MN1178 SubjectGuide C1 5

Undergraduate study in Economics,
Management, Finance and the Social Sciences
Business and
management in a
global context
L.P. Willcocks
MN1178
2021
Business and management
in a global context
L.P. Willcocks
MN1178
2021
Undergraduate study in
Economics, Management,
Finance and the Social Sciences
This subject guide is for a 100 course offered as part of the University of London
undergraduate study in Economics, Management, Finance and the Social Sciences. This is
equivalent to Level 4 within the Framework for Higher Education Qualifications in England,
Wales and Northern Ireland (FHEQ).
For more information about the University of London, see: london.ac.uk
This guide was prepared for the University of London by:
L.P. Willcocks, Emeritus Professor of Work, Technology and Globalisation Department of
Management, The London School of Economics and Political Science.
Acknowledgements
The author would like to thank Dr Jorn Rothe for his immense collegiality and all the detailed
constructive help he has given in arriving at the finished version of this subject guide. He
would also like to thank the academic reviewers for their support and encouragement.
This is one of a series of subject guides published by the University. We regret that due to
pressure of work the author is unable to enter into any correspondence relating to, or arising
from, the guide. If you have any comments on this subject guide, favourable or unfavourable,
please use the form at the back of this guide.
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Contents
Contents
Introduction............................................................................................................. 1
1.1 Route map to the guide............................................................................................ 1
1.2 Introduction to the subject area................................................................................ 2
1.3 The syllabus.............................................................................................................. 2
1.4 Aims and objectives of this course............................................................................. 4
1.5 Learning outcomes for the course............................................................................. 5
1.6 Overview of learning resources................................................................................. 5
1.7 Examination advice................................................................................................ 13
Part 1: Introduction to the global business environment..................................... 15
Chapter 1: Perspectives on globalisation and international business.................. 17
1.1 Introduction........................................................................................................... 17
1.2 What is globalisation?............................................................................................ 19
1.3 Trends towards globalisation................................................................................... 20
1.4 The globalisation debates....................................................................................... 23
1.5 What does globalisation mean for companies?........................................................ 26
1.6 Key concepts.......................................................................................................... 27
1.7 Reminder of your learning outcomes....................................................................... 28
1.8 Test your knowledge and understanding................................................................. 28
1.9 Sample examination question................................................................................. 28
Chapter 2: Political, economic and legal environments........................................ 29
2.1 Introduction........................................................................................................... 29
2.2 An institution-based view of international business................................................. 30
2.3 Political systems..................................................................................................... 31
2.4 Economic systems................................................................................................... 34
2.5 Legal systems......................................................................................................... 35
2.6 Country development: political, economic and legal issues...................................... 37
2.7 Key concepts.......................................................................................................... 39
2.10 Sample examination question............................................................................... 39
Chapter 3: Informal institutions: cultural, social and ethical challenges.............. 41
3.1 Introduction........................................................................................................... 41
3.2 Cultures and international business........................................................................ 43
3.3 Languages............................................................................................................. 45
3.4 Religion and ethics................................................................................................. 46
3.5 Corporate social responsibility in international business........................................... 48
3.6 CSR and sustainability............................................................................................ 51
3.7 Dealing with corruption.......................................................................................... 52
3.8 Key concepts.......................................................................................................... 53
3.10 Test your knowledge and understanding............................................................... 54
i
MN1178 Business and management in a global context
Part 2: Business across borders: the foundations.................................................. 55

Chapter 4: International trade and investment.................................................... 57
4.1 Introduction........................................................................................................... 57
4.2 Classic trade theories.............................................................................................. 59
4.3 Modern trade theories............................................................................................ 60
4.4 National institutions and international trade........................................................... 61
4.5 Government intervention and free trade: the debate................................................ 63
4.6 Foreign direct investment (FDI)................................................................................ 64
4.7 Governments and FDI............................................................................................. 66
4.8 Key concepts.......................................................................................................... 67
Chapter 5: Multilateral organisations and regional integration........................... 69
5.1 Introduction........................................................................................................... 69
5.2 Regional economic integration................................................................................ 70
5.3 The multilateral trade system................................................................................... 72
5.4 The multilateral monetary system............................................................................ 74
5.5 Regional integration examples: Europe.................................................................... 75
5.6 Regional integration examples: the Americas........................................................... 77
5.7 Regional integration examples: Asia Pacific............................................................. 79
5.8 Key concepts.......................................................................................................... 80
Chapter 6: Exchange rates and the international monetary system..................... 83
6.1 Introduction........................................................................................................... 83
6.2 Markets for currencies............................................................................................ 84
6.3 Implications for managers....................................................................................... 85
6.4 Institutions of the international monetary system.................................................... 86
6.5 Managing exchange risks – implications for managers............................................ 89
6.6 Key concepts.......................................................................................................... 91
6.9 Sample examination question................................................................................. 92
Part 3: International business strategy................................................................. 93
Chapter 7: Overview of strategy and the enterprise in international contexts.... 95
7.1 Introduction........................................................................................................... 95
7.2 Strategy and value creation..................................................................................... 96
7.3 Going international: gaining economies from location, experience effects
and scale.................................................................................................................... 100
7.4 Analysing the international environment............................................................... 101
7.5 Developing international business strategy: Ghemawat’s AAA model..................... 103
7.6 Choosing a strategy for international business...................................................... 105
7.7 Key concepts........................................................................................................ 106
7.8 Reminder of your learning outcomes..................................................................... 107
7.10 Sample examination question............................................................................. 107
ii
Contents
Chapter 8: Competitive strategy for international business............................... 109

8.1 Introduction......................................................................................................... 109
8.2 Porter’s five forces framework............................................................................... 111
8.3 Generic strategies................................................................................................. 114
8.4 A resource-based perspective of competitiveness................................................... 115
8.5 Resource-based competition: the VRIO framework................................................. 117
8.6 Bringing environment and strategy together.......................................................... 118
8.7 Debates and an institution-based view of competition........................................... 119
8.8 Key concepts........................................................................................................ 121
8.10 Test your knowledge and understanding new case needed?................................ 121
Chapter 9: Entry strategies, alliances and evolution........................................... 123
9.1 Introduction......................................................................................................... 123
9.2 The decision to enter foreign markets.................................................................... 124
9.3 Major modes of entering foreign markets.............................................................. 127
9.4 Assessing the relevance of strategic alliances........................................................ 131
9.5 Going international: growth through evolution...................................................... 133
9.6 Key concepts........................................................................................................ 134
Chapter 10: International marketing and R&D strategy..................................... 137
10.1 Introduction....................................................................................................... 137
10.2 Marketing strategy and the marketing mix.......................................................... 138
10.3 Marketing across the consumer life cycle ............................................................ 140
10.4 Product ............................................................................................................. 141
10.5 Pricing strategy................................................................................................... 142
10.6 Promotion strategy............................................................................................. 144
10.7 Place: distribution strategy.................................................................................. 145
10.8 Research and development (R&D) strategy.......................................................... 147
10.9 Key concepts...................................................................................................... 149
10.10 Reminder of your learning outcomes................................................................. 149
10.11 Test your knowledge and understanding........................................................... 149
10.12 Sample examination question........................................................................... 149
Part 4: International business management........................................................ 151
Chapter 11: The organisation of international business..................................... 153
11.1 Introduction....................................................................................................... 153
11.2 Centralised or decentralised structure?................................................................ 155
11.3 Revisiting international business strategy............................................................ 156
11.4 The international division structure...................................................................... 156
11.5 Geographic area structure................................................................................... 157
11.6 Global product division structure......................................................................... 157
11.7 Global matrix structure....................................................................................... 158
11.8 Evolution of structure and the need for a contingency approach.......................... 159
11.9 Integrating mechanisms and the role of knowledge management........................ 160
11.10 Fitting strategy, structure and organisation architecture..................................... 162
11.11 Key concepts.................................................................................................... 164
iii

Chapter 12: Global sourcing of production and services.................................... 167
12.1 Introduction....................................................................................................... 167
12.2 Locating production............................................................................................ 169
12.3 Make-or-buy decisions........................................................................................ 171
12.4 Offshoring global services and production........................................................... 172
12.5 Deciding on location attractiveness..................................................................... 173
12.6 Global business and IT services: sourcing decisions and risks............................... 175
12.7 Key concepts...................................................................................................... 179
12.8 Reminder of your learning outcomes................................................................... 179
12.9 Test your knowledge and understanding ............................................................ 180
Chapter 13: Global information systems management....................................... 181
13.1 Introduction....................................................................................................... 181
13.2 Business and IT alignment.................................................................................. 183
13.3 Managing global enterprise IT architecture.......................................................... 186
13.4 Enterprise IT architecture for the ‘multinational’ (localisation) approach............... 187
13.5 Enterprise IT architecture for the ‘international’ approach.................................... 188
13.6 Enterprise IT architecture for the ‘transnational’ approach................................... 189
13.7 Enterprise IT architecture for the ‘global’ (global standardisation) approach......... 190
13.8 Key concepts...................................................................................................... 191
Chapter 14: International dimensions of human resource management............ 193
14.1 Introduction....................................................................................................... 193
14.2 Staffing policy.................................................................................................... 195
14.3 Expatriate issues and the role of recruitment and selection.................................. 197
14.4 Expatriate training and development................................................................... 198
14.5 Performance appraisal........................................................................................ 200
14.6 Compensation.................................................................................................... 200
14.7 Labour relations................................................................................................. 202
14.8 IHRM Prospects: some emerging issues............................................................... 203
14.9 Key concepts...................................................................................................... 204
Chapter 15: International project management.................................................. 207
15.1 Introduction ...................................................................................................... 207
15.2 Project and programme management: overview.................................................. 209
15.3 Project management methodologies .................................................................. 210
15.4 What makes for successful projects? .................................................................. 213
15.5 Are international projects different? ................................................................... 214
15.6 Managing risk in international projects .............................................................. 215
15.7 Key concepts...................................................................................................... 217
15.9 Test your knowledge and understanding............................................................. 218
15.10 Sample examination question .......................................................................... 218
iv
Contents
Chapter 16: Global digital management............................................................. 219

16.1 Introduction ...................................................................................................... 219
16.2 SMAC/BRAIDA Technologies............................................................................... 221
16.3 Developing a digital business model .................................................................. 223
16.4 Building blocks for a digital business................................................................... 224
16.5 Digital transformation: why and how.................................................................. 225
16.6 Key concepts...................................................................................................... 228
16.8 Test your knowledge and understanding............................................................. 229
v
Notes
vi
Introduction
Introduction
1.1 Route map to the guide

The guide and course are structured in four parts. The first provides an
introduction to the global business environment and covers trends towards
globalisation (Chapter 1) and the formal and informal institutions of
countries. In particular, we focus on international political, economic,
legal, cultural, and social diversity (Chapters 2 and 3). The subject
guide provides activities that will help you to pick out the management
challenges and implications, not least that of corporate social responsibility
when operating on the global stage.
The second part gives an overview of why international trade takes place,
why firms invest abroad (Chapter 4), the cross-border institutions that
exist such as the IMF, World Bank and regional economic blocs (Chapter 5)
and how the global financial system functions (Chapter 6).
These first two parts provide the context of international business
while Part 3 gives insight into how to analyse that context to arrive at
competitive international strategies (Chapters 7 and 8), enter markets
and evolve (Chapter 9) and develop marketing and R&D strategies
(Chapter 10).
The fourth part focuses on major operational areas of an international
business, namely designing the organisation (Chapter 11), global
sourcing and supply chain management (Chapter 12), establishing
global information systems (Chapter 13), managing human resources
(Chapter 14). The updated new syllabus also includes two areas that have
become increasingly high profile in an uncertain, dynamic global business
environment. These are international project management (Chapter
15) and global digital management, including digital transformation
(Chapter 16).
1.1.1 How to use this guide and hours of study

The advice normally given to students on this programme is that if they
are studying one course a year, they should allow at least six hours of
study a week. This subject guide provides detailed chapters to save you
time, since there are too many books on this subject to read and absorb in
the time, while the articles in refereed journals tend to be over-specialised.
There are also two essential texts designed to distill the fundamentals
of managing international business. Willcocks (2021a) is very strong on
international business, institutions, global context and global business
strategy, and focuses on Parts 1, 2, and 3 of the syllabus. The other,
complementary, text by Willcocks (2021b) covers Part 4 of the syllabus,
and concentrates on global business management. There is also some
additional reading, but this has been kept to a minimum.
You should read each chapter of the subject guide once, then work through
it methodically a second time, doing the activities as they appear. This
will involve reading pages from the Essential reading texts and articles
prescribed for the chapter, but might also involve looking at an article, or a
case study provided in the textbook or on the virtual learning environment
(VLE). There are many activities and sample examination questions. Do
not skip these! They are a key part of your learning. Where you are asked
questions, write your answers down carefully and in detail so you can
revise from them at a later point, before any examination. Each chapter
1
includes a set of learning outcomes. These set out what you should have
learned from the Essential reading, engaging with the activities and the
chapter of the subject guide. You should use these to assess your own
progress and if necessary revisit some of the material to ensure you have
made the necessary progress.
1.2 Introduction to the subject area

As a manager faced with this complexity, dynamism, unpredictability, and
diversity, you face the difficult challenge of devising strategies that will
work internationally, in different parts of the globe, plan entry strategies
for new markets, and decide who you need to establish alliances with
and how your strategy is to evolve. You then need to work at the detail
of managing, specifically designing structure and organisation, devising
sourcing and supply chain arrangements, establishing information systems
that perform globally, and creating distinctive arrangements for managing
international human resources. Increasingly, in the face of change, you
will need to draw upon international project management capability.
Meanwhile, competitive forces and available technologies pressure you to
move ever more towards becoming a digital business.
As a student, you will find understanding and analysing international
business and making managerial judgements to be full of fresh challenges,
and you will also find that studying this subject area provides insights and
gives you the analytical equipment and knowledge to begin to perform in
a business that operates globally.
1.3 The syllabus

Part 1: Introduction to the global business environment
Perspectives on globalisation and international business:
trends and drivers of globalisation, foundations of global trade and
finance, overview and framework for understanding the global economy,
the development of the multinational enterprise (MNE), debates on the
nature and impacts of impacts of globalisation, and the implications
for managing international business. Recent trends: deglobalisation,
‘slowbalisation”, global systemic risks. Future challenges, opportunities
and directions for international businesses in changing global contexts.
Political, economic and legal environments: common and
diverse; political, economic and legal; formal and informal institutions
and how they contextualise and shape management practices and the
conduct of business. This includes comparing national economies, regional
integration, international organisations, and relationships between
government and business.
Culture society, ethics and corporate social responsibility:
informal institutional influences of social, cultural, ethical and religious
factors and how these play into globalisation, rendering a necessary focus
on balancing global, regional and local factors when conducting business
internationally. The chapter discusses differences and types of culture,
language and religion and the different types of ethics and attitudes
towards corruption and corporate social responsibility to be found. It also
deals with corporate social responsibility and corporate sustainability
practices.
2
Introduction
Part 2: Business across borders: the foundations

International trade and investment: classical and modern trade
theories, national institutions and international trade, government
intervention and free trade, patterns in global trade; rationale for, and
challenges of, foreign direct investment.
Global and regional integration and multilateral
organisations: the different levels of regional integration found across
the globe, and the benefits and challenges of regional integration. It
describes regional integration in Europe, the Americas, Asia and Middle
East and North Africa.
The global financial system: the international capital market, foreign
exchange markets and related institutions., including evolution and roles
of the WTO, World Bank and IMF.
Part 3: International business strategy

Strategy and the enterprise in international contexts:
introduction to international business strategy. Detailed assessment
of the PESTEL framework and Ghemawat’s culture, administration,
geography, economy (CAGE) framework as a basis for analysing the
international environment for a firm, types of strategy commonly pursued
in international business, how such strategies evolve, Ghemawat’s
aggregation, arbitrage and adaptation (AAA) framework as a basis for
designing strategy for international contexts.
Competitive strategy for international business: concepts of
corporate and business strategy, how firms compete through competitive
positioning and resource-based approaches, dynamics of competition, the
global, regional and local dimensions in strategy, Porter’s five forces, value
chain and generic strategies frameworks, resource-based and institution-
based approaches to international competitiveness. Critical assessment of
applicability and limitations of these frameworks and approaches. Bringing
environment and strategy together – which strategy, and when; new
debates on strategy.
Entry strategies, alliances and evolution: foreign entry strategies,
including where, when and how to enter international markets, the
strategies to be pursued, the contextual factors that need to be taken
into account, the role of strategic alliances in entering and positioning in
international markets, the role of Foreign Direct Investment (FDI), how to
organise operations given the choices made, evolving the global strategy,
including growth by acquisition.
Part 4: International business management

Organisation of international business: different types of
organisational structure and how they relate to strategy, processes,
institutions and culture. Includes divisionalisation, matrix and hybrid
structures, organisational change issues, organisational architecture and
integrating the international business, need for a contingency approach.
Marketing and R&D: international marketing assessment, international
consumers, developing marketing strategy, customer lifecycle marketing,
modes of differentiation, the 4 ‘P’s mix of place, price, product and
promotion, and global branding, new product and market development,
distribution and supply chain issues, R&D and sources of innovation
including R&D offshoring.
3
Global sourcing of production and services: global sourcing

choices and drivers, make-or-buy decisions, locating production, logistics
concepts and developments, strategic sourcing issues of emerging locations
and country attractiveness. Offshoring and nearshoring production and
services, sourcing options, decisions, risk and management for global
business and IT services. Managing across the outsourcing lifecycle.
Global information systems management: business strategy
and IS alignment from strategy to operations, organising for internal
IT performance – structure, staffing and capabilities, the role of IT
infrastructure and its management, retained capabilities, global
implementation of IS projects, managing global enterprise IT architecture.
Managing international finance: exchange rates and markets for
currencies, types of risk, and techniques for risk management, managing
exchange rates in the context of a changing international monetary
system, roles of the IMF and the World Bank. Cryptocurrencies: will their
time come?
International dimensions of human resources management:
approaches to managing people, the main functions of the HR department,
Types of international staffing policy, global pay and incentivisation
practices, managing expatriates and multinational workforces,
recruitment, selection, training, development, appraisal, performance
management, international labour relations, impact of 2020–21 crises on
work. Automation and international human resources management.
International project and change management: Definitions.
The principles for effective project management. Why projects fail.
Methodologies – uses and limitations. Why international projects are
different, distinctive risks and their management in international projects,
action principles for effective international project management. Why
change management challenges in international contexts, taking a holistic
approach to change management.
Moving to global digital business: Major emerging digital
technologies, developing a digital business model, designing for digital –
the building blocks, achieving digital transformation – practices and cases.
1.4 Aims and objectives of this course

This course specifically aims to:
• Give you a research-based grounding in the shifting contexts of, and
changing priorities in, international business including globalising
trends, formal and informal institutions, the political, economic,
social, technological and legal issues and the resultant diversity of
international business. Specifically takes into account the impacts of
the 2020–21 pandemic and economic crises.
• Prepare you to be able to discuss cultural, ethical and social issues
for international business and suggest policies of corporate social
responsibility and sustainable business practices.
• Provide an introduction to and develop your ability to assess
international trade and investment, multilateral organisations and
regional integration and the global financial system.
• Prepare you to be able to discuss how firms develop international
business strategies, enter markets and alliances, and operate and
manage on the global stage.
4
Introduction
• Give insight through frameworks, studies and examples of how

businesses manage marketing and research & development,
organisational structure and architecture, sourcing and the supply
chain, exchange rates, information systems and human resources, in
different parts of the globe, globally, regionally and domestically.
• Prepare you to understand and assess project and change management
practices in an international context
• Provide an introduction to the major emerging digital technologies,
and how to manage these into operation and become digital
businesses internationally.
• Overall, give you insight into the contexts of international business
and enable you to work within these contexts to make judgements on
strategizing and managing operations in the global.
1.5 Learning outcomes for the course

At the end of the course and having completed the essential reading and
activities students should:
• demonstrate knowledge of, and the ability to assess, core institutions
of international business and how firms manage on the global stage
• assess regional, cultural and institutional differences in how business is
conducted globally
• apply core understandings, frameworks and management principles to
specific business contexts
• formulate choices and decisions in international business strategy and
operations
• operate as an informed employee in an international firm.
1.6 Overview of learning resources

1.6.1 Essential reading
The Essential reading consists of two texts, which between them cover the
whole syllabus:
Willcocks, L. Global business: strategy in context. (Stratford: SB Publishing,
2021) [ISBN 9780995682085]. This text covers subject guide Chapters
1, 2, 3, 4, 5, 7, 8 and 9 of the subject guide. Available directly from the
publisher: www.sbpublishing.org (referred to in this guide as Willcocks
2021a)
Willcocks, L. Global business: management. (Stratford: SB Publishing, 2021)
[ISBN ]. The text covers Chapters 6, 10, 11, 12, 13, 14, 15 and 16 of the
subject guide. Available directly from the publisher:
www.sbpublishing.org (referred to in this guide as Willcocks 2021b)
You will find that all of the points covered in the subject guide chapters
will be covered in these two books, although there are also a variety
of other texts recommended as Essential reading for specific chapters.
Further reading, from the journal articles, books and the weekly sources
mentioned below will give you more arguments, examples and detail that
can greatly enhance your knowledge and understanding, as well as, more
pragmatically, help you improve your examination answers.
Check the VLE regularly for updated guidance on readings and case
studies. There are several Essential journal articles, listed below.
5
Journal articles: Essential

Abbasi, N., I. Wajid,. Z. Iqbal and F. Zafar ‘Project failure case studies and
suggestion’, International Journal of Computer Applications 86(6) 2014,
pp.34–39.
Bingham, C., K. Eisenhardt and N. Furr ‘Which strategy, when?’, Sloan
Management Review 53 2011, pp.71–78.
Cantwell, J. et al. ‘An evolutionary approach to understanding international
business activity’, Journal of International Business Studies 41(4) 2010,
pp.567–86.
Collings, D., H. Scullion and P. Dowling ‘Global staffing: a review and thematic
research agenda’, International Journal of Human Resources Management
Special issue 20(6) 2009, pp.1253–72.
Cullen, S., P. Seddon and L. Willcocks ‘Managing the outsourcing lifecycle
imperative’, MISQ Executive 4(1) 2005, pp.229–46.
Davies, H. and P. Ellis ‘Porter’s competitive advantage of nations’, Journal of
Management Studies 37(8) 2000, pp.1189–1215.
Decker, C. and T. Mellewigt ‘Thirty years after Michael E. Porter’, Academy of
Management Perspectives 21(2) 2007, pp.41–55.
Ghemawat, P. ‘Managing differences: the central challenge of global strategy’,
Harvard Business Review 85(3) 2007, pp.58–68.
Ghemawat, P. ‘Distance still matters: the hard reality of global expansion’,
Goold, M. and A. Campbell ‘Do you have a well-designed organisation?’,
Gottfredson, M., R. Puryear and S. Phillips ‘Strategic sourcing’, Harvard
Business Review 83(2) 2005, pp.132–39.
Kettinger, W., D. Marchand and J. Davis ‘Designing enterprise IT architectures
to optimise flexibility and standardisation in global business’, MISQ
Executive 9(2) 2010, pp.95–113.
Luftman, J., H. Zadeh, B. Derkesen et al. ‘Key information technology
and management issues 2011–12: an international study’, Journal of
Information Technology 27(3) 2012, pp.198–212.
Malhotra, N. and C. Hinings ‘An organisational model for understanding
internationalisation processes’, Journal of International Business Studies
41(2) 2010, pp.330–49.
Nelson, R. R. (2007), ‘IT project management: Infamous failures, classic
mistakes, and best practices’, MIS Quarterly Executive, 6(2).
Peng, M. ‘The resource-based view and international business’, Journal of
Management 27 2001, pp.803–29.
Peng, M., D. Wang and Y. Jiang ‘An institution-based view of international
business strategy’, Journal of International Business 39 2008, pp.920–36.
Porter, M. ‘What is strategy?’, Harvard Business Review 74(6) 1996, pp.61–78.
Trent, R. and R. Monczka ‘Achieving excellence in global sourcing’, Sloan
Management Review 47(1) 2005.
Willcocks, L. ‘Can business recover from the crisis? Assessing scenarios, riding
trends.’ Journal of Financial Transformation 52(1) 2021, pp.94–101.
Willcocks, L. ‘Take the outsourcing health check’, Professional Outsourcing
Magazine 7 2011, pp.6–12.
1.6.2 Further reading

Please note that as long as you read the Essential reading you are then free
to read around the subject area in any text, paper or online resource. You
will need to support your learning by reading as widely as possible and
by thinking about how the principles apply in the real world. To help you
read extensively you have free access to the VLE and University of London
Online Library (see below).
Business and management in a global context is a fast moving subject
to study. Therefore, it is particularly important that you keep up with
6
Introduction
the most recent developments. You can do this by regularly reading

such sources as The Economist, which has weekly news and regular,
relevant special studies; the Financial Times, which provides daily world
commentary and also has a backlog and regular regional and theme
special issues; and the Wall Street Journal, which also provides detailed
daily world commentary. The two daily newspapers have regional editions.
You should also identify more regionally based weekly business journals
and magazines that will provide insightful articles and good illustrative
examples of the events and practices you are studying in this course. Do
not forget to keep detailed notes on what you find from such sources for
revision purposes.
There are numerous books available on international business, far too
many for you to be able to read. However, here are three of the most
useful ones that we occasionally refer to in the subject guide:
Collinson, S., R. Narula, and A. Rugman International business. (Harlow:
Pearson Education, 2020) eighth edition [ISBN 9781292274157]. This
is strong on international business strategy and gives the most detailed
coverage of regions.
Hill, C. International business: competing in the global marketplace. (New York:
McGraw Hill, 2021) 13th edition [ISBN 9781260575866]. This gives
another perspective on international business from a book with a greater
focus on economics and a more North American perspective.
Peng, M. and K. Meyer International business. (Andover: Cengage Learning,
2019) third edition [ISBN 9781473758438]. This gives a strong European
perspective.
Journals
There are also many journals covering international business and
management. Some will be too research based and advanced for your
purposes. It is also best to focus on the more recent articles, written
within the last three years. The main journals for additional articles on
globalisation, business strategy and management are:
• Academy of Management Perspectives (formerly the Academy of
Management Executive)
• Academy of Management Review
• Strategic Management Journal
• Long Range Planning
• Journal of Management Studies
• Journal of International Business Studies
• Journal of Management
• Management Information Systems Quarterly Executive
• Organization Science
• Management International Review
• Harvard Business Review
• Sloan Management Review
• California Management Review.
Full list of Further reading

For your ease of reference, here is a list of all the further reading for this
course. Many of these papers and books are listed as further reading in the
7
relevant chapters. There are also additional useful references, if you wish
to explore a topic even further.
AMA: The definition of marketing. (American Marketing Association, 2007).
Available at: www.ama.org/the-definition-of-marketing-what-is-marketing/
Ansoff, H. Corporate strategy. (London: Penguin, 1988)
[ISBN 9780140091120].
Barney, J. ‘Is the resource-based view a useful perspective for strategic
management research?’, Academy of Management Review 26 2001, pp.41–56.
Bartlett, C.A. and S. Ghoshal Managing across borders: the transnational
solution. (Boston: Harvard Business School Press, 2002) second edition
[ISBN 9781578517077].
Bhagwati, J. In defense of globalization. (New York: Oxford University Press,
2007) [ISBN 9780195330939].
BMG Research Factors in project success. (Birmingham, UK: BMG Research,
2014).
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a review of the progress on a 30-year research agenda’, Journal of
International Business 40 2009, pp.1563–80.
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Bughin, J., J. Deakin and B. O’Beirne. ‘Digital transformation: improving the
odds of success’, McKinsey Quarterly October 2019.
Caligiuri, P., H. De Cieri, D. Minbaeva, A. Verbeke and A. Zimmerman
‘International HRM insights for navigating the COVID 10 Pandemic:
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Chang, H. Kicking away the ladder. (London: Anthem Press, 2003).
Cuervo-Cazurra, A. ‘Corruption in international business’, Journal of World
Businesses 51 2016 pp.35–49.
Cullen, S., M. Lacity, and L. Willcocks Outsourcing – all you need to know.
(Melbourne, Australia: White Plume, 2014).
Dicken, P. Global shift: mapping the changing contours of the world economy.
(London: Sage, 2010) sixth edition [ISBN 9781849207676].
Doh, J., P. Rodriguez, K. Uhlenbruck, J. Collins, and L. Eden ‘Coping with
corruption in foreign markets’, Academy of Management Executive 17(3)
2003, pp.114–29.
Donaldson, T. ‘Values in tension: ethics away from home’, Harvard Business
Review September–October 1996.
Dunning, J. and S. Lundan Multinational enterprises and the global
economy. (Cheltenham: Edward Elgar Publishing, 2008) second edition
[ISBN 9781847201225].
Earl, M. (ed.) Information management: the organisational dimension. (Oxford:
Oxford University Press, 1996).
Fonstad, N. and M. Subramani ‘Building enterprise alignment: a case study’,
MISQ Executive 8(1) 2009, pp.31–41.
Friedman, M. ‘The social responsibility of business is to increase profits’, New
York Times Magazine 13 September 1970.
Friedman, T. The world is flat: the globalized world in the twenty-first century.
(London: Penguin, 2007) third edition [ISBN 9780141034898].
Ghemawat, P. ‘Developing a global strategy’ in Ghemawat, P. Strategy and the
business landscape. (Boston: Pearson, 2008) third international edition
[ISBN 9780132457200].
Ghemawat, P. ‘Regional strategies for global leadership’, Harvard Business
Review December 2005.
Ghemawat, P. The laws of globalisation and business applications. (Cambridge:
Cambridge University Press, 2017).
8
Introduction
Ghemawat, P. The new global road map: enduring strategies for turbulent times.
(Boston: Harvard Business Review Press, 2018).
Goldin, I. and M. Mariathasan The butterfly defect. (Princeton: Princeton
University Press, 2016).
Gurbaxani, V. and D. Dunkle, ‘Gearing up for successful digital transformation’,
MISQ Executive, 18(3) 2019 pp.209–220.
Hall, P. and D. Soskice (eds) Varieties of capitalism. (Oxford: Oxford University
Press, 2001) [ISBN 9780199247752].
Haskel, J. and S. Westlake Capitalism without capital. (Princeton: Princeton
Hennart, J. ‘Down with MNE-centric theories! Market entry and expansion as
the bundling of MNE and local assets’, Journal of International Business 40
2010, pp.1432–54.
Hitt, M.D., D. Ireland and R. Hoskisson Strategic management. (Cincinnati:
Thomson South-Western, 2003) fifth edition [ISBN 9780324114799] p.9.
Hoffmann, W. ‘Strategies for managing a portfolio of alliances’, Strategic
Management Journal 28 2007, pp.827–56.
Hofstede, G. Cultures and organizations. (New York: McGraw Hill, 1997) [ISBN
9781861975430].
Hofstede, G., G.J. Hofstede, and M. Mankov Cultures and organisations. (New
York: McGraw Hill, 2010).
House, R.J., P.J. Hanges, M. Javidan et al. Culture, leadership and organizations.
(Thousand Oaks: Sage, 2004) [ISBN 9780761924012].
Huntingdon, S. The clash of civilizations and the remaking of world order.
(London: Simon and Schuster, 1996) [ISBN 9780743231497].
Johnson, G., R. Whittington and K. Scholes Exploring strategy. (London:
Financial Times/Prentice Hall, 2010) ninth edition [ISBN 9780273737025].
Jones, A. Globalisation: key thinkers. (Cambridge: Polity, 2011).
Khan, R. and K. Spang Critical success factors in international projects.
Sixth International IEEE Conference on Data Acquisition and Advanced
Computing Systems, 15–17 September 2011, Prague, Czech Republic, www.
researchgate.net/publication/220798045_Critical_success_factors_for_
international_projects
Khanna, T. and K. Palepu ‘Emerging giants: building world class companies in
developing countries’, Harvard Business Review October 2006, pp.60–69.
Koster, K. International project management. (London, UK: Sage, 2009).
Lacity, M. and L. Willcocks Robotic process automation and risk mitigation: the
definitive guide. (Stratford: SB Publishing, 2017).
Lacity, M. Blockchain foundations: for the internet of value. (Stratford: SB
Publishing, 2020).
Lacity, M. and L. Willcocks Robotic process and cognitive automation: the next
phase. (Stratford: SB Publishing, 2018).
Lacity, M. and L. Willcocks ‘Sourcing information technology services: a review
of the evidence’, LSE Outsourcing Unit Research Paper, 2012.
Laudon, K. and J. Laudon Management information systems: managing the
digital firm. (Harlow: Pearson, 2020) 16th edition. Especially Chapter 15
Managing global systems.
Lee, H. ‘Factors that influence expatriate failure’, International Journal of
Management 24 2007, pp.403–15.
Levy, D. ‘Offshoring in the new global political economy’, Journal of
Management Studies 42 2005, pp.685–93.
Liu, R. et al. ‘Why are different services outsourced to different countries?’,
Journal of International Business 42 2011, pp.558–71.
Luftman, G., R. Dwivedi, B. Derkesen, and M. Sanatana ‘Influential IT
management trends: an international study’, Journal of Information
Technology 30(3) 2015 pp.293–305.
Luftman, J., H. Zadeh, B. Derkesen et al. ‘Key information technology
and management issues 2011–12: an international study’, Journal of
9
Information Technology 27(3) 2012, pp.198–212.

Mathur, S. and A. Kenyon Creating value: shaping tomorrow’s business. (Oxford:
Butterworth Heinemann, 2015).
Malhotra, N. and C. Hinings ‘An organisational model for understanding
internationalisation processes’, Journal of International Business 41 2010,
pp.330–49.
McKinsey and Co. How COVID-19 has pushed companies over the technology
tipping point – and transformed business forever. (McKinsey Digital and
Strategy & Corporate Finance Practices, October 2020).
McKinsey Global Institute Twenty five years of digitisation: ten insights into how
to play it right. (McKinsey Global Institute, Briefing Note, May 2019).
McKinsey Global Institute Notes from the AI frontier: modelling the impacts of AI
on the world economy. (McKinsey Global Institute, Briefing Note, September
2018).
Mendenhall, M. and G. Oddou ‘The dimensions of expatriate acculturation: a
review’, Academy of Management Review 10 1985, pp.39–47.
Mintzberg, H. Managing. (London: Financial Times/Prentice Hall, 2009)
[ISBN 9780273745624].
Nolan, R., W. McFarlan, R.L. Nolan and F.W. McFarlan ‘Information technology
and the board of directors’, Harvard Business Review 83(10) 2005
pp.96–106.
North, D. Understanding the process of economic change. (Princeton: Princeton
University Press, 2010) [ISBN 9780691145952].
Ohlin, B. Interregional and international trade. (Cambridge: Harvard University
Press, 1933).
Oshri, I., J. Kotlarsky and L. Willcocks The handbook of global outsourcing and
offshoring. (Basingstoke: Palgrave Macmillan, 2021) Chapters 2 and 3.
Oster, S. Modern competitive analysis. (New York: Oxford University Press,
1999) third edition [ISBN 9780195119411] p.4.
Peng, M. Global strategic management. (London: Cengage, 2009) second
international edition [ISBN 9780324590982] Chapter 2 ‘Industry
competition’.
Peng, M. and E. Pleggenkuhle-Miles ‘Current debates in global strategy’,
International Journal of Management Reviews 11(1) 2009, pp.51–68.
Peteraf, M. ‘The foundation of competitive advantage: a resource-based view’,
Strategic Management Journal 14 2003, pp.179–91.
Porter, M. ‘The competitive advantage of nations’, Harvard Business Review
March/April 1990, pp.73–98.
Reich, R.B. ‘Who is Us? Across the United States, you can hear calls for us to
revitalize our national competitiveness’, Harvard Business Review 68(1)
1990 pp.53–64.
Ronen, S. and O. Shenkar ‘Clustering countries on attitudinal dimension’,
Academy of Management Review 10 1985, pp.435–54.
Ross, J. ‘Creating a strategic IT architecture competence: learning in stages’,
MISQ Executive 2(1) 2003, pp.31–43.
Ross, J., C. Beath, and M. Mocker Designed for digital: how to architect your
business for sustained success. (Boston MA: MIT Press, 2019).
Ross, J., C. Beath, and R. Nelson The digital operating model: building a
componentized organization. (MIT Center For Information Systems
Research, Research Briefing, June 2020).
Rothaermal, F., S. Kotha et al. ‘International market entry by US internet firms’,
Journal of Management 32 2006, pp.56–82.
Rugman, A. and R. Hodgetts ‘The end of global strategy’, European Management
Journal 19(4) 2001, pp.333–43.
Rugman, A. M. and J.R. D’Cruz ‘The “double diamond” model of international
competitiveness: The Canadian experience’, Management International
Review 1993, pp.17–39.
10
Introduction
Saldhana, T. Why digital transformations fail. (Oakland, USA: BK Publishers,

2019).
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[ISBN 9780385720274].
Shpilberg, D., S. Berez, R. Puryear et al. ‘Avoiding the alignment trap in
information technology’, Sloan Management Review 49(1) 2007, pp.50–58.
Sigglekow, M. and A. Terwiesch Connected strategy. (Boston: Harvard Business
Review Press, 2019).
Tanev, S. ‘Global from the start: the characteristics of born global firms in the
technology sector’, Technology Innovation Management Review March 2012,
pp.5–8.
Teece, D., G. Pisano and A. Shuen ‘Dynamic capabilities and strategic
management’, Strategic Management Journal 18 1997, pp.509–33.
Tharp, J. ‘Sustainability in project management: practical applications’ in
Sustainability integration for effective project management. (Hershey, PA: IGI
Global, 2013).
Trompenaars, F. Riding the waves of culture. (London: Nicholas Brealey, 2000).
Tung, R. ‘Selection and training procedures of US, European and Japanese
multinationals’, California Management Review 25 1982, pp.57–71.
Vernon, R. ‘International investments and international trade in product life
cycle’, Quarterly Journal of Economics May 1966, pp.190–207.
Whittington, R., P. Regnér, K. Scholes, D. Angwin and G. Johnson Exploring
strategy. (London: Pearson, 2019) 12th edition.
Weill, P., M. Subramani and M. Broadbent, ‘Building IT infrastructure for
strategic agility’, Sloan Management Review Fall 2002 pp.57–65.
Weill, P. and S. Woerner ‘Optimising your digital business model’, Sloan
Management Review Special Collection: ‘What’s in store for your digital
enterprise?’ 2014.
Weill, P. and S. Woerner What’s your digital model? (Boston MA: HBR Press,
2018).
Willard, B. The new sustainability challenge. (London: New Society Publisher,
2012.)
Willcocks, L. ‘COVID-19 may exacerbate the digital divide among businesses’,
LSE Business Review 3 September 2020.
Willcocks, L. and C. Griffiths ‘The crucial role of middle management in
outsourcing’, MISQ Executive 9(3) 2010, pp.177–93.
Willcocks, L., J. Hindle and M. Lacity Becoming strategic with robotic process
automation. (Stratford: SB Publishing, 2019).
Willcocks, L. and M. Lacity The new IT outsourcing landscape. (London:
Palgrave, 2012) [ISBN 9780230358812].
Willcocks, L., P. Petherbridge and N. Olson Making IT count: strategy,
delivery, infrastructure. (Oxford: Butterworth-Heinemann, 2002)
[ISBN 9780750648219] Chapter 2.
Willcocks, L., P. Reynolds and D. Feeny ‘Evolving IS capabilities to leverage the
external IT services market’, MISQ Executive 6(3) 2008, pp.127–45.
Williamson, O. The economic institutions of capitalism. (New York: Free Press,
1985) [ISBN 9780684863740].
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Yin, E. and C. Choi ‘The globalization myth’, Management International Review
45(1) 2005, pp.103–20.
1.6.3 Online study resources

In addition to the subject guide and the Essential reading, it is crucial that
you take advantage of the study resources that are available online for this
course, including the VLE and the Online Library.
You can access the VLE, the Online Library and your University of London
email account via the Student Portal at: http://my.london.ac.uk
11
You should have received your login details for the Student Portal with
your official offer, which was emailed to the address that you gave
on your application form. You have probably already logged in to the
Student Portal in order to register! As soon as you registered, you will
automatically have been granted access to the VLE, Online Library and
your fully functional University of London email account.
If you have forgotten these login details, please click on the ‘Forgotten
your password’ link on the login page.
The VLE
The VLE, which complements this subject guide, has been designed to
enhance your learning experience, providing additional support and a
sense of community. It forms an important part of your study experience
with the University of London and you should access it regularly.
The VLE provides a range of resources for EMFSS courses:
• Electronic study materials: All of the printed materials which you
receive from the University of London are available to download, to
give you flexibility in how and where you study.
• Discussion forums: An open space for you to discuss interests
and seek support from your peers, working collaboratively to solve
problems and discuss subject material. Some forums are moderated by
an LSE academic.
• Videos: Recorded academic introductions to many subjects;
interviews and debates with academics who have designed the courses
and teach similar ones at LSE.
• Recorded lectures: For a few subjects, where appropriate, various
teaching sessions of the course have been recorded and made available
online via the VLE.
• Audiovisual tutorials and solutions: For some of the first year
and larger later courses such as Introduction to Economics, Statistics,
Mathematics and Principles of Banking and Accounting, audio-visual
tutorials are available to help you work through key concepts and to
show the standard expected in exams.
• Self-testing activities: Allowing you to test your own
understanding of subject material.
• Study skills: Expert advice on getting started with your studies,
preparing for examinations and developing your digital literacy skills.
Note: Students registered for Laws courses also receive access to the
dedicated Laws VLE.
Some of these resources are available for certain courses only, but we
are expanding our provision all the time and you should check the VLE
regularly for updates.
Making use of the Online Library

The Online Library (http://onlinelibrary.london.ac.uk) contains a huge
array of journal articles and other resources to help you read widely and
extensively.
To access the majority of resources via the Online Library you will either
need to use your University of London Student Portal login details, or you
will be required to register and use an Athens login.
12
Introduction
The easiest way to locate relevant content and journal articles in the
Online Library is to use the Summon search engine.
If you are having trouble finding an article listed in a reading list, try
removing any punctuation from the title, such as single quotation marks,
question marks and colons.
For further advice, please use the online help pages (http://onlinelibrary.
london.ac.uk/resources/summon) or contact the Online Library team:
[email protected]
Other web resources

Various websites are cited in this subject guide. Unless otherwise stated,
they were accessed in April 2021. We cannot guarantee, however, that
they will stay current and you may need to perform an internet search to
find the relevant pages.
1.7 Examination advice

Important: the information and advice given here are based on the
examination structure used at the time this guide was written. Please
note that subject guides may be used for several years. Because of this
we strongly advise you to always check both the current Programme
regulations for relevant information about the examination, and the VLE
where you should be advised of any forthcoming changes. You should also
carefully check the rubric/instructions on the paper you actually sit and
follow those instructions.
1.7.1 Format of the examination

The examination is three hours long and you are normally required to
answer four questions from a choice of eight.
The examination is three hours long, and you are normally required to
answer four questions from a choice of eight.
Remember, it is important to check the VLE for:
• up-to-date information on examination and assessment arrangements
for this course
• where available, past examination papers and Examiners’ commentaries
for the course which give advice on how each question might best be
answered.
13
Notes
14
Part 1: Introduction to the global business environment
Part 1: Introduction to the global

business environment
15
Notes
16
Chapter 1: Perspectives on globalisation and international business
Chapter 1: Perspectives on globalisation

and international business
1.1 Introduction
Welcome to international management. Managing is essentially about
getting work done through others. Historically, many have seen
management as quite a ‘hands-off’ task, involving thinking, the scientific
and systematic sifting of evidence, making decisions based on sufficient
objective information, and then planning, controlling, coordinating
and monitoring outcomes. All this is undoubtedly part of management.
But, starting in the 1970s, Henry Mintzberg began to demonstrate that
managing is also, at the same time, an art involving vision and creative
insights, a craft involving experience and practical learning and, ultimately,
a practice aimed at getting effective results. In fact, study after study
has supported Mintzberg’s views. It turns out that when you manage,
typically you will experience unrelenting pace, brevity and variety of the
activities you undertake and fragmentation and discontinuity in the job.
You will need an orientation to action, will tend to favour informal and
spoken forms of communication, and you will deal a lot with colleagues
and associates (i.e. sideways as much as up and down the organisation’s
hierarchy). And your soft skills in motivation, negotiation and persuasion
will be as important as any formal control mechanisms you might have
available.
In this course we explore management, but with the added complexity of
moving management onto the world stage. Suddenly you will discover
that what works in your own organisation and in your own country might
not work as well, if at all, abroad. In this course you will learn about the
factors that make managing internationally similar in many respects to
managing in your home country, but very different in many others. In the
first six chapters you will find out how the formal and informal institutions
of the international community, regions and countries make the job of
managing very much more sophisticated. In Chapters 7 to 10 you will
learn how international managers deal with these contextual factors when
they devise and implement strategies to compete, invest and operate in
different regions and countries. And in Chapters 11 to 16 we will have
a more detailed look at the international challenges facing managers
responsible for devising organisational structure, global sourcing,
information systems, human resources, international project management,
global digital management and how they go about their tasks.
In this chapter we are going to start by looking at a major phenomenon
that managers have to live with if operating internationally, that of
globalisation. Globalisation can be defined as the shift towards a more
integrated and interdependent world economy. In other words, the
world has been moving away from self-contained national economies,
towards an interdependent, integrated global system. However, as we
shall see, there has been a slowing down of this process, and in some
cases even a reversal in recent years, worsened by the 2020–21 pandemic
and economic crisis. Historically, a major part of globalisation has been
increased international trade and foreign direct investment. International
trade occurs when a company exports goods or services to consumers in
another country. Foreign direct investment (FDI) occurs when a company
17
invests resources in business activities outside its home country. From

a business perspective, you can think of globalisation in terms of both
markets and production. The globalisation of markets refers to the
merging of historically distinct and separate national markets into one
huge global marketplace. The globalisation 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 land, labour and capital.
What has all this meant for business? Consider the Dell notebook and
its global journey, described in Friedman (2005). Even back then its
components were sourced from over 30 countries around the world! What
does all this mean for you and me? Consider my own day. I wake up in the
United Kingdom in a bed made by Sweden’s Ikea, get dressed in a shirt
made in India and a pair of US Levi’s jeans that were produced in China.
After putting on my Taiwanese-made trainers, and drinking an Italian-style
cappuccino, I drive to work in my Japanese Honda that was manufactured
in the UK. On the way to a client headquartered in the Netherlands, but
with operations in the UK, I talked to my friend on a Nokia cell phone
designed in Finland, about getting together later for Spanish-style tapas
and Tiger beer from Singapore. As you can see, my day has already been
filled with the effects of globalisation. But there are multiple other effects.
As examples only, is my job safe? Are there new job prospects? Where
is the next technological change going to come from? Is globalisation
adversely affecting my environment?
This chapter introduces you to globalisation, the trends towards
globalisation and its main drivers. We explore the major debates for
and against globalisation, and whether companies wishing to operate
internationally can work on the basis of the assumption that the world
is flat, or something else. We look at the implications of globalisation for
companies wanting to extend themselves further globally. We also take
into account the short-term and long-term impacts of the 2020–21 crisis
on international business.
1.1.1 Aims of the chapter

The aims of this chapter are to:
• introduce the major attributes of globalisation the global economy
• identify the major trends and players in the global economy
• present the major debates around globalisation and its impacts,
and the advantages and disadvantages from different stakeholder
perspectives
• pinpoint the implications of globalisation for international and
domestic businesses
• Assess the short and long-term impacts of the pandemic and economic
crises of 2020–21 on how international business can be conducted.
1.1.2 Learning outcomes

By the end of this chapter, and having completed the Essential reading and
activities, you should be able to:
• define the major characteristics of globalisation
• assess the global economy and its broad trends
• explain the major trends in globalisation, and the major players in the
globalisation process
18
• enter into the major globalisation debates and assess under what
conditions and for whom globalisation can be considered an advantage
or disadvantage
• describe the implications of globalisation for companies operating
internationally
• assess the short- and long-term implications for international business
arising from the COVID-19 and economic crises, and emerging global
trends, including de-globalisation.

Ghemawat, P. ‘Distance still matters: the hard reality of global expansion’,
Harvard Business Review 79(8) pp.137–47.
Willcocks, L. Global business: strategy in context. (Stratford-upon-Avon, UK: SB
Publishing, 2021a), Chapters 1 and 7.
Willcocks, L. ‘Can business recover from the crisis? Assessing scenarios,
riding trends.’ Journal of Financial Transformation, 2021, January, 52, 1,
pp.94–101.

Willcocks, L. Global business: management. (Stratford-upon-Avon, UK: SB
Publishing, 2021b), Chapter 1, sections 1.2, 1.5. and 1.6.
1.1.5 References cited

Bhagwati, J. In defence of globalisation. (New York: Oxford University Press,
2007).
Dicken, P. Global shift: mapping the changing contours of the world economy.
(London: Sage, 2007).
Friedman, T. The world is flat: the globalised world in the twenty-first century.
(London: Penguin, 2005).
Ghemawat, P. The laws of globalisation and business applications. (Cambridge:
Cambridge University Press, 2017).
Goldin, I. and M. Mariathasan The butterfly defect. (Princeton: Princeton
Jones, A. Globalisation: key thinkers. (Cambridge: Cambridge University Press,
2010).
McGraw Hill, 2021), thirteenth edition.
Mintzberg, H. Managing. (London: Financial Times/Prentice Hall, 2009).
Peng, M. and K. Mayer International business. (London: Cengage 2019) third
edition.
1.1.6 Synopsis of chapter content

Trends and drivers of globalisation, foundations of global trade and
finance, overview and framework for understanding the global economy,
the development of the multinational enterprise (MNE), debates on the
nature and impacts of impacts of globalisation, impact of COVID-19 and
the 2020–21 economic crisis, emerging trends and the implications for
managing international business.
1.2 What is globalisation?

What is globalisation and what are the challenges it raises for business
organisations worldwide? Some identify globalisation with the accelerated
spread of communication and transportation technology. Others
identify it with the rising power of multinational enterprises (MNEs)
and increased inequality in the world. Some experience it as increased
19
competition for jobs, especially for low skilled workers. Others emphasise
how globalisation is a force eliminating differences between distinctive
cultures and identities, while still others argue this is exaggerated and
the world is still defined by national boundaries, and others see the world
moving rapidly towards a homogenous plain without national boundaries.
Defining globalisation has big implications; how it is explained to the
public influences how the idea is received.
Globalisation involves increasing amounts of cross-border trade, with
traditional distances between nations lessening, due to advances in
transportation and telecommunications technology. Globalisation does
involve the rise of MNEs and has seen the globalising of markets and
production, which has seen increased competition for jobs and between
nations. Globalisation has also seen some erosion of differences among
distinctive national cultures and identities, but, as we shall see below and
in Chapter 7, the extent may be exaggerated. Companies that treat all
markets the same invariably learn the limits of this approach.
Globalisation has also seen the development of international bodies to
try to deal with all this increased interconnectedness. There are now
international governing bodies such as GATT (General Agreement on
Tariffs and Trade), which has been succeeded by the WTO (World Trade
Organisation) that hold the key to many economic decisions affecting the
world and have power over nations akin to a political body or national
government. These governing bodies symbolise the interconnectedness of
the world just as the United Nations did after the end of the Second World
War. The goal of the International Monetary Fund is to maintain order in
the international monetary system. As we will see in later chapters, the
World Bank promotes economic development by making loans to cash-
strapped nations wishing to make significant infrastructure improvements
like building dams or roads. These international organisations influence
businesses and communities wishing to collaborate with other countries.
Activity
Read Willcocks (2021a) pp.13–16, sections 1.1 to 1.2. Decide for yourself:
1. What is a good definition of globalisation?
2. How would you define international business?
1.3 Trends towards globalisation

As Willcocks (2021a) Chapter 1 points out, globalisation is hardly new.
People have been trading internationally for several thousands of years.
However, the last 150 years have seen an intensification of globalisation,
in what Jones (2010) depicts as two waves, arising in each case from a
combination of long-term trends and pendulum swings.
Activity
Read Willcocks (2021a) pp.16–20, Section 1.3.
1. Assuming there have been three waves of globalisation what are the dates for each
of these waves? See Willcocks (2021a), p.16.
2. What is ‘slowbalisation’ and when did it start? Is it still with us? What are the
indicators? See Willcocks (2021b) Chapter 1, section 1.2 for more on this subject.
3. What does The Economist, 5 May 5 2020 mean by the phrase ‘the 90% economy’?
Look this up by browsing on the internet, and also in Willcocks (2021b) section 1.2.
20
In the 1970s and 1980s globalisation as international trade was largely a

matter for developed economies in the triad of North America, Western
Europe and Japan. However, globalisation accelerated dramatically in the
1990s. Emerging economies joined much more in global trade, particularly
the largest in terms of population, namely Brazil, Russia, India and China
– the so-called BRIC countries. An emerging economy is one that has only
recently established institutional frameworks that facilitate international
trade and investment. Typically they have low- or middle-level incomes
among their population and above average economic growth compared
to other nations. In the 1990s world output grew by 23 per cent over the
decade, global trade expanded by 80 per cent and the total flow of FDI
increased fivefold.
Gross Domestic Product (GDP) is the sum of value added by resident
companies, households and governments operating in an economy. In
the first decade of the 21st century, world GDP, cross-border trade and
per capita GDP all grew to new, unprecedented levels. All this was before
the 2008–09 global economic crisis, which led to global output, trade
and investment plummeting and unemployment rising. From mid-2009
there was renewed confidence after massive government intervention
in developing economies, but economic recovery has been slow in
developed economies, while some emerging economies have rebounded
faster. Overall, the second wave has become less steep from 2010–12 as
globalisation has slowed down.
What has been driving globalisation? Two macro factors are important:
first, the decline in trade and investment barriers since the Second
World War, and second, technological change, specifically dramatic
improvements in communication, information processing and
transportation technologies. Hill (2021) suggests that four trends have
been particularly important:
• Changes in world output and world trade: In the 1960s, the
USA dominated the world economy and world trade picture. Today,
this picture has changed. In 2008, the USA accounted for only about
20 per cent of world economic activity. Other developed countries
saw their share of global economic activity decline over time as well.
Developing nations saw the opposite trend – their share of world
output has been rising, and by 2025 they are expected to account for
more than 60 per cent of world economic activity, with today’s ‘rich’
nations declining from 55 per cent in 2018, to 38 per cent in 2025.
Countries like China, Thailand and Indonesia have emerged as global
economic players. Countries such as the USA, the UK, Germany and
Japan, which were among the first to industrialise, will continue to
see their standings in world exports and world output slip, while
developing nations like China, India, South Korea and Thailand see
their economies and roles in global trade and investment increase.
• Foreign direct investment: In the 1960s, the USA accounted for
over 66 per cent of worldwide foreign direct investment flows. Today,
investments by developing nations are on the rise, while the stock,
or total cumulative value, of foreign investments by rich industrial
countries is falling. Developing nations like China have also become
important destinations for foreign direct investment flows. The
share of total stock of foreign direct investment by the world’s six
most important sources – the USA, the UK, Japan, Germany, France,
Netherlands and developing countries – changed significantly from
1980 to 2007. In particular, the share of the USA noticeably declined
(from 38 per cent to 18 per cent), and the world’s developing
countries increased from less than 1 per cent to 15 per cent.
21
• Increased growth in cross-border flows of foreign direct investment

is very noticeable in the official figures, reaching an all-time high in
2007. One can also see the rising importance of developing nations as
destinations for FDI. Chapter 4 of this guide deals with FDI in detail.
• Types of companies: The global economy has also shifted in
terms of the types of companies that are involved. A multinational
enterprise is any business that has productive activities in two or more
countries. Since the 1960s, two important trends have emerged. First,
an increase in the number of non-US multinationals. Multinational
enterprises from France, Germany, Britain and Japan have become
more important and there has been a notable decline in the role of
US companies. By 2017, only 540 of the top 2000 global firms were
US-based multinationals, a drop of some 236 in 15 years. Companies
from developing countries such as China and South Korea have also
emerged as important players. The second trend is the growth in
the number of mini-multinationals. China’s Lenovo, for example,
acquired IBM’s PC division in 2004, in an effort to become a global
player in the PC industry, and moved its headquarters to the USA as
part of its strategy. Traditionally, global markets have been the venue
for large companies, but today, thanks to advances in technology like
the internet, international sales can account for a significant share of
revenues for small companies too.
• Change in world order: The collapse of Russian communism
has brought about new opportunities in Eastern Europe, and China’s
economic development and enormous population presents huge
opportunities for companies. Mexico and Latin America have also
emerged both as new markets and as production locations. And China
and India, for example, are now home to a number of companies
that either are or could become significant players in their global
industries. This world order changed again as we moved into the third
decade of the 21st century. For example, some states have moved to
more authoritarian government with state involvement in business.
Several South American countries have been attracting more inward
investment, while others have suffered economic mismanagement and
are less attractive markets, and targets for FDI.
Willcocks (2021a) Chapter 1, pp.16–20, section 1.3, and Chapter 7 are
useful for describing the 2020–21 pandemic and economic crisis and its
short- and long-term impact on international business.
Activity
Read Willcocks (2021a) Chapter 1, sections 1.1, 1.2 and 1.3, pp.13–20, and answer the
following questions:
1. What have been the four main trends towards globalisation since the 1980s?
2. What new trends emerged from around 2015?
3. What do you see as the main lessons arising from the 2020–21 crisis for international
businesses? See Willcocks (2021b) sections 2.5 and 2.6 for more ideas.
4. What new global trends do international businesses have to plan for from 2021? (See
Willcocks, 2021a) pp.196–200, sections 7.6 and 7.7.
22
1.4 The globalisation debates

What does the global economy look like in the third decade of the 21st
century? The world is moving towards a more global economic system
but, as Willcocks (2021a) Chapter 7, section 7.5 p.196 points out, this
interdependency creates new types of risk. Proponents of globalisation,
such as Bhagwati (2007), focus on its benefits. Supporters argue that
globalisation means lower prices, more economic growth and more
jobs. But critics worry that globalisation will cause job losses, damage
the environment and create cultural imperialism. Ian Goldin and Mike
Mariathasan (2016), in their book The butterfly defect, also discuss how
globalisation creates systemic risks. These are adverse consequences
arising from the ‘butterfly effect’ where, in an inter-connected world, small
changes in condition in one system or part of the world can create major
differences in a seemingly remote and unconnected system. They discuss
financial sector risks; risks in supply chains and infrastructure; as well as
pandemic, health, ecological, and social inequality risks.
Four major areas of debate recur:
1. Jobs and income: Critics of globalisation worry that jobs are
being lost to low-wage nations. They argue that falling trade barriers
are allowing companies to move manufacturing jobs to countries
where wage rates are low. Supporters, however, claim that free trade
will prompt countries to specialise in what they can produce most
efficiently, and to import everything else. They argue that the whole
economy will be better off as a result. In other words, if you are in
the USA and can buy an imported shirt that was made for cents in
Honduras, you will have more money to spend on products the USA
can produce efficiently like computers and software.
The debate is now extended and continues over the impact of
automation on global sourcing and job numbers, skills and related
incomes. Will jobs be repatriated from global locations? Will those jobs
be automated, leading to job loss wherever the work is located? (See
Chapter 14 of this guide, and Willcocks, 2021b, Chapter 7.)
2. Labour policies and the environment: Critics fear that free
trade encourages companies from advanced nations, where there
are costly environmental standards, to move manufacturing facilities
offshore to less developed countries with lax environmental and
labour regulations. However, advocates of globalisation claim that
environmental regulation and stricter labour standards go hand
in hand with economic progress, so foreign direct investment
actually encourages countries to raise their standards. Advocates
of globalisation argue that by tying free trade agreements to the
implementation of tougher environmental and labour laws, economic
growth and globalisation can occur together with a decrease in
environmental pollution.
3. Shifts in economic power: Critics of globalisation have worried
that economic power was shifting away from national governments
and towards supranational organisations like the WTO (see Chapter
6) and the European Union (EU) (see Chapter 5). However,
globalisation’s supporters argue that the power of these organisations
is limited to that granted by their members. They also point out that
the organisations are designed to promote the collective interests
of members and they will not gain support for policies that do not
achieve this goal. Since 2015, there was also some movement away
23
from international regulatory institutions, best exemplified by the

USA’s ‘America First’ policy from 2016–20 under President Trump.
Some regional economic blocs have seen turbulence – for example the
United Kingdom leaving the European Union at the end of 2020; the
renegotiation of trade agreements between Mexico, USA and Canada;
and China looking to gain more influence in economic blocs and trade
arrangements in Asia Pacific.
4. Wealth distribution: Critics worry that the gap between rich and
poor is growing and that the benefits of globalisation have not been
shared equally. Supporters of globalisation concede the gap between
rich and poor has got wider, but also contend that it has more to do
with the policies countries have followed than with globalisation. For
example, many countries have totalitarian regimes, or have failed to
contain population growth, and many countries have huge debts that
are hindering economic growth.
Willcocks (2021a) p.22, section 1.4, provides a useful listing of some
major contributors and arguments in the globalisation debate and is worth
looking at now. Consider also this question: if globalisation is such a good
thing, why has there been a trend towards de-globalisation since at least
2015?
Activity
So where do you stand on the globalisation debate?
1. Make a list of the advantages that arise for your country, its citizens, and for
multinationals.
2. Now make a list of how globalisation works against the interests of your country and
its citizens, but also multinationals.
1.4.1 Does distance still matter?

Yet another debate exists over the degree of globalisation, its impacts
and its implications for international business. Friedman (2005) believes
globalisation is accelerating and is flattening the world so that every
nation will eventually be part of the global marketplace and production
process. Dicken (2007) calls this a ‘hyper-globalist’ view. Friedman
takes a technological stance on globalisation, believing it to be shaped
considerably by technological advances, cheap computer access and the
easy assimilation and transportation of knowledge over the internet.
Before computer access was a worldwide phenomenon, geographical
distance had a big impact on how companies conducted business.
Moreover, outsourcing would be harder as there would be no reliable,
efficient way of collaborating with other departments, whether in the same
office or in a different country.
Friedman argues that 10 ‘flatteners’ have shaped globalisation and caused
increased homogeneity in the world. By calling the world ‘flat’ he does
not mean literally flat, of course. He means that geography, differences
and distance increasingly cease to matter as a result of the influence
of these 10 ‘flatteners’. These ‘flatteners’ include the fall of the Berlin
Wall representing economic liberalisation; the development of internet
protocols, workflow and open source software; the increased use of
outsourcing and offshoring; the development of global supply chains; the
increased use of specialised companies to carry out internal functions; the
development of search engines and, latterly, of wireless, digital, mobile,
personal and virtual technologies. From this perspective, technological
24
capacity and connectedness define the parameters of globalisation and this

is only set to continue as the age of the personal technology relationship
is gaining momentum, where people not content with established
information-sharing bodies take matters into their own hands with blogs,
review sites and the establishing of their own media channels.
Although for ‘hyper-globalists’ like Friedman globalisation means
free cooperation and connection with nations all over the world, to
Ghemawat (2001; 2017) and Dicken (2007) flattening creates a general
misconception about the extent of globalisation. In his influential
article ‘Distance still matters’, Ghemawat (2001) argues that companies
consistently ‘overestimate the attractiveness of foreign markets’. He
argues that the true amount of trade and investment between countries is
influenced largely by geographical and cultural differences. He points out
that countries 5,000 miles apart only carry out 20 per cent of the trade
they would otherwise do if they were 1,000 miles apart. Furthermore,
trade is 10 times more likely to take place if a country was a former colony
of another, which, Ghemawat argues, significantly lowers the cultural
barriers to trade. Arguing against Friedman’s flattening thesis, Ghemawat
elaborates that, while it has been claimed that global communications and
technologies are ‘shrinking the world, running it into a small and relatively
homogenous place’, this is not only an incorrect assumption but also a
dangerous one.
The cultural difference between countries is still wide and complex, and
although outsourcing and foreign direct investment have recently grown
between nations, it is evident, as we shall see in Chapter 3, that cultural
differences still prove challenging. In support of Ghemawat’s argument,
Dicken (2007) argues that quantitative and aggregative evidence suggests
that the world economy was ‘more open and more integrated in the half
century prior to the First World War than it is today (2007)’. Ghemawat
also supports this empirically based analysis, stating that cultural
differences in religious beliefs, language, social norms and behaviours
have a huge impact in the risk involved in trading and the likelihood
of succeeding. His later evidence, in Ghemawat (2017), reaffirms this.
Therefore, according to these theorists, globalisation cannot be said to be
flattening the world.
Dicken explains that part of the problem with defining globalisation is
understanding that aggregative and quantitative analysis, though valid,
are not the only story we should take on board when looking at the world
economy today. The economy in the 21st century, he goes on to suggest,
constitutes a deep and complex integration that cannot be captured in
the statistics of trade and foreign direct investment. Instead, globalisation
is ‘a supercomplex series of multi-centric, multi-scalar, multi-temporal,
multi-form and multi-causal processes’. This explanation, in contrast to
Friedman’s linear model of technological progress, is more dynamic and
circulatory in design.
In ‘Distance still matters’ and his 2017 work, Ghemawat complements
this view by suggesting that companies often overestimate the ease with
which their business can move abroad. The cultural, administrative and
geographical distance between nations presents a fundamental challenge
to companies facing the globalisation of the world economy today. As just
one example, Coca-Cola had problems in the Peruvian market when they
attempted to replace Inca Kola, the national beverage, with their own
US-branded cola. The Peruvian people held mass demonstrations against
Coca-Cola until their Inca Kola was returned to the shelves. Being sensitive
to national differences is not just a consideration; in international business
25
it may well be an imperative to survival – something we explore in detail

in Chapters 2, 3 and 7.
Ghemawat (2017) confirms his earlier analysis and posits two laws,
strengthened by the 2020–21 crisis, and worth noting in any globalisation
debate:
• The law of semi-globalisation: international interactions,
while non-negligible, are significantly less intense than domestic
interactions.
• The law of distance: international interactions are dampened
by distance in terms of culture, administration, geography, and are
often affected by economic distance as well, a law that also holds in
cyberspace.
Activity
Read Ghemawat (2001) ‘Distance still matters’, and Willcocks (2021a), Chapter 1,
pp.23–25, section 1.5.
1. How ‘flat’ do you think the world is? Who is right?
2. If, in 2021, a UK multinational retailer of men and women’s clothing chose to operate
in your country, what difficulties do you think they would encounter? Recall also that
the UK left the European Union in December 2020.
1.5 What does globalisation mean for companies?

All this means that managing an international business, or any company
that engages in international trade or investment, will be very different
from managing a domestic business. In particular, companies operating
internationally will find that countries and cultures differ – a subject we
will explore in much more detail in Chapters 2 and 3. It will emerge from
those chapters that the range of problems faced by managers is greater
and more complex, not least because government intervention in markets
creates limitations for companies, as do the ways in which the global
trading system operates and the existence of international institutions as
we shall discover in Chapters 4, 5 and 6. At the same time, companies
can work with the forces for globalisation and improve their global
performance. Such forces include:
• Low barriers to trade and investment: These mean that
companies can see the world, rather than a single country, as their
market. Low trade and investment barriers also mean that companies
can locate production facilities in the optimal location, wherever in the
world that might be. Production and sales now take place in multiple
markets, creating interdependency between countries for goods and
services.
• Technological change: Major advances in communication,
information processing and transportation technology have made
what had been possibilities into tangible realities. The cost of
global communication has fallen, for example, because advances
in telecommunications and information processing help companies
to coordinate and control global organisations at a fraction of what
these costs might have been even a decade ago. The microprocessor
that facilitates high-power, low-cost computing is perhaps the most
important of these developments. Dell, for example, takes advantage
of these innovations to control its globally dispersed production
system. When a customer submits an order via the company’s
website, it is immediately transmitted to the suppliers of the various
26
components, wherever they are located in the world. Suppliers

have real-time access to Dell’s order flows and can then adjust their
production accordingly. Dell uses inexpensive air freight to transport
its products to meet demand as needed. The company maintains a
customer service operation in India where English-speaking personnel
handle calls from the USA. Indeed, the internet has made it possible
for even small companies to play a role in the global economy. Yet,
less than 20 years ago, this technology did not even exist. Internet
usage was less than 1 million users in 1990 to 4.39 billion in 2019.
Just looking at the internet, global e-commerce sales surpassed
$US two trillion for the first time in 2017, and have been on a
rising trend since. The internet is a global equaliser, lessening the
constraints of sale, location and, obviously, time zones. Meanwhile,
the microprocessor that facilitates high-power, low-cost computing is
perhaps the most important of these developments.
• Transportation improvements: Improvements in transportation
such as containerisation and the development of super freighters have
also facilitated the growth of globalisation. Even in 2021, 90 per cent
of the world’s traded goods were shipped by sea. The time it takes
people and products to get from one place to another has shrunk,
as has the cost. For example, Ecuador has been able to capitalise on
falling transportation costs to become a global supplier of roses. As an
experiment, surprise yourself and analyse where the goods you buy
and use on a daily basis come from.
While there have been huge global shifts in how firms do business, there
is evidence that the strongest companies are not only international but
also strategically sensitive to localising their products or service when
operating in different markets (we shall see more about this in Chapter
7). For example, Google found this to be a winning combination in
their expansion into China. Here, despite an initial backlash, Google
pursued a local strategy for their Chinese market using a Chinese name
for their search engine and customising their web page to fit the tastes
of Chinese internet users, who tend to spend longer on a given page and
read the left-hand side of the screen first. However, global linkages and
interdependencies and working in foreign markets also mean global risks.
As a symbol of the risks of globalisation for a company, Google also ran
into subsequent problems with the Chinese government on a number of
issues.
1.6 Key concepts

The key concepts in this chapter are:
• globalisation and deglobalisation
• multinational enterprises (MNEs)
• foreign direct investment (FDI)
• World Trade Organisation (WTO)
• International Monetary Fund (IMF)
• United Nations (UN)
• developed and emerging economies
• ‘the world is flat’
• globalisation trends
• globalisation debates
• distance still matters.
27
1.7 Reminder of your learning outcomes

Having completed this chapter, and the Essential reading and activities,
you should be able to:
• define the major characteristics of globalisation
• assess the global economy and its broad trends
• explain the major trends in globalisation, and the major players in the
globalisation process
• enter into the major globalisation debates and assess under what
conditions and for whom globalisation can be considered an advantage
or disadvantage
• describe the implications of globalisation for companies operating
internationally
• assess the short- and long-term impacts on international businesses
arising from the COVID-19 and economic crises, and emerging global
trends, including de-globalisation.
1.8 Test your knowledge and understanding

1. Read the case study ‘GE healthcare in India – locally driven innovation’
(VLE Chapter 1).
a. What are the similarities and differences between traditional and
reverse innovation?
b. Why is GE so interested in reverse innovation?
c. What are the main concerns that prevent western MNEs from
aggressively investing in emerging economies? What are the costs
of not doing so?
d. Why is a leading US multinational like GE afraid of emerging
multinationals from emerging economies?
2. View the video (six minutes) on deglobalisation: www.youtube.com/
watch?v=OQSogUd_5go
Answer the following questions, taking notes:
a. What is deglobalisation and what is the evidence for it?
b. Why are global brands becoming distrusted?
c. The localisation in India is worth noting. What is happening here,
and why?
1.9 Sample examination question

‘The phenomenon of globalisation has given rise to major benefits and
costs for countries and companies in the contemporary world economy.’
Discuss this statement by considering the following questions:
a. What are the major trends underlying globalisation?
b. What do supporters of globalisation see as its major benefits for
countries and international firms? What do critics see as the major
drawbacks and disadvantages with globalisation for international firms
and countries?
c. In recent years, we have seen a slowing down of globalisation.
Why is this, how has the pandemic and economic crises of 2020–21
contributed, and what are the most recent trends impacting on
international businesses?
28
Chapter 2: Political, economic and legal environments
Chapter 2: Political, economic and legal

environments
2.1 Introduction
You already know that the political, economic and legal systems of
countries differ. But you may not know what these differences are, and
how and why they are important to companies that do business in foreign
markets. In practice, managers working abroad should have a thorough
understanding of a country’s formal institutions before entering that
country. In this chapter, we are going to explore these institutions and
related systems, known collectively as the political economy of a country,
and what they mean for businesses operating internationally. In doing so,
we will introduce something called ‘an institution-based perspective’. As
we shall see, political, economic and legal institutions establish the formal
‘rules of the game’ for operating in a particular country. The key functions
of these institutions are to reduce uncertainty, reduce transaction costs and
constrain opportunism. We will look at the equally and sometimes more
important informal rules in Chapter 3.
In this chapter we will look at the varieties of political systems, ranging
from totalitarianism through to different types of democracy. We will
also examine systemic differences among economies, ranging from pure
market economies and liberal market economies through to coordinated
market economies. We will also explore the basic differences between legal
systems. Finally, we will consider how these political, economic and legal
institutions influence the economic development of a country and their
implications for international business managers.

• identify the nature of formal institutions in different countries, and the
ways in which these reduce uncertainty
• introduce the major types of political, economic and legal systems, and
point out the similarities and differences in these across countries
• develop knowledge of how these attributes and differences across
countries impact and constrain how businesses operate internationally
• provide a platform for debating the role of national formal institutions
in international business and how they can be managed.

• define the concept of institutions and delineate their key role in
reducing uncertainty
• explain the basic differences between political systems and their
influence on international business
• discuss the systemic differences among economies and the related
challenges for international business
• describe the basic differences between legal systems in the world
• engage in and assess leading debates on political, economic and legal
institutions and international business. 29

Peng, M., D. Wang and Y. Jiang ‘An institution-based view of international
business strategy’, Journal of International Business 39 2008, pp.920–36.
Publishing, 2021a) Chapter 2.

Peng, M. and K. Meyer International business. (London: Cengage Learning,
2019) Chapter 2.

Chang, H. Kicking away the ladder. (London: Anthem Press, 2003).
Hall, P. and D. Soskice (eds) Varieties of capitalism. (Oxford: Oxford University
Press, 2001).
North, D. Understanding the process of economic change. (Princeton: Princeton
Sen, A. Development as freedom. (London: Anchor Publishing, 1999).
Williamson, O. The economic institutions of capitalism. (New York: Free Press,
1985).

The institution-based view of international business; overview of political,
economic and legal systems; how political economic and legal trends
develop in different countries.
2.2 An institution-based view of international business

Peng and Meyer (2019) are great proponents of the institution-based view
of international business. You can read more about this in Peng, Wang and
Jiang (2008). They argue that, essentially, a country’s institutions establish
the formal and informal rules for operating in that country. Companies
operating internationally need to know these rules, because they differ
between countries and because they shape what can be achieved and what
is not possible in a country. Institutions can be formal or informal.
Formal institutions consist of laws, regulations and rules. Informal
institutions consist of norms, cultures and ethics. In this chapter we focus
on the formal institutional framework – laws, regulations and rules – of a
country that governs the behaviour of individuals and companies.
What do institutions do? Essentially their key role is to reduce uncertainty
by limiting the range of acceptable actions. Institutions have developed
over time because the potential adverse consequences of uncertainty
can be devastating. For example, if you were trying to do business in the
Middle East in 2021 – say in Egypt; United Arab Emirates; Israel; Qatar;
or Lebanon – imagine the immense difficulties of just understanding the
business context, let alone deciding what to do. Uncertainty increases
transaction costs, a term made highly popular by Oliver Williamson
(1985). Transaction costs are the costs associated with carrying out
an economic transaction or, in short, the costs of doing business – for
example, search, negotiation, getting to contract and monitoring
supplier performance. Transaction costs will increase if others behave
opportunistically, defined by Williamson as ‘self-interest seeking with
guile’. Institutional frameworks can reduce the potential for such
opportunistic behaviour. This is important for international business,
because if transaction costs become prohibitively high in a country, people
may choose not to undertake trade in that country at all.
30
Institutions are evolving all the time, and international business managers
need to keep up with these changes. For example, in the last decade
and more, China, Poland, Russia and Vietnam have been moving from
central planning to market competition, though each in different ways,
and at different speeds, and in the case of China and Russia more
recently there have been some re-centralising tendencies. These are often
called transition economies. Institutional transition can be defined as
fundamental and comprehensive changes to the formal and informal rules
of the game that affect organisations as players.
In summary, Peng and Meyer (2019) argue, convincingly, that, for
international businesses, institutions matter. They suggest that at the
heart of an institution-based view there are two core propositions.
Firstly, managers and firms rationally pursue their interests and make
choices within the formal and informal constraints of a given institutional
framework. Secondly, although formal and informal institutions combine
to govern firm behaviour, in situations where formal constraints fail or are
unclear, informal constraints will play a larger role in reducing uncertainty
and providing constancy to managers and firms. We will focus on the role
of informal institutions in Chapter 3.
Activity
Read the Wikipedia entry on South Africa, focusing particularly on the sections on
political, legal and economic characteristics – sections 4 and 5:
• https://en.wikipedia.org/wiki/South_Africa
1. Imagine you run a manufacturing company from your own country. What do you
see as the main institutional – political, economic and legal – challenges of doing
business in South Africa?
2. What are the sources of transaction costs in doing business with South Africa?
3. How important do you think informal institutions are in doing business in South
Africa?
2.3 Political systems

A political system represents the ‘rules of the game’ on how a country
is governed politically. You can think of political systems as having two
dimensions: first, the degree to which they emphasise collectivism as
opposed to individualism, and second, the degree to which they are
totalitarian or democratic.
2.3.1 Collectivism versus individualism

Collectivism refers to a system that stresses the primacy of collective
over individual goals. In other words, in a collectivistic society the needs
of the society as a whole are generally viewed as being more important
than individual freedoms. In modern times collectivism has been equated
with socialism and state ownership of the basic means of production,
distribution and exchange. During the late 1970s, communism, with
strong command economies, was a dominant force in the world. You might
think of the former Soviet Union, for example, and its eastern European
neighbours like Poland, Czechoslovakia and Hungary. Think also of China,
Cambodia, Vietnam, Angola, Mozambique, Cuba and Nicaragua. By 2000,
the world was a very different place than it had been in the 1970s. The
Soviet Union, for example, had been replaced by 15 republics that were
structured as democracies. China, though it still limited political freedom,
was moving away from its strict communist ideology. Today, only a few
31
fringe states like Cuba and North Korea still practise a strong brand of
communism. Social democracy, which believes in a mixed economy of
central planning, state and private enterprise, has also been fluctuating.
For example, countries like the United Kingdom and France have placed
less emphasis on state ownership of the means of production and have
seen moves towards privatisation (i.e. selling state-owned enterprises to
the private sector).
Individualism has been championed by economists such as Adam Smith,
Milton Friedman and Friedrich von Hayek. It is based on two key concepts:
first, that individual freedom and self-expression are guaranteed and,
secondly, that people are allowed to pursue their own self-interest within
the rule of law and that this will achieve the best overall good for society.
For international companies there is a debate about how important
individualism and the related idea of free market economics are for
creating a favourable business environment, and about who gains from
applying these concepts in international trading environments.
2.3.2 Totalitarianism
You can think of totalitarianism and democracy as being at opposite ends
of a political dimension. At one end, totalitarianism means one person
or political party exercises absolute control over all spheres of life, and
opposing political parties are forbidden; and at the other end democracy
is a system in which government is by the people, exercised either directly
or through elected individuals. While we generally think of democracy
as going hand-in-hand with individualism, and totalitarianism as being
associated with collectivism, grey areas do exist.
For example, China is still under totalitarian rule, but has adopted free
market policies that tend to be associated with individualism (though in
recent years commentators have pointed to a return to greater communist
party control). In recent years Russia has become increasingly totalitarian,
while still holding to some democratic forms (e.g. elections). The world
has seen four major forms of totalitarianism:
• Communist totalitarianism advocates achieving socialism
through totalitarian dictatorship. While this form of totalitarianism is
declining worldwide, countries like Vietnam, Cuba and North Korea
still follow the philosophy.
• Theocratic totalitarianism is where political power is
monopolised by a party, group or individual that governs according
to religious principles. This type of system exists in countries such as
Saudi Arabia and Iran. Both countries are greatly influenced by the
principles of Islam, and both countries restrict political and religious
freedom.
• Tribal totalitarianism is where a political party that represents the
interests of a particular tribe monopolises power. This type of system
has occurred, for example, in some African nations like Zimbabwe,
Uganda and Tanzania.
• Right-wing totalitarianism may allow individual economic
freedom, but individual political freedom is restricted to avoid forms
of socialism. A nation’s military often backs this type of system. This
type of system has been declining, but existed in Germany and Italy
during the 1930s and 1940s. Military dictatorships were frequent in
Latin America, such as Brazil (1964–1985) and Chile under General
Pinochet. They could also be found at various times in Asian countries
like Taiwan, Indonesia, Philippines and South Korea, though these
have since become more democratic.
32
2.3.3 Democracy
A pure democracy is based on the belief that people should be directly
involved in decision making. The most common form of democracy today,
however, is representative democracy, where elected representatives vote
on behalf of constituents.
Reputed characteristics of democracies include freedom of expression,
free media, regular elections, a fair justice system and free access to state
information. The political system is governed by institutions.
The rules are usually laid down in a constitution, determining things
such as how elections are organised, how votes are translated into
representation in a parliament and how much power the elected officials
and representatives have. There are notable variations in representation
methods, including:
• Proportional representation versus first-past-the-post:
Countries such as Germany and Denmark have systems whereby
all votes are added up and seats are allocated to political parties in
proportion to the number of votes they gained. Countries like India,
the USA and the UK have a first-past-the-post system where each
constituency elects one representative based on who has won the most
votes in the election.
• Direct versus indirect elections of government: Some
countries have direct elections for certain posts (e.g. citizens of France
and the USA directly elect their presidents with executive power to
appoint ministers). In most countries citizens elect representatives
who then, on the citizens’ behalf, elect and monitor government and
ministers.
• Representative versus direct democracy: In most countries
citizens elect representatives to act on their behalf.
• Centralisation of power: There are variations between countries in
the degree of power held by central, regional and local governments.
For example, in federated countries like Australia and the USA, states
wield quite a lot of power. In the UK, central government has devolved
quite a lot of functions to the Scottish, Welsh and Northern Irish
assemblies.
Political systems matter for international business because they:
• set the rules and whose interests are served by the rules
• determine whether and how businesses can influence legislative
processes through lobbying (mostly legal) or corruption (usually
illegal)
• influence how frequently, and in what ways, the rules of the game
for business change, which can be a major source of political risk
since political changes may negatively affect domestic and foreign
businesses.
Activity
Read Willcocks (2021a), pp.43–46 section 2.3, noting the diagram on p.46.
1. How do elections and political processes work in your country?
2. How do elections and political processes work in a country with which your country
trades a great deal?
33
2.4 Economic systems

An economic system refers to the rules by which a country is governed
economically. Broadly, there are three types of economic system:
• Market economy: Here goods and services are privately owned
and production quantities are determined by supply and demand. In
a market economy, governments encourage free and fair competition
and discourage monopolies. Note that there have been very few pure
market economies. In 2001, Hong Kong had the highest degree of
economic freedom, but there was still some noticeable government
intervention in the economy. By 2021, Honk Kong’s economic (and
political and legal) freedoms had been seriously curtailed. More
generally, the 2008–09 financial crisis and its aftermath, then the
2020–21 pandemic crisis saw increased government intervention
in many countries across the world. How permanent did these
interventions need to be?
• Command economy: Here the goods and services that a country
produces, the quantity in which they are produced and the price at
which they are sold, are planned by the government. Businesses are
state owned and the government allocates resources for the good
of society as a whole. An example of a command economy was the
former Soviet Union and, in 2021, North Korea.
• Mixed economy: Here elements of both a market economy and
a command economy are present. Governments often take control
of industries that are considered vital to national interest. Examples
include France, the UK and Sweden in the 1980s, though subsequently
all three counties have reduced state ownership and undertaken more
privatisation. India, Brazil and Italy have also sought, over the years,
to reduce their large state-owned sectors, though they still retained a
number of such state-owned enterprises into 2021.
In 2021 most countries were more or less market economies – they
organise themselves by market forces but also have varying degrees of
non-market coordination. The ‘varieties of capitalism’ view embodies
this reality. Hall and Soskice (2001) suggest that, due to history, culture,
resources and other factors, countries can vary enormously in how they
combine market and non-market mechanisms to coordinate economic
activity. Moreover, these economies will be constantly changing in the
modern dynamic global environment. The view suggests two main types of
economy (Willcocks, 2021a):
• Coordinated market: This operates through a system of
coordinating by market signals together with a variety of other means,
as, for example, in Italy, the Netherlands and Japan. Such economies
may well have more employment protection and less ability to raise
capital through the stock market. In Germany, for example, employees
have representatives on corporate boards (unlike in the UK) and
government is much more directly involved in vocational training. In
Asia, many countries have embraced liberal market principles but also
have a strong state providing direction and investment supporting the
economic development path (e.g. South Korea, Singapore).
• Liberal market: This operates through a system of coordination
primarily through market signals. Hall and Soskice (2001) suggest the
UK, the USA, Canada and Australia were examples of this in 2000,
though it is important not to understate the extent of government
involvement in economic development even in these states, especially
during periods of economic crisis.
34
Activity
Read Willcocks (2021a) Chapter 1, pp.47–48, section 2.4.
1. Describe your own country’s economy. Is it a market, command or mixed economy?
2. What is the degree of coordination and liberalisation in your economy?
3. Has your country changed in terms of type of economy in the last 10 years? How?
4. Do you foresee further changes in the next five years, following the pandemic and
economic crisis of 2020–21?
2.5 Legal systems

A legal system represents the formal rules that regulate behaviour, along
with the processes by which the laws of a country are enforced and
through which redress for grievances is obtained. The importance for
international managers is that a country’s laws regulate business practice,
define the manner in which business transactions are to be executed
and set down the rights and obligations of those involved in business
transactions. The legal system impacts on the attractiveness of a country
as a business investment or a potential target market (see Chapters 4 and
6 below). A country’s legal system is influenced by its political system.
So, countries that are ‘collectivistic totalitarian’ states tend to restrict
private enterprise, while ‘individualistic market’ economies support private
enterprise and consumer rights.
There are three broad types of legal system. Note, however, that it is
common for legal systems to be influenced by multiple legal traditions:
• Common law is based on tradition, precedent and custom. Judges
look at how previous cases have been treated to decide how to treat
current cases. Then, as new precedents are made, laws can be amended
if necessary. Common law is English in origin but has stretched to
many English-influenced countries (in Africa, Asia, South Africa, and
also Canada and the USA). It is based on statutes, customs and court
decisions. Judges are arbiters and juries are decision makers. The
implications for business are greater freedom to design contracts and
codes of practice; detailed contracts are needed to fill in for gaps in the
legal framework; more legal disputes involving much use of lawyers; a
greater legal burden may favour the more powerful companies.
• Civil law is based on a detailed set of laws organised into codes.
This type of system, which is practised in more than 80 countries
including Germany, Japan and Russia, is less adversarial than common
law because under civil law, judges only have the power to apply
the existing law, not interpret the law. Here law is codified in books
of law, and judges lead the proceedings including questioning and
deciding. For businesses the implications tend to be relatively short
contracts and codes of practice, and more consumer and employee
protection available under the law. Businesses often complain about
the bureaucracy of civil law, but civil law also often gives greater legal
certainty (e.g. in France and Germany).
• Religious, or theocratic law is based on religious teachings.
Today, Islamic law is the most widely practised theocratic law system
in the world and is practiced in countries including Iran, Libya,
Saudi Arabia and Morocco. In practice, Islamic jurors and scholars
are struggling to apply the foundations of Islamic law to the modern
world, and many Muslim countries today are actually practising
Islamic law combined with common law or civil law.
35
Why it is important for international companies to be familiar with the

legal system in the countries in which they operate? One key reason
is because each system approaches the enforcement of contracts in a
different way. So, suppose you come from a common law state, and you
have signed an agreement with a company operating under a civil law
system. Which law should apply? To deal with this type of scenario, about
83 countries as of 2016 had signed the United Nations Convention on
Contracts for the International Sale of Goods (CIGS), which established
a uniform set of rules governing certain aspects of the making and
performance of everyday contracts between sellers and buyers who have
their places of business in different nations.
2.5.1 Issues for international businesses

Legal systems are also important for dealing with several other essential
issues for international businesses:
• Property rights: Property rights are the legal rights over the use
to which a resource is put and over the use of any income that may
be derived from that resource. In some countries, even though there
are laws protecting property, the laws are not consistently enforced.
Property rights can be violated through private actions and through
public actions. Private violations like theft, piracy or blackmail are
done by individuals. Keep in mind that this type of violation can
take place in any country, but in countries with weak legal systems,
like Russia, it is a much bigger problem. When public officials like
politicians and bureaucrats violate property rights, they might use
legal mechanisms such as levying excessive taxes, as in Venezuela
in the 2000s, or requiring special expensive licences, or even simply
taking assets into state control.
• Intellectual property issues: Intellectual property rights are rights
associated with the ownership of intellectual property – which can
include anything from computer software or a chemical formula for a
new drug to a screenplay or a music score. Intellectual property can be
protected in three ways:
• A patent gives the inventor of a new product or process exclusive
rights to manufacture, use or sell the invention.
• A copyright is the exclusive right of authors, composers,
playwrights, artists and publishers to publish and dispose of their
work as they see fit.
• A trademark is a design or name that may be officially
registered, that allow merchants or manufacturers to designate or
differentiate their products.
Protection of intellectual property rights varies by country. China and
Thailand are currently among the world’s biggest violators of intellectual
property rights. In Latin America, about 68 per cent of all software is
pirated, and in China some studies estimate that 86 per cent of software
is pirated. Nearly 200 countries have signed the Paris Convention for the
Protection of Industrial Property to protect intellectual property rights,
and are part of the World Property Organisation, but enforcement of
property regulations is still lax in many countries. What can you do if your
intellectual property is stolen? You can lobby your government to take
action. You can also file your own lawsuit. For example, Starbucks was
successful in suing a Chinese company that opened stores that were almost
replicas of the traditional Starbucks store.
36
• Product safety and product liability: Product safety laws

set certain standards to which a product must adhere and product
liability involves holding a company and its officers responsible when
a product causes injury, death or damage. These vary greatly across
countries. This often leads to an ethical dilemma for companies. What
should a company do if the standards in a foreign market are lower
than the standards at home? Should they comply with home standards
even if this puts them at a competitive disadvantage?
• Corporate governance: This involves the rules by which
shareholders and other interested parties control corporate decision
makers. Variations across countries are closely related to differences
in economic and legal systems. Generally, common law systems have
evolved in ways that provide strong protection for financial investors
(i.e. shareholders). In civil law countries, for example Germany and
Denmark, the law tends to offer less protection for shareholders and
more rights to other stakeholders in the company – for example,
non-managerial employees who tend to be represented on corporate
supervisory boards.
Activity
Read the case study ‘Who is breaking whose copyright?’ (VLE Chapter 2). Ask yourself:
1. In your view, were the British behaving legally?
2. Why do you think legal systems and international agreements have such a poor
record against copyright and IP violations?
3. How could the IP laws in your own country be strengthened?
2.6 Country development: political, economic and

legal issues
The political, economic and legal environments of a country can have a
significant impact on its economic development, and on its attractiveness
as a potential investment location or target market. Economic
development levels can be measured using gross national income per
person, or GNI. But GNI measures can be misleading because they do
not take into account cost of living differences. So, we adjust these
numbers by purchasing power. Using purchasing power parity (PPP), we
can adjust the numbers to reflect how far your money actually goes in
a particular country. What does this mean for companies? Well, looking
at a PPP-adjusted GNI for India in 2007, we would conclude that the
average Indian could only consume about 6 per cent of the goods and
services consumed by the average US citizen. Should US businesses have
discounted India as a potential market then? No, because if we look a little
deeper we would find that the country has an emerging middle class of
about 100 million people that represents a tremendous opportunity for
foreign companies.
Are there other ways to measure economic development? Sen (1999)
argues that, rather than simply focusing on material output measures
like GNI per capita, we should consider the capabilities and opportunities
people enjoy when measuring economic development. Sen believes
that economic progress includes things like removing impediments to
freedom, such as tyranny, poverty and the neglect of public facilities, and
a democratisation of political communities so that citizens have a voice
in decision making. So, for example, Sen argues that providing basic
37
healthcare and education is essential for economic growth. The UN has

incorporated Sen’s ideas in its Human Development Index, or HDI, which
measures the quality of life in different countries. HDI is based on life
expectancy at birth, educational attainment and whether average incomes
in a country are sufficient to meet the basic needs of life in that country.
Why do some countries succeed in economic development while others
fail? Some argue that investment and technological progress explain
capital accumulation, higher productivity and thus increasing economic
success. Many policy makers and scholars argue that innovation and
entrepreneurship are the engines of long-run economic growth, and
that innovation and entrepreneurship require some form of market
economy. In other words, new products and business processes can
increase the productivity of labour and capital. Similarly, innovation
and entrepreneurship probably require strong property rights. If the
innovations by, say, Microsoft or Samsung were not given protection, there
would have been little incentive for the companies to continue to develop
new software and technological products.
Others argue that human capital is the key to prosperity; so developing
counties must invest in higher education. Others relate success to market-
friendly, macro-economic policies by government, including low inflation,
stable exchange rates, low trade barriers and low government budget
deficits. Peng and Meyer (2019) line up with the argument of North
(2005) and see political, economic and legal institutions as the basic
determinants of a country’s national economic performance because these
influence incentives and the costs of doing business:
• Institutions ensure that companies are able to make gains from trade.
• Lack of strong, formal market-supporting institutions force companies
to trade on a much more informal basis, incurring political, legal and
economic risks in conditions of instability and over-dependence on
informal relationships.
• Emerging formal market-supporting institutions support foreign
businesses moving into complicated long-distance trade with a country
because they can see reasons for specialisation and growing in size,
and making long-term commitments to international trade there.
• If property rights are protected, this will fuel innovation,
entrepreneurship, more economic growth and increased inward
investment.
Activity
Read Willcocks (2021a) Chapter 2, Section 2.6, pp.32–33,
1. Why are formal institutions important for developing countries?
2. Read the case study ‘Economic transformation in Vietnam’ (VLE Chapter 2).
a. What changes in formal institutions and economic policy explain Vietnam’s
progress in recent years?
b. How should the government and international businesses deal with the high
levels of corruption?
c. If you were going to enter Vietnam as a new market, what formal institutional
risks would you anticipate?
d. How would you mitigate those risks?
38
2.7 Key concepts

• institution-based view
• collectivism versus individualism
• market, command and mixed economies
• coordinated market
• liberal market
• types of totalitarianism
• proportional representation
• representative democracy
• civil law, common law and religious law
• property and intellectual property rights.

• define the concept of institutions and delineate their key role in
reducing uncertainty
• explain the basic differences among political systems and their
influence on international business
• discuss the systemic differences among economies and the related
challenges for international business
• describe the basic differences between legal systems in the world
• engage in and assess leading debates on political, economic and legal
institutions and international business.

1. How do you think a country might make the shift from a centrally
planned to a more market-based economy?
2. You are looking to sell goods to another country (pick one you know
something about). What are the costs of doing business in this foreign
market? Given the costs of doing business in a foreign market, is it
worth it?
3. What do you think are the factors that explain the degree of
development and success experienced by your own country over the
last 10 years? What were the roles of political, economic and legal
institutions?

‘Formal institutions greatly affect and shape the strategies that are possible
in specific countries and markets.’
Therefore:
a. Describe, using examples, the major political institutions an
international business needs to take into account in designing its
strategy.
b. Describe, using examples, the major economic institutions an
international business needs to take into account in designing its
strategy. 39
c. Describe, using examples, the major legal institutions that will impact
on a business operating globally
d. Why are formal institutions important for:
i. developing economies?
ii. international trade?
iii. multinationals?
40
Chapter 3: Informal institutions: cultural, social and ethical challenges
Chapter 3: Informal institutions: cultural,

social and ethical challenges
3.1 Introduction
If you ever visit a foreign country, you will probably notice some
differences in how people dress, the food they eat or their choice of
transportation. Perhaps a particular religion influences how society works,
or a different language is spoken. All of these things are manifestations of
culture. Just as you would adapt for differences when away from home,
when doing business in foreign countries, companies need to adapt as
well.
In this chapter we look at the informal institutions that companies need
to take into account when operating internationally. In particular, we will
focus on the differences between countries in culture, religion, language,
ethics and approaches to corporate social responsibility. Culture is a system
of values and norms that are shared among a group of people and that,
when taken together, constitute a design for living. Values are abstract
ideas about what a group believes is good, right and desirable, and norms
are the social rules and guidelines that prescribe appropriate behaviour in
particular situations. Long-standing cultural differences still influence how
business is being done. Also, keep in mind that culture is dynamic, in other
words it is always changing.
We will discover in this chapter that managers and companies unfamiliar
with foreign languages and religious traditions may end up making
mistakes that harm their business. We also explore different approaches
to ethics in international business, and how variations on ethics across
countries can create ethical dilemmas, as can a range of differences
about dealing with such issues as the environment, labour, human rights
and corruption. We also explore companies’ different corporate social
responsibility (CSR) strategies, and whether CSR is vital to or a diversion
from what international businesses need to be focusing on.

• explain the concept of culture and provide means by which different
cultures can be analysed and described
• identify the different type of language and religion across the globe,
and their relevance to understanding cultures and behaviours
• pinpoint the importance of ethics in international business, and how
what is considered ethical varies across countries, and religions
• introduce possible managerial responses to informal (and formal)
institutions, with particular reference to corporate social responsibility
activities
• examine possible strategies for corporate sustainability practices
• analyse corruption in the international business environment and
assess corruption reduction strategies.

41
• define what culture is and articulate two of its manifestations, namely

language and religion
• discuss how cultures systematically differ from each other
• explain how language competences shape intercultural interactions
• explain how religions shape cultures
• describe the importance of ethics
• summarise corporate social responsibility challenges faced by
companies operating in the global economy
• discuss how institutions influence companies’ corporate social
responsibility activities and sustainability practices
• describe forms of corruption in international contexts, and suggest
counter-policies
• participate in leading debates about culture, social responsibility and
sustainability
• draw implications for management action.

Publishing, 2021a) Chapter 2.

McGraw Hill, 2021) 13th edition Chapters 4 and 5.

Collinson, S., R. Nerula and A. Rugman International business. (Harrow:
Pearson Education, 2017).
Cuervo-Cazurra, A. ‘Corruption in international business’, Journal of World
Businesses 51 2016, pp.35–49.
Doh, J., P. Rodriguez, K. Uhlenbruck, J. Collins, and L. Eden ‘Coping with
corruption in foreign markets’, Academy of Management Executive 17(3)
2003, pp.114–29.
Donaldson, T. ‘Values in tension: ethics away from home’, Harvard Business
Review 74(5) 1996, pp.48–62.
Friedman, M. ‘The social responsibility of business is to increase profits’, New
York Times Magazine 13 September 1970.
Hall, E. Understanding cultural differences – German, French and Americans.
(Maine: Yarmouth, 1990).
Hill, C. and T. Hult International business. (New York: McGraw Hill, 2019).
Hofstede, G. Culture and organisations. (New York: McGraw Hill, 1997).
Huntingdon, S. The clash of civilizations and the remaking of world order. (New
York: Simon and Schuster, 1996).
Hofstede, G., G.J. Hofstede and M. Mankov Cultures and organisations. (New
York: McGraw Hill, 2010).
2019).
Ronen, S. and O. Shenkar ‘Clustering countries on attitudinal dimension’,
Academy of Management Review 10 1985, pp.435–54.
Trompenaars, F. Riding the waves of culture. (London: Nicholas Brealey, 1993).
Willard, B. The new sustainability challenge. (London: New Society Publishers,
2012).
Willcocks, L. Global business: management. (Stratford-upon-Avon, UK: SB
Publishing, 2021b).
42
World Commission on Environment and Development Our common future.

(Oxford: Oxford University Press, 1987).

Culture – definitions and role in international business; language
differences and impacts; religion and ethics on the world stage; corruption
and its mitigation ; corporate social responsibility (CSR) and corporate
sustainability practices in international business.
3.2 Cultures and international business

Informal institutions come from socially transmitted information and
are part of the heritage that we call culture. They tell individuals in a
society what behaviours are considered right and proper, and what would
be unacceptable. Typically, cultures have no clearly defined origin, but
have evolved over time. Those within a society tend to perceive their
own culture as ‘natural, rational and morally right’. This self-centred
mentality is known as ethnocentrism. Culture can be seen as the collective
programming of the mind that develops over time, which distinguishes
the members of one group or category of people from another. Though we
talk about French culture and Japanese culture, culture is not necessarily
divided by national boundaries. Some countries like Switzerland have
multiple distinct cultures, in this case German, Italian and French.
Similarly, some cultures transcend national boundaries. For example,
you might think of how the values promoted by Islam influence many
countries.
Culture has been described as ‘the way things are done round here’ and
also as the shared norms, values and assumptions of a group, organisation
or society that translate into distinctive behaviours. The social rules that
govern people’s actions towards one another are called norms, which you
can think of as the routine conventions of everyday life like dress codes,
social manners and accepted codes of conduct.
What determines culture? The values and norms of a culture evolve
over time and are a function of a number of factors at work in a society
including religion, political and economic philosophies, education,
language and social structure. How can we understand differences in
culture? Willcocks (2021a) distinguishes between three approaches – the
context approach, the cluster approach and the dimensions approach.
3.2.1 The context approach

Context is the underlying background upon which interaction takes
place. In low-context cultures (such as in North American and western
European countries), communication is usually taken at face value without
much reliance on unspoken context. In other words, yes means yes. In
contrast, in high-context cultures (such as Arab and Asian countries),
communication relies a lot on the underlying, unspoken context, which
is as important as the words used. For example, ‘yes’ does not necessarily
mean ‘yes, I agree’, it might mean ‘yes, I hear you’. Failure to understand
context and differences in interaction style can lead to misunderstandings
in international business. According to this theory, Chinese, Korean,
Japanese and Arab cultures are high context, while German, Canadian
and Swiss, for example, are low context. This looks a bit simplistic,
however. Critics point out that the context approach may exaggerate the
lack of context in so-called ‘low context’ approaches, and that all cultures,
national, business or otherwise, as products of history and tradition,
have important unspoken aspects, which are as important as the words
43
used. Also the context approach only looks at one dimension, unlike the
dimensions approach detailed below.
3.2.2 The cluster approach

A cluster in this case is a group of countries that share similar cultures.
There are three main theories of clusters. Ronen and Shenkar (1985)
identify eight clusters, while the Globe Global Leadership and
Organisational Behaviour Effectiveness – study (House et al., 2004)
proposes 10, of which five are similar to the Ronen and Shenkar study.
Huntingdon (1996) proposed eight ‘civilisations’. The clusters are a
useful way of looking at things, because we need to understand that in
international business people will feel more comfortable doing business
with countries and businesses from the same cluster. However, the
approach tells us little about differences between countries within a cluster
(e.g. between Argentina and Brazil).
3.2.3 The dimensions approach

The most extensive studies exploring this have been done by Hofstede
(1997). He and his colleagues initially identified five dimensions of
culture: power distance, individualism versus collectivism, masculinity
versus femininity, uncertainty avoidance and long-term orientation. These
are well described in Willcocks (2021a) Chapter 3, p.78, section 3.2.
Subsequently Hofstede and Minkov (2010) identified a sixth dimension –
indulgence – referring to the freedom social norms give to the individual
to fulfil his/her human desires.
Note that Hofstede’s studies record only relative culture differences
between countries. Hofstede’s work has been criticised. While Hofstede’s
original study gave us many important insights into cultural differences,
his study was flawed in that he made the assumption that there is a one-
to-one relationship between culture and the nation-state. In addition, the
research was culturally bound since it was conducted only by Europeans
and North Americans, and the study may have been biased since it took
place within a single company, IBM. It is important for you to read about
and note the strengths and limitations of Hofstede’s work. Hofstede
provides a good starting point for a cultural analysis that needs to be more
fine-grained if it is to influence actual management practice.
You need to note a further ‘dimensions’ approach put forward by
Trompenaars (1993). Building on Hofstede’s work, he suggests seven
dimensions of culture in the workplace. These are described in Willcocks
(2021a) Chapter 3, pp.79–80 section 3.2.
What are the implications of all of this for managers? It is vital for
international businesses to develop cross-cultural literacy. To be successful,
you have to be able to conform and adapt to the value system and norms
of the host country. One way you can gain knowledge of the local culture
is to hire local citizens. Developing a cadre of cosmopolitan managers who
have been exposed to different cultures can also be helpful. It is important
to avoid being ethnocentric, believing that your ethnic group or culture is
superior to that of others.
A second reason for companies to be aware of cultural differences is
the link between culture and competitive advantage. The value systems
and norms of a country influence the costs of doing business, which
of course then affect the competitive advantage of the company. A
society’s class structure affects the relationship between management
and labour, for example – look at Japan’s strong worker loyalty system,
where lifetime employment guarantees affect the success of Japanese
44
companies. Similarly, it has been suggested that a more individualistic

culture promotes entrepreneurial activities as compared to a culture that
emphasises collective behaviour. These differences provide companies with
insight as to which countries are most likely to produce competitors, and
which countries will be the best for investing or selling (see also Chapter
12 below on the subject of location attractiveness).
A third reason is that cultural sensitivity leads to better cross-cultural
management of diverse workforces. Collinson, Narula and Rugman (2017)
summarise a number of research studies and suggest that cultural diversity
can be managed by:
• Recognising diversity.
• Building diversity issues into such areas as recruitment; HRM
planning; strategy; location decisions and alliances. This helps avoid
clashes and inefficiency.
• Identifying where and to what degree local divisions should be
encouraged to take the lead in expressing and managing diversity.
• Getting a cultural balance in particular areas of strategic and
tactical decision-making.
• Leading from the top with behaviours that signal the valuing of
cultural diversity.
Activity
Read Willcocks (2021a) Chapter 3, in particular sections 3.1 and 3.2, which have
additional information on culture, points and cases.
1. Make notes on the criticisms of the context, cluster and dimensions approaches.
2. Make notes on the Trompenaars (1993) approach described in Section 3.2. Define the
dimensions of the approach and criticisms of the approach.
3. Look at your own country and plot your own culture according to Hofstede’s five
dimensions.
4. How useful is this for understanding behaviour at work in your country? If you were
doing business with a US company, what cultural differences would you need to take
into account compared to doing business with a company from mainland China?
3.3 Languages
Language influences culture. It is how we communicate with each other
both in the spoken and unspoken form and it is also how we perceive the
world. Some countries have more than one language and distinct culture.
Canada, for example, has both an English-speaking and a French-speaking
area – both with their own cultures. Belgium is divided into Flemish and
French speakers, and four different languages are spoken in Switzerland.
Chinese is the mother tongue of the largest number of native speakers
(20 per cent), though English is the most widely spoken language in the
world. For native speakers, six per cent speak English, five per cent Hindi,
five per cent Spanish, four per cent Arabic and four per cent Russian.
However, 56 per cent of the global population still speak other languages,
often in addition to these six major languages.
Many multinationals have adopted English as the official corporate
language, to enable knowledge sharing and communication across
borders, not least with customers, suppliers and fellow employees. But
note that, even though English is the main global business language, using
English as a language in a business meeting can still create problems.
45
People from different cultures may understand the same words differently.
Why is unspoken language important? Think for a moment about how you
stand when you are talking with another person. People in North America
and Western Europe usually stand about an arm’s length away. But in Latin
America, people tend to stand much closer together. Now, what happens
in a business meeting between someone from Brazil and someone from
Canada, for example? The Brazilian might try to stand at their customary
distance causing the Canadian to take a step backwards because their
personal space has been invaded. The Canadian may be annoyed at the
Brazilian for standing so close, and the Brazilian may interpret their
response as aloofness. The meeting is already off to a bad start. Similarly,
consider the circle you might make with your thumb and forefinger. In
the USA, you have signalled a positive response, but if you make the same
gesture in Greece, you have just insulted someone.
Activity
Read Willcocks (2021a) pp.81–82 section 3.3.
1. What do you see as the value of being a multilingual employee?
2. You are not Indian and are having a meeting with a businessperson from Mumbai in
India. What would you see as the likely communication challenges? How would you
deal with these?
3.4 Religion and ethics

3.4.1 Religion
Religion is another important determinant of culture, especially in
countries where a single religion is dominant. Religion is the systems of
shared beliefs and rituals that are concerned with the realm of the sacred.
Religions with the greatest number of followers today are (approximately):
Christianity 1.7 billion
Islam 1 billion
Hinduism 750 million
Buddhism 350 million.
You might also include Confucianism with these. While not strictly a
religion, Confucianism influences behaviour and shapes culture in many
parts of Asia. Closely related to religion are ethical systems, or sets of
moral principles or values that guide and shape behaviour. So, you might
think of Christian ethics or Islamic ethics.
Most followers of Christianity live in Europe, the Americas or other
countries settled by Europeans. Christians are divided into Roman
Catholics, those who belong to the Orthodox Church and Protestants.
Muslims are found in more than 35 countries, particularly in the Middle
East. Islam is an all-embracing way of life – prayers take place five times
a day, women are expected to dress in a certain manner, and pork and
alcohol are forbidden. How does Islam affect business? The Koran, which
is the sacred book for Islam like the Bible is for Christianity, supports free
enterprises and legitimate profits, and the right to protect private property,
but advocates using profits in a righteous, socially beneficial manner. The
central tenets of Hinduism, which is mainly based in India, are spiritual
growth and development. Many Hindus believe that the way to achieve
nirvana is through material and physical self-denial.
46
Hinduism creates interesting challenges for companies. For example,

because the religion emphasises spiritual rather than individual
achievement, the drive for entrepreneurial behaviour so common among
Protestants, for example, is not present. So a devout Hindu may not see
promotion or additional responsibilities as being desirable. Buddhism’s
followers are located mainly in central and southeast Asia, China, Korea
and Japan. Buddhism stresses spiritual achievement and the afterlife
above involvement in this world. As with Hinduism, there is a lack of
emphasis on entrepreneurial behaviour.
Confucianism is practised mainly in China and teaches the importance
of attaining personal salvation through right action. Moral and ethical
conduct is important, as is loyalty. What do the principles of Confucianism
mean for business? The key principles of the ideology – loyalty, reciprocal
obligations and honesty – could translate into making the costs of doing
business lower.
A knowledge of religions is crucial even for non-religious managers.
Religious beliefs and activities affect business through religious festivals,
daily and weekly routines that vary across religions (e.g. prayer times,
sacred days, fasts), and activities and objects with symbolic values.
For example, in India cows are holy in Hindu religion and may not be
disturbed or eaten. Some objects or practices are taboo or banned – for
example, Muslims are not supposed to eat pork. Recall the international
furore over the Danish newspaper, which published cartoons depicting
the Muslim prophet Mohammed. Religious differences, more than any
other differences, tend to raise emotions, and thus are challenging for
businesses to handle. Showing respect for other religions and associated
values will help you avoid conflict and create a basis for doing business.
An individual’s religion may also help shape his/her attitude towards work
and entrepreneurship.
3.4.2 Ethics
Ethics refers to the principles of right and wrong, standards and norms of
conduct governing individual and company behaviour. Ethics are not only
an important part of informal institutions but are also deeply reflected in
formal laws and regulations. Business ethics are the accepted principles
of right or wrong governing the conduct of business people. An ethical
strategy is a course of action that does not violate these principles.
Managing ethics overseas is challenging because what is ethical in one
country may be unethical elsewhere. How should you deal with ethical
dilemmas that arise when operating internationally? The Friedman
doctrine argues that the only responsibility of business is to increase
profits. Friedman (1970) claimed that as long as the company stayed
within the letter of the law, ethics did not enter the equation. So, in other
words, he would argue that it is not the responsibility of a company to
take on social expenditures beyond what the law mandates, and what is
required to run a business efficiently. What Hill (2021) calls the naïve
immoralist approach argues that if a manager of a multinational
company sees that companies from other countries are not following
ethical norms in a host country, that manager should ignore the norms as
well. Peng and Meyer (2019) suggest three approaches:
• Ethical relativism follows the saying ‘When in Rome, do as the
Romans do’.
• Ethical imperialism refers to the absolute belief that ‘There is only
one set of ethics and we have it’.
47
• Companies often run into problems adopting either of these two

approaches. Therefore Donaldson (1996) suggests a ‘middle of the
road’ approach in international business by observing three principles
when overseas – respect for human dignity and human rights, respect
for local traditions, and respect for institutional context. In practice
these principles may clash in specific circumstances, leaving the
business manager to behave as diplomatically as he/she can in the
prevailing situation.
Ethics provides a useful bridge between culture, language, religion and the
subject of a major way forward – corporate social responsibility – which
we will now look at.
Activity
Read Willcocks (2021a) Chapter 3, pp.82–85, sections 3.4 and 3.5.
1. Assess the limitations of taking an ethical imperialist or ethical relativist approach
when doing business in foreign countries
2. Write down what you see as the ethical ‘rules of conduct’ for a company whose
operations are impacted by the informal institutions of a foreign country, for example
United Arab Emirates To help you, have a look at the Wikipedia entry for the UAE:
https://en.wikipedia.org/wiki/United_Arab_Emirates
3.5 Corporate social responsibility in international

business
How can companies deal with the ethical dilemmas that arise when
operating internationally? A major approach is corporate social
responsibility (CSR), defined as the consideration of, and response to,
issues beyond the narrow economic, technical and legal requirements
of the company to accomplish social benefits along with the traditional
economic gains the company seeks.
A stakeholder view of the company sees a business as responsible not
just to its shareholders for its performance, but also to a much wider
constituency. There are primary stakeholder groups on whom the company
directly relies for its survival and prosperity – managers, employees,
customers, shareholders, governments. There are also secondary
stakeholder groups who do not engage in transactions with the company,
but who influence or are affected by the company, though they are not
essential for its survival. As a result of rising global concerns and the
stakeholder view, companies increasingly develop CSR triple bottom
line strategies (‘profit, people, and planet’) that take into account
their economic, social and environmental performance. International
businesses are faced with at least four major CSR concerns:
• The environment is currently a high profile topic, especially the
irreversible damage that man-made pollution is causing. A key concern
is sustainability, defined as the ability to meet the needs of the present
without compromising the ability of future generations to meet their
needs. Because many countries are establishing strong environmental
regulations to try to limit further damage, companies are having to
adopt new, often costly measures to abide by the laws. For example,
new regulations may be forcing your company to take costly steps
to stay within the law. Should you shift your production to another
country where the laws do not exist, or are only loosely enforced?
48
Activity
Read Willcocks (2021a) Chapter 3, pp.85–90, sections 3.6 and 3.7 on this subject.
1. Make notes on the pressures on multi-national enterprises (MNEs) to lower their
standards on the environment.
2. Explain the following terms: triple bottom line strategy; tragedy of the commons;
pollution havens.
• Employment practices frequently present ethical dilemmas.

Suppose work conditions in a host country are inferior to those in the
home country. Which standards should be applied – the home country
standards or the host country standards? Nike found itself in the midst
of a huge controversy in the mid-1990s when it was reported that the
working conditions at some of its sub-contractors were poor.
While neither the sub-contractor nor Nike was actually breaking
the law, there was strong reason to suspect that workers were being
exploited. Nike was forced by public pressure to establish a code of
conduct for all of its sub-contractors, and implement a monitoring
system to ensure that the code was followed. The pressure to lower
conditions in foreign operations is particularly strong with ‘footloose
plants’ that are labour intensive and can easily relocate when local
regulations get tighter. Another problem area is where an MNE buys
products or components from foreign companies. MNEs like Adidas
(see Peng and Meyer, 2011, In Focus 10.4) sometimes introduce
standards of engagement on their suppliers. These are written policies
and standards for corporate conduct and ethics. But what happens if
suppliers fail to meet standards or provide misleading evidence?
• Human rights: Human rights and freedoms are not respected in all
countries. Think about the apartheid system that denied basic political
rights to black people in South Africa, for example. Should companies
do business in countries with repressive regimes? Some people argue
that the presence of multinational companies actually helps bring
change to these countries. Others, however, argue that some countries
like Myanmar, which has one of the worst human rights records in the
world, are so brutally repressive that no investment can be justified.
• Corruption: Is it necessary to be ethical when dealing with corrupt
government or individuals? This is something companies have to
consider. At what point does ‘gift giving’ become bribery, for example?
From a government perspective, bribery is invariably not allowed.
The Organization for Cooperation and Development (OECD) passed
an anti-bribery measure in 1997, which obligates member states to
make the bribery of foreign public officials a criminal offence. Despite
laws like these, bribery continues to be a common practice for some
companies. In fact, some economists believe that in certain cases
speed payments, or payments made to speed up approval for business
investments, can be justified, for example, if they enhance public
welfare by creating jobs. Others argue, however, that corruption can
become ingrained as a way of doing business, and hard to stop if it is
part of a country’s way of getting things done.
49
Activity
Read Willcocks (2021a) pp.87–88, section 3.6 again.
1. Make notes on illustrative examples where companies have run into problems on
environment, employment practices, human rights, and corruption.
2. Find a foreign multinational that operates in your country. Search on the internet.
Using its most recent annual report – and noting any media stories – assess how well
it does on these four areas.
3.5.1 Institutions and CSR strategies

What are the moral obligations of companies operating internationally?
You can guess that the formal and informal institutions operating in a
country greatly influence the types of CSR strategies companies can adopt,
and the levels of success experienced. In liberal market economies like the
USA and the UK, companies have a high discretion over their activities. So
far as they undertake CSR, it will be done as explicit corporate activities
undertaken voluntarily as policies, programmes and strategies, with
the extent of these activities dependant on the expectations of different
stakeholders of the company. In more coordinated market economies,
for example in Germany and Scandinavia, much more implicit CSR takes
place, with CSR being part of the fabric of the legal, political, and social
and cultural institutions, and indeed may not only be morally demanded
but legally demanded (e.g. in Germany health care benefits must be paid
for all those employed for more than 20 days a month). Note, however,
that among developed countries in particular there has been some
convergence towards more CSR regulation.
Do companies have a responsibility to take into account the social
consequences of their actions when they make business decisions? Should
companies always choose the path that has both good economic and good
social consequences? You might answer yes – companies have a social
responsibility simply because it is the right way to operate. Many people
believe that companies need to give something back to the societies that
have made their success possible. Some companies, however, do not share
this view. Willcocks (2021a) Chapter 3 section 3.7 suggests that companies
often adopt one of four different responses to ethical challenges – reactive,
defensive, accommodative and proactive – and gives worked examples
in the text which you will need to understand. The spirit of CSR is better
captured by adopting a proactive strategy, embracing the triple targets of
profit, people and planet.
Activity
Refer to Willcocks (2021a) Chapter 3, pp.88–90, sections 3.7 and 3.8.1.
1. Describe the four strategies an international business can adopt on CSR.
2. Give examples of each strategy in action, and assess the advantages and
disadvantages of each strategy.
3. What is stakeholder analysis, who are the firm’s main stakeholders, how is
stakeholder analysis related to CSR strategies?
Sometimes, it can very difficult for companies to decide how to behave

in some situations. Managers will be influenced by their personal ethics
and cultural perspective, which may or may not be appropriate in a given
situation. However, there are several things that managers can do to be
sure that ethical issues are considered when decisions are made:
50
• Companies can hire and promote people with well-grounded personal

ethics.
• Companies can build an organisational culture that places a high value
on ethical behaviour. To develop this, companies need to articulate
values that place a strong emphasis on ethical behaviour. Some firms
do this by establishing a formal code of ethics. Once a code has been
developed, leaders need to emphasise it and act on it. Companies can
encourage employees to adopt the code by offering incentives and
rewards to those employees who behave in an ethical manner.
• Companies can make sure that leaders articulate the rhetoric of ethical
behaviour and act in a manner consistent with that rhetoric.
• Managers can develop moral courage. Companies can strengthen the
moral courage of employees by committing themselves not to retaliate
against employees who exercise moral courage, say no to superiors or
otherwise complain about unethical actions.
• Companies can put decision-making processes in place that require
people to consider the ethical dimension of business decisions.
Activity
Read the case study ‘Marks and Spencer and corporate social responsibility’
(VLE Chapter 3).
1. Why is the plan A agenda so important to Marks and Spencer?
2. What do you see as the disadvantages and risks of giving ‘how we do business’ such
a central place in the company’s profile?
3. What could the company do even better?
4. Do you think the company’s approach is particularly profitable? How?
3.6 CSR and sustainability

Sustainability has become a critical component of corporate social
responsibility approaches in recent years, especially in the face of climate
change challenges. The idea here is that businesses must support wider
sustainable development beyond their own profit goals. A 1987 report
by the World Commission on Environment and Development defined
sustainable development as ‘development that meets the needs of the
present without compromising the ability of future generations to meet
their own needs’.
Willard (2012) has suggested a five-stage sustainability journey for
business enterprises. The stages are:
1. pre-compliance
2. compliance
3. beyond compliance
4. integrated strategy
5. purpose/passion.
According to this framework, companies evolve from an unsustainable
model of business (stages 1, 2 and 3), to a sustainable business framework
(stages 4 or 5). Executive thinking also evolves from positioning ‘green’,
‘environmental’, and ‘sustainable’ initiatives as expensive and bureaucratic
threats in the early stages, to seeing them as catalysts for strategic growth
in the later stages (see Willard, 2012).
51
By stage 4 the firm has transformed its business model into a sustainable
‘borrow-use-return’ design. This is to help to build a ‘circular economy’.
A circular economy is one that is restorative and regenerative by design,
and which aims to keep products, components and materials at their
highest utility and value at all times, distinguishing between technical and
biological cycles (see Willcocks, 2021a, Chapter 3, p.93, figure 3.1). This
involves practices such as recycling, refurbishing, servicing rather than
disposal, with the focus on reuse and minimising waste.
Driven by a passionate, values-based commitment to improve the well-
being of the company, society, and the environment, a Stage 5 company
would help to build a better world because it is the right thing to do.
(Stage 4 companies do most of the things a Stage 5 company does but ‘do
the right things’ in order to become successful businesses).
Activity
Read Willcocks (2021a) Chapter 3, pp.91–94, section 3.8.2.
1. Make sure you understand the five-stage sustainability framework a company can
adopt.
2. Referring to figure 3.1, p.93, make sure you can explain the concept of ‘the circular
economy.’
3. Do you think a multinational, for example Tencent, IBM or Singapore Airlines, that
carries out a wider stakeholder analysis and adopting the sustainability journey will
ultimately be more or less profitable?
3.7 Dealing with corruption

This is another part of corporate social responsibility. How do international
businesses deal with the challenges of experiencing differing degrees of
corruption in countries and business practices across the world?
How extensive is corruption, internationally? According to the
Transparency International Corruption Perceptions Index, in 2019 a
majority of countries were showing little or no improvement in tackling
corruption. According to Transparency International, businesses and
individuals spend in excess of $400 billion a year worldwide on bribes
related to government procurement contracts alone. It suggests that
reducing big money in politics and promoting inclusive political decision-
making are essential to curbing corruption. Looking at 180 countries and
their perceived levels of public sector corruption, the report found more
than two-thirds of countries scoring below 50 out of 100 (where 100 is
‘very clean’). No country recorded a perfect score, the highest being 87.
Corruption occurs on a large scale in markets and in transactions between
businesses. Cuervo-Cazurra, (2016) has provided a neat framework for
analysing corruption, and the points of leverage for governments and
companies wanting to behave more ethically, to which you are referred
now (see Willcocks, 2021a, pp.96, figure 3.3). This identifies the causes of
corruption, in terms of demand for and supply of bribes, and low risk and
punishments from behaving corruptly. If proper controls and punishments
are put in place at government and company level, it is possible to gain
more desirable outcomes in terms of country development and company
profitability.
Poor corruption governance by a company can be very costly, leading to
business losses, reputational damage, higher costs, deadlines not met,
and barriers to innovation – as just some examples. There are many ways
forward, including:
52
• tighter national and international rules, policing and more certain

higher punishments
• non-state actors publishing guidelines and standards
• clearer, detailed corporate directives and their policing
• instilling stakeholder values militating against corruption.
Activity
Read Willcocks (2021a) Chapter 3, pp.94–97, section 3.8.1.
1. Why do you think corruption is so widespread across countries and in international
business?
2. Your company is bidding to win an oil pipeline construction contract in Russia. You
are aware that there are three other consortia bidding for the same work. There are
a number of options including working with a Russian construction company, or with
one of the other consortia competing for the business. You are also aware that bribery
is frequently present in such negotiations and final contracts. What corporate policy
and way forward would you recommend?
4. What actions can be taken to lower the corruption levels in international business?
3.8 Key concepts

• culture
• context, cluster and dimension approaches to culture
• collectivism and individualism
• main types of religion
• ethics
• ethical dilemmas
• five corporate attitudes to ethics
• corporate social responsibility (CSR)
• reactive, defensive, accommodative and proactive CSR strategies
• triple bottom line
• sustainability journey
• dealing with corruption.

• define what culture is and articulate two of its manifestations, namely
language and religion
• discuss how cultures systematically differ from each other
• explain how language competences shape intercultural interactions
• explain how religions shape cultures
• describe the importance of ethics
• summarise corporate social responsibility challenges faced by
companies operating in the global economy
• discuss how institutions influence companies’ corporate social
responsibility activities and sustainability practices
53
• describe forms of corruption in international contexts, and suggest

counter-policies
• participate in leading debates about culture, social responsibility and
sustainability
• draw implications for management action.

Read the case study ‘Alstom in Saudi Arabia and China’ (VLE Chapter 3).
1. If you were invited to a party in Saudi Arabia, how would you behave?
What would you tell an Indian colleague who is a vegetarian?
2. Do you think it is necessary or appropriate to join in the drinking when
being invited to a business party in China?
3. How would you treat your Saudi Arabian or Chinese colleagues at
your own company official party?
4. Alstom is an engineering company looking for new contracts all over
the world. What should its CSR and anti-corruption policies be in
Saudi Arabia and China?
5. Will it secure profitable contracts if it adopts your recommendations?

‘Informal institutions, particularly culture and ethics, are highly influential
factors that shape the conduct of international business.’ Discuss this
proposition as follows:
a. Outline two major theories of culture and assess their relevance and
limitations when applied to the conduct of international business.
b. Describe and assess the relevance of the main approaches to ethics in
international business
c. Describe what corporate social responsibility (CSR) is, the main
approaches to CSR that international businesses take, and the main
challenges that CSR seek to deal with.
54
Part 2: Business across borders: the foundations
Part 2: Business across borders: the

foundations
55
Notes
56
Chapter 4: International trade and investment
Chapter 4: International trade and

investment
4.1 Introduction
Free trade refers to a situation where a government does not attempt to
influence through quotas or tariffs what its citizens can buy from another
country or what they can produce and sell to another country. Economists
have debated the merits of free trade for centuries. You probably do not
need trade theories to explain some patterns of trade – it’s easy to see
why Saudi Arabia exports oil and Brazil exports coffee, but it’s much
harder to explain why Switzerland exports watches and pharmaceuticals
or why Japan exports consumer electronics. Why does Ford assemble cars
made for the US market in Mexico, for example, while BMW and Nissan
manufacture cars for US citizens in the USA?
In this chapter we look at the major classic and modern theories of trade.
We then review how the governments and national institutions that we
looked at in Chapters 2 and 3 regulate and shape MNE activity around the
world and, through this lens, look at the fair trade versus protectionism
debate.
Given that MNEs do make foreign direct investments (FDIs), why do they
do so and under what conditions can these investments be successful?
We discuss the ownership, locational and internalisation advantages that
companies may enjoy when making such FDIs, how governments assess
the costs and benefits of FDIs into their countries, and the sorts of policies
they may undertake to ensure FDI is controlled and beneficial to the host
country.

• establish the relevance of three classical and three modern theories of
trade
• identify how national governments regulate and attempt to control
international trade and its impacts on a country
• provide a structure for debating how free trade and protectionism can
affect stakeholders, especially host countries, home countries, MNEs,
customers and producers
• establish the main theories and strategies that support or inhibit an
MNE making direct foreign investments in a country
• explain the main challenges to a host country when faced with foreign
direct investment (FDI), and the main challenges and considerations
for an MNE making those investments.

• describe and assess the relevance of classical and modern theories of
trade
• explain the role of governments in regulating and restraining
international trade
57
• debate the evidence on whether free trade or protectionism provide

net advantages to host countries, home countries, consumers,
domestic producers and MNEs making foreign direct investments
(FDIs)
• discuss the major theories and conditions under which an MNE
strategy of FDI makes business sense
• assess the costs and benefits of FDI from a host-country perspective
and understand the actions host countries can and may take with
regard to FDI
• assess and make recommendations on the challenges MNEs face when
undertaking international trade and FDI.

Davies, H. and P. Ellis ‘Porter’s competitive advantage of nations’, Journal of
Management Studies 37 2001, pp.1189–1215.
Willcocks, L. Global business: strategy in context. (Stratford-upon-Avon: SB
Publishing, UK, 2021a) Chapter 1, pp.27–38, sections 1.7 to 1.10 and
Chapter 6, pp.165–71, sections 6.3 to 6.4.

Buckley, P. et al. ‘The internalisation theory of the multinational enterprise:
A review of the progress on a 30-year research agenda’, Journal of
International Business 40 2009, pp.1563–80.
2019) Chapters 5 and 6.

Dunning, J. and S. Lundan Multinational enterprises and the global economy.
(Cheltenham: Edward Elgar Publishing, 2008) second edition.
Ohlin, B. Interregional and international trade. (Cambridge, MA: Harvard
Porter, M. ‘The competitive advantage of nations’, Harvard Business Review
68(2) 1990, pp.73–98.
Rugman, A.M. and J.R. D’Cruz ‘The “double diamond” model of international
competitiveness: The Canadian experience’, MIR: Management International
Review 33 1993, pp.17–39.
Vernon, R. ‘International investments and international trade in product life
cycle’, Quarterly Journal of Economics May 1966, pp.190–207.
Reich, R.B. ‘Who is Us? Across the United States, you can hear calls for us to
revitalise our national competitiveness’, Harvard Business Review 68(1)
1990, pp.53–64.
Willcocks, L. Global business: management. (Stratford-upon-Avon: SB
Publishing, 2021b).
World Trade Organisation World trade statistical review. (Geneva: WTO, 2019).

Introduction to classical and modern theories of trade; national
institutions and relationship to international trading; debates on free
trade and government interventions; MNES and FDI; FDI and the role of
government.
58
4.2 Classic trade theories

You need to be familiar with three classic theories and be able to critique
them. Peng and Meyer (2019) and Willcocks (2021a) point to three main
theories – you need to read and understand them in detail.
• Mercantilism: The main idea behind 16th-century mercantilist
philosophy is to encourage exports and discourage imports. To achieve
this, you limit imports through tariffs and quotas and maximise
exports through government subsidies. The more modern version
of mercantilism is protectionism, where a country actively protects
its domestic businesses from imports while promoting exports, for
example China in 2008–13 kept the exchange rate of the remnimbi
low by doing this. From 2016 the USA also sought to become more
protectionist in both posture and practice. Thus the two most powerful
economies in the world had by 2021 much more domestic focused,
less liberal trade policies.
• Adam Smith and absolute advantage: Smith argued, in his The
wealth of nations (1776), that trade without government intervention
could be beneficial to countries if each country produced and exported
those products in which it was most efficient or, in his words, where
countries had an absolute advantage. The theory here is that it is
better for a country to become most efficient at producing what it is
best at producing, and trade with other nations in exchange for goods
that those other nations are best at producing.
• Ricardo and comparative advantage: In 1817, Ricardo argued
that it still made sense for a country to specialise in the production
of those goods that it produces most efficiently and to buy goods that
it produces relatively less efficiently from other countries, even if
this meant buying goods from other countries that it had an absolute
advantage in (i.e. that it could produce more efficiently itself). The key
issue here is opportunity cost. A key idea in all of this is productivity.
Smith looked at absolute productivity differences between countries,
while Ricardo looked at relative productivity differences. Eli Heckscher
and Bertil Ohlin (Ohlin, 1933) extended Ricardo’s work by suggesting
that a country’s comparative advantage is a result of differences in
national factor endowments. The Heckscher–Ohlin theory argues
that countries will export goods that make intensive use of factors of
production like land, labour and capital that are locally abundant. At
the same time, countries will import goods that make intensive use of
factors that are locally scarce.
59
Activity
Read Willcocks (2021a) Chapter 1, section 1.7, pp.27–28, section 1.7 on this same
subject.
Make notes on the strengths and weaknesses of each of the three classic theories.
Activity
1. Make sure you understand the idea of comparative advantage. Willcocks (2021a)
p.28 provides the example of a student studying a degree. This example is worth
understanding.
2. Consider your own country.
a. What factor endowments does it have?
b. Who are its three main trading partners, and what is traded between your country
and those three nations in terms of imports and exports?
c. Can you explain why this trade takes place? Look at this issue from your country’s
perspective.
4.3 Modern trade theories

Classic trade theories paint a static picture of the world, but, as we know,
things move all too quickly these days! Willcocks (2021a) Chapter 1,
pp.29–31, section 1.7 discusses three modern theories and their relevance:
• Product life cycle: Why are some products that used to be made
in home countries now imported from other countries, especially less
developed ones? For example, the UK used to be a major producer
of textile products, but is no longer. Vernon (1966) suggested that as
products mature both the sales location and the optimal production
location would change. As these change, so too will the flow and
direction of trade. Products move through different stages of their
life cycle, and as they do, where they are produced and sold changes
too. For Vernon, the product life cycle consisted of three stages: new,
maturing and standardised. Moreover, there were three types of
nations: lead innovation nation (in the 1960s he saw this as the USA),
other developed nations, and developing nations. As demand for a
new US product grew in other advanced countries, foreign producers
would begin to produce the product, and then so would developing
nations, who could produce it more cheaply. A criticism is that while
this theory might have been valid in the 1960s, it has largely been
overtaken by globalisation and integration of the world economy.
• Strategic trade theory: In an effort to resolve some of the
shortcomings of earlier theories, researchers in the 1970s began to
search for other explanations of trade. Strategic trade theory argued
that because of the unit cost reductions that are associated with a
large scale of output (economies of scale), some industries can support
only a very few companies. Moreover, in some industries, to achieve
economies of scale, companies have to have a major share of the
world’s market. The costs of developing new aircraft, for example, are
so high that companies have to hold a significant share of the world
market in order to gain economies of scale. There are reasons why
there are only two makers of large commercial aircraft in the world.
First mover advantage is an important concept here. Companies
that achieve first mover advantages will develop economies of scale
and create barriers to entry for other companies. This theory suggests
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that government should support certain strategic industries so that

they can gain first mover, hard-to-replicate advantages. Have a look
at South Korea and China, for example, and ask yourself if their
governments are exemplars of this theory.
• National competitive advantage: Why do some countries
have certain industries that seem to be superior to those of other
countries? In 1990, Michael Porter identified four factors that, he
argued, promoted or impeded the creation of competitive advantage
in an industry. The first factor Porter identified, called factor
endowments, refers to a country’s factors of production that can
lead to a competitive advantage – things like a skilled labour force
or infrastructure. Demand conditions, the second factor, refer
to the nature of home demand for the industry’s products/services.
For example, sophisticated and demanding Japanese customers for
iPods, console games and mobile phones have pressured Japanese
consumer electronics companies to be highly competitive. The
third factor, related and supporting industries, refers to
the presence or absence of supplier and related industries that are
internationally competitive and contribute to other industries. The
fourth factor, company strategy, structure and rivalry, refers
to the conditions in a nation that govern how companies are created,
organised and managed, and the nature of domestic rivalry. When
domestic rivalry is strong, there is greater pressure to innovate,
improve quality, reduce costs and invest in advanced product features.
Activity
Refer to Willcocks (2021a) Chapter 1, section 1.7, pp.130–31:
1. Make a list of the four factors in the ‘Porter diamond’.
2. Was Porter successful at increasing our understanding of trade patterns? Porter
argued that a nation’s success in an industry is a function of the combined impact
of the four points on his diamond. He also suggested that government could play a
role in supporting this success. There is some debate about the amount of evidence
supporting his theory.
Activity
These newer trade theories are summarised in Willcocks (2021a) Chapter 1, section 1.7,
pp.29–31.
1. Describe these three newer trade theories – product life cycle, strategic trade and
national competitive advantage of industries.
2. Assess their relevance to international businesses. Look at their strengths, weaknesses
and usefulness.
3. Using your own country as the example, think about the following questions:
a. Establish your country’s strategic industries and the extent to which they are
supported by government.
b. Apply the ‘Porter diamond’ model to your own country. Does it work? What does
it leave out, or get wrong?
4.4 National institutions and international trade

Free trade refers to a situation where a government does not restrict what
its citizens can buy from another country or what they can sell to another
country. Many nations today claim to support free trade, but, in reality,
most countries are only nominally committed to free trade. The global
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recession of 2008–09 led to an increase in protectionist policies in many

countries. Countries intervene in markets in several ways.
• Tariffs are levied on imports that effectively raise the cost of imported
products relative to domestic products. Tariffs are beneficial to
governments because they increase revenues. They are also beneficial
to domestic producers because they provide protection against foreign
competitors by increasing the cost of imported foreign goods, though,
of course, this means higher prices for consumers. There is general
agreement that tariffs tend to favour producers and not consumers.
They are often introduced as a result of special interest groups’
abilities to influence political decisions. An interesting example has
been the USA and China using tariffs against each other as part of a
trade dispute during 2016–21, which is ongoing.
• Subsidies are government payments to domestic producers.
Governments can give subsidies in various ways, including cash grants,
low interest loans and tax breaks. They can help domestic producers
compete against low-cost foreign imports and they can help them gain
export markets. Some 21 countries were spending more than $300
billion a year on subsidies by 2010, a figure that was much higher
by 2021, and spread across many more nations, given the rise of
protectionist policies.
• An import quota is a direct restriction on the quantity of some good
that may be imported into a country. In the USA, for example, there is
a quota on cheese imports.
• Voluntary export restraints are quotas on trade imposed by the
exporting country, usually at the request of the importing country’s
government. Import quotas and voluntary export restraints benefit
domestic producers by limiting import competition, but they do raise
price of imported goods.
• Export tariffs and prohibitions: Countries sometimes put a tariff
on an exportable good, in order to ensure there is a sufficient supply
domestically. For example, historically, China has placed such tariffs on
some steel products and grain, because it needed these to support its
building boom and feed its people.
• Local content requirements are another form of trade barrier
where the government demands that some specific fraction of a good
be produced domestically.
• Administrative trade policies are bureaucratic rules designed
to make it difficult for imports to enter a country. The Japanese are
known for this type of trade barrier, which can be very frustrating for
companies trying to break into the market. Since 2008 Indonesia and
Malaysia have limited imports to certain ports, and India has banned
Chinese toys, citing safety concerns.
• Anti-dumping policies are imposed when goods are sold in a
foreign market below their cost of production or when they are sold
in a foreign market at below their fair market value, which is known
as dumping. Dumping is a method by which companies unload excess
production in foreign markets. To stop this, countries implement
anti-dumping policies designed to punish foreign companies that are
dumping and protect domestic producers from this type of unfair
competition.
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Activity
Read Willcocks (2021a) Chapter 1, section 1.8, pp.32–34. Also the case study ‘Was China
dumping excess steel production?’ (VLE Chapter 4).
1. Was China dumping excess steel? What is the evidence?
2. Who benefitted and who was harmed by China’s trade practices?
3. Were the EU and USA correct to impose anti-dumping duties? Give arguments for
and against.
4.5 Government intervention and free trade: the debate

Is free trade always best? Many argue that economically and over the
long term it is. For example, it is argued that free trade can increase a
country’s stock of resources and can also increase the efficiency of resource
utilisation. If companies can sell to a bigger market, they can gain from the
economies associated with large-scale production. Studies show that there
is a link between more trade and economic growth. Countries that adopt a
more open stance towards international trade tend to have higher growth
rates than those that close their economies to trade. There may be times
when restrictions on trade are counterproductive, for example, when they
involve retaliation and trade wars, or efforts to further domestic policies.
Special interests are not necessarily national interests.
But others argue that a country needs to protect its own domestic
industries and also its new, emerging industries. One of the problems with
the latter argument, though, is determining when an industry has grown
up enough to stop government support. Others argue that, regardless of
the economic arguments, protectionism can advance a country’s political,
social and environmental agenda. The following are the main arguments
advanced for government intervention.
• Protecting home country job numbers and employment prospects.
• National security concerns are often evoked to protect defence-related
industries in France, the USA and the UK, for example.
• Governments claim that trade barriers are sometimes necessary to
protect consumers. For example, the European Union has limited
imports of hormone-treated beef for many years, and this has been the
source of a huge conflict between the European Union and the USA.
• Sometimes governments intervene in markets to retaliate against
moves made by other governments. China has been under fire in recent
years for failing to take proper steps against product and intellectual
property piracy, and many nations have threatened to implement trade
barriers against Chinese products if the practice isn’t stopped. China
initially responded to the threats with threats of increasing its own
barriers to trade, although it subsequently backed off.
• Governments also argue that intervention in the market is necessary
to support their foreign policy objectives. A country might, for
example, extend favourable trade terms to a country with which it
is trying to build a relationship or implement policies designed to
punish countries. For example, in 2021 the USA still maintained trade
embargoes against Cuba, Iran, Russia, and North Korea.
• It is argued that the best way to protect human rights in a country is
to encourage it to trade. This will raise income levels, which generally
means that human rights practices improve.
63
• Environmental and social responsibility arguments are sometimes

used to start trade intervention against certain countries, for example,
the USA banning shrimp imports from India, Malaysia, Thailand and
Pakistan, arguing that their fishing techniques also trapped sea turtles,
a protected species in US waters.
• Protecting infant industries and supporting strategic trade policies are
common economic arguments for state intervention. They have been
used extensively by developing nations in recent years, not least to
justify protectionism. This, of course, may be counter-productive if it
does not result in an infant industry becoming efficient and able to
compete against international competitors.
Activity
Read Willcocks (2021a) Chapter 1, section 1.9, pp.34–36. Make notes on new points and
cases.
Answer the following questions:
1. Since 2016, has your country become more protectionist? In what ways? Why?
2. How did the 2020–21 crises affect your government’s trade policies? What have
been the differences since the end of 2021?
3. Assess the advantages and disadvantages of your government intervening in
international trade using:
a. subsidies
b. tariff barriers
c. import quotas
d. anti-dumping policies.
4.6 Foreign direct investment (FDI)

How do MNEs engage in international trade? Foreign direct investment, or
FDI, occurs when a company invests directly in facilities to produce and/
or market its products or services in a foreign country. Once a company
undertakes FDI it becomes, by definition, a multinational enterprise or
MNE.
There are two main forms of FDI. A greenfield investment involves
establishing a wholly owned new operation in a foreign country. The
second type of FDI is an acquisition or merger with an existing
company in the foreign country. Most companies make their investments
either through mergers with existing companies, or acquisitions.
Companies prefer this route because mergers and acquisitions tend to
be quicker to execute than greenfield investments, it is usually easier to
acquire assets than build them from the ground up, and companies believe
they can increase the efficiency of acquired assets by transferring capital,
technology or management skills. See Chapter 9, below, for a detailed
treatment of this topic.
The flow of FDI refers to the amount of FDI undertaken over a given
period of time. Outflows of FDI are the flows of FDI out of a country, while
inflows of FDI are the flows of FDI into a country. The stock of FDI refers
to the total accumulated value of foreign-owned assets at a given time.
There has been a marked increase in both the flow and stock of FDI in
the world economy. In 1975, the outflow of FDI was about $25 billion,
and by 2008 it peaked at $2.2 trillion. Together, six countries accounted
for almost 60 per cent of all FDI outflows from 1998 to 2006 – the USA,
64
the UK, the Netherlands, France, Germany and Japan. By 2016 outflows
had declined to $1.6 trillion but this still represented a massive financial
presence abroad, even though this showed no signs of rising between
2017–20, and dipped notably during the 2020–21 crisis.
Activity
Read Willcocks (2021a) Chapter 6, sections 6.3 and 6.4, pp.165–71, then answer the
following questions:
1. Why do you think FDI outflows – that is, companies investing in foreign countries
– remain so large, despite recent trends towards de-globalisation? What are the
advantages of investing abroad for multinationals? See Willcocks (2021a) section 6.3.
2. Why do you think there has been a slowdown in FDI in recent years? Willcocks (2021a)
Chapter 1, section 1.10, pp.37–38, will help you here.
4.6.1 Why do companies become MNEs by engaging in FDI?

The answer to this question will help you understand how companies
choose between the different foreign modes of entry – exporting, licensing,
turnkey projects, franchising, joint ventures, fully owned subsidiaries
– discussed in detail in Chapter 9. You have some answers already, but
let’s look further at a useful framework by Dunning and Lundan (2008).
They argue that companies will undertake FDI if there are ownership
advantages, locational advantages or internalisation advantages. This
is known as Dunning’s OLI framework. A useful reference point now
is Willcocks (2021a) Chapter 6, pp.167–68, figures 6.1 and 6.2, which
illustrate the advantages of ownership, location and internalisation.
Ownership advantages: These are resources of the company
transferable across borders that enable the company to obtain competitive
advantage abroad. You can read more about such capabilities in Willcocks
(2021a) Chapter 6, pp.166–69, section 6.3.
Locational advantages: Location-specific advantages which are
available to the company in foreign locality conditions that it would not
enjoy at home (e.g. raw materials, human resources). These are dealt with
in more detail in Chapters 9 and 12, but here we will mention four types
of locational advantages:
• Markets: There are often advantages in being close to existing or
potential markets – this is one reason why so many companies have
sought to set up in the rapidly developing, hugely populated country
of China.
• Resource endowments: The locality may have specific resource
advantages, for example, in land, labour, weather and infrastructure
that the MNE can tap into. For example, in recent years Chinese MNEs
have been seeking natural resources around the world in oil, gas,
minerals and also agriculture and land.
• Agglomeration refers to the location advantages arising from the
clustering of economic activity in certain locations. Think of Silicon
Valley in the USA and the cluster of suppliers, manufacturers, research
companies and market leaders there or of the City in London as a
global financial centre.
• Institutions: A country may well offer tax advantages, business
opportunities, legal recourse, subsidies, access and the like in order
to attract FDI from multinationals. For information about assessing
location attractiveness see also Chapter 12.
65
• Internalisation advantages: These arise if the MNE can organise

activities better and more cheaply internally, within the MNE, than by
using a third party that incurs prohibitive transaction costs – see also
Chapter 9 (transaction costs) and Chapter 12 (sourcing) where this
issue is discussed in depth. You are recommended to read Willcocks
(2021a) pp.166–69, section 6.3, and note how the advantages and
disadvantages of these options compare, as a preliminary to studying
later chapters in this guide.
Activity
The OLI framework (ownership, location and internalisation) and the advantages accruing
are shown and discussed in Willcocks (2021a) pp.167–69. Read this now.
1. Make notes on the ownership advantages and examples of these.
2. Make notes on the location advantages and examples of these.
3. Make notes on the internalisation advantages and examples of these.
4.7 Governments and FDI

How does a government’s attitude affect FDI? You can think of ideology
towards FDI as being on a continuum where at one end is the radical view
that is hostile to all FDI, and at the other end is the non-interventionist
principle of free market economies. In between these two extremes is
pragmatic nationalism. In recent years more countries have adopted more
friendly FDI policies, however, between 2020–21 in particular, countries
not only retained, but in many cases strengthened institutions that restrict
and regulate FDI, such as the following:
• Outright banning, such as nationalisation of the oil industry in
Venezuela early in the 21st century; US government’s 2019 restrictions
on Chinese-based hi-tech company, Huawei.
• Case-by-case approval of FDI with registration and approval
requiring a range of conditions and negotiations to be gone through.
• Ownership requirements which disallow full foreign ownership
but allow joint ventures perhaps, or minority foreign ownership
(e.g. for security reasons the USA does not allow majority foreign
ownership of domestic air transportation).
• Local business regulations will have to be complied with and
may be restrictive if applied inflexibly.
• Local content requirements that a certain part of the value of
the goods made or sold in the country should originate from that
country (e.g. European countries introduced legislation demanding
that Japanese auto-makers use components that had partly originated
in the host country rather than being made wholly in Japan and
assembled in the host country).
Activity
Clearly some governments are very suspicious of FDI and need to weigh up the costs and
benefits of FDI to their country. Look at Willcocks (2021a) Chapter 6, p.170, figure 6.3,
and make notes on the following:
1. What are the benefits of FDI to your country as the host country?
2. What are the drawbacks of FDI to your country as the host country?
3. What does your country do to regulate FDI in the banking sector, the telecommunic
ations industry and the car manufacturing sector? Why does it have these policies?
66
4.8 Key concepts

• free trade
• protectionism
• theory of absolute advantage
• theory of comparative advantage
• first-mover advantage
• theory of national competitive advantage of industries
• strategic trade theory
• resource endowments
• foreign direct investment (FDI)
• Dunning’s OLI framework
• government, institutions and FDI regulation.

• describe and assess the relevance of classical and modern theories of
trade
• explain the role of governments in regulating and restraining
international trade
• debate the evidence on whether free trade or protectionism provide
net advantages to host countries, home countries, consumers, domestic
producers and MNEs making foreign direct investments (FDIs)
• discuss the major theories and conditions under which an MNE
strategy of FDI makes business sense
• assess the costs and benefits of FDI from a host-country perspective
and understand the actions host countries can and may take with
regard to FDI
• assess and make recommendations on the challenges MNEs face when
undertaking international trade and FDI.

1. In considering the various theories of international trade, ask yourself
what a manager can learn from such theories of trade, and the types
of government intervention. What practices should the practising
international manager adopt when trying to operate in a foreign
country?
2. Peng and Meyer (2019) suggest the following as recommendations for
management action on FDI:
• carefully assess whether FDI is justified in light of other foreign
entry modes such as outsourcing and licensing
• pay careful attention to the location advantages in combination
with the company’s strategic goals
• be aware of the institutional constraints and enablers governing
FDI and enhance legitimacy in host countries.
67
Are there additional recommendations you would make to an MNE

looking to make FDIs into a country?
3. Have a look at the online video: ‘How to enrich a country: Free trade
or protectionism’.
See: www.youtube.com/watch?v=5ITyd1Pzek0
The video argues that Free Trade has won the argument.
1. Do you agree or disagree?
2. What is the argument for free trade?

‘International trade needs to be both understood and regulated.’ In light of
this statement:
1. Describe and assess strategic trade theory and Porter’s diamond of
national competitive advantage.
2. Outline and assess whether the Dunning OLI framework explains
satisfactorily the occurrence of foreign direct investment.
3. What can a host government do to support, or slow, FDI and foreign
trade?
68
Chapter 5: Multilateral organisations and regional integration
Chapter 5: Multilateral organisations and

regional integration
5.1 Introduction
Are you familiar with GATT, the WTO, the World Bank and the IMF? These
are multilateral institutions set up by several collaborating countries to
deal with common difficulties. Are you also familiar with NAFTA – the
North American Free Trade Agreement – and that it has recently been
superseded by USMCA? How about the European Union (EU)? Do
you know what these agreements are and why they are important to
international companies? Both NAFTA/USMCA and the EU are forms
of regional economic integration – agreements between countries in a
geographic region to reduce tariff and non-tariff barriers to the free flow of
goods, services and factors of production between each other.
Despite problems, and the renegotiation, NAFTA had significantly
boosted trade and investment among its members. In South America,
the prominent regional deals are Andean Community and Mercosur.
Regional integration in the Asia Pacific is also taking place through ASEAN
(Association of South East Asian Nations), SAFTA (South Asian Free Trade
Association) and the GCC (Gulf Cooperation Council). Such agreements,
and there are many more, are designed to promote free trade and,
depending on the level of integration, allow the factors of production to
move freely between countries.
In this chapter we look at the institutional developments supporting global
integration and governance. We start with types of economic integration.

• provide descriptions of the institutions of the global trade and
monetary systems, including GATT, WTO, World Bank and IMF
• identify the challenges these institutions face in the contemporary
global environment
• explain the nature and rationale for regional and bilateral economic
integration, with reference especially to Europe, the Americas, and
Asia Pacific, including descriptions and assessment of the major
economic institutions in these regions
• establish the parameters of the debate on further multilateral policy
forums and institutions and the implications for international business
management.

• explain the multilateral institutions of the global trade system and
their current challenges
• describe the multilateral institutions of the global monetary system
and discuss their current challenges
• describe the advantages and disadvantages of regional and bilateral
economic integration in Europe, the Americas and the Asia Pacific
69
• discuss the EU’s political institutions and how and why the
institutional framework created by the EU is pivotal for business
• participate in debates about further multilateral policy forums and
institutions contributing to economic integration
• outline the implications for management action.

Willcocks, L. Global business: strategy in context. (Stratford-upon-Avon: SB
Publishing, 2021a) Chapter 2, sections 2.7 to 2.12, pp.53–72.

Collinson, S., R. Narula and A. Rugman International business. (Harlow:
Pearson Education, 2020) Chapters 16–20. This book provides the most
thorough coverage of world economic blocs and intra-regional activity.
2019) Chapter 8 is strong on European integration.

Regional economic integration; multilateral trade and monetary systems;
Europe and regional integration; regional integration in the Americas and
Asia Pacific.
5.2 Regional economic integration

The idea behind regional economic integration is that without trade
barriers, member countries will be better off. However, there is some
concern that, as more countries become involved in regional agreements,
the trading blocs will begin to compete against each other.
As you can see in figure 5.1, there are five levels of economic integration:
Political Integration of political

Union and economic affairs
Economic Common economic
Union policies
Common Free movement of
Market goods, people and
capital
Customs Common external
Union tariff
Free Trade
Removal of intragroup
Area
tariffs
Figure 5.1 Types of regional economic integration

• A free trade area removes all barriers to the trade of goods and
services among member countries, but members determine their own
policies towards non-members.
• A customs union eliminates trade barriers between members and
adopts a common policy towards non-members.
• A common market has no barriers to trade between members, a
common policy towards non-members, and the free movement of
the factors of production. This is a significant step up from a customs
union, and requires members to cooperate on fiscal, monetary and
employment policies. The EU was a common market for many years
before moving to the next level of integration.
70
• The next level of economic integration is the economic union which

involves the free flow of the factors of production between members,
the adoption of a common external trade policy, a common currency,
harmonisation of tax rates, and a common monetary and fiscal policy.
• In a political union, independent states are combined into a single
union where the economic, social and foreign policy of members is
coordinated. An example is the USA. The EU has potentially headed
towards this level, but some members have insisted on limits to these
ambitions.
Countries integrate for both economic and political reasons. We will see
that, for various reasons, trade barriers still exist, despite the efforts of
the World Trade Organisation (WTO). Regional economic integration
offers countries a way to achieve the gains from free trade, at least on
a limited basis, more quickly than would be possible under the WTO
process. The political case for integration has two main points. First, by
linking countries together, making them more dependent on each other,
and forming a structure where they regularly have to interact, the chance
for violent conflict and war decreases. Second, economic integration gives
the bloc of countries greater power and influence and makes them much
stronger politically when dealing with other countries than if they were to
act independently.
Two key issues limit integration. First, while a nation as a whole benefits
from integration, some groups may actually lose. Critics of NAFTA, for
example, were concerned about the potential for job losses in the USA
if companies shifted production to take advantage of Mexico’s low-
cost labour. From 2016, the US administration was more aggressive on
these and other trade issues relative to Canada and Mexico, and indeed
renegotiated the agreement in 2018 (see Willcocks, 2021a, Chapter 2,
pp.58–60, section 2.9). Second, integration requires that countries give
up some control over monetary policy, fiscal policy and trade policy. For
example, most of the countries belonging to the EU have given up their
currencies and adopted the euro instead.
Some economists point out that integration only makes sense when the
amount of trade it creates is greater than the amount that it is diverting.
Trade creation occurs when low-cost producers within a free trade area
replace high-cost domestic producers, while trade diversion occurs when
higher-cost suppliers within a free trade area replace lower-cost external
suppliers.
We will look in more detail at some major regional and trading blocs
below, but first we focus on the role of the main multilateral organisations
that operate globally to assist trade and monetary policy.
Activity
Read Willcocks (2021a), section 2.7, pp.53–55.
1. Make further notes on the differences between a free trade area, customs union,
common market, economic union and political union.
2. Identify whether your country belongs to an economic/political regional bloc. What
type of grouping is it?
3. Why does your country belong to this grouping? Do you see drawbacks?
4. Would your country be better off in one of the other types of group or even going it
alone?
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5.3 The multilateral trade system

In the late 1940s the world community developed several institutions to
facilitate international trade and political integration. These included the
United Nations, the International Monetary Fund and the World Bank,
together with the General Agreement on Tariffs and Trade (GATT), and its
successor, the World Trade Organization (WTO).
GATT was created in 1948 to reduce the levels of tariffs among
participating countries. In 1995 participating countries extended GATT
by creating the WTO. The WTO is the main multilateral organisation
involved in making rules for international trade and resolving trade-
related conflicts between nations. It has both political and economic
functions. Peng and Meyer (2019) suggest that in recent years it has
focused on:
• Handling disputes constructively. One good example is the dispute
between Airbus and Boeing involving the USA and Europe.
• Making life easier for all participants. This involves setting out a
common set of rules for international trading partners. For example,
the WTO’s principle of non-discrimination means that a country
cannot discriminate against some trading partners and benefit others.
• If you lower tariffs for one WTO member country you must do so for
all WTO members (regional trade groups are an exception here).
• Raising incomes, generating jobs and stimulating economic growth.
The essential role here is cutting trade barriers. There is a debate,
however, about the environmental impacts of more trade, and how it
is conducted and who benefits.
The WTO has six main areas, and does a lot more than GATT used to cover:
1. The umbrella agreement establishing the WTO.
2. The old GATT agreement covering international trade of goods.
3. A new agreement covering the trade in services – General Agreement
on Trade in Services.
4. An agreement covering intellectual property rights – Trade-Related
Aspects of Intellectual Property Rights.
5. Trade dispute settlement mechanisms.
6. Trade policy review for looking at an individual country’s trade
policies.
In recent years the WTO has undertaken two major initiatives:
• Trade dispute settlement: The WTO has a procedure to resolve
conflicts between governments over trade-related matters. The WTO
first facilitates negotiations between the parties, but if consultation
fails, it establishes a group of experts to hear the evidence, write a
report and adjudicate. A limitation is that the WTO does not have its
own enforcement capability.
• The Doha development agenda, also called the Doha round,
initiated in Qatar in 2001. This was the first time the participating
countries in the WTO established the aim of promoting economic
development for developing countries. The four aims were to:
a. reduce agricultural subsidies in developed countries
b. cut tariffs, especially in industries of interest to developing
countries, (e.g. textiles)
c. free up trade in services
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d. strengthen intellectual property protection.

You might be able to guess which group of countries supported which
aim. However, by 2003, numerous countries had failed to deliver on
their promises of 2001. By the 2006 round in Geneva there was still little
movement on global agreements, although, outside the WTO altogether,
regional and bilateral (between two countries) agreements were
accelerating, and have been since then. Advocates of bilateral Free Trade
Agreements see them as a convenient substitute for global free trade.
It is worth noting common criticisms of the WTO. Willcocks (2021a)
section 2.11, pp.68 and 69, lists nine criticisms. Note also the six responses
to these criticisms (p.69).
Through 2019–21, the WTO faced challenges on multiple fronts. The
organisation’s Dispute Settlement Body (DSB) faced several systemic tests.
Members questioned the governance processes of the WTO, with 2019 a
particularly difficult year. There were multiple unsettled disputes between
countries. As just one example, WTO ruling in China’s favour on some
issues, and against the USA, led some to believe the USA would threaten
to leave the WTO. Finally, despite the proposals by some members to
reform the WTO in 2018 (e.g. with respect to agricultural and industrial
subsidies, state-owned enterprises, etc.), members appeared to be far away
from finding common ground on which to start a serious discussion – let
alone an eventual negotiation – on elements of WTO reform. The debates
on reform continued during 2021.
5.3.1 Other multilateral organisations

While the WTO and IMF (see below) are the most important multilateral
organisations, there are others, not least the United Nations, whose
mission is to secure world peace. We can usefully organise these in terms
of three agendas driving global collaboration and negotiation. These were
all extended as a result of the 2020–21 pandemic and economic crises:
• The development agenda: As two examples, the World Bank
supports major projects that otherwise would not get off the ground,
particularly in developing economies. The European Bank for
Reconstruction and Development serves transition economies, mainly
in Central and Eastern Europe (see Willcocks, 2021a, p.70).
• The climate change agenda: A major global concern is the
environmental impact of human activity. A major focus has been on
the detrimental global warming effects of greenhouse gas emissions.
The 1997 Kyoto protocol had developed countries pledging to cut
GHG emission levels by six per cent from 1990 to 2012. Unfortunately,
not much actually happened. The 2009 Copenhagen meeting of
countries agreed that more action had to be taken, but resulted in the
weak, non-binding Copenhagen Accord. This remains a difficult issue
on which to make global progress. In December 2015, in the Paris
Agreement, many countries made substantive commitments towards
creating a sustainable low carbon future. These included keeping the
rise in global temperature to below 2C above pre-industrial levels,
and investing $100 billion to support this aim. By 2018, 195 countries
had signed the agreement, but the USA announced its intention to
withdraw from it. By 2021, under a different president the USA was
prepared to sign the agreement again. Read more about this issue in
Willcocks (2021a) pp.70–71.
• The financial sector regulation agenda: Bank crashes can harm not just
the home country but can have adverse consequences internationally.
73
The Basel Committee for Bank Supervision disseminates minimum

regulatory standards, revised in 2004 and known as Basel II. This
established minimum requirements for liquidity and procedures
for risk metrics. In the aftermath of the 2008 financial crisis these
have been criticised as being inadequate. Some argue that national
regulation of international banks is not enough. However, there is, as
yet, no agreement as to how global bank supervision could be carried
out. Read more about this issue in Willcocks (2021a) p.71.
Activity
Watch the Video ‘Whats the difference between the IMF and the world bank?’
• www.youtube.com/watch?v=lN3qrFA4jXc
1. Make notes on what the IMF does and the major criticisms of the IMF.
2. Note what the World Bank does that is different.
5.4 The multilateral monetary system

The IMF is a multilateral organisation promoting international monetary
cooperation and providing temporary financial assistance to countries with
balance of payments problems. It has three primary activities on behalf of
its 188 member countries:
• monitoring the global economy
• providing technical assistance to developing countries
• lending money to countries in financial difficulties.
The IMF’s lending activity focuses on helping countries with severe
balance of payment problems. The IMF acts as a lender of last resort,
with loan repayments typically expected within one to five years IMF
loans come with strings attached. IMF conditionality typically imposes
conditions that require ‘belt-tightening’ by pushing governments to embark
on reforms that they probably would not have undertaken otherwise.
To attack inflation and government deficits, the IMF typically looks for
cuts in government expenditure, among other things, in agreement with
that government. In principle, the conditions imposed are also designed
to ensure the country can repay its IMF loans. In the 1990s and early
2000s the IMF often went into action in emerging economies including
Mexico, Russia, Indonesia, South Korea, Turkey and Brazil. The financial
crisis of 2008 and subsequent events, for example the financial crisis in
Greece, Spain, Ireland and Portugal from 2010–12, and the economic
crisis of 2020–21 has led to renewed debates around the advantages and
disadvantages of IMF conditionality. These are well worth understanding,
together with the achievements of the IMF to date.
Activity
Read Willcocks (2021a) Chapter 2, sections 2.11 and 2.12, pp.63–73, then answer the
following questions.
1. Assess the role of the IMF in the 1997 Asian financial crisis. What were the IMF’s
policy recommendations and their consequences? Were there better alternatives?
2. What are the main criticisms that can be made of the IMF?
3. What have been the IMF’s main achievements?
4. What are the main criticisms often directed against the World Trade Organisation?
How would you respond to these criticisms?
74
5.5 Regional integration examples: Europe

Faced with the inevitable limitations of global institutions, many countries
have chosen to organise themselves into regional blocs to pursue joint
economic and sometimes political objectives. It is useful for you to have a
working knowledge of what the major economic blocs are and what they
do, but you are not expected to know in detail the histories, institutions,
workings and challenges of all the world’s trading blocs. What you should
focus on is a general knowledge of the names and coverage of the main
blocs. Note also the reasons why they are set up and examples of the
challenges they have to deal with. The best option then is to focus only
on one you know really well and can cite details about. If your country is
member of a regional bloc, or close to one, pick that one to focus on.
5.5.1 Regional integration in Europe

The European Union (EU) is the world’s most integrated group of
countries with 27 members (the United Kingdom formally left in January
2020 and reached a new trade agreement with the EU in December 2020).
The EU single market is based on freedom of movement of goods, capital,
people and services. This is implemented through harmonisation of
regulation in some sectors, and mutual recognition of national regulation
in others. The euro has become a common currency in 16 countries that
have transferred their monetary policy to the European Central Bank.
EU competition policy aims to ensure that a competitive environment is
maintained in cases of mergers and acquisitions, cartels, collusion and
state aid. Formal political structures of the EU resemble a government,
yet national governments wield power through the European Council
(for more information about the Council, see below). The decision-
making processes in the EU are based on democratic principles, yet they
often are far removed from the individual citizens in member countries.
Enlargement creates not only benefits but also costs for existing EU
members, who may be less enthusiastic to admit further members. The UK
had an ambiguous relationship within the EU, grounded in its history and
its political culture. For example, like several other European countries, it
refused to have the euro as its currency.
Today, the EU consists of many countries. By 2004 its 14 countries
were joined by 10 more, and three more joined in 2007. The European
Economic Community was founded in 1957 by the Treaty of Rome. This
became the European Union in 1993 after the Maastricht Treaty was
ratified. This extended political cooperation, and provided for committed
members to adopt a single currency by 1999. This created the single
largest currency zone in the world after the US dollar. Euro notes and
coins started circulating in 2002. However, three members, the UK,
Denmark and Sweden, opted out of the euro zone.
Five institutions govern the EU:
• The European Council resolves major policy issues and sets policy
directions.
• The European Commission is responsible for implementing EU law and
monitoring member states to be sure they are in compliance.
• The Council of the European Union is the ultimate controlling
authority.
• The European Parliament debates legislation proposed by the
commission and forwarded to it by the council.
75
• The Court of Justice acts as the supreme appeals court for EU law.
For our purposes the most relevant aspect of the EU is the institutional
framework it provides for business. Four aspects of EU policy shape greatly
how international business can be done:
• The ‘single market’: The EU has created an institutional framework
that establishes many of the rules by which businesses compete. It
has removed most internal trade barriers between member countries.
Internal customs and passport controls have been abolished. A prime
focus has been on establishing the four freedoms – free movement
of people, goods, services and capital – among member countries. A
common external tariff is applied to all imported goods across the
customs union. The EU has attempted to harmonise – that is, create
common rules, standards and regulations – on the free movement of
goods and services, and has made considerable headway, but this has
been a difficult and complex political process, with national or local
regulations sometimes being allowed to stand if they are deemed
more effective than EU stipulation. Moreover, and a bigger point for
both goods and services, harmonisation represents liberalisation and
threatens protectionism in local markets.
• The free movement of people: People from EU member states are
free to work in other EU countries but there can be barriers. The EU
has moved to guarantee mutual recognition of professional experience,
qualifications and training across EU countries. It has also encouraged
the movement of EU students and the advancement of higher
education across EU countries.
• European competition policy: The European Commission
regulates for competition issues such as over-dominant players or
illegal collusion, but only in cases involving multiple countries. National
authorities are the regulators where only a national market is affected.
The EU commission also looks to regulate mergers and acquisitions,
including foreign mergers, if they seem to represent a substantial
impediment to effective competition within the EU. Note that the EU
also regulates governments, for example, when ‘state aid’ or subsidies
are being offered to subsidise companies or protect local jobs.
• The euro as a common currency: Having one currency, rather
than several, is easier for companies and individuals. Instead of having
to convert currencies, the same currency is used across the bloc, so
companies will save the cost and risks of converting currencies. Having
a single currency also makes it easier to compare prices across Europe.
Another benefit of the euro is that it should boost the development of
a highly liquid pan-European capital market. Finally, the capital market
will provide a greater range of investment options to individuals and
institutions. Are there disadvantages? Individual countries lose control
over monetary policy. The EU is not an optimal currency area, nor
an area where similarities in the underlying structure of economic
activities make it feasible to adopt a single currency and use a single
exchange rate as an instrument of macro-economic policy. In other
words, because of differences in member economies – take Portugal
and Finland, for example – they might react differently to external
shocks. So, a change in the euro exchange rate that helps Finland
might actually hurt Portugal.
76
The EU is a significant, emerging superpower – even without the UK.

In 2020, it contained some 5.8 per cent of the world population. In
2017, the EU (including the United Kingdom) had generated a nominal
gross domestic product (GDP) of around US$20 trillion, constituting
approximately 25 per cent of global nominal GDP.
Activity
Now read Willcocks (2021a) Chapter 2, section 2.8, pp.55–58, to give you a detailed feel
for these issues of doing business in and with the EU.
5.6 Regional integration examples: the Americas

5.6.1 North America: From NAFTA to USMCA
NAFTA became law in 1994. Under NAFTA, tariffs on 99 per cent of the
goods traded between Mexico, Canada and the USA were abolished, and
so were most of the restrictions on the cross-border flow of services. The
agreement also protected intellectual property, removed most restrictions
on FDI between the three countries, and allowed each country to maintain
its own environmental standards. In addition, two commissions were
established to intervene when environmental standards or legislation were
violated involving health and safety, minimum wages or child labour.
What were the benefits of NAFTA? Its supporters argued that it would
provide economic gains to all members. Mexico should benefit from
more jobs as companies from Canada and the USA shift production south
to take advantage of lower-cost labour. The jobs would help Mexico
grow economically. Economically, Mexico looked to secure preferential
treatment for 80 per cent of its exports. In the USA and Canada,
consumers could benefit from the lower-priced products that come from
Mexico, and companies would benefit not only from low-cost labour but
also from having access to a large and more prosperous market.
How did NAFTA’s critics see the agreement? NAFTA’s critics worried that
the loss of jobs and lower wage levels that would occur as a result of
NAFTA would be detrimental to the USA and Canada. They also raised
concerns that pollution would increase as companies shifted production
to take advantage of Mexico’s more lax environmental regulations.
In addition, some critics raised concerns that Mexico would lose its
sovereignty as the country became dominated by US businesses not really
committed to helping the economy grow, but rather just seeing Mexico as
a cheap assembly location.
After the first decade of NAFTA, most people agreed that both the critics
and the supporters of the agreement were probably guilty of exaggeration.
By most statistical measures NAFTA was a success with trade between the
countries and FDI into Mexico growing very quickly indeed. For example,
studies showed that the concern over jobs turned out to be a non-issue.
Jobs in Mexico boomed while job losses in the USA were very small.
Some US businesses preserved jobs because most components in Mexican
assembly plants used US-made parts, unlike Asian-based assembly plants.
One positive that came from the agreement was increased political stability
in Mexico. This, of course, was also beneficial to the USA and Canada.
Some Mexican critics pointed out that job gains stagnated as the US and
Canadian multinationals shifted more work to China rather than Mexico.
But NAFTA’s very recent history has been more problematic, partly
77
because of the more aggressive negotiating stance adopted by the US

administration elected in 2016. After US President Donald Trump took
office in January 2017, he sought to replace NAFTA with a new agreement,
beginning negotiations with Canada and Mexico.
On 27 August 2018, Mexico and the United States announced they had
reached a bilateral understanding on a revamped NAFTA trade deal
that included provisions that would boost automobile production in the
USA The agreement favoured the USA more than Mexico. Negotiations
with Canada followed. According to an August 2018 article in the
Ottawa Citizen, key issues under debate included supply management;
pharmaceuticals; cultural exemption; the sunset clause; and de minimis
thresholds. In September 2018, the United States, Mexico, and Canada
reached an agreement to replace NAFTA with the United States–Mexico–
Canada Agreement (USMCA). NAFTA remained in force, pending the
ratification of the USMCA. In January 2020, the revised agreement was
signed into law in the USA. The new agreement certainly saw a move
towards trade barriers and protectionism by the USA.
A range of trade experts have said that changing trade relations would
have a range of unintended consequences for the USA, including reduced
access to the USA’s biggest export markets; a reduction in economic
growth; and increased prices for gasoline, cars, fruits, and vegetables. The
worst affected sectors would be textiles, agriculture and automobiles.
5.6.2 Mercusor and the Andean Community

It is useful to look at regional blocs that are less successful. Mercusor
includes a population of more than 270 million, with the combined Gross
Domestic Product of the full-member nations over $3.0 trillion a year
($3.393 trillion in 2018) making it the fifth-largest economy in the world.
It is the fourth largest trading bloc globally.
The Andean Pact between Bolivia, Chile, Ecuador, Columbia and Peru was
formed in 1969 and modelled on the EU. However, by the mid-1980s, it
was clear that it had more or less failed to achieve any of its goals. In the
late 1980s, though, many Latin American countries began to adopt free
market policies, and in 1990 the Andean Pact was re-launched and now
operates as a customs union. In 2003, the Andean Community signed an
agreement with Mercusor to work towards a free trade area.
Mercusor began in 1988 as a free trade agreement between Brazil and
Argentina. It was expanded to include Paraguay and Uruguay in 1990,
and has been making progress towards free trade between the countries.
However, some critics have argued that rather than creating trade,
Mercusor, by establishing high tariffs to outside countries, is actually
diverting trade in some industries and that companies in these industries
will be unable to compete in global markets. In recent years, the future of
this group has been shaky, not least because of politics. Venezuela pulled
out of the Andean Community in protest against Colombia and Peru signing
trade deals with the USA. Uruguay demanded the right to sign a separate
trade deal with the USA despite being a Mercusor member. The central
problem has been that members of both trade blocs actually trade very little
with each other but mainly with the USA. Other economic blocs have been
proposed but seem difficult to organise and sustain in the difficult political
disunity of the continent. The working of Mercosur has not met with
universal approval within interested countries. Chile has, to a certain extent,
preferred to pursue bilateral agreements with trading partners, and there
have been calls from Uruguayan politicians to follow this example.
78
Mercosur signed free trade agreements with Israel in December 2007;

with Egypt in August 2010; with the State of Palestine in December 2011;
and with Lebanon on 18 December 2014. In 2016, Brazilian presidents,
Dilma Rousseff, and later Michel Temer, along with Argentine President
Macri, began to exert pressure to negotiate a free trade agreement between
Mercosur and the European Union and other Latin American nations. In
June 2019, the European Union– Mercosur Free Trade Agreement was
confirmed. The bilateral trade deal opens 100 per cent of EU trade and
90 per cent of Mercosur trade. The deal, however, took a long time to be
ratified.
Activity
Read Willcocks (2021a), Chapter 2, section 2.9, pp.43–44, then answer the following
questions.
1. What do you see as the advantages and disadvantages of USMCA membership to
each of the three countries?
2. Why have the Andean Community and Mercusor been unsuccessful in comparison?
3. For a company in your own country, what do you see as the risks in trading with these
three economic blocs?
5.7 Regional integration examples: Asia Pacific

One of the most important efforts in Asia Pacific is the Association of South
East Asian Nations, or ASEAN. This was formed in 1967 with five founding
nations, later increased to 10, including Brunei; Cambodia; Indonesia;
Laos; Malaysia; Myanmar; The Philippines; Singapore; Thailand; and
Vietnam. There are two observer nations: Papua New Guinea and Timor
Leste. ASEAN’s goals are to promote free trade between members and
achieve cooperation on industrial policy, but so far, it has made only slow
progress. However, a new agreement between the six original members
came into effect in 2003 to create a free trade area, with the creation of
the ASEAN Economic Community by 2015.
Across all nations of ASEAN, there is a population of over 622 million
people. The region has one of the largest economies in the world, and it
is believed that by 2050, it will have the fourth largest economy in the
world. The organisation focuses on boosting economic and trade growth,
with all member states having a free trade agreement. Travel within the
region is also easier for member states. All member states have signed a
treaty against the development of nuclear weapons. Most have also signed
on to a counter-terrorism pact. Technical and research cooperation is also
promoted across the member states.
ASEAN has suffered because members’ main trading partners – USA,
Japan, China, and Europe – are outside the ASEAN bloc. Size of
intra-ASEAN trade also varies from country to country so benefits of
membership are unevenly distributed. Furthermore, ASEAN experiences
internal political tensions, and much more economic, religious, and
cultural diversity than, say, the EU.
However, ASEAN does act as a group in negotiating agreements with
other countries, or groups like the EU for which it is an important trading
partner. As a region, ASEAN has undeniably grown in importance.
Southeast Asia is quickly establishing itself as an Industry 4.0 hub.
Geopolitically, it has become a valuable site of contention with major
powers such as the USA and China looking to establish their influence
over the region. In 2018, in response to US President Donald Trump’s
79
more insular policies, ASEAN proposed a trade agreement of its own: The
Regional Comprehensive Economic Partnership (RCEP). The RCEP could
be one of the biggest trade deals in history as it would encompass 25
per cent of global gross domestic product (GDP); 45 per cent of the total
population; 30 per cent of global income; and 30 per cent global trade.
Other countries involved in this trade agreement are India; China; Japan;
South Korea; Australia; and New Zealand. But passing the agreement has
been a challenge on its own. In 2018, ASEAN and the countries involved
missed its fourth deadline to sign the deal, despite having negotiations
for more than a year. It was reported in November 2019, however, that
Southeast Asian countries were committed to signing the mega Asia Pacific
trade pact in 2020. ASEAN Secretary-General Lim Jock Hoi had also said
that ASEAN leaders, together with their counterparts from the five RCEP
participating countries had agreed to push forward and sign the trade pact
in 2020.
Activity
Read Willcocks (2021a) Chapter 2, sections 2.7 to 2.10, pp.53–63, to consolidate your
understanding of this chapter and make notes on points and cases.
1. Find out more details on the operation and recent history of ASEAN by searching on
the Internet.
2. If your country was a member of ASEAN in 2021, what do you see as the advantages
and disadvantages of membership for your country?
3. How has the RCEP worked out?
5.8 Key concepts

• World Trade Organization
• International Monetary Fund
• free trade area
• customs union
• common market
• economic union
• regional integration
• European Union
• NAFTA
• USMCA
• Mercusor
• Andean Community.
• ASEAN
• RCEP.

• explain the multilateral institutions of the global trade system and
their current challenges
80
• describe the multilateral institutions of the global monetary system

and discuss their current challenges
• describe the advantages and disadvantages of regional and bilateral
economic integration in Europe, the Americas and the Asia Pacific
• discuss the EU’s political institutions and how and why the
institutional framework created by the EU is pivotal for business
• participate in debates about further multilateral policy forums and
institutions contributing to economic integration
• outline the implications for management action.

Look at the Video – ‘Economic integration between countries’:
• www.youtube.com/watch?v=4HjN1FPYXaY
1. Focus on the EU and make notes on how it operates.
2. Focus on your own economic bloc and make notes on what it is and
what it does.

‘Regional integration has been an imperfect, but valuable way of
protecting trade amongst member countries, but creates challenges for
international businesses’. Discuss this statement under the following
headings:
a. Describe the major types of regional integration, giving an example of
each.
b. What are the political and economic arguments in favour of, and
against regional integration? Give examples from existing blocs, (e.g.
ASEAN, NAFTA/USMCA, EU) to illustrate your points.
c. Using illustrative examples, evaluate the challenges and opportunities
regional integration presents to an international business?
81

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Undergraduate study in Economics,

Management, Finance and the Social Sciences

Published by: University of London

Part 2: Business across borders: the foundations.................................................. 55

Chapter 8: Competitive strategy for international business............................... 109

11.14 Sample examination question........................................................................... 165

Chapter 16: Global digital management............................................................. 219

1.1 Route map to the guide

1.1.1 How to use this guide and hours of study

1.2 Introduction to the subject area

1.3 The syllabus

Part 2: Business across borders: the foundations

Part 3: International business strategy

Part 4: International business management

Global sourcing of production and services: global sourcing

1.4 Aims and objectives of this course

• Give insight through frameworks, studies and examples of how

1.5 Learning outcomes for the course

1.6 Overview of learning resources

Journal articles: Essential

1.6.2 Further reading

the most recent developments. You can do this by regularly reading

Full list of Further reading

Information Technology 27(3) 2012, pp.198–212.

Saldhana, T. Why digital transformations fail. (Oakland, USA: BK Publishers,

1.6.3 Online study resources

Making use of the Online Library

Other web resources

1.7 Examination advice

1.7.1 Format of the examination

Part 1: Introduction to the global

Chapter 1: Perspectives on globalisation

invests resources in business activities outside its home country. From

1.1.1 Aims of the chapter

1.1.2 Learning outcomes

1.1.3 Essential reading

1.1.4 Further reading

1.1.5 References cited

1.1.6 Synopsis of chapter content

1.2 What is globalisation?

1.3 Trends towards globalisation

In the 1970s and 1980s globalisation as international trade was largely a

• Increased growth in cross-border flows of foreign direct investment

1.4 The globalisation debates

from international regulatory institutions, best exemplified by the

1.4.1 Does distance still matter?

capacity and connectedness define the parameters of globalisation and this

it may well be an imperative to survival – something we explore in detail

1.5 What does globalisation mean for companies?

components, wherever they are located in the world. Suppliers

1.6 Key concepts

1.7 Reminder of your learning outcomes

1.8 Test your knowledge and understanding

1.9 Sample examination question

Chapter 2: Political, economic and legal

2.1.1 Aims of the chapter

2.1.2 Learning outcomes

2.1.3 Essential reading

2.1.4 Further reading

2.1.5 References cited