Solution Manual for International Business A Managerial Perspective, 9th Edition

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International Business:The New RealitiesFifth EditionS. Tamer CavusgilGary KnightJohn R. Riesenberger6olutLon Manual forInternational Business: The NewRealities by Marta Szabo Whiteand Gary Knight

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USMCA AgreementInternational Business: The New Realities, 5th EditionCavusgil, Knight, & Riesenbergerp g .1Explanation of the USMCA AgreementIn January 2020, Canada, Mexico and the United States concluded the U.S.‐Mexico‐CanadaAgreement (USMCA), replacing the North American Free Trade Agreement (NAFTA) which tookeffect in 1994. The USMCA is mostly an updated version of NAFTA. Like NAFTA, the USMCA is afree trade agreement – tariffs and other barriers to trade in products and services have beenreduced or eliminated among the signatory countries. Both NAFTA and the USMCA imposed localcontent requirements, which specify that products produced within the region must contain aminimum proportion of locally manufactured parts, components, and labor. If the contentrequirement is not met, the product becomes subject to the tariffs that member governmentsnormally impose on nonmember countries.The broad aim of NAFTA and the USMCA is to encourage international trade and investmentamong North America’s three economic powers. The combined population of the USMCA regionis approximately 500 million people, which is much larger than that of any of the membercountries and slightly larger than the European Union. Thus, companies within the USMCA zonecan access a much larger customer base, within a contiguous free trade area. Experts argue theresultant increase in economic activity in the USMCA zone should lead to job creation and risinggross domestic product in each country. In addition to ensuring free trade and investment amongthe member nations, NAFTA had enhanced intellectual‐property rights and protections, includingstrict measures against industrial theft. NAFTA included provisions to protect worker rights andthe natural environment, as well as formal rules for resolving disputes between investors andparticipating countries.Overall, experts say that about 85 percent of the USMCA agreement is a modernized version ofNAFTA. Consequently, the USMCA has been labelled "NAFTA 2.0”.The USMCA continues therules, regulations, and procedures present in NAFTA.The USMCA also improves rules forinvestment and intellectual property rights, as well as procedures on dispute settlement in suchareas as investment, unfair pricing, labor issues, and the environment. The USMCA enhances rulesparticularly for three industries: automobiles, chemicals, and agriculture. For example, the USMCAincreased the local content requirements on vehicles from 66 percent (the NAFTA standard) to 75percent, with the goal of increasing jobs in the auto industry. The USMCA gives U.S. farmers betteraccess to the Canadian market. The USMCA mandates stronger labor rights and working conditionsfor factories in Mexico, but also requires that 40‐45 percent of auto content be made by workersearning at least $16 per hour, a provision intended to shift some auto industry jobs to the UnitedStates and Canada.Critics have charged the USMCA is largely ‘window‐dressing’, a politicalmaneuver and will have relatively limited impact on the economies of the three membercountries.In terms of the specific impact, the International Trade Commission, an agency of the UnitedStates, has forecast that the USMCA will add 176,000 U.S. jobs, increasing employment by amodest 0.12%, and raise U.S. GDP by $68.2 billion, or 0.35%, by its sixth year.Companies in the automotive, chemical, and agricultural sectors are expected to feel the biggestimpact. The expected impacts are summarized below.

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USMCA AgreementInternational Business: The New Realities, 5th EditionCavusgil, Knight, & Riesenbergerp g .2Auto industry. The USMCA will require vehicles to have 75% of their parts manufactured in NorthAmerica, up from 65% under NAFTA. Automotive parts will be classified as core parts, principalparts, and complementary parts. In addition, the USMCA contains a new ‘Labor Value Content’provision that requires 40% to 45% of automotive parts be produced by workers earning at least$16 an hour — a change intended to shift manufacturing from Mexico to the United States andCanada. From the U.S. perspective, the overall goal of these changes is to increase the number ofvehicles manufactured in the United States.Chemical industry. The rules of origin have been made more transparent. Documentationrequirements have been simplified so that many chemical manufacturers no longer need todetermine regional value content and submit associated documentation. Simultaneously, the newrules include offering additional qualification options aimed at increasing the amount of productsproduced within the member countries. These changes are intended to favor chemical companiesbased within the USMCA region, and to reduces advantages for chemical firms based outside theUSMCA region.Agriculture. The agricultural provisions mainly benefit the U.S. sector. Farmers based in the UnitedStates will gain more access to the Canadian market, especially for dairy and poultry, with anexpected new market of $70 million. U.S. farmers will be able to export more milk, ice cream,cheese, and other dairy products in Canada. U.S. farmers will be able to export more poultry toCanada. Overall, the USMCA is expected to increase annual U.S. agricultural and food exports by$2.2 billion.The above noted changes in the USMCA (as compared to NAFTA) will require companies in thethree member countries to substantially restructure aspects of their supply chains and establishedmanufacturing methods.The USMCA includes additional provisions, which are summarized below.Labor. The agreement requires Mexico to pass legislation that improves the collective bargainingcapabilities of labor unions. This is intended to improve worker rights and working conditions inMexico.Intellectual property. The USMCA extends copyright length in Canada to life plus 70 years.Inaddition, the ‘exclusivity period’ for biotechnological firms will increase from 5 years to 10 years,and for industrial designs from 10 to 15 years. An exclusivity period refers to the delays andprohibitions on approval of competitor products. E.g., in the biotechnology and pharmaceuticalindustries, an exclusivity period is intended to promote a balance between new drug innovationand greater public access to drugs. Exclusivity is similar to having a patent, and prevents potentialcompetitors from bringing to market products that replicate or directly compete against theproducts invented by a given firm.Dispute settlement.The USMCA contains new provisions for resolving disputes betweencompanies and countries. E.g., if a company believes that another firm, or a country, has violatedthe USMCA, that company can seek recourse through the domestic legal system, via a USMCA‐developed Panel that acts as an International Trade Court in arbitrating the dispute, or by suingthe government over perceived violations.

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USMCA AgreementInternational Business: The New Realities, 5th EditionCavusgil, Knight, & Riesenbergerp g .3Others. The USMCA has provisions aimed at stabilizing the exchange rates among the currenciesof the three member countries, and against government support of state‐owned enterprises.The USMCA will be valid for 16 years with a mandatory review every six years.Proponents believe the USMCA will trigger a cycle of market disruption and risk‐taking, whichshould lead firms in the member countries to innovate in order to increase their competitiveadvantages. This will arise partly because affected companies will need to explore new sourcingand manufacturing options, including adding supply and trade diversity to their supply chains. Itis hoped that such changes will potentially reduce costs, increase efficiency, and increaserevenues.Sources:Office of the United States Trade Representative, United States‐Mexico‐Canada Agreement,https://ustr.gov/trade‐agreements/free‐trade‐agreements/united‐states‐mexico‐canada‐agreement;EdGarsten, “USMCA Trade Deal Is Now In Force–And Mandating Higher Wages, More Paperwork,” Forbes,July 1, 2020, www.forbes.com; Lecharo Owens, “USMCA expected to deliver small positive economicimpactandbigchangesfor3industries,”ThomsonReuters,February4,2020,https://blogs.thomsonreuters.com/answerson/usmca‐economic‐impact/;AnaSwansonandJimTankersley, “Trump Just Signed the U.S.M.C.A. Here’s What’s in the New NAFTA,” New York Times, July 1,2020, www.nytimes.com

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1| PagePART 1FOUNDATION CONCEPTSCHAPTER 1INTRODUCTION: WHAT IS INTERNATIONAL BUSINESS?Instructor’s Manual by Marta Szabo Whiteand Gary KnightI. LECTURESTARTER/LAUNCHER■Considerhavingeveryoneinclassintroducethemselves.Onewaytoinitiateintroductions is distribute random pages torn from business magazines, in which eachperson receives one page. Next each student circles words on the page that describehim/her. In groups of two or three, each student shares the rationale behind each wordthat he/she circled. Finally, one of the group members introduces another group memberto the class. This process enables students to immediately know at least one otherstudent in the class. The circled words and explanations are often humorous, whichserve as icebreakers during your first classroom encounter.■globalEDGE™(globaledge.msu.edu) assembles a collection of tools and games thatwill allow you to compare countries on avariety of statistical indicators, rank countriesbased on these indicators, and test your knowledge of country capitals from around theworld.Get Insights By Country:http://globaledge.msu.edu/Global-Insights/By/countryCurrency Converter:http://www.xe.com/Country Comparator:http://globaledge.msu.edu/comparatorRanking Countries:http://globaledge.msu.edu/global-resources/resource/5128Country Tools and Data:http://globaledge.msu.edu/tools-and-dataGlobal Resource Directory:http://globaledge.msu.edu/global-resources/■ Under Country Insights click on a region, then select a country, Zimbabwe for example.http://globaledge.msu.edu/Countries/ZimbabweEveryone in the class should be assigned a different country. Each student is thenresponsible for becoming an expert on that country. Twice during the term, each studentcould report on their country, and summarize a newspaper article published in theircountry, i.e. an International Newspaper Memorandum assignment.

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2| Page[1]An exciting way to introduce your students to International Business is theCIA Maps,from the CIA World Factbook, which provides an interactive and fun tool to introduce tointernational business:https://www.cia.gov/library/publications/the-world-factbook/[2]Another great way to introduce student to the world ofinternational business is todirect them to the BBC website:http://news.bbc.co.uk/1/hi/country_profiles/default.stm[3]Comic relief-Humorous (possibly offensive) introduction to IB2:09 minutesCatherine Tate-Translator:http://www.youtube.com/watch?v=ma8Vwkpx5y8INTERNATIONALIZATION AT HARLEY-DAVIDSON [CLOSING CASE]■ Harley Davidson is the chapter Closing Case. Thesequestions serve as hooks forstudents to familiarize themselves with the chapter concepts■1908-HarleyDavidsonsoldthefirstHarleypolicemotorcycletowhichpolicedepartment?ANSWER:Detroit;NearlyeverylargeU.S.policedepartmentemployedHarleymotorcycles■1988-Harley Davidson opened up its first foreign production facility in what country?ANSWER:Brazil (Manaus)… Why is Brazil an important foray into the internationalarena? It represents a key emerging market country.■There have been recent updates to the situation of Harley Davidson regarding itsperformance and international activities. In particular, Harley management has sought tomove more of the firm’s production and marketing activities abroad, in light of highermanufacturing costs in the United States and the fact that the market for Harley sales isincreasingly saturated in the US and Millennials and other younger consumers are lessinterested in buying large motorcycles. These trends have been reported in numerousaccounts in the news media.II. LEARNING OBJECTIVES AND THE OPENINGCASELEARNING OBJECTIVESAfter studying this chapter, students should be able to:1.1 Describe the key concepts in international business1.2 Understand how international business differs from domestic business1.3 Identify major participants in international business1.4 Describe why firms internationalize1.5 Appreciate why you should study international business1.6Learn the CKR Intangible Soft Skills™ and the CKR Tangible Process Tools™ toimprove your employability and success in the workplace.

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3| PageKey Themes■ In this chapter, there are five themes:[1] Key concepts in international business[2] How international business differs from domestic business[3] Who participates in international business[4] Why firms internationalize[5] Why you should study international business■This chapter is the introduction to the text, as well as to the foundation concepts. Thefirst part of this text (chapters 1-8) explores globalization from a macro, environmentallevel, while the second part (chapters 9 -17) examines international business from amore micro, organizational level. The fundamental concepts introduced in Chapter 1 arecentral to both macro and micro perspectives for understanding international business.Thus, these basic concepts permeate the entire text, and students should be well-acquainted them.■ In this chapter, use a macro lens to introduce students to some of the fundamentalinternational business concepts.■Cross-bordertradinghasbeenaroundforcenturies;contemporaryinternationalbusiness has gained considerable momentum/complexity over the past four decades.■International businessrefers to the trade and investment activities by companiesacrossnationalborders.Globalizationofmarketsreferstoongoingeconomicintegration and growing interdependency of countries worldwide. Stress the dramaticgrowth in world trade, which now exceeds some $18 trillion annually.■ There are two ways to invest internationally- passively (portfolio investment-financialassets)or actively(foreign direct investment-capital, technology, labor, land, plant andequipment).■ Also important areimporting(global sourcing)-buying products/services from abroadand bringing them back to the home country.Exporting-manufacturing a product orservice in one country and selling it to another.■ Address the broader questions of:◘Why firms go international?- Primarily toincrease sales and profits!◘Whatis the difference between internationalization and globalization?Former-Expansionofinternationalbusinessactivitiesvs,Latter-Integration,interdependency & interconnectedness of internationalization (the 4 I’s) Example:Increasing exports vs. Sourcing value-chain activities strategically around theglobe to leverage factor efficiencies◘Howinternationalbusinessisdifferentfromdomesticbusiness:Complexity and Risks (4)◘Who participates in international business-Multinational Enterprise(MNE)Small and Medium-sized Enterprise(SME)Born Global- entrepreneurial firm that is international from almost inception◘Why you should study international business- Competitive advantage- foryou and your firm!■ Note that international business isbotha cause and a result of increasing nationalprosperity.

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4| PageTeaching Tips■ In this chapter, use a broad brush approach in generating excitement about theimportance of international business activity. Ask students to examine their clothing,watches, iPhones, iPods and report where in the world each item was manufactured.This discussion underscores the profound and pervasive impact that globalization hashad on all of us.■ Next, ask students what they would like to do professionally, after they graduate. Oncetheyrespond,askiftheycanaccomplishthatsuccessfullywithoutunderstandinginternational business, and the impact of global trends on their industry and business?The answer is, of course, a resounding NO!!!Commentary on the OpeningCase:FACEBOOK: A GLOBAL PHENOMENONKey messageInstagramisaphoto-andvideo-sharingnetworkenjoyedbysmartphoneownersworldwide who use the service to share photos and short videos with others. The sitehas more than 700 million active monthly users, and was acquired by Facebook in 2012.InstagramandFacebookunderscoretheeconomic,politicalandpersonalinterconnectedness among countries, companies, and consumers.Uniqueness of the situation described■What is striking about this case is that by the time the reader finishes this case,Instagram usage will have again jumped globally. One of every ten people on the planet-aboutmore than 700 million users- has an Instagram account.■Available in 33 languages, Instagram has a dual identity—a for-profit business and avehicle for our personal lives.■Instagram is the sixth most popular social media platform worldwide, after Facebook,Twitter, LinkedIn, YouTube, and Google+.Classroomdiscussion■ This example illustrates how the global economy has permeated our everyday lives.■ International business activity is increasingly complex and impacts our everyday lives-shopping,listeningtomusic,watchingamovie,orsurfingtheInternet-involveinternational business transactions that connect us to the global economy, and influencequality of life, standard of living, and economic well-being.■The vision of both Instagram and Facebook mirrors this activity by empoweringindividuals, mapping the social relationships among them, and creating a new system forexchanging information that many find indispensable.■ Mode of Entry:◘FDI-foreigndirectinvestmentestablishingofficesaroundtheworld.■ Which countries is it especially popular in?◘Instagram is especially popular in Russia, Brazil, Turkey, Poland, the UnitedKingdom, and the United States. It enjoys fast growth in Asia.■What are the most photographed countries among Instagram users?

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5| Page◘Italy, Japan, Indonesia, Kuwait, Thailand, and France■ Primary revenue generation:◘ Advertising- Brand awareness- Key■How does Instagram market itself in less developing economies, where incomes arelower?◘The platform allows people in such countries to take and share high-qualityphotographsusinglow-resolutionphones,astheyoftencannotaffordexpensivesmartphones or fast Internet connections.■Key revenue source:◘Retailers and other companies leverage Instagram to market their products andservices at lowcost. Most of the world’s top brands—for example, Apple, BMW, andSony—have established Instagram pages, to facilitate sharing photos about their brands.■ Specific country examples (Russia, Turkey, Brazil, Poland, United Kingdom, UnitedStates) enrich the overall theme: the Instagram phenomenon illustrates how converginglifestyles, modern communications technology, and imaginative entrepreneurship arefacilitating the emergence of global enterprises.■ Use thiscase as a springboard for the first teaching tip offered above.■ Also ask students to update theInstagram saga since its sales to Facebook in 2012.Break students into small groups to work on the following questions, with each groupproviding a brief presentation of their answers.QUESTIONS1-1. What advantages doesInstagramobtain from doing business in internationalmarkets?(LO 1.4; AACSB: Application of knowledge)■Capitalizingupontheglobalinterdependencyandinterconnectednessamongeconomic, political, social forces on professional and personal levels.■Instagram appeals to people worldwide who enjoy taking photos and sharing them withothers around the world.Many countries constitute key markets for the firm’s photo/videosharing services. Instagram earns more than $5 billion in annual advertising revenueworldwide.■ Thetendency of people to create photos and videos of their favorite brands is valuableto brand managers in a world of targeted advertising; reach is enhanced.1-2.What attributes of Instagram have allowed it to gain rapid acceptance incountries around the world?(LO 1.1; AACSB: Reflective thinking)■Widespreadadoptionofsmartphoneapps.Thenumberofsmartphoneusersworldwide has reached 3 billion, about 40 percent of world population.■ Instagram management has developed the service so that it has atruly globalplatform. Management has used foreign direct investment to establish offices around theworld, to support customer adoption and better understand Instagram’s most popular

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6| Pagemarkets worldwide.■ The Instagram platform allows people to take and share high-quality photographsusing low-resolution phones, which appeals to users in less-developed economies.■ Instagram also launched an expanded web version that allows users to skip the app’swait time, data costs, and storage needs while still providing basic functionality.■Ingeneral,Instagrambenefitsfromconverginglifestyles,theriseofadvancedcommunicationstechnologies,andimaginativeentrepreneurshipandskillfulmanagement in the firm.1-3.How do companies use Instagram to market their products and services?(LO 1.1; AACSB: Diverse and multicultural work environments)■Based in Germany, sportswear company Puma contracts with Instagrammers whohave many followers to capture photos that showcase the firm’s products..■Based in Denmark,brewing company Carlsberg launched a marketing strategy called“Happy Hour”that offers half-priced beers in exchange for Instagram posts.■In Japan,Instagram’s most popular influencer is a dog, Marutaro, who promotes petfood, real estate, and other ventures through the app.■In Brazil, sports teams use Instagram to promote themselves.■Worldwide, many firms that market youth-oriented services leverage Instagram topromote their brands. Firms target Instagram for brand promotion among upwardlymobile young managers.III. DETAILED CHAPTER OUTLINEINTRODUCTION: WHAT IS INTERNATIONAL BUSINESS?■International business (cross-border business)refers to cross-border trade andinvestment activities by firms.■ Primarily, individual firms engage in international business, yet, governments andinternational agencies may also conduct international business activities.■Exhibit 1.1-Elementsof International Business (Six)1] Globalization of markets2] International trade3] International investment4] International business risks5] Participants: Firms, distribution channel intermediaries, facilitators and governments.6] International entry strategies, including exporting and direct investment■Globalization of markets(orthe globalizationof economies) refers to ongoingeconomic integration and growing interdependency of countries worldwide.■Onlineplatforms-Amazon,Alibaba,FacebookandInstagramunderscorethisintegration and are central to globalization.

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7| Page■Internationalizationrefers to the tendency of firms to systematically increase theinternational dimension of their business activities.■ This has resulted in the widespread diffusion of products, technology, and knowledgeworldwide.■Macroperspective(trend)-globalizationofmarketsmeansintenseeconomicinterconnectedness between/among countries.Market globalization is characterized by several related trends:●Cross-border transactions-unprecedented growth rates-from $300 billion per yearin1960 to current numbers of $16trillion annually●Trade=Substantial international flows of capital, technology, and knowledge●Developmentof highly sophisticated global financial systemsand mechanismsto facilitate cross-borderflows ofproducts, money, technology, knowledge, and data.●Greater collaboration among nationsthrough multilateral regulatory agencies suchas the World Trade Organization (WTO:www.wto.org) and the International MonetaryFund (IMF:www.imf.org)■Micro perspective (focus)-firm level, activity-Value-Chain Perspective- Firmsconduct value-adding activities on aglobalscale, i.e. organize, source, manufacture,market, sell, and employ market entry strategies such as exporting, strategic alliances,and direct investment.■ The text focuses primarily on the international business activities of the individual firm.■Globalization bothcompelsandfacilitatescompanies to expand abroad- internationalexpansion is easier due to market and product globalization.■ A “level playing field” has made cross-border activities appealing to all types of firms-largeandsmall;manufacturingandservicesectors(e.g.banking,engineering,insurance, and retailing).■ Globalization impacts everyone, as evidenced by the global financial crisis (2008). Theeconomic contagion, or interconnectedness was underscored as the crisis began in theU.S. and rapidly spread to U.S. trade partners, eventually impacting Canada, Mexico,Japan,Chinaandtheworld.Thismanifestationillustratestheintegrationandinterdependency of national economies throughout the world.WHAT ARE THE KEY CONCEPTS IN INTERNATIONAL BUSINESS?■International trade and investment are the most conventional forms of internationalbusiness transactions.International Trade■ Cross-borderexchange of products (merchandise) and services (intangibles) typicallythrough exporting and importing.

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8| Page■Exporting(outbound activity) - entry strategy involving the sale of products/ servicesto customers located abroad.■Importing(global sourcing; inbound activity) - the procurement of products/servicesfrom foreign suppliers for consumption in the home country or a third country■Exportingandimportingmayincludebothintermediate(rawmaterialsandcomponents) and finished products.International Investment■ Cross-border investment is the transfer of assets to another country or the acquisitionof assets in that country.■ Thefactors of production(assets) include capital, technology, managerial talent, andmanufacturing infrastructure.■Trade= products and services cross national borders.■Cross-border investment= the firm itself crosses national borders.Two Types of International Investment:■International portfolio investment(typically short-term) is the passive ownership offoreign securities such as stocks and bonds for the purpose of generating financialreturns.■Foreigndirectinvestment(FDI)(typicallylong-term)isaforeign-marketentrystrategy that gives investors partial or full ownership of a productive enterprise. The firmestablishes a physical presence abroad through acquisition of productive assets such ascapital, technology, labor, land, plant, and equipment.The Nature of International Trade■Macro-InternationalTrade:Aggregateexportandimportflowsofproductsandservices between nations.■Micro-InternationalBusiness:Cross-bordertransactionsofanindividualbusinessenterprise.■ Gross domestic product (GDP) is the total value of products and services produced ina country during a year.■ Exhibit 1.2contrasts the growth of total world exports to the growth of total worldgross domestic product (GDP)since 1980.■ Due to the global recession, world trade declined in 2009, ending a 27-year boomperiod.■ Trade revived and returned to normal levels in 2012.■ Remarkable- since 2008, annual rate of growth inworld exportssurpassedworldGDPby almost 2x (5.3% versus 2.8%).Trade Growth > GDP Growth:[1]Significant rise of emerging markets during the past three decades, which are hometo growing middle class households equipped with substantial disposable incomes.[2]Advanced (or developed) economies such as the U.S. and the European Union arenow sourcing many of the products from low-cost manufacturing locations such asChina, India, and Mexico.

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9| Page[3]Advances in information and transportation technologies, decline of trade barriers,and liberalization of markets fuel the rapid growth of trade.■Exhibit1.3identifiestheleadingnationsinmerchandiseexports(notincludingservices).■ During the recent global recession, China surpassed the U.S. as the world’s leadingexporter in total dollar terms, trade accounts for about31%of its GDP (in the U.S., tradeis 19% of its GDP).■ For other economies, merchandise trade is a much larger component of economicactivity: e.g. Netherlands (125%), Mexico (68%), and South Korea (68%).■Exhibit 1.4identifies thetop 25 countriesininternationalmerchandisetrade(notincluding services).The 25 countries shown account for the vast majority of worldmerchandise trade.■Entrepôteconomies(intermediate depot; exports = imports): Singapore, Hong Kongand Malaysia export more than 100% of their respective GDPs.■ Such countries import a large volume of products, some of which they process intohigher value-added products and some they simply re-export to other destinations.The Nature of International Investment■Foreign Direct Investment(FDI) - (asset ownership and long time frame) is theultimate commitment-level of internationalization, and thus this text focuses primarily onFDI(mostcommonmodeofentrystrategy)asopposedtoInternationalPortfolioinvestment.■Newlegalbusinessentity,recognizedbythehostcountryandsubjecttoitsregulations.■ Motivations for firm FDI: (Note how these fit into the value chain)(1)PrimaryActivity: Set up manufacturing/assembly facilities to produceproducts/services;(2)PrimaryActivity: Open a sales/representative office to conduct marketing ordistribution activities; or(3)SupportActivity: Establish a regional headquarters■FDI and Competitive Advantage:Large, resourceful companies with substantial international operations are better able toleverage FDI to:(1) Manufacture/assemble products in low-cost labor countries (or for other resources),i.e. China, India, Russia, Brazil, and Mexico:■ Example-◘Fordinvestedsome$3billiontobuildanewcarfactoryinMexicotomanufacture Fiesta automobiles.

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10| Page(2) Global challengers originating in rapidly developing economies invest in westernmarkets:■ Examples-◘Chinesecompany Haier purchased General Electric’s appliance division for$5.4 billion, in 2016.◘Turkeyin2014- Yildiz paid over three billion dollars to acquire British basedcookie and snack maker, United Biscuits.◘India'sMittal Steel Co. acquired the Belgium-based Arcelor SA in August 2006,creating a $38 billion conglomerate -- the world's largest steel company.◘Russianoil and gas firm Lukos established thousands of service stations in theU.S. and Europe.■Exhibit 1.5shows the dramatic growth of FDI since the 1980s.■ September 11,2001interrupted FDI inflows with the worldwide panic that ensuedfollowing the terrorist attacks in the U.S.; then interrupted again in2008by the globalrecession. Stability in world economy is key.■Developed (Advanced) economies= Japan, Australia, Canada, the U.S., and mostcountries in Western Europe. Dollar volume of FDI has grown immensely since the1980s, in developed economies.■Developing economies= Parts of Africa, Asia, and Latin America.■Significant- is the growth of FDI into developing economies (surpassing advancedeconomy inflows in 2010) despite widespread poverty, lower incomes, less-developedindustrial bases, and less investment capital than advanced economies, and representthe need for modern industrial infrastructure.Services as Well as Products■ Key international players: Tangible merchandise (products) and intangibles (services-e.g. banks, consulting firms, hotels, construction companies, retailers, airlines, etc.).■ International trade in services accounts for aboutone-quarterof all global trade and isgrowing faster than products, however the value of merchandise trade is still muchgreater than the value of services trade.■ Challenges unique to services:◘ Not all services can be exported.◘ Physical presence in host country is a prerequisite for many services.■More than $2 trillion worth of services are sold abroad every year.■Exhibit 1.6identifies the leading countries in total international services trade.■ Larger, developed economies account for the greatest proportion of services- asservices typically comprise more than 2/3 of the GDPs of these countries.■ EBay- the giant Internet retailer earned $9 billion in 2017, of which more than 50%came from international sales.■ EBay expanded to India, China, Korea, and Europe in anticipation of most of its futurerevenue growth coming from abroad.■When developing its business in India, eBay acquired the Mumbai-based e-retailerBaazee.■Exhibit1.7(greatchart)illustratesthediversityofservicesectorsthatareinternationalizing.

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11| PageThe International Financial Services Sector■ Banking and financial services are the most activecross-border services.■ Explosive growth of global capital markets is attributed to:(1)Internationalization Banks/Financial institutions→ increased amount ofcheap,localinvestmentcapital,stimulatinglocalfinancialmarketsandencouraging savings(2)International Flow ofMoney → into pension funds and portfolio investments■ Developing economies- banks/financial institutions have fostered economic activity byincreasing the availability of local investment capital, which stimulates the developmentof financial markets and encourages savings.■International banking is primarily conducted by very large banks.■Governmentsworldwideimposedmanynewregulationsinthebankingindustryfollowing the global financial crisis that arose in 2007–2008.■Consumers and local businesses generally prefer to deal with local banks, obtainingfinancial services from homegrown “brick-and-mortar”branches and personnelwhounderstand local conditions.■China is now home to three of the world’s five largest banks, specifically ICBC, ChinaConstruction Bank, and the Agricultural Bank of China.■London long has been the banking hub of Europe, but the status may be threatened ifthe United Kingdom ends its membership in the European Union (EU) under the Brexitarrangement.HOW DOES INTERNATIONAL BUSINESS DIFFER FROM DOMESTIC BUSINESS?■Complexity-Macroforcesdifferfromcountrytocountry-economicconditions,national culture, legal and political systems- vary by country.■Risk- Uncontrollable variables- the firm has little or no control over these.■ Foreign environments involve new risks that firms must manage.■Instagram(opening case)- exemplifies how distinctive conditions in each country leadbusinesses and consumers to utilize services differently, from country to country.The Four Risks of InternationalizationThe Four Risks of International Business■Exhibit 1.8summarizes the four major risks: cross-cultural risk, country risk, currencyrisk, and commercial risk.Cross-Cultural Risk■ Situation where a cultural misunderstanding places some human value at risk.■ Differences in language, lifestyles, mind-sets, customs, and religion.■Cross-cultural literacy - critical to embrace culturally-valued mind-set and/or work style.■ Cultural blunders- hinder the effectiveness of foreign managers.

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