''ll*i:;.,l 81

should be broadened to include more than just

;;;;;;. development' What other factors does

il;ht;k rhorrldb" included in an assessment of

;;;l"p*""t? How might-adoption of Sen's views

influence got"**""'policy? Do you think Sen

il;;;;; ?hut dtu"lop*ent is about more than

1rr* ".ott"*ic development? Explain'

5. Yor., ur. the CEO of a company that has to chooseJ' ;;;"" making a $100 miliion investment in

i,rrri" or rhe Czech Republic' Both investments

".t**. in" same long-run return' so your choice

[;;i;;;b, risk considerations' Assess the vari'

"".-tttf.t oi doi'lg business in each of these na-

,it"r. Wt *h investment would you favor and

why?

6. Read the Country Focus on Chavez's Venezuela'

then answer the following questions:

a. Under Chavez's leadership' what klnd of

economic system is being put in place in

Politicai EconomY Chapter 2

b.

c.

Venezuela? How would you characterize the

political system?

Ho* do you think that Chavez's unilaterat

changes to contracts with foreign oil compa'

nies will impact upon future investment by

foreigners in Venezuela?

How will the high levei of pubhc- corrup-tion

in V.rr"r,-,"Iu impact future growth ratesJ

Currently Venezuela is benefiting from- a

t""t"1".tt prices' What do you think might

t upp.t, if oii prices retreat from their current

hlgh level?

ln your estimation, what is the long-run prog-

,rort fo, the Venezuelan economy? Is this a

.ol,rrr*y that is attractive to international

businesses?

d.

e.

BgggAg,eEg YmWk Qgrobate*cx stohatedqe.mst:.eder

National Differences ln Political Economy

Use ttre globalEDGE'M site to comptete the following

exerclses:

Exercise 2

One wav that experts anatyze conditions in different

""j,!,ffifi;il;Jil.ult"t' in transition is through

the use of economic indictors' The Marker Potenaal In'

ir" lltipll i, u v"rttv studv conducted bv the Michigan

State University Center for lntemational Business Edu'

IrrJ" ""a

Research (MSU-CIBER) to compare emerg'

ins markets on a variety of dimensions' Provide a

J"I"''.ti"" of the indicators used in the indexing proce-

a"l"l ixrnnft of the indicators would have greater impor-

tance for a company that markets laptop- computers?

6;;i;;*c tr,. Mpi rankings' which developing coun'

;rJ;;iJ"ro., "d"ise such a company to enter first?

The defi.ritlon of words and political ideas can have

differ.n, meanings in different contexts worldwide' In

,iio.,-rfr" Freedoln in the Worl'd.tYl""y evaluates, the

=.i##;;;inLri "tt"s and civil liberties around the

='.., ia. pr.tide a description of this survey and,a rank--ffiiJ."",*;;i'+;;;$;i') or 'h'

world's leaders and

...;il;e- \Uhat factors are taken into consideration in

*is survey?

ment permission. It could ake years to get permissron to

diversify into a new product' Mt"h of heavy industry'

;;h;;'^;., chemical, and steel production' was te-

served for state-owned enterprises' Production quotas

,"i frigtt tariffs on imports also stunted the development

of a healthy private sec[or' as did labor laws that made it

difficult to fire emPloYees'

82

ii1

;i't

i)

l=

By the early 1990s, it was clear that this system was

iflcapable of delivering the kind of economic progress

that many Southeastern Asian nations had started to

enjoy. In 1994, India's economy was still smalter than

B.igir*'r, despite having a popuiation of 950 million'trc GDp per cipita was a paltry $310; less than half the

population .orrid r."d; only 6 million had access to tele'

pht"".; only 14 percent had access to clean sanitation;

ihe World Bank estimated that some 40 percent of the

worid's desperately poor iived in lndia; and only Z'3 per'

cent of the population had a household income in excess

ot$7,484.The lack of progress led the government to embark

on an ambitious economic reform program' Starting in

1991, much of the industrial licensing system was dis-

mantted, and several areas once closed to the private

sector were opened, including electricity generation,

parts of the oii industry, steelmaking, air transport, and

,o*. u."u, of the telecommunications industry' lnvest-

ment by foreign enterprises-formerly allowed only

grudgingly andiubject to arbitrary ceilings, was suddenly

*.l.L*"d. Approval was made automatic for foreign eq-

uity srakes of up to 51 percent in an lndian enterprise,

uni tOO p.r..rrt foreign ownership was allowed under

certain circumstances. Raw materials and many indus'

trial goods could be freely imported and the maximum

arifflhat could be levied on imports was reduced from

400 percent to 65 percenr. The top income tax rate was

also ieduced, and corporate tax fell from 57'5 percent to

46 percent in 1994, and then to 35 percent in 1997' The

government also announced plans to start privatizing

india's state-owned businesses, some 40 percent of which

were losing money in the early 1990s.

Judged by some measures' the response to these eco-

nomic reforms has been impressive. The economy ex'

panded at an annual rate of about 6.3 percent from

1994 to 2004, and then accelerated io 9 percent per an-

num during 2005-2008. Foreign investment, a key indi-

cator of how attractive foreign companies thought the

Indian economy was, jumped from $150 million in 1991

to $36.7 biltion in 2008. Some economic sectors have

done particularly well, such as the information technol-

ogy ...,o. where India has emerged as a vibrant global

.Ir,r", for software development with sales of $50 bil-lion in 2007 (about 5.4 percent of GDP) up from just

$150 million in 1990. In pharmaceuticals too, lndiancompanies are emerging as credible players on the

global marketplace, primarily by selling low-cost' ge-

ieric version. -of

d.,rgt that have come off patent in the

developed world.However, the country still has a long way to go' At'

tempts to further reduce import tariffs have been stalled

by pohtical opposition from employers, employees, and

economy?

^/r,\ LPart2 l;,.;:r.:',' . iiterences

politicians, who fear that if barriers come down, a flood

tf i.,e*pe.r.ive Chinese products will enter lndia' The

privatization program continues to hit speed bumps-,h. lu,"t. in September 2003 when the Indian Supreme

Court ruled that the government could not privatize two

state-owned oil companies without explicit approval

from the parliament. State-owned firms still account for

38 percent of national output in the nonfarm sector, yet

lndia's private firms are 30+0 percent more productive

than their state-owned enterprises. There has also been

strong resistance to reforming many of India's laws that

*ak. it difficult for private business to operate effi-

ciently. For example, labor laws make it almost impossi-

ble for firms with more than 100 employees to fireworkers, creating a disincentive for entrepreneurs to

grow their enterprises beyond 100 employees' Other

1""r0, *u.rdute that certain products can be manufactured

only by small companies, effectively making it impossi-

ble for cornpanies in these industries to attain the scale

required to compete intemationally.T2

Gase Discussion Ouestions(t.^lWt'r^t klnd of economic system did Indla operate\--l

under during 1947 to 1990? What kind of system

is it moving toward today? What are the impedi-

. ments to completing this transformation?

f, ) How might *id..p..ud public ownership of busi-\-/

nesses and extensive government regutations

have impacted ( 1) the efficiency of state and pri'vate businesses, and (2) the rate ofnew business

{ormation in India during the 1947-1990 time

frame? How do you think these factors affected

the rate of economic growth in lndia during this

/ ^ time frame?

() Ao* would privatization, deregulation, and the

removal of barriers to foreign direct investment

affect the efficiency of business, new business for-

mation, and the rate of economic growth in India

- during the post-1990 time periodl

Q) t.,at, now has pockets of strengths in key high-v 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 lndian

Given what is now occurring in the lndianeconomy, do you think the country represents

an attra;tive target for inward investment by

foreign multinatlonals selling consumer prod'

ucts? \Vhy?

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::Partl I 'l'': j ,-''-:-

"

c.

ffieSgAf mk YAglf ff globarrmnr Et*hated6e":{tap}x.edu

Globalization

Use the globalEDGE'M site to complete the following

exercises:

Exercise 1

Your company has developed a new product that has

rlar*"tt"t ,ppart u.,o,, to"t'tries and cultures' ln fact' it

;;-;".*d to a.hie're high penetration. rates in all the

ccuntries where it is lntroduied, regardtess of the aver-

;;;;;*. of the local populace' Considering the costs

;?-;;;fficr launch, iht *ut''gtment.team has de'

.ia"J t" introduce the product initially only in countries

afr* t urr. a sizeable population base' You are required to

;;.;r.. a preli*inaiy report about the top 10 countries

i.r i.r*. of population size' A member of management

t ",

irral.u,"i ihu, u ,"rot"ce called the "\Uorld Popula-

tion Data Sheet" may be useful for the report' Since

growth opportunities are another major concern' the

G Thomas Edison

;;;d"J, and now the largest industrial conglomerate

possible implications of such a development for

irl rtr. worid trading system' (b) the world mon-

"iur, ,y.r.*, (c) the business strategy of today's

European and U.S.-based global corporations'

and (d) global commoditY Prices'

Reread the Management Focus on Vizio and

answer the following questions:

a. Why is the manufacturing of flat panel,TVs

*igtuti"g to different locations around the

world?

b. Vi4ro benefits from the globalization of the flat

panel display industry? tVho are the losers?

What would happen if the U'S' govemmerrt

..qr.ri..a thrt flai panel displays sold in tlre

U"ir"a States hui to atso be made in the

U"ir.a States? On balance, would this be a

good or a bad thing?'What does the example of Vizio tell you

about the future ofproduction in an increas-

ingly int"grrted glotal economy? What does

It iell you about the strategies that enter-

orises must adopt in order to rhrive in highly

competitive global markets?

be number I ot Z globally in every business in which it

rrrit.i""i.a. To fi,tth.r this goal, \Velch sanctioned

il;;;;;ile and often opportunistic foreign direct

;";;;", strategy. GE took advantage of economic

weakness in Europe ftom 1989 to1995 to invest

$rz!uiiltt" in the region, half of which was use{ 11

d.

average population growth rates should be listed also for '

management's consideration'

Exercise 2

You are working for a company that is considering in'

r"ra*g in a foieign countty' Investing in countries

*trfl'itff*"n, ,rrii,io"s is an important element of

;;;; ;;r;"y's long-term strategic goals' As such'

**rg.-.rr, iru, ..q"tted a report regarding the at-

,rr.ai""""tt of alteinative countries based on the

;;;-1;t.,* of FDI' Accordinglv' the ranking of

ih" ,op 25 countries in terms of FDI attractiveness is a

;;.i;i iugredient for your report' A colleague men-

,anJ, p?t..,tully "seful toot called the "FDI Confi-

il;" lnilt," which is updated periodically' Find this

il;; ;;J provide additional information regarding

how the index is constructed'

i"-a*..i.r, produces u 'ild" array of goods and ser-

,i."r, fro* medical equipment' power generators' jet

ensines, and home uppii''-""'' tolinancial services and

;;:;^;;i;;i;io., u'oui.ustine (cE owns NBc' one of

A*".i.r', big three network broadcasters)' This giant

.o*p""v witi-l rerenues of close to $180 billion is no

,rr".,.g.r'ro international business' GE has been operat-

r"g ""a

selling overseas for decades' During the tenure

ofl"g"rautv 6fO ]u.t \X/elch, GE's main goal was to

".q,ri.. some 50 companies'^\When the Mexican?eso

..,ii;;t; trr". t" iq95, G,E took advantage of the

J;ffi ;;..tl"t"i, . purchase companies through'

out in Latin America. And when Asian slipped into a

*u1o. ".o.,omic

crisis in1997-1998 due to turmoil in

GeLthe Asian currency rnarkets, Welch urged his managersto view it as a buying opportuniry. I., japa., alone,"thecompany spent $15 biilion on acquisition in jusr sixmonths. As a resuk, by the ..d oi \7elch,s tenure in2001, GE earned over 4C percent of its revenues fromintemarional sales, up frorn 20 percent in 1985.

Welch's GE, however, was stilivery much an Americancompany doing business abroad. Under the leadership oihis successor, J"tr".V Immeh, GE,seems to be intent on be-coming atrue globalcompany. For.rne thing, intemationalrevenues continue to grow faster tlan domestic revenues,passing 50 percent of the total inZa./i-This expansion isincreasingly being powered by the dy,,rf;r,i. economies ofAsia,.particularly India and China.'Ct' .o* sells morewide-bodled ier engines to India than in the Untied Srates,and GE is a major beneficiary of the huge ini,.astrucrureinvestmenm now taking place in China as rhal couniryllI.j" rapidly in airports, railways, and power srarrons., By2012, analysts estimare that GE will be generating ,5 rto60 percent of its business intemationally.

To reflect the shifting cenrer of graviry, Immelt hasmade some major changes in the wiy GE'is organizedand operates. Until recently, all of GE,s major businesseshad head offices in the United States ,.,j rr"." tightlycontrolled from the center. Then in 2004, GE movedthe head office of its health care business from theUnited States to London, the home of Amersham, acompany GE had just bought. Next, GE relocared tireheadquarters for the unit rh]at sells eq,lipm".rt ro oil a.rdgas companies to Florence, ltaly. And in 2008, the com_pany moved the headquarters for GE Money to London.Moreover, it gave country managers more power. !7hy isGE doing this? The company b,".li.rr.s thrt to succeedinternationally, it must be close to its customers. Mov-i"g 9E Money ro London, for example, was prompteclby a desire to be closer ro cus[omers in Europe and Asia.Execurives at GE Healrh Care like Lo"J;; because irallows easier flights to anywhere* i., th" *o.ld.

GE has also shifted research overseas. Since 2004 it hasopened R&D centers in Munich, Germany; Shanghai,China; and. Bangalore, India. The beliei'is thal bylocating in those economies where it i, g.ori.rg rapidly,GE can berter design equipment that is best suited to

' - -,--ii'w?i:+gt_h*1iqjti.,+u:a:ji&

ftfo&es

Chapter I 37

local needs. For example, GE Health Care rrlakes MRIscanners that cosr $1.5 million each, but its Chinese re-search center is designing MRI scanners that can.bepriced for $500,000 and are more likely to gain sales inthe developing world.

GE is also rapidly internationalizing its senior man_agement. Once viewed as a compu,ly thrt preferred tohire- managers from the Midwest L*"rr. .iif,.i. ,tro.,gwork ethic, foreign accents are now frequently heariamong the higher ranks. Counrry *rrr"g..r, who in thepast were often American expatriates, in"creasingly comefrom the regions in where they work. GE ha, fo.,nd thatlocalnationals are invaluabie when t.yingi; s.llto localcompanies and governments, where a deep understand-tl,g of local language and culture is often critical. InChina, for example, the govemment is a large customer,and working closely with govern..r".rt b,r.?r.,crars re-quires a cultural sensitivity that is difficult for outsiders togain. In addition to the internarionalization of theirmanagement ranks, GE,s American managers are increas-ingly traveling overseas-for managemerit trainlng andcompany evenrs. In 2008, in a highly symbolic g.I.,rr",GE Tiansporrarion, which is based in b.il, p*.rf1rrrrri",moved its annual sales meeting to Sorrento, Italy fromFlorida. "lt was time that the America.r"l.r..r, to dealwith jet lag," according to the head of the u.rlt.oo

Case Discussion Ouestions

C) Wfry do you thtnk GE has invested so aggres-sively in foreign expansion? What opporruniries

z.-- is it trying to exploit?

()Ynl, is GE rrying ro achieve by moving some ofr rhe headquarters of its global businesses ro for-eign locations? How might s,_rch moves benefitthe company? Do these .*.r., benefit the UnitedStates ?

CD

What is the goal behind trying to ,,inremational_ize" the.sen-ior management ranks at GE? Whatclo you think it means to,,internationalize,,theseranks ?

What does the GE example tell you about thenature of true global businessesl

1. Sources: G. Colvin, ,,Think your Job Can,t Be Senr rollilut" Fortune, December 13, ZOO4, p. g0, A. pollack,"\il/ho's Reading your X-Ray,,, The New yrrk T,_.s, No-vember 16,2003, pp. 1, 9; ,,Sun,

Sand "nd

S.alp"[s,;,TheEconomist, March 10, 2OO?, p.6; ,,Op"ru,i.,g R ofit,,, TheEconomist, August 16, 200d, pp Zi*le; r"J n. Bailey,"Hips Abroad," Reason, May 2d0i9, p. 14.'

2. Tiade sraristics from !7orld Tiade Organizarion, trade sra.tistics database, accessed May 12, 2059, athttp://stat.wto.org/ HomefMSDBHome.aspx. Foreign t,..l,r"g" srarisricsfrom Bank for Intematio.rrl S"ttl"ir..rt" ui-tittp 77***.bis.org/index.htm.

3. Thomas L. Friedman, The\X/orld.Is Flar (New york: Farrar,Straus and Giroux, 2005).