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1 Globalization: a Cautionary Tale 1 Notes 1 Globalization: A Cautionary Tale 1 . Trade data from the World Trade Organization, “Statistics: Trade and Tariff Data,” https://www.wto.org/english/res_e/statis_e/statis_e.htm (accessed May 11, 2015). Investment data from United Nations Conference on Trade and Development “FDI Flows and Stocks,” http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics. aspx (accessed May 11, 2015). 2 . The World Bank http://www.worldbank.org/en/topic/poverty (accessed May 11, 2015). 3 . See the case study, W. J. Henisz and B. A. Zelner, “AES-Telasi: Power Trip or Power Play?” (The Wharton School, 2006); or Paul Devlin’s film Power Trip (2003), for more in-depth coverage of AES and its failed entry to Georgia. 4. I explain some of the specific issues that IKEA faced in Russia, along with more gen- eral issues that similar companies face in emerging markets, in a blog post. See R. Salomon, “So You Want to Do Business In a Developing Country?” September 15, 2009, http://www.robertsalomon.com/so-you-want-to-do-business-in-a-developing-country / (accessed May 11, 2015). 5 . See “Tesco Plans Foray into US Market,” BBC News , February 9, 2006, http://news.bbc. co.uk/2/hi/business/4695890.stm (accessed June 24, 2015). 6 . In June 2007 I wrote a blog post forecasting that, given its strategy, Tesco would have trouble entering the US market. See R. Salomon, “Tesco’s American Foray,” June 27, 2007, http://www.robertsalomon.com/2007/06/ (accessed May 11, 2015). In March 2008, it was clear that many of those predictions had come true; Tesco failed to make a profit in the US market and exited a short time later. See R. Salomon, “Update: Tesco’s Venture into the U.S.,” March 4, 2008, http://www.robertsalomon.com/update-tescos -venture-into-the-us/ (accessed May 11, 2015). 7 . For an in-depth review of China’s infrastructure development, see Y. Chen, S. Matzinger, and J. Woetzel, “Chinese Infrastructure: The Big Picture, ” McKinsey Quarterly , June 2013, http://www.mckinsey.com/insights/winning_in_emerging_markets/chinese _infrastructure_the_big_picture (accessed May 11, 2015). 8 . See U. Galani, “No Froth in Starbucks’ Buyout in Japan,” New York Times , September 14, 2014, http://dealbook.nytimes.com/2014/09/24/no-froth-in-starbucks-buyout-in-japan (accessed May 11, 2015). 9 . See J. I. Siegel, “Lincoln Electric,” Harvard Business School Case 707–445, November 2006 (revised August 2008), http://www.hbs.edu/faculty/Pages/item.aspx?num=33844 (accessed May 11, 2015). 196 ● Notes 10. See “A World of Pain: The Giants of Global Finance are in Trouble,” The Economist , March 7, 2015, http://www.economist.com/news/finance-and-economics/21645807 -giants-global-finance-are-trouble-world-pain (accessed May 11, 2015). 11. Another way to think about the increase in the pace of globalization is by looking at the growth of the World Trade Organization (WTO), whose member states commit to broadly liberalizing cross-border trade. In 1995, its founding year, there were 128 WTO members; there are currently 160. China became a member in 2001 and Russia in 2011. As of this writing, WTO members account for approximately 96 percent of all global trade and 97 percent of the world’s GDP. 12 . See T. L. Friedman, The World is Flat: A Brief History of the Twenty-First Century (New York: Farrar, Straus and Giroux, 2015). See also T. L. Friedman, Hot, Flat, and Crowded: Why We Need a Green Revolution and How It Can Renew America (New York: Farrar, Straus and Giroux, 2008). T. Levitt was among the first to make flat-world arguments in “The Globalization of Markets,” Harvard Business Review (May 1983). 13. For the purposes of this book, political institutions also refer to legal and regulatory insti- tutions. For more, see chapter 4 . 14 . See R. Florida, “The World Is Spiky,” Atlantic Monthly, October 2005; or P. Ghemawat, “Distance Still Matters,” Harvard Business Review 79, no. 8 (September 2001): 137–149. 2 The Globalization Process 1. See J. Szczesny, “Milestone: China Now General Motors’ Biggest Market,” CNBC , July 8, 2013, http://www.cnbc.com/id/100870316 (accessed May 11, 2015). 2 . A maquiladora is manufacturing facility located within a free trade zone in Mexico. The principal purpose of a maquiladora is to manufacture products for export. The benefits of locating a maquiladora in Mexico are the tax benefits. Imported equipment and inputs as well as exported outputs are generally not subject to tax. 3 . For details, see E. Araiza and P. Cardona Soriano, “LL Bean Latin America,” IESE Business School, 2000. 4 . For more on what I mean by currency risk, see chapter 5 . 5. I continue with assumption no. 5, above (there is no residual value of the assets in which the company invests for its expansion to Newlandia—that is, the entire value of the Newlandia venture goes to $0 in year 6). I also continue with assumptions no. 6 (no cur- rency risk) and no. 7 (no tax considerations). 6 . Clearly, I am simplifying quite a bit for analytical convenience. For detailed infor- mation on how to calculate discount rates, I refer you to Aswath Damodaran’s website ( http://people.stern.nyu.edu/adamodar/ ). One common technique for generating the cost of capital that is appropriate to use as the discount rate in present value calculations comes from the capital asset pricing model (CAPM). β CAPM can be expressed as K c = R f + i (R m – R f ), where K c stands for the cost of capital used for discounting purposes; R f is the risk-free rate (typically that β associated with local US government bonds); i is the specific market beta of the company; and R m is the market return (typically the return on some index like the S&P 500). n 7. The generic present value formula can be expressed as {FV n /(1+r) } where FV n is the future value (in this case, profit) in time period n , r is the discount (interest) rate, and n is the period (month, year, etc.). Notes ● 197 3 The Impact of National Institutions on Globalization 1 . Just a reminder that, throughout this book, when I refer to political institutions, I include legal and regulatory institutions as well. See chapter 4 for more explanation. 2 . See D. C. North, “Institutions,” Journal of Economic Perspectives 5, no. 1 (1991): 97–112. 3. Srilata Zaheer is widely credited for coining the phrase “liability of foreignness” in S. Zaheer, “Overcoming the Liability of Foreignness,” Academy of Management Journal 38, no. 2 (1995): 341–363. The concept itself dates back at least to Stephen Hymer, who wrote about the disadvantages foreign companies face in his doctoral thesis. See S. Hymer, The International Operations of National Firms: A Study of Direct Foreign Investment (Cambridge, MA: MIT Press, 1960). 4 . See “China Loses Its Allure,” The Economist , January 23, 2014, http://www.economist. com/news/leaders/21595001-life-getting-tougher-foreign-companies-those-want-stay -will-have-adjust-china (accessed May 15, 2015). 5 . Chapter 4 addresses individual kinds national institutions. 6 . Typically, measures of institutional distance are calculated using Euclidean or Mahalnobis distance approaches. I will come back to measurement issues in later chapters. 7 . See J. Campbell, “Ikea Shuts Down Lifestyle Website in Russia Over Fears It Promotes Gay Propaganda,” The Independent , March 14, 2015, http://www.independent.co.uk /news/world/europe/ikea-closes-lifestyle-website-in-russia-over-fears-it-promotes-gay -propaganda-10108270.html (accessed May 26, 2015). 8 . See J. Alcacer and J. Leitao, “Logoplaste: Global Growing Challenges,” Harvard Business School Case 711–411, December 2010 (revised February 2013). 4 Political Institutions and Globalization 1 . That is to say, when I speak of political institutions in this book, I refer generi- cally to political, legal, and regulatory institutions as a set. It is perfectly reason- able to treat and measure political, governmental, legal, and regulatory institutions as distinct and separate institutional constructs. I simply collapse them here for analytical convenience and because they share significant theoretical and empirical overlap. 2 . See First Read DMV, “Uber Wins Right to Operate in D.C.,” NBC Washington , December 4, 2012, http://www.nbcwashington.com/blogs/first-read-dmv/Uber-Wins -Right-to-Operate-in-DC-182097951.html (accessed May 15, 2015). 3 . See E. Badger, “How Airbnb Just Changed the Housing Laws in San Francisco,” The Washington Post , October 8, 2014, http://www.washingtonpost.com/blogs/wonkblog /wp/2014/10/08/how-airbnb-just-changed-the-housing-laws-in-san-francisco/ (accessed May 15, 2015). 4 . For examples of the difficulties experienced by Uber and Airbnb in Europe, see M. Scott and S. Plass, “German Court Lifts Ban on Uber Ride Service,” The New York Times , September 16, 2014, http://www.nytimes.com/2014/09/17/business/international/uber -ban-in-germany-is-lifted-by-court.html?_r=0 (accessed May 15, 2015), or R. Minder and M. Scott, “Sharing Economy Faces Patchwork of Guidelines in European Countries,” The New York Times , September 21, 2104, http://www.nytimes.com/2014/09/22 /technology/sharing-economy-faces-patchwork-of-guidelines-in-european-countries. html (accessed May 15, 2015). 198 ● Notes 5 . See U. Bhattacharya, N. Galpin, and B. Haslem, “The Home Court Advantage in International Corporate Litigation,” Journal of Law and Economics 50 (2007): 625–659. 6 . See Public Citizen, “Canadian Corporation Uses NAFTA to Sue the U.S.: The Loewen Group, Inc. v. The United States,” http://www.citizen.org/trade/article_redirect .cfm?ID=1173 (accessed May 15, 2015). 7 . For details, see K.
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