1. International Business Chapter Two, Three, and Four The Cultural, Political and Legal, and Economic Environments Facing Business

2. Cultural Environment

3. 3 Culture Defined Culture: the specific learned norms of a society that reflect attitudes, values, and beliefs Major problems of cultural collision are likely to occur if: -a firm implements practices that do not reflect local customs and values and/or -employees are unable to accept or adjust to foreign customs.

4. 4 Cultural Dynamics Cultures consist of societies, i.e., relatively homogeneous groups of people, who share attitudes, values, beliefs, and customs. Cultures are dynamic; they evolve over time. Cultural value systems are set early in life, but may change because of: -choice or imposition -contact with other cultures.

5. 5 The Nation as a Point of Reference The basic similarity amongst people within countries is both a cause and an effect of national boundaries. National identity is perpetuated through the rites and symbols of a country and a common perception of history. Subcultures may link groups from different nations more closely than certain groups within nations.

6. 6 Cultural Formation and Change Societal values and customs constantly evolve in response to changing realities. Cultural imperialism is brought about by the imposition of one culture upon that of another. Certain elements introduced from outside a culture may be known as creolization, indigenization, or cultural diffusion.

7. 7 Language as a Cultural Stabilizer Isolation from other groups, especially because of language, tends to stabilize cultures. Some countries see language as being so important that they regulate the inclusion of foreign words and/or mandate the use of the country’s official language for business purposes.

8. 8 Religion as a Cultural Stabilizer Religion is a major source of both cultural imperatives and cultural taboos. Major religions include: -Buddhism -Christianity -Hinduism -Islam -Judaism

9. 9 Social Stratification Systems Ascribed group memberships are defined at birth; they may include gender, family, age, caste, and ethnic or national origin. Acquired group memberships are based on one’s choice of affiliation, such as political party, religion, and social and professional organizations. Social stratification affects both business strategy and operational practices.

10. 10 Factors Affecting the Communication Process Spoken language Written language Silent language -color associations -conversational distance -perception of time -kinesics [body language and gestures] Problems in communication may arise, even when nations share the same basic language (e.g., British, Canadian, and American English).

11. 11 Managerial Issues Associated with Cultural Differences Accommodation of foreigners Cultural distance [degree of similarity] Culture shock and reverse culture shock Managerial orientations  polycentric  ethnocentric  geocentric

12. 12 Factors Affecting Strategies for Instituting Cultural Change Value systems Cost/benefits of change Resistance to change Participation in decision-making Reward sharing Role of opinion leaders Timing Opportunities to learn from abroad

13. Political and Legal Environment

14. 14 Political System Defined Political system: the complete set of institutions, political organizations, and interest groups, the relationships amongst those institutions, and the political norms and rules that govern their functions The ultimate test of any political system is its ability to hold a society together.

15. 15 Ways to Assess Political Systems Individualistic -people accept the primacy of individual freedoms in the political, economic, and cultural realms -people believe in minimal government intervention Collectivist -people reason that the needs of society take precedence over the needs of the individual -people believe that it is the government’s role to define the needs and priorities of the country Collectivist paradigms may be either democratic (Japanese) or authoritarian (Chinese) in nature.

16. 16 Political Ideology Defined Political ideology: the body of constructs, theories, and aims that constitute a sociopolitical program Pluralism indicates the coexistence of a variety of ideologies within a particular society. Shared ideologies create bonds within and between countries; differing ideologies split societies apart.

17. 17 Types of Political Ideologies: The Two Extremes Democracy: widespread citizen participation in the decision- making and governance processes, either directly or through elected representatives Totalitarianism: the monopolization of power by a single agent; opposition is neither recognized nor tolerated In theocratic totalitarianism, religious leaders are also the political leaders; in secular totalitarianism, the government imposes order via military power.

18. 18 Fig. 3.2: The Political Spectrum

19. 19 Features of Contemporary Democratic Systems freedom of opinion, expression, and the press freedom to organize free elections limited terms for elected officials an independent and fair court system a nonpolitical bureaucracy and defense infrastructure citizen access to the decision-making process

20. 20 Fig. 3.3: Comparative Measures of Freedom

21. 21 Political Risk Defined Political risk: the expectation, i.e., the likelihood, that the political climate in a country will change in such a way that a firm’s operating position or investment value will deteriorate MNEs do their best to effectively deal with the threat of political risk through active and/or passive approaches.

22. 22 Types of Political Risk [ranging from the least to the most destructive] Systemic [a change in public policy] Procedural [bureaucratic delays, labor disputes, etc.] Distributive [tax and regulatory revisions] Catastrophic [random political events]

23. 23 Leading Sources of Political Risk Expropriation or nationalization International war or civil strife Unilateral breaches of contract Destructive governmental actions Harmful actions against people Restrictions on the repatriation of profits Differing points of view Discriminatory taxation policies

24. 24 Legal System Defined Legal system: the mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction Generally, differences in the structure of law influence the attractiveness of a particular country as an investment site.

25. 25 Types of Legal Systems Common law [based on precedent] Civil law [based upon a set of laws that comprise a code] Theocratic law [based upon religious precepts] Customary law anchors itself in the wisdom of daily experience or important traditions. A mixed legal system emerges when two or more legal systems are used within a single country.

26. 26 Legal Issues in International Business Operational concerns  ease of entry and exit  hiring and firing employees  contract enforcement Strategic concerns  product safety and liability  marketplace behavior  product origin  legal jurisdiction  arbitration

27. 27 Intellectual property rights [IPRs]: ownership rights to intangible assets [copyrights, patents, trademarks, etc.] Generally, less developed countries provide less protection for IPRs than do industrialized nations. Those countries with a more individualistic orientation view IPRs as intrinsically legitimate, but those with a more collectivist outlook extol the virtues of shared ownership.

28. Economic Environment

29. 29 Key Economic Forces The general economic framework of a country Its degree of economic stability The existence and role of capital markets The presence of factor endowments Market size The existence of economic infrastructure

30. 30 Gross National Income Gross National Income (GNI): the market value of all final goods and services produced by a country’s domestically-owned firms in a given year

31. 31 Purchasing Power Parity Purchasing power parity: the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market that one unit of income would buy in another country. Purchasing power parity [PPP] is estimated by calculating the value of a universal “basket of goods” that can be purchased with one unit of a country’s currency.

32. 32 Second-order Indicators of Economic Development and Potential Inflation Unemployment rate Debt  Internal  external Income distribution Poverty rate Balance of payments The Consumer Price Index (CPI) measures the average change in consumer prices over time in a fixed market basket of goods and services; the misery index represents the sum of a country’s inflation and unemployment rates.

33. 33 The Balance of Payments reports the total of all money flowing into a country less all money flowing out of that country to any other country during a given period of time records a country’s international transactions amongst companies, governments, and/or individuals during a given period of time The Balance of Payments [BOP] is officially known as the Statement of International Transactions.

34. 34 The Balance of Payments: Key Components Current Account  Value of merchandise exports and imports  Value of services exports and imports  Value of income receipts and payments  Net value of unilateral transfers Capital Account  Value of capital inflows and outflows  Value of financial inflows and outflows  Net change in official reserve assets

35. 35 Surpluses and Deficits A trade surplus indicates that the value of exports exceeds the value of imports. A trade deficit indicates that the value of imports exceeds the value of exports. Trends in balance of payments data can reveal important strategic implications with respect to a country’s economic environ- ment and potential economic policies.

36. 36 Economic System Defined Economic system: the set of structures and processes that guides the allocation of scarce resources and shapes the conduct of business activities in a nation Spectrum of Economic Systems Centrally-plannedFree-market N. Korea China Brazil Japan USA Cuba Russia India Germany Canada Vietnam S. Korea France UK

37. 37 Types of Economic Systems Market Economy: a free-market (capitalistic) economy built upon the private ownership and control of the factors of production Command Economy: a centrally-planned economy built upon government ownership and control of the factors of production Mixed Economy: an economy in which economic decisions are largely market-driven and ownership is largely private, but significant government intervention is still evident

38. 38 Economic Transition The shift from a command or mixed economy to a freer market economy largely depends on a government’s ability to: -dismantle features such as central planning -create features such as consumer sovereignty. The success of the transition process depends upon the government’s ability to liberalize economic activity, to reform business practices, and to establish legal and institutional frameworks.

39. 39 Policies That Shape the Economic Transition Process Privatization: the sale and/or legal transfer of government-owned resources to private individuals and/or entities Deregulation: the relaxation or removal of restrictions on the free operation of markets and business practices Property rights: the protection of real (tangible) and intellectual (intangible) property [continued]

40. 40 Fiscal and monetary reform: the reliance upon market-oriented instruments to achieve macroeconomic stabilization, the setting of strict budgetary limits, and the use of market-based policies to manage the money supply Antitrust legislation: laws designed to maintain and promote market competition, i.e., to prohibit the anticompetitive behavior of monopolies