CHAPTER 5
The Global Environment
CHAPTER SUMMARY
This chapter focuses on international issues in management. After introducing students to the nature of
international business, the chapter discusses the structure of the global economy. Various challenges
regarding the economic, political/legal, and cultural environment of international business are described.
The chapter concludes with a discussion of how firms compete in a global economy.
LEARNING OBJECTIVES
After covering this chapter, students should be able to:
1. Describe the nature of international business, including its meaning, recent trends, management of
globalization, and competition in a global market.
The United States’ embargo against Cuba means that, among other things, Cuban coffee cannot be sold in
the United States. Paul Katzeff, founder and CEO of Thanksgiving Coffee Co. believes that the embargo
is politically and morally unjust and is laying the foundations of a business relationship with that country
once the embargo is lifted. The opening case presents both sides to the controversial embargo and also
details how the embargo affects companies.
Management Update: It appears as though President Barack Obama is listening to those who feel that
LECTURE OUTLINE
I. THE NATURE OF INTERNATIONAL BUSINESS
International business is a pervasive process that touches virtually every sector of the economy and
every business in the world.
People around the world use products on a daily basis that are imported from countries thousands of
miles away.
Chapter 5: The Global Environment
A. The Meaning of International Business
There are four forms of international business.
1. A domestic business acquires essentially all of its resources and sells all of its products or
services within a single country.
country.
Teaching Tip: Stress for students that these four categories of international business fall along a
continuum.
B. Trends in International Business
After World War II, U.S. firms dominated the markets for automobiles, electronic equipment,
Extra Example: Wal-Mart Stores was the world’s biggest firm in 2011, with revenues in excess of
$421 billion.
C. Managing the Process of Globalization
Firms that plan to increase their international business activity must plan their expansion into
foreign markets very carefully. Several alternative approaches are possible.
1. Importing and exporting is the easiest way to enter a market with a small outlay of
capital.
Teaching Tip: Although the U.S. steel industry has declined greatly since the 1970s, today it is
experiencing a revival by importing raw steel from Brazil and other makers and then transforming it
into value-added customized products for American manufacturers.
2. Licensing is an arrangement whereby one company allows another to use its brand name,
Chapter 5: The Global Environment
3. Strategic alliances occur when two or more firms jointly cooperate for mutual gain. A
joint venture is a special type of strategic alliance in which the partners share ownership
in a new enterprise.
Extra Example: One of the most successful strategic alliances is Cereal Partners Worldwide, or CPW.
4. Direct investment occurs when a firm headquartered in one country builds or purchases
operating facilities or subsidiaries in a foreign country.
Global Connection: The passage of the North American Free Trade Agreement has increased the
importance of maquiladoras to firms doing business in Mexico.
Teaching Tip: Stress the fact that large firms use multiple methods of international business. For
Teaching Tip: Use Table 5.1 to describe the advantages and disadvantages of the four different
approaches to internationalization.
D. Competing in a Global Market
The functions performed by a firm are the same, whatever the level of international
II. THE STRUCTURE OF THE GLOBAL ECONOMY
A. Mature Market Economies and Systems
A market economy is based on the private ownership of business and allows market factors
such as supply and demand to determine business strategy. The United States, Japan, and
Group Exercise: Have students sketch a world map from memory with no aids. Then have them mark
the approximate locations of each of the market systems discussed on the next several pages.
Chapter 5: The Global Environment
Discussion Starter: Ask students for their opinion of NAFTA. For example, ask whether they think it
is generally a good or a bad thing for each of the three major partners.
similar to or different from the United States each country was.
B. High Potential/High Growth Economies
High potential/high growth economies are found in countries whose economies are just now
beginning to emerge as important business centers. They are generally characterized as
C. Other Economies
The Middle East and much of Africa cannot be classified as a market or developing economy
due to their mixed models of resource allocation, property ownership, and development of an
III. ENVIRONMENTAL CHALLENGES OF INTERNATIONAL MANAGEMENT
A. The Economic Environment
1. Economic system—Most countries are moving toward a market economy in which free
choices made by firms and customers determine business success. Most countries have a
2. Natural resources—Countries vary in the degree to which they have natural resources
available for production purposes or for selling. Japan, for example, has relatively no
3. Infrastructure—Countries also vary in the degree to which they have developed their
infrastructures: the schools, hospitals, power plants, railroads, highways, ports,
communication systems, air fields, and commercial distribution systems.
Chapter 5: The Global Environment
B. The Political/Legal Environment
1. Government stability can be viewed in two ways: as the ability of a given government to
stay in power against other opposing factions in the country or as the permanence of
government policies toward business. The more instability in the government, the riskier
Extra Example: Although the government of Cuba has been relatively stable for years (under the
regime of Fidel Castro first and now his brother, Raul), many observers believe that communism will
2. Incentives for international trade—Many countries offer incentives to foreign businesses
to attract them to these countries. Some examples of these incentives include free land or
A tariff is a tax collected on goods shipped across national boundaries.
Teaching Tip: The stiff trade barriers employed by the government of Japan continue to be a point of
contention between that country and the United States. U.S. firms, for example, argue that there are so
many trade barriers in place in Japan, that it results in unfair competition for them.
Quotas are a limit on the number or value of goods that can be traded.
4. Economic communities are sets of countries that have agreed to significantly reduce or
eliminate trade barriers among its member nations. NAFTA, the European Union, the
C. The Cultural Environment
1. Values, symbols, beliefs, and language—When the countries in which a firm is
manufacturing or selling a product or service have different cultures, problems can arise.
For example, Barbie dolls (made by U.S.-based Mattel) are considered by many Muslim
parents to be too sexual for young children, and so they are not popular products in
Muslim countries.
Chapter 5: The Global Environment
Discussion Starter: Ask students to think of common business practices in the United States that might
Extra Example: A current joint venture between IBM (a U.S. firm), Toshiba (a Japanese firm), and
Siemens (a German firm) headquartered in New York has faced several problems stemming from
Language can also be a barrier in international management. Not only the words that are
spoken, but the nonverbal aspects of language can pose a problem to managers in a
foreign country.
Extra Example: Many firms today are adopting English as their “standard” language. For an
2. Individual behaviors across cultures
Social orientation—a person’s beliefs about the relative importance of the individual
versus groups to which the individual belongs. Two opposing beliefs are individualism
and collectivism.
IV. COMPETING IN A GLOBAL ECONOMY
A. Globalization and Organization Size
1. Multinational corporations take a global perspective by transferring capital, technology,
human resources, and inventory from one market to another.
Teaching Tip: Note the diverse set of countries represented in Table 5.2. This is a list of the world’s
60 largest multinationals.
Teaching Tip: Have your students locate the most recent list of the Global 500 (Fortune publishes the
Chapter 5: The Global Environment
2. Medium-size organizations are still primarily domestic organizations that buy and sell
products made abroad and compete with businesses from other countries in their own
domestic market.
B. Management Challenges in a Global Economy
4. Planning and decision making in a global economy
Managers need a broad understanding of the environment and competition in a global
5. Organizing in a global economy
The degree of control allowed the local managers in a global economy will influence the
difficulty of organizing. If little control is provided to managers, they must frequently
6. Leading in a global economy
In order to lead effectively, managers must understand how cultural factors affect
individuals with respect to motivation, communication, and leadership in general.
Cross-Reference: Note that the international implications of leading are integrated throughout
Chapters 15–19.
END OF CHAPTER QUESTIONS
Questions for Review
1. Describe the four basic levels of international business activity. Do you think any organization will
achieve the fourth level? Why or why not?
There are four basic levels of international business activity: (1) domestic business—no
Chapter 5: The Global Environment
2. For each of the four globalization strategies, describe the risks associated with that strategy and the
potential returns from that strategy.
Importing and exporting carries the risks of higher expenses and lack of customization, but it offers
3. Describe the various types of political controls on international trade. Be sure to highlight the
differences between the types.
Tariffs exist when goods that cross national borders are taxed. The effect of tariffs is to protect
4. Explain the relationship between organizational size and globalization. Are large firms the only ones
that are global?
Very large companies are often global firms because they saturated their domestic markets and had
Questions for Analysis
5. What are the advantages and disadvantages for a U.S.-based multinational firm entering a mature
market economy? What are the advantages and disadvantages for such a firm entering a high–
potential or high-growth economy?
A U.S. firm would have experience and expertise in competing in a mature market economy, which
is similar to the American economy. However, a mature economy typically contains a number of
Chapter 5: The Global Environment
6. Choose an industry. Describe the impact that international business has had on firms in that
industry. Are there any industries that might not be affected by the trend toward international
business? If so, what are they? If not, why are there none?
Students’ answers will vary, but here is one example: “In the pharmaceutical industry, a few very
7. You are the CEO of an up-and-coming toy company and have plans to go international soon. What
steps would you take to carry out that strategy? What areas would you stress in your decision–
making process? How would you organize your company?
While student responses will vary, a typical answer follows. The steps to be undertaken include
Questions for Application
8. Use the Internet to locate information about a company that is using a global strategic alliance or
global joint venture. (Hint: Almost any large multinational firm will be involved in these ventures,
and you can find information at corporate home pages.) What do you think are the major goals for
the venture? Do you expect that the firm will accomplish its goals? If so, why? If not, what stands in
its way?
Students should not have trouble finding an example. Of course, answers will depend on the
9. Assume that you are the CEO of Walmart. What are the basic environmental challenges you face as
your company continues its globalization efforts? Give some specific examples that relate to
Walmart.
A look at Wal-Mart’s web page (www.walmart.com) indicates the extent of the company’s global
Chapter 5: The Global Environment
10. Review the following chart of Hofstede’s cultural dimensions. Based on the chart, tell which
country you would most like to work in and why. Tell which country you would like least to work
in and why.
Power Distance
Range: 11–104
Individualism
Range: 6–91
Uncertainty
Avoidance
Range: 8–112
Aggressiveness
Range: 5-95
Germany
35
67
65
65
U.K.
35
89
35
66
Adapted from: Geert Hofstede, Cultures and Organizations: Software of the Mind: Intercultural
Cooperation and its Importance for Survival, London: HarperCollins, 1994, 26, 55, 84, 113.
END OF CHAPTER EXERCISES
Building Effective Technical Skills
I. Purpose
This exercise gives students a chance to learn more about foreign countries and their economies
through Internet research. Students also are asked to think about the impact that a country’s
economy has on the involvement of multinational firms.
II. Format
III. Follow-Up
A. List the five countries in the world that projected to have the largest populations in 2050.
Explain how the list will have changed since 2009.
In 2009 China had 1.3 billion people, India had 1.157 billion, the U.S. had 307 million,
Chapter 5: The Global Environment
D. Life span is a measure of individual prosperity in a country. What is the average life span in
each of the five largest countries in the world? In each of the five largest exporters to the
United States? In each of the five largest importers from the United States?
E. Gross domestic product (GDP) is a measure of a country’s economic health. What is the GDP
per capita, in U.S. dollars, of each of the five largest countries? Of each of the five largest
exporters to the United States? Of each of the five largest importers from the United States?
F. What are the implications for your firm? What, for example, do the data suggest about the
desirability of various countries as current trading partners? What do the data suggest about
the desirability of the same countries as future trading partners?
Building Effective Communication Skills
I. Purpose
This exercise is designed to help students think through the logistical issues that international
communication can raise.
II. Format
III. Follow-Up
There are no follow-up questions for this exercise. Students will have a variety of answers,
depending upon their opinions and assumptions. Point out to students that even though
communication technology has dramatically improved the ease of international communication,
there are still some very real barriers to communicating internationally.
Chapter 5: The Global Environment
MANAGEMENT AT WORK
SHIFTING GEARS IN THE AUTO INDUSTRY
The car maker, Chrysler, has fallen on hard times and even a generous government bailout has failed to
help the company. Chrysler has agreed to merge with Fiat, the Italian carmaker in an attempt to stem the
Management Update: As part of Chrysler’s 2009 bankruptcy proceeding, Fiat gained control of the
U.S. automaker. In July 2011, Sergio Marchionne announced that a single management team will
oversee both Fiat and Chrysler. The integration of the merged companies was going at full speed by
mid-2011.
1. Case Question 1: According to a major economics consulting firm, Fiat’s “South American
operations are the jewel in the Italian company’s global operations.” Fiat has plants in Brazil and
Argentina, and Brazil is its biggest market, well ahead of its home-country market. In 2011, with
the Chrysler venture taking up more and more of the firm’s attention – and as European sales
suffered a steep decline – rumors began to circulate that Marchionne might move Fiat headquarters
from Italy to the United States. Discuss Fiat’s takeover of Chrysler as part of a strategy to transform
itself from an international business into a multinational or global business.
An international business, as defined in the chapter, is “one that is based primarily in a single country,
2. Case Question 2: What benefits does Fiat hope to gain from its arrangement with Chrysler? What
potential drawbacks does it face? Judging from your analysis of benefits and drawbacks, explain
why the Fiat-Chrysler arrangement might best be characterized as a strategic alliance? In what
sense is it best characterized as a direct investment?
Fiat gets Chrysler’s infrastructure – its dealer and supplier network – in the U.S. giving it the power to
3. Case Question 3: What challenges in the U.S. cultural environment do you expect Fiat to face as it
uses its Chrysler connection to compete in the American car market? What management challenges
will Marchionne face in the areas of planning and decision making, organizing and leading?
American culture differs from Italian culture, particularly in terms of Hofstede’s dimensions. It is likely