Regional Trading Alliances
Global competition once was considered country against country—the United States versus Japan, France versus Germany, Mexico versus Canada, and so on. Now, global competition and the global economy are shaped by regional trading agreements, including the European Union (EU), North American Free Trade Agreement (NAFTA), and the Association of Southeast Asian Nations (ASEAN), which we review here. A comprehensive list of trading alliances is available on the U.S. federal government’s International Trade Administration website (www.trade.gov). More than 200 countries participate in at least one regional trade agreement.21 The United States alone has agreements with 75 countries.
THE EUROPEAN UNION The European Union (EU) is an economic and political partnership of 28 democratic European countries. Five countries (Albania, the former Yugoslav Republic of Macedonia, Turkey, Montenegro, and Serbia) are candidates to join the EU. Two countries are potential candidates to join the EU (Bosnia and Herzegovina and Kosovo).23 Before they are allowed to join, however, the countries must meet the criteria, which include democracy, rule of law, a market economy, and adherence to the EU’s goals of political and economic union. When the 12 original members formed the EU in 1992, the primary motivation was to reassert the region’s economic position against the United States and Japan. Before then, each European nation had border controls, taxes, and subsidies; nationalistic policies; and protected industries. These barriers to travel, employment, investment, and trade prevented European companies from developing economic efficiencies.
Now, with these barriers removed, the economic power represented by the EU is considerable. Its current membership covers a population base of more than half a billion people (7 percent of the world population)24 and accounts for approximately 16 percent of the world’s global exports and imports.25 In June 2016, the citizens of the United Kingdom (U.K.) voted to remove themselves from the EU because they felt that their needs and interests were being shifted to the greater EU. Conflicts have arisen over immigration, legal, and economic policies. The U.K. decided that its interests would be better served as an independent entity. While the U.K.’s transition will take a few years to complete, this vote holds significance for both the U.K. and other EU countries. The fact that the U.K. will no longer be part of the EU opens the door for other countries to vote themselves out, which could eventually lead to the demise of the EU.
NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) AND OTHER LATIN AMERICAN AGREEMENTS When agreements in key issues covered by the North American Free Trade Agreement (NAFTA) were reached by the Mexican, Canadian, and U.S. governments in 1992, a vast economic agreement was created. It’s the secondlargest trade alliance in the world in terms of combined gross domestic product (GDP) of its members.29 Between 1994, when NAFTA went into effect, and 2014, imports from Canada and Mexico to the United States increased 212 percent and 637 percent, respectively. The rise in export activity from the United States to Canada and Mexico was 211 percent and 478 percent, respectively.
ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN) The Association of Southeast Asian Nations (ASEAN) is a trading alliance of 10 Southeast Asian nations. OTHER TRADE ALLIANCES Other regions around the world have also developed regional trading alliances. For instance, the 54-nation African Union (AU), which came into existence in 2002, seeks to “build an integrated, prosperous and peaceful Africa, an Africa driven and managed by its own citizens and representing a dynamic force in the international arena.
Five east African nations—Burundi, Kenya, Rwanda, Tanzania, and Uganda— have formed a common market called the East African Community (EAC).44 Under this agreement, goods can be sold across borders without tari¤s. The next step for the EAC will be monetary union, although that will take time to implement.
Global Trade Mechanisms
Global trade among nations doesn’t just happen on its own. As trade issues arise, global trade systems ensure that trade continues eªciently and efectively. Indeed, one of the realities of globalization is the interdependence of countries—that is, what happens in one can impact others, good or bad. For example, the �nancial crisis that started in the United States in 2008 threw the global economy into a tailspin. Although things spiraled precariously out of control, it didn’t completely collapse. Why? Because governmental interventions and trade and �nancial mechanisms helped avert a potential crisis. We’re going to look at four important global trade mechanisms: the World Trade Organization, the International Monetary Fund, the World Bank Group, and the Organization for Economic Cooperation and Development.
International Monetary Fund (IMF) An organization of 188 countries that promotes international monetary cooperation and provides advice, loans, and technical assistance. World Bank Group A group of five closely associated institutions that provides financial and technical assistance to developing countries. Organization for Economic Cooperation and Development (OECD)An international economic organization that helps its 34 member countries achieve sustainable economic growth and employment.
Different Types of International Organizations
Multinational corporation (MNC) A broad term that refers to any and all types of international companies that maintain operations in multiple countries. multidomestic corporation An MNC that decentralizes management and other decisions to the local country. global company An MNC that centralizes management and other decisions in the home country. transnational or borderless organization An MNC in which artificial geographical barriers are eliminated.
How Organizations Go International?
When organizations do go international, they often use di¤erent approaches. izations do go international, they often use di¤erent approaches. (See Exhibit 4-4.) Managers who want to get into a global market with minimal investment may start with global sourcing (also called global outsourcing), which is purchasing materials or labor from around the world wherever it is cheapest. The goal: take advantage of lower costs in order to be more competitive. For instance, Massachusetts General Hospital uses radiologists in India to interpret CT scans. Although global sourcing may be the �rst step in going international for many companies, they often continue to use this approach because of the competitive advantages it o¤ers. Each successive stage of going international beyond global sourcing, however, requires more investment and thus entails more risk for the organization.
The next step in going international may involve exporting the organization’s products to other countries—that is, making products domestically and selling them abroad. In addition, an organization might do importing, which involves acquiring products made abroad and selling them domestically. Both usually entail minimal investment and risk, which is why many small businesses often use these approaches to doing business globally.
Purchasing materials or labor from around the world wherever it is cheapest.
exportingMaking products domestically and selling them abroad. importingAcquiring products made abroad and selling them domestically.
Managers also might use licensing or franchising, which are similar approaches involving one organization giving another organization the right to use its brand name, technology, or product speci�cations in return for a lump sum payment or a fee usually based on sales. The only di¤erence is that licensing is primarily used by manufacturing organizations that make or sell another company’s products and franchising is primarily used by service organizations that want to use another company’s name and operating methods. For example, Chicago consumers can enjoy Guatemalan Pollo Campero fried chicken, South Koreans can indulge in Dunkin’ Donuts co¤ee, Hong Kong residents can dine on Shakey’s Pizza, and Malaysians can consume Schlotzky’s deli sandwiches—all because of franchises in these countries. On the other hand, Anheuser-Busch InBev has licensed the right to brew and market its Budweiser beer to brewers such as Kirin in Japan and Crown Beers in India.
A partnership between an organization and foreign company partner(s) in which both share resources and knowledge in developing new products or building production facilities.
A specific type of strategic alliance in which the partners agree to form a separate, independent organization for some business purpose.
Directly investing in a foreign country by setting up a separate and independent production facility or office.
Finally, managers may choose to directly invest in a foreign country by setting up a foreign subsidiary as a separate and independent facility or oªce. This subsidiary can be managed as a multidomestic organization (local control) or as a global organization (centralized control). As you can probably guess, this arrangement involves the greatest commitment of resources and poses the greatest amount of risk. For instance, United Plastics Group of Houston, Texas, built two injection-molding facilities in Suzhou, China. The company’s executive vice president for business development said that level of investment was necessary because “it fulfilled our mission of being a global supplier to our global accounts.
The Political/Legal Environment
The growing complexity of the political and legal landscapes in the global environment is one of the most important trends a¤ecting global business. Managers working for global businesses contend with a growing tide of employment legislation that cuts across national boundaries. Legal and political forces are unique to each country, and sometimes the laws of one contradict those of another, or are ignored altogether. For instance, Americans may encounter laws that are routinely ignored by host countries, creating somewhat of a dilemma.
The Economic Environment
A global manager must be aware of economic issues when doing business in other countries. First, it’s important to understand a country’s type of economic system. The two major types are a free market economy and a planned economy. A free market economy is one in which resources are primarily owned and controlled by the private sector. A planned economy is one in which economic decisions are planned by a central government. Let’s consider the United States and China, respectively, as examples of these types of economies. The U.S. economy is based on the idea of capitalism.
The Cultural Environment.
One year, the entire senior leadership team at Starwood Hotels relocated to Shanghai, China, for five weeks. Why? Because clearly China is a huge growth market and “working closely with people from a di¤erent culture helps you to see pitfalls and opportunities in a very di¤erent way. Managing today’s talented global workforce can be a challenge!89 A large multinational oil company found that employee productivity in one of its Mexican plants was o¤ 20 percent and sent a U.S. manager to and out why. After talking to several employees, the manager discovered that the company used to have a monthly esta in the parking lot for all the employees and their families. Another U.S. manager had canceled the estas, saying they were a waste of time and money. The message employees were getting was that the company didn’t care about their families anymore. When the were reinstated, productivity and employee morale soared. At HewlettPackard, a cross-global team of U.S. and French engineers were assigned to work together on a software project. The U.S. engineers sent long, detailed e-mails to their counterparts in France. The French engineers viewed the lengthy e-mails as patronizing and replied with quick, concise e-mails. This made the U.S. engineers think that the French were hiding something from them. The situation spiraled out of control and negatively affected output until team members went through cultural training.
Challenges of Managing a Global Workforce
Cross-cultural work teams can have many benefits, but conflicts can arise due to differences in work methods, pay levels, and language barriers.
Global companies with multicultural work teams are faced with the challenge of managing the cultural differences in work-family relationships. The work-family practices and programs appropriate and effective for employees in one country may not be the best solution for employees in other locations.
These examples indicate challenges associated with managing a global workforce. As globalization continues to be important for businesses, it’s obvious that managers need to understand how to best manage that global workforce. Some researchers have suggested that managers need cultural intelligence or cultural awareness and sensitivity skills.101 Cultural intelligence encompasses three main dimensions: (1) knowledge of culture as a concept— how cultures vary and how they a¤ect behavior; (2) mindfulness—the ability to pay attention to signals and reactions in di¤erent cross-cultural situations; and (3) behavioral skills— using one’s knowledge and mindfulness to choose appropriate behaviors in those situations