International Business: Competing in the Global Marketplace Fifth Edition
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Globalization
This chapter is dedicated to introducing
the student to the emergence of a new
and integrated world of business in which
the traditional barriers to cross-border
trade and investment including distance,
time zones, language, differences in
national government regulation, culture
and business systems recede in
significance due to globalization. The
discussion of contemporary issues in
international business illustrates the
unique challenges of international
business. A review of macro-economic
and political changes that have taken
place in the last 30 years highlights the
issues that a typical manager must
address in a global market. Information
technology and technological changes
have put global markets within the reach
of small firms in remote locations. In
spite of all its benefits, globalization is
not a panacea. Critics of globalization
point out that it has adverse effects on
some firms and individuals.
The opening case chronicles the meteoric
rise of Wal-Mart from its humble
Arkansas beginnings in 1962 to a global
retailing giant with $218 billion in sales
in 2002.
The closing case, Ecuadorian Valentine
Roses, follows a rose from Ecuador to
New York while describing the
hazardous working conditions in Ecuador
and the growing backlash among
European consumer groups.
Learning objectives





Chapter 1
Explain why it is important for
managers today to have a global
perspective.
Explain the three components of
globalization
Describe its effects on markets and
production
Explain how technology and innovation
in transportation have speeded up
globalization
Discuss pros and cons of globalization
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International Business: Competing in the Global Marketplace Fifth Edition
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Web Source
Chapter 1
http://www.cnn.com/2004/US/Southwest/01/08/levi.s.closing.ap/
http://www.nacsonline.com/NACS/News/Daily_News_Archives/July2003/nd0722036.ht
m
http://www.businessweek.com/magazine/content/03_16/b3829031_mz007.htm
http://globalization.about.com/mbody.htm
OUTLINE OF CHAPTER 1: GLOBALIZATION
Opening Case: Wal-Mart’s Global Expansion
Introduction
What is globalization?
The Globalization of Markets
The Globalization of Production
The Emergence of Global Institutions
Drivers of Globalization
Declining Trade and Investment Barriers
The Role of Technological Change
The changing demographics of the Global Economy
The Changing World Output and World Trade Picture
The Changing Foreign Direct Investment Picture
The Changing Nature of the Multinational Enterprise
The Changing World Order
The Global Economy of the 21st Century
The Globalization Debate
Anti-globalization Protests,
Globalization, Jobs, and Income
Globalization, Labor Policies, and the Environment
Globalization and National Sovereignty
Globalization and the World’s Poor
Managing in the global marketplace
Chapter Summary
Critical Discussion Questions
Research Task
Closing Case: Ecuadorian Valentine Roses
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Chapter 1
TEACHING SUGGESTIONS
One interactive approach to getting this class started is to ask a number of questions
related to the country of origin of every day items that they see around themselves for
example the clothes or shoes that they wear. Where were your shoes manufactured?
(Note: Nike is an American brand which is manufactured by contract manufacturers in
Southeast Asia) Where was your watch manufactured? Where were your jeans made?
(On Jan 8th of 2004 the last two Levi plants in North America closed and moved its
manufacturing operations to China. See web reference above). If you had to take off all
your clothes that were not made in North America (or any other particular country), do
you think you would be left wearing very much? Why are so many of our clothes made
outside North America? (Note: The labor content of the manufacturing processes used for
making most apparel is relatively high, and this makes it economically attractive to
manufacture these items in locations where the labor costs are low.)
Another interactive way to begin is by discussing the type of car they or their families
own. Does it make sense any more to talk about the nationality of a car? Is SAAB a
Swedish car? Saab is partially owned by General Motors of USA, uses many mechanical
parts imported into Sweden from GM in Germany, and assembles its cars in Sweden for
sale in USA. Is a Mercedes Benz assembled in Alabama an American car? Is a Pontiac
assembled in South Korea a Korean car?
TRANSITION
After this brief warm-up has helped you get the students thinking about globalization, you
can transition to the opening case by asking:
1) How many of you shop at Wal-Mart?
2) Why do you shop at Wal-Mart?
3) Why do you think Wal-Mart has grown so successfully, both in North America
and internationally?
4) You may refer to Costco recent international expansion (see web reference on US
retailers moving their expansion overseas, above)
LECTURE OUTLINE FOR CHAPTER
This teaching outline follows the Power Point presentation provided along with this
instructor’s manual.
Introduction
This chapter introduces the student to the emergence of a new and integrated world of
business. The traditional barriers to cross-border trade and investment including distance,
time zones, language, differences in national government regulation, culture and business
systems recede in significance due to globalization. Building on this chapter the next
chapter focuses on the differences in political, economic, and legal infrastructures across
countries.
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Slide 1-2 Wal- Mart’s global Expansion
The opening case describes Wal-Mart’s global expansion over the past several years. The
effects of globalization are particularly noticeable in the retail industry. This industry has
had to learn to localize products or packaging to meet the demands and needs of locals in
the different countries. A question to pose to the students would be: Why has Wal-Mart a
home grown US company been pursuing growth opportunities internationally?
By 1990 Wal-Mart realized that opportunities for growth were becoming limited. It had
stores in all 50 states. The domestic market would soon be saturated. Growth
opportunities were outside the US. Also increasingly more of the products that were
stocked were made in these overseas markets.
Wal-Mart had trouble with international expansion initially. The first country it operated
in outside of the U.S. was Mexico. Here it could not replicate its efficient distribution
system because of bad roads poor infra structure, differing labor values, lack of leverage
with local suppliers etc. As a result costs went up. Further, Wal-Mart did not carry
localized products to suit Mexican tastes, needs and environment. Wal-Mart carried
products that were popular in the US. However, the company learnt quickly from its
mistakes and was emboldened to open stores in eight other countries. Today Wal-Mart is
the largest retailer in the world.
Slide 1-3 What is globalization?
Globalization refers to a shift toward a more integrated and interdependent world
economy.
Globalization has 3 components:
The globalization of markets
The globalization of production and
The emergence of global institutions
Slide 1-4 Globalization of markets.
In many markets the emergence of a global norm in terms of customer expectations has
made it possible to sell standardized products all over the world.
The global acceptance of Coca-Cola, Levi's jeans, Sony Walkmans, and McDonald's
hamburgers are all examples of the emergence of global markets.
Slide 1-5 Globalization of markets.
In spite of globalization of the markets for some products, there remain significant
differences across most national markets. Germany still leads in per capita beer
consumption, with a local pub on almost every corner and in some cities, women selling
beer out of their front windows to passers by on the street. The French lead in wine
consumption, and the consumption of wine is a natural part of life anywhere in France.
Italians eat more pasta per capita than any other nationality.
These differences are expected to persist and managers need to match their strategies to
the unique features of each national market.
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Slide 1-6 Globalization of markets.
In addition to the need for marketing strategies customized to the needs of local
consumers, managers must be sensitive to other forces that make national markets unique.
Government regulations and the exchange rates for local currency are some of the
additional factors that shape the work of managers in global markets.
Slide 1-7 Globalization of production
Today it is common for companies to disperse parts of their production processes to
different locations around the globe to take advantage of national differences in the cost
and quality of factors of production.
While part of the rationale is based on costs and finding the best suppliers in the world,
there are also other factors. Boeing’s manufacture of commercial aircraft is dispersed all
over the world because of the desire of many national governments to develop expertise
in the manufacture of aircraft. For example, Boeing manufactures aircraft parts in China
because the Chinese government will not buy Boeing’s planes unless some domestic
Chinese firms are contracted to supply portions of the plane - otherwise they will find
another supplier (Airbus) who is willing to support local industry.
Slide 1-8 Global production.
The positioning of Swan Optical’s production activities illustrates the dispersion of
production activities across the globe.
Slide 1-9 Increase in volume of world trade and production
Fig 1.1
Slide 1-10 Emergence of global institutions
As globalization increased the interconnection and interdependence of countries and
companies across the world, there was an increased need for global institutions that
govern the flow of goods and services between these entities.
The World Trade Organization (WTO) is primarily responsible for policing the world
trading system and making sure nation-states adhere to the rules laid down in trade
treaties. The International Monetary Fund (IMF) and the World Bank were created to
maintain order in the international monetary system and promote economic development.
The United Nations (UN) was created to preserve peace through international
cooperation.
Slide 1-11 Global drivers
The two macro factors that seem to underlie and drive the trend towards greater
globalization are first, the decline in the barriers to free flow of goods, services, and
capital and second, dramatic technological change in communications, information
processing, and transportation technologies.
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Slide 1-12 Pattern of declining tariffs
Table 1.1
Slide 1-13 Declining barriers to trade
Globalization is facilitated by the reduction in trade barriers. After WWII, the
industrialized countries of the West started a process of removing barriers to the free flow
of goods, services, and capital between nations. First, under the General Agreement of
Trade and Tariffs (GATT), over 140 nations negotiated even further decreases in tariffs
and made significant progress on a number of non-tariff issues (e.g. intellectual property,
trade in services). Subsequently, with the establishment of the WTO, a mechanism now
exists for dispute resolution and the enforcement of trade laws.
The growth of foreign direct investment is a direct result of nations liberalizing their
regulations to allow foreign firms to invest in facilities and acquire local companies.
With their investments, these foreign firms often also bring expertise and global
connections that allow local operations to have a much broader reach than would have
been possible for a purely domestic company.
Slide 1-14 The changing pattern of world output and trade
The changing pattern of world output and trade
As the progressive reduction of tariffs were orchestrated first by GATT and then by
WTO, the total volume of international trade increased and the relative proportions of
outputs and exports from the different countries changed. The dominance of the United
States was reduced significantly as nations like Japan, South Korea, and China began to
export. Table 1.2
Slide 1-15 Percentage share of total FDI stock
Percent share of FDI stock Fig 1.3
Slide 1-16 Volume of FDI inflows
Fig 1.4
Slide 1-17 The role of technological change
Improved information processing and communication allow firms to have better
information about distant markets and coordinate activities worldwide. The cost of
computers as well as the cost of long-distance and international communications has
plummeted in the last 10 years.
The explosive growth of the World Wide Web and the Internet provide a means to rapid
communication of information and the ability of firms and individuals to find out about
what is going on worldwide for a fraction of the cost and hassle as was required only a
couple of years ago.
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Improvements in transportation technology, including jet transport, temperature
controlled containerized shipping, and coordinated ship-rail-truck systems have made
firms better able to respond to international customer demands.
Slide 1-18 Shrinking globe
Fig 1.2
Slide 1-19 Changing demographics of the world economy
The U.S. share of world output has declined dramatically in the past 30 years, and a much
more balanced picture is now developing among industrialized countries. Looking ahead
into the next century, the share of world output of what are now referred to as
“developing countries” is expected to greatly surpass that of the current “industrialized
countries.”
The source and destinations of FDI has also dramatically changed over recent years, with
the US and industrialized countries becoming less important (although still dominant) as
developing countries are becoming increasingly considered as an attractive and stable
location for investment.
A number of large multinationals are now non-U.S. based, and many are recognizable
brand names in the worldwide (e.g. Sony, Philips, Toshiba, Honda, BMW). The new
large multinationals are not only are originating in other developed countries, but there
are an increasing number of multinationals based in developing countries.
Slide 1-20 National origin of largest multinationals.
Many economists, politicians and business leaders seem to think globalization is
desirable. Globalization stimulates economic growth, raises the incomes of consumers,
and helps to create jobs in all countries that choose to participate in the global economy.
(Your text book is strongly in favor of free trade). (Fig 1.5)
Globalization encourages each country to specialize in the production of those goods and
services that can be made most efficiently using the raw materials and skills available in
that country. This increases the overall efficiency of the world trade system.
Slide 1-21 Environmental performance and income
Environmental performance and income. It is argued that tougher environmental
regulations and stricter labor standards go hand in hand with economic progress.
Slide 1-22, Slide 1-23 Globalization debate-Pro and con
There are many critics of globalization who believe that the benefits of globalization are
outweighed by the costs.
In developed countries, labor leaders lament the loss of good paying jobs to low wage
countries. When the NAFTA agreement was signed, some politicians warned of a
hearing a “giant sucking sound” as jobs left the USA for Mexico.
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Even if the jobs in developed countries are not lost, globalization creates downward
pressure on wages in industries where overseas production is a viable option. The
availability of jobs for unskilled workers is clearly threatened when those jobs can be
more efficiently performed elsewhere.
Lower labor costs are only one of the reasons why a firm may seek to expand in
developing countries. These countries may also have lower standards on environmental
controls and workplace safety which permit the creation of “sweatshops”. This situation
allows cost-cutting and cost-efficiency but over time it has a massive negative effect on
the environment and living conditions.
With the development of the WTO and other multilateral organizations such as the EU
and NAFTA, countries and localities necessarily cede some authority over their actions.
If the USA wanted to “protect its domestic lumber industry” by preventing imports of
lumber from Canada, the dispute would likely be settled by an international arbitration
panel set up by the NAFTA agreement or the WTO. Because of its trade agreements, the
USA would likely be forced to open its markets to importation of lower cost, higher
quality Canadian lumber. The critics of globalization argue that this amounts to a loss of
sovereignty.
ANSWERS TO CRITICAL DISCUSSION QUESTIONS IN CHAPTER 1
QUESTION 1: Describe the shifts in the world economy over the last 30 years. What are
the implications of these shifts for international businesses based in Britain, North
America, and Hong Kong?
ANSWER 1: Globalization has led to an ever more integrated world economy over the
past 30 years. There has been a significant shift away from the USA and Western
European countries as being dominators of world business. While the role of these
countries is still large, developing countries and Asian countries are becoming
increasingly active and aggressive in international trade and investment. Significant
implications for British firms involve their need to look beyond Europe and America for
investment and opportunities. Consumer spending power is growing the most quickly in
developing countries. British firms also face the opportunity (and the threat) of attracting
Asian firms interested in Britain as a launch pad for the European market. For North
American firms, the same holds true, although the importance of the increasing prosperity
in Latin America suggests a potentially huge market in “their backyard.” Hong Kong,
while losing its “independence”, is perceived as the gateway to the immense market of
mainland China. While the free market freedoms Hong Kong firms have enjoyed are
now under question, the access to China is improving along with the move towards a
market economy within China. International businesses based in all three locations are
facing new opportunities and threats.
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QUESTION 2: "The study of international business is fine if you are going to work in a
large multinational enterprise, but it has no relevance for individuals who are going to
work in small firms." Evaluate this statement.
ANSWER 2: Persons who believe in this view, and the firms that they work for, may
find that they do not achieve their full potential (at best) and may ultimately fail because
of their myopia. As barriers to trade decrease and state of the art technological
developments take place throughout the world, new opportunities and threats exist on a
worldwide basis. The rise of the mini-multinationals suggests there are global
opportunities for even small firms. But staying attuned to international markets isn't only
important from the perspective of seeking profitable opportunities for small firms; it can
also be critical for long-term competitive survival. Firms from other countries may be
developing products that, if sold internationally, may wipe out small domestic
competitors. Scanning international markets for the best suppliers is also important for
small firms, for if a domestic competitor is able to tap into a superior supplier from a
foreign country, it may be able to seriously erode a small firm's competitive position
before the small firm understands the source of its competitor's competitive advantage
and can take appropriate counter actions.
QUESTION 3: How have changes in technology contributed towards the globalization of
markets and of production? Would the globalization of products and markets have been
possible without these technological changes?
ANSWER 3: Technological changes have significantly contributed to the globalization
of products and markets, and accelerated the creation of a global village. While
increasing globalization of markets has been taking place since before either Marco Polo
or Christopher Columbus traveled across the globe in search of trade, recent technological
developments have brought the world closer together more quickly than at any time in the
past. Developments in information processing and communication have decreased the
costs of managing a global production system, and improvements in transportation have
made the shipment of goods timelier and less costly than at any time in the past.
International firms can locate facilities wherever it is most advantageous, coordinate the
activities between facilities, and ship products to customers worldwide more cost
effectively than at any time in the past.
QUESTION 4: “Ultimately, the study of international business is no different from the
study of domestic business. Thus, there is no point in having a separate course on
international business.” Evaluate that statement.
ANSWER 4: The truth is that if an international business attempts to utilize the same
business techniques that were effectively domestically on the international scene, it is
quite likely to fail. The annals of corporate business are lined with examples of that
concept, from small companies struggling to make an impact to large multinationals like
Procter and Gamble, who failed in Japan when they first introduced disposable diapers to
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that market. International business is different in many of the ways mentioned here: 1)
countries differ, 2) the range of problems a manager faces is greater and more complex, 3
the limits imposed by governmental intervention and the global trading system
complicate international business, and 4) international transactions require converting
funds and being susceptible to exchange rate changes. A separate course on international
business can provide an understanding of these difficulties, and how conducting
international business requires consideration of issues not typically covered in other
courses.
QUESTION 5: How might the Internet and the associated World Wide Web affect
international business activity and the globalization of the world economy?
ANSWER 5: The ability of firms and individuals to both market their products or
services, and find out about interesting new products or services worldwide, is greatly
enhanced by the World Wide Web. Using this as an initial point of contact, we can
imagine how this could then initiate new flows of trade and investment. Consumers can
find new products of interest that are not available in local retail outlets, and then simply
order them over the internet. Firms will find that they have an increasingly global
customer base, and that current distribution systems may be inadequate or inappropriate.
QUESTION 6: If current trends continue, China may emerge as the world’s largest
economy by 2050. Discuss the possible implications for such a development for the
world trading system, the world monetary system, and the business strategy of today’s
European and US-based global corporations.
ANSWER 6: The world trading system would clearly be affected by such a development.
Currently China enjoys a somewhat privileged status within the World Trade
Organization as a “developing” country. Such a rise to eminence, however, would clearly
force it to become a full and equal member, with all the rights and responsibilities. China
would also be in a position to actively affect the terms of trade between many countries.
On the monetary front, one would expect that China would have to have fully convertible
and trading currency, and it could become one of the “benchmark” currencies of the
world. From the perspective of Western global firms, China would represent both a huge
market, and potentially the home base of some very capable competitors.
TEACHING SUGGESTIONS FOR THE CLOSING CASE OF CHAPTER 1
QUESTION 1: How has participation in the international rose trade helped Ecuador’s
economy and its people? How has the rise of Ecuador as a center for rose growing
benefited consumers in developed nations who purchase the roses? What do the answers
to these questions tell you about the benefits of international trade?
ANSWER 1: Participation in the international rose industry has helped the Ecuadorian
rose farms create tens of thousands of jobs. The revenues and taxes from rose growers
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have been used to build vital infrastructure like schools, roads, an airport, and irrigation
systems. Individual workers at the rose farms earn well above Ecuador’s minimum wage
of $120/month and their jobs provide them with healthcare and pension. By employing
women the rose industry has created a social revolution in Ecuador because women now
much more control over their family’s spending.
Consumers in developed nations get the opportunity to buy Ecuadorian roses which are
now considered the Rolls Royce of roses. They have huge heads, unusually vibrant
colors and are excellent premium products for Valentine’s Day, Mother’s Day and other
occasions when roses are appropriate.
International trade can yield benefits for both the country that produces the goods or
services as well as the country that consumes them.
QUESTION 2: Why do you think that Ecuador’s rose industry only began to take off 20
years ago?
ANSWER 2: The rose is a perishable product. When a rose is grown in Ecuador for sale
in international markets such as North America and the European Union, it is imperative
that the rose is transported rapidly and under the right conditions so that it can attract a
premium price in the market. The rose industry in Ecuador probably began to take off 20
years ago when developments in refrigeration technology and air transportation
technology made it feasible for a rose producer in Ecuador to serve a market as far away
as North America.
The Ecuadorian rose industry has grown rapidly because it provides an attractive product
in response to a strong and steady market demand.
QUESTION 3: To what extent can the alleged health problems among workers in
Ecuador’s rose industry be laid at the feet of consumers in the developed world and their
desire for perfect Valentine’s Day roses?
ANSWER 3: It is difficult to make a direct connection between consumers in the
developed world and the alleged health problems of workers in Ecuador’s rose industry.
To be sure, an indirect connection exists because the roses in Ecuador are grown in
response to demand in developed countries. However, that demand pre-dates the
Ecuadorian rose industry and would probably be just as strong if Ecuador stopped
producing roses. If the alleged health problems of the rose industry workers are indeed
linked to toxic exposure at the farms, the large growers who permit the use of chemicals
without protective gear and the chemical manufacturers who could do a better job of
educating users about the toxicity of the chemicals must bear the primary responsibility
for the health problems.
QUESTION 4: Do you think governments in the developed world should place trade
sanctions on Ecuador roses if reports of health issues among Ecuadorian rose workers are
verified? What else might they do to improve the situation in Ecuador?
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ANSWER 4: Placing trade sanctions on Ecuador roses is one option that governments in
the developed world have if the health issues are verified. The impact of these sanctions
would be most severe on workers in the rose farms because they would lose their jobs.
Another option is to threaten sanctions if protective steps are not introduced in a staged
and progressive manner. This option has the following advantages: it would give the
growers some time to get the appropriate protective gear; it would not result in immediate
job losses for the workers; and finally as long as the situation is monitored rigorously it
would eventually eliminate toxic exposure in the rose farms.
STUDENT EXERCISES FOR CHAPTER 1
global EDGE™ Exercise Questions
http://globalEDGE.msu.edu/
Answers to Exercise Questions
Chapter 1 – Exercise 1
Numerous statistical databases and websites provide population information. Any of
these sources (including the CIA World Fact book or the globalEDGE Country Insights
pages) could be used to provide the answer to the exercise. For example, if the search
term “population” is entered into the search box, located at
http://globaledge.msu.edu/ibrd/ibrd.asp , the first resource that comes up is World
Population Data Sheet located at the Population Reference Bureau (http://www.prb.org/).
This resource is found under the globalEDGE category “Research: Statistical Data
Sources”
Search Phrase: “Population”
Resource Name: World Population Data Sheet
Website: http://www.prb.org/
globalEDGE™ Category: “Research: Statistical Data Sources”
Chapter 1 – Exercise 2
The FDI Confidence Index is a study published by the consulting firm A.T. Kearney
based on surveys of CEOs. Since it ranks countries in terms of their attractiveness, it’s
listed under the category of “Research: Rankings”. It can be reached by either browsing to
this category, or by searching for the phrase FDI Confidence using the search box located
at http://globaledge.msu.edu/ibrd/ibrd.asp
Search Phrase: “FDI Confidence”
Resource Name: A.T. Kearney: FDI Confidence Index
Website: http://www.atkearney.com/
globalEDGE™ Category: “Research: Rankings”
SUGGESTED READINGS FOR CHAPTER 1
Friedman, Thomas 2000. The Lexus and the Olive Tree. Paperback (a “must read”
for anyone interested in the topic of globalization)
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Dicken, Peter 1992. Global shift. New York: Guilford Press.
Economist. The Economist magazine frequently publishes special reports (“surveys” in
their terminology) that I have used throughout courses. These can help bring
material in the text “up to the current time” as well as provide more extensive
background. Copies of reprints are available through the magazine for
distribution in class. Look through recent editions to find the most current reports.
- 3 October 1998: “World Trade”, 38 pages including advertisements
- 17 April 1999: “International Banking”, 38 pages including
advertisements
- 30 January 1999: “Global Finance”, 18 pages including advertisements
Greider, William 1997. One world, ready or not: The manic logic of global capitalism.
New York: Simon and Schuster.
Naisbitt, John 1994. Global paradox: The bigger the world economy, the more powerful
its smallest players. New York: William Morrow and Company.
Ohmae, Kenichi 1990. The borderless world: Power and strategy in the interlinked
economy. New York: Harper-Collins.
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