Lecture 4 The political, economic, social and cultural environment Dr John R Thomson

Learning objectives Discuss how the political/legal environment will affect the attractiveness of a potential foreign market. Distinguish between political factors in the home country environment and the host country environment. Explain the steps in a political risk analysis procedure. Nature of tariff and non-tariff barriers. Discuss the nature of regional integration.

Aspects of the political / legal environment Home country environment Host country environment General international environment

REGIONAL TRADING AREAS OF THE WORLD [460 million] [425 million] [300 million] [2.6 billion] [550 million]

Barriers in the political/legal environment

The home country environment Promotional activities sponsored by governmental organizations. Financial activities. Information services. Export-facilitating activities. Promotion by private organizations. State trading.

Kinds of information typically available Economic, social, political data on individual countries. Summary and detailed information on aggregate global market transactions. Individual reports on foreign firms. Specific export opportunities. Lists of potential overseas buyers, distributors, and agents for various products in different countries. Information on relevant government regulations. Foreign credit information.

Major types of political risk in the host country environment Ownership risk Operating risk Transfer risk

Effects of political risk Import restrictions. Local content laws. Exchange controls. Market control. Price controls. Tax controls. Labour restrictions. Change of government party. Nationalization. Domestication.

Categories of trade barriers Tariff barriers: Specific Ad valorem Discriminatory Non-tariff barriers: Quotas Embargoes Administrative delays Local content requirements

Why do countries levy tariffs? To protect domestic producers To generate revenue

Political Risk Analysis Step 1: Issues of relevance to the firm Step 2: Potential political events Step 3: Probable impacts and responses

Relationship building Build relationships with government Build relationships with customers Build relationships with employees Build relationships with local community

How does the threat of terrorism affect business? Short and long-term decline of customer demand. Unpredictable shifts in the supply chain. Government policies and laws. Macroeconomic effects such as falling stock market values. Deteriorating relations among countries.

How can businesses respond to the threat of terrorism Reconsideration of the customer and the market portfolio. Flexibility in sourcing from different suppliers. Collaboration and information sharing with local partners.

Types of economic activity PrimarySecondaryTertiary

Classifying countries by income Less developed countries (LDCs). Newly industrialised countries (NICs). Advanced industrialised countries.

Forms of economic integration

Benefits of regional integration Trade creation Greater consensus Political cooperation

Drawbacks of regional integration Trade diversification Shifts in employment Loss of national sovereignty

Major trading blocs European Union Association of South East Asian Nations (ASEAN) Asia Pacific Economic Cooperation (APEC) North American Free Trade Area (NAFTA)

Criticisms of using per capita income figures Uneven income distribution. Purchasing power not reflected. Lack of comparability.

The Socio-cultural Environment

Culture Culture is the collective programming of the mind which distinguishes the members of one human group from another. It is the learned ways in which a society understands, decides and communicates.

Characteristics of culture Culture is learned. Culture is interrelated. Culture is shared.

CULTURE DEFINED The sum total of learned beliefs, values and customs that serve to direct customer behaviour in a particular country market.

COMPONENTS OF CULTURE Beliefs : A large number of mental and verbal processes which reflect our knowledge and assessment of products and services.

COMPONENTS OF CULTURE Values: The indicators consumers use to serve as guides for what is appropriate behaviour, they tend to be relatively enduring and stable over time and widely accepted by members of a particular market.

COMPONENTS OF CULTURE Customs: Overt modes of behaviour that constitute culturally approved or acceptable ways of behaving in specific situations. Customs are evident at major events in ones life eg birth, marriage, death and at key events in the year e.g. Christmas, Easter, Ramadan, etc.

The visible and invisible parts of culture

Layers of culture Individual behaviour/ decision maker Company culture Business/industry culture National culture

Layers of Culture Hofstede (2003) A national level –according to one’s country which determines our basic cultural assumptions. A regional/ethnic/religious/linguistic affiliation level –determining basic cultural beliefs. A gender level –according to whether a person was born as a girl or as a boy. A generation level –which separates grandparents, parents and children. A social class level –associated with educational opportunities, a person’s occupation or profession.

A CULTURAL FRAMEWORK

Hall’s Communication Context Low-context cultures High-context cultures

The contextual continuum of differing cultures

INTERRELATIONSHIP BETWEEN CONTEXT & PRODUCT DIFFUSION Source: Willis, Samli and Jacobs (1991) High Context/Fast DiffusionHigh Context/Slow Diffusion Low Context/Fast DiffusionLow Context/Slow Diffusion South East Asia Japan India Asia Scandinavia USA, Canada UK Eastern Europe

Comparing low- and high-context cultures Communication Explicit, directImplicit, indirect CharacteristicLow-contextHigh-context Informal handshakes Formal hugs, bows, and handshakes Sense of self and space

Elements of culture Language. Manners and customs. Technology and material culture. Social institutions. Education. Values and attitudes. Aesthetics. Religion.

The role of language in global marketing Language is important in information gathering and evaluation efforts. Language provides access to local society. Language capability is important to company communications. Language enables the interpretation of context.

Sensuality and touch culture in Saudi Arabian versus European advertising

Major religions Christianity Islam Hinduism Buddhism Confucianism

Hofstede’s model of national cultures Power distance Uncertainty avoidance Individualism Masculinity Time perspective

Approaches to eliminate SRC Define problem or goal in terms of home country culture, traits, habits, and norms. Define problems or goals in terms of the foreign culture. Isolate the SRC influence and examine it carefully to see how it complicates the problem. Redefine the problem without the SRC influence and solve for the foreign market situation.

CROSS CULTURAL ANALYSIS How the culture communicates Hofstede’s criteria Speed of learning & diffusion Ghosal and Bartlett about managers ‘who sit comfortably in any culture’ Ohmae ‘insider identity’

Ethical decision making Most ethical Spirit of morality Practical standard Adherence to law plus common sense Least ethical Just adherence to law Not ethical Not even following law

The code of ethics for the ‘most ethical’ include Organizational relations. Economic relations. Employee relations. Customer relations. Industrial relations. Political relations.

Discussion Questions 1.Because English is the world language of business is it necessary for UK managers to learn a foreign language? 2.According to Hofstede and Hall, Asians are (a) more group oriented, (b) more family oriented and (c) more concerned with social status. How might such orientations affect the way you market your product to Asian consumers? 3.Do you think that cultural differences between nations are more or less important than cultural variations within nations? Under what circumstances is each important? 4.Identify some constraints in marketing to a traditional Muslim society. Use some of the examples in the chapter. 5.What layers of culture have the strongest influence on business people’s behavior? 6. The focus of this chapter has been the influence of culture on marketing. What is the influence of marketing on culture? 7.What role does the self-reference criterion play in international business ethics? 8.How do the roles of women in different cultures affect women’s behaviour as consumers and as business people?

IKEA Catalogue: Are there any cultural differences? Discuss the advantages and disadvantages of having the same product range shown in all IKEA catalogues around the world? The catalogue is the most important element in IKEA’s global marketing planning. Discuss if there could be some cultural differences in the effectiveness of the catalogue as a marketing tool. Explain some cultural differences which are illustrated by the two different illustrations of the same product (from the Danish and Chinese IKEA catalogues).

Discussion on globalisation In your opinion, is globalisation inevitable? Are the benefits of globalisation positive? What are the gains and losses from globalisation? What external influences does a company encounter when determining how and where to conduct business globally? How do the stages that a company goes through evolve as its operations become more globalised?

Comparing low- and high-context cultures Dress and appearance Varies widely, dress for success Indication of position in society, religious rule CharacteristicLow-contextHigh-context Eating is a necessity, fast food Eating is social event Food and eating habits

Comparing low- and high-context cultures Time consciousness Linear, exact, promptness is valued, time = money Elastic, relative, time = relationships CharacteristicLow-contextHigh-context Nuclear family, self-oriented, value youth Extended family, other oriented, loyalty Family and friends

Comparing low- and high-context cultures Values and norms Independence, confrontation of conflict Group conformity, harmony CharacteristicLow-contextHigh-context Egalitarian, challenge authority, gender equity Hierarchical, respect for authority, gender roles Beliefs and attitudes

Comparing low- and high-context cultures Mental process and learning Linear, logical, sequential, problem solving Lateral, holistic, accepting life’s difficulties CharacteristicLow-contextHigh-context Deal oriented, rewards based on achievement Relationship oriented, rewards based on seniority Business/ work habits