Interactive Preface
International Business: Competing in the Global Marketplace is intended for the first international business course at either the undergraduate or the MBA level. My goal in writing this book has been to set a new standard for international business textbooks: I have attempted to write a book that (1) is comprehensive and up-to-date, (2) goes beyond an uncritical presentation and shallow explanation of the body of knowledge, (3) maintains a tight, integrated flow between chapters, (4) focuses managerial implications, and (5) makes important theories accessible and interesting to students.
Comprehensive and Up-to-Date
To be comprehensive, an international business textbook must:
- Explain how and why the world's countries differ.
- Present a thorough review of the economics and politics of international trade and investment.
- Explain the functions and form of the global monetary system.
- Examine the strategies and structures of international businesses.
- Assess the special roles of an international business's various functions.
This textbook does all these things. Too many other textbooks pay scant attention to the strategies and structures of international businesses and to the implications of international business for firms' various functions. This omission is a serious deficiency, because the students in these international business courses will soon be international managers, and they will be expected to understand the implications of international business for their organization's strategy, structure, and functions. This book pays close attention to these issues.
Comprehensiveness and relevance also require coverage of the major theories. Although many international business textbooks do a reasonable job of reviewing long-established theories (e.g., the theory of comparative advantage and Vernon's product life-cycle theory) they tend to ignore such important newer work as:
- The new trade theory and strategic trade policy.
- Michael Porter's theory of the competitive advantage of nations.
- Robert Reich's work on national competitive advantage.
- The new growth theory championed by Paul Romer and Gene Grossman.
- The work of Douglas North and others on national institutional structures and the protection of property rights.
- The market imperfections approach to foreign direct investment that has grown out of Ronald Coase and Oliver Williamson's work on transaction cost economics.
- Bartlett and Ghoshal's research on the transnational corporation.
- The writings of C. K. Prahalad and Gary Hamel on core competencies, global competition, and global strategic alliances.
The failure of many books to discuss such work is a serious deficiency considering how influential these theories have become, not just in academic circles, but also in the world at large. A major proponent of strategic trade policy, Laura Tyson served for a time as chairperson of President Clinton's Council of Economic Advisors. Robert Reich served as Secretary of Labor in the Clinton administration. Ronald Coase won the 1992 Nobel Prize in economics, giving the market imperfections approach new respectability. Two years later, Douglass North won the Nobel Prize in economics for his work showing how a nation's economic history influences its contemporary institutions and property rights regime. The work of Bartlett, Ghoshal, Hamel, and Prahalad is having an important impact on business practices.
I have incorporated all relevant state-of-the-art work at the appropriate points in this book. For example, in Chapter 2, "Country Differences in Political Economy," reference is made to the new growth theory and the work of North and others on national institutional structures and property rights. In Chapter 4, "International Trade Theory," in addition to such standard theories as the theory of comparative advantage and the Heckscher-Ohlin theory, there is detailed discussion of the new trade theory and Porter's theory of national competitive advantage. In Chapter 5, "The Political Economy of International Trade," the pros and cons of strategic trade policy are discussed. In Chapter 6, "Foreign Direct Investment," the market imperfections approach is reviewed. Chapters 12, 13, and 14, which deal with the strategy and structure of international business, draw extensively on the work of Bartlett, Ghoshal, Hamel, and Prahalad.
In addition to including leading edge theory, in light of the fast-changing nature of the international business environment, every effort is being made to ensure that the book is as up-to-date as possible when it goes to press. A significant amount has happened in the world since the first edition of this book was published in 1993. The Uruguay Round of GATT negotiations was successfully concluded and the World Trade Organization was established. The European Union moved forward with its post-1992 agenda to achieve a closer economic and monetary union, including plans to establish a common currency by the end of the decade. The North American Free Trade Agreement passed into law, and Chile indicated its desire to become the next member of the free trade area. The Asian Pacific Economic Cooperation forum (APEC) emerged as the kernel of a possible future Asia Pacific free trade area. The former Communist states of Eastern Europe and Asia continued on the road to economic and political reform. As they did, the euphoric mood that followed the collapse of communism in 1989 was slowly replaced with a growing sense of realism about the hard path ahead for many of these countries. The global money market continued its meteoric growth. By 1995 over $1 trillion per day was flowing across national borders. The size of such flows fueled concern about the ability of short-term speculative shifts in global capital markets to destabilize the world economy. These fears were fanned by the well-publicized financial problems of a number of organizations that traded derivatives through the global money market, such as Baring's Bank. The World Wide Web emerged from nowhere to become the backbone of an emerging global network for electronic commerce. The world continued to become more global. Several Asian Pacific economies, including most notably China, continued to grow their economies at a rapid rate. New multinationals continued to emerge from developing nations in addition to the world's established industrial powers. And increasingly, the globalization of the world economy affected a wide range of firms of all sizes, from the very large to the very small.
Reflecting this rapid pace change, in this edition of the book I have tried to ensure that all material and statistics are as up-to-date as possible as of 1999. However, being absolutely up-to-date is impossible since change is always with us. What is current today may be outdated tomorrow. Accordingly, I have established a home page for this book on the World Wide Web at www.mhhe.com/hill. From this home page the reader can access regular updates of chapter material and reports on topical developments that are relevant to students of international business. I hope readers find this a useful addition to the support material for this book.
Beyond Uncritical Presentation and Shallow Explanation
Many issues in international business are complex and thus necessitate considerations of pros and cons. To demonstrate this to students, I have adopted a critical approach that presents the arguments for and against economic theories, government policies, business strategies, organizational structures, and so on.
Related to this, I have attempted to explain the complexities of the many theories and phenomena unique to international business so the student might fully comprehend the statements of a theory or the reasons a phenomenon is the way it is. These theories and phenomena are typically explained in more depth in this book than they are in competing textbooks, the rationale being that a shallow explanation is little better than no explanation. In international business, a little knowledge is indeed a dangerous thing.
Integrated Progression of Topics
Many textbooks lack a tight, integrated flow of topics from chapter to chapter. In this book students are told in Chapter 1 how the book's topics are related to each other. Integration has been achieved by organizing the material so that each chapter builds on the material of the previous ones in a logical fashion.
Part One Chapter 1 provides an overview of the key issues to be addressed and explains the plan of the book.
Part Two Chapters 2 and 3 focus on national differences in political economy and culture. Most international business textbooks place this material at a later point, but I believe it is vital to discuss national differences first. After all, many of the central issues in international trade and investment, the global monetary system, international business strategy and structure, and international business operations arise out of national differences in political economy and culture. To fully understand these issues, students must first appreciate the differences in countries and cultures.
Part Three Chapters 4 through 8 investigate the political economy of international trade and investment. The purpose of this part is to describe and explain the trade and investment environment in which international business occurs.
Part Four Chapters 9 through 11 describe and explain the global monetary system, laying out in detail the monetary framework in which international business transactions are conducted.
Part Five In Chapters 12 through 14 attention shifts from the environment to the firm. Here the book examines the strategies and structures that firms adopt to compete effectively in the international business environment.
Part Six In Chapters 15 through 20 the focus narrows further to investigate business operations. These chapters explain how firms can perform their key functions-manufacturing, marketing, R&D, human resource management, accounting, and finance-in order to compete and succeed in the international business environment.
Throughout the book, the relationship of new material to topics discussed in earlier chapters is pointed out to the students to reinforce their understanding of how the material comprises an integrated whole.
Focus on Managerial Implications
Many international business textbooks fail to discuss the implications of the various topics for the actual practice of international business. This does not serve the needs of business school students who will soon be practicing managers. Accordingly, the usefulness of this book's material in the practice of international business is discussed explicitly. In particular, at the end of each chapter in Parts Two, Three, and Four-where the focus is on the environment of international business, as opposed to particular firms-there is a section titled Implications for Business. In this section, the managerial implications of the material discussed in the chapter are clearly explained. For example, Chapter 4, "International Trade Theory," ends with a detailed discussion of the various trade theories' implications for international business management.
In addition, each chapter begins with a case that illustrates the relevance of chapter material for the practice of international business. Chapter 2, "Country Differences in Political Economy," for example, opens with a case that describes Brazil's privatization efforts.
I have also added a closing case to each chapter. These cases are also designed to illustrate the relevance of chapter material for the practice of international business. The closing case to Chapter 2, for example, describes the problems General Electric has had trying to establish profitable operations in Hungary. As the case makes clear, these problems are rooted in the political economy of Hungary and in General Electric's initial failure to fully appreciate the impact that political economy has on business operations. Each closing case is followed by a list of discussion questions, which facilitates the use of these cases as a vehicle for in-class case discussion and analysis. Another tool that I have used to focus on managerial implications are Management Focus boxes. There is at least one Management Focus in each chapter. Like the opening case, the purpose of these boxes is to illustrate the relevance of chapter material for the practice of international business. The Management Focus in Chapter 2, for example, looks at Microsoft's battle against software piracy in China. This box fits in well with a section of the chapter that looks at the protection of intellectual property rights in different countries.
Accessible and Interesting
The International business arena is fascinating and exciting, and I have tried to communicate my enthusiasm for it to the student. Learning is easier and better if the subject matter is communicated in an interesting, informative, and accessible manner. One technique I have used to achieve this is weaving interesting anecdotes into the narrative of the text-stories that illustrate theory. The opening cases and focus boxes are also used to make the theory being discussed in the text both accessible and interesting.
Each chapter has two kinds of focus boxes—a Management Focus box (described above) and a Country Focus box. Country Focus boxes provide background on the political, economic, social, or cultural aspects of countries grappling with an international business issue. In Chapter 2, for example, the Country Focus box discusses the changing political economy in India. Moreover, the opening cases and boxed material are not free floating. I continually refer to and utilize opening cases and boxed material in the main body of the text. The idea, once more, is to show students real-world examples of the issues being discussed in the text.
Just how accessible and interesting this book actually is will be revealed by time and student feedback. I am confident, however, that this book is far more accessible to students than its competitors. For those of you who view such a bold claim with skepticism, I urge you to read the sections in Chapter 1 on the globalization of the world economy, the changing nature of international business, and how international business is different.
What's New in the 3rd Edition
The success of the first two editions of International Business was based in part upon the incorporation of leading edge research into the text, the use of the up-to-date examples and statistics to illustrate global trends and enterprise strategy, and the discussion of current events within the context of the appropriate theory. Building on these strengths, my goals for the third revision have been threefold:
- Incorporate new insights from recent scholarly research wherever appropriate.
- Make sure the content of the text covers all appropriate issues.
- Make sure the text is as up-to-date as possible with regard to current events, statistics, and examples.
Often these goals have overlapped. For example, the global financial crisis that started in Asia in 1997 and spread to Russia in 1998 is relevant both because it is a current event of great significance to international business and because it has sparked a furious debate between scholars as to the appropriate role of the IMF. Thus, in Chapter 10, I outline the causes and consequence of the recent Asian and Russian financial crises, and I discuss the current debate between scholars such as Jeffrey Sachs and Stanley Fisher over the role of the IMF in such crises.
As part of the revision process, changes have been made to every chapter in the book. The following are examples of the kind of changes that have been made in the text.
Chapter 1: Globalization. The chapter has been rewritten around the theme of globalization. All the statistics pertaining to globalization (such as the growth of world trade, output, and foreign direct investment) have been updated to incorporate the most recently available data. A new section deals with the debate between scholars on the merits and drawbacks of globalization. This debate is concerned with the impact of globalization on job security, income levels, labor policies, the environment, and national sovereignty.
Chapter 2: Differences in Political Economy. A new section titled "States in Transition" has been added to the chapter. This section discusses the nature of the economic transformation, or liberalization, now being pursued by numerous states around the world, including many former Communist nations. The section discusses deregulation and privatization in greater depth than hitherto. Also new to this chapter is a discussion of Samuel Huntington's influential work on the Clash of Civilizations and the New World Order. Huntington rejects the popular view, best articulated by Francis Fukuyama in The End of History, that we are moving toward a universal global civilization based on Western liberal ideology. Instead, Huntington paints a picture of a world divided between different civilizations, some of which are potentially opposed to Western ideology. If Huntingon is correct, the implications for international business are profound.
Chapter 5: The Political Economy of International Trade. The chapter has been significantly updated to reflect the recent activities of the World Trade Organization (WTO). This includes a discussion of the record of the WTO in resolving trade disputes between nations, as well as a discussion of recent multinational agreements, brokered by the WTO, to liberalize cross-border trade and investment in financial services and telecommunications.
Chapter 8: Regional Economic Integration. The chapter has been updated to reflect recent developments in the European Union, including the move toward monetary union, which began to take effect January 1, 1999. The chapter also contains an expanded and updated discussion of the effects on the 1993 North American Free Trade Agreement (NAFTA) and the South American free trade pact, MERCOSUR. Recent research has shed new light on the magnitude of the effects of NAFTA and MERCOSUR. The chapter also updates the evolution of other moves toward regional economic integration, including the Asian Pacific Economic Cooperation forum (APEC).
Chapter 10: The International Monetary System. New material has been added that reviews the causes and consequences of the recent financial crises in Asia and Russia. The response of the International Monetary Fund to these crises has been discussed in light of the debate between scholars such as Jeffrey Sachs and Stanley Fisher as to the appropriate role of the IMF.
Chapter 14: Entry Strategy and Strategic Alliances. A new section in this chapter discusses basic entry decisions, such as which foreign markets to enter first, the timing of entry, and the appropriate scale of entry and strategic commitments to a market. This section draws on recent research work pertaining to foreign market entry and strategic commitments.
Chapter 17: Global Marketing and R&D. This chapter has been extensively rewritten and extended to enhance its contribution to the text. A new section deals with market segmentation in global markets. The discussion of pricing strategy has been expanded to incorporate recent research on multipoint pricing by international businesses. The section on new product development has been significantly expanded to incorporate new research and discuss additional issues. Additional areas covered include how best to integrate different functions and manage cross-functional product development teams in a globally dispersed enterprise, and where to locate different R&D activities in a firm's global value chain.
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