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Developed economies have

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INTERNATIONAL
BUSINESS
S T R AT E G Y A N D T H E M U LT I N AT I O N A L C O M PA N Y
INTERNATIONAL
BUSINESS
STRATEGY AND THE MULTINATIONAL COMPANY

JOHN B. CULLEN
Professor in the Department of Management,
Washington State University

AND

K. PRAVEEN PARBOTEEAH
Associate Professor in the College of Business,
University of Wisconsin, Whitewater
Publisher: John Szilagyi 1
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First published 2010
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Cullen, John B. (John Brooks), 1948- 36
International business : strategy and the multinational company / John B. Cullen, K. Praveen
Parboteeah.
37
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1. International business enterprises—Management. I. Parboteeah, Praveen. II. Title. 39
HD62.4.C847 2009 40
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ISBN 0-203-87941-4 Master e-book ISBN
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 To
Jean and Jaye
and
Kyong, Alisha, and Davin
1
2
3
4 Brief Contents
5
6
7
8 Preface xix
9 Acknowledgments xxiii
10 About the Authors xxiv
11
12 Part One
13 Introduction to International Business 2
14
15 1 Competing in the Global Marketplace 4
16 2 Strategy and the MNC 34
17
18 Part Two
19 The Global Context of Multinational Competitive Strategy 60
20 3 Global and Regional Economic Integration: An Evolving
21 Competitive Landscape 62
22 4 Global Trade and Foreign Direct Investment 92
23 5 Foreign Exchange Markets 128
24 6 Global Capital Markets 154
25
26
Part Three
27
The Institutional and Cultural Context of
28
29
Multinational Competitive Strategy 176
30 7 Culture and International Business 178
31 8 The Strategic Implications of Economic, Legal, and Religious
32 Institutions for International Business 212
33
34 Part Four
35 Multinational Operational and Functional Strategies 240
36
37 9 Entry Strategies for MNCs 242
38 10 International Marketing and Supply-chain Management
39 for MNCs 274
40 11 Financial Management for MNCs 308
41 12 Accounting for Multinational Operations 332
42 13 Organizational Structures for MNCs 366
43 14 International Human Resource Management 394
44 15 E-commerce and the MNC 424
45
46 Part Five
47 Ethical Management in the International Context 448
48
16 Managing Ethical and Social Responsibility in an MNC 450
49
50
Notes 477
Photo Credits 487
Index 488
vii
D E T A I L E D C O N T E N T S

Detailed Contents

Part One
Introduction to International Business
Chapter Internet Activity 30
Key Concepts 31
Case 1 McDonald’s Sells Hamburgers in
India 31
Case Discussion Points 33
1 COMPETING IN THE GLOBAL
MARKETPLACE 4
The Nature of International Business 7
Globalization: A Dynamic Context for
International Business 9
Types of Economies in the Global
Marketplace: The Arrived, the Coming, 2 STRATEGY AND THE MNC 34
and the Struggling 11 Strategic Choices for MNCs 36
Globalization Drivers 13 Competitive Advantage and the Value
Lowering the Barriers of National Borders: Chain 37
Making Trade and Cross-border Global Integration: Where Can We Do Things
Investment Easier 14 Best or Cheapest? 40
Locate and Sell Anywhere to Anybody: The Transnational Strategy 40
It’s No Longer Only for Manufacturing International Strategy 42
but Services as Well 15 The Local Responsiveness Strategy: How Far
The Rise of Low-cost Countries: An to Go? 44
Increasingly Important Driver of Multidomestic and Regional Strategies 44
Globalization 19 A Brief Summary and Caveat 46
Information Technology and the Internet: Choosing a Multinational Strategy:
A Necessary Tool for Globally Dispersed How to Solve the Global—Local
Companies 23 Dilemma 47
Increasingly Global Products, Services, and Global Markets 48
Customers 24 Do your Customers from Different Countries
Can I Buy it in Germany and Use it have Similar Needs? 48
in Japan? The Need for Global Are There Global Customers? 48
Standards 25 Can You Transfer Marketing Activities to
Environmental Sustainability and Other Countries? 49
Responsibility 26 Globalization Cost Drivers 49
Plan of the Book 27 Are There Global Economies of Scale? 49
International Business: A Strategic Are There Global Sources of Low-cost Raw
Approach 28 Materials or Components? 50
Chapter Review 29 Are There Cheaper Sources of Skilled Labor?
Discussion Questions 29 50
International Business Skill Builder: Pros Are Product Development Costs High? 50
and Cons of Globalization 30 Governments 50

viii
 D E T A I L E D C O N T E N T S

Do Many Countries have Favorable Trade Company-Situation Analysis and the

Policies for the Industry? 50 Multinational Strategy Choice 53
Do Many Countries have Regulations Chapter Review 55
that Restrict Operations in the Industry? Discussion Questions 56
51 International Business Skill Builder:
The Competition 51 Identifying the Value-chain and
What Strategies do your Competitors Multinational Strategies 56
Use? 51 Chapter Internet Activity 57
What is the Volume of Imports and Exports Key Concepts 57
in the Industry? 51 Case 2 Walmart or Carrefour: Who will be
A Caveat 51 Master of Planet Retail? 58
How to Make the Transnational or Case Discussion Points 59
International Choice 52

Part Two
The Global Context of Multinational Competitive Strategy
Case 3 Sunshine Farms: Withering since
NAFTA 90
Case Discussion Points 91

3 GLOBAL AND REGIONAL ECONOMIC

INTEGRATION: AN EVOLVING COMPETITIVE
LANDSCAPE 62
Dropping Barriers to World Trade: GATT
and the WTO 64 4 GLOBAL TRADE AND FOREIGN DIRECT
Regional Trade Agreements (RTAs) 70 INVESTMENT 92
Are RTAs Friend or Foe to World History of Trade Theory 94
Trade? 70 Mercantilism: Early Thinking 94
Types of Regional Trade Agreements 70 Foundations of Modern Trade Theory 97
Motivations for Regional Trade Absolute Advantage: The World According
Agreements 73 to Adam Smith 97
Are Regional Trade Agreements Good for Comparative Advantage: The World
Business? 74 According to David Ricardo 99
Regional Trade Agreements: A Look Comparative Advantage and Production
Inside 74 Gains 100
European Union 78 Comparative Advantage and Consumption
History and Organization of the EU 79 Gains 101
North American Free Trade The Heckscher–Ohlin Theory and the Role
Agreement 83 of Factor Endowments 102
Governance of NAFTA 83 The Leontief Paradox 104
Asia-Pacific Economic Cooperation 84 Updating the HO Theory 104
Chapter Review 87 Other Views of Trade 106
Discussion Questions 88 The Product Life Cycle: A Technology
International Business Skill Builder: Innovation View 106
Understanding the WTO Debate 88 New Trade Theory 109
Chapter Internet Activity 89 Michael Porter and the Competitive
Key Concepts 89 Advantage of Nations 110

ix
D E T A I L E D C O N T E N T S

Firm Strategy, Structure, and Rivalry 110 Income Levels 144

Related and Supporting Industries 111 Government Controls 144
Demand Conditions 112 Exchange-rate Risks and Hedging 145
Factor Endowments 112 Foreign Exchange Arbitrage 148
Evaluating Trade Theories: What Do They Chapter Review 149
Tell Us? 113 Discussion Questions 150
Arguments against Free Trade 115 International Business Skill Builder:
Free Trade as a Threat to National Formulating a Hedging Strategy 150
Sovereignty 115 Chapter Internet Activity 151
Protecting Infant Industries 115 Key Concepts 151
Fair Trade 116 Case 5 Trading Pesos for Greenbacks:
Protecting the Environment 116 The Dollarization of San Miguel 152
Job Loss 116 Case Discussion Points 153
Foreign Direct Investment 118
Chapter Review 121
Discussion Questions 123
International Business Skill Builder: A
Simulation of International Trade 123
Chapter Internet Activity 124
Key Concepts 124 6 GLOBAL CAPITAL MARKETS 154
Case 4 Levi Strauss & Company: No Longer What are Capital Markets? 156
“Made in the USA” 125 The Bond Market 157
Case Discussion Points 127 The Stock Market 158
Global Financial Markets 159
Global Banking 159
The International Bond Market 161
Global Stock (Equity) Market 163
An Alternative Way to List on a Foreign
Exchange 164
5 FOREIGN EXCHANGE MARKETS 128 A Changing Future for the World’s Stock
What is the Foreign Exchange Market? 130 Markets 169
Types of Foreign Exchange Transactions 133 Chapter Review 171
The History of Exchange-rate Systems 134 Discussion Questions 172
The Gold Standard 134 International Business Skill Builder:
The Bretton Woods Agreement 135 Understanding how Stock Markets
Other Currency Exchange-rate Systems 136 Work 172
What Determines Exchange Rates 138 Chapter Internet Activity 172
Purchasing Power Parity 138 Key Concepts 173
Market Factors 141 Case 6 Wall Street or Great Wall? The
Effects of Other Factors on Exchange Challenge to Maintain Dominance in the
Rates 143 Global Financial Markets 173
Inflation 143 Case Discussion Points 175
Relative Interest Rates 143

x
 D E T A I L E D C O N T E N T S

Part Three
The Institutional and Cultural Context of Multinational Competitive Strategy

7 CULTURE AND INTERNATIONAL 8 THE STRATEGIC IMPLICATIONS OF

BUSINESS 178 ECONOMIC, LEGAL, AND RELIGIOUS
National Culture 180 INSTITUTIONS FOR INTERNATIONAL
National Culture Components 180 BUSINESS 212
National Culture: Hofstede and the Global Social Institutions 214
Organizational Behavior and Leadership Economic Systems 215
Studies 182 Types of Economic Systems 216
Hofstede’s Model of National International Business Implications of
Culture 182 Economic Systems 216
The Global Leadership and Legal Systems 220
Organizational Behavior Studies Types of Legal Systems 221
Model of Culture 189 Other Aspects of the Legal Environment:
National Culture and Business Culture 196 The “Doing Business” Project 222
National Culture: Some Cautions and Political Risk 226
Caveats 199 Religion 229
National Culture: Cross-cultural Buddhism 229
Training 201 Christianity 230
Culture Training Methods 202 Hinduism 231
Culture Training: Best Practices 204 Islam 232
Chapter Review 205 Judaism 234
Discussion Questions 205 Confucianism 234
International Business Skill Builder: Chapter Review 235
Designing a Cross-cultural Training Discussion Questions 236
Program 206 International Business Skill Builder: Where
Chapter Internet Activity 206 to Start a Business? 236
Key Concepts 206 Chapter Internet Activity 237
Case 7 Trying to Do Business in Mexico, Key Concepts 237
Gringo Style 207 Case 8 Tonia Motorbikes: Chinese Piracy 238
Case Discussion Points 211 Case Discussion Points 239

xi
D E T A I L E D C O N T E N T S

Part Four
Multinational Operational and Functional Strategies

Discussion Questions 270

International Business Skill Builder:
Identifying the Value-chain Activities
and Entry Strategies 270
Chapter Internet Activity 271
9 ENTRY STRATEGIES FOR MNCS 242 Key Concepts 271
MNC Entry Strategies 244 Case 9 Moonbeam Electronics: Profiting from
Exporting 244 a Foreign Trade Zone 272
Active Export Strategies 245 Case Discussion Points 273
Which Way to Go—Passive or Direct? 248
Licensing and Franchising 249
International Franchising: A Special
Licensing Agreement 249
When to Choose a Licensing Entry
Strategy 251
The Product 251 10 INTERNATIONAL MARKETING AND
Characteristics of the Target Country 252 SUPPLY-CHAIN MANAGEMENT FOR
The Nature of the Company 252 MNCS 274
When to Choose Franchising 253 Market Research—The Knowledge
Some Disadvantages of Licensing and Advantage 276
Franchising 253 Understanding Global Demand—
International Strategic Alliances 254 Segmentation 279
When to Choose Strategic Alliances 256 Products and Brands—Global or
The Local Partner’s Knowledge of their Local? 280
Market 256 Global and Local Branding 281
Local Government Regulations and Delivering Products across the Globe—
Requirements 256 Distribution and Supply Chains 286
Sharing Risks among Partners 257 Retailing in Global Markets 286
Sharing Technology 257 Wholesaling in Global Markets 289
Economies of Scale 257 Global Supply-chain Management 289
Foreign Direct Investment 257 Pricing—Global or Local? 293
FDI Advantages and Disadvantages 261 Talking to Customers across the Globe—
Selecting the Entry Strategy: Some General Marketing Communications 295
Strategic Considerations 263 Chapter Review 301
Strategic Intent 263 Discussion Questions 302
Company Capabilities 263 International Business Skill Builder:
Local Government Regulations 264 Test Your Cross-cultural
Target Market and Product Advertisements 303
Characteristics 264 Chapter Internet Activity 303
Cultural and Geographic Distance 264 Key Concepts 304
Political and Financial Risk of the Case 10 Frito-Lay Adapts to the Chinese
Investment 265 Market 305
Need for Control 265 Case Discussion Points 307
Entry Strategies and Multinational
Strategies 267
Chapter Review 269

xii
 D E T A I L E D C O N T E N T S

The Nature of Capital Markets 336

The Type of Tax Reporting 336
The Legal System and Levels of Enforcement
of Regulations 336
The Types of Businesses 337
11 FINANCIAL MANAGEMENT FOR MNCS 308 The Status of the Accounting
The Cost of Capital and Project Valuation 312 Profession and Accounting
MNC Capital Structure 315 Education 337
Cost of Capital for the MNC 316 Economic and Political Ties with Other
Access to International Capital Nations 337
Markets 316 Types of National Accounting
International Diversification 318 Systems 337
Exchange-rate Risk Exposure 318 Harmonization 338
Country Risk 318 Setting International Accounting Standards
How MNCs Decide on the Mixture of Debt 338
and Equity in their Capital Structure 319 Why are the International Accounting
Company Factors 319 and Financial Reporting Standards
Country Factors 320 Important for International
Financing International Trade 322 Business? 342
Methods of Payments in International Accounting for Exchange Rates 343
Trade 322 Foreign Currency Transactions 343
Cash-in-advance 322 Foreign Currency Translation 344
Letters of Credit 322 Foreign Currency Translation Rules for US
Documentary Collections 325 Firms and for International Accounting
Open Account 325 Standards 345
Export Financing 325 Major International Managerial Accounting
Working Capital Financing 325 Issues: Transfer Pricing and International
Export Factoring 326 Taxation 347
Forfaiting 327 Transfer Pricing 348
Chapter Review 327 Why have Transfer Pricing? 348
Discussion Questions 328 Factors Affecting Transfer Pricing 348
International Business Skill Builder: Making International Taxation 349
NPV Decisions 328 Tax Planning Strategies for the MNC 350
Chapter Internet Activity 328 Social Responsibility Reporting and
Key Concepts 328 Accounting 352
Case 11 Wilson International: International Chapter Review 354
Capital Budgeting 330 Discussion Questions 355
Case Discussion Points 331 International Business Skill Builder:
Exploring Accounting
Standards 356
Chapter Internet Activity 356
Key Concepts 357
Case 12 “Baa”st Transfer Price 357
Case Discussion Points 361
12 ACCOUNTING FOR MULTINATIONAL Appendix: A Primer on Accounting
OPERATIONS 332 Statements 362
Why do Nations have Different Accounting Balance Sheets 362
Systems? 334 Income Statements 363
National Culture 334 Earnings Per Share or EPS 364
Social Institutions 335 Cash Flow Statements 364

xiii
D E T A I L E D C O N T E N T S

Compensation 404
Labor Relations 406
Expatriates 409
Cost of Expatriates 410
Expatriate Failure 411
13 ORGANIZATIONAL STRUCTURES FOR Ensuring Expatriate Success 412
MNCS 366 The Future: Women Expatriates? 415
Organizational Design: Challenges, Forms and Chapter Review 417
Basic Designs 368 Discussion Questions 418
The Functions of Organizational International Business Skill Builder:
Design 368 Choosing a Plant Location 418
Organizational Designs for Chapter Internet Activity 419
Multinationals 370 Key Concepts 419
The Export Department 370 Case 14 India: The Employment Black
The International Division 372 Hole? 420
Worldwide Geographic Structure 373 Case Discussion Points 423
Worldwide Product Structure 374
The Matrix and the Transnational Network
Structure 376
Choosing the Appropriate Structure:
Strategy and Structure 379
Coordination Mechanisms 380
Coordination and Integration 381 15 E-COMMERCE AND THE MNC 424
Teams 383 E-commerce: Definitions, Types, and
Global Virtual Teams 384 Importance 426
Knowledge Management 385 Internet and E-commerce Structure 428
Chapter Review 389 E-Commerce and Globalization 429
Discussion Questions 390 Global E-commerce Opportunities and
International Business Skill Builder: Threats 432
Building a Knowledge Management Key Cross-cultural and Global E-commerce
System 390 Issues 433
Chapter Internet Activity 391 Cross-cultural E-commerce Adoption and
Key Concepts 391 Diffusion 433
Case 13 Airbus: Trouble Getting the A380 Off Cross-cultural Consumer Trust in E-
the Ground 392 commerce 435
Case Discussion Points 393 Cross-cultural Web Design 436
Building a Successful Global E-commerce
Strategy 438
Important Aspects of a Successful
E-commerce Strategy 438
Cyber and E-commerce Security 441
Chapter Review 444
14 INTERNATIONAL HUMAN RESOURCE Discussion Questions 445
MANAGEMENT 394 International Business Skill Builder:
International Human Resource Management: Designing an International Website 445
The International Setting 396 Chapter Internet Activity 446
Recruitment and Selection 396 Key Concepts 446
Training and Development 401 Case 15 E-cash: Global Currency? 446
Performance Appraisal 403 Case Discussion Points 447

xiv
 D E T A I L E D C O N T E N T S

Part Five
Ethical Management in the International Context

Building the Socially Responsible

Company 464
Stakeholder Analysis 464
Code of Conduct 466
Successful Implementation of Codes of
16 MANAGING ETHICAL AND SOCIAL Conduct 468
RESPONSIBILITY IN AN MNC 450 Ethics Monitoring and Enforcement 469
International Ethics and Social Other Key Elements of the Successful
Responsibility 452 Socially Responsible Multinational 470
Key Global Ethics Issues 454 Chapter Review 472
Labor Rights 454 Discussion Questions 472
Environmental Pollution 456 International Business Skill Builder:
Corruption and Bribery 457 Determining Key Areas of Corporate
Dealing with Global Ethics 462 Social Responsibility 473
Multinational Approach to Global Ethics: Chapter Internet Activity 473
Ethical Relativism vs Ethical Key Concepts 473
Universalism 462 Case 16 Mighty-Mart’s Contract
Pressures Supporting Ethical Manufacturing Issues 474
Universalism 463 Case Discussion Points 476

xv
F E A T U R E T O P I C S

Feature Topics

Country Clusters and the GLOBE Project 196

Kiwi Companies and China 199
MTV Networks International and Saudi
IB STRATEGIC INSIGHT
Arabia 201
De Beers and Culture Training 203
Examples from real companies that highlight how The Japanese “Salaryman” 215
the content is used in strategy formulation or imple- Doing Business in Russia 218
mentations Multinational Business Decisions 220
Political Risk in South America 227
Nokia’s New Plant in Cluj, Romania 12 Political Risk in China 228
Automobile Production Moves to Eastern Islam and Interest 233
Europe 18 Exporting Upscale Sake to the US 246
New Competitors on the Move 23 Gap Goes Franchising 251
Health Care Destinations: Indian Hospitals Seek General Motors’ Strategic Alliances in China 255
Global Customers 25 Airbus Struggles to Succeed in China 262
Vodafone and Ikea Try to Get the Global Thing Focus Groups on Wine in China 278
Right 37 Hello Kitty—What Do Brands Mean Across
How Dell Rules Using its Value Chain 39 Cultures? 281
Strategies are Seldom Pure and Don’t Always Cultural Sensitivity Issues Show up in Surprising
Work 47 Ways for Adidas 284
A Warehouse Store in India 52 Country of Origin Effects of “Made in China” 285
The Textile Industry in India 66 Dell’s Global Supply Chain 292
Two Examples of How the WTO Can Influence Using the Global Capital Markets: US-based Intel
Your Strategy 68 and Swiss-based STMicroelectronics find
Pluses and Minuses of the European Monetary Money in Italy for their Joint Venture 320
Union 81 Foreign Currency Translation at BMW 347
Two Canadian Companies Succeed because of New Organizational Structure at Nokia 369
NAFTA 84 Philips and the Matrix Structure 376
Neo-mercantilism: Should the US and EU Protect Improving Collaboration at P&G and Raytheon 381
their Textile Industries from Chinese Multinationals and Global Teams 383
Imports? 95 Building a Knowledge Management System at
A Look at the Italian Furniture-manufacturing Siemens 387
Cluster in Milan 112 IBM’s Global Workforce 397
Competitive Advantage through Exchange Recruitment and Selection at Ritz-Carlton 400
Rates 138 Training in China and India 402
A Sample of Hedging Strategies 147 Women Expatriates 416
In the Financial Crisis, Big Companies Sought Vast.com 430
Samurai Bonds, but Some Investors Still Lost Jack Ma and Alibaba.com in China 435
Out 163 BlueNile.com 439
Managing in Stock Issues in the Regulated US ABB and Corporate Social Responsibility in
Market: The Sarbanes–Oxley Act 165 Africa 466
McDonald’s and Doing the Right Thing in Corporate Social Responsibility at Johnson
India 181 Controls 470

xvi
 F E A T U R E T O P I C S

Small Firms and Export Departments 371

Compensation for Expatriates in Emerging
Markets 414
IB ETHICAL CHALLENGE
Communication Technologies for Small Firms 431
Cross-cultural Website Challenges 437
Examples from the popular press that show ethical
issues relevant to the chapter content.

Drug Testing Made Easier 21

COUNTRY FOCUS
Getting Oil Cheaply but with Increased
Environmental Controls: A Report from the
US Government 43 Examples that show you the unique characteristics
Public Insight, Ralph Nadar’s Consumer of a region or country that are relevant to the chapter
Advocates’ Group, Takes a Negative Position topics.
on NAFTA 85
What Do You Do when over 4,000 People in One India 11
Town Lose their Jobs on the Same Day? 118 Romania 45
How Can You Issue Bonds when Interest is Sweden 188
Forbidden? 164 France 217
South Korea 408
McDonald’s and the French Fries Controversy in
Labor Rights in China 453
India 232
Trust in Global Brands 282
Taking Advantage of Transfer Pricing 348
E-waste in India 442

IB SUSTAINABILITY PRACTICES

Examples of what multinationals are doing to make

their activities more environmentally responsible.
IB SMALL BUSINESS INSIGHT
Trade and the Environmental Threat of
A strategic insight example based on small busi- Genetically Modified Organisms (GMOs) 69
nesses or entrepreneurs. Exporting Absolute Advantage while Reducing the
Local Carbon Footprint 117
A Swedish Company Goes Offshoring 22 Led by the EU, a New Trading Market
Location Advantages and a Mobile Platform 41 Emerges 169
Exporting as an Opportunity for Small Culture and Sustainability 189
Businesses 114 Germany and Alternative Energy 226
Two Entrepreneurs: One Gains and Another Loses Corporate Social Responsibility and Sustainability
from the Weakening Dollar 132 in the Location Choice 261
Even Small Businesses Cross Borders to Issue Stewarding Sustainable Forestry in Bolivia 291
Stock 166 The Case for Building Sustainability Risk into the
Branding in Collectivistic Societies 187 Capital Investment Decision 312
Business Culture in China 198 Cost Accounting for Sustainability 353
Where to Start a Business 223 Building Sustainability Knowledge Management
Experience Helps: Direct Exporting for Aussie Red Systems 386
Wines to Hungary 247 Electronic Human Resource Management 415
Two Alabama Small to Medium-sized Enterprises IBM Software and Green Business 428
(SMEs) Find Financing to Propel their Corporate Social Responsibility in the Mining
Exporting Success 326 Industry 457

xvii
F E A T U R E T O P I C S

Chapter Introductory and 1

Concluding Material 2
3
4
Preview IB Strategic Insight Concluding Case Study with Case
5
Discussion Points
Brief case to add realistic context to chapter material 6
and serve as early referent to the strategic implica- Similar to Preview IB Strategic Insight. 7
tions of the material. 8
9
South Africa’s Shoprite: The Next Walmart? 5 International Business Skill Builder 10
Starbucks’ International Challenge 35 Experiential exercise relevant to chapter content. 11
Let the Wines Pour In 63 12
Boeing’s New 787 Dreamliner is 70 Percent 13
Imported! 93 Key Concepts 14
Living on US Dollars and Buying a Car in 15
France 129 Discussion Questions 16
Chinese Companies Seek Capital for Expansion in 17
the US 155 18
International Cultural Blunders 179 19
Legal Environment in China 213 20
Australian Prawns a Greek Winner 243 21
Zeno and the Global Market for Acne 22
Treatment 275 23
Tesco Comes to the US: Weighing the Financial 24
Risks of a Major International Investment 309 25
A Cultural Revolution in Accounting 333 26
Boeing and the 787 Dreamliner 367 27
Global Human Resource Management and 28
Technology 395 29
New E-commerce Businesses 425 30
International Ethics in China and Around the 31
World 451 32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

xviii
 P R E F A C E

Preface

The globalization of markets and companies, the impact of the possible reces-
sion, the emergence of the BRIC (Brazil, Russia, India, and China) economic
bloc and the pressures for companies to become more environmentally sus-
tainable define international business today. No companies are immune to
such environmental forces. To cope adequately with this complex global
environment, international managers need to be able to develop and implement
successful strategies. International Business: Strategy and the Multinational
Company is designed to provide students with the latest insights into the
complexity of managing multinationals and domestic operations across borders.
The text uses a strategic perspective as the dominant theme to explore inter-
national business and its implications for the multinational company (MNC).
This text is the first international business text that uses this critical emphasis
on strategic decision making as the cornerstone of its approach.

Pedagogical Approach
International Business: Strategy and the Multinational Company provides a
thorough review and analysis of international business using several learning
tools:

Strategy as the Theme All chapters have been written using strategy as a
unifying theme that is highlighted for the learner through the relevance of the
material. This theme provides the students with the ability to see how the various
functional areas of international business contribute to the overall strategy of
the MNC.

Application-based All chapters give the learner three opportunities to apply

the knowledge gained from reading the chapter—an International Business Skill
Builder, Chapter Internet Activity, and an end-of-chapter Case Study. These
exercises provide deeper insights into the challenges faced by international
business managers.

Current The text contains the latest international business information and
examples. It is the first to address the issue of sustainability practices in the
international business area.

Economical The book is priced worldwide at a price nearly half that of many
other international business texts.

xix
P R E F A C E

Key Features

Chapter Case Studies, Internet Activities, and International Business Skill

Builders End-of-chapter projects include cases and activities, which give the
learner the opportunity to apply text material to real-life international business
problems.

Extensive Examples Throughout the text, many examples enhance the text
material by showing actual international management situations. These exam-
ples are illustrated in six different formats:

• Preview IB Strategic Insights show you how real MNCs handle issues to
be discussed in the chapter.
• IB Strategic Insights give information on the strategic implications for
international businesses that relate to the current discussion in the text.
• IB Small Business Insights highlight chapter material of particular relevance
to small businesses.
• Country/Regional Foci are discussions that show you the unique charac-
teristics of the region or country that are relevant to the chapter topics.
• IB Ethical Challenges are examples of situations faced by multinational
managers in dealing with issues being discussed in the chapter.
• IB Sustainability Practices show you what multinationals are doing to
implement such sustainable practices.

Learning Aids The companion website (www.cullenib.com) also contains an

extensive selection of Internet links to resources and information that are
updated regularly.

Current Data All chapters have been updated to include the latest research,
examples, and statistics in multinational management, creating the most
accurate and current presentation possible.

Contents
The book is divided into five major sections. Each section contains chapters that
provide information on essential topics of international business. The intent is
to give you an overview of the complex and exciting world of international
business.
The first section provides an introduction to the field of international
business, including background on globalization and how MNCs compete
strategically. It is important that you first understand the strategic choices open
to MNCs. With that understanding, you will have a better appreciation of the
information provided in later chapters that provides essential material for
understanding international business.
Part Two of your text is intended to provide you with an understanding of
the global context in which MNCs compete. Chapter 1, in Part One, touched
on the issue of how growing international trade and investment combined with

xx
 P R E F A C E

global economic integration is changing the competitive landscape for MNCs.

Two additional chapters will show you how money moves across borders to
make international transactions possible. One chapter overviews the basics of
foreign exchange. There you learn what affects the varying values of currencies
from different countries and how international managers manage cross-border
money transactions. A second chapter discusses how MNCs, in today’s global
financial systems, get capital from bond and stock markets outside of their own
countries.
Part Three looks inside the countries where MNCs do business. Here you
will learn how MNCs adjust their strategies and operations to the local context.
One chapter looks at how culture influences the conduct of international
business. The other chapter focuses on social institutions such as the legal and
political systems. It also considers the effects of religion on an MNC’s operations
and strategies when doing business in countries or areas of the world with
particular religious institutions.
Part Four of your text brings you inside the MNC to look at the functional
and operational strategies that support the broader multinational strategies that
you learned about in Chapter 2. This is the largest part of the book because
there are many issues that an MNC must consider in conducting its international
businesses. One chapter shows how MNCs actually set up operations in
different countries through techniques such as joint ventures or licensing. The
second chapter in this part looks at how companies adjust their marketing and
supply-chain management strategies to support operations in varied countries.
The third and fourth chapters show how MNCs develop specialized accounting
systems and manage their financial systems to conduct cross-border activities
successfully.
Because running an MNC is an organizational challenge, Part Four contains
a chapter devoted to organizational structures for international operations.
Similarly, because of the complexities of dealing with managers and workers
located anywhere in the world, a full chapter is also dedicated to international
human resource management. Part Four concludes with a chapter on e-commerce
for the MNC. This chapter focuses on the unique challenges of running an
international operation via the Internet.
Part Five, the final part of your text, contains only one chapter, “Managing
Ethical and Social Responsibility in an MNC.” However, the challenges of
managing ethical issues in varied cultural and institutional contexts cannot
be overestimated. While you will not learn how to be ethical by reading this
chapter, you will be introduced to the basics of ethical reasoning and some of
the issues you need to consider when faced with ethically challenging decisions.

Support Materials
International Business offers a website for both students and instructors at
www.cullenib.com. This site contains supplements to the text that give students
and instructors many options for learning and teaching the text content.

For Instructors
Web support is available with the following features:

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P R E F A C E

Instructor’s Manual Chapter-by-chapter outlines with teaching tips, web and

in-class excercises, and video resources.

Test Bank A full test bank for each chapter, with multiple choice and true/false
questions, available as Word documents or in a format compatible with
uploading to Blackboard or WebCT.

PowerPoint® Slide Presentations Instructors can access more than 40 slides

per chapter illustrating the main points of each text.

Weblinks Useful links are provided as instructional resources, including all

the links in the Instructor’s Manual.

For Students
Web support is available with the following features:

Practice Quizes Self-tests for each chapter provide students instant feedback
on their answers.

Flashcards Interactive flashcards allow students to test their knowledge of the

book’s key concepts.

Weblinks All the book’s informational links are provided to give students
easy access to online resources.

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 A C K N O W L E D G M E N T S

Acknowledgments

Numerous individuals helped make this book possible. Most of all, we must
thank our families for giving us the time and quiet to accomplish this task:

• Jean Johnson, Professor of Marketing at Washington State University,

John’s wife, read and commented on all chapters. Her suggestions improved
both the content and the writing, and resulted in a better product. She also
authored Chapter 10 on international marketing.
• Kyong Pyun, Praveen’s wife, was very helpful during this project. She
allowed uninterrupted blocks of time to finish the project. She also worked
on the instructor’s manual, completing the teaching outline, presentations
and other support material. Alisha, Praveen’s daughter, was also very
patient as she endured Daddy’s focus on the project. Davin, Praveen’s three-
year-old son, was also very helpful as he checked progress very regularly.

This text would not be possible without the support of a professional editorial
team. In particular, our thanks go to Routledge editor John Szilagyi, who
encouraged us to write a text on international business and weathered with us
the challenges of this formidable task. Developmental editor Elizabeth Renner
worked us on track for a very tight writing schedule. Our thanks also go to sev-
eral other professionals who contributed to this project, including Charles A.
Rarick, who contributed to the cases in the book.
We also appreciate the effors of individuals involved in marketing and
production.
The authors would like to thank the many reviewers from a wide array
of colleges and universities who provided valuable feedback in crafting the
manuscript.

John B. Cullen
K. Praveen Parboteeah

xxiii
A B O U T T H E A U T H O R S

About the Authors

John B. Cullen is Professor of Management at Washington State University,

where he teaches courses on international management, business ethics, organi-
zational theory, and strategic management. He received his PhD from Columbia
University.
In addition to numerous presentations at Asian and European universities,
Professor Cullen has been a visiting professor at l’Université Catholique de Lille
in France and, as a Fulbright Scholar, at Waseda and Keio Universities in Japan.
Professor Cullen is the author or co-author of five books, including
International Management: Strategy and the Multinational Company, and
over 60 journal publications. His research has appeared in journals such as
Administrative Science Quarterly, Journal of International Business Studies,
Academy of Management Journal, Organization Science, Decision Sciences,
American Journal of Sociology, Journal of Management, Organizational
Studies, Management International Review, Journal of Vocational Behavior,
Journal of Business Ethics, Organizational Dynamics, and the Journal of World
Business.
Professor Cullen’s major research interests include the effects of social
institutions and national culture on ethical outcomes and work values, the
management of entrepreneurial firms in changing environments, trust, and
commitment in international strategic alliances, ethical climates in multinational
organizations, and the dynamics of organizational structure.
Professor Cullen has consulted with both private and public organizations
in the US and elsewhere in the areas of international management, organiza-
tional design, and ethics management.

K. Praveen Parboteeah is an Associate Professor of International Management

in the Department of Management, University of Wisconsin–Whitewater. He
received his PhD from Washington State University, and holds an MBA from
California State University–Chico and a BSc (Honors) in Management Studies
from the University of Mauritius.
Parboteeah regularly teaches international management, business ethics,
and strategic management at both undergraduate and graduate levels. He
has received numerous teaching awards and is included in multiple editions
of Who’s Who Among America’s Teachers and is a University of Wisconsin–
Whitewater Master Teacher and Teaching Scholar.
Parboteeah’s research interests include international management,
ethics, and technology and innovation management. He has published over 25
articles in leading journals such as the Academy of Management Journal,
Organization Science, Decision Sciences, Journal of Business Ethics, Journal
of International Business Studies, and Management International Review.
He has received numerous awards for his research, including the Western
Academy of Management Ascendant Scholar award and the 2007–8 University
of Wisconsin–Whitewater Research Award.

xxiv
 A B O U T T H E A U T H O R S

Parboteeah has been involved in many aspects of international business

education at the University of Wisconsin–Whitewater. He chaired the
International Committee in the college of business and economics and is the
exchange faculty coordinator for the exchange programs in France, namely ESC
Rouen and the Burgundy School of Business in Dijon. He was part of the team
that received grants from the US Department of Agriculture to further agri-
cultural exchanges between the US markets and emerging markets such as China
and India. For these efforts, the emerging markets program was awarded the
Small Business/Export Assistance Governor’s Award in 2005. He also lectures
regularly at the WHU–Otto Beisheim School of Management in Germany and
at the Lok Jack Graduate School of Business in Trinidad.
Of Indian ancestry, Parboteeah grew up on the African island of Mauritius
and speaks Creole, French, and English. He currently lives in Whitewater with
his South Korean wife Kyong, daughter Alisha and son Davin.

xxv
INTERNATIONAL BUSINESS
I N T R O D U C T I O N

1 COMPETING IN THE GLOBAL MARKETPLACE

2 STRATEGY AND THE MNC

2 Introduction to
 C O M P E T I N G I N T H E G L O B A L M A R K E T P L A C E

Introduction to International Business

part one

International Business 3
1 Competing in the Global Marketplace

After reading this chapter you should be able to:

• Define international business.

• Understand the nature of an MNC.

• Understand the key forces that drive globalization and the current global economy.

• Know the basic types of economies that make up the world’s competitive landscape.

• Appreciate the role that low-cost countries and rapidly emerging economies play in
today’s world.

• Appreciate the importance of sustainability in the new global environment.

 International Business

As the Preview IB Strategic Insight shows, savvy managers all over the world keep
an eye open for international business opportunities. Often, in today’s competitive world,
the only opportunity to grow a business and its profitability is when a company leaves
its home country. However, with these opportunities come the challenges of running a
multinational operation. For the Shoprite case you can see the challenges faced by
management when employees come from different cultures, when local laws and political
institutions have different requirements for companies, and when foreign currencies must
be managed in different economic environments. These are just a small sample of the
many topics to consider in international business. To help you understand and meet
the challenges of international business, the objective of this text is to show you how
companies such as Shoprite succeed in the global marketplace and how they cope with
the many complexities of running an international operation.
Whether a business is large or small or located in whatever continent, the pressures
to think global continue to grow. Consider just a few examples: if you look at the clothes

PREVIEW IB
South Africa’s Shoprite: The Next Walmart? STRATEGIC INSIGHT

Already operating with over 700 stores in 16 coun-

tries such as Mauritius and Madagascar, Shoprite
(www.shoprite.co.za), the South African Walmart
wannabe, recently entered India with the largest
superstore in this vast country. Only given the
opportunity to go international in 1994 after the
fall of apartheid, Shoprite now gets over half its
revenue outside of South Africa. Shoprite is now
the largest retailer in Africa.
Because Shoprite operates mostly in poorer
developing nations, its target customers are low- Shoprite, the South African Walmart wannabe
to middle-income customers. Most multinational
retailers ignore this niche. However, with profits With over 63,000 employees speaking many
rising over 16 percent last year and a $1.2 billion different languages and complex differences in
market capitalization, the model seems successful. local laws regarding health, employment, taxes,
In spite of its success, Shoprite also faces many etc., organizational challenges are constant. Like
challenges in running its multinational operations. many multinationals, Shoprite uses technology to
African currencies are highly volatile, making the help manage these complex operations. A satellite
costs of supplies and the value of sales unpre- system tracks shipping and sales, and suppliers and
dictable. When the South African rand soared to local stores are linked with an ecommerce system
over 100 percent against the dollar in just three (http://www.shoprite.co.za/pages/127416071/Car
years, the costs of supplies sourced from home in eers/Support--Operations.asp).
South Africa soared as well. Now 60 percent of
suppliers in Madagascar are local. In addition, Source: Based on The Economist, 2005, “Africa’s
strict local laws such as those in Egypt can also Walmart heads east,” www.economist.com, January 13;
force local sourcing. www. shoprite.co.za/
I N T R O D U C T I O N T O I N T E R N A T I O N A L B U S I N E S S

you wear, the cars you drive, or the computers that sit on your desk, or keep
track of your money in the bank, all have some components produced or sold
by companies engaged in international business. Why? The major reason is the
unrelenting pressures of globalization.
globalization Globalization is the worldwide trend of the economies of the world
the worldwide trend of becoming borderless and interlinked—companies are no longer limited by their
economic integration across domestic boundaries and may conduct any business activity anywhere in the
borders allowing businesses
world. Globalization means that companies are more likely to compete any-
to expand beyond their
where. Many companies now sell anywhere, source their raw materials or
domestic boundaries
conduct research and development (R&D) anywhere, and produce anywhere.
Trade barriers are falling, and world trade among countries in goods and
services is growing faster than domestic production. Money is flowing more
freely across national borders as companies seek the best rates for financing
anywhere in the world, and investors look for the best returns anywhere in the
world. The Internet crosses national boundaries with the click of a mouse,
allowing even the smallest of businesses to go global immediately. Consequently,
companies can no longer afford the luxury of assuming that success in their
home market equates to long-term profitability—or even survival.
Globalization is perhaps the major reason why you should study inter-
national business. In today’s Internet-connected world, you may have little
choice. With companies increasingly looking at global rather than domestic
markets, managers must become international in outlook and strategies. Your
suppliers, your research and development, your manufacturing facilities, your
strategic alliance partners, and your customers increasingly come from beyond
your national borders. Foreign competition and doing business in foreign
markets are daily facts of life for today’s managers. Successful managers must
become international in outlook. These are executives with the ability and
motivation to meet and beat the challenges of international business. The study
of international business helps prepare you to deal with this evolving global
economy and to develop the skills necessary to succeed in business in a global-
izing world.
To provide you with a basic background in international business, this book
introduces you to the latest information on how managers respond to the
challenges of globalization and conduct competitive international operations.
You will see how businesses both large and small deal with the complexities of
national differences in cultural, economic, legal, ethical, religious, and political
systems. You will learn how multinational managers use their understanding
of these national differences to formulate strategies that maximize their com-
panies’ success in globalizing industries. You will also learn how multinational
managers implement international strategies with supporting marketing, finan-
cial, organizational, and human resource management systems.
To help you better understand the real world of international business,
you will find several types of real business examples in this and the following
multinational company chapters. Preview IB Strategic Insights show you how real multinational com-
(MNC) panies handle issues to be discussed in the chapter. IB Strategic Insights give
any company that engages in information on the strategic implications for international businesses that relate
business functions beyond its
to the current discussion in the text. IB Small Business Insights highlight chapter
domestic borders
material of particular relevance to small businesses. Country/Regional Focuses
are discussions that show you the unique characteristics of the region or country
that are relevant to the chapter topics. IB Ethical Challenges are examples of

6
 C O M P E T I N G I N T H E G L O B A L M A R K E T P L A C E

situations faced by multinational managers in dealing with issues being discussed

in the chapter. Finally, as you will learn later in this chapter, most multinationals
are also implementing measures to make their activities more environmentally
responsible. The book also contains IB Sustainability Practices, showing you
what multinationals are doing to implement such sustainable practices.

The Nature of International Business

A company engages in international business when it conducts any business international business
functions beyond its domestic borders. What kinds of business activities might when a company conducts
make a company international? The most apparent activity, of course, is interna- any business functions
beyond its domestic borders
tional sales. When a company produces in its own country and sells in another,
it engages in the simplest level of international activity. However, as you will
see in much more detail later in the book, crossing national borders opens up
more international options than simply selling internationally.
In this text, we refer to any company engaging in international business as
a multinational company or MNC. This is a broad definition, which includes
all types of companies, large and small, that engage in international business.
Most multinational companies, however, are also multinational corporations—
the companies are publicly owned through stocks. Most often, when you see
references to MNCs in the popular business press, the reference is to multi-
national corporations. The largest multinationals are all public corporations.
Exhibit 1.1 lists the top MNCs in the world. Smaller MNCs are often privately
owned, but many of their business activities may be conducted outside their
own country. Smaller, non-public MNCs are also becoming increasingly impor-
tant as it becomes more common for smaller organizations to compete globally.
Some entrepreneurs create businesses that go international from the start.
To introduce some of the international options, consider the following
hypothetical company that produces PCs. As a domestic-only company it can
manufacture the chips and other electronic components, build the cases, assem-
ble the components and sell the computers, all in its home country. However,
the firm might not be able to compete successfully using this approach. The
local market may be stagnant, with competitive pricing and lower profit mar-
gins. Even in a growing market, competitors like Dell Computer might source
high-quality, low-cost components from anywhere in the world. Competitors
might also find lower production costs in low-cost countries, allowing them to
offer lower prices. What can this company do?
As an MNC, the firm might sell PCs to overseas buyers in countries with
less competition and higher prices. Several other international activities might
increase its competitive strength. For example, this company might locate any
of the steps in obtaining components or completing production in other coun-
tries. It might buy the highest-quality chips from Taiwan, use the lowest-cost
assemblers in Vietnam, and sell primarily in Europe and the US. For any of these
steps, the company might outsource the activity to local companies in another
country or own its own factories within another country. As you will see in later
chapters, MNCs must develop strategies and systems to accomplish all or some
of these international business tasks.
Next, we will consider the forces that drive the new economic reality facing
the next generation of international managers and MNCs.

7
8
I N T R O D U C T I O N
T O

Exhibit 1.1 Top 10 Companies in the World Based on Profitability, Growth, and Revenues

Most Profitable Profits Country Fastest Growing % Change Country Most Revenues Country
($ millions) Revenues Revenues ($ millions)

Exxon Mobil 40,610 US Tata Steel 353.2 India Wal-Mart 378,799 US

Royal Dutch Shell 31,331 UK/ Freeport-McMoRan 208.7 US Exxon Mobil 372,824 US
I N T E R N A T I O N A L

Netherlands Copper & Gold

General Electric 22,208 US Intesa Sanpaolo 132.3 Italy Royal Dutch Shell 355,782 UK/Netherlands

BP 20,845 UK KFW Bankengruppe 111.3 Luxembourg BP 291,438 UK

Gazprom 19,269 Russia Enterprise GP Holdings 90.9 US Toyota 230,201 Japan

B U S I N E S S

HSBC Holdings 19,133 UK AT&T 88.6 US Chevron 210,783 US

Chevron 18,688 US ArcelorMittal 78.7 ING Group 201,516 Netherlands

Petronas 18,118 Russia CVS Caremark 74.2 US Total 187,280 France

Total 18,042 France Mapfre Group 73.4 Spain General Motors 182,347 US

J.P. Morgan Chase & Co. 15,365 US Iberdrola 73 Spain ConocoPhillips 178,558 US

Source: Adapted from data in http://money.cnn.com/magazines/fortune/global500/2008/full_list/

 C O M P E T I N G I N T H E G L O B A L M A R K E T P L A C E

Globalization: A Dynamic Context for

International Business
Globalization is not a simple uniform evolutionary process. Not all economies
of the world benefit equally or participate equally. In the recent past, financial
crises, terrorism, wars, SARS, increased border security, and a worldwide eco-
nomic stagnation have limited, or in some cases even reversed, some of the
aspects of globalization. You will see below, in the context of the discussion of
the major drivers of globalization, some of the effects produced by political,
economic, and sociocultural upheavals. Consider Exhibit 1.2, which shows the
history of globalization’s major events. Look at this video for further infor-
mation on globalization: www.stwr.org/globalization/commanding-heights-the-
battle-for-the-world-economy.html.
The financial crisis of 2008 demonstrated just how interconnected the global
economy has become in the last few decades. When failures and bad debt in the
home mortgage industry forced some US banks and other financial institutions
out of business, the US stock market declined quickly and precipitously. Almost
immediately, financial institutions around the world followed the US market.
Look at this video for an overview of the crises: www.pbs.org/newshour/video/
module.html?mod=0&pkg=8102008&seg=1, and the Country/Regional Focus
below, which shows the impact of the financial crisis on India.
Before discussing the key globalization trends that affect international
business, it is useful to look at some commonly used classifications of the world’s
countries. The classifications roughly indicate a country’s gross domestic prod-
uct (GDP) and the growth in GDP. The classifications are not exact but they
simplify discussions of world trade and investments.

Exhibit 1.2 Globalization Chronology

Time Economic Political Technological

• Establishment of the Bretton Woods • Foundation of the United Nations (1945) • Expansion of plastics and fibre
System, a new international monetary products e.g. first nylon stockings for
• Launch of the Marshall Plan (1948–57),
system (1944–71) women (1940)
a European recovery program
• Establishment of GATT (1947) entering • Discovery of large oilfields in the
• Founding of the Organization for
1940s

into force in January 1948 Middle East, especially in Saudi

European Economic Cooperation (1948)
Arabia (1948)
• Soviet Union establishes the Council for
• Decolonization starts (1948–62).
Mutual Economic Assistance (CMEA)
Independence of India, Indonesia, Egypt,
for economic cooperation among
for example
communist countries (1949–91)
• China becomes a socialist republic in 1949

• Treaty of Rome establishes the • Korean war (1950–63) • Increased use of oil from the Middle
European Community (1957). EC and the East in Europe and Japan
• Suez crisis (1956)
European Free Trade Association (1959)
• “Just-in-time” production
favor West European integration • Decolonization in Africa (15 countries
implemented by Toyota
become independent between 1958 and
• Major currencies become convertible
1950s

1962) • Increasing usage of jet engines in air

(1958–64)
transport (1957–72)
• Development of the Eurodollar Market
• Offshore oil and gas production
in London which contributed to the
developed
expansion of international liquidity

9
I N T R O D U C T I O N T O I N T E R N A T I O N A L B U S I N E S S

Exhibit 1.2 continued

Time Economic Political Technological

• Foundation of the Organization of the • Erection of Berlin Wall (1961) and Cuban • Green Revolution—transforming
Petroleum Exporting Countries (OPEC) missile crisis (1962) highlight sharp agricultural production in developing
(1960) confrontation between East and West countries (1960s onwards)

• Kennedy Round, 6th session of the • Integrated circuits become

GATT (1964–9) commercially available (1961)

• Rapid spread of automobiles and • First person in space (Yuri Gagarin,

highways in the North accelerates 1961) and the first man on the moon
1960s

demand and shift in fuels (Neil Armstrong, 1969)

consumption (from coal to oil)
• First line of Japan’s high-speed
• Trade politics of East Asian countries train system (shinkansen) opened in
put more emphasis on export-led 1964
development than on import
• Mont Blanc Road Tunnel (1965)
substitution
• Increasing usage of containerization
• Elimination of last customs duties within
in ocean transport (1968 onwards)
EC (1968)

• Departure from US dollar exchange • Yom Kippur war (1973) helps to trigger • First single chip microprocessor (Intel
rate gold standard (1971) oil price hike 4004) is introduced (1971)

• Tokyo Round of the GATT (1973–9) • EU enlargement to nine members (1973)

1970s

• Oil price “shocks” (1973–4 and 1979)

reverse decades of real oil price declines

• Rise of Asian newly industrialized

countries

• China’s economic reform (1978)

• Volcker Fed successfully extinguishes • Enlargement of the EU to 12 members • IBM introduces first personal
US inflation computer (1981)
• Fall of the Berlin Wall (1989)
• Developing country debt crisis • Microsoft Windows introduced (1985)
1980s

• Mexico starts market reforms and joins • Invention of the World Wide Web by
the GATT in 1986 Tim Berners-Lee (1989)

• Lourve Accord promotes stabilization

of major exchange rates (1987)

• Indian economic reforms launched in • Dissolution of the Soviet Union (1991) • First website put online in 1991
1991 leads to the formation of 13
• Launch of the first 2G-GSM network
independent states
• Establishment of the North American by Radiolinja in Finland (1991)
Free Trade Agreement (1994) • Maastricht Treaty (formally, the Treaty on
• Eurotunnel opens in 1994 linking the
1990s

European Union) signed (1992)

• Establishment of the WTO (1995) United Kingdom to continent

• Asian financial crisis (1997) • The number of mobile phones

increases due to the introduction of
• Adoption of the euro by 11 European
second-generation (2G) networks
countries (1999)
using digital technology

• Dotcom crisis (2001) • Enlargement of the EU to 27 members • Number of users rises to 300 million
(2007) by 2000
• China joins WTO (2001)
2000s

• Container ships transport more than

• End of the Multi-fiber Agreement in
70 percent of the seaborne trade in
2005 (quantitative restrictions of textiles
value terms
lifted)
• Number of Internet users rises to 800
million in 2005

Source: UNCTAD, 2007, World Investment Report, New York and Geneva: United Nations, pp. 22–3.

10
 C O M P E T I N G I N T H E G L O B A L M A R K E T P L A C E

India C O U N T R Y F O C U S

In India, soon after the drastic decline in value of the US Not only is the high cost of borrowing locally a problem,
stock market in 2008, the Bombay Stock Exchange Index, but the financial turmoil in India’s main export markets in
or Sensex, tumbled 6 percent, reaching a two-year low. the US and Europe has resulted in reduced demand. For
There is little doubt that the global financial crisis has example, in the IT sector, the US provides more than half
arrived in India. As the financial crisis unfolded, foreign of the revenues for Indian IT giants Tata Consultancy,
investors pulled out nearly $10 billion from India. This Infosys Technologies, and Wipro. The US financial crisis
resulted in less money that Indian banks have to lend to and economic slowdown will result in fewer orders and
companies and consumers. N.R. Narayanan, of ICICI Bank, delays in long-term investments by US customers. In
India’s largest private-sector bank, noted, “We are tight- addition, many of the customers of these IT firms are US
ening our lending norms to certain customer segments.” banks, among the hardest hit in the crisis.
ICICI expects a 35 percent drop in loans. The result of such Source: Adapted from Nandini Lakshman, 2008, “World financial
practices is that companies have had to put off expansion crisis: India’s hurting, too,” BusinessWeek Online, www.business
plans and consumers now face more difficulty in getting week.com, October 8.

home and auto loans.

Types of Economies in the Global Marketplace: The

Arrived, the Coming, and the Struggling
Exhibit 1.3 shows some divisions of the world’s economies based roughly on developed economies
classifications used by the United Nations and the Boston Consulting Group. mature economies with
Developed economies have mature economies with substantial per capita GDPs substantial per capita GDPs
and international trade and investments. The developing economies, such as and international trade and
investments
Hong Kong, Singapore, South Korea, and Taiwan, have economies that have
grown extensively over the past two decades yet have sometimes struggled developing economies
recently, especially during the setbacks of the Asian crisis in the late 1990s. economies that have grown
Other developing economies to watch are what the UN calls the transition extensively over the past two
economies of the Czech Republic, Hungary, Poland, and Russia, and the decades
developing economies of Indonesia, Malaysia, the Philippines, Vietnam, and
Thailand. transition economies
countries in the process
Transition economies are countries that have changed from government-
of changing from
controlled, mostly communist economic systems to market or capitalistic
government-controlled
systems. The former systems relied on state-owned organizations and centralized economic systems to
government control to run the economy. In the transition to free market and capitalistic systems
capitalistic systems, many government-owned companies were converted to
private ownership. The market and not the government then determined the
success of companies. Several of these transition economies, such as Hungary,
Poland, Slovakia, and the Czech Republic, developed market economies that
allowed them to join the European Union. Furthermore, many multinationals least developed countries
(LDCs)
are deciding to locate in transition economies for various reasons. As you can
the poorest nations, often
see from the IB Strategic Insight overleaf, transition economies will remain key plagued with unstable
elements of international business. political regimes, high
Another important aspect of the international business environment are unemployment, and low
least developed countries (LDCs), which have yet to show much progress in the worker skills

11
I N T R O D U C T I O N T O I N T E R N A T I O N A L B U S I N E S S

Exhibit 1.3 Types of Economies in the Globe (example countries)

Developed Developing Countries Least

Countries Developed
Asia Transition Low-cost Countries
Economies Countries (LCCs) (LDCs)

Australia China Czech Republic Brazil Afghanistan

Austria Hong Kong Hungary China Cambodia
Belgium India Poland India Chad
Britain Indonesia Russia Mexico Congo
Canada Malaysia Russia Ethiopia
Denmark Singapore Niger
France South Korea Sudan
Germany Taiwan Yemen
Italy Thailand
Ireland
Japan
Netherlands
Spain
Sweden
Switzerland
United States

Source: Adapted from UNCTD, 2008, Development and Globalization: Facts and Figures, New York and
Geneva: United Nations; Boston Consulting Group, 2004, Capturing Global Advantage, Boston: Boston
Consulting Group.

Nokia’s New Plant in Cluj, Romania I B S T R AT E G I C

I N S I G H T

Nokia will soon close its plant in Bochum, Belgium, as other handset competitors which manufacture their prod-
costs have risen steadily and the factory has become very ucts in Asia, Nokia can be more responsive to local cus-
expensive. Nokia has chosen Cluj in Romania to replace tomer needs and can react very quickly to such changes.
the Belgian factory. Cluj was chosen for many reasons. It
However, setting up operations in Cluj is not without
has a population of 400,000 and most people are relishing
challenges. Nokia will have to deal with poor infrastructure.
the prospect of working for a multinational and making
The local airport is very small and highways in the region
substantial wages. In fact, at a job fair held in June of 2007,
are not well developed. Getting supplies to Cluj and getting
Nokia received twice as many applicants as it needed to
finished products out of Cluj will therefore be challenging.
fill the jobs available. However, Nokia has chosen Cluj for
Furthermore, many multinationals find that wages rise
other reasons besides cheap and plentiful labor. Nokia
rapidly in transition economies and workers do not hesitate
expects to draw heavily from an ample supply of engi-
to work for competitors at higher wages. Nokia is therefore
neering graduates from the well-regarded local technical
providing perks that it hopes will retain skilled workers. It
university. Graduates of the university are well trained and
is expected that the Cluj factory will have a cafeteria with
willing to work for a quarter of what similar engineers
free food, a gym, and playing areas.
would be paid in other Western countries. Cluj was chosen
also because of its proximity to Nokia’s customers. Unlike Source: Adapted from Jack Ewing, 2008, “Nokia’s new home in
Romania,” BusinessWeek, January 28, pp. 40–2.

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 C O M P E T I N G I N T H E G L O B A L M A R K E T P L A C E

evolving global economy. They are the poorest nations and are often plagued
with unstable political regimes, high unemployment, and unskilled workers.
Most of these countries are located in Central and South America, Africa, and
the Middle East.
Perhaps most important strategically are those countries that the Boston
Consulting Group (BCG) calls the low-cost countries (LCCs). These are coun- low-cost countries (LCCs)
tries with cheap labor that are becoming the manufacturing and service countries, usually with cheap
providers for MNCs headquartered in developed nations such as the United labor, that are becoming the
States. Led by China and India, these countries are growing fast as low-cost manufacturing and service
providers for MNCs
sources for a growing number of business functions, and to a large degree are
headquartered in developed
the recipients of many of the jobs leaving the more developed economies such nations such as the United
as the US. States
With this overview of the major economies of the world, we can now look
more closely at the driving forces of the new world economy.

Globalization Drivers
Several key trends drive the globalization of the world economy and, in turn,
force businesses to consider international operations to survive and prosper.
Some of the most important trends include falling borders, growing cross-border
trade and investment, the rise of global products and global customers, the
growing use of the Internet and sophisticated information technology (IT),
the role of LCCs in the world market, and the rise of global standards of quality
and production. Exhibit 1.4 illustrates these important forces. Each of these
driving forces is discussed below.

Lowering Trade
Barriers

Locate and Sell Rise of Low-cost

Anywhere Countries

GLOBALIZATION

Information Global Products,

Technology and Services, and
the Internet Customers

Global
Standards
Exhibit 1.4
The Drivers of Globalization

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I N T R O D U C T I O N T O I N T E R N A T I O N A L B U S I N E S S

Lowering the Barriers of National Borders: Making

Trade and Cross-border Investment Easier
In the mid-1900s, worldwide tariffs averaged 45 percent. By the early 2000s,
tariffs on industrial products fell to 3.8 percent.1 Tariffs are taxes most often
charged to goods imported into a country. They have the effect of raising the
price of an imported good. As you will see in more detail in Chapters 4 and 9,
tariffs tend to make foreign goods more expensive and less competitive with
local goods. Trade is reduced because companies cannot compete with domestic
General Agreement on producers. After several rounds of tariff negotiations, known as the General
Tariffs and Trade (GATT) Agreement on Tariffs and Trade (GATT), worldwide tariffs on manufactured
tariff negotiations between goods declined from 45 percent to less than 7 percent.
several nations that reduced Later negotiations in Uruguay ended with agreements to reduce tariffs even
the average worldwide further, liberalize trade in agriculture and services, and eliminate some nontariff
tariff on manufactured
barriers to international trade, such as excessive use of health regulations to
goods
keep out imports.2 The Uruguay talks ended in 1993 and established the World
World Trade Organization Trade Organization (WTO). The WTO now provides a formal organization
(WTO) that promotes continued negotiations and settles trade disputes among nations.
a formal structure for There are now 148 nations in the WTO, up from the original 92 in 1986. Over
continued negotiations to 90 percent of world trade takes place among countries that are WTO members.
reduce trade barriers and to At least 30 more countries, including Russia, are seeking WTO membership.
act as a mechanism for The WTO is not the only organization that seeks to eliminate trade barriers.
settling trade disputes
Other organizations based on regional trade agreements, such as the European
regional trade agreements
Union (EU) and North American Free Trade Agreement (NAFTA), also attempt
agreements among nations to reduce tariffs and develop similar technical and economic standards. These
in a particular region to regional organizations lead to more trade among the member nations, and some
reduce tariffs and develop scholars argue that regional agreements are the first step toward complete
similar technical and globalization. Others, however, argue that regional agreements benefit only the
economic standards trade-group members and often harm poorer nations that are left out of the
agreements (such as the Caribbean countries that are not members of NAFTA).3
European Union (EU)
From a practical point of view, although they do benefit member countries the
Austria, Belgium, Britain,
Bulgaria, Cyprus, Czech
most, regional agreements contribute to world trade more than they restrict
Republic, Denmark, Estonia, such trade. Also, the regional agreements, with fewer countries, are more
Finland, France, Germany, politically achievable than worldwide trade agreements that include many
Greece, Hungary, Ireland, countries.4 In Chapter 3 you will find out much more about these agreements.
Italy, Latvia, Lithuania, Is free trade a success? The WTO argues that the answer is yes, and the data
Luxembourg, Malta, seem to support their position. Following the early GATT agreements, world
the Netherlands, Poland,
trade exceeded the output of the world’s gross domestic product by over
Portugal, Romania, Slovakia,
fourfold.
Slovenia, Spain, and
Sweden, plus Norway and However, the policies of the WTO do have critics. Some argue that the WTO
Switzerland in the related favors the developed nations, because the developed nations have the resources
European Free Trade Area to outcompete poorer nations in a non-regulated world. Environmentalists also
criticize free trade because it allows MNCs to skirt regulations in many of the
North American Free Trade developed countries by moving environmentally damaging production to poorer
Agreement (NAFTA) countries that often have weaker protection laws. Ethicists argue that such
a multilateral treaty that
actions give commercial interests priority over the environment, health, and
links the United States,
Canada, and Mexico in an
safety. Organized labor sees free trade as a source of job loss and pressure to
economic bloc that allows reduce wages for remaining jobs as MNCs move or threaten to move production
freer exchange of goods from higher-wage countries to low-cost countries. You can see the WTO’s
and services response to these criticisms on their website at www.wto.org/.

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 C O M P E T I N G I N T H E G L O B A L M A R K E T P L A C E

Locate and Sell Anywhere to Anybody: It’s No Longer

Only For Manufacturing but Services as Well
The September 11th, 2001, attack on the United States and the resulting world-
wide economic stagnation led to a major setback for world trade. For example,
double-digit growth in worldwide exporting of merchandise in 2000 was
followed by a more than 4 percent decline in the following two years. However,
most of the world’s trade rebounded in 2003 and 2004 and trade growth neared
double digits again by 2007. Some countries, particularly China, have benefited
substantially during the post 9/11 period. China is now in third place in imports
and exports and is rapidly gaining on Japan, the US and the EU. Exhibit 1.5
shows the current leading countries in terms of import and export total volume.
This suggests that the world’s economies are increasingly more intertwined and
mutually stimulated.
Not only do MNCs trade across borders with exports and imports, but they
also build global networks that connect different worldwide locations for R&D,
supply, support services like call centers, production, and sales. Setting up and

% shares of the top ten exporters

Belgium
Canada 6% Germany
6% 18%
Italy
7%

United Kingdom
7% United States
Netherlands 16%
7%

France
8%
China
Japan
15%
10%

% shares of the top ten importers

Belgium
Canada 5%
5% United States
Netherlands
28%
6%
Italy
6%

France
8%

Japan Germany
8% 13%

United Kingdom
9% China
12%

Exhibit 1.5
The World’s Top Ten Exporters and Importers: Who’s Selling, Who’s Buying
Source: Adapted from World Trade Organization, 2007, International Trade Statistics 2007, Geneva:
World Trade Organization, Table 1.8.

15
I N T R O D U C T I O N T O I N T E R N A T I O N A L B U S I N E S S

foreign direct investment owning your own operations in another country is known as foreign direct
(FDI) investment (FDI). That is, FDI occurs when an MNC from one country owns
a multinational firm’s
an organizational unit located in another country. Multinationals often build
ownership, in part or in
their own units in foreign countries but they also use cross-border mergers and
whole, of an operation
in another country acquisitions, such as the acquisition of the European company Arcelor for $32
billion by the Indian company Mittal Steel. This was also the largest acquisition
ever by a company from a developing nation.5
Which countries give and get these cross-border investments in the global
economy? The competitive landscape is changing, with the developing nations
taking a more active role.
FDI soared to record levels, increasing by over 36 percent between 1996
and 2000 and ultimately topping $1.5 trillion in 2000.6 However, following a
pattern similar to international trade, FDI declined to $735 billion in 2001, less
than half of the previous year, and declined another 25 percent in the following
two years. Since that time, however, and again like world trade, FDI has
regained its steam, growing nearly 40 percent a year.7
Even though FDI declined temporarily, there remained a large volume
during the recent decade, due in large part to the existence of an estimated
61,000 multinational corporations! These have over 900,000 foreign invest-
ments with over 55 million employees, and a stock value of $7 trillion.8 It is
also important to note that in spite of the dramatic slowdown in the growth of
FDI starting in 2001, the value of new FDI was and still is the major revenue
generator for MNCs.9 Exhibit 1.6 lists the top 25 companies in the world ranked
by the size of their foreign-owned assets.
The most recent statistics show the EU, led by the UK and France, at the
top of the list of inward FDI: that is, FDI from other countries going into the
EU. The US is second, followed by China.10 Although the developed countries
still lead the world in inward FDI, the share of FDI for developing nations has
increased steadily to nearly 40 percent of worldwide inward FDI. However,
many LDCs had minimal FDI. Africa as a whole, for example, received less than
3 percent of inward FDI. Outward FDI follows a similar pattern with the EU
leading the US, making nearly half the world’s investments outside of their own
countries. The US is second with less than 20 percent of worldwide FDI, and
Japan is a distant third. 11
At the time of writing this chapter, it was not clear what impact the 2008
financial crisis would have on world trade and investment. However, immediate
indicators showed signs of a worldwide recession and declines in both trade and
investment.
What does this mean for individual companies? Perhaps the most important
implication is that companies engaging in international business now more easily
locate and sell anywhere that makes the most sense for their business. Although
the EU and the US contribute the bulk of world FDI, and will be likely to do so
in the immediate future, astute multinational managers must scan the world
continuously for possible profitable investments. The following IB Strategic
Insight shows how some major MNCs are moving quickly to take advantage
of opportunities in the transition economies.

16
 Exhibit 1.6 Companies with the Largest Stakes in Foreign Countries

Rank Company Country Industry Foreign % Foreign Foreign % Foreign Foreign % Foreign
(foreign Assets Assets Sales Sales Employees Employees
assets) ($ millions)

1 General Electric USA Electrical & electronic equipment 412,692 61% 59,815 40% 155,000 49%

2 Vodafone UK Telecomm 196,396 89% 39,497 75% 51,052 83%

3 General Motors USA Motor vehicles 175,254 37% 65,288 34% 194,000 58%

4 British Petroleum UK Petroleum 161,174 78% 200,293 79% 78,100 81%

5 Royal Dutch/Shell UK Petroleum 151,324 69% 184,047 60% 92,000 84%

6 ExxonMobil USA Petroleum 143,860 69% 248,402 69% 52,920 63%

7 Toyota Japan Motor vehicles 131,676 54% 117,721 63% 107,763 38%

8 Ford USA Motor vehicles 119,131 44% 80,325 45% 160,000 53%

9 Total France Petroleum 108,098 86% 132,960 75% 64,126 57%

10 Eléctricité de France France Electricity, gas, and water 91,478 45% 26,060 41% 17,801 11%

11 France Telecom France Telecomm 87,186 67% 25,634 42% 82,034 40%

12 Volkswagen Germany Motor vehicles 82,579 52% 85,896 72% 165,849 48%

13 RWE Group Germany Electricity, gas, and water 82,569 64% 23,390 45% 42,349 49%

14 Chevron USA Petroleum 81,225 65% 99,970 52% 32,000 54%

C O M P E T I N G

15 E.ON Germany Electricity, gas, and water 80,941 54% 29,148 35% 45,820 57%
I N

16 Suez France Electricity, gas, and water 78,400 82% 39,565 77% 96,741 61%

17 Deutsche Teledom Germany Telecomm 78,378 52% 31,659 43% 75,820 31%
T H E

18 Siemens Germany Electrical & electronic equipment 66,854 64% 64,447 67% 296,000 64%

19 Honda Japan Motor vehicles 66,682 74% 69,791 80% 126,122 87%

20 Hutchison Whampoa Hong Kong Diversified 61,607 80% 24,721 79% 165,590 83%
G L O B A L

21 Procter & Gamble USA Diversified 60,251 44% 38,760 57% 69,835 51%

22 Sanofi-Aventis France Pharmacy 58,999 57% 18,901 56% 69,186 71%

23 ConocoPhillips USA Petroleum 55,906 52% 48,568 27% 15,931 45%

24 BMW Germany Motor vehicles 55,308 63% 44,404 76% 25,924 25%

25 Nissan Company Motor vehicles 53,747 55% 59,771 72% 89,336 49%

17
M A R K E T P L A C E

Source: Adapted from UNCTD. World Investment Report: Transnational Corporations, Extractive Industries, and Development. United Nations: New York and Geneva, 2008, Annex table A.1.13, pg. 229.
I N T R O D U C T I O N T O I N T E R N A T I O N A L B U S I N E S S

Automobile Production Moves to I B S T R AT E G I C

Eastern Europe I N S I G H T

Louis Schweitzer, CEO of Renault, recently remarked that Eastern European production of automobiles grew 27
Toyota’s assembly plant in northern France, completed percent over the last five years while Western European
in 2001, is the last of a breed, probably the last new production remained flat. Typical is the new plant in Kolin,
automobile assembly plant that will be built in Western Czech Republic, which can produce 300,000 vehicles a
Europe. Recently passing Italy, Russian is now the fifth- year. French Peugeots and Citroëns as well as Japanese
largest European automobile assembly country. Why? The Toyotas roll off the line. The Japanese company Suzuki has
cheaper labor costs in the transition economy countries 24 assembly plants in Central and Eastern Europe. Not only
can save Renault around $2,500 per vehicle. This allows do these automotive companies do final assembly but they
companies that build cars in countries like Hungary to sell also produce many components in smaller plants.
below competitors manufacturing in Western Europe and Source: The Economist, 2005, “Driving out of the east,” www.
still make a healthy profit. economist.com, March 3.

Traditionally, most FDI was in manufacturing as MNCs sought low-cost

production sites or locations near valued customers. However, in today’s global
economy, FDI is growing in the service sector as well. Exhibit 1.7 shows the
changing distribution of FDI types.

Inward of FDI Stock 1990 Outward of FDI Stock 1990

Manufacturing Service Manufacturing Service

41% 49% 44% 47%

Primary Primary
10% 9%

Inward of FDI Stock 2006 Outward of FDI Stock 2006

Manufacturing Manufacturing
30% 26%
Service Service
62% Primary 68%
6%
Primary
8%

Exhibit 1.7 Service FDI is Replacing Manufacturing

Source: Adapted from UNCTAD, 2007, World Investment Report 2007, Geneva and New York, Annex A.

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 C O M P E T I N G I N T H E G L O B A L M A R K E T P L A C E

The Rise of Low-cost Countries: An Increasingly

Important Driver of Globalization
Low-cost countries have two roles as drivers of globalization. First, they fuel
trade and investments by MNCs looking for low-cost platforms to manufacture
goods or secure services such as information technology and call centers. Second,
some low-cost countries are becoming what the Boston Consulting Group calls
rapidly developing economies (RDEs).12 Rapidly developing economies are rapidly developing
LCCs such as China, India, Mexico, and Brazil that not only provide a low-cost economies (RDEs)
production site but also have an expanding market for multinational sales. These LCCs using the benefits of
foreign investments to grow
countries as a whole are expected to see a $2.3 trillion growth in gross domestic
rapidly into world
product by the next decade as compared to the $3.15 trillion expected for the competitors
Triad during the same period. However, this growth is a two-way street as RDEs
are using the benefits of foreign investments to grow local companies rapidly Triad
into world competitors. The Chinese household appliance company Haier the world’s dominant trading
Group is a prime example. A $10 billion revenue company and number one in partners: the European
China for full-line appliances, Haier Group already generates 10 percent of its Union, the United States,
and Japan
sales from outside of China.13
The cost savings of locating in an LCC for a typical manufacturing orga-
nization are shown in Exhibit 1.8. This significant cost difference between LCCs
and the developed world encourages companies such as Motorola to set up
outsourcing
operations in LCCs like China, or companies such as Walmart (previously Wal- when a company in one
Mart) to source their goods or services from local LCC companies. As you will country contracts with a
see in later chapters, although a traditional trade theory suggests that we all company in another country
benefit from moving jobs where the work can be done best or cheapest, there to perform some business
are those who are hurt by the shifting of jobs from the developed economies to function
the LCCs.
To show the impact of LCCs on the world’s competitive landscape, the offshoring
when a company in one
BCG uses a matrix mapping how much of a country’s industrial production is
country moves a business
being switched to LCCs through either outsourcing or offshoring. International function such as
outsourcing is when a company in one country contracts with a company in manufacturing to another
another country to perform some business function. Offshoring is when a country, usually to take
company in one country moves a business function such as manufacturing to advantage of lower costs

Highly
Developed
Country 100
Manufacturing
Costs

LCC Cost
25 5 10 5 5
Advantage

LCC Landed
50 10 5 5
Exhibit 1.8
Costs Saving Big: Cost Advantages
of LCC Manufacturing
20 40 60 80 100 120
Manufacturing Costs Labor Savings Depreciation Savings Source: Adapted from Boston
Consulting Group, 2005, BCG
Material Savings Scale Savings Special Incentives Focus, Navigating the Five Currents
of Globalization, Boston: Boston
Logistics Other Management Import Duties Consulting Group, p. 5.

19
I N T R O D U C T I O N T O I N T E R N A T I O N A L B U S I N E S S

another country, usually to take advantage of lower costs. Exhibit 1.9 shows
some examples of outsourcing and offshoring, and Exhibit 1.10 the BCG matrix
for a variety of industries in the United States.

Exhibit 1.9 Definitions and Examples of Offshoring and Outsourcing from the
United Nations

Location Outsourced Internal to the Company

Offshoring in a foreign Production or service done Production or service done

country by a foreign company by a foreign affiliate of the
provider (e.g. Infosys in company (e.g. a US firm
India does software produces in its Mexican
development for Bank of factory)
America)

Home country Production or service done Production or service done

by another company in the inside the company
home country

Source: Adapted from UNCTAD, 2004, World Investment Report, Geneva and New York: United Nations,
p. 148, Table IV.1.

Case Study: The United States

Value of 2002 LCC imports into the United States ($1 billion)

30
LCC penetration, Moving early Electrical Growing fast
2002: LCC equipment
imports as a
percentage Computers and
of US Average = 10.5% Household
peripheral
consumption appliances
25 equipment

Power distribution Motor vehicle

and transformers electrical
equipment
Motors and
20 Commercial and generators
service industry
machinery
Semiconductors
Motor vehicle and other
seating and electrical Other fabricated Relays and industrial
15 components controls
interior trim metal products
Other motor Cutlery and hand tools
vehicle parts
Other electrical Average = 9.8%
equipment and Hardware
components
10
Engine, turbine, Motor vehicle brake Vehicle steering
Globalizing slowly and power transmission Motor systems Up and coming
and suspension
equipment vehicles HVAC components
Motor vehicle Aerospace products
engine parts Other general- and parts
Other Navigational,
purpose Architectural
5 transport Magnetic and optical media measuring,
machinery and structural
equipment Agricultural, construction, medical, and control
Metalworking metals
and mining machinery instruments Motor vehicle transmission
machinery
Railroad Industrial and power train parts
Boilers, tanks,
rolling machinery Machine shop
Motor vehicle and shipping
stock products
bodies and trailers containers
0

–5 0 5 10 15 20 25 30
Net growth of LCC imports, 1997–2002 (percentage points)

Exhibit 1.10 The Boston Consulting Group Maps the Influence of LCCs
Source: Boston Consulting Group, 2004, “Capturing global advantage,” www.bcg.com

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 C O M P E T I N G I N T H E G L O B A L M A R K E T P L A C E

Drug Testing Made Easier E T H I C A L

C H A L L E N G E

Drug companies around the world have been shifting some Although the Indian government has recently instituted
pharmaceutical manufacturing and development work to more strict control of clinical drug trials, some still think the
LCCs driven by the same cost savings in other industries. use of poor and often illiterate subjects is a form of
More recently companies such as Pfizer and Eli Lilly of the exploitation. Given the fourfold growth from 2001 to 2003,
United States and Roche Holding of Switzerland have forecasts are that the drug-testing industry will grow even
started offshoring and outsourcing clinical trials for newly faster.
developed medicines in countries like India, Brazil, China,
As a multinational manager for a drug company, how
and Mexico. Indian physicians such as Dr Arvind Sosale of
would you respond?
Diacon Hospital in Bangalore report no trouble getting
volunteers, unlike the case for patients from developed Sources: Based on Sarith Rai, 2005, “Drug companies cut costs with
foreign clinical trails,” New York Times, February 24, p. C5; Andrew
nations, where participants are often more wary and Pollack, 2005, “Medical companies joining offshore trend, too,” New
resistant to trying new drugs. In a poor country such as York Times, February 24, pp. A1, C4.
India, people are more likely attracted to the free drugs and
special attention one gets for participation.

One side of the matrix in Exhibit 1.10 shows the market penetration of
low-cost products in the US and the other side of the matrix shows the per-
centage of growth. This gives you an idea of the types of products that are
heavily sourced from LCCs through outsourcing and offshoring and those likely
to become more so. A similar matrix could be applied to service areas such as
call centers, which are increasingly outsourced or offshored to India.
Outsourcing and offshoring are not without potential harm to the givers
and receivers. Most often we hear about the people who lose jobs in one country
when their work is transferred to another country. However, that is not the
only potential ethical issue. The ethical and institutional systems may differ in
host countries in ways that might allow potentially ethically questionable
behaviors by MNCs. Above is an example of one possible ethical challenge.
Offshoring and outsourcing are not limited to the large MNCs. Small
businesses are also getting into the act. The IB Small Business Insight overleaf
gives an example of a Swedish company’s efforts to take advantage of the same
benefits sought by larger companies.
The shifting of production and services to LCCs is also creating a potential
group of new competitors in the world market. As noted above, these are the
RDEs including China, India, Mexico, Brazil, and several countries in Southeast
Asia and Eastern Europe.
What are some of these companies to watch? A look at the recent Fortune
Global 500 annual scoreboard of the global largest 500 companies shows an
increased presence of companies from emerging markets and RDEs. At this
point, Korean, Russian, and Chinese companies dominate the top rankings for
emerging markets. Although the US leads the list of Global 500, China now has
29 members and Korea has 15.14

21
I N T R O D U C T I O N T O I N T E R N A T I O N A L B U S I N E S S

A Swedish Company Goes I B S M A L L

Offshoring B U S I N E S S I N S I G H T

The bulk of offshoring of services has so far been under- The company has also chosen to offshore some services
taken by large firms—but smaller companies are also through outsourcing. In one business segment, all trans-
starting to exploit opportunities created by the increased action processing work has been outsourced to a local
tradability of services. Global Refund—a market-leading service provider in Singapore; software development for
supplier of financial services to enable travelers to collect the European market has been outsourced to a local
tax refunds—is a good example. company in Bulgaria; and software development to support
the Asia-Pacific region is undertaken by a local company in
Global Refund employs 800 people worldwide, in some 35
India. There are also plans to establish a captive call center
countries. It has its origin in Sweden, but is legally regis-
in a low-cost location (a captive call centre is one owned
tered in the Netherlands (mainly for tax purposes). IT has
by the company, even if in a foreign location).
made it possible to locate various headquarter functions to
different locations: the chief executive officer (CEO) is The company views the offshoring of services as a
based in Switzerland, marketing and finance functions are necessary process to increase competitiveness. By con-
located in Sweden, IT and transaction processing functions solidating certain functions in centres of excellence, it has
are run from Austria, and certain business segments are been able to reap economies of scale, avoid duplication of
managed from Singapore. work, enhance worker skills, and thereby reduce costs as
well as improve the quality of the services performed.
As of early 2004, Global Refund was in the process of
consolidating back-office work into two “centres of excel- Source: UNCTAD, 2004, World Investment Report, Geneva and New
York: United Nations.
lence” in Europe. Once consolidated, tried and tested, the
company may, as a second step, offshore these functions
and establish a foreign affiliate in a lower-cost location in
either the CEE or Asia.

Climbing oil prices helped the Russian company of Gazprom make the top
50 and China’s Sinopec make the top 20. Korea’s Samsung, known for its mem-
ory chips, LCD display panels, and cell phones, also made the 50. According
to the recent Boston Consulting Group study of the top 100 global challengers
to watch from the RDEs, the majority of the hot companies come from China,
followed by India and Brazil. Chinese companies include Chery Automotive,
China’s leading manufacturer of automobiles now building plants in Eastern
Europe and South America, and Changhong Electric, a $2.6 billion operation
with plants in Australia, Europe, and the US. Brazilian companies include
JBS–Friboi, Latin America’s largest beef and pork processor that recently
acquired the US-based Swift & Co. From India, there is Suzlon Energy, the fifth-
largest company for installed wind energy capacity.15 There is little doubt that
in the near future many of these companies from RDEs will become household
names around the world.
Global trade has two important effects in developing new competitors. First,
when the large multinationals use developing countries as low-wage platforms
for high-tech assembly, they facilitate the transfer of technology. This means
that workers and companies in developing countries often learn new skills when

22
Another random document with
no related content on Scribd:
cursive script to his rough hands. At the very first lesson the pupil learned
how to write, spell, and pronounce pater and mater, and how to translate
these words in the light of the Portuguese padre and madre. Within a week,
having mastered the present indicative of amo and also the first and second
declensions of nouns, he could print on the board Pater amat filium, with
the Portuguese equivalent O padre ama o filho in the line below. Antonio
omitted mention of exceptional genders or inflexions, and discreetly
concealed the existence of the subjunctive mood. He did not attempt to
impart the Latin of Cicero but only a rough-and-ready lingua rustica which
he hoped to polish at his leisure into the language of the Missal and the
Breviary.

Pride in his classical scholarship led José, one day of Lent, into an
indiscretion. Upon a barn-door he carved deeply with his knife "Pater
Antonius" in big letters and "Josephus" in smaller characters underneath.
Antonio made him place a new panel in the door, after cutting out and
burning the old one; and, at the same time, he reminded him sternly how he
had sworn never to let fall the remotest hint that his master was a monk.

To guard against any fatal slip of José's tongue, Antonio forbade his
servant from that hour to call him Father in any circumstances whatsoever.
José's face fell, and he said dolefully:

"I'd been hoping, Father—I mean, Senhor—to make my Easter

confession to your Reverence—I mean, to your Worship. Yes, and I'd been
hoping that your Rever—that your Worship might be saying his Easter
Mass in the abbey chapel and that I might serve it."

Antonio knew that he would only bewilder the honest fellow's mind if
he attempted to explain confessors' faculties; and that it would be still worse
to admit that he, though a choir-monk, had not yet said his first Mass. So he
simply shook his head, and replied:

"No, José, we must fulfil our Easter duties, both of us, in the parish
church. These are bad times for monks in Portugal. And remember, above
all, that you must give up calling me 'Your Reverence' and 'Father.'"
 Nevertheless the priest allowed the layman to share much of his
religious life. Before they parted for the night they told their beads
antiphonally. At dinner, when Antonio had said his Order's two-word grace
before meat, Benedictus benedicat, he would edify José by relating some
miracle or heroic act of the saint for the day. On the mornings of Sundays
and days of obligation they tramped to the parish Mass together; and in the
evenings they stole into the dim abbey and performed their pious exercises
in choir.

In the autumn of that year the two men pressed seventeen pipes of rough
wine. After putting aside two pipes for their own consumption they sold off
the remainder for fourteen pounds. As a result of grafting upon old roots
Antonio also pressed about a dozen gallons of good wine for his great
experiment. This pressing he jealously cellared in a little cask, of José's
making, which had been for months under daily treatment so that the wood
should help rather than hurt the wine. Of course, the new vineyard on the
sea-shore was too young to yield a harvest: but the plants waxed and throve
exceedingly.

While Antonio was thus busied, another vintage was going forward
almost under his eyes. One morning, about the middle of September, José
rushed into the kitchen exclaiming that two women and three men were
openly and calmly picking the grapes in the neglected vineyards of the
abbey, and that they had somehow opened the outbuildings where the wine-
presses and vats were stored.

Antonio paced up and down the kitchen twenty times before he could
come to a decision. As the secret guardian of the abbey, he could not ignore
these trespassers, who, if they were unchallenged, might easily grow bolder
until they committed some act of desecration. On the other hand, there were
dangers attending his interference with people who might turn out to be
acting in a legal manner. He decided, however, to go up to the abbey and
use his own eyes. Before setting out he slipped into his pocket a good
Havana cigar, one of a boxful which had been pressed upon him in England.

The foreman of the vintagers was sitting in the shade of the monastery
buildings, smoking a pipe of Brazilian tobacco.
 "Good days, Senhor," said Antonio in a friendly tone. "Your Worship is
luckier than I am. I made the Fazenda an offer for this vineyard, and they
didn't even ask me to sit down."

"The Ministerio da Fazenda in Lisbon?" asked the foreman.

"No, in Villa Branca."

The foreman laughed a meaning laugh, Antonio changed his ground.

"We're pressing about twenty pipes down there in the valley," he said
pointing out the farm. "But it's poor stuff. The vines have been neglected for
years."

"So have these," the foreman grumbled. "Yet we're expected to take
home wine fit for the Queen."

Antonio described his experiment in the vineyard on the sea-shore, and

asked for the foreman's opinion and advice so deferentially that the man
was pleased and flattered. When the monk rose to go the foreman suddenly
said:

"The Senhor mustn't say I told him. But I don't wonder the chief of the
Fazenda at Villa Branca bowed him out. The chief takes every grape in this
vineyard every year, by his own authority, without paying a vintem to
anybody. That's how Portugal is robbed. We might as well have Dom
Miguel back again."

A burden rolled from Antonio's heart. So long as the Villa Branca

official had an interest in snubbing off possible leasers or buyers the
monastery would be safe. He readily promised never to reveal the source
from which he had learned so spicy a secret; and, after deeply impressing
the foreman by giving him a cigar which had truly seen both Cuba and
England, he returned home.

The day Antonio received payment for the sale of his rough wine he
tendered José his wages. In rural Portugal a servant's annual wages ranged
from four and a half to five and a half pounds a year, with the addition of a
coarse cloak every second year. Antonio offered José the price of a cloak
and five pounds.

"This money," said José, holding it in his hand, "is taken from your
Worship's savings—the money that's to buy back the abbey?"

"It is your own, fairly earned," the monk responded. "Mind you don't
lose it. Have you a safe place to keep it?"

"Yes," said José promptly. "I shall bury it."

Antonio laughed. "You're like a fox," he said. "How many cemeteries

have you?"

With some pride, José admitted, in mysterious tones, that he had three
distinct and untraceable hiding-places, not counting the grave in the abbey-
cloisters where he had buried the boxes. Becoming more at ease, he finally
asked leave to ease his mind of an oppressive secret. Deep in a drift of sand
near the new vineyard he had laid away one hundred pounds—the round
remainder of moneys he had received for his horse and his farm and from a
small legacy. Blushing at his own presumption, he begged Antonio to let
him add this sum to the English pounds which his master was hording up
for the abbey's redemption. Antonio, deeply touched, agreed to accept the
money: but only on condition that José should be allowed a clear year in
which to alter his mind.

Had Antonio been giving one hundred pounds instead of receiving it,
José could not have been more grateful. But he had still something to ask.

"Since I saw those men and women up there in the vineyard, I'm not
easy at nights," he said. "I'm thinking the boxes ought to be buried in our
own garden. And, if I can have the cart and the bullock, I'll dig up
everything that I've got and bring it here."

During the next dark night the two men opened the grave in the cloisters
and brought away the boxes, which they reburied in a dry place within sight
of José's window. The morning after, José set out in the bullock-cart, with a
spade, a dark lantern, some sacking, and two empty barrels hidden under a
heap of straw.

He was away two days. When he returned it was with so abashed an air
that Antonio thought the hiding places had been found empty. But the lifting
of the straw told a different tale. Although José had lost his farm, he had
saved the household gods and heirlooms. There were two carved coffers
filled with fine linen; a box of old Portuguese faience in which the Persian
influence was still strong; five musty books of fusty piety; a fowling-piece,
much more dangerous to the sportsman than to the game; and some great,
round, solid, honest vessels of copper and pewter which shone, after José
had polished them, like suns and moons.

IV

Three years' hard labor turned Antonio's tangled vineyards and

languishing orangeries into an earthly paradise. The red roses nearly
covering the white walls of his golden-thatched farm-house, the round plot
of well-kept turf in front, the bright flower-beds and the trim gate, gave
quite an English appearance to the little farmstead. All the potsherds and
rubbish had been removed from the bed of the stream, while the cascades
and pools had been made fewer and grander. Trellises, pergolas, and arches
everywhere showed that José had been no less industrious than his master.

Up in the village the gossips had plenty of news to keep them busy. The
successive arrivals of Antonio's wine-press from France, of his vine-slips
from vineyards all over Europe, and of his books and papers from England
were so many nine-days' wonders. Fifty wild stories were set going as to his
parentage, his past, and his prospects: but it never entered anybody's head
that he had dwelt for years, almost in their midst, as a monk of Saint
Benedict.
 Antonio was regular in church-attendance: but he took care to conceal
nearly all his piety. For example, he denied himself the consolation of
occasionally serving the cura's Mass, lest his good Latin and his intelligent
grasp of every point in the ritual should betray him. He communicated more
frequently than was usual in the parish: but no one ever thought of
numbering him among those few devotees in the village who were
profanely called os beatos e as beatas—the Saints and Blessed Ones.

What interested the parish much more than Antonio's religion was
Antonio's prosperity. It became known that every hectare of his long-
neglected vineyard was earning a hundred per cent more than any other
hectare within ten leagues. It was also known that he was distilling a new
kind of orange brandy for medicinal use, which he exported to Rio de
Janeiro at a high price. Rumor said that, when his sea-sand vineyard should
begin to bear fruit, Collares would sink to the second place. Most wonderful
of all, it was known that the cellars at Antonio's farm contained some
curious wooden racks in which two or three hundred bottles of blended
white wine were standing on their heads. This blended white wine,
according to a villager who did occasional work at the farm under José, was
intended to rival French champagne, a famous but mysterious beverage
which no native of the parish had ever drunk or seen.

Upon the undeniable fact of Antonio's prosperity the gossips naturally

proceeded to erect fantastic prophecies about his matrimonial intentions. No
tongues wagged concerning José. Had the gossips known of his hundred
pounds, his copper and pewter and fine linen, the case would have been
different; but, if they thought of him at all, they regarded him as a wild-
eyed, eccentric boor who might go mad at any moment, and was certainly
better without a wife to beat or murder. Antonio, however, was worth the
gossips' while. During his first year in the parish they mentally married him
off to Joanna Quintella, a widow who had lost her husband in the civil wars.
Joanna was hardly thirty, had not outlived all her good looks, and was
possessed of nearly sixty pounds.

This was just after the monk had sold off his first pressing of wine for
fourteen pounds. But, with the growth of his prosperity, his prospective
brides advanced in importance. The gossips jilted poor Joanna and
betrothed Antonio successively to Catharina Rodrigues de Barros Lopes,
the farrier's second daughter; to Maria da Conceiçao d'Araujo, the cura's
younger sister; and to Beatriz Amelia Martins, who had lived six months in
Lisbon with her sister, the wife of a customs-house officer. But when it
leaked out that Antonio went nearly every month to the bank in Villa
Branca with drafts from Oporto, Rio de Janeiro, and even London, the
match with Donna Beatriz was broken off.

Within the wide boundaries of the parish only one bride remained: but,
for a time, not one of the gossips was presumptuous enough to link her
name with Antonio's. Ever since she began coiling up her hair, it had been
taken for granted that her father would have to go to Villa Branca or, at the
very least, to Navares in order to find a sufficiently important husband for
Margarida Clara Maria dos Santos Rebolla. When, however, the apothecary
received an invoice from Lisbon charging him half a pound for a single
bottle of champagne the maiden's fate was sealed. The inquisitive crowd
who paid the apothecary three vintens a head for a spoonful of the
champagne were disgusted with their bargain: but when the apothecary's
arithmetic was applied to Antonio's case they recovered their spirits and
unanimously made over Margarida Clara Maria to the young Croesus of the
valley who was about to gild the parish with glory.

Margarida's parents were not surprised on learning what the parish

expected of them; for had they not already brooded long and earnestly over
the same plan? Not to mention the Babylonian wickedness of Villa Branca
and Navares, town husbands were not acceptable to the worthy couple,
because town fortunes, town incomes, town reputations, lay too much at the
mercy of the politicians. Indeed, Senhor Jorge Maria dos Santos Rebolla
held politics in so much horror that he would not seriously entertain the idea
of Antonio as a son-in-law until he had satisfied himself that the young
vintner was unpoisoned by factious doctrines.

Senhor Jorge made his inquiries in person. On an October afternoon,

just after the heavier labors of the vintage were ended, he called upon
Antonio and asked him to sign a petition for the replacement of a bridge
which had been swept away on the terrible night of Antonio's fight with
José. The monk received his visitor with honor and without suspicion. He
knew him as an estimable lavrador, or large farmer: but he had never heard
of Margarida. Outside his church-going, Antonio had no dealings with the
village.

When the monk had subscribed his name of da Rocha to the petition,
the lavrador thanked him and rolled it up.

"Not that it will do any good," he added. "In this parish we've never
learned to crawl up the sleeves of politicians. Ah! When the last politician is
dead, Portugal will come to life again."

Antonio said nothing. But Senhor Jorge did not desist. To catechise a
stranger about his political opinions was always a breach of good manners,
and in Portugal it was still dangerous. Nevertheless the lavrador continued:

"Senhor, everybody says you are a clever man. You have been in
England and France and Spain and, some say, in Brazil. You have seen
many things. I am not a Miguelista; but I want to know if we are any better
off under the Liberals."

Antonio took time to think. When he had decided that there was nothing
to lose by frankness he said:

"Your Worship is older than I, and far wiser. But here is my answer. I,
too, am no Miguelista. If Liberalism truly meant equal freedom and justice
for all, I should be a Liberal. But Liberalism in Portugal is only a name.
Your Worship speaks of England and France. I have traveled in those
countries. One frosty morning, two hundred years ago, the English cut off
their King's head with a sharp axe in the name of Liberty: but the
Englishmen who did that deed equaled the king before long in oppression
and intolerance. Fifty years ago, in the name of Liberty, some Frenchmen
guillotined the King of France: but I have seen a French river where, a few
months afterwards, the men who did that deed drowned barge-load after
barge-load of those who held other opinions. Yes, your Worship. In a single
town, in four months, nearly ten thousand were shot or drowned—more
than the tyrant Miguel put to death in all Portugal, in all his unhappy
career."
 "Then the Senhor does not believe in Republics?" asked the lavrador.

"If all our citizens were good and wise and in possession of the whole
truth," answered Antonio, "a Republic would be the best form of
government. But the Portuguese are no more fit than the French for such an
experiment. Nay, I will go further. The Portuguese are not ripe even for the
English kind of Parliament. Our deputies are not the true choice of the
people. They fill their pockets with the people's money; and their empty
quarrels poison the nation's blood. But I have said too much. After all, what
do I know of politics? I leave politics alone, and..."

He weighed his words. When he uttered them, they came softly and
slowly.

"As for me," he said, "I hope to serve Portugal in some better way."

The lavrador had not understood every word Antonio said, but he felt
sure he was on the right side. He rose up with an approving nod and very
modestly asked if he might have a sight of his host's famous vineyards and
cellars.

Antonio, who was always willing to exhibit and explain everything to

any serious inquirer, rich or poor, gladly consented. He made it plain, as
they walked round the property, that he had introduced no novelties for
novelty's sake, and he was able to give a good reason for every departure
from local practice.

On the whole the lavrador was appreciative; but the champagne worried
him. He would have preferred to see Margarida Clara Maria in the care of a
husband whose wine-bottles stood on their heels and not on their heads.
Still, inverted wine-bottles were less detestable than topsy-turvy morals or
politics. Antonio seemed to be respectably but not excessively religious; he
was healthy; he was industrious; he was unencumbered by relatives; and,
best of all, he was successful. What more could be reasonably hoped for in
a son-in-law? As Senhor Jorge said good-bye, he wrung Antonio's hand
with a bargain-sealing grip which surprised the monk exceedingly.
 The very next Sunday enabled Senhor Jorge and Donna Perpetua, his
consort, to open their campaign. During the cura's sermon bursts of rain
began lashing at the south windows of the church, and it was raining
smartly when Mass came to an end. José borrowed a grass-waterproof: but,
although the servant could wear this peasant's garment, the master's dignity
as a landed proprietor forbade him to do likewise. Senhor Jorge seized his
opportunity, and insisted that Antonio should take shelter in his house,
which stood less than half a mile from the church.

Gossip nudged gossip and busybody winked at busybody as the two

men hastened off together. But Antonio saw neither the nudges nor the
winks; and he entered the lavrador's domain talking freely of farming and of
weather.

The buildings which met the monk's eyes were not like a farm-house in
England. As in England, they formed three sides of a quadrangle: but there
the resemblance ended. The square yard was covered nearly three feet deep
with gorse-litter. The buildings to the right and left housed cattle, horses,
wine-presses, tools and stores of all kinds. The principal façade boasted two
stories, the lower serving as a byre. The upper story made some
architectural pretension. A broad flight of stone steps climbed up to it; and
the front door was set back in a three-arched loggia.

As Antonio mounted the steps he saw that blue and white tiles lined the
inside of the loggia and that the stone floor had been newly whitened. His
host pushed open the nail-studded door, and they entered a large room lit by
three windows in the further wall. Many doors and door-posts crowded the
two side-walls; and Antonio knew that these were the entrances to
bedrooms not much bigger than his own old cell at the abbey. There were a
few pieces of strong old furniture and some pots and crocks even more
imposing than José's: but there was no cheerful fire to dispel the rawness
and gloom of the stormy autumn day, and, altogether, the place lacked
comfort.

Donna Perpetua received Antonio with an attentive cordiality greatly

exceeding the utmost a mere weather-bound churchgoer had a right to
expect; but the monk ascribed her warmth to old-fashioned habits of
hospitality. One after another her three sons, Luiz, Gaspar, and Affonso,
strode into the room. After exchanging greetings with the visitor they sat
down, side by side, and did not utter a word. Antonio turned to them more
than once with remarks or inquiries: but he could get nothing in return save
gasps, grins, and flushes. As Donna Perpetua and her husband were not
much more at their ease, the conversation soon languished; and, when
Antonio perceived that he was doing all the talking, it ceased altogether.

Strangely enough, the whole family appeared to regard the ensuing

silence as a thing altogether natural and seemly, like a silence in church.
When it had lasted long enough, Donna Perpetua arose from her chair in a
curiously formal manner, and, going to one of the side doors, called out,
"Margarida!" But the monk, although he was vaguely conscious that the
others were preoccupied and constrained, still suspected nothing.

The door opened, and Margarida Clara Maria dos Santos Rebolla came
forward into the meager light. Antonia recognized her at once as a damsel
he had often seen kneeling on the church floor in the front row of women.
So far as his thoughts had ever engaged themselves with her, she had
interested him by her dark eyes and by the country bloom on her olive skin.
He remembered how, that very morning, she had pleasantly filled in the
picture of rustic piety.

Antonio rose as she entered. He saw that her head was rather less
attractive without the black lace mantilla she always wore in church. Her
face was a little too broad and her abundant hair was braided too tightly.
But, to make up for the mantilla, Margarida had adorned her person with
unfamiliar splendors. Of her fine lawn camisole only the snowy sleeves
could be seen. The rest was hidden by an over-bodice richly embroidered in
many-colored wools. Her ample apron was even more magnificent than the
bodice. Its bold stripes, triangles, circles, stars and crosses stood out nearly
a quarter of an inch from the velvet ground in wools of blue, orange,
vermilion and green. The full skirt, rather short, revealed a pair of
serviceable ankles. Margarida's ribbed stockings were white, and there was
more embroidery on her velvet slippers. But the maiden's chief glory was
her jewelry. Heart-shaped filigree ear-rings, of gold purer than an English
sovereign, hung from her ears. These hearts were fully two inches long. Her
three golden necklaces sustained two more filigree hearts, each as long as
her longest finger, and a solid gold cross set with colored stones. The
greater part of her belt was also built up from traceried squares and circles
of pure gold.

The monk feared that he had gazed too long and curiously either at
these gorgeous trappings or at their wearer: for Margarida suddenly blushed
crimson from her topmost necklace to the roots of her black hair. Donna
Perpetua pronounced a formula of introduction; but, overwhelmed by
maidenly confusion, Margarida said nothing in answer to Antonio's few
words. She fled to her mother's chair and huddled on a stool beside her.

There was another silence. But Antonio was unperturbed. Not only long
years before, as a youth in Portugal, but also during his journey with young
Crowberry, he had assisted at bourgeois and rich-peasant functions equally
tiresome. Near Blaye, on the Gironde, and again at a tertulia in Valladolid,
he had seen the men herding stupidly at one side of the room while the
women clung together at the other. A look through the window told him that
the rain had ceased; so he resolved to stay ten minutes more, for decency's
sake, and then to go home.

"Down in the valley we are less gay than this," he said to Donna
Perpetua, without intending to be ironical. "My man José and I are the only
human beings within two miles."

Donna Perpetua threw a glance at her husband, as if to remind him of

some pre-arrangement.

"If the Senhor is lonely," said the lavrador, "he must come to our serões.
On Thursdays, at the full moon. That means next Thursday, about seven
o'clock. He will do us a great honor."

"He will indeed," added Donna Perpetua. "And if he plays the mandolin
let him bring it with him."

Antonio knew that at the serões, or soirees, of Portuguese farm-folk

there was much lore to be learned which one might search for vainly in
libraries. Besides, it would hardly be neighborly to refuse an invitation so
heartily given and so kindly meant.
 "All the honor," he said, "is on the other side. I will very gladly come."

Only at that moment did he discern the position. Donna Perpetua's

glance at Margarida lasted not much longer than a flash of lightning; but,
like a flash of lightning, it revealed the truth to Antonio. The furtive looks
of Margarida's brothers, both at their sister and at one another, confirmed
the revelation; and the evident relief and satisfaction of Senhor Jorge
established it beyond a doubt.

Not without traces of hauteur in his manner and curtness in his speech
Antonio thanked his hosts for their hospitality and took his leave.

The monk strode homewards with wrath in his heart. At both their
encounters Jorge dos Santos Rebolla had deceived him by false pretenses.
Antonio now understood that the petition for the new bridge was merely an
excuse for a spying visit to his little territory; and the lavrador's solicitude
for the dryness of Antonio's skin was equally undisinterested. He had been
trapped into a compromising position before all the eyes in the parish, and
he could hardly get out of it without giving pain to the unoffending
Margarida, annoyance to himself, and an opportunity to the gossip-mongers
of the village.

Besides, the affair was a blow to Antonio's pride. He had often recalled,
with some complacency, his skillful treatment of the young English beauty
who gave him the hot-house flower, as well as his tact towards other great
ladies who had failed to dissemble their regard. Yet here he was, enmeshed
in the first net which a pair of rustic match-makers had troubled to spread.
Again, if a Francisco Manoel Oliveira da Rocha were free to wed, it would
not be with a daughter of Senhor Jorge.
 He swung down the muddy track slashing murderously with his thin
English walking-stick at the wet brambles. But Father Antonio had not
ceased to be a monk. Every night he examined his conscience, and nearly
all day long, in his endeavor toward perfection, he maintained a keen-eyed
watch against the approaches of sin. So he reined in his bitter thoughts with
sudden strength, and set himself to analyze their causes. Experience had
taught him how easily un-Christian pride can be confused with righteous
anger.

Before his trim white house rose into sight Antonio re-entered the state
of grace, and was once more in love and charity with all his neighbors. The
results of Senhor Jorge's proceedings were bound to be gravely
embarrassing; but his motives, after all, could not be called disgraceful. It
was a father's duty to secure his daughter's happiness; and Antonio could
not deny that Senhor Jorge's choice implied a certain compliment to
himself. Again, the lavrador could not be blamed for the devices he was
using to press the business forward. No one, save José, knew that a
Benedictine monk was living on the borders of the parish; and probably
Senhor Jorge thought he was doing a shy young bachelor a service by
taking charge of the courtship.

These charitable thoughts towards the people who had drawn Antonio
into a mess did not, however, help him to get out of it. The slight coldness
and stiffness of his farewells could hardly have been noticed by Donna
Perpetua and the family. And on Thursday they would expect him at their
serão. What was he to do?

According to the cowardly and selfish rules of worldly prudence, his

only safe course was to sham some illness or to invent some bogus call of
business which would enable him to evade the serão. But such ways were
not Antonio's. He had given his promise and he meant to keep it. Indeed,
reflection convinced him that the serão would give him his best opportunity
of putting an end to the affair. Outside the church Senhor Jorge had publicly
compromised Antonio; at the serão Antonio would publicly put himself
right again. The parish should see that he was not a woman-hater and a
hermit: but the parish should see, also, that he was not a marrying man.
 About eight that night, as master and man were returning from their
usual Sunday evening exercises in the abbey chapel, Antonio told José that
he had sheltered under Senhor Jorge's roof and that he had promised to
assist at one of his serões. José tramped along without replying: but it was
plain he had a comment to make.

"Is there something you want to say, José?" asked Antonio. "If so, why
don't you say it?"

After stumping on another twenty paces in silence José grunted:

"Senhor Jorge has a daughter."

"I know. The Senhorita Margarida."

Although they were a third of a mile from home José shut his mouth
and did not open it again until they were in the house, with the door shut.
Then he spoke.

"I ask pardon of your Reverence," he began, using the forbidden title
with unconcealed deliberation. "Your Reverence is a holy monk. He
understands Latin and French and English. He understands oranges and
grapes, and winepresses and stills, better than anybody else in Portugal. But
he doesn't understand all the ways of the world—especially young women."

"While you, José," retorted Antonio, "understand all the ways of the
world—especially young women—perfectly."

"I don't, Father," protested José in alarm, "and nobody else, either—may
God help us all! But I understand a thing here and a thing there. The truth
is, Father—"

"Don't call me Father. The truth is what?"

"The truth is," replied José, in a mysterious whisper, "they want to find
a husband for the Senhorita Margarida."

"Go on."
 "Senhor Jorge wants to find some one rich—like your Worship. And
Donna Perpetua wants to find a born gentleman—like your Worship."

"Not to beat about the bush," Antonio interrupted, "you mean that
Senhor Jorge and Donna Perpetua want ... me?"

José admitted it and began apologizing for his presumptuous

interference; but Antonio cut him short by saying:

"You have done quite right to talk with me like this. Thanks. Never ask
pardon for speaking plainly. Now we will eat our bread."

It was the custom of the two men to dine on Sundays before going up to
the abbey, and to eat a small broa, dipped in wine, on their return. They sat
down to this simple supper, without any more words about Margarida, and
confined themselves to arranging the farm-work for the morrow. At half-
past eight José lit his lantern and went off to bed.

The monk made no haste to follow his example. The room was chilly
after the rain: so he kindled a fire of cork-cuttings and walnut-shells. It
blazed up lustily, and José's copper and pewter reflected the cheerful light.
Antonio blew out the useless candle, drew a chair up to the warmth, and sat
down.

Outside, the stillness was profound. José, no doubt, had already fallen
asleep. No dog barked, no bird of night cried. Even the Atlantic lay hushed.

From the heart of this silent loneliness the spirit of Antonio fared forth,
craving the company of living men. He thought first of his old companions,
the fathers and brethren of his Order; of the Abbot, of the Cellarer, of
Sebastian, of Cypriano. But it was little more than an hour since he had
walked past the doors of their abandoned cells and had sat in the midst of
their empty stalls; and, try as he might, he could only think of them as
impalpable ghosts hovering over the dim and deserted abbey. Then he tried
to think of Crowberry, of the young Queen Victoria's nonchalant
Comptroller, of the clean-shaven, wiry, iron-willed Duke. But England
seemed ever so far away, on the other side of a thousand miles of rain and
darkness; and only one memory stood up warm and clear. It was the
memory of that summer evening, when the vane on the gray church tower
burned like a flame and when the blue smoke from the cottage hearths and
the children's merry cries had suddenly turned the exile sick with yearning
for love and home.

Yes. Although all other English memories were faint, that one scene
rebuilt itself before his mind's eyes, solid, richly colored, vocal. He saw
once more the cattle knee-deep in clear, purling waters beside the steep old
bridge, and he heard the rooks cawing. It was so like a happening of
yesterday that he remembered even the chaff of Mr. Crowberry about his
Portuguese sweetheart, Teresa or Dolores or Luiza, or Carmen or Maria.

Maria. Margarida was named Maria. Margarida Clara Maria. The

syllables resounded in his brain like tinkling cymbals. They revived that
morning's experiences in the lavrador's house with so full an actuality that
Antonio's mind-painting of the golden English village faded into gray and
brown. Margarida. When Donna Perpetua called out her name she had
stepped forth; and now, once more, as Antonio breathed it, she seemed to be
advancing through the lonesome byways of his heart.

Perhaps the Rebollas were discussing him at that very moment. He tried
to imagine Senhor Jorge holding forth to his trio of inarticulate sons. But he
failed. The picture which his imagination persisted in painting was a picture
of Donna Perpetua talking to Margarida.

Donna Perpetua, like Senhor Jorge and the three dumb dogs of sons,
was doubtless a worthy creature. But the picture looked better without her.
Again, the comfortless living-room of the lavrador made an unamiable
background. Antonio's fire of cork-bark and nut-shells had sunk from a
blaze to a glow, and the bright eyes of the polished copper vessels no longer
winked and peeped down upon his privacy. But the unwonted warmth, after
the long walk in the fresh air and his draught of generous wine, made him
drowsy. His will was no longer supreme. And so it came to pass that a soft
dream-shape stole in upon him and sat down on the other side of the hearth.
Margarida.

Her presence seemed good to Antonio. Her voice, her cheeks, her arms,
her movements were soft and gentle. She had great, mild, stupid, kind eyes,
like the eyes of the contented English kine beside the steep stone bridge.
Margarida was brainless: but her brainlessness rested his own brains, weary
with plans and fears. Sitting beside her, without speaking, brought healing
to his fretted spirit. Margarida did not challenge the soul to high romantic
passion. She sat there not like a proud maiden to be wooed and won through
stress and storm but more like a comely, cosy, docile, loving young matron.
Antonio, ever drowsier and drowsier, surrendered himself more and more
completely to unheroic peace. He had battled for long years in the teeth of
bitter winds and icy currents: but at last he yielded himself up to the
deliciousness of drifting down a summer stream, warmed by the sun and
hardly ruffled by scented zephyrs.

Margarida seemed to have come nearer. She was at the further end of
the hearth no longer, but was sitting on one of José's carved coffers at his
side. All the room felt soft and silken. As Antonio's drowsy eyes closed, his
right arm sought Margarida's waist that he might gently draw her to his
breast....

He awoke in an instant and started up with a cry. For two or three

moments his wits went on sleeping, and he could not say if he breathed in
heaven or on earth or in hell. The fire had almost died out, and he would
have been standing in complete darkness if two dull, red eyes had not stared
at him from the hearth. Antonio pressed agonizing hands against his
throbbing temples and moaned a broken prayer.

As he came to himself the door was flung open and José rushed in with
a lantern. He had heard the cry.

"It is nothing," said Antonio. "I fell asleep in my chair, and I had ... I
had a kind of nightmare."

"It's these new-fangled French wines of your Worship's," José

grumbled. "Give me honest green wine, old-fashioned Portuguese. It
drowns your nightmares before they are born."
 VI

Antonio kept his promise and took part in the Thursday serão at the
farm of Senhor Jorge.

The monk's robust common-sense would not suffer him to be tormented

by false scruples. On the preceding Monday, when he accomplished his
daily duty of self-examination, he had not failed to recall his Sunday night's
surrender to the dream-maiden: but a well-instructed conscience acquitted
him of blame. Antonio knew how to distinguish between the deliberate
thoughts or imaginations of his waking moments and the unbidden guests of
his dreams. Under the saintly Abbot he had studied perfection in a manly
school where morbid super-sensitiveness could not exist an hour: and he
was too keenly alive to his real faults to accuse himself of fanciful sins. His
drowsy, involuntary pleasure in the shadowy Margarida's presence was not
sin; it was only homesickness. All the same he did not wish the vision to
return: and therefore he began to lay a new emphasis on the lines Procul
recedant somnia, Et noctium phantasmata, when he recited the Compline
hymn.

Having first ascertained that local usage permitted him to do so,

Antonio took José with him to the serão. The servant wore his Sunday
clothes; the master his second-best. Both of them were glad that they had
spent some pains and time on their appearance; for they were joined, half-
way, by a fellow-guest in all the glory of feast-day raiment. In the bright
moonlight they recognized this sumptuous personage as one Emilio
Domingos Carneiro, the eldest son of a small farmer. Although he was on
foot, he was appareled for proud feats of horsemanship. Bright spurs stood
out from his tall jack-boots, and he wore a horseman's jacket of black cloth,
felted. His fine white shirt was fastened by silver buttons, and a light red
sash topped his tight breeches. To make up for the steed which he did not
possess, Emilio carried a business-like whip.

At a cross-road the party picked up Emilio's two cousins, Joaquina and

Candida Carneiro. These strapping damsels wore green cloth skirts, large
green silk kerchiefs with the ends drawn cross-wise over their camisoles,
and aprons of many colors. Their hats were enormous. If the brims had not
been caught up to the pork-pie crowns by means of blue and yellow cords,
they would have measured three feet in diameter.

As Antonio neared the threshing-floor where the serão was to be held,

he noticed with satisfaction that not many of the guests had arrayed
themselves after the fashion of the resplendent Carneiros. Most of those
present had come to work as well as to play, and they were dressed
accordingly.

Donna Perpetua and her husband welcomed Antonio with proprietary

airs. Towards José they were sufficiently gracious, and Donna Perpetua
expressed her pleasure at the sight of the speechless fellow's mandolin. Luiz
and his brothers were already hard at play on the threshing-floor; but of
Margarida nothing was to be seen. Perhaps, thought Antonio, she was
sitting among the group of young men and women who were husking maize
on the sheltered side of the threshing-floor.

The night was warm and balmy. From the south-west a few clouds had
begun to rise: but the round moon was riding free, high among the sparkling
stars. A tinkling of guitars and the chattering and light laughter of youths
and maidens rippled the surface of the enormous silence. The scene was
almost as bright as day. Here a girl's gold ear-ring, there a man's buckles or
buttons of old silver, caught and flung back the faerie light. Some of the
older women were spinning. Eight-pointed wooden wheels whirred round,
buzzing like bees. A youth as handsome as a god lolled on a log, carving an
ox-yoke. Where the maidens sat all together, the colors were like peacocks'
tails and rainbows; and it was there that the moonlight lingered wantonly on
plump arms and little ivory hands.

A clapping of palms proclaimed the end of the game, and Luiz made
haste to begin another. He and Affonso climbed up two poplars, one on the
north side of the threshing-floor, the other on the south; and to these trees
they tied the two ends of a thin rope, so as to stretch it at a height of eight or
nine feet from the ground. Before making his end fast, Luiz passed it
through the handle of a coarse brown jug. Descending to the ground, he
picked up a six-foot clothes-prop, made from the dried stalk of a giant
cabbage, and with this he shoved the jug along the rope until it dangled
absurdly over the center of the floor. Then he produced a clean white
handkerchief and sang out for the first player.

The youth who had been carving the ox-yoke dropped his work and
leaped into the ring like a Greek athlete into the arena. Everybody clapped
hands again. The handkerchief was bound over his eyes and the light pole
was placed in his hand. Luiz turned him three-quarters round; clutched his
arm and walked him half-a-dozen paces this way and that; and then,
retreating to the edge of the floor, began to count a hundred, loudly and
quickly.

The handsome youth, with self-confidence apparent in every limb and

muscle, stepped back, swung the pole around his head, and smashed
mightily at the point where he thought the jug was hanging. Empty air
received the blow, and a burst of laughter mocked him. Luiz went on
counting, and many of the older people counted with him, aloud. At forty
the youth struck again; but he was all at sea, and he was marching further
away from the line. At seventy, eighty-five, ninety he slashed thrice more;
and at a hundred he dragged off his bandage to find that he had walked
nearly off the threshing-floor on the further side. Amidst applause, he came
back, smiling pleasantly, and resumed his carving of the yoke.

Emilio was the next to try. This was his great game, and the four blows
he struck were all within a yard of the jug. Once he missed it by less than a
hand's breadth. But Emilio was not in luck, and he uncovered his eyes a
little sulkily, only recovering his good spirits when six or seven players in
succession failed more signally than himself.

At last José put himself forward. Never having seen the sport before, he
had been loud in ridicule of Emilio and the other pole-wielders. His career
was short and inglorious. He cut fiercely at nothing before Luiz could count
five. Then, losing his head, he advanced rapidly towards the bevy of young
women, brandishing his weapon and laying about him right and left. The
girls sprang up screaming and took to flight. At thirty-seven José's feet
struck a heap of maize-leaves and he came down tremendously, full length
among the cobs. This was the kind of climax to delight the rural mind; and
the night was rent by shouts and shrieks of laughter.
 Unhappily José was not a good loser. He struggled to his feet with that
wild tigerish rage in his eyes which Antonio had seen before; and if his
master had not sprung to the rescue and murmured words in his ear there
would have been trouble.

"It's nothing," said Antonio. "It's only a game. Stay here, where you are.
And give me the handkerchief. I'll try myself. Watch me while I make a
bigger fool of myself than all the rest of you put together."

The girls came flocking back as Antonio, advancing to a spot exactly

under the jug, submitted to the bandaging of his eyes. He became
conscious, at once, of a different mood in the spectators. Nearly all the
gabbling ceased. Everybody was gazing curiously at the mysterious Senhor
Francisco Manoel Oliveira da Rocha, the man who had trod the golden
streets of London, the man who caused bottles of wine to be worth three
milreis each by standing them upon their heads, and, above all, the man
who was going to marry Margarida dos Santos Rebolla.

The counting began. To the blindfolded man it had an uncanny sound;

for nine-tenths of the onlookers were chanting the numbers with Luiz in a
subdued, expectant sing-song. But he kept his senses about him. During the
few moments while Luiz was turning him round and pushing him about,
Antonio had bent his whole mind to the business of smashing the jug. Not
that he expected or even wished to smash it. On the contrary, he had come
forward determined to fail. But it was part of his nature to do with all his
wits and might whatever he took in hand.

Luiz bawled out twenty before Antonio made his first stroke. He did not
touch the jug; but neither did he thwack the vacant air, for he distinctly felt
the rebound of the pole's tip from the rope. He moved a pace to the right
and struck again; but the pole encountered nothing. Meanwhile he knew
that he had come near to victory, because the sing-song of the spectators
had suddenly grown sharper and more excited. He went back half a step and
swept the space above him with a curving stroke as Luiz reached sixty-
three.

So uproarious a shout arose that Antonio did not hear the jug break, and
he thought for a half a second that, in fulfilment of his prophecy to poor
José, he had made himself the supreme fool of the evening. But, a twinkling
later, the broken pieces crashed loudly at his feet, and, in the same moment,
he knew that the intolerable counting had ceased. Somebody rushed
forward to loosen the bandage; and, as it fell from his eyes, he saw
Margarida standing with a beaming face among the young women.

Before he could greet her, a general stampede whirled Margarida out of

sight. The younger guests were rushing to take up positions for a new sport
in which all could join. Emilio explained to Antonio that it was to be a
game of rounders, played with a clay pot instead of a ball. This little pot,
such as could be bought any fair-day for a vintem, had no handle. It was of
red clay, baked thin and brittle. The players stood round in an extended
circle.

Donna Perpetua, as the hostess, led off by throwing the pot to Emilio;
but, as soon as he had caught it, she resumed her place among the matrons.
Emilio, after taking aim fixedly at Joaquina Carneiro, who was close at
hand on his right, turned suddenly on his heel and tossed the clay to
Rosalina Saldanha, a graceful blonde who was far away on his left. These
ruses and pretenses were the salt of the game. The bowl flew spinning
through the air in less than two seconds: but Rosalina was on the alert, and
she caught it with her two slender hands amidst applause.

Clouds from the south-west were mounting higher, but the moon still
shone brilliantly. Under the trees a lazy guitarist went on strumming his
thin, moonlight music, as crisp as hoar-frost and tinkling like icicles.
Whenever the pot was flung high, fifty bright eyes saw, up above it, the
planets and the stars; but the players were too young and too happy to
moralize. In their unstudied attitudes they made up a picture full of
rhythmic grace.

Four times the pot hurtled its way to José; and four times he caught it
before it touched the ground. At the fourth catch, he turned it like lightning
to Emilio; and Emilio spun it slowly and gracefully into the hands of
Margarida.

Margarida paused, clasping the red clay in fingers which were less
slender than Rosalina Saldanha's, but whiter. Every eye was fixed upon her.
She knew that she ought to toss the bowl to one of her brothers, or to a
young woman, or to one of the older men. But an irresistible impulse
moved her another way; and, with glowing cheeks and radiant eyes, she
sent it curving across the space which separated her from Antonio.

Had it dashed like a stone from the catapult-hand of José or flashed like
a meteor from the palm of Emilio the monk could have caught the pot. But
Margarida's action took him unawares. What was he to do? When the pot
was in his hand, how was he to treat her public act of favor? If he should—

His thinking was over in a flash; but it was too late. He plunged at the
pot clumsily and missed his catch. The pot struck the hard floor and broke
into a hundred pieces.

As a rule the smashing of the pot was the signal for a burst of mocking
merriment. But instead of a light-hearted uproar there was an awe-struck
silence. Everybody seemed to recoil from a sinister omen. Two more pots
stood on a log, in readiness for the second and third rounds of the game; but
no one stirred a step to fetch them. Antonio's gaze involuntarily followed
the general movement and rested on the face of Margarida. The glow was
gone from her cheeks, the light from her eyes. Very pale, she turned away.

A weak gust of wind rattled two or three dead leaves across the
threshing-floor and a few cold drops fell from the darkening sky.

"The lamps are lighted in the barn," cried the voice of Senhor Jorge.
"Come in, all of you, before the rain."

VII

Senhor Jorge's lamps were not as bright as full moons. Their smoky
flames lit up the vast barn so feebly that candles had to be set at the elbows
of the knitters and stitchers and spinners. The spattering of the rain against
the dusty windows made a dreariful sound.

There were games that could be played in a barn every bit as gay as the
games of the open air. But the merry-makers had lost their good spirits, and
nobody gave a lead towards recovering them. One by one the maids and
youths sat down on full sacks or empty barrels, or squatted on the ground.
When all were seated Donna Perpetua very politely begged José to tune his
mandolin and to sing a fado, or love-song.

For the sake of the young people, Antonio felt glad. More than once he
had heard José singing folk-songs which would have brought smiles to the
faces of the most austere; and he took it for granted that José would break
out with one of these rollicking lays. José, however, succumbed to the
surrounding depression. Having tuned his mandolin, which was unusually
large and sonorous, he began playing a doleful prelude.

Had his mind been free to enjoy it, Antonio would have found the music
brimful of charm. The descending minor scale was occasionally, but not
always, used in ascending passages, and the monk could not doubt that José
had received some tradition of tonality which urban ears would have
rejected with ignorant scorn. As José played on, it seemed that he changed
the scale more often than the key. At last he subsided into a more familiar
gamut and began to sing in slow and mournful tones:

"O! fountain weeping softly,

Thou canst not weep for ever:
But the full fountains of my tears
Shall be congealed never.

"O! weep, my eyes, and weep, my heart,

Bereaved and forsaken;
Weep as the holy Virgin wept
The night her Son was taken.

"Alas! the sadness of my life.

Alas! my life of sadness;
 Would I had wings to fly with thee,
O Swallow, Bird of Gladness!

"O Eagle! flying up so high,

Upon thy strong wings fleet me;
O Eagle! lift me to that sky
Where she prepares to greet me."

José ceased singing, but went on playing. Although a printed page of

music meant no more than so many black lines and dots and rings to his
untutored mind, he was a musician to his finger-tips, and he could expound
to others in tones many an emotion which he could not express even to
himself in words. Unlike most Portuguese performers, whose melodic
phrases were short-winded and very conventionally joined together, he was
capable of trailing out long-drawn melodies and of welding them into forms
of his own. José's huge fingers stroked the strings so subtly that the monk
could almost see the eagle urging up, up, up, above the purple serras, above
the moon and stars, until it swept on unwearied wings through the gates into
the City.

But Antonio could not give himself up to watching the great bird's
flight. He was painfully conscious that he and his man were killing the
serão. In breaking the bowl he had almost broken poor Margarida's heart;
and here was José driving everybody down into the depths of the blues. He
glanced apologetically towards Donna Perpetua: but the candle on the
trestle-table beside her lit up the unshed tears in her gray eyes so weirdly
that he hastened to gaze upon the ground.

José's threnody ended at last, and he stumped back to his place without
the slightest acknowledgment of the listeners' chastened applause. From a
corner one of the guitarists struck up a lively dance-tune; but his notes
sounded so thin after José's that he broke off of his own accord. To save the
situation, Antonio plunged in desperately and asked if Donna Perpetua
knew any riddles.

Yes. Donna Perpetua knew several.

 "Who is it," she asked, "that knows the hour but not the month; that
wears spurs but never rides a-horse; that has a saw but isn't a carpenter; that
carries a pick-axe but isn't a quarryman; that delves in the ground but gains
no wages?"

Antonio could not guess: but his ignorance was covered up by a general
shout of "The cock!"

"Good," cooed Donna Perpetua. "Now explain this: 'Before the father is
born the son is climbing up to the roof.'"

"Smoke!" roared everybody.

"What is born on the mountain," she continued, "and comes to sing in

the house?"

The shrill voices of the old women were loudest in the chorus of "A
spindle!"

"And who is it who is born on a dunghill, yet comes to eat with the king
at his table?"

"A fly!" was the immediate unanimous answer.

Donna Perpetua beamed benevolently upon the company. It had pleased

her to be made prominent. The guests were equally pleased: for had they
not shown the brightness of their wits, or, at the very least, of their
memories? Antonio was entertained in a different way. These cut-and-dried
riddles and answers reminded him of a village school which he had visited
in England and of the joyous heartiness with which the rosy-cheeked boys
and girls, in answer to the teacher's question, "What is hell?" roared out, "It
is a bottomless and horrible pit, full of fire."

By way of returning the compliment, Donna Perpetua invited Antonio to

propound one or two of the riddles he had heard in England. Unguardedly
he gave consent: and only when he began racking his memory did he
perceive his mistake. He had heard a feeble riddle in a country house about
a door being a jar; but the pun could not be made in Portuguese. Again, he
knew by heart a rhymed enigma, said to be Byron's, on the letter H; but this
was worse still. Apart from the Portuguese having no aspirate, how could he
render the line "'Twas whispered in heaven, 'twas muttered in hell" into a
language which spelled heaven with a "c" and hell with an "i"? At last he
cut short a very uncomfortable silence by saying that the only English
conundrums he knew could not be translated. At this remark the girls hung
their heads modestly and the matrons gave silent thanks that they had not
been born in an apostate country where the very riddles brimmed with
blasphemies and lewdnesses.

"England is no good," grunted Emilio, who had been playing a tune on

his jack-boots with the handle of his whip. "The English have plenty of
money; but they live dogs' lives. In England there are no fruits, no flowers.
They have no wine save what we send them from Portugal. When the rain
stops, there is a fog. No Englishman ever sees the sun."

"Things are hardly so bad as that," said Antonio, smiling. "In July and
August I have known the sun in England shine as fiercely as any sun in
Portugal. It is true there are no grapes or oranges, except those that grow in
glass hot-houses; but the English have apples and pears, cherries and
strawberries, plums and damsons, as fine as ours. Their flowers are
wonderful; and I wish everybody in Portugal could see an English village."

Emilio, whose father had suffered wrongs under Marshal Beresford

during the Regency, thwacked his boot again with the whip-stock and
mumbled. Antonio was concerned. He and José had already gone far
towards wrecking the serão, and he saw the necessity of avoiding a quarrel.
So he added what he conscientiously believed, saying, in a conciliatory
tone:

"The English are not the equals of the Portuguese. But they are a fine
people and a great nation."

"I have heard," put in Senhor Jorge, "that the English are not happy."

"They were merry once," Antonio answered, "and they will be merry
once more when they regain the Faith."
 "Yes," said Donna Perpetua devoutly. "Only those who are going to be
happy in the next life can be truly happy in this."

"Yet the English ought to be happy," objected Senhor Jorge, growing

restive at all this piety. "They have the best government in the world."

"Even the best government in the world is very bad," Antonio retorted.
"Still, with all its faults, the English government is indeed the best in
Europe. There is much more intrigue and corruption in their public life than
they care to recognize; but one can get justice in their courts, and, except
for Catholics, there is almost complete liberty. If we Portuguese had a
government one half so good—"

A thin, short, bald, bent old man with a long white beard and madly
bright eyes leaped out of the shadow and startled Antonio by shouting:

"Till he comes back there'll be no good government in Portugal. They'll

go on being thieves and cowards. Yes, thieves. The French were thieves and
bullies. The English were thieves and bullies too. Dom Miguel was the
worst thief and coward of them all. As for the Queen—"

Antonio staunched the flow of eloquence before treason could burst

forth.

"Whom do you speak of?" he demanded quickly. "You say 'Till he

comes back.' Who?"

While the old man stood glaring at the monk with trembling lips,
Senhor Jorge bent over and whispered in Antonio's ear:

"Have patience with him, your Worship. He is a Sebastianista—the only

Sebastianista for leagues around. On all other points he is saner than I am.
He is a good man. I beg your Worship to indulge him."

Antonio did more than indulge the hoary monomaniac. He strained

forward, all ears. That there should be a Sebastianista left alive in Portugal
amazed him. From the lips of a very old Jesuit he had once heard of some
Sebastianistas in the forests of Brazil, and the Abbot had mentioned a
Sebastianista whom he had seen, as a child, in the Açores. But a
Sebastianista was the last curiosity Antonio had expected to meet at Senhor
Jorge's serão.

"Tell us all about it," he asked.

"Ah, your Excellency," moaned the old man, "I am a poor blacksmith
and no scholar, and I cannot use fine words."

"Don't some people believe," asked Antonio, egging him on, "that King
Sebastião was killed by the Moors at the battle of al-Kasr al-Kebir? Don't
they say his body rests in the church of the Jeronymos at Belem?"

"Lies, all lies!" cried the Sebastianista. "Why were we beaten at

Alcacer-Kibir by those hounds of infidels? Because they were braver or
stronger? No. It was because we had sinned and the just God punished us.
But I tell your Excellency that not one hair of the King's head fell to the
ground. He departed unhurt from the battle. The tomb in the Jeronymos is
emptier than this barrel."

Unfortunately the barrel which the Sebastianista kicked with the iron tip
of his wooden shoe gave back a blunt sound which proved that it was full.
The girls began to titter; but the old man raved on, unabashed.

"Yes," he cried, "King Sebastião, the brave, the good, the Desired,
escaped without a scratch on his body, although he had fought a hundred
Moors hand-to-hand. He slew eighty with his own sword. He is waiting in
the enchanted isle. Waiting, waiting, waiting. God knows things are bad
enough in Portugal. But they will be worse. And when they are worst of all,
he will come back. The Hidden Prince will come back, riding on a white
horse. He will drive out the thieves and cowards. He will deal out justice to
rich and poor alike. He will set up the Fifth Empire."

"The Fifth Empire?" echoed Antonio, astonished at hearing such a

phrase from such lips. "What is the Fifth Empire?"

"It is the Empire which King Sebastião will set up," said the old man.