Chapter

The Dynamic Environment of International Trade

McGraw-Hill/Irwin International Marketing, 13/e

2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Trade Barriers
Tariffs Quotas Voluntary Export Restraints Boycotts and Embargoes Monetary Barriers
Blocked currency Differential exchange Government approval

Standards Antidumping Penalties

Global Perspective Do Blondes Have More Fun in Japan?

Culture, including all its elements, profoundly affects management style and overall business systems
Max Weber (1930)

Americans
Individualists

Japanese
Consensus oriented & committed to the group

Central & Southern Europeans

Elitists and rank conscious

Knowledge of the management style existing in a country and a willingness to accommodate the differences are important to success in an international market.

Required Adaptation
Adaptation is a key concept in international marketing.
As a guide to adaptation, all who wish to deal with individuals, firms, or authorities in foreign countries should be able to meet 10 basic criteria:
1) open tolerance 2) flexibility 3) humility 4) justice/fairness 5) ability to adjust to varying tempos 6) curiosity/interest 7) knowledge of the country 8) liking for others 9) ability to command respect 10) ability to integrate oneself into the environment

Degree of Adaptation
Essential to effective adaptation is awareness of ones own culture and the recognition that differences in others can cause anxiety, frustration, and misunderstanding of the hosts intentions. The self-reference criterion (SRC) is especially operative in business customs. The key to adaptation is to remain American but to develop an understanding of and willingness to accommodate the differences that exist.

Cultural Imperatives
The business customs and expectations that must be met and conformed to or avoided if relationships are to be successful. Friendship motivates local agents to make more sales. The significance of establishing friendship cannot be overemphasized, especially in those countries where family relationships are close. In some cultures a persons demeanor is more critical than in other cultures What may be an imperative to avoid in one culture is an imperative to do in another.

Cultural Electives and Exclusives

Cultural electives:
Relate to areas of behavior or to customs that cultural aliens may wish to conform to or participate in but that are not required. A cultural elective in one county may be an imperative in another. Cultural electives are the most visibly different customs and thus more obvious.

Cultural exclusives:
Those customs or behavior patterns reserved exclusively for the locals and from which the foreigner is barred.

The Impact of American Culture on Management Style

Master of destiny viewpoint Independent enterprise as the instrument of social action Personnel selection and reward based on merit Decisions based on objective analysis Wide sharing in decision making Never-ending quest for improvement Competition producing efficiency

Authority and Decision Making

Influencers of the authority structure of business:
High PDI Countries
Mexico, Malaysia

Low PDI Countries

Denmark, Israel

Three typical authority patterns:

Top-level management decisions Decentralized decisions Committee or group decisions

Management Objectives and Aspirations

Security and mobility
Relate directly to basic human motivation and therefore have widespread economic and social implications.

Personal life
Worldwide study of individual aspirations, (David McClelland).

Affiliation and social acceptance

In some countries, acceptance by neighbors and fellow workers appears to be a predominant goal within business.

Power and achievement

South American countries

Annual Hours Worked

Insert Exhibit 5.1

Communication Styles
Face-to-face communication:
Managers often fail to develop even a basic understanding of just one other language. Much business communication depends on implicit messages that are not verbalized.

Internet communications:
Nothing about the Web will change the extent to which people identify with their own language and cultures. Estimates are that 78% of todays Web site content is written in English, but an English e-mail message cannot be understood by 35% of all Internet users. Country-specific Web sites Web site should be examined for any symbols, icons, and other nonverbal impressions that could convey and unwanted message.

Formality and tempo

Contextual Background of Various Countries

Insert Exhibit 5.2

P-Time versus M-Time

Monochronic time: Polychronic time:
Tend to concentrate on one thing at a time Divide time into small units and are concerned with promptness Most low-context cultures operate on M-Time
Dominant in high-context cultures Characterized by the simultaneous occurrence of many things Allows for relationships to build and context to be absorbed as parts of high-context cultures.

Most cultures offer a mix of P-time and M-time behavior, but have a tendency to be either more P-time or M-time in regard to the role time plays. As global markets expand more businesspeople from P-time cultures are adapting to M-time.

Negotiations Emphasis
Business negotiations are perhaps the most fundamental business rituals. The basic elements of business negotiations are the same in any country. They relate to the product, its price and terms, services associated with the product, and finally, friendship between vendors and customers. One standard rule in negotiating is know thyself first, and second, know your counterpart.

Gender Bias in International Business

Women represent only 18% of the employees who are chosen for international assignments. In many cultures women are not typically found in upper levels of management, and men and women are treated very differently.
Asia, Middle East, Latin America

Prejudices toward women in foreign countries Cross-mentoring system

Lufthansa

Executives who have had international experience are more likely to get promoted, have higher rewards, and have greater occupational tenure.

Corruption Defined
Types of Corruption:
Profits (Marxism) Individualism (Japan) Rampant Consumerism (India) Missionaries (China)

Criticisms of Mattel and Barbie:

Sales of Barbie declined worldwide after the global standardization Parents and government did react Mattels strategy boosted sales of its competition

The Western Focus on Bribery

1970s, bribery became a national issue with public disclosure of political payoffs to foreign recipients by U.S. firms. The decision to pay a bribe creates a major conflict between what is ethical and proper and what is profitable and sometimes necessary for business. OECD Convention on combating the bribery of foreign public officials in international business transactions. Transparency International (TI)

Bribery: Variations on a Theme

Bribery and Extortion:
Voluntary offered payment by someone seeking unlawful advantage is bribery. If payments are extracted under duress by someone in authority from a person seeking only what he are she is lawfully entitled to that is extortion.

Subornation and Lubrication:

Lubrication involves a relatively small sum of cash, a gift, or a service given to a low-ranking official in a country where such offerings are not prohibited by law. Subornation involves giving large sums of money, frequently not properly accounted for, designed to entice an official to commit an illegal act on behalf of the one offering the bribe.

Bribery: Variations on a Theme (continued)

Agents Fees:
When a businessperson is uncertain of a countrys rules and regulations, an agent may be hired to represent the company in that country. The Foreign Corrupt Practices Act Change will come only from more ethically and socially responsible decisions by both buyers and sellers and by governments willing to take a stand.

Ethical and Socially Responsible Decisions

In normal business operations, difficulties arise in making decisions, establishing policies, and engaging in business operations in five broad areas: Employment practices and policies Consumer protection Environmental protection Political payments and involvement in political affairs of the country Basic human rights and fundamental freedoms Laws are the markers of past behavior that society has deemed unethical or socially irresponsible. Three ethical principles to help the marketer distinguish between right and wrong, determine what ought to be done, and properly justify his or her actions: Utilitarian Ethics Rights of the Parties Justice or Fairness

Cultures Influence on Strategic Thinking

British-American
Individualistic

Japan & Germany

Communitarian

In the less individualistic cultures labor and management cooperate. A competitive, individualistic approach works well in the context of an economic boom. Fourth kind of capitalism that common in Chinese cultures
Predicted by culture

A Synthesis, Relationship-Oriented vs. Information-Oriented Cultures

Studies are noting a strong relationship between Halls high/low context and Hofstedes Individualism/Collective and Power Distance indexes. Not every culture fits every dimension of culture in a precise way. Information-Oriented Culture
United States

Relationship Culture
Japan

Synthesis of cultural differences allows us to make predictions about unfamiliar cultures.

Chapter

The Political Environment:

A Critical Concern

McGraw-Hill/Irwin International Marketing, 13/e

2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Global Perspective
One of the most undeniable and crucial realities of international business is that both host and home governments are integral partners. A government controls and restricts a companys activities by encouraging and offering support or by discouraging and banning or restricting its activities. International law recognizes the sovereign right of a nation to grant or withhold permission to do business within its political boundaries and to control where its citizens conduct business.

The Sovereignty of Nations

A sovereign state is independent and free from all external control. Sovereignty refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members. Nations can and do abridge specific aspects of their sovereign rights in order to coexist with other nations.
NAFTA North America Free Trade Agreement NATO North Atlantic Treaty Organization WTO World Trade Organization

The United States involvement in international political affiliations is surprisingly low. The WTO is considered by some as the biggest threat so far to national sovereignty.

Stability of Government Policies

Issues that can affect the stability of a government:
Radical shifts in government philosophy when an opposing political party ascends to power. Pressure from nationalist and self-interest groups. Weakened economic conditions Bias against foreign investment Conflicts between governments

Five main political causes of instability in international markets:

Some forms of government seem to be inherently unstable Changes in political parties during elections can have major effects on trade conditions Nationalism Animosity targeted toward specific countries Trade disputes themselves

Forms of Government
Ancient Greeks Circa 500 B.C. criticized three fundamental forms of government:
Rule by one (monarchy) Rule by few (aristocracy) Rule by many (democracy)

Following the collapse of communism circa 1990 the world seemed to have agreed that free-enterprise democracy was the best solution. Of the more than 200 sovereign states on the planet almost all have at least nominally representative governments with universal suffrage for those 18 years and older. In about 10% of the states voting is required, in the rest it is voluntary.

A Sampling of Government Types

Insert Exhibit 6.1

Political Parties
In countries where two strong political parties typically succeed one another in control of the government, it is important to know the direction each party is likely to take.
Great Britain
The Labour Party Vs. The Conservative Party

Unpredictable and drastic shifts in government policies deter investments, whatever the cause of the shift. A current assessment of political philosophy and attitudes within a country is important in gauging the stability and attractiveness of a government in terms of market potential.

Nationalism
Nationalism is an intense feeling of national pride and unity, an awakening of a nations people to pride in their country. National interest and security are more important than international relations. The more a country feels threatened by some outside force or as the domestic economy declines, the more nationalistic it becomes in protecting itself against intrusions. Nationalism comes and goes as conditions and attitudes change, and foreign companies welcomed today may be harassed tomorrow and vice versa.

Targeted Fear and/or Animosity

It is important for marketers not to confuse nationalism with a widespread fear or animosity directed at a particular country.
Toyota in the U.S. (1980s) Animosity toward the United States in France The unhappiness of citizens and politicians in many other countries concerning the war in Iraq.

It is important to appreciate that no nation-state, however secure, will tolerate penetration by a foreign company into its market and economy if it perceives a social, cultural, economic, or political threat to its well-being. Trade Disputes

Political Risks of Global Business

Confiscation the seizing of a companys assets without payment. Expropriation where the government seizes an investment but some reimbursement for the assets is made. Domestication when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees by mandating local ownership and greater national involvement in a companys management.

Economic Risks
Exchange controls
Stem from shortages of foreign exchange held by a country.

Local-content laws
Countries often require a portion of any product sold within the country to have local content.

Import restrictions
Selective restrictions on the import of raw materials to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry

Economic Risks (continued)

Tax controls
A political risk when used as a means of controlling foreign investments.

Price controls
Essential products that command considerable public interest
Pharmaceuticals Food Gasoline

Labor problems
Labor unions have strong government support that they use effectively in obtaining special concessions from business.

Political Sanctions
One or a group of nations may boycott another nation, thereby stopping all trade between the countries, or may issue sanctions against the trade of specific products. U.S. boycotts of trade with Cuba/Iran History indicates that sanctions are often unsuccessful in reaching desired goals, particularly when other major nations traders ignore them.

Political and Social Activists

Not usually officially sanctioned by the government Can interrupt the normal flow of trade Can range from those who seek to bring about peaceful change to those who resort to violence and terrorism to effect change. Worldwide boycott of Nestle products The Internet has become an effective tool of PSAs to spread the word on whatever cause they sponsor. Protest rallies against the U.S. Iraq War

Nongovernmental Organizations
Nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments.

Protests Lobbying Collaborations with governmental organizations

Many also are involved in mitigating much of the human misery plaguing parts of the planet.
Red Cross Red Crescent Amnesty International Oxfam UNICEF Care Habitat for Humanity

Violence and Terrorism

The State Department reported 3,200 terrorist incidents worldwide in 2004. Goals of terrorism
Multinationals are targeted to embarrass a government and its relationship with firms To generate funds by kidnapping executives to finance terrorist goals To use as pawns in political or social disputes not specifically directed at them To inflict terror within a country as did September 11

In the past 30 years, 80% of terrorist attacks against the U.S. have been aimed at American businesses.

Cyberterrorism and Cybercrime

The internet is a vehicle for terrorist and criminal attacks by foreign and domestic antagonists wishing to inflict damage on a company with little chance of being caught. It is hard to determine if a cyber attack has been launched by a rogue state, a terrorist, or by a hacker as a prank. Each wave of viruses gets more damaging and spreads so rapidly that considerable harm is done before it can be stopped. Tools for cyberterrorism can be developed to do considerable damage to a company, an entire industry, or a countrys infrastructure. Because of mounting concern over the rash of attacks, business leaders and government officials addressed a Group of Eight conference.

Politically Sensitive Products and Issues

Products that have or are perceived to have an effect on the environment, exchange rates, national and economic security, and the welfare of people and that are publicly visible or subject to public debate, are more likely to be politically sensitive. Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political concern. The European Union has banned hormone treated beef for more than a decade.

Forecasting Political Risk

Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political events and their potential influence on current and future international business decisions. The greater the risk to international marketers is the threat of the government actually failing, causing chaos in the streets and markets. Risk assessment is used to estimate the level of a risk a company is assuming when making an investment and to help determine the amount of risk it is prepared to accept.

Top 20 States in Danger of Failing (Ranked)

Insert Exhibit 6.4

Lessening Political Vulnerability

Relations between governments and MNCs are generally positive if the investment: Improves the balance of payments by increasing exports or reducing imports through import substitution Uses locally produced resources Transfers capital, technology, and/or skills Create jobs Make tax contributions Political parties seeking publicity or scapegoats for their failure often serve their own interests by focusing public opinion on the negative aspects of MNCs whether true or false.

Lessening Political Vulnerability (continued)

Strategies that MNCs use to minimize political vulnerability and risk: Joint ventures Expanding the investment base Licensing Planned domestication Political bargaining Political payoffs

Government Encouragement
The most important reason to encourage foreign investment is to accelerate the development of an economy. The U.S. government is motivated for economic as well as political reasons to encourage American firms to seek business opportunities in countries worldwide, including those that are politically risky. Agencies that provide assistance to U.S. companies include:

Export-Import Bank (Ex-Im Bank) Foreign Credit Insurance Association (FCIA) The Agency for International Development (AID) The Overseas Private Investment Corporation (OPIC)

Chapter

The International Legal Environment

Playing By The Rules

McGraw-Hill/Irwin International Marketing, 13/e

2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Bases for Legal Systems

Three heritages form the bases for the majority of the legal systems of the world.
Common law Civil or code law Islamic law

Even though a countrys laws may be based on the doctrine of one of the four legal systems its individual interpretation may vary significantly. One measure of the importance of the legal system in each country is the number of attorneys per capita.

Common and Code Law

Common law seeks interpretation through the past decisions of higher courts which interpret the same statues or apply established and customary principles of law to a similar set of facts. Under code law the legal system is generally divided into three separate codes:
Commercial Civil Criminal

Common law is recognized as not being all-inclusive, whereas code law is considered complete as a result of catchall provisions found in most code-law systems. Under common law, ownership is established by use; under code law, ownership is determined by registration.

Islamic Law
The basis for the Islamic law is interpretations of the Koran. Islamic law defines a complete system that prescribes specific patterns of social and economic behavior for all individuals.
Property rights Economic decision making Types of economic freedom

Among the unique aspects of Islamic law is the prohibition against the payment of interest. The Islamic system places emphasis on the ethical, moral, social, and religious dimensions to enhance equality and fairness for the good of society.

Marxist-Socialist Tenets
As socialist countries become more directly involved in trade with non-Marxist countries it has been necessary to develop a commercial legal system that permits them to engage in active international commerce. The pattern for development varies among the countries because each has a different background and each is at a different stage in its development of a market-driven economy. Under the premise that law is strictly subordinate to prevailing economic conditions, such fundamental propositions as private ownership, contracts, due process, and other legal mechanisms have had to be developed.

Jurisdiction in International Legal Disputes

No judicial body exists to deal with legal commercial problems arising between citizens of different countries. Legal disputes can arise in three situations:
Between governments Between a company and a government Between two companies

Jurisdiction is generally determined in one of three ways:

On the basis of jurisdictional clauses included in contracts On the basis of where a contract was entered into On the basis of where the provisions of the contract were performed

The most clear-cut decisions can be made when the contracts or legal documents supporting a business transactions include a jurisdictional clause.

International Dispute Resolution: Conciliation

Conciliation is a nonbinding agreement between parties to resolve disputes by asking a third party to mediate differences. Conciliation sessions are private and all conferences between parties and the mediator are confidential. Although conciliation may be the friendly route to resolving disputes it is not legally binding; thus an arbitration clause should be included in all conciliation agreements.

International Dispute Resolution: Arbitration

Most arbitration is conducted under the auspices of one of the more formal domestic and international arbitration groups organized specifically to facilitate the resolution of commercial disputes. The popularity of arbitration has led to a proliferation of arbitral centers established by countries, organizations, and institutions. Contracts and other legal documents should include clauses specifying the use of arbitration to settle disputes. Arbitration clauses require agreement on two counts:
The parties agree to arbitrate in the case of a dispute according to the rules and procedures of some arbitration tribunal. They agree to abide by the awards resulting from the arbitration.

International Dispute Resolution: Litigation

The best advice is to seek settlement. Deterrents to litigation:
Fear of creating a poor image and damaging public relations. Fear of unfair treatment in a foreign court. Difficulty in collecting a judgment that may otherwise have been collected in a mutually agreed settlement through arbitration. The relatively high cost and time required when bringing legal action. Loss of confidentiality.

Counterfeiting and Piracy

Lost sales from the unauthorized use of U.S. patents, trademarks, and copyrights amount to more than $100 billion annually. The piracy industry has grown so sophisticated that many counterfeit goods are almost impossible to distinguish from the original. Recent research implies that for companies like Microsoft, some level of piracy actually can serve the company. A pharmaceutical manufacturers association that 2% of the $327 billion worth of drugs sold each year are counterfeit.

Inadequate Protection
The failure to protect intellectual property rights adequately in the world marketplace can lead to the legal loss of rights in potentially profitable markets. There have been many cases where companies have legally lost the rights to trademarks and have had to buy back these rights or pay royalties for their use.

McDonalds in Japan
Many businesses fail to take proper steps to legally protect their intellectual property.

Prior Use versus Registration

Prior Use whoever can establish first use is typically considered the rightful owner. Registration the first to register a trademark or other property right is considered the rightful owner. A company that believes it can always establish ownership in another country by proving it used the trademark or brand name first is wrong and risks the loss of these assets. It is best to protect intellectual property rights through registration.

Marketing Laws
All countries have laws regulating marketing activities. Promotion Product development Labeling Pricing Channels of distribution Usually the discrepancies across markets cause problems for trade negotiators, but particularly for managers and their firms. U.S. does not allow the buying or selling of human organs. There often are vast differences in enforcement and interpretation among countries having laws covering the same activities. Laws governing sales promotions in the European community. Censorship of advertising is a constant concern. For many U.S. products with markets in Europe, meeting EU standards is less expensive than designing products especially for Europe.

Green Marketing Legislation

Green marketing laws focus on environmentally friendly products and on product packaging and its effect on solid waste management. Antitrust
With the exception of the U.S., antitrust laws were either nonexistent or not enforced in most of the worlds countries for the better part of the 20th century.

The U.S. intervenes when non-U.S. companies attempt to acquire American companies. At times, companies are subject to antitrust charges in more than one country.
Nestles proposed acquisition of Dreyers Grand Ice Cream

Competitive methods illegal in the U.S. can be legal in another country

Tony Romas in Mexico only sell Modelo beer.

U.S. Laws Apply in Host Countries

Foreign Corrupt Practices Act National security laws
Makes it illegal for companies to pay bribes to foreign officials, candidates, or political parties.
Prohibit a U.S. company, its subsidiaries, joint ventures, or licenses to sell controlled products without special permission from the U.S. government. Antitrust enforcement has two purposes in international commerce.

Antitrust laws

The question of jurisdiction and how U.S. antitrust laws apply

Sections I and II of the Sherman Act

Protect American consumers Protect American export and investment opportunities against any privately imposed restrictions.

U.S. Laws Apply in Host Countries (continued)

Antiboycott law
U.S. companies are forbidden to participate in any unauthorized foreign boycott. Required to report any request to cooperate with a boycott.

Extraterritoriality of U.S. laws

Especially important to U.S. multinational firms Foreign governments fear the influence of American government policy on their economies through U.S. multinationals.