Unit 2 Part 2 PDF

UM14MB552
International Business – Unit I –

part -2
Prof. Sangeeta Mehrolia

sangeetamehrolia2003@gmail.com
International Business – Unit II
• The Cultural environments facing business
(Chapter 2)
• The Political and Legal environments facing
business (Chapter 3)
• The Economic environments facing business
(Chapter 4)
International business 2
Chapter Objectives : The Cultural
Environments Facing Business
• To understand methods for learning about
cultural environments
• To analyze the major causes of cultural
differences and change
• To discuss behavioral factors influencing
countries’ business practices
• To understand cultural guidelines for
companies that operate internationally
Countries differ in many ways – therefore
international business is more complicated than
domestic business
Different countries have different culture, political,

legal and economic systems; different stages of
development
Impact on business practices, benefits, costs and

risks. Therefore on strategy and operations
Hence important to understand country differences

and the basis of such differences
Cultural Understanding- Wal-mart
Wal-mart failure in Japan, South Korea and Germany
Cultural Understanding - Toyota
Japanese carmaker Toyota lately roused resentment from Chinese people when
it makes two stone lions, a traditional symbol of power in China, salute and
bow to Toyota's Land Cruiser and Prado GX in two ads respectively. Toyota
translates the word Prado as "Badao" in Chinese, a word that means
"high-handed" or "domineering", and the tagline reads "You have to respect
Badao."
Cultural Understanding – Movie Promotion
Cultural Understanding – Barbie in China
American toy maker Mattel closed its first flagship Barbie
store – the House of Barbie – in Shanghai after struggle of two
years since their opening in year 2009. Mattel invested over $30
million in the House of Barbie in celebration of the American
iconic doll’s 50th anniversary. In China, Barbie is simply a
doll. She is not associated with any cultural significance for
Chinese girls or young women.
Cultural Understanding – Dunkin Donuts
Dunkin' Donuts had to apologize after it showcased an
advertisement in Thailand which featured a woman in
"blackface" make-up. The advertisement, was used to promote
the Dunkin donut "charcoal donut". It was called "racist &
bizarre" by a top human rights group
Cultural Understanding – Foster’ s Beer
Fosters is the Australian beer brand company. It entered the
Vietnam market in 1998 and sold beer under the tagline “The
Australian styled beer” it failed to capture the Vietnamese
market because of its positioning.
Cultural Understanding – Meeting Etiquettes
The Cultural environments facing
International Business
• Culture refers to learned norms based on values,
attitudes, and beliefs of a group of people
• It is the sum total of learned behavioral traits – values,
rituals, symbols, beliefs, thought processes – that are
shared by members of a society
• People belong to different groups with different
cultures – based on nationality, ethnicity, religion,
gender, language, work organization, profession, age
etc
• IB involves dealing with people internationally – hence
IB is subject to impact by culture
Cultural environments – People Factor
• Business involves people – hence every business

function is subject to cultural differences
• Cultural diversity affects business operation and
increases complexities.
• Cultural collision – divergent cultures coming in
contact
• Sensitivity and adjustment – changing business
practices to suit the culture of another country –
eg., Japan, UK
Religion as a Cultural Stabilizer
• Centuries of profound religious influence
continue to play a major role in shaping
cultural values
• Many religions influence specific beliefs that
may affect business
Culture Influences Behavioral
Practices at Work Place
• Issues Related to Social Stratification :
• Issues Related to Work Motivation
• Issues Related Factors affecting Relationship
Preferences
• Issues Related to Factors affecting Risk taking
Behavior
Issues in Social Stratification
• Ascribed group memberships (determined at birth)
vs Acquired group memberships (based on one’s
choice of affiliation)
• Performance orientation merit vs. other criteria
• Open vs. Closed society – Eg., Quotas, Gender
literacy
• Attitude towards gender – Eg., Japan
• Attitude towards age – Eg., Retirement,
Advertisements in Sweden
• Prestige of occupation – affects recruitment and
advertisement
Issues in Work Motivation
• Materialism and Motivation – Material wealth as a
pathway to success
• Expectation of Success and Reward
• Assertiveness and Motivation
• The Masculinity–Femininity Index – Performance and
growth over quality of life and environment
• Hierarchies of Needs – important in HR policies in
different countries
Factors Affecting Relationship
Preferences
• Power distance: general relationship between
superiors and subordinates – Affects
management style and organization structure
• Individualism vs. collectivism: degree of
dependence on organization – Self
actualization versus Security – Individual
versus Team incentives
Factors Affecting Risk-taking
Behavior
• Uncertainty avoidance – Employee behavior;
New product introduction
• Trust – Affects cost of doing business
• Future orientation – Affects retirement plans,
incentives
• Fatalism – Vs. Self-determination
Factors Affecting Information and
Task Processing
• Obtaining Information: Low-Context versus
High-Context Cultures: US is low context country
where there pay attention to written words in contract and no
hidden and implicit words
• Information Processing: Iceland: Jon, son of Thor will
be named as “jon thorsonns” in directory. Daughter will be
called “ Thordottire”
• Monochronic vs polychronic : North Euporpean
countries finish first transaction before taking another one.
South European countries they feel uneasy if not dealing with
all customers simultaneously
Factors Affecting Information and
Task Processing
• Idealism vs pragmatism : Looking at whole
picture instead of specific problem. US
specific problems and brazil whole picture.
Factors Affecting the
Communication Process
• Spoken and Written language : in Spain,
Empleados – “white-collar employees” and
obreros – “labors”
• Silent language:
– color associations
– conversational distance
– perception of time and punctuality
– body language and gestures
– prestige
When Gerber started selling baby food in Africa, they used the same packaging as
in the US, with the smiling baby on the label. Later they learnt that in Africa,
companies routinely put pictures on the labels of what’s inside, since many people
can’t read
Language Fiasco
In 1987, when Kentucky Fried Chicken opened its
first outlet in Beijing, its slogan ‘finger-licking
good’ was incorrectly translated as ‘eat your
fingers off.’
GM’s fiasco in trying to market Chevy Nova car in Central and S. America
- “No va” means “it doesn’t go” in Spanish (just an urban legend?)
Pepsi’s “ Come Alive with the Pepsi Generation” translated into “ Pepsi Brings
your Ancestors Back From the Grave” in Chinese
Dealing with Cultural Differences
• Accommodation
• Cultural distance – Easier to do business if the
cultural distance is lesser
• Culture shock
• Company and Management orientations
– Polycentric – BU act like local companies
– Ethnocentric – Own culture is superior
– Geocentric – Balancing cultures
The Political and Legal
Environments Facing Business
• To discuss the goals and functions of a political system
• To profile trends in the emergence and diffusion of
contemporary political systems
• To explain the idea of political risk and describe approaches
to managing it
• To understand how political and legal systems affect the
conduct of business
• To describe trends in the evolution and diffusion of
contemporary legal systems
• To discuss the issue of the rule of law versus the rule of man
• To explain legal issues facing international companies
• To explain the idea of intellectual property and to discuss
areas of concern and controversy
Factors in International Business Operations
OPERATING OPERATIONS
ENVIRONMENT
OBJECTVES
PHYSICAL AND
SOCIAL FACTORS • Sales expansion
• Resource acquisition
• Political policies • Risk minimization
and legal practices
• Cultural factors STRATEGY
• Economic forces
• Geographical MODES FUNCTIONS OVERLYING ALTERNATIVES
influences
•Role of government in society
• Importing and exporting • Marketing • Choice of countries
COMPETITIVE • Tourism and • Global manufacturing •Organization and control
•Political ideologies
FACTORS transportation and supply chain mechanisms
•Political risk
• Licensing and franchising management
•Legal environment
• Competitive product • Turnkey operations • Accounting
strategy •Operational and•strategic
Management legal
contracts • Finance
• Company resources
issues • Direct and portfolio • Human Resources
and experience investments (including
• Competitors in each JV)
market
Cuba – America Relationship
Cuba and the United States restored diplomatic relations on 20 July 2015,
which had been severed in 1961 during the Cold War. U.S. diplomatic
representation in Cuba is handled by the United States Embassy in Havana,
and there is a similar Cuban Embassy in Washington, D.C.. The United States,
however, continues to maintain its commercial, economic, and financial
embargo, which makes it illegal for U.S. corporations to do business with
Cuba.
Reason: one of the reasons expropriation of US corporation properties. In
1961 Cuba became close ally of Russia.
China – Government Intervention
China has a planned economy closely tied to government.
In 2007, for example, the US federal government’s fiscal
revenue was $2.4 trillion, or 18 percent of GDP, whereas
China’s fiscal revenue was 5.1 trillion yuan ($770 billion),
accounting for 21 percent of GDP.
In China, more than 76% of assets are owned by the
government, with people owning less than a quarter; while
in the United States, assets are owned privately. This
means that to do business in China, a company will most
likely have to negotiate with the state.
The bureaucracy involved in negotiating with the state can
slow down the pace of business ventures.
Joint ventures are difficult to establish because they have
substantial government involvement. Legal matters lack
consistency and can be changed at the will of the Chinese
government. No standard rules
MEXICO – Corruption Index - 154
Walmart is facing problems in Mexico where it
was found that their local managers were guilty of
bribing local officials to secure zoning and
construction permits to expand.
The problem was further compounded when news
reports began to suggest that the corporate officers
in the US were aware of this practice and rather
than punishing the guilty, they were trying to brush
it under the carpet.
The corporate officers were probably told that was
how business was conducted in Mexico and they
should not interfere, for it would hinder their store
expansion targets.
Definition of a Political System
• The complete set of institutions, political
organizations, and interest groups
• The relationships among institutions, and the political
norms and rules that govern their functions and
influences ultimately economic development.
• Political system of country should be such that it
would able to unite a society which is diverse and
having diverse viewpoint
Political Ideology
• The system of ideas that expresses the goals,
theories, and aims of a sociopolitical program
Ex: Donald trump : Republicans party are
conservative and Barack Obama was from
democratic (liberal).
• Most modern societies are
pluralistic—different groups champion
competing political ideologies
Individualism vs. Collectivism
• Individualism: primacy of the rights and role of
the individual
• Government will frame rules to correct the
market efficiencies like fair trade, fair
competition and excessive producers power.
• Rules makes every one equal.
• Rules create kind of environment where every
one will equal chance to participate.
Individualism vs. Collectivism
• Collectivism: primacy of the rights and role of
the community .
• Action of business should benefits the society.
• Basically China and Japan, basic objective is to
build such big business organization which will
boost national prestige and power.
• Promotes social equality and labor rights
Democracy
• Wide participation by citizens in the
decision-making process
• Five types:
– Parliamentary
– Liberal
– Multiparty
– Representative
– Social Democracy
Totalitarianism
• Restricts decision making to a few individuals
• Types:
– Authoritarianism
– Fascism
– Secular totalitarianism
– Theocratic totalitarianism
Political Stability Index (2016)
Country Name Rank Country Name Rank
Singapore 1 Iceland 8
New Zealand 2 Switzerland 9

Liechtenstein 3 Aruba 10
Macao 4 Mexico 154

Luxembourg 5 India 166
Andorra 6 US 77
Tuvalu 7
Corruption Index (2016)
Rank Countries Index Score Rank Countries Index Score
1 Denmark 91 8 Netherlands 83
2 New Zealand 90 9 Canada 82
3 Finland 89 10 Germany 81
Luxembour
4 Sweden 88 10 81
g
United
5 Switzerland 86 10 81
Kingdom
6 Norway 85 79 India 40
7 Singapore 84
Political Risk
• Investing overseas exposes companies to political
risk
• The risk that political decisions or events in a country
negatively affect the profitability or sustainability of
an investment
• Types:
– Systemic
– Procedural
– Distributive
– Catastrophic
Types of Political Risk
• Systemic Political Risk

– Shifts in public policy affecting all companies
– Resulting from change in political ideology
– Nationalization/expropriation, Privatization, FDI Policy etc
• Procedural Political Risk
– Bureaucracy, Import procedures, Visa restrictions, Contract breach
• Distributive Political Risk
– Tax revisions , Monetary policy, Local content, Repatriation limits
• Catastrophic Political Risk – flash points, civil disorder, war
Definition of a Legal System
• A fair and fast legal system is important for a nation to attract
foreign investment
• Rule of law versus rule of man
• The mechanism for creating, interpreting, and enforcing the
laws in a specified jurisdiction – regulates business practices
• Types:
– Common law – English origin: UK, India, Australia, US, NZ …80
– Civil law – Roman origin: Germany, France, Japan, Africa, China …120
– Theocratic law – legal authority vests with religious leaders
Common Law
• Types:
– Common law – English origin: UK, India, Australia, US, NZ …80
– Has English origin
– Also known as commonwealth law
– Given preference to precedents, past judgments and custom
– Court has a power to interpret the law and position of judge is
ultimate
Civil System
– Civil law – Roman origin: Germany, France, Japan, Africa, China …120
– Basically colonies of Germany
– Entire law is codified and no importance given to precedents, custom
and traditions
– Judge have less flexibility in terms of interpreting the law
– Judges have only power to apply code.
Bases of Rules
• Rule of Man - authoritarian
• Rule of Law – government and individual are
equal in the eyes of law – no one is above law
– Enforceability of commercial contracts
– Safeguards property
– Individual freedom
Ease of doing business
Rank Country Rank Country

1 Singapore 22 UAE
2 New Zealand 64 Cyprus
3 Hong Kong 99 Sri Lanka
4 Denmark 128 Pakistan
7 US 142 India
8 UK 170 Nigeria
10 Australia 188 Libya
http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annua
l-Reports/English/DB15-Full-Report.pdf
Objectives : The Economic
Environments Facing Businesses
• To understand the importance of economic analysis
of foreign markets
• To identify the major dimensions of international
economic analysis
• To compare and contrast macroeconomic indicators
• To profile the characteristics of the types of
economic systems
• To discuss the idea of economic freedom
• To profile the idea, drivers, and constraints of
economic transition
Importance of Economic
Environments
• Different countries are at different levels of economic
development; GNPs vary; Disposable incomes vary
• Decision factors include wealth, income, stability, poverty,
Purchasing power parity etc.
• Company managers study economic environments to
estimate how trends affect their performance – even if they
do not want to operate in that country
• A country’s economic policies are a leading indicator of
government’s goals and its planned use of economic tools and
market reforms.
• Difficult to determine specific economic indicators for
comparison across countries as economic stage varies
Elements of the Economic
Environment
• GNI, GDP, PPP, HDI
• Inflation, Cost of living
• Unemployment
• Internal and External Debt
• Income distribution
• Poverty
• Labor costs
• Productivity
• Balance of Payments
Elements of the Economic
Environment
• Gross national income (GNI): the income
generated both by total domestic production
as well as the international production
activities of national companies
• Gross domestic product (GDP): the total value
of all goods and services produced within a
nation’s borders over one year, no matter
whether domestic or foreign-owned
companies make the product.
Adjustments to GNI
• Number of people in a country
– per capita conversion – Low total vs. High per capital
• Growth rate – higher the better for business
• Purchasing power parity – What can 1$ buy?
– ‘Basket’ of goods and services
• Human Development Index (UN) - $ is not everything
– Access, Health, Nutrition, Security, Leisure, Freedom, Gender
• Economic sustainability – Green measures
– Green NNP; Genuine progress indicator; GNH; Happy Planet Index
Other features of an economy
• Inflation – affects interest rates, exchange rates, stability
• Unemployment rate – depress economic growth, create social
pressures, provoke political uncertainty; working age population
• Debt – sum total of government’s financial obligation – more implies
faltering economy, more interest payments
• Income distribution – the GINI coefficient – indicates degree of
inequality – lower indicates more even distribution; urban vs. rural
• Poverty – income below minimum threshold – 78% are poor –
potential of the poor
Other features of an economy
• Labor costs – affects cost structures
• Productivity – efficiency at which goods and services are produced;
impacted by technology
• Balance of payments
– Current account – trade activity in merchandise
– Capital account – loans given and loans received
Definition of Economic System
• A mechanism that deals with the production,
distribution, and consumption of goods and
services
• Types:
– Market economy
– Command economy
– Mixed economy
Transition to a Market Economy
• Liberalizing economic activity
• Reforming business activity
• Establishing legal and institutional frameworks
• Success is linked to how well the government deals
with:
– Privatization
– Deregulation
– Property right protection
– Fiscal and monetary reform
– Antitrust legislation

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UM14MB552

International Business – Unit I –

Prof. Sangeeta Mehrolia

Different countries have different culture, political,

Impact on business practices, benefits, costs and

Hence important to understand country differences

Wal-mart failure in Japan, South Korea and Germany

• Business involves people – hence every business

New Zealand 2 Switzerland 9

Macao 4 Mexico 154

• Systemic Political Risk

Rank Country Rank Country

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