requires that managers have to deal with people who hold many different
values and ideas. Your scores have both individual and societal meaning. Compare your scores to
other students to understand your perception of the different values in your colleague group.
On which of the five values would you personally like to score higher? Lower? These five values
also differ widely across national cultures. Go to the Web site www.geert-
hofstede_dimensions.php and compare your country’s scores on the five values to the scores of
people from other countries. (At this site, the term masculinity is used instead of assertiveness.)
What surprises you about the differences across countries?
Apply Your Skills: Small Group Breakout
Where Have You Been?
This exercise asks students to create lists of countries they’ve visited outside their home
countries, record the population of each country, compute the percentage of the world’s
population for each country population, and estimate the grand total of number of countries and
percentage of world population visited by their groups. Once that is completed, they should
discuss reasons for the variability among group members and the implications of high exposure
(to other countries) versus low exposure with regard to a career in management.
Apply Your Skills: Ethical Dilemma
AH Biotech
1. Do the clinical trials in Albania. You’ll be able to bring the drug to market faster and
cheaper, which will be good for AH Biotech’s employees and investors and good for the
millions of people who suffer from anxiety attacks.
The problem with this option is that when the trials end in Albania, free treatment for those
patients will be discontinued and they are likely to be too poor to buy the drug even if it was
marketed there.
2. Do the clinical trials in the United States. Even though it will certainly be more expensive
and time-consuming, you’ll feel as if you’re living up to the part of the Hippocratic Oath that
instructed you to “prescribe regimens for the good of my patients according to my ability
and my judgment and never do harm to anyone.”
This option may be best if Hassan’s primary concern lies in not violating his own values with
regard to the Hippocratic Oath and he does not want to, or has doubts about his ability to
establish a compassionate use program in Albania after trials there are completed. Of
course, if he considers the delay of doing the trials in the U.S. to be doing harm to those
77  Chapter 4
individuals who might be able to get the drug sooner if the trials were done in Albania, then
this may not be the best option.
3. Do the clinical trials in Albania, and if the drug is approved, use part of the profits to set up
a compassionate use program in Albania, even though setting up a distribution system and
training doctors to administer the drug, monitor patients for adverse effects, and track
results will entail considerable expense.
If Hassan believes the drug will eventually produce adequate profits to pay for a
compassionate use program in Albania to continue treatment for those who participate in
clinical trials there, and that the drug will be approved following those trials, then this is
probably the best option for him. He can get the drug to patients in the U.S. sooner and he
will not be abandoning the Albanian patients who participate in the trials, thus upholding his
Hippocratic Oath in both respects.
Apply Your Skills: Case for Critical Analysis
We Want More Guitars!
1. How accurate is Adam Wainwright’s analysis of the situation at Guitarras Dominguez? Do

you think craftsmanship is incompatible with increasing productivity in this company? Why?
Adam Wainwright’s analysis of the situation at Guitarras Dominguez is not accurate. Adam
does not understand the working and management at Guitarras Dominguez. There are major
differences in social values between Guitarras Dominguez in Spain and Adam Wainwright’s
work place in the U.S. Craftsmanship is incompatible with increasing productivity in this
company as each guitar is a creation rather than a streamlined product. At Guitarras
Dominguez, craftsmanship is given paramount importance, not productivity.
2. What social values are present in Guitarras Dominguez, that seem different from U.S. social
values (Exhibit 4.7 and Exhibit 4.8)? Explain.
The social values present in Guitarras Dominguez are quite different from U.S. social values.
There is greater emphasis on high performance in the U.S. whereas in Spain the emphasis is
on loyalty, belonging, and background.
3. What do you recommend Wainwright do to increase production in a business setting that

does not seem to value high production?
Wainwright should communicate more with Salvador and explain him the need for increased
production. In a business setting that does not seem to value high production, Wainwright
should not suggest about the operations in the U.S. rather he should ask Salvador what best
can be done to increase production in the Spanish set up.
On the Job Video Case Answers

Black Diamond Equipment: Managing in a Global Environment
1. What evidence do you see of a global mindset in these managers? List at least three examples
of global thinking provided in the video.
 Black Diamond takes into consideration the differences in culture and perspective
among its global distributors. For example, the European market is different than the
American market even though both appeal to individuals who are passionate about
climbing and mountaineering.
 Black Diamond treats employees in its factories in the same ethical way worldwide.
There are no sweatshops. Employees worldwide work in safe, well-lit, clean factories.
 Black Diamond takes charge of its distributors worldwide so that the company’s
cultural values are upheld globally. There is a certification process that is used
globally to ensure that the company standards are met.
2. Referencing the common traits of an MNC described in the text, explain why you think Black
Diamond is or is not a multinational corporation.
A multinational corporation (MNC) typically receives more than 25 percent of its total sales
revenues from operations outside the home country. Black Diamond is a MNC because it
appeals to a very specialized group of people ─those interested in mountaineering. Its market
must be global because the costs of research and development for its products is so high that
the company could not be profitable if it only did business in the United States. An MNC also
has the following characteristics:
 Black Diamond is managed as an integrated worldwide business system in which foreign

affiliates act in cooperation with one another. Capital, technology, and people are
transferred among affiliates. Black Diamond acquires materials and manufacture parts
wherever it is most advantageous to do so.
 As an MNC, Black Diamond is controlled by a single management authority that makes

key strategic decisions. Centralization of management is required to maintain worldwide
integration and profit maximization.
 Black Diamond’s top managers exercise a global perspective. They regard the
entire world as one market for strategic decisions, resource acquisition, and location of
production.
3. Describe at least two environmental factors affecting this business, and summarize how the
managers are responding to these factors.
The Sociocultural Environment affects this business because many of Black Diamond’s
factory workers in countries such as Bangladesh have little or no formal education. The
company is responding by offering employees educational opportunities.
79  Chapter 4
The Legal-Political Environment affects this business because host governments have myriad
laws concerning libel statutes, consumer protection, in formation and labeling, employment
and safety, and wages. Black Diamond’s managers must learn these rules and regulations and
abide by them. They assure that the workers are treated humanely and work in a safe, clean,
well-lit factory.

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58  Chapter 4

MANAGING IN A GLOBAL ENVIRONMENT

Are You Ready to Work Internationally?

ANNOTATED LEARNING OBJECTIVES

4. Describe the characteristics of a multinational corporation

5. Explain the bottom of the pyramid concept.

 Global outsourcing, or offshoring, means engaging in the international division of labor

8. Explain why it is important for managers to develop their cultural intelligence.

ARE YOU READY TO WORK INTERNATIONALLY?

American managers often display cross-cultural ignorance during business negotiations

I. A BORDERLESS WORLD Exhibit 4.1

B. Developing a Global Mindset Exhibit 4.2

A global mindset is the ability of managers to appreciate and influence individuals,

II. THE CHANGING INTERNATIONAL LANDSCAPE

B. India, the Service Giant

1. Whereas China is strong in manufacturing, India is a rising power in software design,

C. Brazil’s Growing Clout

1. Brazil is another country that is gaining increasing attention of managers. Although

III. MULTINATIONAL CORPORATIONS

Discussion Question #6: Should a multinational corporation operate as a tightly integrated,

1. As the world becomes increasingly interconnected, a backlash over globalization is

B. Serving the Bottom of the Pyramid

1. Although large, multinational organizations are accused of many negative

IV. GETTING STARTED INTERNATIONALLY Exhibit 4.3

1. Exporting is a strategy in which the corporation maintains its production facilities

2. Exporting does entail numerous problems based on physical distances, government

1. Global outsourcing, or offshoring, means engaging in the international division of

1. Direct investing is a strategy in which the corporation is involved in managing the

V. THE INTERNATIONAL BUSINESS ENVIRONMENT Exhibit 4.4

International management is the management of business operations conducted in more than

VI. THE ECONOMIC ENVIRONMENT

2. Infrastructure refers to a country’s physical facilities support economic activities

B. Economic Interdependence Exhibit 4.5

VII. THE LEGAL-POLITICAL ENVIRONMENT

takeovers of property and acts of violence directed against a firm’s properties or

B. Political instability refers to events such as riots, revolutions, civil disorders or

VII. THE SOCIOCULTURAL ENVIRONMENT

a. Hofstede’s Value Dimensions Exhibit 4.7

 Power distance. High power distance means people accept inequality in

uncertainty avoidance include Greece, Portugal, and Uruguay. Low

 A fifth dimension, long-term orientation and short-term orientation, was

2. GLOBE Project Value Dimensions Exhibit 4.8

a. Research by the GLOBE Project (Global Leadership and Organizational Behavior

 Assertiveness is the extent to which a society encourages toughness,

b. GLOBE research provides a more comprehensive view of cultural similarities and

3. Social values have great influence on organizational functioning and management

B. Communication Differences Exhibit 4.9

a. In a high-context culture, people are sensitive to circumstances surrounding

b. In a low-context culture, people use communication primarily to exchange facts

NEW MANAGER SELF-TEST: ARE YOU CULTURALLY INTELLIGENT?

VIII. INTERNATIONAL TRADE ALLIANCES

A. GATT and the World Trade Organization

B. European Union Exhibit 4.10

C. North American Free Trade Agreement (NAFTA)

Suggested Answers to End-Of-Chapter Discussion Questions

6. Should a multinational corporation operate as a tightly integrated, worldwide business

Apply Your Skills: Experiential Exercise

What are Your Social Values?

Apply Your Skills: Small Group Breakout

Where Have You Been?

Apply Your Skills: Ethical Dilemma

Apply Your Skills: Case for Critical Analysis

We Want More Guitars!