CHAPTER 1: CORPORATE CHALLENGES

INTRODUCTION

The major changes that have taken place in the last two centuries are introduced, as are the challenges
that will be facing globally oriented businesses functioning as economic surrogates of society in the
twenty-first century.

A. DIFFERENCES BETWEEN TODAY AND YESTERDAY

1. How the world has changed. Were one to ask how many changes have occurred in the past 200
years, it would be possible to list an almost endless number, beginning with the invention of the
telephone and combustible engine and ending at the end of this millennium with the computer, space
travel, genetic engineering, and artificial intelligence.

At a very personal level, the world has come a long way since the days of the fan and wood- burning
stove as means of climate control and flags, smoke signals, and the pony express as means of
communication.

2. There have also been macro changes in the past century. Demographic patterns of growth and
development have forged a path from rural life barely touched by urban communities to the point
where the populations of most societies live and work within an urban- suburban environment and
surrounding rural communities either provide complementary services or sink to the status of economic
backwaters.

3. An evolution in behavioral ideologies. Major political, social, and economic philosophies have
emerged in that same time frame to postulate the key theories of human organization and behavior that
order society today. Most belief systems regarding resource development and allocation, wealth and
income creation and distribution, political structures, and social interaction stem from ancient ideas
articulated into working theories in the nineteenth and twentieth centuries.

4. Technology and control over resources. It can probably be argued that two factors can be given
credit for bringing about many of the changes, constructive as well as destructive, that have affected
humanity. The first factor is a long-term movement toward the concentration of resource development
and use and the organization and conduct of economic activity in the hands of monolithic, globally
oriented private sector businesses known as multinational or transnational corporations. The second
factor is the accelerating pace of technological change. It is reasonable to suspect in this connection that
the momentum of technological change is being increasingly fueled by market-driven corporate
entrepreneurial initiatives, with infrastructure support provided by governments.

5. The force of private enterprise and the state as surrogate of society. The channeling of effort in most
areas of the world to achieve market-driven goals is accelerating economic growth and development in
many societies which a few years ago might have been consigned to perpetual under development. It is
also altering traditional ideas about relationships between the individual, the community, the corporate
business, and the sovereign state. The concern is whether there will be room for the state to continue,
as it has in the past century, as the surrogate of society if private business becomes responsible by fiat
for operating an economy and its competitiveness on a global scale.
B. BUSINESS IN A CHANGING WORLD

1. Fuzzy distinctions between domestic and international business. Separating business into domestic
and international components for discussion purposes is largely irrelevant today.

Businesses become large and prosperous when they adopt global vision and strategy in matters ranging
from the allocation of resources to the production and marketing of their goods and services. The option
of staying small and thinking “local” can be fatal. Even the smallest community-oriented enterprises
wittingly or unwittingly rely on the global sourcing of the goods and services they sell. Knowledgeable
local retailers and wholesalers will routinely attend the major trade shows where their industries are
featured in order to remain current and competitive.

2. Big business is a relatively new phenomenon. There were few large privately owned businesses in
the United States or in the world before the American Revolution or before the Industrial Revolution in
Europe. The few large commercial entities that did flourish did so under close government control or
ownership. Interestingly, among the first enterprises to operate fairly autonomously of government
control were financial institutions, perhaps because many of them started as offshoots of powerful and
aristocratic titled families who acted as moneylenders to their royal overlords.

3. Private ownership is a contemporary idea. The concept of private ownership also was not clearly
established, even in land ownership, until the 19th century. Acceptance of the idea that the factors of
production could be owned by private stockholders and could be worked by private citizens hired and
supervised by professional managers on behalf of those stockholders became rooted in the United
States after 1800 and then spread to other areas.

4. Privatization is a trend. The trend today, following the dynamic growth of private enterprise in the
nineteenth and twentieth centuries, is to encourage even more privately owned and controlled
business. This is a response to observations that a government does not have the where-withal to
micromanage society. It is also a response to a general feeling that the management of human resources
enjoys greater efficiency when left in private hands.

5. The global vision thing. Even the smallest business establishments in the smallest towns are directly
impacted by world events influenced by multinational businesses and governments. The time when a
growth-oriented enterprise could base itself and operate within the borders of a single country and
prosper is probably over. Corporate growth and survival today require a global perspective and strategy.
The principles of business behavior in a global environment are as important to master today as
economics, accounting, and mathematics if managers of economic enterprise are to succeed in this new
arena of global competition, interaction, and interdependence.

C. DEMOGRAPHICS AND THE ENVIRONMENT

1. Six billion and growing. More than 6 billion people inhabit the planet today compared with about 1.5
billion 100 years ago or about 4.4 billion in 1980. This makes the world a more crowded place in which
to live, work, and play. Until this decade, total world population had been growing at an increasing
annual rate until it peaked in the 1980s at about 2%. The current annual rate of population growth is
1.7%.

2. World population will grow, decline, or stay the same? There is a division of opinion as to whether or
not global population growth has peaked. An extreme-case scenario at a 2% annual growth rate would
mean a doubling to more than 12 billion people by the mid- 2030s. More conservative scenarios see the
world's population peaking at less than 9 billion people by the mid-2050s. There is also a doomsday
scenario that suggests the start of a precipitous decline as societies industrialize and families bear fewer
children. One may indeed observe among those countries that have high-income populations, or are
moving rapidly to become high-income societies, a real consistent decline in their birth rates.

3. Population pressure on resources and facilities. Whatever direction population will take, any change
must be anticipated by government and the private sector to enable societies to maintain and improve
the living standards of their constituencies. A stationary or expanding population will call for more
efficient utilization of resources and considerable investments in education, technology development,
and expansion of business and employment. A declining population will require serious planning to
provide social services for greater numbers of the aged and infirm while still maintaining economic
growth and development momentum.

4. The major challenge for the next 50 years. The major challenge for the 21st century will probably be
to support the large and increasing populations with enough resources and infrastructures to sustain
economic growth and development without destroying the environment.

5. The smallest and largest countries of the world. The World Bank lists 209 countries. Some are tiny,
like Grenada with population over slightly more than 92,000. Some have large populations, like China
and India.

6. Who is growing and who is not? Popular literature still talks about “industrial” societies and
“developing” countries. The World Development Report classifies countries as low- income, middle-
income, and high-income economies. All areas with an annual per capita gross national product (GNP) of
more than $9,000 are included among the high-income countries.

7. The richest and the poorest. The five richest industrial countries in terms of annual per capita GNP
are Switzerland, Japan, Denmark, Norway, and the United States. The five poorest countries are
Rwanda, Mozambique, Ethiopia, Tanzania, and Burundi.

D. THE INCOME GAP

1. Part of the world is developing rapidly. Many developing nations are rapidly moving their economies
ahead and are catching up with high-income societies, many of which are themselves surging ahead. In
many areas, people are better off today than ever before and have been enjoying the fruits of sustained
economic growth and development for several decades.

2. Part of the world remains an economic backwater. Unfortunately, the level of material affluence
seen in parts of the world has not spread to many countries in Asia, Africa, Latin America, and the
Caribbean. There has even been some economic regression in parts of Eastern Europe and in the new
republics of the former Soviet Union. With incomes rising rapidly in so many countries, the gap between
the so-called “haves” and “have-nots” remains glaring. In short, everyone in the world may be getting
richer, but the rich are becoming richer faster.

3. Two-class societies. The trend in income distribution patterns in many parts of the world is toward
greater inequality. Globally, an average of 30% of all populations accounts for 70% or more of earned
income. Income inequality is more askew among poorer countries and least askew in the higher income
Scandinavian nations. Some countries, such as Cuba, have achieved income equality but nevertheless
remain poor.

4. Changes in the income gap over time. It is interesting that the ratio of “rich to poor” societies has not
really changed over the years. Some areas have indeed become developed, but they tend to be
geographically and demographically small units like Singapore. Somewhat larger nations, like Taiwan
and South Korea, have developed, to be sure, but mainly by virtue of their special relationship with the
United States. In most other cases, the distance between the affluence of a small part of the global
village and the relative poverty of many of its parts remains great.

E. GLOBAL CHALLENGES

CORPORATE RESPONSIBILITY

The charge to multinational corporations in this era seems to have evolved to include three areas of
responsibility that are much broader and complex than their nineteenth century focus on economic
power and domination for the sole benefit of their owners. John Rockefeller and Henry Flagler grew
their oil, real estate, and railroad empires without much regard for the constituencies they served and
the environments they affected.

1. The Three- Cornered Hat Concept Things are different today. A large corporation today can be said to
wear a three-cornered hat that shelters all its constituencies. Each corner reflects an area of critical
responsibility.

a. Obligation to the stockholders. The first area of corporate endeavor is to protect the interests of its
stockholder owners by making its best efforts to generate reasonably expected returns on their
investment. This is an important activity because not only must earnings be created to meet stockholder
expectations, but additional earnings must be forthcoming to help keep the business going and growing
and to meet its two other significant obligations or responsibilities.

b. Obligation to the human resources. The second area of responsibility is to the employees, the human
resources without which the enterprise cannot exist. It is now generally recognized that companies have
an obligation to provide a safe and wholesome working environment, with equal pay for equal work
along with a compensation package that allows human resources a commonly acceptable standard of
living and a fair opportunity for advancement.

c. Obligation to the community. The third area of responsibility is to the communities that corporations
serve through the production and sale of their goods and services and in which they operate. The idea
that businesses can pollute environments and physically harm people is rapidly becoming universally
unacceptable. No argument is made for banning noxious processes and driving under companies that
produce important products. The argument is that these processes must be changed through new
technologies to eliminate environmental and human damage and that private enterprise must be held
accountable for making the necessary changes.

PEOPLE ISSUES

The continued success of private multinational enterprise may depend upon how well these nerve
centers of economic activity address the basic needs of all societies. Global business’s big challenge will
be to successfully meet those needs and still be able to turn a profit. The fundamental problems that
directly affect the individual, the community, and society at large (to name a few constituencies) are
education, food and energy, healthcare, income and employment, money and banking, shelter,
transportation and communications, and welfare and social services.

1. Education. The great majority of the world remains undereducated and functionally illiterate.
Existence of and access to college- and university-level programs are limited.

2. Food and energy. The industrialization of food production coupled with advances in the agricultural
sciences has enabled supplies to keep pace with population growth. Yet food distribution and availability
remain problems in many areas where low-income societies are unable to meet local demand through
domestic production and cannot afford foreign imports.

3. Healthcare. This remains an eyesore in many countries. Human longevity in the richer areas reaches
an average of 80 years in comparison to 40 to 50 years in the poorest societies.

4. Income and Employment. It is estimated that unemployment rates for industrial countries range from
2 to 15% depending on the country and the state of its economy.

5. Money and Banking. The world of credit and finance, as it known in many high-income countries, is
beginning to expand its ground in the rest of the world. The pace of expansion will have to quicken if
demand is to be stimulated to encourage investments to spread faster to developing areas. A
comprehensive technology-intensive financial sector can be continually tapped as a resource for
investment funding is critical to accelerating the economic growth and development of countries

6. Shelter. It is estimated that over 50% of people in developing areas live without permanent shelter. In
terms of solid numbers, this means that two billion people sleep in makeshift dwellings without running
water or heating, cooking, and sanitary facilities.

7. Transportation and Communications. Mass transit and intercity transit for goods and people are well
established in developed countries, but they are woefully lacking in the Third World.

8. Welfare and Social Services. Social security insurance and all sorts of other social services and
annuities which have been taken for granted for so long among industrial nations barely exist in many
developing areas. There, the extended family is the major source of welfare and social service for non-
self-supporting individuals such the very young, the aged, and the infirm.

CORPORATE CHALLENGES

1. Turning problems into opportunities. Multinational businesses might, at first blush, take the position
that problems faced by much of the world are too great to be resolved by the private sector and that
they should stick to the traditional bread-and-butter markets of the industrial countries. However, the
rush by large corporations to tap Third World markets anywhere they may exist testifies to the fact that
a potential exists for both market share and profits.

2. Taking the long view. Investors and professional managers are taking the long view that these new
markets will someday be industrialized and prosperous. It is therefore the responsibility of the
multinationals to maintain a presence in and to participate in the economic growth and development of
all emerging regions.

3. The environmental challenge. It is clear that the processes of economic change impact the
environment. How long the planet can continue to endure the battering of its infrastructure is a matter
of argument. There is nevertheless general agreement that technologies must be developed and
brought into play that will minimize environmental damage and perhaps even repair damage already
done. Hence, corporate actions will have to balance stockholder enthusiasm and financial viability with
the need to operate environmentally friendly businesses.

4. The resource and technology challenge. There is a school of thought that maintains that resources
are finite. That may not be the case however. The material resources employed in the distant past are
no longer utilized in the same manner today. Ships were once made of wood and used human labor for
locomotion. Today, they are made of plastic and steel and are propelled by diesel fuel or nuclear energy.
The plastics industry itself is a testament to the creation of synthetic resources as a function of the
development of new technologies. Developing and then implementing these new technologies to meet
the needs of a changing world is probably one of the more daunting tasks faced by the multinationals.
Successfully accomplishing those tasks will require the cultivation of a critical mass of skilled and
educated human resources.

KEY TERMS AND CONCEPTS

1. Developed countries. Nations whose economies are expanding more slowly and whose incomes are
significantly higher than those of other countries. Examples would be the United States and Japan.

2. Developing countries. Nations whose economies are expanding faster than those of their more
mature, industrialized partners. They are some-times called newly industrializing countries. An example
would be Malaysia. Most of the world’s developing countries are classified by the World Bank as “low-
income,” “lower middle-income,” and “high middle- income” states.

3. Globalization. A process of corporate enterprise that involves the procurement of resources from the
best available source worldwide and the production and sale of goods and services in the widest
possible markets.

4. Key people issues. Education, food, energy, healthcare, income, employment, money and banking,
shelter, social services and welfare, transportation and communications, a pollution- free environment.

5. Know-how. The application of technology to effectively produce goods and services.

6. Macro changes. Changes that affect an entire society.

7. Micro changes. Changes that affect a part of society (e.g., a single family, community, or business
enterprise).
8. Multinational company. A corporation that produces and sells its goods and services in many
countries simultaneously.

9. Private ownership. Legitimate possession of assets by individuals and their representative

corporations as a basic right of life and social existence.

10. Privatization. A process of transferring the ownership of assets and the factors of production from
the state to the private sector.

11. Technology. Ideas brought together into applications to create new goods and services or to
improve on existing goods and services.

12. Three-cornered hat. A corporation’s three basic areas of responsibility: an obligation to reasonably
maximize stockholder returns, an obligation to provide its human resources with an adequate standard
of living, and an obligation to behave for the common good of the communities it serves.

CHAPTER 2: A PHILISOPHY OF BUSINESS FOR THE 21ST CENTURY

INTRODUCTION
It is generally agreed that the main challenge of the 21st century will be to develop the infrastructures
and economic enterprises necessary to maintain large number of people in political order at acceptable
living standards without destroying the environment. Business, as society’s surrogate for economic
progress, has a central role to play in meeting this challenge. This is irrespective of whether it is
envisioned as an arm of government, seen as independent force, or sandwiched somewhere between
state and private ownership. Three major competing philosophies are reviewed in this chapter to see
which ideas are best suited to the management of society in the new century. Some leading corporate
philosophies are also analyzed to examine how the business community sees itself blending into the
emerging world order.

A. THREE COMPETING PHILOSOPHIES

Three competing philosophies have captured the imaginations of policymakers and thinkers in the
twentieth century: capitalism, communism, and the mixed economy.

1. Capitalism. This philosophy posits that societies should be less macro- and micromanaged by
governments. It suggests that more faith and reliance should be placed in less regulated and controlled
approaches to human affairs. The conceptual basis of capitalist thinking can be traced from the 17th and
18th century physiocrats and mercantilists through Adam Smith, Thomas Malthus, and David Ricardo in
the late 1700s and early 1800s to John Stuart Mill in the mid-1800s and finally to Keynes in the 1900s.
These ideas call for a fundamental freedom of entrepreneurial action in which the role of government is
minimized except to encourage and protect private sector economic activity. Several neo-Malthusian
and Darwinesque theories have emerged in recent decades. They suggest that the key to organized and
continued economic growth and development may be through more “laissez-faire” non-interventionist
public policies in which the private sector is given maximum latitude in determining the course of
economic affairs. This could even be at the expense of pulling away support systems from less fortunate
populations. Societies would self-manage their populations. Only the best, the strongest, and the ablest
would survive the bloodied and bared fangs of this economic liberalism.
2. Communism. Often called socialism, this philosophy perceives the tasks of economic growth and
development as the obligatory domain of government in representing the state in discharging its
responsibilities to the people living within its borders. The factors of production are to be owned and
managed by the state through special government agencies to reach prescribed goals such as full
employment at a given standard of living. Communist ideology is as old as capitalist philosophy. Karl
Marx and Friedrich Engels were its cardinal advocates in the nineteenth century, although its ideas can
be traced back through Hegel, Kant, and Hobbes to Plato. It remains today a doctrine of sociopolitical
order in many parts of the world. The private sector may exist and indeed prosper, but only in a manner
subordinate to state policy.

3. The Mixed Economy. A more pragmatic and balanced philosophy has evolved in the last 30 years. It
seeks to synthesize the extreme positions of capitalism and communism. It accepts the socialist
proposition that larger and more interdependent population groupings need more comprehensive and
interactive central planning to harmonize human affairs for the good of everyone. Hence, a certain
amount of central government planning, intervention, and even ownership of productive assets may be
essential. However, it also embraces the capitalist notion that the productive capability and capacity of
society are best stimulated when left in the hands of private entrepreneurs who know best how to
manage risk and wrestle with unpredictable market forces. The mixed economy calls for more public
and private sector cooperation. It allows for a balance between public and private policy. Government is
charged with the responsibility of macromanaging the economy to reduce the friction and discord that
result from totally unregulated activity. Private capital would be charged with the obligation of
micromanagement by generating market-inspired and profit-oriented enterprises.

B. CORPORATE BUSINESS ORGANIZATION AND PHILOSOPHY

Large corporate enterprises among the world’s high-income countries tend to classify themselves as
multinational in the sense that they function in many countries simultaneously. It is not unusual for their
annual reports to indicate that they have planted and office locations in 30 or 40 countries and
distributorship arrangements in many more. Many of these companies call themselves “global”
businesses.

Despite the very wide scope of their activities most large enterprises organize their affairs along three
overlapping modes. Companies function as ethnocentric, polycentric, or geocentric (global)
organizations. Each system involves a set of attitudes that impact a company’s management of human
resources, research and development, production and purchasing, marketing and sales, and finance and
accounting.

1. Ethnocentric Corporations.These are large businesses whose equity base is usually concentrated in a
given geographic area (e.g., the United States). Corporate stockholders and stockholder groups are
mostly of a single national origin. Corporate boards of directors also tend to reflect a particular national
ethos. This creates a strong inclination for top management to develop and implement policies and
programs that are skewed to the needs and wants of the national community hosting the corporate
center without giving the same equal weight to international markets and opportunities.

a. Human Resource Development and Management

Ethnocentric corporations tend to depend on home nationals for most executive positions in both
domestic and foreign markets. Implicit in this approach is the belief system that home nationals are best
qualified to reflect the special culture and interest of the corporate center and the society in which it is
situated. The same ideas and practices that work so well domestically are transported with

investments overseas through the widespread use of expatriates, employees from the home office who
are assigned to duty tours with the company’s foreign affiliates.

b. Research and Development

Ethnocentric organizations tend to jealously guard their research and development facilities and efforts
by concentrating all work in the domestic market. The R&D effort is geared to generating new
technologies to create new products geared to meeting home market demand. Products found suitable
for and successful in the domestic market may then be marketed overseas.

c. Production and Purchasing

The classical view of managing these functions has been to centralize them in the home country to avoid
logistic problems. There was, and there still remains, a generalized feeling that the domestic resource
base is large and diverse enough to accommodate most material needs. Sourcing materials from within
therefore makes good sense, good politics, and good economics. Ethnocentricity in production and
purchasing is not an exclusively American experience. Its practice was common in European societies
impacted by the Industrial Revolution and their quest for world empire through the processes of
colonization. Countries like England and France had passed laws encouraging the manufacture if finished
or semi-finished goods in exchange for raw materials from vassal states (colonies) thatwere forbidden to
engage in value-added production. Hence, the practice of single- source purchasing, and single-nation
production quickly became obsolete. Corporations came to realize that productivity, followed by
enhanced competitive positioning, led to greater profits. It was noted that productivity always seemed
to rise as enterprises engaged in multiple-source purchasing, outsourcing, and by having multinational
production facilities.

d. Marketing and Sales

The classical ethnocentric organization relied on domestic brand and product managers to develop the
plans and budgets that would be executed by highly trained sales forces primarily in the domestic
market. Whatever worked at home would then be replicated in overseas markets through a network of
import distributors, import agents, contract manufacturers, licensees, and a few joint venture
arrangements and wholly owned subsidiaries.

e. Finance and Accounting

An ethnocentric attitude can also be detected in financial and accounting practices. U.S. rules and
procedures vary in concept and substance from those practiced in many other countries. The GAAP
(General Accepted Accounting Procedures), a standard in North America, requires modification or
reconciliation with systems used in other societies. Definitions of financial agency, assets and liabilities,
appropriate debt-equity relationships, and the nature and use of interest,to name a few, are ideas not
universally shared. Difficulties in achieving cross- border corporate cooperation arise when managers
insist upon having affiliate financials mirror home office methodologies. There is also a tendency to
require all foreign-source earnings to be repatriated as rapidly as possible. More often than not, an
ethnocentric company regards foreign markets as cash cows that can be fed technology and know-how
already in use at home and then milked for sheer profit.

2. Polycentric Corporations. These companies tend to organize themselves in a conglomerate mold with
far-flung and diversified operations in many different parts of the world. The focus of effort is less upon
the development of core businesses to achieve overall market share and earnings and more on
allocating bottom line responsibility to regional affiliates, whatever their particular enterprise might be.

a. Human Resource Development and Management

Polycentric corporations tend to depend on the host country nationals for most executive positions. In
foreign markets. Senior positions may or may not be reserved for home country expatriates. Implicit in
this approach is the belief that host country nationals are more qualified to the needs of the local
culture and are better connected with their society’s power structure. While some home office training
and indoctrination are usually provided, the foreign affiliate is usually left to its own devices as long as it
continues to generate prescribed financial returns and reaches its announced goals.

b. Research and Development

Polycentric organizations tend to establish technology and research anddevelopment facilities in many
countries in order to tailor their efforts to the needs of the local market. The R&D effort is geared to
generate new technologies to create new products geared to meet individual national market demand.
Products found suitable for and successful in one market may then be introduced elsewhere, although
that usually happens on an ad hoc basis and does not follow a given policy. This is the approach taken by
Colgate-Palmolive in the development of its technology centers in key areas of the world.

c. Production and Purchasing

The polycentric approach is to decentralize these functions down to the local level, with an emphasis on
local sourcing and with little control or oversight from the home office. It is only in recent years that
practice has shifted to global sourcing (best-source purchasing). The idea of local sourcing differs little
from its ethnocentric partner, home country sourcing, where the goal is to avoid logistic problems. As in
home country sourcing, buying materials locally makes good sense, good politics, and good economics.

d. Marketing and Sales

A polycentric organization allows for a diversity of marketing strategies, each suited to a particular area.
A home country marketing plan might be used, but it often has been altered beyond recognition to suit
the local environment. Reliance is less on home country brand and product managers to develop and
implement plans and budgets than on host country marketing executives.

e. Finance and Accounting

Polycentric companies typically shift responsibility for financial accountability to their foreign affiliates.
Local standards may be applied if bottom line performance can be translated back into a meaningful
earnings picture for the parent company. The need to require all foreign-source earnings to be
repatriated as rapidly as possible is not as urgent for polycentric corporations. This may in a sense reflect
the greater national diversity of their major stockholder groups, whose residency may not be
concentrated in any one country.

3. Geocentric Corporations. These companies tend to organize themselves around a single decision-
making center that regards the world as a single market to be approached with a unified strategy that
does not necessarily reflect the interest or the image of a single national group or perspective.

a. Human Resource Development and Management

Geocentric corporations tend to seek, develop, and then manage the most qualified human resources
available from anywhere in the world. They are not committed to either home or host country nationals
for any particular position within their operations. Thus, senior positions may or may not be reserved for
home country or host country nationals.

b. Research and Development

Geocentric organizations tend to establish technology and research and development facilities in many
countries of the world to meet global objectives. The R&D effort is geared to generate new technologies
to create new products gearedto meet specific market demand that may exist in many countries
simultaneously. Products like wireless communication devices (cellular telephones) are developed to
attract buyers and users in a global setting based upon a commonality of demand.

c. Production and Purchasing

The geocentric approach is to centralize decision making in these functions to maximize global sourcing
opportunities, referred to above as “global best-source procurement.” Host and home country sourcing
is de-emphasized except when it becomes politically necessary or when it can be shown that local
sourcing makes the most sense on a cost-benefit analysis basis.

d. Marketing and Sales

A geocentric organization encourages the development of a single global strategy designed to achieve a
worldwide target and market share. The single- strategy approach might still allow for different
marketing strategies spun off from the master plan, each suited to a particular area. A home country
marketing plan might be used, but it often will be altered beyond recognition to suit the global
perspective. Reliance is less on home or host country brand and product managers and more on
managers with global profit-and-loss responsibility to develop and implement plans and budgets.

e. Finance and Accounting

Geocentric companies typically shift responsibility for financial account- ability to the decision-making
center, wherever that might be. Criteria for financial performance are how well disparate parts of the
enterprise throughout the world contribute synergistically to the well-being of the whole. It might be
acceptable, for example, for the U.S. affiliate to lose money in order that the Mexican affiliate show a
profit, hence encouraging some transfer pricing policies, if, in the final analysis, the overall after-tax
profitability of the entire geocentric enterprise is enhanced. The need to require all foreign-source
CHAPTER 3: 
"INTERNATIONAL BUSINESS  OPERATIONS"
INTRODUCTION

International business operations covers a range of activities from import-export transactions to foreign
direct investments and foreign portfolio investments. Some of these operations are oriented toward the
production and marketing of goods and services while some are financially oriented and deal with the
cross-border movement of funds. 
BREAKDOWN OF INTERNATIONAL BUSINESS OPERATIONS
LICENSING 
International licensing is an arrangement whereby a foreign license buys the rights to manufacture
another firm's product in its country for a negotiated fee. This fee is usually distributed through royalty
payment based on units sold.
ADVANTAGE
1. No development cost and risk 
DISADVANTAGE
1. No control over business operations
2. Inability to coordinate strategic moves across countries
3. Potential loss of control of technological know-how to foreign countries
FRANCHISING 
Franchising is similar to licensing, although it tends to involve much longer-term commitments than
licensing. A franchising agreement involves a franchisor selling limited rights for the use of its brand
name to a franchisee in return for a lump sum payment and a share of the franchise's profits. 
ADVANTAGE

1. No developmental cost and risk 

DISADVANTAGE

1. Inhibit a firm's ability to take profits from one country 

STRATEGIC ALLIANCES 
These are intercorporate agreements between two or more companies designed to achieve various
degrees of vertical and horizontal integration. Horizontal and Vertical integration are competitive
strategies that companies use to consolidate their position among competitors. 

The distinguishing feature of a strategic alliance lies in its informality. No formal mergers or acquisitions
are involved. The strategic alliance is a temporary marriage of key human and other resources from the
partnering firms. Once objectives are reached, it is normal for the alliance to end.

FOREIGN DIRECT INVESTMENTS 

Foreign direct investments (FDIs) are made by companies into foreign markets for the purpose of
owning or co-owning, controlling, and managing a business enterprise with market share and earnings
objectives 

OBJECTIVES  

HORIZONTAL INTEGRATION intended to achieve market control through understandings or cooperation

agreements designed to allocate and maintain market share. 

VERTICAL INTEGRATION establishes control over sources of production (e.g., supplies, technology,
financing, labor, and other resources). It can also be used to create control over distribution, marketing,
sales, and after-sales service 

CATEGORIES

JOINT VENTURE refers to that kind of business which is formed when two businesses combine together
and meet their different skill set to achieve a common business objective. 

WHOLLY OWNED SUBSIDIARIES is a corporation whose equity is almost or entirely wholly owned by
another corporation. The investing company becomes known as the “parent", and the subsidiary is
colloquially called the “sub”.

EXPORTING 

Exports are the goods and services produced in one country and purchased by residents of another
country (i.e., if it is produced domestically and sold to someone in a foreign country, it is an export). 

 Rapid Market Access Through Exporting 

 Export Trading  Companies 
 Direct Exporting to  End-Users 
 Exporting through Foreign  Import Distributors 
 Exporting through Foreign  Import Agents 

NOTE: Exports are one component of international trade. The other component is imports. They are the
goods and services bought by a country's residents that are produced in a foreign country. Combined,
they make up a country's trade balance. When the country exports more than it imports, it has a trade
surplus. When it imports more than it exports, it has a trade deficit.

FOREIGN PORTFOLIO INVESTMENT 
A foreign portfolio investment (FPI) is an investment in foreign-based securities (stocks and bonds). The
objective is to generate income through interest, dividends, and capital gains. The larger portion of
international investment flows in the world today are FPIs.

CONTRACT MANUFACTURING 

Business model in which a firm hires a contract manufacturer to produce components or final products
based on the hiring firm's design. A contract manufacturer is a manufacturer that enters into a contract
with a firm to produce components or products for that firm . It is a form of outsourcingNOTE:
Companies enter into contract manufacturing (sometimes called contract-filling operations) when
circumstances stop them from producing the product or products reasonably close to their markets,
when market access is denied, or when their own costs are higher than having the  goods made by
someone else 

CHAPTER 4: THE MONETARY SYSTEM

INTRODUCTION
The monetary system that influences trade, investments, and even daily private and public
sector operations can be traced back to the early nineteenth century. It evolved from the
monetization of gold as a nation’s holder of value in due course and coincided with the
increasing use of paper currency in the late eighteenth century. The themes of this chapter are
to show how the current monetary system developed into its current form, how it affects all
aspects of a company’s global activities, and what shape the monetary system may take in the
future.
WHAT IS THE INTERNATIONAL MONETARY SYSTEM?
A. An Amalgamation of Many Loosely Coordinated Banks
There are over 200 independent nations today. Over 180 of these countries are members of
three interrelated organizations: The United Nations, the World Bank, and the International
Monetary Fund (IMF). These and other organizations are discussed in Part III of this book.
Essentially, the IMF and other related international and supranational financial institutions
interact with a loose association of national and regional banks to create the existing monetary
environment that is euphemistically called “the monetary system.”
B. Two Hundred Independent National Banking Systems with Separate Currencies
Almost every nation has its own banking system and individual currency to serve the interests
of specific resident constituencies. These include individuals and groups that reflect the
complex diversity of the entire society: individuals, businesses, government agencies, banks,
brokerage firms, pension funds, civic groups, religious organizations, producers’ cooperatives,
and indeed anyone who engages in international trade, investments, or travel. When any of
these constituencies participates in an international activity, which can be as mundane as a
family from the United States taking a trip to visit relatives in a foreign country, it trades the use
of one currency for another. Billions of dollars in cross-border currency trading takes place
daily. The level of foreign exchange transactions rises almost geometrically as the globalization
of economic transactions accelerates
C. Foreign Currencies Lead Their Own Lives
To further complicate matters, money and interest rates are increasingly treated today by
banks, traders, and investors like speculative commodities. Hence, they are traded in pretty
much the same way as pork bellies, in addition to being considered mediums of economic
exchange. This means that foreign currency prices have a life and value of their own apart from
the demand for the goods and services whose supply and demand variables they are supposed
to reflect. It was an unpredictable degree of wild currency price fluctuation in Asian monetary
markets in the late summer and early fall of 1997 that prompted Malaysian Prime Minister
Makathir Mohamed to complain that foreign exchange trading “was immoral” and should be
made “illegal” (Wall Street Journal, September 23, 1997, p. C-13). D. The Monetary System to
the Rescue The international monetary system as it exists today is an informal association of
public and private banks that function under a set of national and international understandings
(protocols), Riles, regulations, procedures, and laws that serve to maintain some sort of
discipline and order in monetary markets. This is done by managing cross-border currency
flows, foreign exchange prices, and interest rates through the coordinated activities of central
banks (government owned banks like the U.S. Federal Reserve System), the network of large
private global banks, and the IMF.
HISTORICAL BACKGROUND
A. Two Hundred Years of Scrip With and Without Gold Backing
Before the Napoleonic wars, the general practice was for governments to exchange gold and
silver coins or bullion in exchange for goods and services traded domestically and
internationally. The so-called “coins of the realm” were the monies minted by a ruling
government and issued sparingly to whoever provided goods and service to the reigning
sovereign. This practice helped establish the rule that the power to create and/ or mint money
was a monopoly reserved for the central government. This power is considered sacrosanct
today by most nations as well as by the United States.
Wariness concerning the use of gold as a medium of exchange to be used directly in discharging
financial obligations grew in the Napoleonic era between 1800 and 1815 as continuing war
made the movement of monetary gold hazardous. Paper scrip (fiat money) backed by gold
became a prudent alternative to the risky process of physically shipping the precious metal
across unsecure areas. These government-issued credit notes, fully backed by gold held in
government vaults, became legal tender and gradually gained popular acceptance, eventually
replacing gold as the immediate holder of value in due course. For example, in 1821, the U.S.
mint price was $20.67 per avoirdupois ounce. The British pound, set at 53,17 shillings and 10.5
pence per troy ounce of gold, then bought $4.87.
B. Backing Paper Money with Pure Gold
The current monetary system finds its roots in the gold standard, which gained popularity
among the world’s more powerful economies in the early 1800s when they saw a need to
cultivate a climate of stable exchange rates for commonly traded currencies that were being
printed on paper. It was the first modern attempt by nations to create a universally acceptable
standard, namely gold, as backing for all major paper currencies in use at the time. The gold
standard turned into the gold exchange standard in 1934. That arrangement lasted until 1971,
when the floating rate exchange rate system was introduced. The era of floating rates continues
today.
C. The Gold Standard and Fixed Exchange Rate System
The gold standard was maintained by participating nations through a system of fixed currency
exchange rates in which relative currency prices were based upon a nation’s monetary unit as
defined by a given weight and quantity of gold. A country’s money supply was limited in part to
the amount of monetary gold held by a national government’s central bank. Gold standard
countries generally agreed that all paper money backed by gold could be redeemed for the
metal on demand at the tendered value shown on the paper certificates. Needless to say, in
many cases a government’s promise was not quite as good as gold!
D. The Central Banking System International foreign exchange management was largely the
domain of government-owned banks called central banks. These banks were offshoots of the
exchequers who had been handling the treasuries and finances of European monarchies since
the Middle Ages. They replicated quite successfully in many instances the financing abilities of
wealthy titled families (the Italian Medeci and the French Rothschilds) who had previously
funded state budgets consumed primarily by military conflicts.
By the early nineteenth century, central governments found it cheaper and more expedient to
become their own bankers. This also made it possible for them to put a muzzle on the emerging
private banks, whose unrestrained activities occasionally brought about economic collapse
when they failed. It was then that the concept of a central banking system came into its own. A
notable exception is the United States, where the Federal Reserve System was not formed until
1913. The creation of the Federal Reserve was more a reaction to the eclectic banking practices
of J.P. Morgan and his clique of banker-financiers than an attempt to place private banks under
government authority. In actuality, the J.P. Morgan banking and financial network helped
reduce the economic severity of several crashes and recessions through its clever manipulation
of the money supply. These tactics were eventually incorporated into the Federal Reserve’s
arsenal of monetary policy practices that have proven very effective in more recent years.
E. Privatization of Economic Enterprise
International commerce was only beginning to separate itself from state ownership or franchise
in the nineteenth century. Private traders and investors were dependent upon the emerging
central banks for licenses with which to send and receive monies in payment for specific
transactions or to fund investments. European central banks still concerned themselves with
the foreign currency and monetary gold affairs of their respective governments, which then
accounted for the great majority of international transactions. But they also expanded their
jurisdiction to regulate the international financial flows stemming from private sector
transactions.
F. Exchange Control Authority
The power of a central bank to control international financial flows is called its “exchange
control” authority. This authority is still held by many central banks. It means that the central
bank has the right to allocate its country’s foreign exchange reserves (stocks of foreign
currencies) to individuals and companies that wish to travel abroad, invest in other countries,
and/or import goods and services from abroad. It also has the power to support its national
currency or that of other nations by engaging in foreign exchange operations in international
currency markets. The U.S. Federal Reserve, which acts as a central bank in many respects, has
no exchange control authority.
HOW THE COLD STANDARD WORKED WITH CENTRAL BANKING
A country’s money supply was determined by the central bank’s stock of monetary gold.
Because nations discharged their international financial obligations with a transfer of monetary
gold, a merchandise trade surplus would result in a net gold inflow. This would allow the trade
surplus country to either print more money or up-value its currency. A trade deficit country
would be in a reverse position. It would lose monetary gold and would have to reduce its
money supply or devalue its currency.
A. Determining the Foreign Exchange Rate
Central banks controlled their nations’ money supply in much the same manner they do today.
Hence, if country X had 16 ounces of gold and “printed” 16 francs and country Y had 8 ounces
of gold and “printed” 16 guilders, it meant that, relative to the price of gold, 1 franc was worth
2 guilders. The foreign exchange rate or currency price of francs to guilders would be 1 franc
per 2 guilders or, in reverse, 1 guilder per 0.5 franc. In other words, a country that insisted on
issuing as much currency as another country but which had less monetary gold would possess
the cheaper currency.
B. Currency Price Changes and Commodity Price Changes
Given a cross-border environment (which does not always exist in reality) of price equality for
all goods and services, a canned beverage that cost a consumer 5 francs in country X would cost
a consumer in country Y 10 guilders. If country Y accumulated some significant trade surpluses
or engaged in other international activities that would raise its monetary gold stock to 16
ounces, it would have three options. The first option would be to do nothing and maintain the
existing foreign exchange rate with country X, thereby raising its money supply to 32 guilders.
The second option might be to leave its money supply alone at 16 guilders and raise (up- value)
the guilder price against the franc. In effect, the franc would be devalued (floated down)
against the guilder, or the guilder would be up-valued (floated up) against the franc.
The third option would be for country Y to increase its money supply to some intermediate
Level. Countries on the gold standard often adopted a “split-the-difference” monetary policy,
making only slight adjustments in the money supply and in exchange rates in order to maintain
long-term monetary stability.
C. Central Bank Intervention and Monetary Stability
Cooperation among central banks to help preserve international currency price stability started
with the gold standard and has continued to the present day. Central banks have found it
mutually beneficial over the years to develop a mutual support system that consists of
purchasing weaker currencies with stronger ones to maintain foreign exchange stability. The
feeling was, as it remains today, that inherently stable currency prices are the key to preserving
harmony in international monetary markets. This support system continues to exist today and
is called central bank intervention, with order, stability, and predictability as its principal
objectives. This made it possible for trade and investments to grow with the economies of their
respective nations. The monetary system created a relatively secure atmosphere for the entire
international trading and investment community. Cross-currency prices (foreign exchange
rates) were fixed in the sense that they could not change without official sanction from the
central banking system. No daily foreign exchange rate fluctuation was allowed; hence,
currency speculation was kept to a minimum.
D. The Gold Exchange Standard and the Variable Fixed-Exchange Rate System, 1934-71
This era is best understood in terms of two distinct historical phases. The first phase was the
Great Depression. The United States saw creating and implementing a modified gold standard
as a partial antidote to the economic ills of the time. This new standard was expanded after
1945 by making the system of fixed exchange rates more flexible.
E. The Gold Exchange Standard
Most countries had discarded the gold standard by the early 1920s. World trade and
investments were growing so rapidly that the general sentiment was that limiting economic
growth and development to a state of nature was no longer practical. The problem is that
growth began to stagnate in many parts of the world in the early 1920s. Growing protectionism
further hindered international cooperation to the point that, as the depression deepened after
1929, production, trade, and investments came to a virtual standstill as prices fell precipitously
on many goods and services. Dwindling demand helped destroy the trading value of many
currencies that were no longer backed by gold, and there was a growing perception that
national monies had become debased.
The gold exchange standard started in 1934 with a unilateral declaration by the United States
that it would buy back any U.S. dollars held abroad by residents of other countries with gold at
the officially posted price of $35 per troy ounce. This was an effort by the United States to
shore up the dollar’s value by backing it directly with gold, thus giving new life to the aging gold
standard. The system was finally hammered into place when the IMF was created in 1944. The
gold exchange standard preserved the traditional fixed exchange rate system but fluctuation
around the fixed rate before central bank intervention was called for.
F. The U.S. Dollar as Currency of Ultimate Redemption
This was the major change under the new system. The U.S. dollar became the currency of
ltimate redemption and hence the world’s key international reserve currency. The
international understanding was that, as the currency of ultimate redemption, the U.S. dollar
was as good as gold and could therefore be used as legal tender by the rest of the world. G.
Central Banks Coordinate Their Activities with the IMF The central banks of countries that
joined the IMF allowed their currency support processes to become coordinated by the IMF and
thus subject to more oversight than in the past.
Finally, it was possible for foreign exchange rates to fluctuate freely within prescribed bands of
a fixed exchange rate. The exchange rate was no longer an inflexible price unyieldingly
maintained by a central bank until there was no choice but to mandate a change. The official
foreign exchange rate became a target to be supported, allowing daily movement in cross
border currency prices. Those changes came to be viewed as a barometer of what was going on
in the world of international commerce and as a guideline for central bank monetary policy.
When a national currency showed signs of short-term weakening, namely that its price was
falling toward a preset “floor,” central banks along with the IMF would intervene by buying up
quantities of the weaker currency with stronger ones to bolster its price in international
currency markets. If a national currency moved toward a similarly preset ceiling, the same
process would occur in reverse. Central banks would sell off the currency at lower prices to
bring the foreign exchange rate back down to the official level.
H. The Floating Rate System, 1971 to Present
The gold exchange standard ended in 1971 amid speculation that the United States might no
longer be able to make good on its 1934 pledge. There was also a feeling, especially among
monetarists in decisional power positions in the United States, that central banks had become
sufficiently skilled in monetary policy that paper money, if properly managed, could carry its
own intrinsic value in mirroring an economy’s fundamental strength.
I. The End of Fixed Foreign Exchange Rates
The gold exchange standard, with its variable fixed-exchange rate system, ended in 1971,
leaving all currencies to seek their own price level based on global supply and demand. This
system, which continues through the present day, is called the floating rate system. Stability in
international currency markets is still maintained by the IMF and its network of central banks.
The system receives ad hoc support from the large private financial institutions and
multinational corporations, all of which have strong vested interests in also maintaining global
monetary stability.
J. How Floating Rates Work
The use of gold as backing for currency is minimized under a floating rate system. Indeed,
monetary gold, or gold held as international reserve assets by nations in the system, has been
essentially demonetized since the 1970s. Under a floating rate system, currency prices are
determined by the supply and demand for specific currencies based upon relative inflation
rates, current events, and changes in trade and investment patterns.
K. Hard Currencies and Soft Currencies
A country facing high domestic and international demand for its goods and services and whose
government practices sound fiscal and monetary management will usually find itself with a
currency that is universally acceptable, basically stable, and freely convertible. Such countries
are often called “hard currency” states. A country whose goods and services are not in high
demand, whose economy tends to be highly inflationary, and whose political and economic
policies lead to instability and unrest will generally find itself with a low-demand currency and
may come to be known as a “soft currency” nation. This constitutes the great majority of
countries.
L. Pegged Currencies
Many countries have currencies “pegged” to those of stronger economies. For example, the
currencies of many Caribbean and West Indian nations are pegged to either the U.S. dollar or
the UK’s pound sterling. The Bahamian dollar is pegged to the U.S. dollar at a one-to-one ratio.
This means that the Bahamian dollar rises or falls along with the U.S. dollar against all other
currencies against which the latter floats.

INTERNATIONAL LIQUIDITY, INTERNATIONAL RESERVE ASSETS, AND THE OFFICIAL

SETTLEMENT OF INTERNATIONAL OBLIGATIONS
What Countries Do to Pay Their International Obligations Nations, just like people, have bills to
pay. This involves creating a debit on their financial assets in order to establish a credit against
their socalled accounts payables (i.e., what they owe to other nations). They must thus hold a
quantity of international liquidity, also known as international reserve assets, that can be used
to discharge official international debts.
1. A Country's Checking Account
These international reserve assets can be compared to a personal or business checkingaccount.
When the account is depleted, one’s liquidity is gone. For nations, liquidity consists of monetary
gold, special drawing rights, reserve position with the IMF, and foreign exchange (foreign
currency) reserves. When a country’s international reserve assets are low, it then becomes
necessary to borrow from foreign official sources such as other countries’ central banks. If a
nation has net surpluses in its international transactions, it can increase its international
liquidity and become a lender to other deficit countries.
2. Borrowing and Lending Funds
Nations also engage in what are known as “official” borrowing and lending operations. A
country with depleted financial assets may then borrow the necessary reserves from other
nations. This increases its international liquidity but at the same time raises its international
indebtedness. Surplus countries, to the contrary, pare down their debt or become lenders to
other states.
3. Monetary Gold
The use of monetary gold was widespread until the 1970s. Countries rarely use gold today to
settle international payments. The prevailing attitude, supported by the United States, is that
economic growth and development on an international scale should not be held hostage to
astate of nature. The United States does not back its own currency with gold, either
domestically or internationally, and the feeling is that other nations do not need to do so either.
Gold has been largely demonetized, except for occasional gold auctions held by the IMF, and
efforts to restore a gold or gold exchange standard have thus far been unsuccessful.
4. Special Drawing Rights
The supply of special drawing rights (SDRs) has remained unchanged since the early 1980s.
There are about 10 billion SDRs (US$15 billion) in circulation. Originally conceived as a means of
expanding the international liquidity of nations (they were to be used as a form of foreign
currency reserve), no new SDRs have been issued because of disagreement about the allocation
formula. A country’s allocation of SDRs allows it to debit that special account with the IMF to
discharge its accounts payables. In turn, countries owed money by other nations can also
accept payment in SDRs, banking them with the IMF for future use. It should nevertheless be
noted that the existing stocks of SDRs are in widespread use and are considered an active
international reserve asset.
5. Deposits with the IMF
Nominally classified as reserve assets, these funds are unavailable for normal use. IMF deposits
are initially made by countries joining the fund. This makes it possible for them to borrow from
the IMF against the collateral created by their local currency deposit. Were a nation to draw
down its IMF deposit, it would also be reducing the total amount of fund credit available to it.
6. Foreign Exchange
This is a country’s “quick cash.” In today’s floating rate system, a country’s most important
international reserve asset is its foreign exchange position, namely, the quantity of foreign
currencies it possesses. These are cash inventories against which a country can draw to
discharge its international accounts payables, that is, to pay for its imports and other
international obligations. That stock can be compared to a personal checking or short-term
savings account used to pay current expenses. These foreign exchange reserves are held by
private banks, central banks, and other financial institutions.
Foreign exchange reserves are not always located in the nation where they are claimed as
assets. For example, U.S. banks often hold their foreign exchange in overseas banks to make it
easier for foreign-based exporters that ship their goods to the United States to be paid on time.
This enables them to quickly settle foreign claims by debiting local currency accounts in
overseas banks. The same is true insofar as U.S. exporters are concerned. They too expect on-
time payment. Therefore, foreign banks maintain dollar (their foreign exchange) deposits with
U.S. banks that can be conveniently debited to pay for U.S. exports.