Case Study AW-Q36

Case Study AW-Q36 Online

 

THE GLOBALIZATION OF PRODUCTION
 

The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. Consider the Boeing 777, a commercial jet airliner. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on.11 In total, some 30 percent of the 777, by value, is built by foreign companies. For its most recent jet airliner, the 787, Boeing has pushed this trend even further, with some 65 percent of the total value of the aircraft scheduled to be outsourced to foreign companies,35 percent of which will go to three major Japanese companies.12 Boeing’s new global product, the 787, rolls out.
 
COUNTRY FOCUS
 
Outsourcing American Health Care
 
Conventional wisdom holds that health care is one of the industries least vulnerable to dislocation from globalization. After all, like many service businesses, health care is delivered where it is purchased, right? If an American goes to a hospital for an MRI scan, won’t that scan be read by a local radiologist?
 
And if the MRI scan shows that surgery is required, surely the surgery will be done at a local hospital in the United States. Until recently, this was true, but we are now witnessing the beginnings of globalization in this traditionally most local of industries. Consider the MRI scan: The United States has a shortage of radiologists, the doctors who specialize in reading and interpreting diagnostic medical images, including X-rays, CT scans, MRI scans, and ultrasounds.
 
Demand for radiologists is reportedly growing twice as fast as the rate at which medical schools are graduating radiologists with the skills and qualifications required to read medical images. This imbalance between supply and demand means that radiologists are expensive; an American radiologist can earn as much as $350,000 a year. In the early 2000s, an Indian radiologist working at the prestigious Massachusetts General Hospital, Dr. Sanjay Saini, thought he had found a clever way to deal with the shortage and expense—send images over the Internet to India where they could be interpreted by radiologists. This would reduce the workload on America’s radiologists and also cut costs. A radiologist in India might earn one-tenth of his or her U.S. counterpart. Plus, because India is on the opposite side of the globe, the images could be interpreted while it was nighttime in the United States and be ready for the attending physician when he or she arrived for work the following morning.
 
Critical Thinking and Discussion Questions
 

1. Describe the shifts in the world economy over the past 30 years. What are the implications of these shifts for international businesses based in Great Britain? North America? Hong Kong?
 

2. “The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in small firms.” Evaluate this statement.
 

3. How have changes in technology contributed to the globalization of markets and production? Would the globalization of production and markets have been possible without these technological changes?
 

4. “Ultimately, the study of international business is no different from the study of domestic business. Thus, there is no point in having a separate course on international business.”
 

5. How might the Internet and the associated World Wide Web affect international business activity and the globalization of the world economy?
 

6. If current trends continue, China may be the world’s largest economy by 2020. Discuss the possible implications of such a development for (a) the world trading system, (b) the world monetary system, (c) the business strategy of today’s European and U.S. global corporations, and (d) global commodity prices.
 

7. Reread the Country Focus “Outsourcing American Health Care,” then answer the following questions
 

a. A decade ago the idea that medical procedures might move offshore was unthinkable.Today it is a reality. What trends have facilitated this process?
 

b. Is the globalization of health care good or bad for patients?
 

c. Is the globalization of health care good or bad for the American economy?
d. Who might benefit from the globalization of health care? Who might lose?
 

e. Do you think that the U.S. government should restrict the outsourcing of medical
procedures to developing nations? What if physicians in those countries are certified by
U.S. medical institutions?
 

Case Discussion Questions
 

1. How has the globalization of markets benefited IKEA?
2. How has the globalization of production benefited IKEA?
 

3. What does the IKEA story teach you about the limits of treating the entire world as a
single integrated global marketplace?
 

MARKET ECONOMY
 

In a pure market economy, all productive activities are privately owned, as opposed to being owned by the state. The goods and services that a country produces are not planned by anyone. Production is determined by the interaction of supply and demand and signaled to producers through the price system. If demand for a product exceeds supply, prices will rise,signaling producers to produce more. If supply exceeds demand, prices will fall, signaling producers to produce less. In this system consumers are sovereign. The purchasing patterns of consumers, as signaled to producers through the mechanism of the price system, determine what is produced and in what quantity.For a market to work in this manner, supply must not be restricted. A supply restriction occurs when a single firm monopolizes a market. In such circumstances, rather than increase output in response to increased demand, a monopolist might restrict output and let prices rise.
 

This allows the monopolist to take a greater profit margin on each unit it sells. Although this is good for the monopolist, it is bad for the consumer, who has to pay higher prices. It also is probably bad for the welfare of society. Since a monopolist has no competitors, it has no incentive to search for ways to lower production costs. Rather, it can simply pass on cost increases to consumers in the form of higher prices. The net result is that the monopolist is likely to become increasingly inefficient, producing high-priced, low-quality goods, and society
suffers as a consequence.
 

Given the dangers inherent in monopoly, the role of government in a market economy is to encourage vigorous free and fair competition between private producers. Governments do this by outlawing monopolies and restrictive business practices designed to monopolize a market (antitrust laws serve this function in the United States). Private ownership also encourages vigorous competition and economic efficiency. Private ownership ensures that entrepreneurs
have a right to the profits generated by their own efforts. This gives entrepreneurs an incentive to search for better ways of serving consumer needs. They may introduce new products, develop more efficient production processes, pursue better marketing and after-sale service, or simply manage their businesses more efficiently than their competitors. In turn, the constant improvement in product and process that results from such an incentive, it has been argued, has a major positive impact on economic growth and development.8
 

COMMAND ECONOMY
 

In a pure command economy, the government plans the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold.Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for “the good of society.” In addition, in a pure command economy, all businesses are state owned, the rationale being that the government can then direct them to make investments that are in the best interests of the nation as a whole rather than in the interests of private individuals. Historically, command economies were found in communist countries where collectivist goals were given priority over individual goals. Since the demise of communism in the late 1980s, the number of command economies has fallen dramatically. Some elements of a command economy were also evident in a number of democratic nations led by socialist-inclined governments. France and India both experimented with extensive government planning and state ownership, although government planning has fallen into disfavor in both countries.
 

While the objective of a command economy is to mobilize economic resources for the public good, the opposite seems to have occurred. In a command economy, state-owned enterprises have little incentive to control costs and be efficient because they cannot go out of business. Also, the abolition of private ownership means there is no incentive for individuals to look for better ways to serve consumer needs; hence, dynamism and innovation are absent from command economies. Instead of growing and becoming more prosperous, such economies tend to stagnate.
 

MIXED ECONOMY
 

Between market economies and command economies can be found mixed economies. In a mixed economy, certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning. Mixed economies were once common throughout much of the world, although they are
becoming much less so. Not long ago, Great Britain, France, and Sweden were mixed economies, but extensive privatization has reduced state ownership of businesses in all three nations. A similar trend can be observed in many other countries where there was once a large state sector, such as Brazil, Italy, and India.
 

In mixed economies, governments also tend to take over troubled firms they consider to be vital to national interests. Consider, for example, the French automobile company Renault. The government took over the company when it ran into serious financial problems. The French government reasoned that the social costs of the unemployment that might result if Renault collapsed were unacceptable, so it nationalized the company to save it from bankruptcy. Renault’s competitors weren’t thrilled by this move because they had to compete with a company whose costs were subsidized by the state.
 
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Critical Thinking and Discussion Questions
 

1. Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. Discuss.
2. A democratic political system is an essential condition for sustained economic progress.
Discuss.
 

3. What is the relationship between corruption in a country (i.e., bribe taking by government officials) and economic growth? Is corruption always bad?
4. The Nobel Prize–winning economist Amartya Sen argues that the concept of development should be broadened to include more than just economic development.What other factors does Sen think should be included in an assessment of
development? How might adoption of Sen’s views influence government policy? Do you think Sen is correct that development is about more than just economic development?Explain.
 

5. You are the CEO of a company that has to choose between making a $100 million investment in Russia or the Czech Republic. Both investments promise the same longrun return, so your choice is driven by risk considerations. Assess the various risks of doing business in each of these nations. Which investment would you favor and why?
 

6. Read the Country Focus on India in this chapter and answer the following questions:
 

a. What kind of economic system did India operate under during 1947 to 1990? What kind of system is it moving toward today? What are the impediments to completing this transformation?
 

b. How might widespread public ownership of businesses and extensive government regulations have impacted (i) the efficiency of state and private businesses, and (ii) the rate of new business formation in India during the 1947–90 time frame? How do you think these factors affected the rate of economic growth in India during this time frame?
 

c. How would privatization, deregulation, and the removal of barriers to foreign direct investment affect the efficiency of business, new business formation, and the rate of economic growth in India during the post-1990 time period?
 
d. India now has pockets of strengths in key high-technology industries such as software and pharmaceuticals. Why do you think India is developing strength in these areas?How might success in these industries help to generate growth in the other sectors of the Indian economy?
 
e. Given what is now occurring in the Indian economy, do you think the country represents an attractive target for inward investment by foreign multinationals selling consumer products? Why?
 
Case Discussion Questions
 
1. What political factors explain Indonesia’s poor economic performance? What economic factors? Are these two related?
 
2. Why do you think foreign firms have been exiting Indonesia in recent years? What are the implications for the country? What is required to reverse this trend?
 
3. Why is corruption so endemic in Indonesia? What are its consequences?
 
4. What are the risks facing foreign firms that do business in Indonesia? What is required to reduce these risks?
 
Critical Thinking and Discussion Questions
 
1. The interest rate on South Korean government securities with one-year maturity is 4 percent, and the expected inflation rate for the coming year is 2 percent. The interest rate on U.S. government securities with one-year maturity is 7 percent, and the expected rate of inflation is 5 percent. The current spot exchange rate for Korean won is $1 = W1,200. Forecast the spot exchange rate one year from today. Explain the logic of your answer.
 
2. Two countries, Great Britain and the United States, produce just one good: beef.Suppose the price of beef in the United States is $2.80 per pound and in Britain it is £3.70per pound.
 
a. According to PPP theory, what should the dollar/pound spot exchange rate be?
b. Suppose the price of beef is expected to rise to $3.10 in the United States and to £4.65 in Britain. What should the one-year forward dollar/pound exchange rate be?
 
c. Given your answers to parts a and b, and given that the current interest rate in the United States is 10 percent, what would you expect the current interest rate to be in Britain?
3. Reread the Management Focus feature on Volkswagen in this chapter; then answer the a. Why do you think management at Volkswagen decided to hedge only 30 percent of the company’s foreign currency exposure in 2003? What would have happened if they had hedged 70 percent of their exposure?
 
b. Why do you think the value of the U.S. dollar declined against that of the euro in 2003?
 
c. Apart from hedging through the foreign exchange market, what else can Volkswagen do to reduce its exposure to future declines in the value of the U.S. dollar against the euro?
 
4. You manufacture wine goblets. In mid-June you receive an order for 10,000 goblets from Japan. Payment of ¥400,000 is due in mid-December. You expect the yen to rise from its present rate of $1 = ¥130 to $1 = ¥100 by December. You can borrow yen at 6 percent a year. What should you do?
 
5. You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange
markets over the next year. What actions, if any, should you take?
 
Research Task

Use the globalEDGE™ site to complete the following exercises

1. One component of learning about another country or region is to understand the relationship of its currency with others on the world currency market. As such, you are assigned the duty of ensuring the availability of 100,000 yen for a payment scheduled for next month. Considering that your company possesses only U.S. dollars, identify the spot
and forward exchange rates. What are the factors that influence your decision to use the spot or forward exchange rate? Which one would you choose? How many dollars must you spend to acquire the amount of yen required?
 
2. Sometimes, analysts use the price of specific products across locations to compare currency valuation and purchasing power. In fact, the Big Mac Index compares the purchasing-power parity of many countries based on the price of a Big Mac. Locate the latest edition of this index that is accessible. Identify the five countries (and the
currencies) with the lowest purchasing-power parity according to this classification. Which currencies, if any, are overvalued?
 
Case Discussion Questions
 
1. In retrospect, could the fall in the value of the dollar against the Euro have been predicted in 2003?
 
2. What was the fundamental reason for the decline in the value of the dollar against the euro in 2003–2006? To what extent is the decline in the value of the dollar consistent with the theories of exchange rate determination discussed in this chapter?
 
3. Why do you think that STMicro did very little currency hedging? Was this wise?
4. What strategy is STMicro now adopting to deal with possible future fluctuations in exchange rates? Is this a smart strategy?
 
Case Discussion Questions
 
1. What were the causes of the surge in inflation in Russia during the early 1990s? Could this have been avoided? How?
2. What does the decline in the value of the ruble against the dollar between 1992 and 1998 teach you about the relationship between inflation rates and currency values?
 
3. During the mid-1990s, the IMF wanted Russia to raise tax rates, close loopholes in the tax system, and cut public spending. Russia was unable to do this. Why?
 
4. In the early 2000s Russia cut tax rates for individuals and corporations, and government tax revenues surged. Why? Does this result suggest that the IMF policy prescriptions were wrong?
 
Case Discussion Questions
 
1. What were the macroeconomic underpinnings of the increase in Samurai bond issues?
2. How might an increase in Japan’s rate of economic growth affect the vitality of the Samurai bond market?
 
3. For a company like Deutsche Telekom, which issues yen-denominated debt to raise funds for investments outside of Japan, the lower interest rate must be offset against higher costs. What are these higher costs, and what determines their magnitude?
 
4. What would happen to activity in the Samurai bond market if the yen started to appreciate significantly against the dollar, but interest rate differentials between the United States and Japan stayed constant? What would happen if the yen depreciated against the dollar? What does this tell you about the risks of issuing foreign bonds?
 
Critical Thinking and Discussion Questions
 
1. Licensing proprietary technology to foreign competitors is the best way to give up a firm’s competitive advantage. Discuss.
2. Discuss how the need for control over foreign operations varies with firms’ strategies and core competencies. What are the implications for the choice of entry mode?
 
3. Under what circumstances are joint ventures to be preferred to wholly owned subsidiaries as the most appropriate mode for entering foreign nations?
 
4. In recent years the number of cross-border mergers and acquisitions has ballooned.What are the risks associated with the popularity of this vehicle for entering foreign markets? Can you find an example in recent press reports of such risks? How can these risks be reduced?
 
5. A small Canadian firm that has developed some valuable new medical products using its unique biotechnology know-how is trying to decide how best to serve the European Union. Its choices are given below. The cost of investment in manufacturing facilities will be a major one for the Canadian firm, but it is not outside its reach. If these are the firm’s only options, which one would you advise it to choose? Why?
 
a. Manufacture the product at home and let foreign sales agents handle marketing.
b. Manufacture the product at home and set up a wholly owned subsidiary in Europe to handle marketing.
c. Enter into an alliance with a large European pharmaceutical firm. The product would be manufactured in Europe by the 50/50 joint venture and marketed by the European firm.
 
6. Reread the Management Focus on international expansion at the ING Group and then answer the following questions.
 
a.Why did ING focus on entering the U.S. market rather than, for example, emerging markets such as China and India?
b. What explains the timing of ING’s entry into the U.S. market?
 
c. ING entered the U.S. insurance and investment banking market through acquisitions, rather than beginning from scratch. Why do you think the company chose this entry mode? What are the advantages and disadvantages?

d. Why do you think ING opted to begin its Internet bank, ING Direct, from scratch in the United States?
 
7. Reread the Management Focus on the Jollibee phenomenon; then answer the following questions
 
a. What explains the pattern of Jollibee’s international expansion? Why do you think it entered the countries it did?
 
b. Jollibee’s expansion into the United States has been quite limited. Why might this be so?
c. Jollibee now seems to be focusing on India and China for oversees growth. Why are these countries attractive to Jollibee?
d. Why is Jollibee considering entering India via an acquisition?
 
8. Reread the case about JCB at the beginning of the chapter, then answer the following questions
 
a. Do you think entering India via a joint venture was JCB’s optimal choice in 1979?What other options did it have?
 
b. Why do you think JCB picked India for its first direct foreign investment?
 
c. Was JCB right to take full control of its Indian joint venture in the 2000s?
 
9. Reread the Management Focus on Cisco and Fujitsu; then answer the following questions
 
a. What are the benefits of Cisco’s alliance with Fujitsu? What are the risks and associated costs?
 
b. Given your assessment of the benefits, risks, and cost associated with this alliance, did it make sense for Cisco to enter the alliance?
 
c. How might Cisco mitigate the risks associated with the alliance?
 
1. Why did Tesco’s initial international expansion strategy focus on developing nations?
2. How does Tesco create value in its international operations?
3. In Asia, Tesco has a long history of entering into joint venture agreements with local partners. What are the benefits of doing this for Tesco? What are the risks? How are those risks mitigated?
 
4. In March 2006, Tesco announced that it would enter the United States. This represents a departure from its historic strategy of focusing on developing nations. Why do you think Tesco made this decision? How is the U.S. market different from others Tesco has entered? What are the risks here? How do you think Tesco will do?
 
Case Discussion Questions
 

1. How would you characterize Black & Decker’s international expansion during the 1950s and 1960s? What strategy was the company pursuing? What was the key feature of the international organization structure that Black & Decker operated with at this time? Did Black & Decker’s strategy and structure make sense given the competitive environment
at that time?
 

2. How did the competitive environment confronting Black & Decker change during the 1980s and 1990s? What changes did Black & Decker make in its (a) strategy and (b) structure to compete more effectively in this new environment?
 

3. By the 2000s, what strategy was Black & Decker pursuing in the global marketplace?How would you characterize its structure? Did the structure fit the strategy and environment?
4. Why do you think it took nearly two decades for Black & Decker to effect a change in strategy and structure?
 

Case Discussion Questions
 

1. What multinational strategy is Molex pursuing: localization, international, global standardization, or transnational?
2. How would you characterize the approach to staffing used at Molex? Is this appropriate given its strategy?
 

3. Molex is successful in its use of expatriate managers. Why do you think this is the case?What can be learned from Molex’s approach?
4. How does the human resource management function at Molex contribute to attaining its multinational strategy?
 

Case Discussion Questions
 

1. How would you characterize P&G’s product development and marketing strategy toward Japan in the 1970s and 1980s. What were the advantages of this strategy? What were the drawbacks?
 

2. How would you characterize the strategy since the early 1990s? What are the advantages of this strategy? What are the potential drawbacks?
 

3. Which strategy has been more successful? Why?
 
4. What changes do you think P&G has had to make in its organization and company culture to implement this strategic shift?
 
5. What does P&G’s experience teach us about the argument that consumer tastes and preferences across nations are converging and global markets are becoming more homogenous?
 

Product Code -Case Study AW-Q36
 
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