Market Entry Project: Japan

International Business The Challenges of globalizaTion

Gl o b a l ed i t i o n

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A Look Ahead Part 2, encompassing Chapters 2, 3, and 4, introduces us to different national business environments. Chapter 2 describes important cultural differences among nations. Chapter 3 examines different political and legal systems. And Chapter 4 presents the world’s various economic systems and issues surrounding economic development.

A Look at This Chapter This chapter defines the scope of international business and introduces us to some of its most important topics. We begin by identifying the key players in international business today. We then present globalization, describing its influence on markets and production and the forces behind its growth. Next, we analyze each main argument in the debate over globalization in detail. This chapter closes with a model that depicts international business as occurring within an integrated global business environment.

4. Summarize the evidence for each main argument in the globalization debate.

5. Describe the global business environment and identify its four main elements.

1. Identify the types of companies that participate in international business.

2. Describe the process of globalization and how it affects markets and production.

3. Describe the two forces causing globalization to increase.

Learning Objectives After studying this chapter, you should be able to

globalization

chapter One Part 1 global business environment

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EmiratEs‘ Global impact

DUBAI, United Arab Emirates—The Emirates Group, founded in 1985 and headquartered in Dubai, is one of the world’s leading commercial air trans- portation service providers. Emirates has built up a strong brand name as a leader in the aviation industry, particularly in terms of its excellent customer service and its very rapid growth. It provides passenger, cargo, and postal car- riage services to approximately 100 destinations worldwide. The company is also involved in the wholesale and retail of consumer goods, in-flight and institutional ca- tering, holiday services, and hotel operations in Europe, the Middle East, the Far East, Africa, Asia, Australasia, and North America.

The Group’s operations are global in many ways. Emirates is renowned for its excellent customer service, but how does it attract new customers and keep current customers happy when it op- erates worldwide in many different countries and cultures? The answer is that global customers need global services too. If you visit Emirates’ Web site (see www.emirates .com) you will see it has multi-language booking services, customized in-flight entertainment, and provides international food and drink during the flight. Further- more, Emirates Group employs about 50,000 people, and it’s interesting to note that its cabin crew is highly diverse in terms of nationality, religion, and languages. In fact, the group operates a global recruitment process, and its staff, from cabin crew to engineers, comes from all over the world. As you read this chapter, con- sider how globalization is reshaping our personal lives and altering the activities of international companies.1

Source: © Christopher Parypa/Shutterstock.com

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28 Part 1 • Global business environment

By knitting the world more tightly together, globalization is altering our private lives and transforming the way companies do business. We are increasingly exposed to the traits and practices of other cultures as technology drives down the cost of global communica- tion and travel. Globalization is forcing industries to grow more competitive as countries reduce barriers to trade and investment. And competition is intensifying as large firms from advanced countries and emerging markets seek out new customers on a global scale.

For example, Apple (www.apple.com) is an undisputed global success story. Its spectacu- lar rise illustrates the opportunities that globalization creates for entrepreneurs and businesses everywhere. In addition, technology products like Apple’s iPhone and other smartphones are changing how we interact through social media. Many of these changes are positive and gener- ate all sorts of efficiencies. For example, people anywhere in the world can tune in to what is happening in their Facebook friends’ lives in real time.

But are all the changes positive ones? Larry Rosen, a psychologist and professor, says the desire to stay connected and following through on persistent urges to check for messages on smartphones delivers little satisfaction. “The relief is not pleasurable,” he says. “That’s the sign of an obsession.” Rosen says the best and worst thing about a smartphone today “is that we carry it with us all day long.”2 Yet, this is the world in which we now live and work. The more we embrace technology, the faster paced our lives seem to grow.

International Business Involves Us All Each of us experiences the results of international business transactions as we go about our daily routines. The General Electric (www.ge.com) alarm clock/radio that woke you this morning was likely made in China. The breaking news buzzing in your ears was produced by Britain’s BBC radio (www.bbc.co.uk). You slip on your Adidas sandals (www.adidas.com) that were made in Indonesia, an Abercrombie & Fitch T-shirt (www.abercrombie.com) made in the Northern Mariana Islands, and American Eagle jeans (www.ae.com) made in Mexico. As you head out the door, you pull the battery charger off your Apple iPhone (www.apple.com), which was designed in the United States and assembled in China with parts from Japan, South Korea, Taiwan, and several other nations. You hop into your Korean Hyundai (www.hmmausa.com) that was made in Alabama, grab your iPod, and play a song by the English band Coldplay (www.coldplay.com). You drive into the local Starbucks (www.starbucks.com) to charge your own batteries with coffee brewed from beans harvested in Colombia and Ethiopia. Your day is just one hour old, but in a way, you’ve already taken a virtual trip around the world. A quick glance at the “Made in” tags on your jacket, backpack, watch, wallet, or other items with you right now will demonstrate the pervasiveness of international business transactions.

International business is any commercial transaction that crosses the borders of two or more nations. You don’t have to set foot outside a small town to find evidence of international business. No matter where you live, you’ll be surrounded by imports—goods and services purchased abroad and brought into a country. Your counterparts around the world will undoubt- edly spend some part of their day using your nation’s exports—goods and services sold abroad and sent out of a country. Every year, all the nations of the world export goods and services worth $18 trillion. This figure is around 40 times the annual global revenue of Walmart Stores (www.walmart.com).3

Technology Makes It Possible Technology is a primary driver of societal and commercial change today. Consumers use tech- nology to reach out to the world on the Internet—gathering and sending information and pur- chasing all kinds of goods and services. Companies use technology to acquire materials and products from distant lands and to sell goods and services abroad.

When businesses or consumers use technology to conduct transactions, they engage in e-business (e-commerce)—the use of computer networks to purchase, sell, or exchange products; to service customers; and to collaborate with partners. E-business is making it easier for companies to make their products abroad, not simply to import and export finished goods.

Consider how Hewlett-Packard (HP; www.hp.com) designed and built a computer server for small businesses. Once HP identified the need for a new low-cost computer server, it seized the rewards of globalization. HP dispersed its design and production activities throughout a specialized

international business Commercial transaction that crosses the borders of two or more nations.

imports Goods and services purchased abroad and brought into a country.

exports Goods and services sold abroad and sent out of a country.

e-business (e-commerce) Use of computer networks to purchase, sell, or exchange products; to service customers; and to collaborate with partners.

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ChaPter 1 • Globalization 29

manufacturing system across five Pacific Rim nations and India. This helped the company minimize labor costs, taxes, and shipping delays yet maximize productivity when designing, building, and dis- tributing its new product. Companies use such innovative production and distribution techniques to squeeze inefficiencies out of their international operations and boost their competitiveness.

Global Talent Makes It Happen Firms can tap a global pool of talent in preparing their products for distribution. For example, Fox and NBC Universal created Hulu (www.hulu.com) as a cool venue for fans to watch movies and TV shows online. Hulu engages in a global relay race by employing two technical teams— one in the United States and one in China—to manage its website. Members of the team in Santa Monica, California, work late into the night detailing code specifications that they send to the team in Beijing, China. The Chinese team then writes the code and sends it back to Santa Monica before the U.S. team gets to work in the morning.

Some innovative companies use online competitions to attract innovative ideas worldwide. InnoCentive (www.innocentive.com) connects companies and institutions seeking solutions to difficult problems by using a global network of 250,000 creative thinkers. These engineers, scientists, inventors, and businesspeople with expertise in life sciences, engineering, chemistry, math, computer science, and entrepreneurship compete to solve some of the world’s toughest problems in return for significant financial awards. InnoCentive is open to anyone, is available in seven languages, and pays cash awards that range from as little as $500 to more than $1 million.4

This chapter begins by examining the key players in international business. Then, we describe globalization’s powerful influence on markets and production and explain the forces behind its ex- pansion. Next, we cover each main point in the debate over globalization. We also explain why in- ternational business is special by presenting the dynamic, integrated global business environment. Finally, the appendix at the end of this chapter contains a world atlas to be used as a primer for this chapter’s discussion and as a reference throughout the remainder of the book.

Key players in international business Companies of all types and sizes and in all sorts of industries become involved in international business, yet they vary in the extent of their involvement. A small shop owner might only import supplies from abroad, whereas a large company may have dozens of factories located around the world. Large companies from the wealthiest nations still dominate international business. But firms from emerging markets (such as Brazil, China, India, and South Africa) now vigorously

We see the result of embracing globalization in this photo of skyscrapers in the lujiazui Financial and trade Zone of the pudong New area in shanghai, china. after years of stunning economic growth and expansion, shanghai has emerged as a key city for companies entering china’s marketplace. pudong was developed to reinvigorate shanghai as an international trade and financial center. pudong is now a modern, cosmopolitan district. How has globalization changed the economic landscape of your city and state?

Source: Amanda Hall/Robert Harding/ Newscom

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30 Part 1 • Global business environment

compete for global market share. Small and medium-sized companies are also increasingly active in international business largely because of advances in technology.

Multinational Corporations A multinational corporation (MNC) is a business that has direct investments (in the form of marketing or manufacturing subsidiaries) abroad in multiple countries. Multinationals generate significant jobs, investment, and tax revenue for the regions and nations they enter. Likewise, they can leave thousands of people out of work when they close or scale back operations. Mergers and acquisitions between multinationals are commonly worth billions of dollars and increas- ingly involve companies based in emerging markets.

Some companies have more employees than many of the smallest countries and island na- tions have citizens. Walmart, for example, has 2.2 million employees. We see the enormous economic clout of multinational corporations when we compare the revenues of the Global 500 ranking of companies with the value of goods and services that countries generate. Figure 1.1 shows the world’s 10 largest companies (measured in revenue) inserted into a ranking of nations according to their national output (measured in GDP). If Walmart (www.walmart.com) were a country, it would weigh in as a rich nation and rank just three places behind Norway. Even the $22 billion in revenue generated by the 500th largest firm in the world, Manpower Group (www. manpowergroup.com), exceeds the output of many countries.5

Entrepreneurs and Small Businesses International business competition has given rise to a new entity, the born global firm—a com- pany that adopts a global perspective and engages in international business from or near its inception. Many of these companies become international competitors in less than three years’

multinational corporation (MNC) Business that has direct investments abroad in multiple countries.

born global firm Company that adopts a global perspective and engages in international business from or near its inception.

South Africa BP (Britain)

Sinopec Group (China) United Arab Emirates

China National Petroleum (China) Thailand

Denmark Colombia Venezuela

Greece Malaysia Finland

State Grid (China) Chile

Chevron (USA) Hong Kong, China

Israel Singapore

Portugal ConocoPhillips (USA)

Nigeria Toyota Motor (Japan)

Egypt

C o

u n

tr y/ C o m p a n y

GDP/Revenue (U.S. $ billions)

Exxon Mobil (USA) Walmart Stores (USA)

Royal Dutch Shell (Neth.) Norway

Argentina Austria

0 100 200 300 400 500

FIGURE 1.1 Comparing the World’s Largest Companies with Selected Countries

Source: Based on data obtained from “Fortune Gll 500: The World’s Largest Corporations,” Fortune, July 23, 2012, pp. F1–F7; World Bank data set available at data.worldbank.org.

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ChaPter 1 • Globalization 31

time. Born global firms tend to have innovative cultures and knowledge-based organizational capabilities. And in this age of globalization, companies are exporting earlier and growing faster, often with help from technology.

Small firms selling traditional products benefit from technology that lowers the costs and difficulties of global communication. Vellus Products (www.vellus.com) of Columbus, Ohio, makes and sells pet-grooming products. Around 20 years ago, a dog breeder in Spain became Vellus’s first distributor after the breeder received a request for more information on Vellus’s products from a man in Bahrain. “The way this [business transaction] transpired just blew me away,” says Sharon Kay Doherty, president of Vellus. The company now has distributors in 31 countries. Vellus resembles a global company in that it earned more than half its revenues from international sales soon after going international.6

Electronic distribution for firms that sell digitized products is an effective alternative to tra- ditional distribution channels. Alessandro Naldi’s Weekend in Italy website (en.firenze.waf.it) offers visitors more authentic Florentine products than they’ll find in the scores of overpriced tourist shops in downtown Florence. A Florentine himself, Naldi established his site to sell high- quality, authentic Italian merchandise made only in the small factories of Tuscany. Weekend in Italy averages 200,000 visitors each month from places as far away as Australia, Canada, Japan, Mexico, and the United States.7

Quick Study 1 1. Define the term international business, and explain how it involves us all. 2. Explain how e-business (e-commerce) affects international business. 3. What types of companies are involved in international business?

globalization Nations historically retained absolute control over the products, people, and capital crossing their borders. But today, economies are becoming increasingly intertwined. This greater interde- pendence means an increasingly freer flow of goods, services, money, people, and ideas across national borders. Globalization is the name we give to this trend toward greater economic, cul- tural, political, and technological interdependence among national institutions and economies. Globalization is characterized by denationalization (national boundaries becoming less relevant) and is different from internationalization (entities cooperating across national boundaries).

As its definition implies, globalization involves much more than the expansion of trade and investment among nations. Globalization embraces concepts and theories from political science, sociology, anthropology, and philosophy as well as economics. As such, it is not a term exclusively reserved for multinational corporations and international financial institutions. Nor is globalization the exclusive domain of those with only altruistic or moral intentions. In fact, globalization has been described as going “well beyond the links that bind corporations, traders, financiers, and central bank- ers. It provides a conduit not only for ideas but also for processes of coordination and cooperation used by terrorists, politicians, religious leaders, anti-globalization activists, and bureaucrats alike.”8

For our purposes, this discussion focuses on the business implications of globalization. Two areas of business in which globalization is having profound effects are the globalization of markets and production.

Globalization of Markets Globalization of markets refers to the convergence in buyer preferences in markets around the world. This trend is occurring in many product categories, including consumer goods, industrial products, and business services. Clothing retailer L.L. Bean (www.llbean.com), shoe producer Nike (www.nike.com), and electronics maker Vizio (www.vizio.com) are just a few companies that sell global products—products marketed in all countries essentially without any changes. For example, the iPad qualifies as a global product because of its highly standardized features and Apple’s global marketing strategy and globally recognized brand.

Global products and global competition characterize many industries and markets, includ- ing semiconductors (Intel, Philips), aircraft (Airbus, Boeing), construction equipment (Cater- pillar, Mitsubishi), automobiles (Toyota, Volkswagen), financial services (Citicorp, HSBC), air

globalization Trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies.

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32 Part 1 • Global business environment

travel (Lufthansa, Singapore Airlines), accounting services (Ernst & Young, KPMG), consumer goods (Procter & Gamble, Unilever), and fast food (KFC, McDonald’s). The globalization of markets is important to international business because of the benefits it offers companies. Let’s now look briefly at each of those benefits.

ReduCeS MaRketiNg CoStS Companies that sell global products can reduce costs by standardizing certain marketing activities. A company selling a global consumer good, such as shampoo, can make an identical product for the global market and then simply design different packaging to account for the language spoken in each market. Companies can achieve further cost savings by keeping an ad’s visual component the same for all markets but dubbing TV ads and translating print ads into local languages.

CReateS NeW MaRket oppoRtuNitieS A company that sells a global product can explore opportunities abroad if its home market is small or becomes saturated. China holds enormous potential for e-business with more than 500 million Internet users, which is greater than the population of the entire United States. But while more than 70 percent of people in the United States actively surf the web, only around 38 percent of people in China do.9 So as time goes on, more and more Chinese citizens will go online to research and purchase products. The appeal of reaching such a vast audience drives firms from relatively small countries to explore doing business in the Chinese market.

LeveLS uNeveN iNCoMe StReaMS A company that sells a product with universal, but seasonal, appeal can use international sales to level its income stream. By supplementing domestic sales with international sales, the company can reduce or eliminate wide variations in sales between seasons and steady its cash flow. For example, a firm that produces suntan and sunblock lotions can match product distribution with the summer seasons in the northern and southern hemispheres in alternating fashion—thereby steadying its income from these global, yet highly seasonal, products.

LoCaL BuyeRS’ NeedS Despite the potential benefits of global markets, managers must constantly monitor the match between the firm’s products and markets in order not to overlook the needs of buyers. The benefit of serving customers with an adapted product may outweigh the benefit of a standardized one. For instance, soft drinks, fast food, and other consumer goods are global products that continue to penetrate markets around the world. But sometimes these products require small modifications to better suit local tastes. In southern Japan, Coca-Cola (www.cocacola.com) sweetens its traditional formula to compete with the sweeter-tasting Pepsi (www.pepsi.com). In India, where cows are sacred and the consumption of beef is taboo, McDonald’s (www.mcdonalds.com) markets the “Maharaja Mac”—two all-mutton patties on a sesame-seed bun with all the usual toppings.

gLoBaL SuStaiNaBiLity Another need that multinationals must consider is the need among all the world’s citizens for sustainability—development that meets the needs of the present without compromising the ability of future generations to meet their own needs.10 Most companies today operate in an environment of increased transparency and scrutiny regarding their business activities. The rise of social media is partly responsible for this trend. Concerned individuals and nongovernmental organizations will very quickly use Internet media to call out any firm caught harming the environment or society.

For years, forward-looking businesses have employed the motto, “reduce, reuse, and recycle.” The idea is to reduce the use of resources and waste, reuse resources with more than a single-use lifespan, and recycle what cannot be reduced or reused. The most dedicated managers and firms promote sustainable communities by adding to the motto, “redesign and reimagine.” This means redesigning products and processes for sustainability and reimagining how a product is designed and used to lessen its environmental impact.11 To read more about the call for more sustainable business practices, see this chapter’s Global Sustainability feature, titled “Three Markets, Three Strategies.”

Globalization of Production Globalization of production refers to the dispersal of production activities to locations that help a company achieve its cost-minimization or quality-maximization objectives for a good or ser- vice. This includes the sourcing of key production inputs (such as raw materials or products for

sustainability Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

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ChaPter 1 • Globalization 33

assembly) as well as the international outsourcing of services. Let’s now explore the benefits that companies obtain from the globalization of production.

aCCeSS LoWeR-CoSt WoRkeRS Global production activities allow companies to reduce overall production costs through access to low-cost labor. For decades, companies located their factories in low-wage nations in order to churn out all kinds of goods, including toys, small appliances, inexpensive electronics, and textiles. Yet whereas moving production to low-cost locales traditionally meant production of goods almost exclusively, it increasingly applies to the production of services such as accounting and research. Although most services must be produced where they are consumed, some services can be performed at remote locations where labor costs are lower. Many European and U.S. businesses have moved their customer service and other nonessential operations to places as far away as India to slash costs by as much as 60 percent.

aCCeSS teChNiCaL expeRtiSe Companies also produce goods and services abroad to benefit from technical know-how. Film Roman (www.filmroman.com) produces the TV series The Simpsons, but it provides key poses and step-by-step frame directions to AKOM Production Company (www.akomkorea.com) in Seoul, South Korea. AKOM then fills in the remaining poses and links them into an animated whole. But there are bumps along the way, says animation director Mark Kirkland. In one middle-of-the-night phone call, Kirkland was explaining to the Koreans how to draw a shooting gun. “They don’t allow guns in Korea; it’s against the law,” says Kirkland. “So they were calling me [asking]: ‘How does a gun work?’” Kirkland and others put up with such cultural differences and phone calls at odd hours to tap a highly qualified pool of South Korean animators.12

aCCeSS pRoduCtioN iNputS Globalization of production allows companies to access resources that are unavailable or more costly at home. The quest for natural resources draws many companies into international markets. Japan, for example, is a small, densely populated island nation with very few natural resources of its own—especially forests. But Japan’s largest paper company, Nippon Seishi, does more than simply import wood pulp. The company owns huge forests and corresponding processing facilities in Australia, Canada, and the United States. This gives the firm not only access to an essential resource but also control over earlier stages in the papermaking process. As a result, the company is guaranteed a steady flow of its key ingredient (wood pulp) that is less subject to the swings in prices and supply associated with buying pulp

Global SuStainability Three Markets, Three Strategies

a company adapts its business strategy to the nuances of the mar- ket it enters. The world’s population of 7 billion people lives in three different types of markets:

• Developed Markets.  These include the world’s established consumer markets, around one billion people. The population is solidly middle class, and people can consume almost any prod- uct desired. The infrastructure is highly developed and efficient.

• Emerging Markets.  These markets, around two billion people, are racing to catch up to developed nations. The population is migrating to cities for better pay and is overloading cities’ in- frastructures. Rising incomes are increasing global demand for resources and basic products.

• Traditional Markets.  Globalization has bypassed these mar- kets, nearly four billion people. The population is mostly rural, the infrastructure is very poor, and there is little credit or collateral. People have almost no legal protections, and corruption prevails.

Like business strategy, sustainability strategies reflect local condi- tions. Examples of businesses working toward sustainability in these three markets include the following:

• Toyota  focused on the environment in its developed markets. After extensively researching gas-electric hybrid technologies, Toyota launched the Prius. As Motor Trend’s Car of the Year, the Prius drove Toyota’s profits to record highs and gave it a “green” image.

• Shree Cement  faced limited access to low-cost energy in In- dia’s emerging market. So it developed the world’s most energy- efficient process for making its products. The world’s leading cement companies now visit Shree to learn from its innovations in energy usage.

• Blommer Chocolate  of the United States works closely with cocoa farmers in traditional markets. Blommer received the Rainforest Alliance’s “Sustainable Standard-Setter” award for training farmers in safe farming practices, environmental stewardship, and HIV awareness.

Source: Jeremy Jurgens and Knut Haanæs, “Companies from Emerging Markets Are the New Sustainability Champions,” The Guardian (www.guardian.co.uk), October 12, 2011; Stuart L. Hart, Capitalism at the Crossroads, Third Edition (Upper Saddle River, NJ: Wharton School Publishing, 2010); Daniel C. Esty and Andrew S. Winston, Green to Gold (New Haven, CT: Yale University Press, 2006).

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34 Part 1 • Global business environment

on the open market. Likewise, to access cheaper energy resources used in manufacturing, a variety of Japanese firms are relocating production to China and Vietnam, where energy costs are lower than in Japan.

Quick Study 2 1. Define globalization. How does denationalization differ from internationalization? 2. List each benefit a company might obtain from the globalization of markets. 3. How might a company benefit from the globalization of production?

Forces Driving globalization Two main forces underlie the globalization of markets and production: falling barriers to trade and investment and technological innovation. These two features, more than anything else, are increasing competition among nations by leveling the global business playing field. Greater competition is driving companies worldwide into more direct confrontation and cooperation. Local industries once isolated by time and distance are increasingly accessible to large inter- national companies based many thousands of miles away. Some small and medium-sized local firms are compelled to cooperate with one another or with larger international firms to remain competitive. Other local businesses revitalize themselves in a bold attempt to survive the com- petitive onslaught. And on a global scale, consolidation is occurring as former competitors in many industries link up to challenge others on a worldwide basis. Let’s now explore the pivotal roles of two forces driving globalization.

Falling Barriers to Trade and Investment In 1947, political leaders of 23 nations (12 developed and 11 developing economies) made history when they created the General Agreement on Tariffs and Trade (GATT)—a treaty designed to promote free trade by reducing tariffs and nontariff barriers to international trade. Tariffs are essentially taxes levied on traded goods, and nontariff barriers are limits on the quan- tity of an imported product. The treaty was successful in its early years. After four decades, world merchandise trade had grown 20 times larger, and average tariffs had fallen from 40 percent to 5 percent.

general agreement on tariffs and trade (gatt) Treaty designed to promote free trade by reducing both tariffs and nontariff barriers to international trade.

Workers at a factory in indonesia inspect electronic parts bound for global markets. today, companies can go almost anywhere in the world to tap local expertise and favorable business climates. For example, U.s. businesses exploit technology by subcontracting work to chinese companies that write computer software code and then e-mail their end product to the U.s. clients. in this way, companies can lower costs, increase efficiency, and grow more competitive. in what other ways might technology and global talent facilitate international business activity?

Source: BOB LOW/AFP/Newscom

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ChaPter 1 • Globalization 35

Significant progress occurred again with a 1994 revision of the GATT treaty. Nations that had signed on to the treaty further reduced average tariffs on merchandise trade and lowered subsidies (government financial support) for agricultural products. The treaty’s revision also clearly defined intellectual property rights. This gave protection to copyrights (including com- puter programs, databases, sound recordings, and films), trademarks and service marks, and pat- ents (including trade secrets and know-how). A major flaw of the original GATT was that it lacked the power to enforce world trade rules. Thus, the creation of the World Trade Organiza- tion was likely the greatest accomplishment of the GATT revision.

the WoRLd tRade oRgaNizatioN The World Trade Organization (WTO) is the international organization that enforces the rules of international trade. The three main goals of the WTO (www.wto.org) are to help the free flow of trade, help negotiate the further opening of markets, and settle trade disputes among its members. It is the power of the WTO to settle trade disputes that sets it apart from its predecessor, the GATT. The various WTO agreements are essentially contracts between member nations that commit them to maintaining fair and open trade policies. Offenders must realign their trade policies according to WTO guidelines or face fines and, perhaps, trade sanctions (penalties). Because of its ability to penalize offending nations, the WTO’s dispute-settlement system truly is the spine of the global trading system. The WTO replaced the institution of GATT but absorbed all of the former GATT agreements. Thus, the GATT institution no longer officially exists. Today, the WTO recognizes 157 members and 27 “observers.”

The WTO launched a new round of negotiations in Doha, Qatar, in late 2001. The renewed negotiations were designed to lower trade barriers further and to help poor nations in particular. Agricultural subsidies that rich countries pay to their own farmers are worth $1 billion per day— more than six times the value of their combined aid budgets to poor nations. Because 70 percent of poor nations’ exports are agricultural products and textiles, wealthy nations had intended to further open these and other labor-intensive industries. Poor nations were encouraged to reduce tariffs among themselves and were supposed to receive help in integrating themselves into the global trading system. Although the Doha round was to conclude by the end of 2004, negotia- tions are proceeding more slowly than anticipated.13

RegioNaL tRade agReeMeNtS In addition to the WTO, smaller groups of nations are integrating their economies by fostering trade and boosting cross-border investment. For example, the North American Free Trade Agreement (NAFTA) gathers three nations (Canada, Mexico, and the United States) into a free-trade bloc. The more ambitious European Union (EU) combines 27 countries. The Asia Pacific Economic Cooperation (APEC) consists of 21 member economies committed to creating a free-trade zone around the Pacific. The aims of each of these smaller trade pacts are similar to those of the WTO but are regional in nature. Moreover, some nations encourage regional pacts because of recent resistance to worldwide trade agreements.

tRade aNd NatioNaL output Together, the WTO agreements and regional pacts have boosted world trade and cross-border investment significantly. Trade theory tells us that openness to trade helps a nation produce a greater amount of output. Map 1.1 illustrates that growth in national output over a recent 10-year period has been significantly positive. Economic growth has been greater in nations that have recently become more open to trade, such as China, India, and Russia, than it has been in many other countries. Much of South America is also growing rapidly, whereas Africa’s experience is mixed. This relation between trade and output has persisted despite a drop in nations’ economic growth rates due to the global financial crises of recent years.

Let’s take a moment in our discussion to define a few terms that we will encounter time and again throughout this book. Gross domestic product (GDP) is the value of all goods and ser- vices produced by a domestic economy over a one-year period. GDP excludes a nation’s income generated from exports, imports, and the international operations of its companies. We can speak in terms of world GDP when we sum all individual nations’ GDP figures. GDP is a somewhat narrower figure than gross national product (GNP)—the value of all goods and services pro- duced by a country’s domestic and international activities over a one-year period. A country’s GDP or GNP per capita is simply its GDP or GNP divided by its population.

World trade organization (Wto) International organization that enforces the rules of international trade.

gross domestic product (gdp) Value of all goods and services produced by a domestic economy over a one-year period.

gross national product (gNp) Value of all goods and services produced by a country’s domestic and international activities over a one-year period.

gdp or gNp per capita Nation’s GDP or GNP divided by its population.

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36 Part 1 • Global business environment

MAP 1.1 Growth in National Output

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ChaPter 1 • Globalization 37

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38 Part 1 • Global business environment

Technological Innovation Although falling barriers to trade and investment encourage globalization, technological innovation is accelerating its pace. Significant advancements in information technology and transporta- tion methods are making it easier, faster, and less costly to move data, goods, and equipment around the world. Let’s examine several innovations that have had a considerable impact on globalization.

e-MaiL aNd videoCoNfeReNCiNg Operating across borders and time zones complicates the job of coordinating and controlling business activities. But technology can speed the flow of information and ease the tasks of coordination and control. E-mail is an indispensable tool that managers use to stay in contact with international operations and to respond quickly to important matters.

Videoconferencing allows managers in different locations to meet in virtual face-to-face meetings. Primary reasons for 25 to 30 percent annual growth in videoconferencing include the lower cost of bandwidth (communication channels) used to transmit information, the lower cost of equipment, and the rising cost of travel for businesses. Videoconferencing equipment can cost as little as $5,000 and as much as $340,000. A company that does not require ongoing video- conferencing can pay even less by renting the facilities and equipment of a local conference center.14 And for those willing to videoconference on a desktop, laptop, tablet computer, or mobile device (which includes most people) there is iMeet (www.imeet.com). This service provider charges less than $70 per month for unlimited video meetings.15

the iNteRNet Companies use the Internet to quickly and cheaply contact managers in distant locations—for example, to inquire about production runs, revise sales strategies, and check on distribution bottlenecks. They also use the Internet to achieve longer-term goals, such as sharpen their forecasting, lower their inventories, and improve communication with suppliers. The lower cost of reaching an international customer base especially benefits small firms, which were among the first to use the Internet as a global marketing tool. Additional gains arise from the ability of the Internet to cut postproduction costs by decreasing the number of intermediaries a product passes through on its way to the customer. Eliminating intermediaries greatly benefits online sellers of books, music, and travel services, among others.

CoMpaNy iNtRaNetS aNd extRaNetS Internal company websites and information networks (intranets) give employees access to company data using personal computers. A particularly effective marketing tool on Volvo Car Corporation’s (www.volvocars.com) intranet is a quarter- by-quarter database of marketing and sales information. The cycle begins when headquarters submits its corporate-wide marketing plan to Volvo’s intranet. Marketing managers at each subsidiary worldwide then select those activities that apply to their own market, develop their marketing plan, and submit it to the database. This allows managers in every market to view every other subsidiary’s marketing plan and to adapt relevant aspects to their own plan. In essence, the entire system acts as a tool for the sharing of best practices across all of Volvo’s markets.

Extranets give distributors and suppliers access to a company’s database so they can place orders or restock inventories electronically and automatically. These networks permit inter- national companies (along with their suppliers and buyers) to respond to internal and external conditions more quickly and more appropriately.

advaNCeMeNtS iN tRaNSpoRtatioN teChNoLogieS Retailers worldwide rely on imports to stock their storerooms with finished goods and to supply factories with raw materials and intermediate products. Innovation in the shipping industry is helping globalize markets and production by making shipping more efficient and dependable. In the past, a cargo ship would sit in port up to 10 days while it was unloaded one pallet at a time. But because cargo today is loaded onto a ship in 20- and 40-foot containers that are quickly unloaded onto railcars or truck chassis at the final destination, a 700-foot cargo ship is routinely unloaded in just 15 hours.

Operation of cargo ships is now simpler and safer due to computerized charts that pinpoint a ship’s movements on the high seas using Global Positioning System (GPS) satellites. Combining GPS with radio frequency identification (RFID) technology allows continuous monitoring of indi- vidual containers from port of departure to destination. RFID can tell whether a container’s doors are opened and closed on its journey and can send an alert if a container deviates from its planned route.

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ChaPter 1 • Globalization 39

Measuring Globalization Although we intuitively feel that our world is becoming smaller, researchers have created ways to measure the extent of globalization scientifically. One index of globalization is the one cre- ated by the KOF Swiss Economic Institute (www.kof.ethz.ch). This index ranks nations on 23 variables within three dimensions: economic globalization (trade and investment volumes, trade and capital restrictions), social globalization (dissemination of information and ideas), and political globalization (political cooperation with other countries).16

By incorporating a wide variety of variables, the globalization index attempts to cut through cycles occurring in any single category and capture the broad nature of globalization. Table 1.1 shows the 10 highest-ranking nations according to the KOF Index of Globalization. European nations occupy 9 of the top 10 positions, with smaller nations clearly dominating the rankings. The city-state of Singapore is the only Asian nation listed in the top 10. The United States ap- pears in 35th place overall, and ranks 79th in economic globalization, 29th in social globaliza- tion, and 22nd in political globalization. Large nations often do not make it into the higher ranks of globalization indices because a large home market means they tend to depend less on external trade and investment.

The world’s least-globalized nations account for around half the world’s population and are found in Africa, East Asia, South Asia, Latin America, and the Middle East. Some of the least- globalized nations are characterized by never-ending political unrest and corruption (Bangladesh, Indonesia, and Venezuela). Other nations with large agricultural sectors face trade barriers in de- veloped countries and are subject to highly volatile prices on commodity markets (Brazil, China, and India). Still others are heavily dependent on oil exports but are plagued by erratic prices in energy markets (Iran and Venezuela). Kenya has suffered from recurring droughts, terrorism, and burdensome visa regulations that hurt tourism. Finally, Turkey and Egypt, along with the entire Middle East, suffer from continued concerns over violence and social unrest, high barri- ers to trade and investment, and heavy government involvement in the economy. To deepen their global links, these nations will need to make great strides forward in their economic, social, and political environments.

Quick Study 3 1. How have global and regional efforts to promote trade and investment advanced

globalization? 2. How does technological innovation propel globalization? 3. What factors make some countries more globalized than others?

TablE 1.1 globalization’s top 10

Rank

Country overall economic social Political

Belgium 1 5 5 3

Ireland 2 3 2 28

Netherlands 3 6 8 14

Austria 4 14 4 4

Singapore 5 1 3 74

Sweden 6 8 17 7

Denmark 7 13 9 15

Hungary 8 7 22 21

Portugal 9 17 12 9

Switzerland 10 25 6 11

Source: Based on the 2012 KOF Index of Globalization (www.globalization.kof.ethz.ch), March 16, 2012.

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40 Part 1 • Global business environment

Untangling the globalization Debate Globalization means different things to different people. A businessperson may see globaliza- tion as an opportunity to source goods and services from lower-cost locations and to pry open new markets. An economist may see it as an opportunity to examine the impact of globalization on jobs and standards of living. An environmentalist may be concerned with how globalization affects our ecology. An anthropologist may want to examine the influence of globalization on the culture of a group of people. A political scientist may be concerned with the impact of globalization on the power of governments relative to that of multinational companies. And an employee may view globalization either as an opportunity for new work or as a threat to his or her current job.

It is because of the different lenses through which we view events around us that the global- ization debate is so complex. Entrepreneurs, small business owners, and globetrotting managers need to understand globalization and the arguments of those who oppose it. In the pages that follow, we explain the main arguments of those opposed to globalization and the responses of those in favor of it. But before we address the intricacies of the debate, it is helpful to put today’s globalization into its proper context.

Today’s Globalization in Context Many people forget that there was a first age of globalization that extended from the mid-1800s to the 1920s.17 In those days, labor was highly mobile, with 300,000 people leaving Europe each year in the 1800s and 1 million people leaving each year after 1900.18 Other than in wartime, nations did not even require passports for international travel before 1914. And like today, work- ers in wealthy nations back then feared competition for jobs from high- and low-wage countries.

Trade and capital flowed more freely than ever during that first age of globalization. Huge companies from wealthy nations built facilities in distant lands to extract raw materials and pro- duce all sorts of goods. Large cargo ships plied the seas to deliver their manufactures to dis- tant markets. The transatlantic cable (completed in 1866) allowed news between Europe and the United States to travel faster than ever before. The drivers of that first age of globalization included the steamship, telegraph, railroad, and, later, the telephone and airplane.

That first age of globalization was abruptly halted by the arrival of the First World War, the Russian Revolution, and the Great Depression. A backlash to fierce competition in trade and unfettered immigration in the early 1900s helped usher in high tariffs and barriers to immigra- tion. The great flows of goods, capital, and people common before the First World War became a mere trickle. For 75 years from the start of the First World War to the end of the Cold War, the world remained divided. There was a geographic divide between East and West and an ideologi- cal divide between communism and capitalism. After the Second World War, the West experi- enced steady economic gains, but international flows of goods, capital, and people were confined to their respective capitalist and communist systems and geographies.

Fast-forward to 1989 and the collapse of the wall separating East and West Berlin. One by one, central and eastern European nations rejected communism and began marching toward democratic institutions and free-market economic systems. Although it took until the 1990s for international capital flows, in absolute terms, to recover to levels seen prior to the First World War, the global economy had finally been reborn. The drivers of this second age of globalization include communication satellites, fiber optics, microchips, and the Internet.

Introduction to the Debate In addition to the WTO presented earlier, several other supranational institutions play leading roles in fostering globalization. The World Bank is an agency created to provide financing for national economic development efforts. The initial purpose of the World Bank (www.worldbank .org) was to finance European reconstruction following the Second World War. The World Bank later shifted its focus to the general financial needs of developing countries, and today it fi- nances many economic development projects in Africa, South America, and Southeast Asia. The International Monetary Fund (IMF) is an agency created to regulate fixed exchange rates and to enforce the rules of the international monetary system. Today, the IMF (www.imf.org) has 185 member countries. Some of the purposes of the IMF include promoting international monetary cooperation, facilitating the expansion and balanced growth of international trade,

World Bank Agency created to provide financing for national economic development efforts.

international Monetary fund Agency created to regulate fixed exchange rates and to enforce the rules of the international monetary system.

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ChaPter 1 • Globalization 41

avoiding competitive exchange devaluation, and making financial resources temporarily available to members.

At this point, we should note one caveat. Each side in the debate over globalization tends to hold up results of social and economic studies that it says show “definitive” support for its arguments. Yet many organizations that publish studies on globalization have political agendas, such as decreasing government regulation or expanding government programs. This can make objective consideration of a group’s claims and findings difficult. A group’s aims may influence the selection of the data to analyze, the time period to study, the nations to examine, and so forth. It is essential to take into account such factors anytime we hear a group arguing the beneficial or harmful effects of globalization.

Let’s now engage the debate over globalization by examining its effects on (1) jobs and wages, (2) labor and environmental regulation, (3) income inequality, (4) cultures, (5) and national sovereignty.

Quick Study 4 1. How does this current period of globalization compare with the first age of globalization? 2. Explain the original purpose of the World Bank and its mandate today. 3. What are the main purposes of the International Monetary Fund?

Globalization’s Impact on Jobs and Wages We open our coverage of the globalization debate with an important topic for both developed and developing countries—the effect of globalization on jobs and wages. We begin with the arguments of those against globalization and then turn our attention to how supporters of globalization respond.

agaiNSt gLoBaLizatioN Groups opposed to globalization blame it for eroding standards of living and ruining ways of life. Specifically, they say globalization eliminates jobs and lowers wages in developed nations and exploits workers in developing countries. Let’s explore each of these arguments.

Eliminates Jobs in Developed Nations Some groups claim that globalization eliminates manufacturing jobs in developed nations. They criticize the practice of sending good-paying manufacturing jobs abroad to developing countries where wages are a fraction of the cost for

Employees cheerfully celebrate at Volkswagen’s (www.vw.com) automobile plant in anchieta, brazil. Factory employees are celebrating the production of more than 15 million vehicles in Volkswagen’s 50-plus years in brazil. the country is one of the strongest emerging markets in the world and one that benefited tremendously by embracing the opportunities offered by globalization. can you identify other emerging markets in which globalization helped create good jobs and rising incomes for people?

Source: Agentur/Newscom

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42 Part 1 • Global business environment

international firms. They argue that a label reading “Made in China” translates to “Not Made Here.” Although critics admit that importing products from China (or another low-wage nation) lowers consumer prices for televisions, sporting goods, and so on, they say this is little consolation for workers who lose their jobs.

To illustrate their argument, globalization critics point to the activities of big-box retailers such as Costco (www.costco.com) and Walmart (www.walmart.com). It is difficult to overstate the power of these retail giants and symbols of globalization. Some say that by relentlessly pursuing low-cost goods, these retailers force their suppliers to move to China and other low-wage nations.

lowers Wages in Developed Nations Opposition groups say globalization causes worker dislocation that gradually lowers wages. They allege that, when a manufacturing job is lost in a wealthy nation, the new job (assuming new work is found) pays less than the previous one. Those opposed to globalization say this decreases employee loyalty, employee morale, and job security. They say this causes people to fear globalization and any additional lowering of trade barriers.

Big-box retailers also come under fire in this discussion. Globalization critics say powerful retailers continually force manufacturers in low-wage nations to accept lower profits so that the retailers can slash prices to consumers. As a result of these business practices, critics charge, powerful retailers force down wages and working conditions worldwide.

Exploits Workers in Developing Nations Critics charge that globalization and international outsourcing exploit workers in low-wage nations. One notable critic of globalization, Naomi Klein, vehemently opposes the outsourced call center jobs of Western companies. Klein says such jobs force young Asians to disguise their nationality, adopt fake Midwestern accents, and work nights when their U.S. customers are awake halfway around the world. Klein maintains that free trade policies are “a highly efficient engine of dispossession, pushing small farmers off their land and laying off public-sector workers.”19

foR gLoBaLizatioN Supporters of globalization credit it with improving standards of living and making possible new ways of life. They argue that globalization increases wealth and efficiency in all nations, generates labor market flexibility in developed nations, and advances the economies of developing nations. Let’s examine each of these arguments.

Increases Wealth and Efficiency in all Nations Some economists believe globalization increases wealth and efficiency in both developed and developing nations. Globalization supporters argue that openness to international trade increases national production (by increasing efficiency) and raises per capita income (by passing savings on to consumers). For instance, by squeezing inefficiencies out of the retail supply chain, powerful global retailers help restrain inflation and boost productivity. Some economists predict that removing all remaining barriers to free trade would significantly boost worldwide income and greatly benefit developing nations.

Generates labor Market Flexibility in Developed Nations Globalization supporters believe globalization creates positive benefits by generating labor market flexibility in developed nations. Some claim that there are benefits from worker dislocation, or “churning” as it is called when there is widespread job turnover throughout an economy. Flexible labor markets allow workers to be redeployed rapidly to sectors of the economy where they are highly valued and in demand. This also allows employees, particularly young workers, to change jobs easily with few negative effects. For instance, a young person can gain experience and skills with an initial employer and then move to a different job that provides a better match between employee and employer.

advances the Economies of Developing Nations Those in favor of globalization argue that globalization and international outsourcing help to advance developing nations’ economies. India initially became attractive as a location for software-writing operations because of its low-cost, well-trained, English-speaking technicians. Later, young graduates who would not become doctors and lawyers found bright futures in telephone call centers that provide all sorts of customer services. More recently, jobs in business-process outsourcing (including financial, accounting, payroll, and benefits services) is significantly elevating living standards in India. Western corporations can outsource such work to Indian firms for a fraction of what they pay at home.

Today, the relentless march of globalization is bringing call center jobs to the Philippines. Young Filipinos possess an excellent education, a solid grasp of the English language and

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ChaPter 1 • Globalization 43

U.S. culture, and a neutral accent. Top Indian firms, such as Wipro (www.wipro.com), now have substantial operations in the Philippines and happily pay more, not less, than what they would need to pay workers in India. The work is not considered low-paying by any means, and instead represents a solid, middle-class job.20

Figure 1.2 illustrates why companies in industrialized nations choose to outsource jobs to emerging markets. The figure shows the average net annual salary of a computer programmer living in each country. The salary of a programmer in the United States is nearly four times that of one in some eastern European nations, including Lithuania. So long as such economic dis- parities exist, international outsourcing will continue to be popular.

Summary of the Jobs and Wages Debate All parties appear to agree that globalization eliminates some jobs in a nation but creates jobs in other sectors of the nation’s economy. Yet, although some people lose their jobs and find new employment, it can be very difficult for others to find new work. The real point of difference between the two sides in the debate, it seems, is whether overall gains that (may or may not) accrue to national economies are worth the lost livelihoods that individuals (may or may not) suffer. Those in favor of globalization say individual pain is worth the collective gain, whereas those against globalization say it is not.

Globalization’s Impact on Labor, the Environment, and Markets Critics of globalization say companies locate operations to where labor and environmental regu- lations are least restrictive and, therefore, least costly. They argue this puts downward pressure on labor and environmental protection laws in all countries as nations compete to attract interna- tional firms. Let’s examine these claims and the responses of globalization supporters.

LaBoR StaNdaRdS Trade unions claim globalization reduces labor’s bargaining power and lowers global labor standards when international firms are permitted to continually move to nations with lower labor standards. One place to test this assertion is in developing nations’ export-processing zones (EPZs)—special areas in which companies engage in tariff-free importing and exporting. More than 850 EPZs employ 27 million people worldwide. Yet a study by the International Labor Organization (www.ilo.org), hardly a pro-business group, found no evidence to support the claim that nations with a strong union presence suffered any loss of investment in their EPZs. In fact, another study by the World Bank found that the higher occupational safety and health conditions an EPZ had in place, the greater foreign investment it attracted.21 The evidence fails to support critics’ allegations that economic openness and foreign investment contribute to lower labor standards.

eNviRoNMeNtaL pRoteCtioN Some environmental groups say globalization causes a “race to the bottom” in environmental conditions and regulations. Yet studies show that pollution- intensive U.S. firms tend to invest in countries with stricter environmental standards. Many developing nations, including Argentina, Brazil, Malaysia, and Thailand, liberalized their foreign investment environment while simultaneously enacting stricter environmental legislation. If large international companies were eager to relocate to nations having poor environmental protection laws, they would not have invested in these countries for decades. Additional evidence that closed, protectionist economies are worse than open ones at protecting the environment includes Mexico

0 $10,000 $20,000 $30,000 $40,000 $50,000

Average annual net income of an Information Technology worker living in:

China $12,900

Lithuania $12,852

Brazil $37,056

United States $49,692

Singapore $18,192

Germany $27,840

FIGURE 1.2 Comparing Salaries of information technology Workers

Source: Based on data obtained from the International Average Salary Income Database (www.worldsalaries.org).

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44 Part 1 • Global business environment

before NAFTA, Brazil under military rule, and the former Warsaw Pact of communist nations— all of which had extremely poor environmental records. Again, the evidence does not support claims of lower environmental standards being the result of economic openness and globalization.

futuRe MaRketS Opponents to globalization claim that international firms exploit local labor markets and the environment to produce goods that are then exported back to the home countries. Such claims may not only perpetuate a false image of corporations but may also have no factual basis. Most international firms today support reasonable labor and environmental laws because (if for no other reason) they want to expand future local markets for their goods and services. They recognize that healthy future markets will require a sustainable approach to business expansion. When analyzing a country prior to investing, companies today often examine a location for its potential as a future market as well as a production base. Less than 5 percent of U.S. firms invest in developing countries to obtain low-cost resources and then export finished products back to the United States. For additional insights into how managers today succeed by respecting unfamiliar markets, see the Manager’s Briefcase, titled, “The Keys to Global Success.”

Quick Study 5 1. What are the claims of those who say globalization eliminates jobs, lowers wages, and

exploits workers? 2. Identify the arguments of those who say globalization creates jobs and boosts wages. 3. Why do critics say globalization adversely affects labor standards, environmental regula-

tions, and future markets? 4. How do supporters of globalization argue that it does not harm labor standards, environ-

mental regulations, and future markets?

Globalization and Income Inequality Perhaps no controversy swirling around globalization is more complex than the debate over its effect on income inequality. Here, we focus on three main aspects of the debate: inequality within nations, inequality between nations, and global inequality.

iNequaLity WithiN NatioNS The first aspect of the inequality debate is whether globalization is increasing income inequality among people within nations. Opponents of globalization argue that freer trade and investment allows international companies to close factories in high-wage, developed nations and to move them to low-wage, developing nations. They argue that this increases the wage gap between white-collar and blue-collar occupations in rich nations.

Making everything from 99-cent hamburgers (McDonald’s) to $150 million jumbo jets (Boeing), managers of global companies must overcome obstacles when competing in unfamiliar markets. Global managers acknowledge certain common threads in their approaches to management and offer the following advice:

• Communicate Effectively. Cultural differences in business relationships and etiquette are central to global business and require cross-cultural competency. Effective global managers welcome uniqueness and ambiguity while demonstrating flex- ibility, respect, and empathy.

• Know the Customer. Successful managers understand how a company’s different products serve the needs of international cus- tomers. Then, they ensure that the company remains flexible and capable enough to customize products that meet those needs.

• Emphasize Global Awareness. Good global managers inte- grate foreign markets into business strategy from the outset. They ensure that products and services are designed and built with global markets in mind, and not used as dumping grounds for the home market’s outdated products.

• Market Effectively. The world will beat a path to your door to buy your “better mousetrap” only if it knows about it. A poor marketing effort can cause great products to fade into obscurity while an international marketing blunder can bring unwanted media attention. Top global managers match quality products with excellent marketing.

• Monitor Global Markets. Successful managers keep a watch- ful eye on business environments for shifting political, legal, and socioeconomic conditions. They make obtaining accurate information a top priority.

ManaGer’S briefcaSe The Keys to Global Success

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Two studies of developed and developing nations find contradictory evidence on this argument. The first study, of 38 countries over almost 30 years, supports the increasing inequal- ity argument. The study found that as a nation increases its openness to trade, income growth among the poorest 40 percent of a nation’s population declines, whereas income growth among other groups increases.22 The second study, of 80 countries over 40 years, failed to support the increasing inequality argument. It found that incomes of the poor rise one-for-one with overall economic growth and concluded that the poor benefit from international trade along with the rest of a nation.23 The mixed findings of these two studies are typical of a large set of research exam- ining inequality between developed and developing nations.

Two studies of developing nations only are more consistent in their findings. One study found that an increase in the ratio of trade to national output of 1 percent raised average income levels by 0.5 to 2 percent. Another study showed that incomes of the poor kept pace with growth in average incomes in economies (and periods) of fast trade integration, but that the poor fell behind during periods of declining openness.24 Results of these two studies suggest that, by inte- grating their economies into the global economy, developing nations (by far the nations with the most to gain) can boost the incomes of their poorest citizens.

A new approach being developed takes a multidimensional view of poverty and deprivation. Proponents of this approach say that the problem with focusing on income alone is that higher income does not necessarily translate into better health or nutrition. The new approach examines 10 basic factors, including whether the family home has a decent toilet and electricity service; whether children are enrolled in school; and whether family members are malnourished or must walk more than 30 minutes to obtain clean drinking water. A household is considered poor if it is deprived on over 30 percent of the indicators. This new approach reveals important differences among poor regions. For example, whereas material measures contribute more to poverty in sub- Saharan Africa, malnutrition is a bigger factor in South Asia.25

iNequaLity BetWeeN NatioNS The second aspect of the inequality debate is whether globalization is widening the gap in average incomes between rich and poor nations. If we compare average incomes in high-income countries with average incomes in middle- and low- income nations, we do find a widening gap. But averages conceal differences between nations.

On closer inspection, it appears the gap between rich and poor nations is not occurring everywhere: One group of poor nations is closing the gap with rich economies, while a second group of poor countries is falling further behind. For example, China is narrowing the income

a man dismantles the carcass of a car for recycling in the “cité soleil” slum of port- au-prince, Haiti. Haiti is a “traditional” market that has not benefited as much from globalization as have other nations. the plight of people like the man shown here incites calls for a wider distribution of the benefits of economic progress. What, if anything, do you think businesses and governments can do to improve the lives of people enduring such harsh living conditions?

Source: THONY BELIZAIRE/Newscom

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46 Part 1 • Global business environment

gap between itself and the United States as measured by GDP per capita, but the gap between Africa and the United States is widening. China’s progress is no doubt a result of its integration with the world economy and annual economic growth rates of between 7 and 9 percent. Another emerging market, India, is also narrowing its income gap with the United States by embracing globalization.26

Developing countries that embrace globalization are increasing personal incomes, extend- ing life expectancies, and improving education systems. In addition, post-communist countries that welcomed world trade and investment experienced high growth rates in GDP per capita. But nations that remain closed off from the world economy have performed far worse.

gLoBaL iNequaLity The third aspect of the inequality debate is whether globalization is increasing global inequality—widening income inequality between all people of the world, no matter where they live. A recent study paints a promising picture of declining poverty. This study found that the percentage of the world’s population living on less than a dollar a day (a common poverty gauge) fell from 17 percent to just 7 percent over a 30-year period, which reduced the number of people in poverty by roughly 200 million.27 Yet, a widely cited study by the World Bank finds that the percent of world population living on less than a dollar a day fell from 33 percent to 18 percent over a 20-year period, which reduced the number of people in poverty from 1.5 billion to 1.1 billion.28

For a variety of reasons, the real picture likely lies somewhere in between these two studies’ estimates. For example, whereas the World Bank study used population figures for developing countries only, the first study used global population in its analyses, which lowered poverty es- timates, all else being equal. What is important is that most experts agree that global inequality has fallen, although they disagree on the extent of the fall.

What it is like to live on less than a dollar a day in sub-Saharan Africa, South Asia, or elsewhere is too difficult for most of us to comprehend. The continent of Africa presents the most pressing problem. Home to 13 percent of the world’s population, Africa accounts for just 3 percent of world GDP. Rich nations realize they cannot sit idly by while so many of the world’s people live under such conditions.

What can be done to help the world’s poor? First of all, rich nations could increase the amount of foreign aid they give to poor nations—foreign aid as a share of donor country GDP is at historically low levels. Second, rich nations can accelerate the process of forgiving some of the debt burdens of the most heavily indebted poor countries (HIPCs). The HIPC initiative is committed to reducing the debt burdens of the world’s poorest countries. This initiative would enable these countries to spend money on social services and greater integration with the global economy instead of on interest payments on debt.29

Summary of the Income Inequality Debate For the debate over inequality within nations, studies suggest that developing nations can boost incomes of their poorest citizens by embracing globalization and integrating themselves into the global economy. In the debate over inequality between nations, nations open to world trade and investment appear to grow faster than rich nations do. Meanwhile, economies that remain sheltered from the global economy tend to be worse off. Finally, regarding the debate over global inequality, although experts agree inequality has fallen in recent decades, they disagree on the extent of the drop.

Globalization’s Influence on Cultures National culture is a strong shaper of a people’s values, attitudes, customs, beliefs, and com- munication. Whether globalization eradicates cultural differences between groups of people or reinforces cultural uniqueness is a hotly debated topic.

Protesters complain that globalization is homogenizing our world and destroying its rich diversity of cultures. Critics say that in some drab, new world we all will wear the same clothes bought at the same brand-name shops, eat the same foods at the same brand-name restaurants, and watch the same movies made by the same production companies.

But supporters argue that globalization allows us all to profit from our differing circum- stances and skills. Trade allows countries to specialize in producing the goods and services they can produce most efficiently. Nations can then trade with each other to obtain goods and services they desire but do not produce. In this way, France still produces many of the world’s finest wines, South Africa yields much of the world’s diamonds, and Japan continues to design some

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ChaPter 1 • Globalization 47

of the world’s finest-engineered automobiles. Other nations then trade their goods and services with these countries to enjoy the wines, diamonds, and automobiles that they do not, or cannot, produce. To learn more about the interplay between culture and globalization, see this chapter’s Culture Matters feature, titled, “The Culture Debate.”

Globalization and National Sovereignty National sovereignty generally involves the idea that a nation-state (1) is autonomous, (2) can freely select its government, (3) cannot intervene in the affairs of other nations, (4) can control movements across its borders, and (5) can enter into binding international agreements. Opposi- tion groups allege that globalization erodes national sovereignty and encroaches on the authority of local and state governments. Supporters disagree, saying that globalization spreads democ- racy worldwide and that national sovereignty must be viewed from a long-term perspective.

gLoBaLizatioN: MeNaCe to deMoCRaCy? A main argument leveled against globalization is that it empowers supranational institutions at the expense of national governments. It is not in dispute that the WTO, the IMF, and the United Nations are led by appointed, not democratically elected, representatives. What is debatable, however, is whether these organizations unduly impose their will on the citizens of sovereign nations. Critics argue that, by undercutting the political and legal authority of national, regional, and local governments, such organizations undercut democracy and individual liberty.

Opponents of globalization also take issue with the right of national political authorities to enter into binding international agreements on behalf of citizens. Critics charge that such agree- ments violate the rights of subfederal (local and state) governments. For example, state and local governments in the United States had no role in creating the NAFTA. Yet WTO rules require the U.S. federal government to take all available actions (including enacting preemptive legislation or withdrawing funding) to force subfederal compliance with WTO terms. Protesters say that such requirements directly attack the rights and authority of subfederal governments.30

gLoBaLizatioN: guaRdiaN of deMoCRaCy? Globalization supporters argue that an amazing consequence of globalization has been the spread of democracy worldwide. In recent decades, the people of many nations have become better educated, better informed, and more empowered. Supporters say globalization has not sent democracy spiraling into decline but instead has been instrumental in spreading democracy to the world.

Backers of globalization also contend that it is instructive to take a long-term view on the issue of national sovereignty. Witnessing a sovereign state’s scope of authority altered is nothing new, as governments have long given up trying to control issues they could not resolve. In the

• A Force for Good. On the positive side, globalization tends to foster two important values: tolerance and diversity. Advocates say nations should be more tolerant of opposing viewpoints and should welcome diversity among their peoples. This view inter- prets globalization as a potent force for good in the world.

• Deeper Values. Globalization can cause consumer purchases and economic ideologies to converge, but these are rather super- ficial aspects of culture. Deeper values that embody the essence of cultures may be more resistant to a global consumer culture.

• Want to Know More? Visit the globalization page of the Global Policy Forum (www.globalpolicy.org), Globalization 101 (www.globalization101.org), or The Globalist (www. theglobalist.com).

Source: “Economic Globalization and Culture: A Discussion with Dr. Francis Fukuyama,” Merrill Lynch Forum website (www.ml.com); “Globalization Issues,” The Globaliza- tion website (www.sociology.emory.edu/globalization); Cultural Diversity in the Era of Globalization,” UNESCO Culture Sector website (www.unesco.org/culture).

the debate over globalization’s influence on culture evokes strong opinions. Here are a few main arguments in this debate:

• Material Desire. Critics say globalization fosters the “Coca- Colanization” of nations through advertising campaigns that promote material desire. They also argue that global consumer- goods companies destroy cultural diversity (especially in develop- ing nations) by putting local companies out of business.

• Artistic Influence. Evidence suggests, however, that the cultures of developing nations are thriving and that the influ- ence of their music, art, and literature has grown (not shrunk) throughout the past century. African cultures, for example, have influenced the works of artists including Picasso, the Beatles, and Sting.

• Western Values. International businesses reach far and wide through the Internet, global media, increased business travel, and local marketing. Critics say local values and traditions are being replaced by U.S. companies promoting “Western” values.

culture MatterS The Culture Debate

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48 Part 1 • Global business environment

mid-1600s, governments in Europe surrendered their authority over religion because attempts to control it undermined overall political stability. Also, Greece in 1832, Albania in 1913, and the former Yugoslavian states in the 1990s had to protect minorities in exchange for international rec- ognition. And over the past 50 years, the United Nations has made significant progress on worthy issues such as genocide, torture, slavery, refugees, women’s rights, children’s rights, forced labor, and racial discrimination. Like the loss of sovereignty over these issues, globalization supporters say lost sovereignty over some economic issues may actually enhance the greater good.31

Quick Study 6 1. What does the evidence suggest for each aspect of the debate over globalization and

income inequality? 2. Summarize the claims of each side in the debate over globalization’s influence on cultures. 3. What are the arguments on each side of the debate over globalization’s impact on national

sovereignty?

Why international business is special As we’ve already seen in this chapter, international business differs greatly from business in a purely domestic context. The most obvious contrast is that different nations can have entirely different societies and commercial environments. Let’s take a moment to examine what makes international business special by introducing a model unique to this book—a model we call the global business environment.

The Global Business Environment International business is special because it occurs within a dynamic, integrated system that weaves together four distinct elements:

1. The forces of globalization 2. The international business environment 3. Many national business environments 4. International firm management

The model in Figure 1.3 identifies each of these elements and their subparts that together comprise the global business environment. Thinking about international business as occurring within this global system helps us understand the complexities of international business and the interrelations between its distinct elements. Let’s preview each of the four main components in the global business environment.

Globalization is a potent force transforming our societies and commercial activities in countless ways. Globalization, and the pressures it creates, forces its way into each element shown in Figure 1.3. In this way, the drivers of globalization (technological innovation and fall- ing trade and investment barriers) influence every aspect of the global business environment. The dynamic nature of globalization also creates increasing competition for all firms everywhere, as managers begin to see the entire world as an opportunity. At home and abroad, firms must re- main vigilant to the fundamental societal and commercial changes that globalization is causing.

The international business environment influences how firms conduct their operations in both subtle and not-so-subtle ways. No business is entirely immune to events in the international business environment, as evidenced by the long-term trend toward more porous national borders. The drivers of globalization are causing the flows of trade, investment, and capital to grow and to become more entwined—often causing firms to search simultaneously for production bases and new markets. Companies today must keep their fingers on the pulse of the international business environment to see how it may affect their business activities.

Each national business environment is composed of unique cultural, political, legal, and economic characteristics that define business activity within that nation’s borders. This set of national characteristics can differ greatly from country to country. But as nations open up and embrace globalization, their business environments are being transformed. Globalization can cause powerful synergies and enormous tensions to arise within and across various elements of

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ChaPter 1 • Globalization 49

a society. Company managers must be attentive to such nuances, adapting their products and practices as needed.

International firm management is vastly different from the management of a purely domes- tic business. Companies must abide by the rules in every market in which they choose to operate. Therefore, the context of international business management is defined by the characteristics of national business environments. Because of widely dispersed production and marketing activi- ties today, firms commonly interact with people in distant locations within the international busi- ness environment. Finally, managers and their firms are compelled to be knowledgeable about the nations in which they operate because of the integrating power of globalization. Businesses should try to anticipate events and forces that can affect their operations by closely monitoring globalization, national business environments, and the international business environment.

The Road Ahead for International Business The coverage of international business in this book follows the model of the global business environment displayed in Figure 1.3. In this chapter, we learned how globalization is transform- ing our world and how elements of the global business environment are becoming increasingly intertwined. As globalization penetrates deeper into the national context, every aspect of interna- tional business management is being affected.

In Part 2 (Chapters 2 through 4), we explore how national business environments differ from one nation to another. We examine how people’s attitudes, values, beliefs, and institutions differ from one culture to another and how this affects business. This part also covers how na- tions differ in their political, legal, and economic systems. This material is placed early in the text because such differences between countries help frame subsequent topics and discussions, such as how companies modify business practices and strategies abroad.

We describe major components of the international business environment in Part 3 (Chapters 5 through 8) and Part 4 (Chapters 9 and 10). Our coverage begins with an examination

Developing and Marketing

Products (ch. 14)

Managing International Operations

(ch. 15)

Economics and

Emerging Markets (ch. 4)

International Financial Markets (ch. 9)

Business– Government

Trade Relations

(ch. 6)

Cross-Cultural Business

(ch. 2)

International Monetary System

(ch. 10)

Globalization (ch. 1)

Increasing Competition

Technological Innovation

Falling Trade/FDI Barriers

International Trade (ch. 5)

Regional Economic

Integration (ch. 8)

Foreign Direct Investment

(ch. 7)

Analyzing International Opportunities

(ch. 12)

Selecting and

Managing Entry Modes

(ch. 13)

Hiring and Managing Employees

(ch. 16)

International Strategy and Organization

(ch. 11)

National

Firm

International

Politics, Law, and Business Ethics

(ch. 3)

FIGURE 1.3 the global Business environment

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50 Part 1 • Global business environment

of trade and investment theories and a discussion of why governments encourage or discourage these two forms of international business. We explore the process of regional economic integra- tion that is sweeping the globe and outline its implications for international business. Finally, we discuss how events in global financial markets affect international business and how the global monetary system functions.

In Part 5 (Chapters 11 through 16), our coverage turns to ways in which international busi- ness management differs from management of a purely domestic firm. We explain how a com- pany creates an international strategy, organizes itself for international business, and analyzes and selects the markets it will pursue. We explore different potential entry modes and then dis- cuss how a firm develops and markets products for specific nations, regions, or the entire world. We then cover how international companies manage their sometimes far-flung international op- erations. The book closes by discussing how international firms manage their human resources in the global business environment.

Quick Study 7 1. Identify the four main components of the global business environment. 2. How does globalization influence other elements in the global business environment?

Wages and Jobs Some labor groups in wealthy nations contend that globalization is forcing companies to join the “race to the bottom” in terms of wages and benefits. But to attract investment, a location must offer low- cost, adequately skilled workers in an environment with acceptable levels of social, political, and economic stability.

Rapid globalization of markets and production is making delivery a complex engineering task. And as companies cut costs by outsourc- ing activities, supply and distribution channels grow longer and more complex. Corporate logistics departments and logistics specialist firms are helping international companies untangle lengthy supply chains, monitor shipping lanes, and forecast weather patterns. High-wage logistics jobs represent the kind of high-value-added employment that results from the “churning” in labor markets caused by globalization.

the policy agenda Countless actions could be taken by developed and developing na- tions to lessen the negative effects of globalization. The World Bank calls on rich countries to (1) open their markets to exports from de- veloping countries, (2) slash their agricultural subsidies that hurt poor-country exports, and (3) increase development aid, particularly in education and health. It calls on poor countries to improve their investment climates and improve social protection for poor people in a changing economic environment.

The Peterson Institute for International Economics (www.iie.com) proposed a policy agenda for rich nations on two fronts. On the domestic front, it proposes (1) establishing on-the-job training to help workers cope with globalization, (2) offering “wage insurance” to workers forced by globalization to take a lower-paying job, (3) subsi- dizing health insurance costs in case of lost work, and (4) improving education and lifetime learning. On the international front, it pro- poses (1) better enforcing labor standards, (2) clarifying the relation between international trade and environmental agreements, and (3) reviewing the environmental implications of trade agreements.

This chapter has only introduced you to the study of international business—we hope you enjoy the rest of your journey!

the main theme of this chapter is that the world’s national econo- mies are becoming increasingly intertwined through the process of globalization. Cultural, political, legal, and economic events in one country increasingly affect the lives of people in other countries. Com- panies must pay attention to how changes in nations where they do business can affect operations. In this section, we briefly examine several important business implications of globalization.

harnessing globalization’s Benefits People opposed to globalization say it negatively affects wages and en- vironmental protection, reduces political freedom, increases corruption, and inequitably rewards various groups. Yet there is evidence that the most globalized nations have the strongest records on equality, the most robust protection of natural resources, the most inclusive political sys- tems, and the lowest levels of corruption. People in the most globalized nations also live the healthiest and longest lives, and women there have achieved the most social, educational, and economic progress.

One thing the debate over globalization has achieved is a dialogue on the merits and demerits of globalization. What has emerged is a more sober, less naïve notion of globalization. Those on each side of the debate understand that globalization can have positive effects on people’s lives, but globalization cannot, by itself, alleviate the misery of the world’s poor. Both sides in the debate are now working together to harness the benefits of globalization while minimizing its costs.

intensified Competition The two driving forces of globalization (lower trade and investment barriers and increased technological innovation) are taking companies into previously isolated markets and increasing competitive pressures worldwide. And innovation is unlikely to slow any time soon.

As the cost of computing power continues to fall and new tech- nologies are developed, companies will find it easier and less costly to manage widely dispersed marketing activities and production fa- cilities. Technological developments may even strengthen the case for outsourcing more professional jobs to low-cost locations. As competi- tion intensifies, international companies will increase their coopera- tion with suppliers and customers.

bottoM line for buSineSS

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ChaPter 1 • Globalization 51

Chapter Summary

1. Identify the types of companies that participate in international business. • Large multinational corporations (MNCs) conduct most international business

transactions. • MNCs have great economic and political muscle, and their deals are often worth

billions of dollars. • Globalization has given rise to the born global firm—a company that adopts a global

perspective and engages in international business from or near its inception. • Born global firms tend to have an innovative culture, knowledge-based capabilities,

and the status of international competitor in less than three years. • Entrepreneurs and small firms benefit from the Internet and other technologies that

help them overcome high advertising and distribution costs. 2. Describe the process of globalization and how it affects markets and production.

• Globalization is the trend toward greater economic, cultural, political, and techno- logical interdependence among national institutions and economies.

• Globalization is marked by denationalization, in which national borders become somewhat less relevant.

• The globalization of markets helps a company to (1) reduce costs by standardizing marketing activities, (2) explore international markets if the home market is small or saturated, and (3) level income streams, especially for makers of seasonal products.

• The globalization of production helps a company to (1) access low-cost labor and become more price competitive and (2) access technical know-how or natural resources nonexistent or too expensive at home.

3. Describe the two forces causing globalization to increase. • Falling barriers to trade and investment is one major force behind globalization. • Trade barriers have been drastically reduced through institutions such as the General

Agreement on Tariffs and Trade and the World Trade Organization. • Groups of several or more nations are reducing trade barriers by creating regional

trade agreements. • Technological innovation is a second main force driving globalization. • Companies can manage global business activities through the use of e-mail,

videoconferencing, intranets, and extranets. • Technology increases the speed and ease with which companies can manage

far-flung operations. • Innovations in transportation technologies are making the shipment of goods

between nations more efficient and dependable. 4. Summarize the evidence for each main argument in the globalization debate.

• Regarding jobs and wages, both sides agree that globalization causes dislocation in labor markets: Those supporting globalization believe overall gains of national economies are worth lost jobs for individuals; but critics of globalization do not.

• Labor unions argue that globalization causes a “race to the bottom” in labor and environmental regulation, though they lack supporting evidence.

• Regarding inequality within nations, developing nations can boost the incomes of their poorest citizens by integrating themselves into the global economy.

• In the debate over inequality between nations, nations that embrace world trade and in- vestment grow faster than rich nations, whereas sheltered economies become worse off.

• Groups agree that global inequality has fallen in recent decades but differ on the extent of the drop.

• Evidence suggests that the cultures of developing nations are thriving in an age of globalization and that deeper elements of culture are not easily abandoned.

• In terms of national sovereignty, globalization has helped spread democracy worldwide and has aided progress on many global issues.

5. Describe the global business environment and identify its four main elements. • International business occurs within an integrated, global business environment

consisting of four elements.

MyManagementLab Go to www.mymanagementlab.com to complete the problem marked with this icon .

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52 Part 1 • Global business environment

• Globalization is transforming business and society and increasing competition for all firms.

• The international business environment influences how firms conduct operations, while globalization further entwines the flows of trade, investment, and capital.

• Separate national business environments comprise unique cultural, political, legal, and economic characteristics that define business activity within a nation.

• International business management differs from management of a purely domestic firm in nearly all respects.

Teaming Up 1. Research Project. Imagine that you and a group of your fellow classmates own a com-

pany that manufactures cheap sunglasses. To lower production costs, you want to move your factory from your developed country to a more cost-effective nation. Choose a prospective country to which you will move production. What elements of the national business environment might affect your move? Are there obstacles to overcome in the international business environment? How will managing your company be different when you undertake international activities? What challenges will you face in managing your new employees?

2. Market Entry Strategy Project. This exercise corresponds to the MESP online simulation. With a group of classmates, select a country that interests you. Describe its national flag: What do its colors and any symbols on it represent? Identify neighbors with which it shares borders. Give some important facts about the country, including its population, population density, land area, topography, climate, and natural resources and the locations of its main industries. What does the nation produce? Do any aspects of the natural environment help ex- plain why it produces what it does? Integrate your findings into your completed MESP report.

Key Terms born global firm (p. 30) e-business (e-commerce) (p. 28) exports (p. 28) GDP or GNP per capita (p. 35) General Agreement on Tariffs and

Trade (GATT) (p. 34) globalization (p. 31)

gross domestic product (GDP) (p. 35)

gross national product (GNP) (p. 35)

imports (p. 28) international business

(p. 28)

International Monetary Fund (IMF) (p. 40)

multinational corporation (MNC) (p. 30) sustainability (p. 32) World Bank (p. 40) World Trade Organization

(WTO) (p. 35)

Talk It Over 1. Today, international businesspeople must think globally about production and sales oppor-

tunities. Many global managers will eventually find themselves living and working in cul- tures altogether different from their own. Many entrepreneurs will find themselves booking flights to places they had previously never heard of. What do you think companies can do now to prepare their managers for these new markets? What can entrepreneurs and small businesses with limited resources do?

2. In the past, national governments greatly affected the pace of globalization through agree- ments to lower barriers to international trade and investment. Is the pace of change now outpacing the capability of governments to manage the global economy? Will national governments become more or less important to international business in the future? Explain your answer.

3. Information technologies are developing at a faster rate than ever before. How have these technologies influenced globalization? Give specific examples. Do you think globalization will continue until we all live in one “global village”? Why or why not?

4. Consider the following statement: “Globalization and the resulting increase in competition harm people, as international companies play one government against another to get the best deal possible. Meanwhile, governments continually ask for greater concessions from their citizens, demanding that they work harder and longer for less pay.” Do you agree? Why or why not?

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ChaPter 1 • Globalization 53

Take It to the Web 1. Video Report. Visit this book’s channel on YouTube (www.YouTube.com/MyIBvideos).

Click on “Videos” near the top of the page, and click on the set of videos labeled “Ch 01: Globalization.” Watch one video from the list, and then summarize it in a half-page report. Reflecting on the contents of this chapter, which aspects of globalization can you identify in the video? How might a company engaged in international business act on the informa- tion contained in the video?

2. Website Report. In this chapter, we’ve seen how globalization is fundamentally changing business and society. Managers can be more effective if they know what drives globaliza- tion and are familiar with its positive and negative aspects.

Select a controversial globalization topic that interests you, and visit the Websites of two organizations that have opposing views on this topic. (Hint: You might begin by visit- ing an organization noted in this chapter.) For the topic you’ve chosen, report on (1) the specific argument(s) of each side, (2) the evidence each side uses to support its position(s), and (3) the policy agenda, if any, each side promotes.

Which argument(s) do you agree with most? Have your views on this topic changed as a result of your research? If yes, explain how. Which types of firms/industries do you think this topic affects most? Explain. Write a short summary of your findings and include key websites you found helpful.

Ethical Challenges 1. You recently started a new job in a foreign country as manager of distribution for a busy

seaport. On your first day of work, you are asked to sign for a shipment at the dock. Nor- mally, there would be an official shipping fee of $1,000 for the delivery. The captain of the ship says that he is willing to forget about the official shipping paperwork and split the cost with you in exchange for a “tip.” This situation makes you feel uncomfortable, as you know that bribery is illegal and could easily cost you your job. What do you tell the ship captain? Do you take your half of the money and keep quiet, tell the captain that you cannot participate in such a deal and leave it at that, or report the captain to higher authorities?

2. You are the president of a Japanese textile manufacturer. Your company has recently de- cided to outsource production to a developing country to save on labor costs. Complaints have been arising from workers in the foreign plant that supervisors are verbally and some- times even physically abusive. You have yet to visit the plant but have been hearing rumors that working conditions are poor and that plant safety is not up to the company standard. When you confront the managers in charge of this plant, they claim that labor conditions are acceptable and that the workers are only complaining in the hopes of receiving higher payment for their work. A local labor-advocacy group has made claims that your managers at the plant have threatened workers with incarceration and bodily harm if they reveal the conditions of the plant. How do you handle this situation? Do you take steps to improve working conditions, or do you simply shut down the plant? How might your actions affect your relations with officials in this country and your future ability to do business there?

3. You are the newly elected president of a developing country. In the past, your economic foreign policy did not favor importing goods from the global market. However, you feel that encouraging trade with foreign nations will benefit your country. What steps do you take to convince the public that this is the best policy? If you encounter public resistance to your plan, will you go ahead with it anyway? Why or why not?

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54 Part 1 • Global business environment

compared the experience to watching a movie by famed Chinese film director John Woo.

IO Interactive is helped in its quest for international credibility by its highly diverse workforce of specialists hailing from 23 differ- ent countries. This is not unusual in this industry. Game developers are used to relocating and frequently transfer to different countries to find the work they want. This inevitably affects both the storylines and content of games as the newcomers are not imbibed with local traits and have no strong pull to protect national identities.

Likewise, IO Interactive frequently dispatches its game devel- opers to locations around the world to soak up that local culture and reflect it more accurately in their games. According to IO Interac- tive, the secret to creating good games is to get all the right ingre- dients together in one big stew and then stir the pot, which for any Hans Christian Andersen fan sounds like a very familiar tale indeed.

Thinking Globally 1. Some say globalization is homogenizing the attitudes and

spending habits of young consumers worldwide. As one journalist puts it, it may still be conventional wisdom to ‘think globally and act locally,’ but in the youth market, it is increasingly a case of one size fits all. Do you agree or disagree? Why or why not?

2. Some critics say that although video games are designed to have a broad appeal, they do reflect a “Westernized” version of life. Is there a danger that teens exposed to large doses of video games will identify less with the cultures of their own societies and that teens in develop- ing countries will want a Western lifestyle and goods they cannot afford?

3. It is now the norm for game developers to relocate to work anywhere in the world. Can you think of other social trends and technological innovations that have helped companies to think more globally?

4. Advances in technology often spur evolution in the enter- tainment industry. How might new products and services, such as the iPhone and YouTube, affect entertainment in years to come?

Sources: IO Interactive website (www.ioi.dk); Margaret Robertson, “State of Play, a Wide World of Games”, BBC News website (http://news.bbc.co.uk), September 11, 2007; “IO Interactive’s Thomas Howalt”, GamesIndustry.biz website (www.gamesindustry.biz), September 4, 2008; Christian Nutt, “IO Style: We Just Want to Entertain People”, Gamasutra website (www.gamasutra .com), August 17, 2010; Kane & Lynch 2: Dog Days, EMI website (http:// www.emisound.com).

Denmark is a country probably best known for its storytelling culture characterized by Hans Christian Andersen and his clas- sic folk stories. Those fairy tales have for many years delighted youngsters from across the globe, seamlessly crossing language and cultural barriers. They are an art form that has inspired the country’s largest video game developer, IO Interactive. The 200-strong Copenhagen-based group of programmers, software engineers, animators, and mathematicians has created a number of critically acclaimed games such as Hitman, Kane & Lynch, and Freedom Fighters whose dark tales appeal to gamers from Boston to Beijing.

IO Interactive decided very early on after it was formed in 1998 that it wanted to target the international market. It did not have to look far to realize that the companies at the top of their game, so to speak, were the ones whose products held a world- wide appeal. Indeed, the perceived wisdom in the highly competi- tive industry is that the only way to survive, and indeed thrive, is to go for total globalization. This in itself has appeal to the youth market that buys games because young people are proud to be us- ing a modern medium for the modern age. They love the fact that gaming is capable of hitting all the current buzz words as it crosses borders and encourages a rich mix of collaboration and user- generated content.

Most game companies have interpreted this as a sign that in order to successfully market games worldwide they must limit any overtly culturally distinct elements in their titles. Any refer- ences to local traditions, national literature, and musical identity are intentionally kept to a minimum. This is something IO In- teractive very much bears in mind when devising its games, but, thanks to its rich storytelling roots, the company has been fortu- nate that it has not had to completely turn its back on its tradi- tions. Indeed, the company has managed to make great use of its native culture of dark humor and fantasy, which perfectly suits the genre of games it designs and has significant appeal to young gamers worldwide.

This is not to say that IO Interactive has been able to com- pletely ignore the sensibilities of the international audience, and sometimes the search for global appeal means including cred- ible material from abroad. Thus, for the release of Kane & Lynch 2: Dog Days, which featured levels based in China, 23 different authentic-sounding Asian songs were written with vocals in Mandarin, backed with musicians performing with Chinese instru- ments including percussion, Shakuhachi, and Pipa. Game review- ers were bowled over by the international aspect, and one even

Practicing International Management Case

IO Interactive—Storytelling Goes Global

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ChaPter 1 • Globalization 55

Appendix World Atlas As globalization marches across the globe, international busi- ness managers can make more-informed decisions if they know the locations of countries and the distances between them. This atlas presents the world in a series of maps and is designed to assist you in understanding the global landscape of business. We encourage you to return to this atlas frequently to refresh your memory, especially when you encounter the name of an unfamiliar city or country.

Familiarize yourself with each of the maps in this appendix, and then try to answer the following 20 questions. For each question, select all answers that apply.

Map Exercises 1. Which of the following countries border the Atlantic

Ocean? a. Bolivia b. Australia c. South Africa

8. Thailand shares borders with: a. Cambodia b. Pakistan c. Singapore

d. Japan e. United States

2. Which of the following countries are found in Africa? a. Guyana b. Morocco c. Egypt

d. Pakistan e. Niger

3. Which one of the following countries does not border the Pacific Ocean? a. Australia b. Venezuela c. Japan

d. Mexico e. Peru

4. Prague is the capital city of: a. Uruguay b. Czech Republic c. Portugal

d. Tunisia e. Hungary

5. If transportation costs for getting your product from your market to Japan are high, which of the following countries might be good places to locate a manufacturing facility? a. Thailand b. Philippines c. South Africa

d. Indonesia e. Portugal

6. Seoul is the capital city of (capitals are designated with red dots): a. Vietnam b. Cambodia c. Malaysia

d. China e. South Korea

7. Turkey, Romania, Ukraine, and Russia border the body of water called the ___________________ Sea.

17. Which of the following countries is not located in central Asia? a. Afghanistan b. Uzbekistan c. Turkmenistan

15. The distance between Sydney (Australia) and Tokyo (Japan) is shorter than that between: a. Tokyo and Cape Town (South Africa) b. Sydney and Hong Kong (China, SAR) c. Tokyo and London (England) d. Sydney and Jakarta (Indonesia) e. all of the above

16. Madrid is the capital city of: a. Madagascar b. Italy c. Mexico

13. The body of water located between Sweden and Estonia is the ________________________ Sea.

14. Which of the following countries are located on the Mediterranean Sea? a. Italy b. Croatia c. Turkey

12. Saudi Arabia shares borders with: a. Jordan b. Kuwait c. Iraq

11. Chile is located in: a. Africa b. Asia c. the Northern Hemisphere

10. Oslo is the capital city of: a. Germany b. Canada c. Brazil

9. Which of the following countries border no major ocean or sea? a. Austria b. Paraguay c. Switzerland

d. Malaysia e. Indonesia

d. Niger e. all of the above

d. Australia e. Norway

d. South America e. Central Europe

d. United Arab Emirates e. all of the above

d. France e. Portugal

d. Spain e. United States

d. Kazakhstan e. Suriname

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56 Part 1 • Global business environment

18. If you were shipping your products from your produc- tion facility in Pakistan to market in Australia, they would likely cross the ________________________ Ocean.

19. Papua New Guinea, Guinea-Bissau, and Guinea are alter- native names for the same country. a. true b. false

20. Which of the following countries are island nations? a. New Zealand b. Madagascar c. Japan d. Australia e. all of the above

answers (1) c. South Africa, e. United States; (2) b. Morocco, c. Egypt, e. Niger; (3) b. Venezuela; (4) b. Czech Republic; (5) a. Thai- land, b. Philippines, d. Indonesia; (6) e. South Korea; (7) Black; (8) a. Cambodia, d. Malaysia; (9) e. all of the above; (10) e. Norway; (11) d. South America; (12) e. all of the above; (13) Baltic; (14) a. Italy, c. Turkey, d. France; (15) a. Tokyo and Cape Town (South Africa), c. Tokyo and London (England); (16) d. Spain; (17) e. Suriname; (18) Indian; (19) b. false; (20) e. all of the above.

Self-assessment If you scored 15 correct answers or more, well done! You seem well prepared for your international business journey. If you scored fewer than 8 correct answers, you may wish to review this atlas before moving on to Chapter 2.

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ChaPter 1 • Globalization 57

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58 Part 1 • Global business environment

Edmonton

Anchorage

Vancouver

Fairbanks

Seattle

Los Angeles

San Francisco

San Diego Tijuana

Denver

Phoenix

Tucson

Boston

New York

Ciudad Juárez

Albuquerque

Toronto

Detroit

Montreal Ottawa

Minneapolis

Chicago Milwaukee

Jacksonville

Indianapolis Cincinatti

Des Moines

Nashville

Houston

Dallas

Monterrey

Corpus Cristi

Guadalajara

Havana

Guatemala

Atlanta

Miami

Kingston

Ponce Port-Au-Prince

Nassau

Santo Domingo

San José

Managua El Salvador

Panama

St. Louis Las Vegas

Acapulco

Portland

Tacoma

Helena

Spokane

OmahaSalt Lake City

Carson CitySacramento

Oklahoma City

Austin

Juneau

Kansas City

Wichita

Tulsa Memphis

Bismarck

Jackson

Richmond

Cleveland Pittsburgh

Norfolk

Charlotte Columbia

Augusta

Little Rock

Baltimore

Hartford

Washington, D.C.

Concord

Charleston

Providence

Philadelphia

Tegucigalpa

New Orleans

Whitehorse

Prince Rupert

Hermosillo Chihuahua

Torreón

Leon

Mexico City

Tampico Mérida

San Antonio

Fort Worth

Tampa

Mobile Orlando

Savannah El Paso

Saskatoon Calgary

Regina Winnipeg

Thunder Bay

Moosonee

Churchill Goose Bay

St. John’s

Halifax

C A N A D A

UNITED STATES

MEXICO

GUATEMALA BELIZE

HONDURAS

NICARAGUA

PANAMA COSTA RICA

EL SALVADOR

CUBA

JAMAICA

HAITI

DOMINICAN REPUBLIC

PUERTO RICO

BAHAMAS

BERMUDA

ALASKA

GREENLAND ICELAND

AT L A N T I C

O C E A N

P A C I F I C

O C E A N

A R C T I C O C E A N

C a r i b b e a n S e a

B e a u f o r t S e a

L a b r a d o r S e a

Baf�n Bay

Hudson Bay

B e r i n g S e a

G u l f o f M e x i c o

G u l f o f A l a s k a

Ponce

Port-Au-Prince Santo Domingo

Port of Spain

TURKS & CAICOS ISLANDS

HAITI

DOMINICAN REPUBLIC

PUERTO RICO

BarbudaAnguilla

Antigua

Guadeloupe (Fr.) St. Kitts & Nevis

Virgin Islands

(U.S. & Br.)

Montserrat (Br.)

Domínica Martinique (Fr.)

St. Lucia BarbadosSt. Vincent &

the Grenadines

Grenada

Trinidad

TobagoBonaire (Neth.)

Curaçao (Neth.)

Aruba (Neth.)

ATLANTIC OCEAN

C a r i b b e a n S e a

MAP A.2 North America

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ChaPter 1 • Globalization 59

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

SURINAME FRENCH GUIANA

ECUADOR

B R A Z I LP E R U

B O L I V I A

PARAGUAY

A R G E N T I N A

URUGUAY

CHILE

FALKLAND/MALVINAS ISLANDS (UK)

GUYANA

S O U T H

AT L A N T I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

C a r i b b e a n S e a

Corrientes Posadas

Santiago del Estero

San Miguel de Tucumán

Salta

San Juan

Santiago

Córdoba

Río Cuarto

Santa Fe Paraná

Rosario

Buenos Aires La Plata

Bahia Blanca

Montevideo

Mendoza

Rancagua

Valdivia Temuco

Concepción

Talcahuano

Valparaíso Viña del Mar

Asunción Antofagasta

Iquique

Sucre

La Paz Santa Cruz

Potosi

Arequipa

Cuzco Callao

Lima

Trujillo

Iquitos

Arica

Chiclayo

Guayaquil Ambato

Quito

Popoyán Cali

Buenaventura Manizales

Medellín

BogotáIbagué

Neiva

Pasto

Montería

Bucaramanga

Cartagena

Barranquilla

Cúcuta San Cristóbal

Maracaibo

Barquisimeto Valencia

Caracas

Ciudad Bolívar

Cumaná Maturín

Ciudad Guayana

Mackenzie

Manaus Belém

Teresina

São Luís

Fortaleza

Campina Grande Caruaru Recife

Natal

Salvador

Itabuna

Brasilia Goiânia

Uberlândia Campo Grande Uberaba Belo Horizonte

Juiz dé Fora Niterói

Bauru Araraquara

Campinas São Paulo

Ponta Grossa

Curitiba Santos

Rio de Janeiro

Pôrto Alegre

Rio Grande Pelotas

Santa Maria

Georgetown

Paramaribo

Cayenne

Port of Spain

Port Stanley

Tierra del Fuego

CURAÇAO (Neth.)

MAP A.3 South America

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60 Part 1 • Global business environment

MAP A.4 Europe

WALES

ENGLAND

F R A N C E

BELGIUM

NETHERLANDS GERMANY

LUX.

RUSSIA

LITHUANIA

LATVIA

BELARUS

CZECH REPUBLIC

SLOVAKIA

AUSTRIA SWITZERLAND

LIECH.

SLOVENIA HUNGARY

CROATIA BOSNIA-

HERZEGOVINA

SERBIA

ROMANIA

BULGARIA

MACEDONIA

MONTENEGRO

U K R A I N E

MOLDOVA

GREECE

ALBANIA

CYPRUS MALTA

PORTUGAL

S P A I N

ANDORRA

I T A L Y

SAN- MARINO

MONACO

DENMARK

SWEDEN

POLAND

SCOTLAND

NORTHERN IRELAND

ICELAND

R U S S I A NORWAY

FINLAND

ESTONIA

IRELAND

UNITED KINGDOM

AT L A N T I C

O C E A N

A R C T I C O C E A N

Ba lt

ic S

e a

N o r t h S e a

B a y o f

B i s c a y

Tyrrhenian Sea

Ionian Sea

Black Sea

N o r w e g i a n S e a

M e d i t e r r a n

e a n S e a

A driatic Sea

English Channel

Crete

BALEARIC IS.

Corsica

Sicily

FAEROE IS. (Denmark)

SHETLAND IS. (U.K.)

Sardinia

ORKNEY IS. (U.K.)

Malaga

Madrid

Seville Murcia

Lisbon

Marseilles

Valencia

Palma

Barcelona

Palermo

Valleta Iráklion

Athens

Istanbul

Thessaloniki

Tirana

So�a

Skopje

Naples

Rome

Minsk Hamburg

Berlin

Gdansk

Poznan

Vilnius

Leipzig Warsaw

Krakow

Lódz

L’vov

Belgrade

Zagreb

Budapest

Munich Stuttgart

Vienna Zurich

Bern Bratislava

Bologna

Florence

Venice

Genoa

Paris

Bordeaux Lyon

Nice

Bilbao

Toulouse

London

Birmingham

Liverpool

Cardiff The Hague

Brussels

Frankfurt

ManchesterDublin

Belfast

Cork

Edinburgh Glasgow

Amsterdam

Dortmund Bonn

Copenhagen

Prague

Riga

Helsinki Bergen

Oslo

Göteborg

Malmo

Stockholm

St. Petersburg

Tallinn

Kiev Kharkov

Kursk

Moscow

Nizhniy Novgorod

Smolensk

Arkhangel’sk

Oulu

Porto

Reykjavik

Milan

Gibraltar

Messina

Taranto

Bari

Odessa

Sevastopol

Chisinau

Rostov

Bucharest

Timisoara

Podgorica

Le Havre

StrasbourgNantes St. Nazaire

Cartagena

Graz

Ljubljana

Andorra la Vella

La Coruña

Sarajevo

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ChaPter 1 • Globalization 61

MAP A.5 Asia

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62 Part 1 • Global business environment

MAP A.6 Africa

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MAP A.7 Oceania

ChaPter 1 • Globalization 63

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64

A Look Ahead Chapter 3 describes the political and legal systems of nations. We will learn how different national systems affect international businesses and how managers can reduce political risk. We also will discover how ethics and social responsibility affect inter- national business.

A Look at This Chapter This chapter introduces the impor- tant role of culture in international business. We explore the main ele- ments of culture and how they affect business policies and practices. We learn different methods of classifying cultures and how these methods can be applied to business.

A Look Back Chapter 1 introduced us to interna- tional business. We examined the impact of globalization on markets and production, the forces behind globalization’s expansion, and each main argument in the debate over globalization. We also profiled the kinds of companies engaged in inter- national business.

4. Explain how the physical environment and technology influence culture.

5. Describe the two main frameworks used to classify cultures and explain their practical use.

1. Describe culture and explain the significance of both national culture and subcultures.

2. Identify the components of culture and describe their impact on international business.

3. Describe cultural change and explain how companies and culture affect each other.

Learning Objectives After studying this chapter, you should be able to

cross-cultural business

chapter twO Part 2 national business environments

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65

Hold tHe Pork, Please!

Bonn, Germany—“Kids and grownups love it so, the happy world of Haribo!” So goes the phrase that drives sales of Haribo gummi candies worldwide. In operation since the 1920s, Germany-based Haribo (www.haribo.com) gets its name from that of the company’s founder, Hans Riegel Bonn.

Haribo candies, with names such as Gold Bears and Horror Mix, are available in 46 shapes, including soda bottles and glowworms. Haribo supplies 105 countries from its 18 factories at home and abroad, producing over 100 million gummi candies a day. But despite its success, Haribo was not meeting the needs of a globally dispersed subculture potentially worth $2 billion annually. The culprit: the pork-based substance that gives the candy its sticky, rubbery feel makes the candy off-limits to Muslims and Jews who adhere to a strict religious diet.

So the company embarked on a four-year mission to create a gummi candy free of the pork-based gela- tin. “The first time we made it, we got a marmalade you could spread on bread,” reported neville Finlay, the British exporter who ships the new product under his own brand. “And at the other extreme was some- thing you could fill a swimming pool with and drive a truck across,” he added. Haribo found success eventu- ally with a bacteria-based compound already common in salad dressings and sauces.

Later, a local supplier committed a language blunder—a common occurrence in international business. The printing on the first packages of candies destined for Hebrew communities was backward—Hebrew is read from right to left, not left to right like English. But today production is going smoothly. Haribo even has a Jewish rabbi (for kosher candies) or a Muslim cleric (for halal can- dies) inspect ingredients and oversee production to ensure that it adheres to religious customs.

As you read this chapter, consider all the ways culture affects international busi- ness and how companies affect cultures around the world.1

Source: Roy McMahon/Corbis

MyManagementLab® Improve Your Grade!

Over 10 million students improved their results using the Pearson MyLabs. Visit www.mymanagementlab.com for simulations, tutorials, and end-of-chapter problems.

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66 Part 2 • NatioNal BusiNess eNviroNmeNts

This chapter is the first of three that describe the links between international business activity and a nation’s business environment. We discuss these topics early because they help determine how commerce is conducted in different countries. Success in interna- tional business can often be traced directly to a deep understanding of some aspect of a people’s commercial environment. This chapter explores the influence of culture on international busi- ness activity. Chapter 3 presents the roles of political and legal systems, and Chapter 4 examines the impact of economic systems and emerging markets on international business.

Assessment of a nation’s overall business climate is typically the first step in analyzing its potential as a host for international commercial activity. This means addressing some important questions, such as the following: What language(s) do the people speak? What is the climate like? Are the local people open to new ideas and new ways of doing business? Do government officials and the people want our business? Is the political situation stable enough so that our assets and employees are not placed at unacceptable levels of risk? Answers to these kinds of questions—plus statistical data on items such as income level and labor costs—allow companies to evaluate the attractiveness of a location as a place for doing business.

We address culture first in our discussion of national business environments because of its pivotal role in all international commercial activity. Whether we are discussing an entrepreneur running a small import/export business or a huge global firm directly involved in more than 100 countries, people are at the center of all business activity. When people from around the world come together to conduct business, they bring with them different backgrounds, assumptions, expectations, and ways of communicating—in other words, culture.

We begin this chapter by exploring the influence of nation-states and subcultures on a peo- ple’s overall cultural image. next, we learn the importance of values, attitudes, manners, and customs in any given culture. We then examine ways in which social institutions, religion, lan- guage, and other key elements of culture affect business practices and national competitiveness. We close this chapter with a look at two alternative methods for classifying cultures.

what is culture? When traveling in other countries, we often perceive differences in the way people live and work. In the United States, dinner is commonly eaten around 6:00 p.m.; in Spain, it’s not served until 8:00 or 9:00 p.m. In the United States, most people shop in large supermarkets once or twice a week; Italians tend to shop in smaller local grocery stores nearly every day. Essentially, we are experiencing differences in culture—the set of values, beliefs, rules, and institutions held by a specific group of people. Culture is a highly complex portrait of a people. It includes everything from high tea in England to the tropical climate of Barbados, to Mardi Gras in Brazil.

Before we learn about the individual components of culture, let’s look at two important con- cepts: one that should be discouraged and one that should be fostered.

Avoiding EthnocEntricity Ethnocentricity is the belief that one’s own ethnic group or culture is superior to that of others. Ethnocentricity can seriously undermine international business projects. It causes people to view other cultures in terms of their own and, therefore, disregard the beneficial characteristics of other cultures. Ethnocentricity played a role in many stories, some retold in this chapter, of companies that failed when they tried to implement a new business practice in a subsidiary abroad. Failure can occur when managers ignore a fundamental aspect of the local culture. This can provoke a backlash from the local population, its government, or nongovernmental groups. As suppliers and buyers increasingly treat the world as a single, interconnected marketplace, managers should eliminate the biases inherent in ethnocentric thinking. To read about how companies can foster a nonethnocentric perspective, see this chapter’s Culture Matters feature, titled “Creating a Global Mindset .”

dEvEloping culturAl litErAcy As globalization continues, people directly involved in international business increasingly benefit from a certain degree of cultural literacy—detailed knowledge about a culture that enables a person to work happily and effectively within it. Cultural literacy improves people’s ability to manage employees, market products, and conduct negotiations in other countries. Global brands such as Procter & Gamble (www.pg.com) and Apple (www.apple.com) have a competitive advantage because consumers know and respect

culture Set of values, beliefs, rules, and institutions held by a specific group of people.

ethnocentricity Belief that one’s own ethnic group or culture is superior to that of others.

cultural literacy Detailed knowledge about a culture that enables a person to work happily and effectively within it.

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these highly recognizable names. Yet, cultural differences often dictate alterations in some aspect of a business in order to suit local tastes and preferences. The culturally literate manager who compensates for local needs and desires brings his or her company closer to customers and improves the firm’s competitiveness.

As you read through the concepts and examples in this chapter, try to avoid reacting with ethnocentricity while developing your own cultural literacy. Because these two concepts are central to the discussion of many international business topics, you will encounter them through- out this book. In the book’s final chapter (Chapter 16), we explore specific types of cultural training that companies use to develop their employees’ cultural literacy.

National Culture and Subcultures Rightly or wrongly, we tend to invoke the concept of the nation-state when speaking of culture. In other words, we usually refer to British and Indonesian cultures as if all Britons and all Indonesians are culturally identical. We do this because we are conditioned to think in terms of national culture. But this is at best a generalization. For example, the British population consists of the English as well as the Scottish and Welsh peoples. And people in remote parts of Indonesia build homes in treetops even as people in the nation’s developed regions pursue ambitious economic development projects. Let’s take a closer look at the diversity that lies beneath the veneer of national culture.

nAtionAl culturE nation-states support and promote the concept of national culture by building museums and monuments to preserve the legacies of important events and people. nation-states also intervene in business to preserve other treasures of national culture. Most nations, for example, regulate culturally sensitive sectors of the economy, such as filmmaking and broadcasting. France continues to voice fears that its language is being tainted with English and its media with U.S. programming. To stem the English invasion, French laws limit the use of English in product packaging and storefront signs. At peak listening times, at least 40 percent of all radio station programming is reserved for French artists. Similar laws apply to television broadcasting. The French government even fined the local branch of a U.S. university for failing to provide a French translation on its English-language website.

Cities, too, get involved in enhancing national cultural attractions, often for economic rea- sons. Lifestyle enhancements to a city can help it attract companies, which benefit by having

• Building Global Mentality. Companies can apply personality- testing techniques to measure the global aptitude of managers. A global-mindset test evaluates an individual’s openness and flexibility, understanding of global principles, and strategic im- plementation abilities. It can also identify areas in which training is needed and generate a list of recommended programs.

• Flexibility Is Key. The more behavioral the issues, the greater the influence of local cultures. Japanese and Korean managers are more likely than U.S. managers to wait for directions and consult peers on decisions. Western managers posted in the Middle East must learn to work within a rigid hierarchy in order to be successful. And although showing respect for others is universally valued, respect is defined differently from country to country.

• Want to Know More? Visit the Center for Creative Leader- ship (www.ccl.org), The Globalist (www.theglobalist.com), and Transnational Management Associated (www.tmaworld.com).

in this era of globalization, companies need employees who function without the blinders of ethnocentricity. Here are some ways managers can develop a global mindset:

• Cultural Adaptability. Managers need the ability to alter their behavior when working with people from other cultures. The first step in doing this is to develop one’s knowledge of unfa- miliar cultures. The second step is to act on that knowledge to alter behavior to suit cultural expectations. The manager with a global mindset can evaluate others in a culturally unbiased way and can motivate and lead multicultural teams.

• Bridging the Gap. A large gap can emerge between theory and practice when Western management ideas are applied in Eastern cultures. Whereas U.S. management principles are often accepted at face value in businesses throughout the world, U.S. business customs are not. In Asia, for example, Western man- agers might try implementing “collective leadership” practices more in line with Asian management styles.

Culture Matters Creating a Global Mindset

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an easier task retaining top employees. The Guggenheim Museum in Bilbao, Spain (www. guggenheim-bilbao.es), designed by Frank Gehry, revived that old Basque industrial city. And Hong Kong’s government enhanced its cultural attractions by building a Hong Kong Disney to lure businesses that may otherwise locate elsewhere in Asia.

SubculturES A group of people who share a unique way of life within a larger, dominant culture is called a subculture. A subculture can differ from the dominant culture in language, race, lifestyle, values, attitudes, or other characteristics.

Although subcultures exist in all nations, they are often glossed over by our impressions of national cultures. For example, the customary portrait of Chinese culture often ignores the fact that China’s population includes more than 50 distinct ethnic groups. Decisions regarding prod- uct design, packaging, and advertising should consider each group’s distinct culture. Marketing campaigns also need to recognize that Chinese dialects in the Shanghai and Canton regions dif- fer from those in the country’s interior; not everyone is fluent in the official Mandarin dialect.

A multitude of subcultures also exists within the United States. of 300 million U.S. residents, around 80 million are black, Latino, or Asian. Initially, Frito Lay (www.fritolay.com) had trouble convincing 46 million U.S. Latinos to try its Latin-flavored versions of Lay’s and Doritos chips. But then Frito Lay brought four popular brands into the U.S. market from its Mexican subsidiary, Sabritas. The gamble paid off. Sales of the Sabritas brand doubled to more than $100 million over a two-year period.

Cultural boundaries do not always correspond to political boundaries. In other words, sub- cultures sometimes exist across national borders. People who live in different nations but who share the same subculture can have more in common with one another than with their fellow nationals. These subcultures may share purchasing behaviors rooted in lifestyle or values that allow them to be marketed to with a single worldwide campaign.

QuiCk study 1 1. Define culture. How does ethnocentricity distort one’s view of other cultures? 2. What is cultural literacy? Why should businesspeople understand other cultures? 3. How do nation-states and subcultures influence a people’s overall cultural image?

subculture A group of people who share a unique way of life within a larger, dominant culture.

subculture members define themselves by their style (such as clothing, hair, tattoos) and may rebel against mass consumerism. london, england’s Camden district is famous for its historic markets and as a gathering place for alternative subcultures such as goth, punk, and emo. Businesses like Facebook help subcultures to spread quickly worldwide. Can you think of a company that targets an international subculture with its products?

Source: nik Wheeler Danita Delimont Photography/newscom

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components of culture A culture is defined by more than the actions of nation-states and the presence of subcultures. A people’s culture also includes what they consider beautiful and tasteful, their underlying beliefs, their traditional habits, and the ways in which they relate to one another and their surroundings. These elements of culture are the building blocks of society on which all else rests. Let’s take a detailed look at each main component of culture (see Figure 2.1): aesthetics, values and atti- tudes, manners and customs, social structure, religion, personal communication, education, and physical and material environments.

Aesthetics What a culture considers “good taste” in the arts (including music, painting, dance, drama, and architecture), the imagery evoked by certain expressions, and the symbolism of certain colors is called aesthetics.

Aesthetics are important when a company does business in another culture. The selection of appropriate colors for advertising, product packaging, and even work uniforms can improve the odds of success. For example, green is a favorable color in Islam and adorns the national flags of most nations of the Middle East. Companies take advantage of the emotional attachment to the color green in these countries by incorporating it into a product, its packaging, or its promotion. Across much of Asia, on the other hand, green is associated with sickness. In Europe, Mexico, and the United States, the color of death and mourning is black; in Japan and most of Asia, it’s white.

Music is deeply embedded in culture and, when used correctly, can be a clever and creative addition to a promotion; if used incorrectly, it can offend the local population. The architecture of buildings and other structures should also be researched to avoid making cultural blunders attributable to the symbolism of certain shapes and forms.

The importance of aesthetics is just as great when going international using the Internet. Many companies exist that teach corporations how to globalize their Internet presence. These companies often provide professional guidance on how to adapt websites to account for cultural preferences such as color scheme, imagery, and slogans. The advice of specialist firms can be particularly helpful for entrepreneurs and small businesses because they rarely have in-house employees well versed in other cultures.

Values and Attitudes Ideas, beliefs, and customs to which people are emotionally attached are called values. Values include concepts such as honesty, freedom, and responsibility. Values are important to business because they affect a people’s work ethic and desire for material possessions. For example, whereas people in Singapore value hard work and material success, people in Greece value leisure and a modest lifestyle. The United Kingdom and the United States value individual freedom; Japan and South Korea value group consensus.

aesthetics What a culture considers “good taste” in the arts, the imagery evoked by certain expressions, and the symbolism of certain colors.

values Ideas, beliefs, and customs to which people are emotionally attached.

Physical & Material

Environments

Education

Personal Communication

Religion

Social Structure

Manners &

Customs

Values &

Attitudes

Aesthetics

C u l t u r e

Figure 2.1 components of culture

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The influx of values from other cultures can be fiercely resisted. Many Muslims believe drugs, alcohol, and certain kinds of music and literature will undermine conservative values. This is why the Arab world’s reality TV programs tend to be short-lived. In Bahrain, the local version of Big Brother was canceled after people objected to the program’s format, which involved young unmarried adults of both sexes living under the same roof. The Lebanon-based program Hawa Sawa (On Air Together) was shut down because its “elimidate” format (a young man gradually eliminates women to finally select a date) was perceived as too Western. And Indonesia’s national Police denied Lady Gaga a permit to perform despite her concert being sold out. She is the first foreign artist ever to be denied a permit by authorities there. Conser- vative religious groups accused Gaga of “being vulgar, corrupting the morals of the country’s youth, and worshiping Satan.”2

Attitudes are positive or negative evaluations, feelings, and tendencies that individuals har- bor toward objects or concepts. Attitudes reflect underlying values. For example, a Westerner would be expressing an attitude if he or she were to say, “I do not like the Japanese purification ritual because it involves being naked in a communal bath.” The Westerner quoted here might hold conservative beliefs regarding exposure of the body.

Similar to values, attitudes are learned from role models, including parents, teachers, and religious leaders. Attitudes also differ from one country to another because they are formed within a cultural context. But unlike values (which generally concern only important matters), people hold attitudes toward both important and unimportant aspects of life. And whereas values remain quite rigid over time, attitudes are more flexible.

A “European” attitude has sunk into the psyche of young people across Europe as companies from different countries merge, industries consolidate, and nations grow closer together in the European Union. Many young people in Europe today consider themselves to be “European” as much as they identify with their individual national identities. Still, the underly- ing values of young Europeans tend to remain similar to those of their parents. Such cultural knowledge can help managers decide whether to adapt promotions to local attitudes for maxi- mum effectiveness.

Let’s now look at how people’s attitudes differ toward three important aspects of life that directly affect business activities: time, work, and cultural change.

AttitudES towArd timE People in many Latin American and Mediterranean cultures are casual about their use of time. They maintain flexible schedules and would rather enjoy their time than sacrifice it to unbending efficiency. Businesspeople, for example, may arrive after the scheduled meeting time and prefer to build personal trust before discussing business. not surprisingly, it usually takes longer to conduct business in these parts of the world than in the United States or northern Europe.

By contrast, people in Japan and the United States typically arrive promptly for meetings, keep tight schedules, and work long hours. The emphasis on using time efficiently reflects the underlying value of hard work in both these countries. Yet people in Japan and the United States sometimes differ in how they use their time at work. For example, U.S. employees strive toward workplace efficiency and may leave work early if the day’s tasks are done, reflecting the value placed on producing individual results. But in Japan, although efficiency is prized, it is equally important to look busy in the eyes of others even when business is slow. A Japanese employee would not leave work early even if he or she finished the day’s task ahead of schedule. Japanese workers want to demonstrate their dedication to superiors and coworkers—an attitude grounded in values such as the concern for group cohesion, loyalty, and harmony.

AttitudES towArd work Some cultures display a strong work ethic; others stress a more balanced pace in juggling work and leisure. People in southern France like to say they work to live, whereas people in the United States live to work. The French say work is a means to an end for them, whereas work is an end in itself in the United States. not surprisingly, the lifestyle in southern France is slower-paced. People tend to concentrate on earning enough money to enjoy a relaxed, quality lifestyle. Businesses practically close down during August, when many workers take month-long paid holidays, often outside the country.

attitudes Positive or negative evaluations, feelings, and tendencies that individuals harbor toward objects or concepts.

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People tend to launch their own businesses when capital is available for new business start- ups and when the cultural stigma of entrepreneurial failure is low. In European countries, start- ups are considered quite risky, and capital for entrepreneurial ventures can be scarce. Moreover, if an entrepreneur’s venture goes bust, he or she can find it very hard to obtain financing for future projects because of the stigma of failure. This remains true despite some progress recently. The opposite attitude tends to prevail in the United States. A prior bankruptcy is sometimes con- sidered a valuable learning experience (assuming lessons were learned) when referenced in a business plan. As long as U.S. bankers or venture capitalists see promising business plans, they are generally willing to loan money. Today, many European nations are working to foster an entrepreneurial spirit similar to that of the United States.

AttitudES towArd culturAl chAngE A cultural trait is anything that represents a culture’s way of life, including gestures, material objects, traditions, and concepts. Such traits include bowing to show respect in Japan (gesture), a Buddhist temple in Thailand (material object), celebrating the Day of the Dead in Mexico (tradition), and practicing democracy in the United States (concept). Let’s look more closely at the role of cultural traits in causing cultural change over time and the relation between international companies and cultural change.

Cultural Diffusion The process whereby cultural traits spread from one culture to another is called cultural diffusion. As new traits are accepted and absorbed into a culture, cultural change occurs naturally and, as a rule, gradually. Globalization and technological advances are increasing the pace of both cultural diffusion and cultural change. The global spread of media today along with the expanding reach of the Internet and services like YouTube play a role in cultural diffusion. These forces expose people of different (sometimes isolated) nations to the cultural traits and ideas of other cultures.

When Companies Change Cultures International companies are often agents of cultural change. As trade and investment barriers fall, for example, U.S. consumer-goods and entertainment companies are moving into untapped markets. Critics in some of these places charge that, in exporting the products of such firms, the United States is practicing cultural imperialism—the replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another.

cultural trait Anything that represents a culture’s way of life, including gestures, material objects, traditions, and concepts.

cultural diffusion Process whereby cultural traits spread from one culture to another.

cultural imperialism Replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another.

Cultural diffusion is a powerful force of cultural change. traditional cultures are especially vulnerable when introduced to the lifestyles of people in wealthy, industrialized nations. satellite tV and the Internet are highly effective at exposing people to the cultural traits of other societies. do you think people in this village in northern Namibia view the world any differently since they acquired satellite tV?

Source: Thomas Schulze/newscom

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Fears of cultural imperialism still drive some French to oppose the products of the Walt Disney Company (www.disney.com) and its Disneyland Paris theme park. They fear “Mickey and Friends” could replace traditional characters rooted in French culture. McDonald’s (www. mcdonalds.com) is also sometimes charged with cultural imperialism. It is reported that the aver- age Japanese child thinks McDonald’s was invented in Japan and exported to the United States. Chinese children consider “Uncle” McDonald to be “funny, gentle, kind, and understanding.” Meanwhile, politicians in Russia decry the “Snickerization” of their culture—a snide term that refers to the popularity of the Snickers candy bar made by Mars Incorporated (www.mars.com). And when the Miss World Pageant was held in India, conservative groups criticized Western corporate sponsors for spreading the message of consumerism and portraying women as sex objects.

Sensitivity to the cultures in which they operate can help companies avoid charges of cul- tural imperialism. Firms must focus not only on meeting people’s product needs but also on how their activities and products affect people’s traditional ways and habits. Rather than view their influence on culture as the inevitable consequence of doing business, companies can take several steps to soften those effects. For example, policies and practices that are at odds with deeply held beliefs can be introduced gradually. Managers could also seek the advice of highly respected local individuals such as elders, who fulfill key societal roles in many developing countries. And businesses should always make clear to local workers the benefits of any proposed changes that are closely linked to cultural traits.

An area in which U.S. companies may be changing the workplace in other cultures is fair- ness in the workplace. Just a few years ago, sexual harassment lawsuits were a peculiar phe- nomenon of U.S. culture. Increased awareness of this issue in other nations coincides with the international outsourcing of jobs. As U.S. companies outsource jobs to other nations, they are being held accountable for how these subcontractors treat their employees. In the process, U.S. companies export the values of the U.S. workplace, such as what constitutes sexual harassment.

When Cultures Change Companies Culture often forces companies to adjust their business policies and practices. Managers from the United States, for example, often encounter cultural differences that force changes in how they motivate employees in other countries. Managers sometimes use situational management—a system in which a supervisor walks an employee through every step of an assignment or task and monitors the results at each stage. Although time-consuming, this technique helps employees fully understand the scope of their jobs and clarifies the boundaries of their responsibilities.

other types of changes might also be needed to suit local culture. Vietnam’s traditional, agriculture-based economy means that people’s concept of time revolves around the seasons. The local “timepiece” is the monsoon, not the clock. Western managers, therefore, modify their approach and take a more patient, long-term view of business by modifying employee evalua- tion and reward systems. For example, individual criticism should be delivered privately to save employees from “losing face” among coworkers. Individual praise for good performance can be delivered either in private or in public, if done carefully. The Vietnamese place great value on group harmony, so an individual can be embarrassed if singled out publicly as being superior to the rest of the work unit.

is a global Culture emerging? What does the rapid pace of cultural change worldwide mean for international business? Are we witnessing the emergence of a new, truly global culture in which all people share similar lifestyles, values, and attitudes? The rapid pace of cultural diffusion today is causing cultures to converge to some extent. The successful TV show American Idol, where aspiring singers compete for a chance to become a celebrity, is one example of global pop culture. The U.S. show is one of 39 clones around the world based on the original British show, Pop Idol. The same company helped develop and market The Apprentice, another successful global TV platform.3

It might be true that people in different cultures are developing similar perspectives on cer- tain issues. But it seems that just as often as we see signs of an emerging global culture, we discover some new habit unique to one culture. When that happens, we are reminded of the roles of history and tradition in defining culture. Though values and attitudes are under continually

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greater pressure from globalization, their transformation will be gradual rather than abrupt because they are deeply ingrained in culture. This is why the managers of tomorrow must work to develop their knowledge and understanding of other cultures.

QuiCk study 2 1. What is meant by a culture’s aesthetics? Give several examples. 2. Compare and contrast values and attitudes. How do cultures differ in their attitudes toward

time, work, and cultural change? 3. Describe the process of cultural diffusion. Why should international businesses be sensitive

to charges of cultural imperialism?

Manners and Customs When doing business in another culture, it is important to understand a people’s manners and customs. At a minimum, understanding manners and customs helps managers avoid mak- ing embarrassing mistakes or offending people. In-depth knowledge, meanwhile, improves the ability to negotiate in other cultures, market products effectively, and manage interna- tional operations. Let’s explore some important differences in manners and customs around the world.

mAnnErS Appropriate ways of behaving, speaking, and dressing in a culture are called manners. Jack Ma founded Alibaba (www.alibaba.com) as a way for suppliers and buyers to increase efficiency by cutting through layers of intermediaries and trading companies. But he realized early that his Chinese clients needed training in business etiquette to cross the cultural divide and do business with people from Western cultures. So Alibaba offers seminars on business manners that instruct clients to spend more time chitchatting with clients and conversing more casually.4

Conducting business during meals is common practice in the United States. In Mexico, however, it is poor manners to bring up business at mealtime unless the host does so first. Busi- ness discussions in Mexico typically begin when coffee and brandy arrive. Likewise, toasts in the United States tend to be casual and sprinkled with lighthearted humor. In Mexico, where a toast should be philosophical and full of passion, a lighthearted toast would be offensive.

cuStomS When habits or ways of behaving in specific circumstances are passed down through generations, they become customs. Customs differ from manners in that they define appropriate habits or behaviors in specific situations. For example, the Japanese tradition of throwing special parties for young women and men who turn age 20 is a custom. Let’s examine two types of customs and see how instances of each vary around the world.

Folk and Popular Customs A folk custom is behavior, often dating back several generations, that is practiced by a homogeneous group of people. Celebrating the Dragon Boat Festival in China and the art of belly dancing in Turkey are both folk customs. A popular custom is behavior shared by a heterogeneous group or by several groups. Popular customs can exist in just one culture or in two or more cultures at once. Wearing blue jeans and playing golf are both popular customs across the globe. Folk customs that spread by cultural diffusion to other regions develop into popular customs.

Despite their appeal, popular customs can be seen as a threat by some members of a culture. Authorities in a strict religious district of Indonesia’s Aceh province banned Muslim women from wearing tight clothing, short skirts, and blue jeans. Religious police set up raids to dis- tribute long skirts to women found violating the ban and to confiscate their offending garments. Violators were released from custody after they provided their identities to police and received religious advice.5

We can also distinguish between folk and popular food. Popular Western-style fast food, for instance, is rapidly replacing folk food around the world. Widespread acceptance of “burgers ’n’ fries” (born in the United States) and “fish ’n’ chips” (born in Britain) is altering deep-seated

manners Appropriate ways of behaving, speaking, and dressing in a culture.

customs Habits or ways of behaving in specific circumstances that are passed down through generations in a culture.

folk custom Behavior, often dating back several generations, that is practiced by a homogeneous group of people.

popular custom Behavior shared by a heterogeneous group or by several groups.

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dietary traditions in many Asian countries, especially among young people. In Japan and South Korea today, these popular foods are even becoming a part of home-cooked meals.

The Business Custom of gift giving Although giving token gifts to business and government associates is customary in many countries, the proper type of gift varies. A knife, for example, should not be offered to associates in Russia, France, or Germany, where it signals the severing of a relationship. In Japan, gifts must be wrapped in such a delicate way that it is wise to ask someone trained in the practice to do the honors. It is also Japanese custom for the giver to protest that the gift is small and unworthy of the recipient and for the recipient to not open the gift in front of the giver. This tradition does not endorse trivial gifts but is simply a custom.

Cultures differ in their legal and ethical rules against giving or accepting bribes. Large gifts to business associates are particularly suspicious. The U.S. Foreign Corrupt Practices Act, which prohibits companies from giving large gifts to government officials in order to win business favors, applies to U.S. firms operating at home and abroad. Yet in many cultures, bribery is woven into a social fabric that has worn well for centuries. In Germany, bribe payments may even qualify for tax deductions. Though many governments worldwide are adopting stricter measures to control bribery, in some cultures large gifts are still an effective way to obtain contracts, enter markets, and secure protection from competitors. See the Manager’s Briefcase, titled “A Globetrotter’s Guide to Meetings,” for additional pointers on manners and customs when abroad on business.

Social Structure Social structure embodies a culture’s fundamental organization, including its groups and insti- tutions, its system of social positions and their relationships, and the process by which its resources are distributed. Social structure plays a role in many business decisions, including production-site selection, advertising methods, and the costs of doing business in a country. Three important elements of social structure that differ across cultures are social group associa- tions, social status, and social mobility.

SociAl group ASSociAtionS People in all cultures associate themselves with a variety of social groups—collections of two or more people who identify and interact with each other. Social groups contribute to each individual’s identity and self-image. Two groups that play especially important roles in affecting business activity everywhere are family and gender.*

social structure A culture’s fundamental organization, including its groups and institutions, its system of social positions and their relationships, and the process by which its resources are distributed.

*We put these two “groups” together for the sake of convenience. Strictly speaking, a gender is not a group. Sociologists regard it as a category—people who share some sort of status. A key to group membership is mutual interaction. Individuals in categories know that they are not alone in holding a particular status, but the vast majority remain strangers to one another.

social group Collection of two or more people who identify and interact with each other.

large multinationals need top managers who are comfortable liv- ing, working, and traveling worldwide. Here are a few guidelines for a manager to follow when meeting colleagues from other cultures:

• Familiarity. Avoid the temptation to get too familiar too quickly. Use titles such as “doctor” and “mister.” Switch to a first-name basis only when invited to do so, and do not shorten people’s names from, say, Catherine to Cathy.

• Personal Space. Culture dictates what is considered the appropriate distance between two people. Middle Eastern and Latin American nations close the gap significantly. And in Latin America the man-to-man embrace can occur regularly in business.

• Religious Values. Be cautious so that your manners do not offend people. Former Secretary of State Madeline Albright acquired the nickname “The Kissing Ambassador” for

kissing the Israeli and Palestinian leaders of those two religious peoples.

• Business Cards. In Asia, business cards are considered an extension of the individual. Business cards in Japan are typically exchanged after a bow, with two hands extended, and the wording facing the recipient. Leave the card on the table for the entire meeting—don’t quickly stuff it in your wallet or toss it into your briefcase.

• Comedy. Use humor cautiously because it often does not trans- late well. Avoid jokes that rely on wordplay and puns or events in your country, of which local people might have little or no knowledge.

• Body Language. Do not “spread out” by hanging your arms over the backs of chairs, but don’t be too stiff either. Look peo- ple in the eye lest they deem you untrustworthy, but don’t stare too intently in a challenging manner.

Manager's BriefCase A Globetrotter’s Guide to Meetings

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Family There are two different types of family groups:

• The nuclear family consists of a person’s immediate relatives, including parents, brothers, and sisters. This concept of family prevails in Australia, Canada, the United States, and much of Europe.

• The extended family broadens the nuclear family and adds grandparents, aunts and uncles, cousins, and relatives through marriage. It is an important social group in much of Asia, the Middle East, north Africa, and Latin America.

Extended families can present some interesting situations for businesspeople unfamiliar with the concept. In some cultures, owners and managers obtain supplies and materials from another company at which someone from the extended family works. Gaining entry into such family arrangements can be difficult because quality and price are not sufficient motives to ignore family ties.

In extended-family cultures, managers and other employees often try to find jobs for rela- tives inside their own companies. This practice (called nepotism) can present a challenge to the human resource operations of a Western company, which typically must establish explicit poli- cies on the practice.

gender Gender refers to socially learned traits associated with, and expected of, men or women. It includes behaviors and attitudes such as styles of dress and activity preferences. It is not the same thing as sex, which refers to the biological fact that a person is either male or female.

Though many countries have made great strides toward gender equality in the workplace, others have not. In countries where women are denied equal opportunity in the workplace, their unemployment rate can easily be double that for men and their pay half that for men in the same occupation. Women’s salaries can be so low and the cost of childcare so high that it simply makes more sense for mothers to stay home with their children. Caring for children and per- forming household duties are also likely considered women’s work and not the responsibility of the entire family.

SociAl StAtuS Another important aspect of social structure is the way a culture divides its population according to status—that is, according to positions within the structure. Although some cultures have only a few categories, others have many. The process of ranking people into social layers or classes is called social stratification.

Three factors that normally determine social status are family heritage, income, and occupation. In most industrialized countries royalty, government officials, and top business leaders occupy the highest social layer. Scientists, medical doctors, and others with a uni- versity education occupy the middle layer. Below are those with vocational training or a secondary-school education, who dominate the manual and clerical occupations. Although rankings are fairly stable, they can and do change over time. For example, because Confu- cianism (a major Chinese religion) stresses a life of learning, not commerce, Chinese cul- ture frowned on businesspeople for centuries. In modern China, however, people who have obtained wealth and power through business are now considered important role models for younger generations.

SociAl mobility Moving to a higher social class is easy in some cultures but difficult or impossible in others. Social mobility is the ease with which individuals can move up or down a culture’s “social ladder.” For much of the world’s population today, one of two systems regulates social mobility: a caste system or a class system.

Caste System A caste system is a system of social stratification in which people are born into a social ranking, or caste, with no opportunity for social mobility. India is the classic example of a caste culture. Although the Indian constitution officially bans discrimination by caste, its influence persists. Little social interaction occurs between castes, and marrying out of one’s caste is taboo. opportunities for work and advancement are defined within the system, and certain occupations are reserved for the members of each caste. For example, a member of a lower caste cannot supervise someone of a higher caste because personal clashes would be inevitable.

social stratification Process of ranking people into social layers or classes.

social mobility Ease with which individuals can move up or down a culture’s “social ladder.”

caste system System of social stratification in which people are born into a social ranking, or caste, with no opportunity for social mobility.

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76 Part 2 • NatioNal BusiNess eNviroNmeNts

The caste system forces Western companies to make some hard ethical decisions when entering the Indian marketplace. They must decide whether to adapt to local human resource policies in India or to import their own from the home country. As globalization penetrates deeper into Indian culture, the nation’s social system and international companies will face many challenges.

Class System A class system is a system of social stratification in which personal ability and actions determine social status and mobility. It is the most common form of social stratification in the world today. But class systems vary in the amount of mobility they allow. Highly class- conscious cultures offer less mobility and, not surprisingly, experience greater class conflict. Across Western Europe, for example, wealthy families have retained power for generations by restricting social mobility. Countries there must sometimes deal with class conflict in the form of labor–management disputes that can increase the cost of doing business.

Conversely, lower levels of class consciousness encourage mobility and lessen conflict. A more cooperative atmosphere in the workplace tends to prevail when people feel that a higher social standing is within their reach. Most U.S. citizens share the belief that hard work can improve their standard of living and social status. People attribute higher status to greater income or wealth but often with little regard for family background.

QuiCk study 3 1. How do manners and customs differ? Give examples of each. 2. List several manners to consider when doing business abroad. 3. Define folk and popular customs. How can a folk custom become a popular custom? 4. Define social structure. How do social rank and social mobility affect business?

Religion Human values often originate from religious beliefs. Different religions take different views of work, savings, and material goods. Identifying why they do so may help us understand business practices in other cultures. Knowing how religion affects business is especially important in countries with religious governments.

Map 2.1 (on pages 78–79) shows where the world’s major religions are practiced. Religion is not confined to national political boundaries but can exist in different regions of the world simultaneously. It is also common for several or more religions to be practiced within a single nation. In the following sections, we explore Christianity, Islam, Hinduism, Buddhism, Confu- cianism, Judaism, and Shinto. We examine their potential effects, both positive and negative, on international business activity.

chriStiAnity Christianity was born in Palestine around 2,000 years ago among Jews who believed that God sent Jesus of nazareth to be their savior. Although Christianity boasts more than 300 denominations, most Christians belong to the Roman Catholic, Protestant, or Eastern orthodox churches. With 2 billion followers, Christianity is the world’s single largest religion. The Roman Catholic faith asks its followers to refrain from placing material possessions above God and others. Protestants believe that salvation comes from faith in God and that hard work gives glory to God—a tenet known widely as the “Protestant work ethic.” Many historians believe this conviction to be a main factor in the development of capitalism and free enterprise in nineteenth-century Europe.

Christian organizations sometimes get involved in social causes that affect business policy. For example, some conservative Christian groups have boycotted the Walt Disney Company (www.disney.com), charging that, in portraying young people as rejecting parental guidance, Disney films impede the moral development of young viewers worldwide.

The Catholic Church itself has been involved in some highly publicized controversies. Ireland-based Ryanair (www.ryanair.com), Europe’s leading low-fare airline, ruffled the feathers of the Roman Catholic Church with an ad campaign. The ad depicted the pope (the head of the Catholic Church) claiming that the fourth secret of Fatima was Ryanair’s low fares. The Church sent out a worldwide press release accusing the airline of blaspheming the pope. But much to the Church’s dismay, the press release generated an enormous amount of free publicity for Ryanair.

class system System of social stratification in which personal ability and actions determine social status and mobility.

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Hyundai (www.hyundai.com) offended the Catholic Church when it ran a TV commercial during World Cup soccer matches. The spot showed a “church” in Argentina with a stained glass window of a soccer ball, a soccer ball topped with a crown of thorns, and parishioners receiving slices of pizza instead of communion hosts. The Catholic Church took offense at the images of people worshipping soccer and at the mocking of its practice of receiving Holy Communion. Hyundai put a stop to the ad two days after it began airing, saying that upon review it found the ad to be unintentionally insensitive.6

iSlAm With 1.3 billion adherents, Islam is the world’s second-largest religion. The prophet Muhammad founded Islam around A.D. 600 in Mecca, the holy city of Islam located in Saudi Arabia. Islam thrives in north Africa, the Middle East, Central Asia, Pakistan, and some Southeast Asian nations, including Indonesia. Muslim concentrations are also found in most European and U.S. cities. Islam means “submission to Allah,” and Muslim means “one who submits to Allah.” Islam revolves around the “five pillars”: (1) reciting the Shahada (profession of faith), (2) giving to the poor, (3) praying five times daily, (4) fasting during the holy month of Ramadan, and (5) making the Hajj (pilgrimage) to the Saudi Arabian city of Mecca at least once in one’s lifetime.

Religion strongly affects the kinds of goods and services acceptable to Muslim consumers. Islam, for example, prohibits the consumption of alcohol and pork. Popular alcohol substitutes are soft drinks, coffee, and tea. Substitutes for pork include lamb, beef, and poultry (all of which must be slaughtered in a prescribed way so as to meet halal requirements). Because hot coffee and tea often play ceremonial roles in Muslim nations, the markets for them are quite large. And because usury (charging interest for money lent) violates the laws of Islam, credit card compa- nies collect management fees rather than interest, and each cardholder’s credit line is limited to an amount held on deposit.

nations governed by Islamic law (see Chapter 3) sometimes segregate the sexes at certain activities and in locations such as schools. In Saudi Arabia, women cannot drive cars on public streets. In orthodox Islamic nations, men cannot conduct market research surveys with women at their homes unless they are family members. Women visiting Islamic cultures need to be especially sensitive to Islamic beliefs and customs. In Iran, for example, the Ministry of Islamic Guidance and Culture posts this reminder to visiting female journalists: “The body is a tool for the spirit and the spirit is a divine song. The holy tool should not be used for sexual inten- tions.” Although the issue of hejab (Islamic dress) is hotly debated, both Iranian and non-Iranian women are officially expected to wear body-concealing garments. They are also expected to wear scarves over their hair because hair is considered enticing.

hinduiSm Hinduism formed around 4,000 years ago in present-day India, where more than 90 percent of Hinduism’s 900 million adherents live. It is also the majority religion of nepal and a secondary religion in Bangladesh, Bhutan, and Sri Lanka. Considered by some to be a way of life rather than a religion, Hinduism recalls no founder and recognizes no central authority or spiritual leader. Integral to the Hindu faith is the caste system described earlier in this chapter.

Hindus believe in reincarnation—the rebirth of the human soul at the time of death. For many Hindus the highest goal of life is moksha—escaping from the cycle of reincarnation and entering a state of eternal happiness called nirvana. Hindus tend to disdain materialism. Strict Hindus do not eat or willfully harm any living creature because it may be a reincarnated human soul. Because Hindus consider cows to be sacred animals, they do not eat beef. Yet, consuming cow’s milk is considered a means of religious purification. Firms such as McDonald’s (www. mcdonalds.com) must work closely with government and religious officials in India in order to respect Hindu beliefs. In many regions, McDonald’s has removed all beef products from its menu and prepares vegetable and fish products in separate kitchen areas. And for those Indians who do eat red meat (but not cows because of their sacred status), the company sells the Maharaja Mac, made of lamb, in place of the Big Mac.

In India, there have been attacks on Western consumer-goods companies in the name of preserving Indian culture and Hindu beliefs. Some companies such as Pepsi-Cola (www.pepsi. com) have been vandalized, and local officials even shut down a KFC restaurant (www.kfc.com) for a time. Although it currently operates in India, Coca-Cola (www.cocacola.com) once left the market completely rather than succumb to demands that it reveal its secret formula to authori- ties. India’s investment environment has improved greatly in recent years. Yet labor–management relations sometimes deteriorate to such a degree that strikes cut deeply into productivity.

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78 Part 2 • NatioNal BusiNess eNviroNmeNts

F R A N C E

BELGIUM

NETHER- LANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA

HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA

MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y

G R E E C E

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO SAN

MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

Christianity

Hinduism

Judaism

Buddhism

Nature religion

Chinese religion

Islam Other groups

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

SURINAME

ECUADOR

B R A Z I L PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM LUXEMBOURG

GERMANY

LITHUANIA

POLAND BELARUS

U K R A I N E

SPAIN

PORTUGAL

CZECH- REP.

AUSTRIA

SWITZ.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B YA

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

S O U T H S U D A N

ERITREA

E T H I O P I A CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

RWANDA BURUNDI

UGANDA

K E N YA

SOMALIA

A N G O L A

N A M I B I A

Z A M B I A

TA N Z A N I A

MALAWI

Z I M B A B W E

B O T S WA N A

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHO

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJI VANUATU

NEW CALEDONIAA U S T R A L I A

NEW ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPAN C H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJBOUTI

HAWAII

GALAPAGOS ISLANDS

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

NETHER- LANDS

LATVIA

RUSSIA

LICHT.

CENTRAL AFRICAN REPUBLIC

SOUTH AFRICA

G H

A N

A T

O G

O B

E N

IN

GUYANA FRENCH GUIANA

TRINIDAD & TOBAGO

MYANMAR (BURMA)

MAP 2.1 World Religions

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ChaPter 2 • Cross-Cultural BusiNess 79

F R A N C E

BELGIUM

NETHER- LANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA

HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA

MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y

G R E E C E

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO SAN

MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

Christianity

Hinduism

Judaism

Buddhism

Nature religion

Chinese religion

Islam Other groups

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

SURINAME

ECUADOR

B R A Z I L PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM LUXEMBOURG

GERMANY

LITHUANIA

POLAND BELARUS

U K R A I N E

SPAIN

PORTUGAL

CZECH- REP.

AUSTRIA

SWITZ.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B YA

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

S O U T H S U D A N

ERITREA

E T H I O P I A CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

RWANDA BURUNDI

UGANDA

K E N YA

SOMALIA

A N G O L A

N A M I B I A

Z A M B I A

TA N Z A N I A

MALAWI

Z I M B A B W E

B O T S WA N A

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHO

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJI VANUATU

NEW CALEDONIAA U S T R A L I A

NEW ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPAN C H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJBOUTI

HAWAII

GALAPAGOS ISLANDS

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

NETHER- LANDS

LATVIA

RUSSIA

LICHT.

CENTRAL AFRICAN REPUBLIC

SOUTH AFRICA

G H

A N

A T

O G

O B

E N

IN

GUYANA FRENCH GUIANA

TRINIDAD & TOBAGO

MYANMAR (BURMA)

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80 Part 2 • NatioNal BusiNess eNviroNmeNts

buddhiSm Buddhism was founded about 2,600 years ago in India by a Hindu prince named Siddhartha Gautama, who later became the Buddha. Today, Buddhism has around 380 million followers, mostly in China, Tibet, Korea, Japan, Vietnam, and Thailand, and there are pockets of Buddhists in Europe and the Americas. Although founded in India, Buddhism has relatively few adherents there. Unlike Hinduism, Buddhism rejects the caste system of Indian society. But like Hinduism, Buddhism promotes a life centered on spiritual rather than worldly matters. Buddhism also teaches that seeking pleasure for the human senses causes suffering. In a formal ceremony, Buddhists take refuge in the “three jewels”: the Buddha, the dharma (his teachings), and the sangha (community of enlightened beings). They seek nirvana (escape from reincarnation) through charity, modesty, compassion for others, restraint from violence, and general self-control.

Although monks at many temples are devoted to lives of solitary meditation and discipline, many other Buddhist priests are dedicated to lessening the burden of human suffering. They finance schools and hospitals across Asia and are active in worldwide peace movements. In Tibet, most people still acknowledge the exiled Dalai Lama as the spiritual and political head of the Buddhist culture. In the United States, a coalition of religious groups and human rights advo- cates continue to press the U.S. Congress to apply economic sanctions against countries that are seen as practicing religious persecution.

confuciAniSm An exiled politician and philosopher named Kung-fu-dz (pronounced “Confucius” in English) began teaching his ideas in China nearly 2,500 years ago. Today, China is home to most of Confucianism’s 225 million followers. Confucian thought is also ingrained in the cultures of Japan, South Korea, and nations with large numbers of ethnic Chinese, such as Singapore.

South Korean business practice reflects Confucian thought in its rigid organizational struc- ture and unswerving reverence for authority. Whereas Korean employees do not question strict chains of command, non-Korean managers and workers often feel differently. Efforts to apply Korean-style management in overseas subsidiaries have caused some high-profile disputes with U.S. executives and confrontations with factory workers in Vietnam.

Some observers contend that the Confucian work ethic and a commitment to education helped spur East Asia’s phenomenal economic growth. But others respond that the link between culture and economic growth is weak. They argue that economic, historical, and international factors are at least as important as culture. They say that Chinese leaders distrusted Confu- cianism for centuries because they believed that it stunted economic growth. Likewise, many

Buddhism instructs its followers to live a simple life void of materialistic ambitions. But as globalization pries open asia’s markets, the products of Western multinational corporations are streaming in. Here, young Buddhist monks in Bhutan gather around a laptop computer. do you think asian cultures can modernize while retaining their traditional values and beliefs?

Source: Timothy Allen/newscom

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ChaPter 2 • Cross-Cultural BusiNess 81

Chinese despised merchants and traders because their main objective (earning money) violated Confucian beliefs. As a result, many Chinese businesspeople moved to Indonesia, Malaysia, Singapore, and Thailand, where they launched successful businesses. Today, overseas Chinese people in these countries (and Taiwan) are helping finance China’s rapid economic growth.

JudAiSm More than 3,000 years old, Judaism was the first religion to preach belief in a single God. nowadays, Judaism has roughly 18 million followers worldwide. In Israel, orthodox (“fully observant”) Jews make up 12 percent of the population and constitute an increasingly important economic segment. In Jerusalem, there is even a modeling agency that specializes in casting orthodox Jews in ads aimed both inside and outside the orthodox community. Models include scholars and one rabbi. In keeping with orthodox principles, women model only modest clothing and never appear in ads alongside men.

Employers and human resource managers must be aware of important days in the Jewish faith. Because the Sabbath lasts from sundown on Friday to sundown on Saturday, work sched- ules might need adjustment. Devout Jews want to be home before sundown on Fridays. on the Sabbath itself, they do not work, travel, or carry money. Several other important observances are Rosh Ha-Shanah (the two-day Jewish new Year, in September or october), Yom Kippur (the Day of Atonement, 10 days after new Year), Passover (which celebrates the Exodus from Egypt, in March or April each year), and Hanukkah (which celebrates an ancient victory over the Syrians, usually in December).

Marketers must take into account foods that are banned among strict Jews. Pork and shell- fish (such as lobster and crab) are prohibited. Meat is stored and served separately from milk. other meats must be slaughtered according to a practice called shehitah. Meals prepared accord- ing to Jewish dietary traditions are called kosher. Most airlines offer kosher meals for Jewish passengers on their flights.

Shinto Shinto (meaning “way of the gods”) arose as the native religion of the Japanese. But today, Shinto can claim only about 4 million strict adherents in Japan. Because modern Shinto preaches patriotism, it is sometimes said that Japan’s real religion is nationalism. Shinto teaches sincere and ethical behavior, loyalty and respect toward others, and enjoyment of life.

Shinto beliefs are reflected in the workplace through the traditional practice of lifetime employment (although this is waning today) and through the traditional trust extended between firms and customers. Japanese competitiveness in world markets has benefited from loyal work- forces, low employee turnover, and good labor–management cooperation. The phenomenal suc- cess of many Japanese companies in recent decades gave rise to the concept of a Shinto work ethic, certain aspects of which have been emulated by Western managers.

QuiCk study 4 1. What are the main beliefs of each of the seven religions presented in the previous sections? 2. In what ways does religion affect international business activities? 3. Identify the dominant religion in each of the following countries: (a) Brazil, (b) China, (c)

India, (d) Ireland, (e) Mexico, (f) Russia, and (g) Thailand.

Personal Communication People in every culture have a communication system to convey thoughts, feelings, knowl- edge, and information through speech, writing, and actions. Understanding a culture’s spoken language gives us great insight into why people think and act the way they do. Understanding a culture’s body language helps us avoid sending unintended or embarrassing messages. Let’s examine each of these forms of communication more closely.

SpokEn And writtEn lAnguAgE Spoken and written language is the most obvious difference we notice when traveling in another country. We overhear and engage in a number of conversations and read many signs and documents to find our way. Knowledge of a people’s language is the key to deeply understanding a culture.

Linguistically different segments of a population are often culturally, socially, and politically distinct. Malaysia’s population is composed of Malay (60 percent), Chinese (30 percent), and

communication System of conveying thoughts, feelings, knowledge, and information through speech, writing, and actions.

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82 Part 2 • NatioNal BusiNess eNviroNmeNts

Indian (10 percent) peoples. Although Malay is the official national language, each ethnic group speaks its own language and continues its traditions. The United Kingdom includes England, northern Ireland, Scotland, and Wales. The native languages of Ireland and Scotland are dialects of Gaelic, and the speaking of Welsh in Wales predates the use of English in Britain. After decades of decline, Gaelic and Welsh are staging comebacks on radio and television and in school curricula.

The global reach of media today and increased travel for tourism and business mean that some cultures face the possibility of losing their native languages. Read the Global Sustainabil- ity feature, titled “Speaking in Fewer Tongues,” to see how a lack of social sustainability can endanger languages around the world.

implications for Managers The importance of understanding local languages is becoming increasingly apparent on the Internet. Roughly two-thirds of all web pages are in English, but around three-fourths of all Internet users are nonnative English speakers. Software-solutions providers are assisting companies from English-speaking countries in adapting their websites for global e-business. Web surfers from cultures across the globe bring their own specific tastes, preferences, and buying habits online with them. The company that can provide its customer in Mexico City, Paris, or Tokyo with a quality buying experience in his or her native language will have an edge on the competition.

Language proficiency is crucial in production facilities where nonnative managers are supervising local employees. one U.S. manager in Mexico was confused when his seemingly relaxed and untroubled workers went on strike. The problem lay in different cultural perspec- tives. Mexican workers generally do not take the initiative in problem solving and workplace complaints. Workers concluded the plant manager knew, but did not care, about their concerns because he did not question employees about working conditions.

American-born Thomas Kwan, who works for a health products company in Shanghai, China, says similar scenarios occur there. “Whereas Americans are encouraged to challenge their boss to explain things, I have to ask Chinese staff what they think and encourage them to speak up. A lot of [expatriate] managers fail in China because they don’t understand that Chinese don’t tell you what they think,” he says.7

Marketers prize insights into the interests, values, attitudes, and habits of teenagers. Habbo (www.habbo.com), the world’s largest virtual hangout for teens, surveyed more than 50,000 teenagers in 31 countries to learn how they communicate with each other. The study found that, although 72 percent of teens have active e-mail accounts, 76 percent communicate with friends primarily through instant messaging. Teens reserve e-mail for nonpersonal needs such

gloBal sustainaBility Speaking in Fewer Tongues

one day this year, somewhere in the world, an old man or woman will die and with them will go their language. Dozens of languages have just one native speaker still living, and some blame globalization. Here are the facts, the consequences, and what can be done.

• Some Are Losing. Of the world’s roughly 6,000 languages, about 90 percent have fewer than 100,000 speakers. By the end of this century, more than half of the world’s languages may be lost; perhaps fewer than 1,000 will survive. One endangered language is Aramaic, a 2,500-year-old Semitic language that was once the major language in the Middle East.

• Some Are Gaining. Even as minority languages die out, three languages continue to grow in popularity: Mandarin, Spanish, and English. English has emerged as the universal language of business, higher education, diplomacy, science, popular music, entertainment, and international travel. More than 70 nations give special status to English, and roughly one-quarter of the world’s population is fluent or competent in it.

• The Consequences. The loss of a language can diminish the richness of a people’s cultural, spiritual, and intellectual life. What is lost includes prayers, myths, humor, poetry, ceremonies, conversational styles, and terms for emotions, behaviors, and habits. When a language dies, all these must be expressed in a new language with different words, sounds, and grammar.

• What Can Be Done? Linguists are concerned that such a valuable part of human culture could vanish. So, they are busily creating videotapes, audiotapes, and written records of endangered tongues before they disappear. Communities are also taking action. In New Zealand, Maori communities set up nursery schools called kohanga reo, or “language nests,” that are staffed by elders and conducted entirely in Maori.

• Want to Know More? Visit Enduring Voices (http://travel. nationalgeographic.com/travel/enduring-voices), Living Tongues (www.livingtongues.org), and the Foundation For Endangered Languages (www.ogmios.org).

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as school, work, and correspondence with family members. And, of course, teens keep in touch on Facebook (www.facebook.com). Knowledge of these habits help marketers to better target promotions.8

Language Blunders Advertising slogans and company documents must be translated carefully so that messages are received precisely as intended. If they are not carefully translated, a company can make a language blunder in its international business dealings. In Sweden, Kellogg (www.kellogg.com) had to rename its Bran Buds cereal because the Swedish translation came out roughly as “burned farmer.” And then there’s the entrepreneur in Miami who tried to make the most of a visit to the United States by the Pope of the Roman Catholic Church. He quickly began printing T-Shirts for Spanish-speaking Catholics that should have read, “I saw the Pope (el Papa).” But a gender error on the noun resulted in T-Shirts proclaiming, “I saw the Potato (la Papa)”! 9 other translation blunders include:

• An English-language sign in a Moscow hotel read, “You are welcome to visit the cemetery where famous Russian composers, artists, and writers are buried daily except Thursday.”

• A sign for English-speaking guests in a Tokyo hotel read, “You are respectfully requested to take advantage of the chambermaids.”

• An airline ticket office in Copenhagen read in English, “We take your bags and send them in all directions.”

• A Japanese knife manufacturer labeled its exports to the United States with “Caution: Blade extremely sharp! Keep out of children.”

• Braniff Airlines’ English-language slogan “Fly in Leather” was translated into “Fly naked” in Spanish.

Such blunders are not the exclusive domain of humans. The use of machine translation— computer software used to translate one language into another—is booming along with the explosion in the number of nonnative English speakers using the Internet. one search engine allows its users to search the Internet in English and Asian languages, translate web pages, and compose an e-mail in one language and send it in another. The computers attempted a translation of the following: “The Chinese Communist Party is debating whether to drop its ban on private- enterprise owners being allowed to join the party.” And it came up with this in Chinese: “The Chinese Communist Party is debating whether to deny its ban in join the Party is allowed soldier enterprise owners on.” Various other machine translators turned the French version of “I don’t care” (“Je m’en fou”) into “I myself in crazy,” “I of insane,” and “Me me in madman.”

Lingua Franca A lingua franca is a third or “link” language understood by two parties who speak different native languages. The original lingua franca arose to support ancient trading activities and contained a mixture of Italian and French, along with Arabic, Greek, and Turkish. Although only 5 percent of the world’s population speaks English as a first language, it is the most common lingua franca used in international business, followed closely by French and Spanish.

The Cantonese dialect of Chinese spoken in Hong Kong and the Mandarin dialect spoken in Taiwan and on the Chinese mainland are so different that a lingua franca is often preferred. And, although India’s official language is Hindi, its lingua franca among the multitude of dialects is English because it was once a British colony. Yet many young people speak what is referred to as “Hinglish”—a combination of Hindi, Tamil, and English words mixed within a single sentence. Multinational corporations also sometimes choose a lingua franca for official internal communi- cations because they operate in many nations, each with its own language.

Companies that use English for internal correspondence include Philips (www.philips.com; a Dutch electronics firm), Asea Brown Boveri (www.abb.com; a Swiss industrial giant), and Alcatel-Lucent (www.alcatel-lucent.com; a French telecommunications firm). Japan’s number- one Internet shopping site, Rakuten (www.rakuten.co.jp), officially adopted English because of its pervasiveness on the Internet. All executive meetings are held in English, and all internal documents will eventually be written in English.10

body lAnguAgE Body language communicates through unspoken cues, including hand gestures, facial expressions, physical greetings, eye contact, and the manipulation of personal space. Similar to spoken language, body language communicates both information and feelings

lingua franca Third or “link” language understood by two parties who speak different native languages.

body language Language communicated through unspoken cues, including hand gestures, facial expressions, physical greetings, eye contact, and the manipulation of personal space.

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and differs greatly from one culture to another. Italians, French, Arabs, and Venezuelans, for example, tend to animate conversations with lively hand gestures and other body motions. Japanese and Koreans, although more reserved, can communicate just as much information through their own body languages; a look of the eye can carry as much or more meaning as two flailing arms.

Most body language is subtle and takes time to recognize and interpret. For example, navi- gating the all-important handshake in international business can be tricky. In the United States, a firm grip and several pumps of the arm is usually the standard. But in the Middle East and Latin America, a softer clasp of the hand with little or no arm pump is the custom. And in some coun- tries, such as Japan, people do not shake hands at all but bow to one another. Bows of respect carry different meanings, usually depending on the recipient. Associates of equal standing bow about 15 degrees toward one another. But proper respect for an elder requires a bow of about 30 degrees. Bows of remorse or apology should be about 45 degrees.

Proximity is an extremely important element of body language to consider when meeting someone from another culture. If you stand or sit too close to your counterpart (from their per- spective), you may invade their personal space and appear aggressive. If you remain too far away, you risk appearing untrustworthy. For north Americans, a distance of about 19 inches is about right between two speakers. For Western Europeans, 14 to 16 inches seems appropriate, but someone from the United Kingdom might prefer about 24 inches. Koreans and Chinese are likely to be comfortable about 36 inches apart; people from the Middle East will close the dis- tance to about 8 to 12 inches.

Physical gestures often cause the most misunderstanding between people of different cul- tures because they can convey very different meanings. For example, the thumbs-up sign is vul- gar in Italy and Greece but means “all right” or even “great” in the United States.

QuiCk study 5 1. Define communication. Why is knowledge of a culture’s spoken language important for

international business? 2. Describe the importance of a lingua franca to conducting international business. 3. Why is body language influential for international business? Give several examples.

Education Education is crucial for passing on traditions, customs, and values. Each culture educates its young people through schooling, parenting, religious teachings, and group memberships. Families and other groups provide informal instruction about customs and how to socialize with others. In most cultures, intellectual skills such as reading and mathematics are taught in formal educational settings. Two important topics in education are education level and brain drain.

EducAtion lEvEl Data that a government provides on its people’s education level must be taken with a grain of salt. Comparisons from country to country can be difficult because many nations rely on literacy tests of their own design. Although some countries administer standardized tests, others require only a signature as proof of literacy. Yet searching for untapped markets or new factory locations can force managers to rely on such undependable benchmarks. As you can see from Table 2.1, some countries have further to go than others to increase national

Forming the thumb-and-index circle in most of europe and in the United states means “okay”; in Germany it’s a rude gesture. tapping one’s nose in england and scotland means “You and I are in on the secret”; in Wales it means “You’re very nosy.” tapping one’s temple in much of Western europe means “You’re crazy”; in the Netherlands it means “You’re very clever.”

Sources: oto.fritz/ Shutterstock; Stephen orsillo/ Shutterstock; ostill /Shutterstock

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literacy rates. Around 800 million adults remain illiterate globally. And although global illiteracy rates are higher for women, the gap with men is closing.11

Countries with poorly educated populations attract the lowest-paying manufacturing jobs. nations with excellent programs for basic education tend to attract relatively good-paying industries. Those that invest in worker training are usually repaid in productivity increases and rising incomes. Meanwhile, countries with skilled, highly educated workforces attract all sorts of high-paying jobs.

Emerging economies in Asia owe much of their rapid economic development to solid educa- tion systems. They focus on rigorous mathematical training in primary and secondary schooling. University education concentrates on the hard sciences and aims to train engineers, scientists, and managers.12

thE “brAin drAin” phEnomEnon The quality of a nation’s education system is related to its level of economic development. Brain drain is the departure of highly educated people from one profession, geographic region, or nation to another. over the years, political unrest and economic hardship has forced many Indonesians to flee their homeland for other nations, particularly Hong Kong, Singapore, and the United States. Most of Indonesia’s brain drain has occurred among Western-educated professionals in finance and technology—exactly the people needed for economic development.

Many countries in Eastern Europe experienced high levels of brain drain early in their transition to market economies. Economists, engineers, scientists, and researchers in all fields fled westward to escape poverty. But as these nations continue their long transition from com- munism, some of them are luring professionals back to their homelands—a process known as reverse brain drain.

Physical and Material Environments The physical environment and material surroundings of a culture heavily influence its develop- ment and pace of change. In this section, we first look at how physical environment and culture are related, and then we explore the effect of material culture on business.

phySicAl EnvironmEnt Although the physical environment affects a people’s culture, it does not directly determine it. Two aspects of the physical environment that heavily influence a people’s culture are topography and climate.

brain drain Departure of highly educated people from one profession, geographic region, or nation to another.

TaBLe 2.1 illiteracy rates of Selected countries

Country adult illiteracy rate (% of People age 15 and up)

Burkina Faso 71

Pakistan 44

Morocco 44

nigeria 39

Egypt 29

Cambodia 22

Saudi Arabia 14

Peru 10

Brazil 10

Zimbabwe 8

Jordan 8

Mexico 7

Colombia 7

Philippines 5

Portugal 5

Source: Based on World Development Indicators 2012, World Bank website (www.worldbank.org).

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Topography All the physical features that characterize the surface of a geographic region constitute its topography. Some surface features such as navigable rivers and flat plains facilitate travel and contact with others. By contrast, treacherous mountain ranges and large bodies of water can discourage contact. Cultures isolated by topographical features can find themselves less exposed to the cultural traits of other peoples, which can mean slower cultural change.

Topography can affect consumers’ product needs. For example, there is little market for Honda scooters (www.honda.com) in most mountainous regions because their engines are too small. These are better markets for the company’s more rugged, maneuverable motorcycles with larger engines.

Topography can have a profound impact on personal communication in a culture. For exam- ple, mountain ranges and the formidable Gobi Desert consume two-thirds of China’s land sur- face. Groups living in the valleys of these mountain ranges hold on to their own ways of life and speak their own languages. Although the Mandarin dialect was decreed the national language many years ago, the mountains, desert, and vast expanse of China still impair personal commu- nication and, therefore, the proliferation of Mandarin.

Climate Climate affects where people settle and helps direct systems of distribution. In Australia, for example, intensely hot and dry conditions in two large deserts and jungle conditions in the northeast pushed settlement to coastal areas. These climatic conditions combined with the higher cost of land transport means coastal waters are still used to distribute products between distant cities.

Climate plays a large role in lifestyle and work habits. The heat of the summer sun grows intense in the early afternoon hours in the countries of southern Europe, northern Africa, and the Middle East. For this reason, people often take afternoon breaks of one or two hours in July and August. People use this time to perform errands, such as shopping, or even to take short naps before returning to work until about 7 or 8 p.m. Companies doing business in these regions must adapt to this local tradition.

Climate also affects customs such as the type of clothing people wear. People in many tropi- cal areas wear little clothing and wear it loosely because of the warm, humid climate. In the desert areas of the Middle East and north Africa, people also wear loose clothing, but they wear long robes to protect themselves from intense sunshine and blowing sand.

topography All the physical features that characterize the surface of a geographic region.

Members of the “Chinese root-seeking tour” pose for photos under an old tree at the temple of Heaven in Beijing, China. the summer camp program attracts more than 6,000 overseas Chinese youths from 51 countries and regions each year. It is designed to educate young people in the cultural traditions of their Chinese ancestors. organizers hope that by gaining a better understanding of Chinese history and culture, these youths will grow to become good cross-cultural communicators between China and other nations.

Source: Wang Yongji/newscom

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mAtEriAl culturE All the technology used in a culture to manufacture goods and provide services is called its material culture. Material culture is often used to measure the technological advancement of a nation’s markets or industries. Generally, a firm enters a new market under one of two conditions: Demand for its products has developed or the infrastructure is capable of supporting production operations.

Many regions and nations lack the most basic elements of a modern society’s material cul- ture. Yet technology is helping some nations at the bottom of the global economic pyramid break down barriers that keep their people mired in poverty.

uneven Material Culture Material culture often displays uneven development across a nation’s geography, markets, and industries. For example, much of China’s recent economic progress is occurring in coastal cities. Shanghai has long played an important role in China’s international trade because of its strategic location and its superb harbor on the East China Sea. Although it is home to only 1 percent of the total population, Shanghai accounts for about 5 percent of China’s total output—including about 12 percent of both its industrial production and its financial-services output.

Likewise, Bangkok, the capital city of Thailand, houses only 10 percent of the nation’s pop- ulation but accounts for about 40 percent of its economic output. Meanwhile, the northern parts of the country remain rural, consisting mostly of farms, forests, and mountains.

QuiCk study 6 1. Why is the education level of a country’s people important to international companies? 2. What is meant by the terms brain drain and reverse brain drain? 3. How are a people’s culture and physical environment related? 4. What is the significance of material culture for international business?

classifying cultures Throughout this chapter, you’ve seen how cultures can differ greatly from one another. People living in broadly different cultures tend to respond differently in similar business situations. There are two widely accepted ways to classify cultures based on differences in characteristics such as values, attitudes, social structures, and so on. Let’s now take a detailed look at each of these tools: the Kluckhohn–Strodtbeck and Hofstede frameworks.

Kluckhohn–Strodtbeck Framework The Kluckhohn–Strodtbeck framework compares cultures along six dimensions. It studies a given culture by asking each of the following questions:13

• Do people believe that their environment controls them, that they control the environment, or that they are part of nature?

• Do people focus on past events, on the present, or on the future implications of their actions?

• Are people easily controlled and not to be trusted, or can they be trusted to act freely and responsibly?

• Do people desire accomplishments in life, carefree lives, or spiritual and contemplative lives?

• Do people believe that individuals or groups are responsible for each person’s welfare? • Do people prefer to conduct most activities in private or in public?

cASE: dimEnSionS of JApAnESE culturE By providing answers to each of these six questions, we can apply the Kluckhohn–Strodtbeck framework to Japanese culture:

1. Japanese believe in a delicate balance between people and environment that must be maintained. Suppose an undetected flaw in a company’s product harms customers using it. In many countries, a high-stakes class-action lawsuit would be filed against the manufacturer on behalf of the victims’ families. This scenario rarely plays out in Japan.

material culture All the technology used in a culture to manufacture goods and provide services.

kluckhohn–Strodtbeck framework Framework for studying cultural differences along six dimensions, such as focus on past or future events and belief in individual or group responsibility for personal well-being.

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Japanese culture does not feel that individuals can possibly control every situation but that accidents happen. Japanese victims would receive heartfelt apologies, a promise it won’t happen again, and a relatively small damage award.

2. Japanese culture emphasizes the future. Because Japanese culture emphasizes strong ties between people and groups, including companies, forming long-term relationships with people is essential when doing business there. Throughout the business relationship, Japanese companies remain in close, continuous contact with buyers to ensure that their needs are being met. This relationship also forms the basis of a communication channel by which suppliers learn about the types of products and services buyers would like to see in the future.

3. Japanese culture treats people as quite trustworthy. Business dealings among Japanese companies are based heavily on trust. After an agreement to conduct business is entered into, it is difficult to break unless there are extreme, uncontrollable factors at work. This is due to the fear of “losing face” if one cannot keep a business commitment. In addition to business applications, society at large reflects the Japanese concern for trustworthiness. Crime rates are quite low, and the streets of Japan’s largest cities are very safe to walk at night.

4. Japanese are accomplishment-oriented—not necessarily for themselves, but for their employers and work units. Japanese children learn the importance of groups early by contributing to the upkeep of their schools. They share duties such as mopping floors, washing windows, cleaning chalkboards, and arranging desks and chairs. They carry such habits learned in school into the adult workplace, where management and labor tend to work together toward company goals. Japanese managers make decisions only after considering input from subordinates. Also, materials buyers, engineers, designers, factory floor supervisors, and marketers cooperate closely throughout each stage of a product’s development.

5. Japanese culture emphasizes individual responsibility to the group and group responsibility to the individual. This trait has long been a hallmark of Japanese corporations. Traditionally, subordinates promise hard work and loyalty, and top managers provide job security. But to remain competitive internationally, Japanese companies have eliminated jobs and moved production to low-wage nations like China and Vietnam. As the tradition of job security falls by the wayside, more Japanese workers now consider working for non-Japanese companies, whereas others find work as temporary employees. Although this trait of loyalty is diminishing somewhat in business, it remains a very prominent feature in other aspects of Japanese society, especially family.

6. The culture of Japan tends to be public. You will often find top Japanese managers located in the center of a large, open-space office surrounded by the desks of many employees. In comparison, Western executives are often secluded in walled offices located on the perimeter of workspaces. This characteristic reaches deep into Japanese society—consider, for example, Japan’s tradition of bathing in public bathhouses.

Hofstede Framework The Hofstede framework compares cultures along five dimensions.14 Dutch psychologist Geert Hofstede developed the framework from a study of more than 110,000 people working in IBM subsidiaries (www.ibm.com) in 40 countries and from a follow-up study of students in 23 coun- tries. Let’s examine each of these dimensions in detail:15

1. Individualism versus collectivism. This dimension identifies the extent to which a culture emphasizes the individual versus the group. Individualist cultures (those scoring high on this dimension) value hard work and promote entrepreneurial risk taking, thereby fostering invention and innovation. Although people are given freedom to focus on personal goals, they are held responsible for their actions. That is why responsibility for poor business decisions is placed squarely on the shoulders of the individual in charge. At the same time, higher individualism may be responsible for higher rates of employee turnover.

on the contrary, people in collectivist cultures (those scoring low on this dimension) feel a strong association to groups, including family and work units. The goal of maintaining group harmony is probably most evident in the family structure. People in collectivist

hofstede framework Framework for studying cultural differences along five dimensions, such as individualism versus collectivism and equality versus inequality.

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cultures tend to work toward collective rather than personal goals and are responsible to the group for their actions. In turn, the group shares responsibility for the well-being of each of its members. Thus, in collectivist cultures, success or failure tends to be shared among the work unit, rather than any particular individual receiving all the praise or blame. All social, political, economic, and legal institutions reflect the group’s critical role.

2. Power distance. This dimension conveys the degree to which a culture accepts social inequality among its people. A culture with large power distance tends to be characterized by much inequality between superiors and subordinates. organizations tend also to be more hierarchical, with power deriving from prestige, force, and inheritance. This is why executives and upper management in cultures with large power distance often enjoy special recognition and privileges. on the other hand, cultures with small power distance display a greater degree of equality, with prestige and rewards more equally shared between superiors and subordinates. Power in these cultures (relative to cultures with large power distance) is seen to derive more from hard work and entrepreneurial drive and is therefore often considered more legitimate.

Figure 2.2 shows how various countries rank according to these first two dimensions: power distance and individualism versus collectivism. What is striking about this figure is the tight grouping of nations within the five clusters (plus Costa Rica). You can see the concentration of mostly African, Asian, Central and South American, and Middle Eastern nations in Quadrant 1 (cultures with relatively larger power distance and lower individualism). By contrast, Quadrants 3 and 2 comprise mostly the cultures of Australia and the nations of north America and Western Europe. These nations had the highest individualism scores, and many had relatively smaller power distance scores.

3. Uncertainty avoidance. This dimension identifies the extent to which a culture avoids uncertainty and ambiguity. A culture with large uncertainty avoidance values security and places its faith in strong systems of rules and procedures in society. It is perhaps not surprising then that cultures with large uncertainty avoidance normally have lower employee turnover, more formal rules for regulating employee behavior, and more difficulty implementing change. Cultures scoring low on uncertainty avoidance tend to

Low

Costa Rica

Austria

Israel

Finland

Ireland

Norway Germany

Switzerland Sweden

New Zealand Canada

Spain

Uruguay Greece

Colombia

Ecuador Guatemala

Panama Venezuela

MexicoEast Africa

Philippines

Malaysia

West Africa

Pakistan Peru Indonesia

Yugoslavia

Taiwan

Hong Kong

South Korea Thailand

Salvador Singapore

Chile Portugal

Jamaica

Argentina Japan India

Arab Countries Iran Brazil

Turkey

South Africa

France

Belgium

Italy

Netherlands

Great Britain United StatesAustralia

Denmark

High

Small Power Distance Large

In d

iv id

u a li sm

4 1

3 2

Figure 2.2 power distance and individualism versus collectivism

Source: Geert Hofstede, “The Cultural Relativity of organizational Practices and Theories,” Journal of International Business Studies, Fall 1983, p. 82.

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be more open to change and new ideas. This helps explain why individuals in this type of culture tend to be entrepreneurial and organizations tend to welcome the best business practices from other cultures. Because people tend to be less fearful of change, however, these cultures can also suffer from higher levels of employee turnover.

Figure 2.3 plots countries according to the second and third dimensions: power distance and uncertainty avoidance. Although the lines of demarcation are somewhat less obvious in this figure, patterns do emerge, forming six clusters (plus Jamaica). Quadrant 4 contains nations characterized by small uncertainty avoidance and small power distance, including Australia, Canada, Jamaica, the United States, and several Western European nations. Meanwhile, Quadrant 2 contains many Asian, Central American, South American, and Middle Eastern nations—nations having large power distance and large uncertainty avoidance indexes.

4. Masculinity versus femininity. This dimension captures the extent to which a culture emphasizes masculinity versus femininity. According to Hofstede, cultures scoring high on masculinity tend to be characterized more by personal assertiveness and the accumulation of wealth, typically translating into an entrepreneurial drive. Cultures scoring low on this dimension (greater tendency toward femininity) generally have more relaxed lifestyles, wherein people are more concerned about caring for others as opposed to material gain.

5. Long-term orientation. This dimension indicates a society’s perspective on time and attitudes about overcoming obstacles with time, if not with will and strength. It attempts to capture the differences between Eastern and Western cultures. A high-scoring culture (strong long-term orientation) values respect for tradition, thrift, perseverance, and a sense of personal shame. These cultures tend to have a strong work ethic because people expect long-term rewards from today’s hard work. A low-scoring culture is characterized by individual stability and reputation, fulfillment of social obligations, and reciprocation of greetings and gifts. These cultures can change more rapidly because tradition and commitment are not impediments to change.

Locate your country in Figure 2.2 and Figure 2.3. In your personal experience, do you agree with the placement of your nation in these figures? Do you believe managers in your country display the types of behaviors depicted on each dimension just described?

Small

Large

Small Power Distance Large

U n

ce rt

a in

ty A

vo id

a n

ce

4 1

3 2

Costa Rica

Austria

Israel

Finland

Ireland

Norway

Germany

Switzerland

Sweden

New Zealand Canada

Spain

Uruguay

Greece

Colombia

Ecuador

Guatemala

Panama

Venezuela

Mexico

East Africa Philippines

Malaysia

West Africa

Pakistan

Peru

Indonesia

Yugoslavia

Taiwan

Hong Kong

South Korea

Thailand

Salvador

Singapore

Chile

Portugal

Jamaica

Argentina

Japan

India

Arab Countries

Iran

Brazil

Turkey

South Africa

France

Belgium

Italy

Netherlands

Great Britain

United States

Australia

Denmark

Figure 2.3 power distance and uncertainty Avoidance

Source: Geert Hofstede, “The Cultural Relativity of organizational Practices and Theories,” Journal of International Business Studies, Fall 1983, p. 84.

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QuiCk study 7 1. What six dimensions comprise the Kluckhohn–Strodtbeck framework for classifying

cultures? 2. What are the five dimensions of the Hofstede framework for classifying cultures? 3. Briefly explain how each framework can be used to analyze a culture.

BottoM line for Business

As globalization continues to draw companies into the international arena, understanding local culture can give a company an advantage over rivals. By avoiding ethnocentric thinking, managers can avoid mistakenly disregarding the beneficial aspects of other cultures. By contrast, culturally literate managers who understand local needs and desires bring their companies closer to customers and, therefore, in- crease their competitiveness. They can become more-effective market- ers, negotiators, and production managers. Let’s explore several areas in which culture has a direct impact on international business activity.

marketing and cultural literacy Many international companies operating in local markets abroad take advantage of the public relations value of supporting national culture. Some of India’s most precious historical monuments and sites are crumbling due to a lack of government funds for upkeep. Companies are helping the government to maintain key sites and are earning the goodwill of the people.

This chapter introduced the Kluckhohn–Strodtbeck and Hofstede frameworks for classifying cultures. Local culture is important for a company exploring international markets for its products. We can see the significance of power distance in the export of luxury items. A nation with a large power distance accepts greater inequality among its people and tends to have a wealthy upper class that can afford luxury goods. Thus, companies marketing products such as expensive jewelry, high-priced cars, and even yachts could find wealthy market segments within relatively poor nations.

work Attitudes and cultural literacy National differences in work attitudes are complex and involve other factors in addition to culture. Perceived opportunity for financial re- ward is no doubt a strong element in attitudes toward work in any culture. Research suggests both U.S. and German employees work longer hours when there is a greater likelihood that good perfor- mance will lead to promotion and increased pay. Yet this appears

relatively less true in Germany, where wages are less variable and job security and jobless benefits (such as free national health care) are greater. Thus, other aspects of German society are at least as impor- tant as culture in determining work attitudes. The culturally literate manager understands the complexity of national workplace attitudes and incorporates this knowledge into reward systems.

Expatriates and cultural literacy As stated in our discussion of classifying cultures, people living in broadly different cultures tend to respond differently in similar busi- ness situations. This is why companies that send personnel abroad to unfamiliar cultures are concerned with cultural differences. For exam- ple, a Norwegian manager working in Japan for a European car man- ufacturer, but whose colleagues were mostly Japanese, soon became frustrated with the time needed to make decisions and take action. The main cause for his frustration was that the uncertainty avoidance index for Japan is much larger than that in his native Norway (see Figure 2.3). In Japan, a greater aversion to uncertainty led to the need for a greater number of consultations than would have been needed in the home market. The frustrated manager eventually left Japan to return to Europe.

gender and cultural literacy In Japan, men have traditionally held nearly all positions of responsi- bility. Women have generally served as office clerks and administrative assistants until their mid- to late 20s, when they were expected to marry and then focus on tending to family needs. Although this is still largely true today, progress is being made in expanding the role of women in Japan’s business community. Women own nearly a quarter of all businesses in Japan, but many of these businesses are very small and have little economic influence. Greater gender equality prevails in Australia, Canada, Germany, and the United States, but women in these countries still tend to earn less money than men in similar positions.

Chapter Summary

1. Describe culture and explain the significance of both national culture and subcultures. • Culture is the set of values, beliefs, rules, and institutions held by a specific group of

people. • Managers should try to avoid ethnocentricity (the tendency to view one’s own culture

as superior to others) and to develop cultural literacy (detailed knowledge necessary to function effectively in another culture).

• We are conditioned to think in terms of national culture—that is, to equate a nation- state and its people with a single culture.

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• Governments promote national culture and intervene in business to protect it from the influence of other cultures.

• Most nations are also home to numerous subcultures—groups of people who share a unique way of life within a larger, dominant culture.

• Subcultures contribute greatly to national culture and must be considered in marketing and production decisions.

2. Identify the components of culture and describe their impact on international business. • Aesthetics help determine which colors and symbols will be effective in promotions

and advertising. • Values influence a people’s attitudes toward time, work, and cultural change. • Knowledge of manners and customs is necessary for negotiating, marketing products,

and managing operations in other cultures. • Social structure affects business decisions, including production-site selection,

advertising methods, and the costs of doing business in a country. • Different religions take different views of work, savings, and material goods. • Understanding a people’s system of personal communication provides insight into

their values and behavior. • A culture’s education level affects the quality of the workforce and a people’s

standard of living. • Physical and material environments influence work habits and preferences for

products such as clothing and food. 3. Describe cultural change and explain how companies and culture affect each other.

• Cultural change occurs when people integrate the gestures, material objects, traditions, or concepts of another culture through cultural diffusion.

• Globalization and technology are increasing the pace of cultural change around the world.

• Companies influence culture when they import new products, policies, and business practices into a host country.

• Companies should try to avoid cultural imperialism—the replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another.

• Cultures affect management styles, work scheduling, and reward systems. • Adapting to local cultures around the world means heeding the maxim “Think

globally, act locally.” 4. Explain how the physical environment and technology influence culture.

• A people’s physical environment includes topography and climate and how people relate to their surroundings.

• Cultures isolated by topographical barriers, such as mountains or seas, normally change relatively slowly, and their languages are often distinct.

• Climate affects a people’s work hours, clothing, and food. • Material culture refers to all the technology a culture uses to manufacture goods and

provide services, and it can be uneven within a nation. • Businesspeople measure material culture to determine whether a market has

developed adequate demand for a company’s products and whether it can support production activities.

5. Describe the two main frameworks used to classify cultures and explain their practical use. • The Kluckhohn–Strodtbeck framework compares cultures along six dimensions by

seeking answers to questions on six topics, including a people’s (1) relation to the environment; (2) focus on past, present, or future; (3) trustworthiness; (4) desire for accomplishment; (5) group–individual responsibility; and (6) public versus private nature.

• The Hofstede framework compares cultures along five dimensions, including a people’s (1) individualism versus collectivism, (2) power distance, (3) uncertainty avoidance, (4) masculinity versus femininity, and (5) long-term orientation.

• Taken together, these frameworks help companies understand many aspects of a culture, including risk taking, innovation, job mobility, team cooperation, pay levels, and hiring practices.

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Teaming Up 1. Research Project. Select a company in your city or town that does business internationally

and make an appointment to interview the owner or a senior manager. Your team’s goal is to learn how cultural differences affect the decisions of this business as it pursues international opportunities. How does the company balance the need for global efficiency and local responsiveness in a cultural sense? Has local culture ever required the company to alter its personnel or corporate practices? Be sure to ask your interviewee for specific examples. Present a brief talk or paper on your group’s interview findings.

2. Market Entry Strategy Project. This exercise corresponds to the MeSP online simulation. For the nation you are studying, list several of its people’s manners and customs. What values do people hold dear? Describe their attitude toward time, work, and cultural change. What religions are practiced there? What language(s) are spoken? What ethnicities reside in the nation, and do they form distinct subcultures? Describe the nation’s social structure and its education system. Turn to Figures 2.2 and 2.3, and either (a) explain why you think the nation appears where it does in the figures, or (b) identify where you think it belongs on the figure and explain why. Integrate your findings into your completed MeSP report.

Take It to the Web 1. Video Report. Visit this book’s channel on YouTube (www.YouTube.com/MyIBvideos).

Click on “Videos” near the top of the page, and click on the set of videos labeled “Ch 02: Cross-Cultural Business.” Watch one video from the list and then summarize it in a half- page report. Reflecting on the contents of this chapter, which components of culture can you identify in the video? How might a company engaged in international business act on the information contained in the video?

2. Website Report. Culture affects the product a company sells in a market or region, how it markets the product, its human resource practices, and so on. It is increasingly important that managers have cultural understanding of their markets in this age of globalization.

Select a well-known multinational company and visit its website. Locate the section of the website that tells about the company’s activities (usually titled “About Us”). Report on

Key Terms aesthetics (p. 69) attitudes (p. 70) body language (p. 83) brain drain (p. 85) caste system (p. 75) class system (p. 76) communication (p. 81) cultural diffusion (p. 71) cultural imperialism (p. 71) cultural literacy (p. 66)

cultural trait (p. 71) culture (p. 66) customs (p. 73) ethnocentricity (p. 66) folk custom (p. 73) Hofstede framework (p. 88) Kluckhohn–Strodtbeck framework

(p. 87) lingua franca (p. 83) manners (p. 73)

material culture (p. 87) popular custom (p. 73) social group (p. 74) social mobility (p. 75) social stratification (p. 75) social structure (p. 74) subculture (p. 68) topography (p. 86) values (p. 69)

Talk It Over 1. Two students are discussing the various reasons why they are not studying international

business. “International business doesn’t affect me,” declares the first student. “I’m going to stay here, not work in some foreign country.” “Yeah, me neither,” agrees the second. “Besides, some cultures are really strange. The sooner other countries start doing business our way, the better.” What counterarguments can you present to these students’ perceptions?

2. In this exercise, two groups of four students each will debate the benefits and drawbacks of individualist versus collectivist cultures. After the first student from each side has spoken, the second student questions the opponent’s arguments, looking for holes and inconsistencies. The third student attempts to reply to these counterarguments. Then, the fourth student summarizes each side’s arguments. Finally, the class votes on which team presented the more compelling case.

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(1) the main products or services the company offers; (2) the extent to which the company pursues international business operations (often expressed as percentage of sales or assets); (3) ways that the company has adapted to cultures around the world; and (4) the general policies it follows in doing business internationally.

Regarding its online presence, does the company offer its website in another widely spoken language? Find and click on several of the company’s other national websites. What kinds of products are advertised on the home pages of the different sites? Can you identify how the company adapts its website to suit cultural preferences?

Ethical Challenges 1. The netherlands-based software company you work for has decided to outsource content

development to India. You are in charge of the project and have been asked to organize the development team. Do you think it will be possible to uphold the management style that your company currently employs? Should your company be prepared to adjust to local Indian managerial style and human resources practices?

2. You are the owner of an athletic shoe manufacturer, with factories in several countries around the world. outsourcing work is easy for your company, as developing countries are drawn to your company’s ability to create jobs. one of your oldest factories is in Indonesia, victim of a disease epidemic that has slowed production to a standstill. This factory has been your highest producer in the past, and the managers have been loyal to the company. Do you close the factory and relocate due to the drop in production, or do you wait for the epidemic to pass? How strongly do you feel about rewarding the factory’s past efforts and loyalty to the company?

3. As the president of a troubled manufacturing company, you are concerned about low production in your foreign facilities. The newest foreign plant, however, allows you to pay the lowest wages thus far and is producing at a much higher rate than the rest. Although you are pleased with this facility’s output, rumors have been spreading that the plant is forcing employees to work unreasonable hours. Upon investigating these claims, you find that they are true. Do you allow the plant to continue running as it is because of the high success rate? or do you make some changes in the way the plant is run and suffer the losses?

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influx of Western professionals, such as lawyers, who accepted good-paying jobs there that could not be found back home during the global recession.

Roopa Murthy works for an Indian company that offers call- center and back-office services. Roopa moved to Bangalore from her native Mysore in 2002 armed with an accounting degree. She now earns $400 per month, which is several times what her father earned before he retired from his government job. Roopa cut her hair short and tossed aside her salwar kameez, the traditional loose-fitting clothing she wore back home, in favor of designer- labeled Western attire.

Although she once shunned drinking and her curfew at home was 9 p.m., Roopa now frequents a pub called Geoffrey’s, where she enjoys dry martinis and rum, and The Club, a suburban disco. Roopa confesses that she is “seeing someone” but that her par- ents would disapprove, adding, “It is difficult to talk to Indian par- ents about things like boyfriends.” She said she sometimes envies her callers’ lives but that she hopes her job will help her succeed. “I may be a small-town girl, but there is no way I’m going back to Mysore after this,” she said. Many observers wonder whether Asia can embrace modernization and yet retain traditional values.

Thinking globally 1. If your international firm were doing business in Asia, is

there anything that your company could do to ease the tensions these cultures are experiencing? Be specific.

2. In your opinion, is globalization among the causes of the increasing incidence of divorce, crime, and drug abuse in Asia? Why or why not?

3. Broadly defined, Asia comprises more than 60 percent of the world’s population—a population that practices Buddhism, Confucianism, Hinduism, Islam, and numerous other religions. Thus, do you think it is possible to carry on a valid discussion of “Asian” values? Why or why not?

4. Consider the following statement: “Economic development and capitalism require a certain style of doing business in the twenty-first century. The sooner Asian cultures adapt the better.” Do you agree or disagree? Explain.

Source: Heather Timmons, “outsourcing to India Draws Western Lawyers,” New York Times (www.nytimes.com), August 4, 2010; Lisa Tsering, “nBC Picks up Series ‘outsourced’ for Fall 2010,” Indiawest.com website (www.indiawest.com), May 27, 2010; Saritha Rai, “India outsourcing Workers Stressed to The Limit,” Silicon.com website (www.silicon.com; now www.techrepublic.com), August 26, 2009; Sol E. Solomon, “Vietnam’s IT Way to Social Progress,” Bloomberg Businessweek (www.businessweek.com), May 19, 2008.

Many cultures in Asia are in the midst of an identity crisis. In effect, they are being torn between two worlds. Pulling in one direction is a traditional value system derived from agriculture- based communities and extended families—that is, elements of a culture in which relatives take care of one another and state-run welfare systems are unnecessary. Pulling from the opposite direc- tion is a new set of values emerging from manufacturing- and finance-based economies—elements of a culture in which workers must often move to faraway cities to find work, sometimes leaving family members to fend for themselves.

For decades, Western multinational corporations set up facto- ries across Southeast Asia to take advantage of relatively low-cost labor. Later, local companies sprang up and became competitive global players in their own right. Spectacular rates of economic growth in a few short decades elevated living standards beyond what was thought possible. Young people in Malaysia and Thailand felt the lure of “Western” brands. Gucci handbags (www.gucci. com), Harley-Davidson motorcycles (www.harley- davidson.com), and other global brands became common symbols of success. Many parents felt that brand-consciousness among their teenage children signaled familywide success.

Despite the growing consumer society, polls of young people show them holding steadfast to traditional values such as respect for family and group harmony. Youth in Hong Kong, for exam- ple, overwhelmingly believe that parents should have a say in how hard they study, in how they treat family members and elders, and in their choice of friends.

now globalization is washing over India. An explosion in outsourcing jobs is causing a social revolution among India’s graduates of technical colleges and universities. Unlike in India’s traditional high-tech service jobs, young call-center staffers are in direct contact with Western consumers, answering inquiries on items such as tummy crunchers and diet pills. For these young, mostly female staffers, the work means money, independence, and freedom—sometimes far away from home in big cities such as Bangalore and Mumbai. But in addition to the training in American accents and geography, these workers are learning new ideas about family, materialism, and relationships.

Parents are suspicious of call-center work because it must typi- cally be performed at night in India, when consumers are awake in Canada, Europe, or the United States. When her parents objected, Binitha Venugopal quit her call-center job in favor of a “regular” daytime job. Binitha says her former coworkers’ values are chang- ing and that dating and live-in relationships among them are com- mon. Indian tradition dictates that young adults live with their parents at least until they get married (typically to someone their parents choose). Perhaps facilitating shifting values in India is an

Practicing International Management Case

A Tale of Two Cultures

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96

A Look Ahead Chapter 4 discusses the world’s different economic systems. We learn about emerging markets and development and explore challenges facing countries that are transforming their economies into free markets.

A Look at This Chapter This chapter explores the roles of politics and law in international business. We begin by explaining different types of political systems and how managers cope with political risk. We then examine several kinds of legal systems, ethics, social responsibility, and how international relations affect business.

A Look Back Chapter 2 explored the main elements of culture and showed how they affect business practices. We learned about different methods used to classify cultures and how these methods can be applied to business.

4. Explain ethics and social responsibility and key issues facing international companies.

5. Explain how international relations affect international business activities.

1. Describe each main type of political system.

2. Identify the origins of political risk and how managers can reduce its effects.

3. Describe each main type of legal system and some important global legal issues.

Learning Objectives After studying this chapter, you should be able to

Politics, Law, and business ethics

chaPter three

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Understanding Vietnamese BUsiness CUltUre

HANOI, Vietnam—Forming international business alliances is often lucrative but can be difficult. An understanding of the culture with which you hope to do business is essential in reaching an agreement. Conducting business in Vietnam requires a solid understanding of Vietnamese business culture. Many potential business deals have been ruined when international business people inadvertently disobeyed the norms of Vietnamese corporate culture. A single gesture that is considered offensive can spell the end of a transaction.

The introduction to potential Vietnamese busi- ness partners is crucial. Business cards are an impor- tant part of any business transaction. It is important to give and receive a business card with both hands. Shaking hands upon meeting and saying goodbye is expected. A handshake may use both hands, and it is important to bow your head slightly when shaking as a sign of respect. Once a successful introduction has been made, business talks are given the green light, but they are far from easy and success is never guaranteed.

Setting up shop in Vietnam always involves working with government officials. Some businesses are frustrated by the slow procedure of gaining necessary permits from the govern- ment to operate a foreign business. It is important to stay in continual, direct contact with the officials responsible for approving your business. Individual connections are not as important in Vietnam as in other Asian nations, as most decisions are made by committee. Business negotiations can be confusing, as the Vietnamese attempt to avoid unpleasantness or confrontation. Significant misunderstandings can arise if you do not continually check any commitments that are made. Navigating a new cul- ture can take a lot of work and good diplomatic skills, but developing solid business relationships in the global economy can be a great tool in promoting cross-cultural understanding. As you read this chapter, consider how companies adapt to different cultures when conducting business with global partners.1

Source: © Inna Vlasova/Fotolia.com

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C hapter 2 explained that an understanding of culture contributes to success in the inter- national marketplace. Another crucial element of success is political and legal savvy. Businesses involved internationally need to overcome some tricky political and legal situ-

ations in other countries. This is true for both brick-and-mortar and online companies. Although the web shrinks the distance between two points, it still matters where those two points are located. The Internet community consists of about 250 country domains and dozens of political and legal environments.

Just as brick-and-mortar companies have always adapted to local politics and laws in the global marketplace, so too do Internet companies. Yahoo! (www.yahoo.com) held back certain news stories from its website in China, though the stories appeared on the company’s U.S. site. Rupert Murdoch’s News Corp. (www.newscorp.com) removed BBC news (www.bbc.co.uk) from its Asian television broadcasts because it occasionally criticized China. Barnes & Noble (www.barnesandnoble.com) and Amazon (www.amazon.com) stopped selling the English- language version of Mein Kampf to Germans when the German government complained— although it’s illegal only to sell the German-language version. A statement by Barnes & Noble read, “Our policy with regard to censorship remains unchanged. But as responsible corporate citizens, we respect the laws of the countries where we do business.” And a broad spectrum of German politicians and citizens decried Google’s (www.google.com) plan to introduce its map- ping service called Street View there. Memories of secret police prying into personal lives under past dictatorial and fascist regimes make Germans fearful of allowing the entire world to see photos of their homes and gardens on the Internet.2

Understanding the nature of politics and laws in other countries lessens the risks of conduct- ing international business. In this chapter, we present the basic differences between political and legal systems around the world. We explain how disputes arising from political and legal matters affect business activities and how companies can manage the associated risks. We also discuss key ethical issues for international managers and how companies fulfill their social responsibili- ties. We close this chapter by briefly discussing the interaction between business and interna- tional relations.

Political systems A political system includes the structures, processes, and activities by which a nation governs itself. Japan’s political system, for instance, features a Diet (Parliament) that chooses a prime minister who will carry out the operations of government with the help of Cabinet ministers. The Diet consists of two houses of elected representatives who enact the nation’s laws. These laws affect the personal lives of people living in and visiting Japan, as well as the activities of compa- nies doing business there.

Politics and Culture Politics and culture are closely related. A country’s political system is rooted in the history and culture of its people. Factors such as population, age and race composition, and per capita income influence a country’s political system.

Consider the case of Switzerland, where the political system actively encourages all eli- gible members of society to vote. By means of public referendums, Swiss citizens vote directly on many national issues. The Swiss system works because Switzerland consists of a relatively small population living in a small geographic area. Contrast this practice with that of most other democracies, in which representatives of the people, not the people themselves, vote on specific issues.

Political Participation We can characterize political systems by who participates in them and to what extent they par- ticipate. Participation occurs when people voice their opinions, vote, and show general approval or disapproval of the system.

Participation can be wide or narrow. Wide participation occurs when people who are capa- ble of influencing the political system make an effort to do so. For example, most adults living in the United States have the right to participate in the political process by voting in elections.

political system Structures, processes, and activities by which a nation governs itself.

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Narrow participation occurs when few people participate. In Kuwait, for example, only citizens who can prove Kuwaiti ancestry can participate in the political process.

Political Ideologies We can arrange the world’s three political ideologies on a horizontal scale, with one on either end and one in the middle:

• At one extreme lies totalitarianism—the belief that every aspect of people’s lives must be controlled for a nation’s political system to be effective. Totalitarianism disregards indi- vidual liberties and treats people as slaves of the political system. The state reigns supreme over institutions such as family, religion, business, and labor. Totalitarian political systems include authoritarian regimes such as communism and fascism.

• At the other extreme lies anarchism—the belief that only individuals and private groups should control a nation’s political activities. An anarchist views public government as unnecessary and unwanted because it tramples personal liberties.

• Between totalitarianism and anarchism lies pluralism—the belief that both private and pub- lic groups play important roles in a nation’s political activities. Each group (consisting of people with different ethnic, racial, class, and lifestyle backgrounds) serves to balance the power that can be gained by the others. Pluralistic political systems include democracies, constitutional monarchies, and some aristocracies.

To better understand how elements of politics influence national business practices, let’s examine two prevalent political systems—totalitarianism and democracy.

ToTaliTarianism In a totalitarian system, individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints. Nazi Germany under Adolf Hitler and the former Soviet Union under Joseph Stalin are historical examples of totalitarian governments. Today, North Korea is the most prominent example of a totalitarian government. Totalitarian leaders attempt to silence those with opposing political views and, therefore, require the near-total centralization of political power. But a “pure” form of totalitarianism is not possible because no totalitarian government is capable of entirely silencing all its critics.

Totalitarian governments tend to share three features:

• Imposed Authority. An individual or group forms the political system without the explicit or implicit approval of the people. Leaders often acquire and retain power through

totalitarian system Political system in which individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints.

election Commission workers in libya collect ballot boxes from various polling stations for final counting. Voters went to the polls in July 2012, nine months after the removal of a dictatorship that ruled libya for more than 40 years. around 2.8 million libyans were eligible to vote in this first step toward creating a new constitution and system of government in libya. the election followed a nasty civil war that exposed libya’s deep regional, tribal, and ethnic differences. How do you think wide political participation can benefit a country and its people?

Source: SABRI ELMHEDWI/EPA/ Newscom

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military force or fraudulent elections. In some cases, they come to power through legiti- mate means but then remain in office after their terms expire.

• Lack of Constitutional Guarantees. Totalitarian systems deny citizens the constitu- tional guarantees woven into the fabric of democratic practice. They limit, abuse, or reject concepts such as freedom of expression, periodically held elections, guaranteed civil and property rights, and minority rights.

• Restricted Participation. Political representation is limited to parties sympathetic to the government or to those who pose no credible threat. In most cases, political opposition is completely banned, and political dissidents are severely punished.

Let’s now take a detailed look at the two most common types of totalitarian political systems: theocratic and secular.

Theocratic Totalitarianism A political system in which a country’s religious leaders are also its political leaders is called a theocracy. The religious leaders enforce a set of laws and regulations based on religious beliefs. A political system under the control of totalitarian religious leaders is called theocratic totalitarianism.

Iran is a prominent example of a theocratic totalitarian state. Iran has been an Islamic state since the 1979 revolution in which the reigning monarch was overthrown. Today, many young Iranians appear disenchanted with the strict code imposed on many aspects of their public and private lives, including stringent laws against products and ideas deemed too “Western.” They may not question their religious beliefs but yearn for a more open society.

Secular Totalitarianism A political system in which political leaders rely on military and bureaucratic power is called secular totalitarianism. It takes three forms: communist, tribal, and right-wing.

Under communist totalitarianism (referred to here simply as communism), the government maintains sweeping political and economic powers. The Communist Party controls all aspects of the political system, and opposition parties are given little or no voice. In general, each party member holding office is required to support all government policies, and dissension is rarely permitted. Communism is the belief that social and economic equality can be obtained only by establishing an all-powerful Communist Party and by instituting socialism—an economic system in which the government owns and controls all types of economic activity. This includes granting the government ownership of the means of production (such as capital, land, and facto- ries) and the power to decide what the economy produces and the prices at which goods are sold.

However, important distinctions separate communism from socialism. Communists follow the teachings of Marx and Lenin, believe that a violent revolution is needed to seize control over resources, and wish to eliminate political opposition. Socialists believe in none of these. Thus, communists are socialists, but socialists are not necessarily communist.

Under tribal totalitarianism, one tribe (or ethnic group) imposes its will on others with whom it shares a national identity. Tribal totalitarianism characterizes the governments of several African nations, including Burundi and Rwanda. When the European colonial powers departed Africa, many national boundaries were created with little regard to ethnic differences among the people. People of different ethnicities found themselves living in the same nation, whereas members of the same ethnicity found themselves living in different nations. In time, certain ethnic groups gained political and military power over other groups. Animosity among them often erupted in bloody conflict.

Nations mired in military conflict pay a hefty price in terms of sustainability. Over the decades, civil war has inflicted enormous human, social, and environmental costs on many Afri- can nations, for example. To explore the costs of civil wars (particularly in Africa) and how developed nations can help put an end to them, see the Global Sustainability feature, titled “From Civil War to Civil Society.”

Under right-wing totalitarianism, the government endorses private ownership of property and a market-based economy but grants few (if any) political freedoms. Leaders generally strive for economic growth while opposing left-wing totalitarianism (communism). Argentina, Brazil, Chile, and Paraguay all had right-wing totalitarian governments in the 1980s.

Despite the inherent contradictions between communism and right-wing totalitarianism, China’s political system is currently a mix of the two ideologies. China’s leaders are engineer- ing high economic growth by implementing certain characteristics of a capitalist economy while

theocracy Political system in which a country’s religious leaders are also its political leaders.

theocratic totalitarianism Political system under the control of totalitarian religious leaders.

secular totalitarianism Political system in which leaders rely on military and bureaucratic power.

socialism Belief that social and economic equality is obtained through government ownership and regulation of the means of production.

communism Belief that social and economic equality can be obtained only by establishing an all-powerful Communist Party and by granting the government ownership and control over all types of economic activity.

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ChaPter 3 • PolitiCs, law, aNd BusiNess ethiCs 101

retaining a hard line in the political sphere. The Chinese government is selling off money-los- ing, state-run companies and encouraging the investment needed to modernize its factories. But China’s government still has little patience for dissidents who demand greater political freedom, and it does not allow a completely free press.

Doing Business in Totalitarian Countries What are the costs and benefits of doing business in a totalitarian nation? On the plus side, international companies can be relatively less concerned with local political opposition to their activities. On the negative side, they might need to pay bribes and kickbacks to government officials. Refusal to pay could result in loss of market access or even forfeiture of investments in the country.

In any case, doing business in a totalitarian country can be a risky proposition. In a country such as the United States, laws regarding the resolution of contractual disputes are quite spe- cific. In totalitarian nations, the law can be either vague or nonexistent, and people in powerful government positions can interpret laws largely as they please. In China, for instance, it may not matter so much what the law states but rather how individual bureaucrats interpret the law. The arbitrary nature of totalitarian governments makes it hard for companies to know how laws will be interpreted and applied to their particular business dealings.

Companies that operate in totalitarian nations are sometimes criticized for lacking compas- sion for people hurt by the oppressive policies of their hosts. Executives must decide whether to refrain from investing in totalitarian countries—and miss potentially profitable opportunities— or invest and bear the brunt of potentially damaging publicity. There are no simple answers to this controversial issue, which amounts to an ethical dilemma.

Quick Study 1 1. What is a political system? Explain the relationship between political systems and culture. 2. Identify the three main features of totalitarianism. 3. Briefly explain each form of totalitarianism. 4. How might a totalitarian government affect business activities?

Global SuStainability From Civil War to Civil Society

Today, most wars occur within nations that were once controlled and stabilized by colonial powers. If these nations are to prosper from globalization, they must break the vicious cycle whereby conflict causes poverty and poverty causes conflict.

• War’s Root Causes. Although tribal or ethnic rivalry is typically blamed for starting civil wars, the most common causes are pov- erty, low economic growth, and dependency on natural resource exports. In fact, the poorest one-sixth of humanity endures four- fifths of the world’s civil wars. Still, religious differences increas- ingly underlie civil conflicts.

• What’s at Stake. It appears that the pitched battles in Bunia, in the eastern part of Democratic Republic of the Congo, are rooted in ethnic conflict. Yet the Hema and the Lendu tribes only began fighting each other when neighboring Uganda (so that it could control mineral-rich Bunia) started arming rival militias in 1999. In the Darfur region of Sudan, Arab Muslims battle black non-Muslims. Depending on whom you ask, the conflict began as a fight over pastures and livestock or over the oil beneath them. Meanwhile, foreign investors remain wary.

• What Is Lost. On average, a civil conflict lasts eight years. And apart from the terrible human cost in lives and health, there is also a financial cost. Health costs are $5 billion per conflict

because of collapsed health systems and forced migrations (which worsen and spread disease). Gross domestic product (GDP) falls by 2.2 percent, and another 18 percent of income is spent on arms and militias. Full economic recovery takes a dec- ade, which reduces output by about 105 percent of the nation’s prewar GDP.

• What To Do. Because the risk of civil war is cut in half when income per person doubles, conflicts may be prevented by fun- neling more aid to poor nations. Also, war might be limited by restricting a nation in conflict from spending the proceeds from its exports on munitions or by lowering the world market price of those exports. Finally, to halt nations from slipping back into civil war, health and education aid could be increased after war ends, or a foreign power could intervene to keep the peace.

• Want to Know More? Visit the Centre for the Study of African Economies (www.csae.ox.ac.uk), Copenhagen Consensus Center (www.copenhagenconsensus.com), and World Bank Conflict Prevention and Reconstruction unit (www.worldbank.org).

Source: “Unloved for Trying to Keep the Peace,” The Economist, April 17, 2010, pp. 51–52; “Correspondent’s Diary: More than Sectarian Strife,” The Economist (www. economist.com), April 13, 2010; Paul Collier and Anke Hoeffler, The Challenge of Reduc- ing the Global Incidence of Civil War (Oxford: Copenhagen Consensus, March 2004); Copenhagen Consensus Center website (www.copenhagenconsensus.com).

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Democracy A democracy is a political system in which government leaders are elected directly by the wide participation of the people or by their representatives. Democracy differs from totalitarianism in nearly every respect. The foundations of modern democracy go back at least as far as the ancient Greeks.

The Greeks tried to practice a pure democracy, one in which all citizens participate freely and actively in the political process. But a pure democracy is more an ideal than a workable sys- tem for several reasons. Some people have neither the time nor the desire to get involved in the political process. Also, citizens are less able to participate completely and actively as a popula- tion grows and as the barriers of distance and time increase. Finally, leaders in a pure democracy may find it difficult or impossible to form cohesive policies because direct voting can lead to conflicting popular opinion.

Representative Democracy For practical reasons, most nations resort to a representative democracy, in which citizens elect individuals from their groups to represent their political views. These representatives then help govern the people and pass laws. The people reelect representatives they approve of and replace those they no longer want representing them.

Representative democracies strive to provide some or all of the following:

• Freedom of Expression. A constitutional right in most democracies, freedom of expres- sion ideally grants the right to voice opinions freely and without fear of punishment.

• Periodic Elections. Each elected representative serves for a period of time, after which the people (or electorate) decide whether to retain that representative. Two examples of periodic elections include the U.S. presidential elections (held every four years) and the French presidential elections (held every five years).

• Full Civil and Property Rights. Civil rights include freedom of speech, freedom to organize political parties, and the right to a fair trial. Property rights are the privileges and responsibilities of owners of property (homes, cars, businesses, and so forth).

• Minority Rights. In theory, democracies try to preserve peaceful coexistence among groups of people with diverse cultural, ethnic, and racial backgrounds. Ideally, the same rights and privileges extend legally to each group, no matter how few its members.

• Nonpolitical Bureaucracies. The bureaucracy is the part of government that implements the rules and laws passed by elected representatives. In politicized bureaucracies, bureau- crats tend to implement decisions according to their own political views rather than those of the people’s representatives. This clearly contradicts the purpose of the democratic process.

democracy Political system in which government leaders are elected directly by the wide participation of the people or by their representatives.

representative democracy Democracy in which citizens elect individuals from their groups to represent their political views.

Freedom of expression is a fundamental right that most democracies strive to uphold. On the international day of Press Freedom, a woman in tegucigalpa, Honduras, wears tape on her mouth to show support for the right of freedom of expression. to limit and tightly control the news that ordinary people receive, some countries block or scramble the reception of foreign media broadcasts. in what ways do you think freedom of expression can benefit a society?

Source: DANIEL MENDOZA/Newscom

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Despite such shared principles, countries vary greatly in the practice of representative democracy. Britain, for example, practices parliamentary democracy. The nation divides itself into geographical districts, and people in each district vote for competing parties rather than individual candidates. But the party that wins the greatest number of legislative seats in an elec- tion does not automatically win the right to run the country. Rather, a party must gain an abso- lute majority—that is, the number of representatives that a party gets elected must exceed the number of representatives elected among all other parties.

If the party with the largest number of representatives lacks an absolute majority, it can join with one or more other parties to form a coalition government. In a coalition government, the strongest political parties share power by dividing government responsibilities among them- selves. Coalition governments are often formed in Italy, Israel, and the Netherlands, where a large number of political parties make it difficult for any single party to gain an absolute majority.

Nations also differ in the relative power that each political party commands. In some demo- cratic countries, a single political party has effectively controlled the system for decades. In Japan, for example, the Liberal Democratic Party (which is actually conservative) has enjoyed nearly uninterrupted control of the government since the 1950s. In Mexico, the Institutional Revolutionary Party (PRI) ran the country for 71 years until 2001 when Vicente Fox of the conservative National Action Party (PAN) won the presidency. But then in 2012, Enrique Peña Nieto won the presidential election and led the PRI back into power.3

Doing Business in Democracies Democracies maintain stable business environments primarily through laws that protect individual property rights. In theory, commerce prospers when the private sector includes independently owned firms that seek to earn profits. Capitalism is the belief that ownership of the means of production belongs in the hands of individuals and private businesses. Capitalism is also frequently referred to as the free market. (We cover the economics of communism and capitalism in Chapter 4.)

Bear in mind that, although participative democracy, property rights, and free markets tend to encourage economic growth, they do not always do so. For instance, although India is the world’s largest democracy, it experienced slow economic growth for decades until recently. Meanwhile, some countries achieved rapid economic growth under political systems that were not truly democratic. The four tigers of Asia—Hong Kong, Singapore, South Korea, and Taiwan—built strong market economies in the absence of truly democratic practices.

Political Systems in Times of Change People around the world are demanding wider participation in the political process and are forc- ing a move toward more democratic systems. Capitalism also seems to have won the battle over communist totalitarianism and economic socialism. Shortly after the former Soviet Union imple- mented its twin policies of glasnost (political openness) and perestroika (economic reform), its totalitarian government crumbled. Communist governments in Central and Eastern Europe fell soon after, and today countries such as the Czech Republic, Hungary, Poland, Romania, and Ukraine have republican governments. There are far fewer communist nations than there were two decades ago, although Cuba and North Korea remain hard-line communist nations.

One of the most closely watched nations in terms of its political change is China. After 1949, when the communists defeated the nationalists in China’s civil war, China imprisoned or exiled most of its capitalists. But private businesspeople are now allowed to join China’s Communist Party, and workers can now elect local representatives to the official trade union. These moves represent the leadership’s struggle to maintain order in the face of increasingly rapid economic and social change. Part of the reason for this move was explained in a government report that spoke of problems facing the nation. Difficulties reported included the collapse of state-owned industry, a social safety net unable to cope with millions of unemployed, poor relations with the nation’s ethnic minorities, an unjust legal system, and an increasingly restless rural population.

Quick Study 2 1. What is democracy? Explain the differences between democracy and totalitarianism. 2. What five freedoms does a representative democracy strive to provide its people? 3. How might a democratic government affect business activities in a nation?

private sector Segment of the economic environment comprising independently owned firms that seek to earn profits.

capitalism Belief that ownership of the means of production belongs in the hands of individuals and private businesses.

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Political risk All companies doing business domestically or internationally confront political risk—the likeli- hood that a society will undergo political changes that negatively affect local business activity. Political risk abroad affects different types of companies in different ways. It can threaten the market of an exporter, the production facilities of a manufacturer, or the ability of a company to extract profits from a country in which they were earned. A solid grasp of local values, customs, and traditions can help reduce a company’s exposure to political risk.

Map 3.1 on pages 106–107 shows that political risk levels vary from nation to nation. Some of the factors included in this assessment of political risk levels include government stability, internal and external conflict, military and religion involvement in politics, corruption, law and order, and bureaucracy quality.

Types of Political Risk The broadest categories of political risk reflect the range of companies affected. Macro risk threatens the activities of all domestic and international companies in every industry. Examples include an ongoing threat of violence against corporate assets in a nation and a rising level of government corruption. Micro risk threatens companies only within a particular industry (or more narrowly defined group). For example, an international trade war in steel affects the opera- tions of steel producers and companies that require steel as an input to their business activities.

In addition to these two broad categories, we can classify political risk according to the actions or events that cause it to arise, including:

• Conflict and violence • Terrorism and kidnapping • Property seizure • Policy changes • Local content requirements

conflicT anD Violence Local conflict can discourage international companies from investing in a nation. Violent disturbances impair a company’s ability to manufacture and distribute products, obtain materials and equipment, and recruit talented personnel. Open conflict also threatens a company’s physical assets (such as offices and factories) and the lives of its employees.

Conflict arises from several sources. First, it may arise from people’s resentment toward their own government. When peaceful resolution of disputes between people (or factions) and the government fails, violent attempts to change political leadership can ensue. ExxonMobil (www.exxonmobil.com) suspended production of liquid natural gas at its facility in Indonesia’s Aceh province when separatist rebels targeted the complex with violence.

Second, conflict can arise over territorial disputes between countries. For example, a dispute over the Kashmir territory between India and Pakistan resulted in major armed conflict between their two peoples several times. And a border dispute between Ecuador and Peru caused these South American nations to go to war three times.

Third, disputes among ethnic, racial, and religious groups may erupt in violent conflict. Indonesia comprises 13,000 islands, more than 300 ethnic groups, and some 450 languages. Years ago, Indonesia’s government relocated people from crowded, central islands to less popu- lated, remote ones without regard to ethnicity and religion. Violence among them later displaced more than one million people.

Terrorism anD KiDnapping Terrorist activities are a means of making political statements. Groups dissatisfied with the current political or social situation sometimes resort to terrorist tactics in order to force change through fear and destruction. On September 11, 2001, the world witnessed terrorism on a scale like never before. Two passenger planes were flown into the twin towers of the World Trade Center in New York City, one plane was crashed into the Pentagon in Washington, DC, and one plane crashed in a Pennsylvania field. The terrorist group Al-Qaida claimed responsibility for those U.S. attacks and for more recent attacks around the world. The terror organization’s stated goals are to drive Western influence out of Muslim nations and to implement Islamic law.

political risk Likelihood that a society will undergo political changes that negatively affect local business activity.

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Kidnapping and the taking of hostages for ransom may be used to fund a terrorist group’s activities. Executives of large international companies are often prime targets for kidnappers because their employers have “deep pockets” to pay large ransoms. Latin American countries have some of the world’s highest kidnapping rates, and Mexico City is at or near the top of the list of cities with the highest kidnapping rates. Annual security costs for a company with a sales office in Bogotá, Colombia, can be $125,000 and up to $1 million for a company with operations in rebel-controlled areas. Top executives are forced to spend about a third of their time coordi- nating their company’s security in Colombia. A medium-sized firm that has 5 to 10 employees traveling to Latin America for a week at a time could carry $10 million in kidnap and ransom insurance at a cost of around $5,000 a year.4

When high-ranking executives are required to enter countries with high kidnapping rates, they should enter unannounced, meet with only a few key people in secure locations, and leave just as quickly and quietly. Some companies purchase kidnap, ransom, and extortion insurance, but security experts say that training people to avoid trouble in the first place is a far better investment. For additional ways managers can stay safe during overseas assignments, see the Manager’s Briefcase, titled “Your Global Security Checklist.”

properTy seizure Governments sometimes seize the assets of companies doing business within their borders. Asset seizures fall into one of three categories: confiscation, expropriation, or nationalization.

The forced transfer of assets from a company to the government without compensation is called confiscation. Usually the former owners have no legal basis for requesting compensation or the return of assets. The 1996 Helms–Burton Law allows U.S. businesses to sue companies from other nations that use their property confiscated by Cuba in its 1959 communist revolution. For example, the Cuban government faces nearly 6,000 company claims valued at $20 billion. But U.S. presidents repeatedly waive the law so as not to harm its relations with other countries.5

The forced transfer of assets from a company to the government with compensation is called expropriation. The expropriating government normally determines the amount of compensa- tion. There is no framework for legal appeal, and compensation is typically far below market value. Today, governments rarely resort to confiscation or expropriation because these acts can jeopardize investment in the country. Still, it does happen. Argentina expropriated 51 percent of that country’s largest energy firm, named Yacimientos Petroliferos Fiscales (YPF). The move isolated Argentina internationally and caused even greater uncertainty for international inves- tors. Buenos Aires Waterworks and Aerolineas Argentinas are two other entities in Argentina that saw increasing losses after they were nationalized a second time.6

Whereas expropriation involves one or several companies in an industry, nationaliza- tion means government takeover of an entire industry. Nationalization is more common than

confiscation Forced transfer of assets from a company to the government without compensation.

expropriation Forced transfer of assets from a company to the government with compensation.

nationalization Government takeover of an entire industry.

• Getting There. Take nonstop flights when possible, as acci- dents are more likely during takeoffs and landings. Move quickly from an airport’s public and check-in areas to more secure areas beyond passport control. Report abandoned packages to airport security.

• Getting Around. Kidnappers watch for daily routines. Vary the exits you use to leave your house, office, and hotel, and vary the time that you depart and arrive. Drive with your windows up and doors locked. Swap cars with others occasionally, or take a cab one day and ride the tram/subway the next. Be discreet regarding your itinerary.

• Keep a Low Profile. Don’t draw attention by pulling out a large wad of currency or paying with large denominations. Avoid public demonstrations. Dress like the locals when possible and leave expensive jewelry at home. Avoid loud conversation and being overheard. If you rent an automobile, avoid the flashy car and choose a local, common model.

• Guard Personal Data. Be friendly but cautious when answering questions about you, your family, and your employment. Keep answers short and vague when possible. Give out your work number only—all family members should do the same. Do not list your home or mobile phone numbers in directories. Do not carry items in your purse or wallet that contain your home address.

• Use Caution. Be cautious if a local asks directions or the time—it could be a mugging ploy. When possible, travel with others and avoid walking alone after dark. Avoid narrow, dimly lit streets. If you get lost, act as if you know where you are, and ask directions from a place of business, not passersby. Beware of offers by drivers of unmarked or poorly marked cabs.

• Know Emergency Procedures. Be familiar with the local emergency procedures before trouble strikes. Keep the phone numbers of police, fire, your hotel, your nation’s embassy, and a reputable taxi service in your home and with you at all times.

ManaGer’S briefcaSe Your Global Security Checklist

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106 Part 2 • NatioNal BusiNess eNviroNmeNts

very high

high

moderate

low

very low

no data available

Level of risk

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

HAWAII

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM

NETHERLANDS

LUXEMBOURG

GERMANY

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ.

LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B Y A

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

G H

A N

A T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

ERITREA

E T H I O P I ACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

HONG KONG

VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJBOUTI

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

GALAPAGOS ISLANDS

MYANMAR (BURMA)

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

F R A N C E

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

S O U T H S U D A N

MAP 3.1 Political Risk around the World

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ChaPter 3 • PolitiCs, law, aNd BusiNess ethiCs 107

very high

high

moderate

low

very low

no data available

Level of risk

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

HAWAII

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM

NETHERLANDS

LUXEMBOURG

GERMANY

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ.

LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B Y A

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

G H

A N

A T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

ERITREA

E T H I O P I ACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

HONG KONG

VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJBOUTI

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

GALAPAGOS ISLANDS

MYANMAR (BURMA)

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

F R A N C E

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

S O U T H S U D A N

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confiscation and expropriation. Likely candidates for nationalization include industries impor- tant to a nation’s security and those that generate large revenues. In recent years, Venezuela’s President Hugo Chavez nationalized that country’s telephone, electricity, and oil industries and threatened to nationalize many more. Businesses from other countries reacted to these moves by not investing in Venezuela. In general, a government may nationalize an industry to:

• Use subsidies to protect an industry for ideological reasons. • Save local jobs in an ailing industry to gain political clout. • Control industry profits so they cannot be transferred to low tax-rate countries. • Invest in sectors, such as public utilities, that private companies cannot afford.

The extent of nationalization varies widely from country to country. Whereas the govern- ments of Cuba and North Korea control practically every industry, those of the United States and Canada own very few. Many countries, including France, Mexico, Poland, and India, try to strike a balance between government and private ownership.

policy changes Government policy changes are the result of a variety of influences, including the ideals of newly empowered political parties, political pressure from special interests, and civil or social unrest. One common policy tool restricts ownership to domestic companies or limits ownership by nondomestic firms to a minority stake. This type of policy restricted PepsiCo’s (www.pepsico.com) ownership of local companies to 49 percent when it first entered India.

Other policies relate to cross-border investments. Facing a slowdown in the technology sector, Taiwan’s businesses and politicians called for a scrapping of the nation’s “go slow, be patient” policy with China. That policy capped investments in mainland China at $50 million and banned investments in infrastructure and industries sensitive for national security reasons. Taiwan’s government created a new policy called “active opening, effective management,” which reduced restrictions on cross-border investment.

local conTenT requiremenTs Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market are called local content requirements. These requirements can force companies to use locally available raw materials, procure parts from local suppliers, or employ a minimum number of local workers. They ensure that international companies foster local business activity and help ease regional or national unemployment. They also help governments maintain some degree of control over international companies without resorting to extreme measures such as confiscation and expropriation.

But local content requirements can jeopardize an international firm’s long-term survival. First, a company required to hire local personnel might be forced to take on an inadequately trained workforce or take on excess workers. Second, a company made to obtain raw materials or parts locally can find its production costs rise or its product quality decline.

Managing Political Risk International companies benefit from monitoring and attempting to predict political changes that can negatively affect their activities. When an international business opportunity arises in an environment plagued by extremely high risk, simply not investing in the location may be the wisest course of action. Yet when risk levels are moderate and the local market is attrac- tive, international companies find other ways to manage political risks. Let’s now examine the three main methods of managing political risk: adaptation, information gathering, and political influence.

aDapTaTion Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies:

• Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partner- ing helps a company to share the risk of loss, which is especially important in emerging markets. If partners own shares (equity) in local operations, they get cuts of the profits; if they loan cash (debt), they receive interest. Local partners who can help keep political forces from interrupting operations include firms, trade unions, financial institutions, and government agencies.

local content requirements Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market.

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• Localization entails modifying operations, the product mix, or some other business element—even the company name—to suit local tastes and culture. Consider how MTV (www.mtv.com) demonstrates its sensitivity to local cultural and political issues by localizing its programming to suit regional and national tastes.

• Development assistance lets an international business assist the host country or region in improving the quality of life for locals. For example, by developing distribution and communications networks, both a company and a nation benefit. Royal Dutch/Shell (www. shell.com), the oil company, is working in Kenya to increase the incomes of poor villagers and to triple the average period of food security.7 Canon (www.canon.com), the Japanese copier and printer maker, practices kyosei (“spirit of cooperation”) to press local govern- ments into making social and political reforms.

• Insurance against political risk can be essential to companies entering risky business envi- ronments. The Overseas Private Investment Corporation (www.opic.gov) insures U.S. companies that invest abroad against loss and can provide project financing. Some policies protect companies when local governments restrict the convertibility of local money into home-country currency, whereas others insure against losses created by violent events, including war and terrorism. The Foreign Credit Insurance Association (www.fcia.com) also insures U.S. exporters against loss due to a variety of causes.

informaTion gaThering International firms attempt to gather information that will help them predict and manage political risk. Two sources that companies use to conduct accurate political risk forecasting are:

• Current Employees with Relevant Information. Employees who have worked in a country long enough to gain insight into local culture and politics are often good sources of information. Individuals who formerly had decision-making authority while on interna- tional assignment probably had contact with local politicians and other officials. Yet it is important that an employee’s international experience be recent because political power in a nation can shift rapidly and dramatically.

• Agencies Specializing in Political-Risk Services. These include banks, political con- sultants, news publications, and risk-assessment services. Many of these agencies publish

One way to lessen political risk is to offer development assistance to poor communities. shown here is richard Branson, founder of the Virgin group (www.virgin.com), in Johannesburg, south africa. Branson is visiting the school of entrepreneurship his foundation started. the school offers virtually free higher education to students from a financially disadvantaged background. Branson’s not-for-profit foundation, Virgin Unite, strives to educate and inspire young leaders in order to unlock the potential of south africa’s youth.

Source: JON HRUSA/EPA/Newscom

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reports detailing national levels and sources of political risk. Small companies that cannot afford to pay for these services can consider the many free sources of information avail- able, notably from their federal governments. Government intelligence agencies are excel- lent and inexpensive sources to consult.

poliTical influence Managers must work within the established rules and regulations of each national business environment. Business law in most nations undergoes frequent change, with new laws being enacted and existing ones modified. Influencing local politics means dealing with local lawmakers and politicians directly or through lobbyists. Lobbying is the policy of hiring people to represent a company’s views on political matters. Lobbyists meet with a local public official to influence his or her position on issues relevant to the company. The ultimate goal of the lobbyists is to get favorable legislation enacted and unfavorable legislation rejected. Lobbyists also work to convince local officials that a company benefits the local economy, environment, workforce, and so on.

Bribes often represent attempts to gain political influence. Years ago, the president of U.S.– based Lockheed Corp., now Lockheed Martin (www.lockheedmartin.com), bribed Japanese officials in order to obtain large sales contracts. Public disclosure of the incident resulted in passage of the 1977 Foreign Corrupt Practices Act, which forbids U.S. companies from brib- ing government officials or political candidates in other nations (except when a person’s life is in danger). A bribe constitutes “anything of value”—money, gifts, and so forth—and cannot be given to any “foreign government official” empowered to make a “discretionary decision” that may be to the payer’s benefit. The law also requires firms to keep accounting records that reflect their international activities and assets. (We discuss corruption further in the later section on ethics.)

In our discussion of political systems and how companies deal with political uncertainty, we touched on several important legal issues. Although there is a good deal of overlap between a nation’s political and legal systems, they are distinct. Let’s now examine several types of legal systems and how they influence the activities of international companies.

Quick Study 3 1. What are the five main types of political risk? How might each affect international business

activities? 2. Distinguish between confiscation, expropriation, and nationalization. 3. What three methods can businesses use to manage political risk?

Legal systems A country’s legal system is its set of laws and regulations, including the processes by which its laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions. Many cultural factors—including ideas on social mobility, religion, and individualism—influence a nation’s legal system. Likewise, many laws and regulations are enacted to safeguard cultural values and beliefs.

A country’s political system also influences its legal system. Totalitarian governments tend to favor public ownership of economic resources and enact laws limiting entrepreneurial behavior. By contrast, democracies tend to encourage entrepreneurial activity and protect business with strong property-rights laws. The rights and responsibilities of parties to business transactions also differ from nation to nation. Political systems and legal systems, therefore, are naturally interlocked. A country’s political system inspires and endorses its legal system, and its legal system legitimizes and supports its political system.

Legal systems are frequently influenced by political moods and upsurges of nationalism— the devotion of a people to their nation’s interests and advancement. Nationalism typically involves intense national loyalty and cultural pride and is often associated with drives toward national independence. In India, for example, most business laws originated when the coun- try was struggling for “self-sufficiency.” As a result, the legal system tended to protect local

lobbying Policy of hiring people to represent a company’s views on political matters.

foreign corrupt practices act A 1977 statute that forbids U.S. companies from bribing government officials or political candidates in other nations.

legal system Set of laws and regulations, including the processes by which a country’s laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions.

nationalism Devotion of a people to their nation’s interests and advancement.

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iKEA is a Swedish company which designs and sells ready-to-assemble furniture. It has branches all over the world, including in Saudi Ara- bia. In the IKEA catalog distributed in Saudi Arabia, many photos of women, including one of a woman wearing pajamas, were censored. Not all images of females were removed—many were replaced or edited. The bulk of the catalog is the same as other versions, but IKEA’s Saudi marketing team made the decision to tailor the images of the Saudi Arabian version to the cultural values of the local market.

This change in IKEA’s marketing images has stirred some politi- cal controversy. The modification was a result of cultural standards and the requirements of the Islamic system (Sharia), which requires special treatment for women. However, the changes by IKEA were not necessary, since the eighth and ninth clauses of the advertisement

culture MatterS IKEA: Values under Threat

law permit a woman’s participation in advertisement as long as she is modest in her clothes and voice and if her hair is covered—if it’s not then it will be with a suitable veil.

A spokeswoman from IKEA said that it is against the company’s values to remove these images because IKEA believes in equal employ- ment opportunities without regard to race, ethnicity, religion, gender, and age. She considered the removal to be a problematic issue for IKEA’s international regulations and that it should have reacted imme- diately. The company is reviewing the different catalog versions and is investigating why the Saudi franchisee took the decision to omit some images of women from its catalog.

Source: “IKEA Regrets Cutting Women from Saudi Ad”, The Wall Street Journal (http:// uk.wsj.com/), October 1 2012.

businesses from international competition. Although years ago India had nationalized many industries and closely scrutinized business applications, today its government is embracing glo- balization by enacting pro-business laws.

With that brief introduction, let’s now examine the key characteristics of each type of legal system in use around the world (common law, civil law, and theocratic law) and discuss the key legal issues facing international companies.

Common Law The practice of common law originated in eleventh-century England and was adopted in that nation’s territories worldwide. The U.S. legal system, therefore, is based largely on the common law tradition (although it integrates some aspects of civil law). A common law legal system reflects three elements:

• Tradition. A country’s legal history • Precedent. Past cases that have come before the courts • Usage. How laws are applied in specific situations

Under common law, the justice system decides cases by interpreting the law on the basis of tradition, precedent, and usage. Yet each law may be interpreted somewhat differently in each case to which it is applied. In turn, each new interpretation sets a precedent that may be followed in later cases. As new precedents arise, laws are altered to clarify vague wording or to accom- modate situations not previously considered.

Business contracts tend to be lengthy in common-law nations (especially the United States) because they must consider many possible contingencies and many possible interpretations of the law in case of a dispute. Companies devote considerable time to devising clear contracts and spend large sums of money on legal advice. On the positive side, common-law systems are flex- ible. Instead of applying uniformly to all situations, laws take into account particular situations and circumstances. The common-law tradition prevails in Australia, Britain, Canada, Ireland, New Zealand, the United States, and some nations of Asia and Africa.

Civil Law The origins of the civil law tradition can be traced to Rome in the fifth century b.c. It is the world’s oldest and most common legal tradition. A civil law system is based on a detailed set of written rules and statutes that constitute a legal code. Civil law can be less adversarial than com- mon law because there tends to be less need to interpret what a particular law states. Because

common law Legal system based on a country’s legal history (tradition), past cases that have come before its courts (precedent), and how laws are applied in specific situations (usage).

civil law Legal system based on a detailed set of written rules and statutes that constitute a legal code.

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all laws are codified and concise, parties to contracts tend to be more concerned only with the explicit wording of the code. All obligations, responsibilities, and privileges follow directly from the relevant code. Less time and money are typically spent, therefore, on legal matters. But civil law systems can ignore the unique circumstances of particular cases. Civil law is practiced in Cuba, Puerto Rico, Quebec, all of Central and South America, most of Western Europe, and many nations in Asia and Africa.

Theocratic Law A legal tradition based on religious teachings is called theocratic law. Three prominent theo- cratic legal systems are Islamic, Hindu, and Jewish law. Although Hindu law was restricted by India’s 1950 constitution, in which the state appropriated most legal functions, it does persist as a cultural and spiritual force. Likewise, although Jewish law remains a strong religious force, it has served few legal functions since the eighteenth century, when most Jewish communities lost their judicial autonomy.

Islamic law is the most widely practiced theocratic legal system today. Islamic law was initially a code governing moral and ethical behavior and was later extended to commercial transactions. It restricts the types of investments companies can make and sets guidelines for business transactions. According to Islamic law, for example, banks cannot charge interest on loans or pay interest on deposits. Instead, banks receive a portion of the profits earned by inves- tors who borrow funds and pay depositors from these earnings. Likewise, because the products of alcohol- and tobacco-related businesses violate Islamic beliefs, firms abiding by Islamic law cannot invest in such companies.

Quick Study 4 1. What is meant by the term legal system? 2. Explain the role of nationalism in politics. 3. Identify the main features of each type of legal system (common, civil, and theocratic law).

global Legal issues Earlier in this chapter, we saw how international companies work to overcome obstacles that an unfamiliar political system presents. Likewise, companies must adapt to dissimilar legal systems in global markets. Let’s examine several important legal issues facing companies that are active in international business.

Standardization Companies must adapt to dissimilar legal systems because there is no clearly defined body of international law that all nations accept. There is a movement toward standardizing the interpre- tation and application of laws in more than one country, but this does not involve standardizing entire legal systems. Enduring differences in legal systems, therefore, can force companies to continue the costly practice of hiring legal experts in each country where they operate.

Still, international treaties and agreements exist in intellectual property rights, antitrust regulation, taxation, contract arbitration, and general matters of trade. International organiza- tions that promote standardization include the United Nations (UN; www.un.org), the Organiza- tion for Economic Cooperation and Development (OECD; www.oecd.org), and the International Institute for the Unification of Private Law (www.unidroit.org). The European Union is standardizing parts of its members’ legal systems to facilitate commerce in Western Europe.

Intellectual Property Property that results from people’s intellectual talent and abilities is called intellectual property. It includes graphic designs, novels, computer software, machine-tool designs, and secret formu- las, such as that for making Coca-Cola. Technically, it results in industrial property (in the form of either a patent or a trademark) or copyright and confers a limited monopoly on its holder.

Most national legal systems protect property rights—the legal rights to resources and any income they generate. Similar to other types of property, intellectual property can be traded,

theocratic law Legal system based on religious teachings.

intellectual property Property that results from people’s intellectual talent and abilities.

property rights Legal rights to resources and any income they generate.

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ChaPter 3 • PolitiCs, law, aNd BusiNess ethiCs 113

sold, and licensed in return for fees and/or royalty payments. Intellectual property laws are designed to compensate people whose property rights are violated.

Intellectual property laws differ greatly from nation to nation. Business Software Alliance (BSA; www.bsa.org), the trade body for business software makers, conducts an annual study of software piracy rates around the globe. Where illegal copies of business software recently made up 20 percent of the U.S. domestic market (the lowest in the world), pirated software made up 93 percent of the market in Georgia (the highest worldwide). Globally, business soft- ware piracy averages around 42 percent and costs business software makers nearly $59 billion annually.8 Figure 3.1 shows piracy rates for some of the nations included in the BSA study. As these figures suggest, the laws of some countries are softer on piracy than the laws of some other nations. Software companies in the United States and the European Union continually lobby their governments to pressure other nations to adopt stronger laws.

Although peddlers of pirated CDs and DVDs operate openly from sidewalk kiosks in China, China’s government did more to tackle piracy recently. The effort was a test case in fighting piracy in the YouTube era of video sharing. Richard Cotton, a general legal counsel at NBC, says, “[Chinese officials] recognize the future of the Chinese economy depends on innovation and creativity, and they have to protect the [intellectual property] that drives it.”9

inDusTrial properTy Industrial property includes patents and trademarks, which are often a firm’s most valuable assets. Laws protecting industrial property are designed to reward inventive and creative activity. Industrial property is protected internationally under the Paris Convention for the Protection of Industrial Property (www.wipo.int), to which nearly 100 countries are signatories.

A patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. Current U.S. patent law went into effect on June 8, 1995, and is in line with the systems of most developed nations. Its provisions are those of the World Trade Organization (WTO), the international organization that regulates trade between nations. The WTO (www.wto.org) typically grants patents for a period of 20 years. The 20-year term begins when a patent application is filed with a country’s patent office, not when it is finally granted. Patents can be sought for any invention that is new, useful, and not obvious to any individual of ordinary skill in the relevant technical field. Patents motivate companies to pursue inventions and make them available to consumers because they protect investments that compa- nies make in research and development.

Trademarks are words or symbols that distinguish a product and its manufacturer. The Nike (www.nike.com) “swoosh” is a trademark, as is the name “Lexus” (www.lexus.com). Trademark law creates incentives for manufacturers to invest in developing new products. It also benefits

industrial property Patents and trademarks.

patent Property right granted to the inventor of a product or process that excludes others from making, using, or selling the invention.

trademark Property right in the form of words or symbols that distinguish a product and its manufacturer.

FiguRe 3.1 Business software piracy

Source: Based on the Eighth Annual BSA and IDC Global Software Piracy Study (Washington, DC; Business Software Alliance, May 2011), pp. 8–9, available at www.bsa.org/globalstudy.

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114 Part 2 • NatioNal BusiNess eNviroNmeNts

consumers because they know what to expect when they buy a particular brand. In other words, you would not expect a canned soft drink labeled “Coca-Cola” to taste like one labeled “Sprite.”

Trademark protection typically lasts indefinitely, provided the word or symbol continues to be distinctive. Ironically, this stipulation presents a problem for companies such as Coca-Cola (www.coca-cola.com) and Xerox (www.xerox.com), whose trademarks “Coke” and “Xerox” have evolved into generic terms for all products in their respective categories. Trademark laws differ from country to country, though some progress toward standardization is occurring. The European Union, for example, opened a trademark-protection office to police trademark infringement against firms that operate in any European Union country.

Designers who own trademarks, such as Chanel (www.chanel.com), Christian Dior (www. dior.com), and Gucci (www.gucci.com), have long been plagued by shoddily made counterfeit handbags, shoes, shirts, and other products. But recently, pirated products of equal or nearly equal quality are turning up, especially in Italy. Most Italian owners of luxury brands of leather goods and jewelry, for example, outsource production to small manufacturers. It is not hard for these same artisans to counterfeit extra copies of a high-quality product. Bootleg copies of a Prada (www.prada.com) backpack that costs $500 in New York can be bought for less than $100 in Rome. Jewelry shops in Milan can buy fake watches labeled Bulgari (www.bulgari.com) and Rolex (www.rolex.com) for $300 and sell them retail for $2,500.

copyrighTs Copyrights give creators of original works the freedom to publish or dispose of them as they choose. A copyright is typically denoted by the well-known symbol ©, a date, and the copyright holder’s name. A copyright holder has the legal rights to:

• Reproduce the copyrighted work. • Derive new works from the copyrighted work. • Sell or distribute copies of the copyrighted work. • Perform the copyrighted work. • Display the copyrighted work publicly.

Copyright holders include artists, photographers, painters, literary authors, publishers, musical composers, and software developers. Works created after January 1, 1978, are automati- cally copyrighted for the creator’s lifetime plus 50 years. Publishing houses receive copyrights for either 75 years from the date of publication or 100 years after creation, whichever comes first. Copyrights are protected under the Berne Convention (www.wipo.int), which is an inter- national copyright treaty to which the United States is a member, and the 1954 Universal Copy- right Convention. More than 50 countries abide by one or both of these treaties.

A copyright is granted for the tangible expression of an idea, not for the idea itself. For example, no one can copyright the idea for a movie about the sinking of the Titanic. But once a film is made that expresses its creator’s treatment of the subject, that film can be copyrighted.

Perhaps the most well known song around the world, “Happy Birthday to You,” is actually protected by U.S. copyright law. The song was composed in 1859 and copyrighted in 1935. Although the copyright was set to expire in 2010 on the song’s 75th copyright birthday, the U.S. Congress extended it until 2030. Time Warner owns the copyright and stands to gain as much as $20 million from the extension.

Product Safety and Liability Product safety laws in most countries set standards that manufactured products must meet. Product liability holds manufacturers, sellers, individuals, and others responsible for damage, injury, or death caused by defective products. Injured parties can sue for monetary compensation through civil lawsuits and for fines or imprisonment through criminal lawsuits.

Developed nations have the toughest product liability laws, whereas developing and emerg- ing countries have the weakest laws. Business insurance costs and legal expenses are greater in nations with strong product liability laws, where damage awards can be large. Likewise, enforce- ment of product liability laws differs from nation to nation. In the most developed nations, for example, tobacco companies are regularly under attack for the negative health effects of tobacco and nicotine. But critics say that the tobacco industry markets aggressively to women and chil- dren in developing countries where regulations are weak and many people do not know that smoking is dangerous.10

copyright Property right giving creators of original works the freedom to publish or dispose of them as they choose.

Berne convention International treaty that protects copyrights.

product liability Responsibility of manufacturers, sellers, individuals, and others for damage, injury, or death caused by defective products.

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Taxation National governments use income and sales taxes for many purposes. They use tax revenue to pay government salaries, build military capabilities, and shift earnings from people with high incomes to the poor. Nations may also tax imports in order to make them more expensive and give locally made products an advantage among price-sensitive consumers.

Nations pass indirect taxes, called “consumption taxes,” which help pay for the conse- quences of using particular products. Consumption taxes on products such as alcohol and tobacco help pay the health-care costs of treating illnesses that result from using these products. Similarly, gasoline taxes help pay for the road and bridge repairs needed to counteract the effects of traffic and weathering.

Many countries impose a value added tax (VAT)—a tax levied on each party that adds value to a product throughout its production and distribution. The United States has not previ- ously implemented a VAT tax, but the nation’s considerable debt level is causing speculation that it may soon impose one. Supporters of the VAT system contend that it distributes taxes on retail sales more evenly between producers and consumers. Suppose, for example, that a shrimper sells the day’s catch of shrimp for $1 per kilogram and that the country’s VAT is 10 percent (see Table 3.1). The shrimper, processor, wholesaler, and retailer pay taxes of $0.10, $0.07, $0.11, and $0.10, respectively, for the value that each adds to the product as it makes its way to consumers. Consumers pay no additional tax at the point of sale because the government has already collected taxes from each party in the value chain. Still, consumers end up paying the tax because producers and distributors must increase prices to compensate for their tax bur- dens. So that the poor are not overly burdened, many countries exclude the VAT on certain items such as children’s clothing.

Antitrust Regulations Laws designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages are called antitrust (antimonopoly) laws. These laws try to provide consumers with a wide variety of products at fair prices. The United States and the European Union are the world’s strictest antitrust regulators. In Japan, the Fair Trade Commission enforces antitrust laws but is often ineffective because absolute proof of wrongdoing is needed to bring charges.

Companies based in strict antitrust countries often argue that they are at a disadvantage against competitors whose home countries condone market sharing, whereby competitors agree to serve only designated segments of a certain market. That is why firms in strict antitrust coun- tries often lobby for exemptions in certain international transactions. Small businesses also argue that they could better compete against large international companies if they could join forces without fear of violating antitrust laws.

In the absence of a global antitrust enforcement agency, international companies must con- cern themselves with the antitrust laws of each nation where they do business. In fact, a nation (or group of nations) can block a merger or acquisition between two nondomestic companies if those companies do a good deal of business there. This happened to the proposed $43 billion merger between General Electric (GE; www.ge.com) and Honeywell (www.honeywell.com). GE wanted to marry its manufacture of airplane engines to Honeywell’s production of advanced electronics for the aviation industry. Although both companies are based in the United States, together they employed 100,000 Europeans. GE alone earned $25 billion in Europe the year before the proposed merger. The European Union blocked the merger because it believed the result would be higher prices for customers, particularly airlines.

value added tax (VaT) Tax levied on each party that adds value to a product throughout its production and distribution.

antitrust (antimonopoly) laws Laws designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages.

TaBle 3.1 effect of Value added Taxes (VaT)

Production stage selling Price value added 10% vat total vat

Shrimper $1.00 $1.00 $0.10 $0.10

Processor 1.70 0.70 0.07 0.17

Wholesaler 2.80 1.10 0.11 0.28

Retailer 3.80 1.00 1.10 0.38

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Quick Study 5 1. What are intellectual property rights? What is the significance of such rights? 2. Explain the term industrial property. What are its two types? 3. What is a copyright? Explain its importance to international business. 4. Identify the ramifications of antitrust (antimonopoly) laws and product liability laws.

ethics and social responsibility We learned in Chapter 2 that, when a company goes global, its managers encounter many unfa- miliar cultural rules that govern human behavior. Although legal systems set boundaries for law- ful individual and corporate behavior, they are inadequate for dilemmas of ethics and social responsibility. Frameworks for business law vary in strength from country to country. Unfor- tunately, the quest for profits may entice a company to exploit differences in legal standards by locating certain business operations in nations where they will be less scrutinized. In this way, national legal differences can become ethical issues for managers.

Ethical behavior is personal behavior in accordance with guidelines for good conduct or morality. Ethical dilemmas are not legal questions. When a law exists to guide a manager toward a legally correct action, that path should be followed. In an ethical dilemma, there is no right or wrong decision. There are alternatives, however, that may be equally valid in ethical terms depending on one’s perspective.

In addition to the need for individual managers to behave ethically, businesses are expected to exercise corporate social responsibility—the practice of going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities. Corporate social responsibility (or CSR, as it is known) includes a wide variety of activities, including giving to the poor, building schools in developing countries, and protecting the global environment.

We can think of CSR as consisting of three layers of activity. The first layer is traditional philanthropy, whereby a corporation donates money and, perhaps, employee time toward a spe- cific social cause. The second layer is related to risk management, whereby a company develops a code of conduct that it will follow in its global operations and agrees to operate with greater transparency. The third layer is strategic CSR, in which a business builds social responsibility into its core operations to create value and build competitive advantage.11

In the next two sections, we present the main theories of ethics and CSR and then examine several important issues.

Philosophies of Ethics and Social Responsibility There are four commonly cited philosophies of business ethics and social responsibility. The Friedman view—named for its main supporter, the late economist Milton Friedman—says that a company’s sole responsibility is to maximize profits for its owners (or shareholders) while operating within the law.12 Imagine a company that moves its pollution-generating operations from a country having strict and expensive environmental-protection laws to a country having no such laws. Managers subscribing to the Friedman philosophy would applaud this decision. They would argue that the company is doing its duty to increase profits for its owners and is operating within the law in the foreign country. Many people disagree with this argument and say the discussion is not whether a company has CSR obligations but how it will fulfill them.

The cultural relativist view says that a company should adopt local ethics wherever it oper- ates because all belief systems are determined within a cultural context. Cultural relativism sees truth, itself, as relative and argues that right and wrong are determined within a specific situa- tion. The expression “When in Rome, do as the Romans do” captures the essence of cultural relativism. Consider a company that opens a factory in a developing market and, following local customs, employs child laborers. The cultural relativist manager would argue that this company is acting appropriately and in accordance with local standards of conduct. Many people strongly oppose this line of ethical reasoning.

The righteous moralist view says that a company should maintain its home-country ethics wherever it operates because the home-country’s view of ethics and responsibility is superior to

ethical behavior Personal behavior in accordance with guidelines for good conduct or morality.

corporate social responsibility Practice of companies going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities.

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ChaPter 3 • PolitiCs, law, aNd BusiNess ethiCs 117

others’ views. Imagine a company that expands from its developed-country base to an emerging market where local managers commonly bribe officials. Suppose headquarters detests the act of bribery and instructs its subsidiary managers to refrain from bribing any local officials. In this situation, headquarters is imposing its righteous moralist view on local managers.

The utilitarian view says that a company should behave in a way that maximizes “good” outcomes and minimizes “bad” outcomes wherever it operates. The utilitarian manager asks the question, “What outcome should I aim for?” and answers, “That which produces the best outcome for all affected parties.” In other words, utilitarian thinkers say the right behavior is that which produces the greatest good for the greatest number. Consider, again, the righteous moralist company above that instructs its employees not to bribe local officials in the emerging market. Now suppose a manager learns that, by bribing a local official, the company will finally obtain permission to expand its factory and create 100 well-paying jobs for the local community. If the manager pays the bribe based on his or her calculations that more people will benefit than will be harmed by the outcome, he or she is practicing utilitarian ethics.

Although businesses develop guidelines and policies regarding ethical behavior and social responsibility, issues arise on a daily basis that can cause dilemmas for international managers. Let’s examine some of these key issues.

CSR Issues Companies should not produce public relations campaigns that present a business as socially responsible if it does not truly embrace CSR principles. Conscientious business leaders realize that the futures of their companies rest on healthy workforces and environments worldwide. For example, soft drink makers support all sorts of environmental initiatives because they under- stand that their futures depend on an ample supply of clean drinking water. Let’s now discuss CSR as it pertains to bribery and corruption, labor conditions and human rights, fair trade prac- tices, and the environment.

BriBery anD corrupTion Similar to other cultural and political elements, the prevalence of corruption varies from nation to nation. In certain countries, bribes are routinely paid to distributors and retailers in order to push a firm’s products through distribution channels. Bribes can mean the difference between obtaining an important contract and being completely shut out of a market. But corruption is detrimental to society and business. Among other things, corruption can send resources toward inefficient uses, hurt economic development, distort public policy, and damage national integrity.

Map 3.2 on pages 118–119 shows how countries rate on their perceived levels of corrup- tion. The higher a country’s score on the corruption perceptions index (CPI), the less corrupt it is perceived to be by international managers. What stands out immediately on this map is that the poorer and least developed nations tend to be perceived as being most corrupt (such as Russia, much of Africa, and areas in the Middle East). This reflects the hesitancy on the part of interna- tional companies about investing in corrupt economies.

Enron Corporation made history when it acknowledged in a federal filing that it had over- stated its earnings. Investors fled in droves as Enron stock became worthless and the company went bankrupt. Although executives had earned millions over the years in salaries and bonuses, Enron’s rank-and-file employees saw their retirement savings disappear as the firm disintegrated. European banks lost around $2 billion that they had lent to Enron and its subsidiaries. Chairman of the board Kenneth Lay (now deceased) and CEO Jeffrey Skilling were convicted on criminal charges. Then a criminal indictment was filed against accounting firm Arthur Andersen, Enron’s auditor, for shredding documents related to its work for Enron. With its reputation irreparably damaged, Andersen also collapsed.

The financial losses and diminished confidence in business that resulted from Enron’s collapse prompted the U.S. Congress to pass the Sarbanes–Oxley Act (Sarbox) on corporate governance. The law established new, stringent accounting standards and reporting practices for firms. Around the world, governments, accounting standards boards, other regulators, and interest groups won the fight for higher standards and more transparent financial reporting by companies. Businesses worldwide received the message that fudging the accounting numbers, misrepresenting the firm’s financial health, and running a company in that gray area between right and wrong is unethical and, now, illegal.

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118 Part 2 • NatioNal BusiNess eNviroNmeNts

9.0 to 10.0

8.0 to 8.9

7.0 to 7.9

6.0 to 6.9

5.0 to 5.9

4.0 to 4.9

3.0 to 3.9

2.0 to 2.9

1.0 to 1.9

no data available

CPI Score

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM

NETHERLANDS

LUXEMBOURG

GERMANY

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ.

LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B Y A

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

G H

A N

A T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

ERITREA

E T H I O P I ACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

DJBOUTI

HAWAII

GALAPAGOS ISLANDS

SLOVENIA

MYANMAR (BURMA)

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

F R A N C E

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

S O U T H S U D A N

MAP 3.2 Corruption Perceptions Index (CPI)

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ChaPter 3 • PolitiCs, law, aNd BusiNess ethiCs 119

9.0 to 10.0

8.0 to 8.9

7.0 to 7.9

6.0 to 6.9

5.0 to 5.9

4.0 to 4.9

3.0 to 3.9

2.0 to 2.9

1.0 to 1.9

no data available

CPI Score

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM

NETHERLANDS

LUXEMBOURG

GERMANY

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ.

LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B Y A

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

G H

A N

A T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

ERITREA

E T H I O P I ACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

DJBOUTI

HAWAII

GALAPAGOS ISLANDS

SLOVENIA

MYANMAR (BURMA)

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

F R A N C E

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

S O U T H S U D A N

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120 Part 2 • NatioNal BusiNess eNviroNmeNts

Some people believe Sarbox needs to be reformed because of the financial burden that com- panies face in conforming to the act’s requirements. Regulators, securities experts, and scholars (who largely praise Sarbox) are pitted against chief financial officers—many of whom say that the act should be reformed or repealed because its costs outweigh its benefits. But legislators have not backed down. Directors on the boards of companies have had to become far-more- active participants in company operations—to the point where it has become “a job now,” says one expert on corporate governance.13

laBor conDiTions anD human righTs To fulfill their responsibilities to society, companies are monitoring the actions of their own employees and the employees of companies with whom they conduct business. Pressure from human rights activists drove conscientious apparel companies to introduce codes of conduct and monitoring mechanisms for their international suppliers. Levi-Strauss (www.levistrauss.com) pioneered the use of practical codes to control working conditions at contractors’ facilities. The company does business only with partners who meet its “Terms of Engagement,” which sets minimal guidelines regarding ethical behavior, environmental and legal requirements, employment standards, and community involvement.14

Consider one case publicized by human rights and labor groups investigating charges of worker abuse at the factory of one of Nike’s Vietnamese suppliers. Twelve of 56 female employees reportedly fainted when a supervisor forced them to run around the factory as punishment for not wearing regulation shoes. Nike confirmed the report and, in suspending the supervisor, took steps to implement practices more in keeping with the company’s home-country ethics.

International law says that only nations can be held liable for human rights abuses. But activist groups can file a lawsuit against a U.S. business for an alleged human rights violation under the Alien Tort Claims Act by alleging a company’s complicity in the abuse. Yahoo! (www. yahoo.com) felt the power of this law when two Chinese dissidents were jailed after the com- pany gave data it had on them to Chinese authorities. Yahoo! reached an out-of-court settlement with the families of the jailed men. And despite denials of any responsibility in the matter, U.S. oil company Unocal, now part of Chevron (www.chevron.com), settled out of court over alle- gations of complicity in government soldiers’ abuse of villagers during construction of an oil pipeline in Myanmar in the 1990s.15

fair TraDe pracTices Starbucks (www.starbucks.com) works hard to operate in a socially responsible manner by trying to ease the plight of citizens in poor coffee-producing countries. Starbucks does this by building schools, health clinics, and coffee-processing facilities to improve the well-being of families in coffee-farming communities. The company also sells what it calls “fair trade coffee.” Fair trade products are those that involve companies working with suppliers in more equitable, meaningful, and sustainable ways. For Starbucks, this means ensuring that coffee farmers earn a fair price for their coffee crop and helping them farm in environmentally friendly ways.16

Fair Trade USA (www.fairtradeusa.org) is the nonprofit organization that independently certifies fair trade products such as Starbucks coffee. The Fair Trade model of international trade benefits more than one million farmers and farm laborers in 58 developing countries across Africa, Asia, and Latin America. Fair Trade products now include coffee, tea, herbs, cocoa, chocolate, fruit, rice, sugar, flowers, honey, and spices. Fair Trade USA certifies that a product meets the following criteria:17

• Fair Prices. Producer groups receive a guaranteed minimum floor price. • Fair Labor Conditions. Farms do not employ children, and workers are given freedom of

association, safe working conditions, and a living wage. • Direct Trade. Whenever possible, importers purchase from producer groups to eliminate

intermediaries. • Democratic Community Development. Farmers and workers decide how to spend their

Fair Trade premiums in social and business development projects. • Environmental Sustainability. Farming methods protect the health of farmers and

preserve ecosystems.

enVironmenT Concern for the environment and ecosystem is no longer left to government agencies and nongovernmental organizations. Today companies pursue “green” initiatives to

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ChaPter 3 • PolitiCs, law, aNd BusiNess ethiCs 121

reduce their toll on the environment and to reduce operating costs and boost profit margins. Carbon footprint is the environmental impact of greenhouse gases (measured in units of carbon dioxide) that results from human activity. It consists of two components:18

• Primary Footprint. Direct carbon dioxide emissions from the burning of fossil fuels, including domestic energy consumption and transportation (such as electricity and gasoline).

• Secondary Footprint. Indirect carbon dioxide emissions from the whole life cycle of products (from their manufacture to eventual breakdown).

Companies at the leading edge of the green movement are printing a number on their prod- ucts that represents the grams of carbon dioxide emitted from producing and shipping them to retailers. The number signifies the environmental impact of all the materials, chemicals, and so on, used in producing and distributing a good. For example, the United Kingdom’s number- one selling snack food brand, Walker (www.walkers-crisps.co.uk), stamps “75g” on its packets of cheese- and onion-flavored potato chips, or crisps—meaning 75 grams of carbon dioxide were emitted in producing and shipping each packet. Footwear and clothing maker Timberland (www.timberland.com) is implementing a different system. It labels its products with a score ranging from 0 to 10. A score of “0” means producing and shipping a product emitted less than 2.5 kilograms of carbon dioxide; a product with a score of “10” emitted 100 kilograms of carbon dioxide—roughly equivalent to driving a car 240 miles.19

Another trendsetter in reducing its carbon footprint is Marriott International (www.mar- riott.com). The hotel company’s employee cafeteria replaced paper and plastic containers with real plates and biodegradable potato-based containers called Spudware. Marriott gives employ- ees reusable plastic water bottles and lets them exchange burnt-out regular bulbs, from work or home, for energy-saving compact fluorescent bulbs. And the company has “green ambassadors” who remind employees to print documents double-sided and to turn off lights and electronic devices not in use.20

Boisset Family Estates (www.boisset.com), France’s third-largest winery, initiated an eco- smart alternative to the glass bottle. Boisset uses aluminum-coated paperboard similar to con- tainers commonly used for juices and milk. Besides protecting the product from oxidation and making it easier to chill, the new packaging helps the environment and improves company prof- its. It used to take 28 trucks to haul enough empty glass bottles to the winery to package the same volume of wine that today takes just one truck of empty cartons. After the cartons are filled, one truck now hauls away what used to take three trucks. The savings in materials, fuel, and equipment are significant.21

carbon footprint Environmental impact of greenhouse gases (measured in units of carbon dioxide) that results from human activity.

the electric smart car shown here is docked to a charging station in stuttgart, germany. many people believe that globalization and economic development take a toll on the environment. Companies are working to create all sorts of “green” products to reduce the impact of modern economies on our ecosystem. Besides car manufacturers, can you think of other types of companies that are working to become more environmentally responsible?

Source: Franziska Kraufmann/Newscom

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122 Part 2 • NatioNal BusiNess eNviroNmeNts

On a national level, the German government has gone greener than most others. Germany’s energy law guarantees operators of windmills and solar generators prices that are above the market rate for as long as 20 years. That law, combined with German expertise in aerodynamics, is making the country a global leader in renewable energy. Today, 60 compa- nies in Germany specialize in wind systems. The former East Germany is nicknamed Solar Valley because of the large number of companies that manufacture solar cells there. Germa- ny’s green-energy sector employs more than 235,000 people and generates $33 billion in sales annually.22

business and international relations The political relations between a company’s home country and the nations in which it does business affect its international business activities. Favorable political relationships foster sta- ble business environments and increase international cooperation in many areas, including the development of international communications and distribution infrastructures. In turn, a stable environment requires a strong legal system through which disputes can be resolved quickly and fairly. In general, favorable political relations lead to increased business opportunities and lower risk.

To generate stable business environments, some countries have turned to multilateral agreements—treaties concluded among several nations, each of whom agrees to abide by treaty terms even if tensions develop. According to the European Union’s founding treaty, goods, ser- vices, and citizens of member nations are free to move across members’ borders. Every nation must continue to abide by such terms even if it has a conflict with another member. For instance, although Britain and France disagree on many issues, neither can treat goods, services, and citi- zens coming and going between their two nations any differently than it treats any other member nation’s goods, services, and citizens. See Chapter 8 for a detailed presentation of the European Union.

The United Nations Although individual nations sometimes have the power to influence the course of events in cer- tain parts of the world, they cannot monitor political activities everywhere at once. The United Nations (UN; www.un.org) was formed after the Second World War to provide leadership in fostering peace and stability around the world. The UN and its many agencies provide food and medical supplies, educational supplies and training, and financial resources to poorer mem- ber nations. The UN receives its funding from member contributions based primarily on gross national product (GNP). Practically all nations in the world are UN members—except for several small countries and territories that have observer status.

The UN is headed by a secretary general who is elected by all members and who serves for a five-year term. The UN system consists of six main bodies:

• All members have an equal vote in the General Assembly, which discusses and recom- mends action on any matter that falls within the UN Charter. It approves the UN budget and the makeup of the other bodies.

• The Security Council consists of 15 members. Five (China, France, the United Kingdom, Russia, and the United States) are permanent. Ten others are elected by the General Assembly for two-year terms. The council is responsible for ensuring international peace and security, and all UN members are supposed to be bound by its decisions.

• The Economic and Social Council, which is responsible for economics, human rights, and social matters, administers a host of smaller organizations and specialized agencies.

• The Trusteeship Council consists of the five permanent members of the Security Council and administers all trustee territories under UN custody.

• The International Court of Justice consists of 15 judges elected by the General Assembly and Security Council. It can hear disputes only between nations, not cases brought against individuals or corporations. It has no compulsory jurisdiction, and its decisions can be, and have been, disregarded by specific nations.

• Headed by the secretary general, the Secretariat administers the operations of the UN.

united nations (un) International organization formed after World War II to provide leadership in fostering peace and stability around the world.

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ChaPter 3 • PolitiCs, law, aNd BusiNess ethiCs 123

bottoM line for buSineSS

Differences in political and legal systems present both opportuni- ties and risks for international companies. Gaining complete control over events in even the most stable national business environment is extremely difficult because of the intricate connections among politics, law, and culture. Still, understanding these connections is the first step in managing the risks of doing business in unfamiliar environments.

implications for Business in Totalitarian nations Political opposition to business from nongovernmental organizations is extremely unlikely if a totalitarian nation sanctions a particular com- mercial activity. Bribery and kickbacks to government officials will likely prevail, and refusal to pay tends not to be an option. As such, business activities in totalitarian nations are inherently risky. Business law in totalitarian nations is either vague or nonexistent, and interpre- tation of the law is highly subjective. Finally, certain groups criticize companies for doing business in or with totalitarian nations, saying they are helping sustain oppressive political regimes.

implications for Business in Democracies Democracies tend to provide stable business environments through laws that protect individual property rights. Commerce should pros- per when the private sector comprises independently owned firms that exist to make profits. Although participative democracy, property rights, and free markets tend to encourage economic growth, they do not always do so. India is the world’s largest democracy, yet its economy grew very slowly for decades. Meanwhile, some countries achieved rapid economic growth under political systems that were not genuinely democratic.

Which Type of government is Best for Business? Although democracies pass laws to protect individual civil liberties and property rights, totalitarian governments could also grant such rights. The difference is that, whereas democracies strive to guarantee such rights, totalitarian governments retain the power to repeal them whenever they choose. As for a nation’s rate of economic growth, we can say only that a democracy does not guarantee high rates of economic growth and that totalitarianism does not doom a nation to slow economic growth. An economy’s growth rate is influenced by many additional factors.

implications of legal issues for companies A nation’s political system is naturally intertwined with its legal sys- tem. Its political system inspires and endorses its legal system, which legitimizes and supports the political system. Flexible business strate- gies help companies operate within the political and legal frameworks of nations. Managers will benefit if they have a solid grasp of how legal systems affect company operations and strategy.

implications of ethical issues for companies Probably every international company of at least moderate size has a policy for corporate social responsibility (CSR). Traditionally, compa- nies practiced CSR through old-fashioned philanthropy. Indeed, do- nating money and time toward solving social problems helped society and bolstered a company’s public image. Companies later developed codes of conduct for their global operations to ensure they were good citizens wherever they operated. Today, companies search for ways to use CSR to create value and build competitive advantage.

An important body within the UN Economic and Social Council is the United Nations Conference on Trade and Development (UNCTAD; unctad.org). The organization has a broad mandate in the areas of international trade and economic development. It hosts conferences on pressing development issues including entrepreneurship, AIDS, poverty, and national debt. Certain conferences are designed to develop the business management skills of individuals in developing nations.

Quick Study 6 1. Define ethical behavior and corporate social responsibility. 2. What are four commonly cited philosophies of business ethics and social responsibility? 3. List several issues of ethics and social responsibility relevant to international managers. 4. Why are international relations among countries important to international business?

Chapter Summary 1. Describe each main type of political system.

• A political system consists of the structures, processes, and activities by which a nation governs itself.

• In a totalitarian system, individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints.

• Totalitarian governments tend to impose authority, lack constitutional guarantees, and restrict participation.

MyManagementLab Go to www.mymanagementlab.com to complete the problem marked with this icon .

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124 Part 2 • NatioNal BusiNess eNviroNmeNts

• Under theocratic totalitarianism, a country’s religious leaders enforce laws and regulations based on religious and totalitarian beliefs.

• Under secular totalitarianism, political leaders rely on military and bureaucratic power.

• Secular totalitarianism takes three forms: communist totalitarianism, tribal totalitari- anism, and right-wing totalitarianism.

• In a democratic system, leaders are elected directly by the wide participation of the people or by their representatives.

• Most democracies are representative democracies, in which citizens elect individuals from their groups to represent their political views.

• Representative democracies strive to provide freedom of expression, periodic elec- tions, full civil and property rights, minority rights, and nonpolitical bureaucracies.

2. Identify the origins of political risk and how managers can reduce its effects. • Political risk is the likelihood that a society will undergo political changes that nega-

tively affect local business activity. • Macro risk threatens the activities of all domestic and international companies in

every industry, whereas micro risk threatens companies only within a particular industry or more narrowly defined group.

• Five actions or events that cause political risk are conflict and violence, terrorism and kidnapping, property seizure, policy changes, and local content requirements.

• The seizure of assets by a local government can take one of three forms: confiscation (forced transfer of assets without compensation), expropriation (forced transfer with compensation), or nationalization (forced takeover of an entire industry).

• Managers can reduce the effects of political risk through adaptation (incorporat- ing risk into business strategies), information gathering (monitoring local political events), and political influence (such as by lobbying local political leaders).

• The Foreign Corrupt Practices Act forbids U.S. companies from bribing government officials or political candidates in other nations.

3. Describe each main type of legal system and some important global legal issues. • A country’s legal system is its set of laws and regulations, including the processes by

which its laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions.

• Common law is a legal system based on a country’s legal history (tradition), past cases that have come before its courts (precedent), and how laws are applied in specific situations (usage).

• Civil law is a system based on a detailed set of written rules and statutes that consti- tute a legal code, from which flows all obligations, responsibilities, and privileges.

• Theocratic law is a system based on religious teachings. • Businesses prefer a legal system that protects property rights (legal rights to

resources and any income they generate) and intellectual property (property that results from people’s intellectual talent and abilities).

• Intellectual property takes the form of industrial property (a patent or trademark) or copyright.

• Many nations have product liability laws (responsibility for damage, injury, or death caused by defective products) and antitrust laws (designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages).

4. Explain ethics and social responsibility and key issues facing international companies. • Ethical behavior is personal behavior in accordance with guidelines for good con-

duct or morality. • Corporate social responsibility is the practice of companies going beyond legal obli-

gations to actively balance commitments to investors, customers, other companies, and communities.

• The Friedman view of CSR says that a company’s sole responsibility is to maximize profits for its owners while operating within the law.

• The cultural relativist view of CSR says that a company should adopt local ethics wherever it operates.

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ChaPter 3 • PolitiCs, law, aNd BusiNess ethiCs 125

• The righteous moralist view of CSR says that a company should maintain its home- country ethics wherever it operates.

• The utilitarian view of CSR says that a company should behave in a way that maxi- mizes “good” outcomes and minimizes “bad” outcomes wherever it operates.

5. Explain how international relations affect international business activities. • Political relations between a company’s home country and those with which it does

business strongly affect its international activities. • In general, favorable political relations lead to increased opportunity and stable

business environments. • The mission of the United Nations (UN) is to provide leadership in fostering peace

and stability around the world. • Although its global peacekeeping efforts have had mixed results, the UN helps poor

nations by providing food and medical supplies, educational supplies and training, and financial resources.

Talk It Over 1. The Internet and the greater access to information it can provide are forcing politicians

to change their methods of governing. How might the Internet change totalitarian politi- cal systems, such as North Korea? What might its future expansion mean for nations with theocratic systems, such as Iran? How might technology change the way that democracies function?

2. Under a totalitarian political system, the Indonesian economy grew strongly for 30 years. Meanwhile, the economy of the world’s largest functioning democracy, India, performed poorly for decades until recently. Relying on what you learned in this chapter, do you think the Indonesian economy grew despite or because of a totalitarian regime? What might explain India’s relatively poor performance under a democratic political system?

Teaming Up 1. Debate Project. Two groups of four students each will debate the ethics of doing busi-

ness in countries with totalitarian governments. After the first student from each side has spoken, the second student will question the opposing side’s arguments, looking for holes and inconsistencies. The third student will attempt to answer these arguments. The fourth student will present a summary of each side’s arguments. Finally, the class will vote to determine which team has offered the more compelling argument.

2. Market Entry Strategy Project. This exercise corresponds to the MESP online simula- tion. For the nation you are studying, what type of political and legal systems does it have? Do free elections take place? Is the government heavily involved in the economy? Is the legal system effective and impartial? Do political and legal conditions suggest the country could be a potential market? If so, for what kinds of goods or services might the market be appealing? What is the level of corruption in the nation? Is legislation pending that may be relevant to international companies? Integrate your findings into your completed MESP report.

antitrust (antimonopoly) laws (p. 115) Berne Convention (p. 114) capitalism (p. 103) carbon footprint (p. 121) civil law (p. 111) common law (p. 111) communism (p. 100) confiscation (p. 105) copyright (p. 114) corporate social responsibility (p. 116) democracy (p. 102) ethical behavior (p. 116) expropriation (p. 105)

Foreign Corrupt Practices Act (p. 110)

industrial property (p. 113) intellectual property (p. 112) legal system (p. 110) lobbying (p. 110) local content requirements (p. 108) nationalism (p. 110) nationalization (p. 105) patent (p. 113) political risk (p. 104) political system (p. 98) private sector (p. 103)

product liability (p. 114) property rights (p. 112) representative democracy

(p. 102) secular totalitarianism (p. 100) socialism (p. 100) theocracy (p. 100) theocratic law (p. 112) theocratic totalitarianism (p. 100) totalitarian system (p. 99) trademark (p. 113) United Nations (UN) (p. 122) value added tax (VAT) (p. 115)

Key Terms

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Take It to the Web 1. Video Report. Visit this book’s channel on YouTube (www.YouTube.com/MyIBvideos).

Click on “Videos” near the top of the page and click on the set of videos labeled “Ch 03: Politics, Law, and Business Ethics.” Watch one video from the list, and then summarize it in a half-page report. Reflecting on the contents of this chapter, which components of poli- tics, law, and business ethics can you identify in the video? How might a company engaged in international business act on the information contained in the video?

2. Website Report. To attract investment from domestic and foreign companies, nations compete against each other to provide top-notch services.

Visit the main government portal of Hong Kong, SAR (www.gov.hk). Can you identify several sections of the site that are government-to-business activities and government-to- citizen dealings? Visit the “Environment” section and read about Hong Kong’s eco-friendly initiatives. What key milestones has it achieved, and what future initiatives are planned?

List the types of services that would be available to you as (1) a citizen of Hong Kong, (2) a tourist planning to visit Hong Kong, (3) a person thinking of starting a business in Hong Kong, and (4) a company currently operating in Hong Kong. What additional ser- vices should the government offer on its website that it does not currently provide?

Ethical Challenges 1. You are the president of a firm that publishes textbooks for medical students in more than 30

languages. On a recent trip to a university in a developing country (with a GDP per capita of under $1,000 per year), you discover that students are using bound photocopies of your best-selling medical textbook. Speaking with several students, they inform you that if they were required to pay for the actual books, they could not afford medical school. Witnessing the clear copyright violation firsthand, how do you react? What possible courses of action might you take? If additional information would be helpful to you, what would it be?

2. You are the proprietor of a fledging computer graphics company in Shanghai, China. The sophisticated business application software you need for your business normally sells for 2,900 renminbi (around $350) at computer stores in Shanghai. But with an income of just over $5,000 a year, you cannot afford to buy the original graphics software for your busi- ness. A friend has told you she can get you all the software you need, and more, at a nearby street market for only $40. Because very few people buy official software, you know the authorities will not punish you if you are caught. Is it unethical for you to purchase the pi- rated software? Do you believe you are justified in doing so?

3. You are the CEO of a major pharmaceutical firm that holds worldwide patents on several highly successful drugs. Your company invests heavily to develop its drugs because patents allow it to recoup its investment. But your firm has come under pressure from competi- tors selling cheaper alternatives and from politicians and nongovernmental groups to sup- ply drugs to people in poor nations at reduced prices. Several senior executives in your company feel that the firm is unfairly being asked to discount its drugs that treat diseases afflicting people of poor nations. Some executives suggest that the firm focus on drugs to treat diseases (such as heart disease and cancer) that occur mostly in wealthy nations, but you are uneasy with such a move. Would such a course of action be ethical? Diseases such as AIDS, cancer, and heart disease all kill their victims. Should drugs for only certain dis- eases be exempt from patent protection?

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Practicing International Management Case

Pirates of Globalization

It pays to remember that old Latin phrase, caveat emptor (“let the buyer beware”), when tackling the production of counterfeit prod- ucts on a global scale. Sophisticated pirates routinely violate pat- ents, trademarks, and copyrights to churn out high-quality fakes of the best-known brands. Trademark counterfeiting amounts to between 5 and 7 percent of world trade, or around $500 bil- lion a year. Phony products appear in many industries, including computer software, films, books, music CDs, and pharmaceutical drugs. Fake computer chips, broadband routers, and computers cost the electronics industry alone up to $100 billion annually.

Traditionally peddled by sidewalk vendors and in back-street markets, counterfeiters now employ the latest technology. Just as honest businesses do, they are using the Internet to slash the cost of distributing their fake goods. All merchandise on some Internet sites is counterfeit, and even legitimate website operators, such as eBay (www.ebay.com), have difficulty rooting out pirates.

New York retailer Tiffany & Company (www.tiffany.com) sued eBay when counterfeits of its products appeared on eBay’s website. In the complaint, Tiffany said that, of the 186 jewelry pieces bearing the Tiffany name that it randomly purchased on eBay, 73 percent were phony. Tiffany argues that, because eBay profits significantly from the sale of fake merchandise, provides a forum for such sales, and promotes it, the company “should bear responsibility for the sale of counterfeit merchandise on its site.” Others disagree, saying it is impractical to require online auction- eers to verify the authenticity of every product sold on its site.

Pirates have not ignored the market for automotive parts, which loses around $12 billion annually to phony goods. Car man- ufacturers list harmful fakes such as brake linings made of com- pressed sawdust and transmission fluid that is nothing more than cheap oil with added dye. Boxes bearing legitimate-looking labels make it difficult for consumers to tell the difference between a fake and the real deal. The problem is causing fears of lawsuits because of malfunctioning counterfeits and concerns of lost rev- enue for producers of the genuine articles. For example, if some- one is in an accident because of a counterfeit product, legitimate manufacturers need to prove the product is not their own.

Lax antipiracy regulations and booming economies in emerg- ing markets mean potential intellectual-property traps await companies doing business there. For example, Indian law gives international pharmaceutical firms five- to seven-year patents on processes used to manufacture drugs—but not on the drugs them- selves. This lets Indian companies modify the patented production processes of international pharmaceutical companies to create drugs that are only slightly different.

In China, political protection for pirates of intellectual prop- erty remains fairly common. Government officials, people work- ing for the government, and even the People’s Liberation Army (China’s national army) operate factories that churn out pirated goods. An international company has difficulty fighting piracy in China because filing a lawsuit can severely damage its business relations there.

Yet, opinion is divided on the root causes of intellectual property violations in China. Some argue that Chinese legisla- tion is vaguely worded and difficult to enforce. Others say Chi- na’s intellectual property laws and regulations are fine, but poor enforcement is to blame for high rates of piracy. Amazingly, Chi- na’s regulatory body sometimes allows a counterfeiter to remove an infringing trademark and still sell the substandard good. Technology companies said to have been harmed by China’s weak intellectual property laws include Microsoft (www. microsoft.com), which claims that its software is widely pirated, and Cisco Systems (www.cisco.com), which sued a Chinese hardware maker for allegedly copying and using Cisco network- ing software.

Thinking globally 1. Do you think that the international business community

is being too lax about the abuse of intellectual property rights? Are international companies simply afraid to speak out for fear of jeopardizing access to attractive markets?

2. Increased digital communication may pose a threat to intellectual property because technology allows people to create perfect clones of original works. How do you think the Internet is affecting intellectual property laws?

3. Locate information on the Tiffany versus eBay lawsuit mentioned in the case. Identify the arguments of the plaintiff and the defendant and who prevailed. What are the implications of that lawsuit for the sale of counterfeits in online auctions?

Source: “Counterfeit Drugs: Fake Pharma,” The Economist (www.economist.com), Febru- ary 15, 2012; Rachael King, “Fighting a Flood of Counterfeit Tech Products,” Bloomberg Businessweek (www.businessweek.com), March 1, 2010; Andrew Willis, “Europe Awash in Counterfeit Drugs,” Bloomberg Businessweek (www.businessweek.com), December 8, 2009; Rachel Metz, “eBay Beats Tiffany in Court Case over Trademarks,” USA Today (www.usatoday.com) July 14, 2008.

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128

A Look Ahead Chapter 5 introduces us to a major form of international business activity—international trade. We examine the patterns of international trade and outline several theories that attempt to explain why nations conduct trade.

A Look at This Chapter This chapter explains the key differences between centrally planned, mixed, and market economies. We also explore economic development and the challenges facing emerging markets and those transforming their economies into free markets.

A Look Back Chapter 3 presented the ways in which different political and legal systems affect international business activities. We also explored some of the ways managers can cope with the risks created by political and legal uncertainties.

4. Describe the different ways to measure a nation’s level of development.

5. Discuss the process of economic transition and identify the obstacles for business.

1. Describe what is meant by a centrally planned economy and explain why its use is declining.

2. Identify the main characteristics of a mixed economy and explain the emphasis on privatization.

3. Explain how a market economy functions and identify its distinguishing features.

Learning Objectives After studying this chapter, you should be able to

economics and emerging Markets

chapter fOur

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IndIa’s Tech KIng

BANGALORE, India—Infosys (www.infosys.com) was founded in 1981 with an initial capital outlay of only $250. Today, the company is one of India’s top providers of information technology services, with more than 151,000 employ- ees and $7 billion in revenue. Infosys and other Indian firms provide high- quality software and consulting services to global companies. Pictured here, associates walk past the company’s Global Education Center in Mysore, India.

Just as China drove down prices world- wide in manufacturing, India is doing the same in services. But China and India are following two distinct paths to devel- opment. Whereas China developed its economy by throwing open its doors to investment, India’s commitment to free markets was ambiguous and made interna- tional companies wary. So India underwent organic growth and spawned homegrown firms in knowledge-based industries, such as Infosys.

Despite its reputation for high taxes and burdensome regulations, India long had some of the most basic foundations of a market economy—including private enter- prise, democratic government, and Western accounting practices. Its capital markets are also more efficient and transparent than China’s, and its legal system is more advanced. The fact that China is following a top-down approach to development while India pursues a bottom-up approach reflects their opposing political systems: India is a democracy, and China is not.

India appears to be the first developing nation to advance economically by rely- ing on the brainpower of its people. China, by contrast, is relying on its natural resources and inexpensive factory labor to develop its economy. The best growth strategy—the organic-led path of India versus the investment-led path of China— depends on a nation’s circumstances. As you read this chapter, consider the impor- tance of economic development and how companies can help to improve a nation’s standards of living.1

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Source: JAGADEESH NV/EPA/Newscom

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130 Part 2 • NatioNal BusiNess eNviroNmeNts

Similar to culture and systems of politics and law, economic systems differ from country to country. In Chapter 2, we saw that one defining element of a culture is its tendency toward individualism or collectivism. In Chapter 3, we saw how a people’s history and culture influence the development of their political and legal systems. In this chapter, we investigate the linkages between culture and economic systems.

National culture can have a strong impact on a nation’s economic development. In turn, the development of a country’s economy can dramatically influence many aspects of its cul- ture. Economic systems in individualist cultures tend to provide incentives and rewards for indi- vidual business initiative. Collectivist cultures tend to offer fewer such incentives and rewards. For example, in individualist cultures, entrepreneurs—businesspeople who accept the risks and opportunities involved in creating and operating new business ventures—tend to be rewarded with relatively low tax rates that encourage their activities.

We begin this chapter by introducing the world’s different economic systems and exploring the links between culture and economics. We then examine economic development and ways of classifying nations using several indicators of development. We conclude by looking at how countries in transition are implementing market-based economic reforms and the challenges they face. Throughout the chapter, we will encounter anecdotes of how emerging markets are faring in their economic development efforts.

economic systems A country’s economic system consists of the structure and processes that it uses to allo- cate its resources and conduct its commercial activities. No nation is either completely indi- vidualist or completely collectivist in its cultural orientation. Likewise, the economies of all nations display a blend of individual and group values. In other words, no economy is entirely focused on individual reward at the expense of social well-being. Nor is any econ- omy so completely focused on social well-being that it places no value on individual incen- tive and enterprise.

Yet every economy displays a tendency toward individualist or collectivist economic values. We can arrange national economies on a horizontal scale that is anchored by two extremes. At one end of the scale is a theoretical pure centrally planned economy, at the other end is a theo- retical pure market economy, and in between is a mixed economy (see Figure 4.1). Let’s now explore the workings of centrally planned, mixed, and market economies.

Centrally Planned Economy A centrally planned economy is a system in which a nation’s land, factories, and other economic resources are owned by the government. The government makes nearly all econ- omy-related decisions—including who produces what and what the prices of products, labor, and capital will be. Central planning agencies specify production goals for factories and other production units, and they even decide prices. In the former Soviet Union, for example, communist officials set prices for milk, bread, eggs, and other essential goods. The ultimate goal of central planning is to achieve a wide range of political, social, and economic objectives by taking complete control over the production and distribution of a nation’s resources.

economic system Structure and processes that a country uses to allocate its resources and conduct its commercial activities.

centrally planned economy Economic system in which a nation’s land, factories, and other economic resources are owned by the government, which plans nearly all economic activity.

Pure Centrally Planned Economy

Cuba N. Korea

China

India Brazil

France

United Kingdom

Canada

United States

Pure Market EconomyFigure 4.1

Range of Economic Systems

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ORiginS Of ThE CEnTRally PlannEd ECOnOmy Central planning is rooted in the ideology that the group’s welfare is more important than individual well-being. Just as collectivist cultures emphasize group over individual goals, a centrally planned economy strives to achieve economic and social equality.

German philosopher Karl Marx popularized the idea of central economic planning in the nineteenth century. Marx formulated his ideas while witnessing the hardship endured by working- class people in Europe during and after the Industrial Revolution. Marx argued that the econ- omy could not be reformed, but that it must be overthrown and replaced with a more equitable “communist” system. (See the discussion of communism in Chapter 3.)

Different versions of Marx’s ideas were implemented in the twentieth century by means of violent upheaval. Revolutions installed totalitarian economic and political systems in Russia in 1917, in China and North Korea in the late 1940s, and in Cuba in 1959. By the 1970s, central planning was the economic law in lands stretching across Central and Eastern Europe (Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and Yugoslavia), Asia (Cambodia, China, North Korea, and Vietnam), Africa (Angola and Mozambique), and Latin America (Cuba and Nicaragua).

dEClinE Of CEnTRal Planning In the late 1980s, nation after nation began to dismantle communist central planning in favor of market-based economies. Economists, historians, and political scientists attribute the decline of centrally planned economies to a combination of several factors.

Failure to Create economic Value Central planners paid little attention to the task of producing quality goods and services at the lowest possible cost. In other words, they failed to see that commercial activities succeed when they create economic value for customers. Along the way, scarce resources were wasted in the pursuit of commercial activities that were not self-sustaining.

Failure to Provide incentives Government ownership of economic resources drastically reduced incentives for businesses to maximize the output obtained from those resources. Except for aerospace, nuclear power, and other sciences (in which government scientists excelled), there were few incentives to create new technologies, new products, and new production methods. The result was little or no economic growth and consistently low standards of living.

As the world’s most closed economy, North Korea has earned its nickname, “The Hermit Kingdom.” For the most part, its policy of juche (self-reliance) is causing extreme hardship for North Korea’s citizens. The combination of recurring floods and droughts, a shortage of fertilizers,

although farming is a high- tech endeavor in the world’s most advanced nations today, it is labor intensive and inefficient in north Korea. The government’s failed communist economic policies hamper development and are at the root of its inability to afford fertilizers and modern machinery that could boost food production. seemingly endless famines and economic collapse have cut north Korea’s life expectancy to 65 years for men and 73 years for women.

Source: KCNA/EPA/Newscom

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and a lack of farm machinery restrain the nation from reaching its peak food- production potential. As a result, North Korea often must rely on aid from abroad to feed its people.

Failure to Achieve rapid growth Leaders in communist nations took note of the high rates of economic growth in countries such as Hong Kong, Singapore, South Korea, and Taiwan— called Asia’s four tigers. That a once-poor region of the world had so rapidly achieved such astounding growth awakened central planners to the possibilities. They realized that an economic system based on private ownership fosters growth much better than one hampered by central planning.

North Korea, once again, provides us with a good example. Each year for a decade until 1999, the North Korean economy contracted. Out of desperation, the country’s leaders quietly allowed limited free market reforms, and small bazaars soon dotted the countryside. Street- corner currency exchanges sprang up to help facilitate a tiny but growing trade with bordering Chinese merchants. Impoverished North Koreans could buy mobile phones and found hope for a better life in DVDs of South Korean soap operas. But a disastrous attempt to reform its currency dealt a serious setback to North Korea’s experiment with the free market.2 For now, at least, the last green shoots of capitalism in North Korea seem to be coming from its Kaesong Industrial Complex along its border with South Korea. The one-of-a-kind industrial park buses in around 500 South Korean managers daily to manage around 44,000 North Korean factory workers. But its future is uncertain amid volatile relations between the North and South and because many South Korean businesses involved in the project are losing money.3

Failure to Satisfy Consumer Needs People in centrally planned economies were tired of a standard of living that had slipped far below that found in market economies. Ironically, although central planning was conceived as a means to create a more equitable system of distributing wealth, too many central planners failed to provide even basic necessities such as adequate food, housing, and medical care. Underground (shadow) economies for all kinds of goods and services flourished and, in some cases, even outgrew “official” economies. Prices of goods on the black market were much higher than the official (and artificial) prices set by governments.

Emerging Market Focus: China China began its experiment with central planning in 1949, when communists defeated the nationalists in a long and bloody civil war. Today, the country’s leaders describe its economic philosophy as “socialism with Chinese characteristics.” There is possibly no country on earth that has done more for its people economically over the past two decades than China. Glistening skyscrapers now dominate the Shanghai and Beijing cityscapes, where most people have good job prospects. The country’s immense population, rising incomes, and expanding opportunities are attracting huge sums of investment.

EaRly yEaRS From 1949 until reforms were initiated in the late 1970s, China had a unique economic system. Agricultural production was organized into groups of people who formed production “brigades” and production “units.” Communes were larger entities responsible for planning agricultural production quotas and industrial production schedules. Rural families owned their homes and parcels of land on which to produce particular crops. Production surpluses could be consumed by the family or sold at a profit on the open market. In 1979, China initiated agricultural reforms that strengthened work incentives in this sector. Family units could then grow whatever crops they chose and could sell the produce at market prices.

At about the same time, township and village enterprises (TVEs) began to appear. Each TVE relied on the open market for materials, labor, and capital and used a nongovernmental distribution system. Each TVE employed managers who were directly responsible for profits and losses. The government initially regarded TVEs as illegal and unrelated to the officially sanctioned communes. But they were legalized in 1984 and helped lay additional groundwork for a market economy.

PaTiEnCE and Guanxi If there is one trait that is needed by all private companies in China, it is patience. Despite obvious ideological differences between itself and the private sector, China’s Communist Party is trying very hard to appear well suited to running the country. Karl Marx once summed up communism as the “abolition of private property,” and the name of China’s

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Communist Party (in Chinese characters) literally means “common property party.” But business was officially embraced when the Communist Party allowed businesspeople to become party members. Private property is now an accepted concept (though property rights violations are commonplace), which encouraged Chinese companies to invest in innovation. For example, Chinese Telecommunications firm Huawei (huawei.com) is now the world’s fourth-largest applicant for patents.4

A personal touch is another necessary ingredient for success in China. Initially, and in line with communist ideology, non-Chinese companies were restricted from participating in China’s economy. But today, outsiders enjoy ever-greater opportunities to create joint ventures with local partners. One of the most important factors in forming a successful venture in China is guanxi— the Chinese term for “personal relationships.” To learn more about the secrets of guanxi, see this chapter’s Culture Matters feature, titled “Guidelines for Good Guanxi.”

ChallEngES ahEad Despite the global recession, China’s economy continues to reform itself and grow at between 7 and 9 percent annually. Political and social problems, however, pose threats to China’s future economic performance. Skirmishes between secular and Muslim Chinese in western provinces still occur, although less frequently today. Meanwhile, for the most part, political leaders restrict advanced democratic reforms. Protests sporadically arise from time to time whenever ordinary Chinese citizens grow impatient with political progress.

Another potential problem is unemployment. Intensified competition and the entry of interna- tional companies into China are placing greater emphasis on efficiency and the cutting of payrolls in some industries. But the biggest contributor to the unemployed sector seems to be migrant work- ers. Hundreds of thousands of workers have left their farms and now go from city to city searching for better-paying factory work or construction jobs. Unhappiness with economic progress in the countryside and the misery of migrant workers are serious potential sources of social unrest for the Chinese government. And although factory workers are striking with greater frequency, they are mostly trying to recover ground lost by mandatory pay freezes during a recent economic slowdown.5

China has developed its own approach to innovation. First, flexible networks fueled by guanxi help companies to reduce costs and increase flexibility. Chinese companies spread their production contracts over a large number of parts suppliers and can then increase or decrease orders as demand dictates. Second, some companies exploit China’s lax enforcement of prop- erty rights to quickly copy new, pricey global products and make cheaper versions available to

Culture Matters Guidelines for Good Guanxi

• importance of Contacts, not Contracts.  In China, face-to- face communication and personal relationships take priority over written contracts. Mu Dan Ping of Ernst & Young (www.ey.com) offers this diagram to show the different priorities:

United States: Reason ➛ Law ➛ Relationship China: Relationship ➛ Reason ➛ Law

Managers from the United States look for rationale or reason first, wondering if there is a market with profit potential. If so, they want a legal contract before spending time on a business relationship. But the Chinese need to establish a trust relation- ship first and then look for common goals as a reason for doing business. For them, legal contracts are just a formality, serving to ensure mutual understanding.

• Pleasure before Business. Experts advise managers to leave the sales pitch on the back burner and to follow the lead of their Chinese hosts. If seeking partnerships in China, one cannot overlook the importance of personal relationships. Companies that send their top performers to wow Chinese businesspeople with savvy sales pitches can return empty-handed—friendship comes before business in China.

• Business Partners are Family Members, Too. The impor- tance of family means that visiting managers should never turn

down invitations to partake in a Chinese executive’s family life. Lauren Hsu, market analyst for Kohler Company (www.kohler. com), was responsible for researching and identifying potential joint venture partners in China. She once went bowling with the partner’s daughter and then to a piano concert with the entire family. Two years of meetings and visits to get acquainted even- tually resulted in a joint venture deal.

• Cultural Sensitivity. China is not a single market but many dif- ferent regional markets with different cultures and even differ- ent languages. Bob Wilner, of McDonald’s Corporation (www. mcdonalds.com), went to China to learn how Chinese people are managed. “Unlike the way we cook our hamburgers exactly the same in all 101 countries,” says Wilner, “the way we man- age, motivate, reward, and discipline is more sensitive to the culture.” Wilner and other McDonald’s managers developed that sensitivity only through repeated visits to China.

Source: “The Panda Has Two Faces,” The Economist, April 3, 2010, p. 70; Paul Maidment, “China’s Legal Catch-22,” Forbes (www.forbes.com), February 17, 2010; Frederik Balfour, “You Say Guanxi, I Say Schmoozing,” Bloomberg Businessweek (www. businessweek.com), November 18, 2007.

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134 Part 2 • NatioNal BusiNess eNviroNmeNts

Chinese consumers. These companies employ bandit or guerilla innovation to continually learn innovative ways to produce goods at lower cost, though they are clearly violating the original producer’s property rights.6

Another key issue is reunification of “greater China.” China regained control of Hong Kong in 1997 after 99 years under British rule. For the most part, China has kept its promise of “one coun- try, two systems.” Although the economic (and, to a lesser extent, political) freedoms of people in Hong Kong would remain largely intact, the rest of China would continue along lines drawn by the communist leadership. In addition, China regained control of its southern coastal territory of Macao in 1999. Only a one-hour ferry ride from Hong Kong, Macao had been under Portuguese administration since it was founded in 1557. Although Macao’s main function used to be that of trading post, today it serves mainly as a gambling outpost and is referred to as “Asia’s Vegas.”7

Any chance of Taiwan’s eventual reunification with the Chinese mainland depends on how China manages Hong Kong and Macao. For now, reunification seems more likely as economic ties between China and Taiwan steadily grow. Taiwan recently scrapped a 50-year ban that capped the size of investments in China and eased restrictions on direct financial flows between Taiwan businesses and the mainland. Also, the entry of both China and Taiwan into the World Trade Organization (www.wto.org) in recent years has encouraged further integration of their two economies.

QuiCk study 1 1. Define economic system. What is the relationship between culture and economics? 2. What is a centrally planned economy? Describe the link between central planning and

communism. 3. Identify several factors that contributed to the decline of centrally planned economies. 4. Describe China’s experience with central planning and the challenges it faces.

Mixed Economy A mixed economy is a system in which land, factories, and other economic resources are rather equally split between private and government ownership. In a mixed economy, the government owns fewer economic resources than does the government in a centrally planned economy. Yet in a mixed economy, the government tends to control the economic sectors that it considers important to national security and long-term stability. Such sectors usually include iron and steel manufacturing (for building military equipment), oil and gas production (to guarantee continued manufacturing and availability), and automobile manufacturing (to guarantee employment for a large portion of the workforce). Many mixed economies also maintain generous welfare systems to support the unemployed and to provide health care for the general population.

Mixed economies are found all around the world: Denmark, France, Germany, Norway, Spain, and Sweden in Western Europe; India, Indonesia, Malaysia, Pakistan, and South Korea in Asia; Argentina in South America; and South Africa. Although all the governments of these nations do not centrally plan their economies, they all influence economic activity by means of special incentives, including hefty subsidies to key industries, and through significant govern- ment involvement in the economy.

ORiginS Of ThE mixEd ECOnOmy Advocates of mixed economies contend that a successful economic system not only must be efficient and innovative but also should protect society from the excesses of unchecked individualism and organizational greed. The goal is to achieve low unemployment, low poverty, steady economic growth, and an equitable distribution of wealth by means of the most effective policies.

Proponents point out that European and U.S. rates of productivity and growth were almost identical for decades after the Second World War. Although the United States has created more jobs, it has done so at the cost of widening social inequality, proponents say. They argue that nations with mixed economies should not dismantle their social-welfare institutions but should modernize them so that they contribute to national competitiveness. Austria, the Netherlands, and Sweden are taking this route. In the Netherlands, labor unions and the government agreed to an epic deal involving wage restraint, shorter working hours, budget discipline, new tolerance for part-time and temporary work, and the trimming of social benefits. As a result, unemployment

mixed economy Economic system in which land, factories, and other economic resources are rather equally split between private and government ownership.

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ChaPter 4 • eCoNomiCs aNd emergiNg markets 135

in the Netherlands is hovering around 6 percent. By comparison, the average jobless rate for all nations in the Euro currency area is around 11 percent.8

dEClinE Of mixEd ECOnOmiES Many mixed economies are remaking themselves to more closely resemble free markets. When assets are owned by the government, there seems to be less incentive to eliminate waste or to practice innovation. Extensive government ownership on a national level tends to result in a lack of accountability, rising costs, defective products, and slow economic growth. Many government-owned businesses in mixed economies need large infusions of taxpayer money to survive as world-class competitors, which raises taxes and prices for goods and services. Underpinning the move toward market-based systems is the sale of government-owned businesses.

Move toward Privatization As discussed earlier, citizens of many European nations prefer a combination of rich benefits and higher unemployment to the low jobless rates and smaller social safety net of the United States. In France, for instance, the French electorate continues to hold fast to a deeply embedded tradition of social welfare and job security in government-owned firms. Many French believe the social security and cohesion benefits of a more collectivist economy outweigh the efficiency advantages of an individualist one. Yet such attitudes are costly in terms of economic efficiency.

The selling of government-owned economic resources to private operators is called privatization. Privatization helps eliminate subsidized materials, labor, and capital formerly provided to government-owned companies. It also curtails the practice of appointing manag- ers for political reasons rather than for their professional expertise. To survive, newly priva- tized companies must produce competitive products at fair prices because they are subject to the forces of the free market. The overall aim of privatization is to increase economic efficiency, boost productivity, and raise living standards.

Market Economy In a market economy, the majority of a nation’s land, factories, and other economic resources are privately owned, either by individuals or businesses. This means that who produces what and the prices of products, labor, and capital in a market economy are determined by the interplay of two forces:

• Supply: the quantity of a good or service that producers are willing to provide at a specific selling price

• Demand: the quantity of a good or service that buyers are willing to purchase at a specific selling price

privatization Policy of selling government-owned economic resources to private operators.

market economy Economic system in which the majority of a nation’s land, factories, and other economic resources are privately owned, either by individuals or businesses.

supply Quantity of a good or service that producers are willing to provide at a specific selling price.

demand Quantity of a good or service that buyers are willing to purchase at a specific selling price.

citizens and tourists alike go shopping along Myeongdong street in seoul, south Korea. The country is open to both foreign investment and foreign tourists. The comparison with north Korea could not be more striking. south Korea is a bustling economy that has benefited greatly from globalization. The life expectancy is 76 years for south Korean men and 83 for women. By contrast, north Korea remains a poor, closed nation where life expectancy is 65 years for men and 73 for women.

Source: imago stock&people/Newscom

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136 Part 2 • NatioNal BusiNess eNviroNmeNts

As supply and demand change for a good or service, so does its selling price. The lower a product’s price, the greater demand will be; the higher its price, the lower demand will be. Like- wise, the lower a product’s price, the smaller the quantity that producers will supply; the higher the price, the greater the quantity they will supply. In this respect, what is called the “price mechanism” (or “market mechanism”) dictates supply and demand.

Market forces and uncontrollable natural forces can affect prices for many products, partic- ularly commodities. Chocolate lovers, for example, should consider how the interplay of several forces affects the price of cocoa, the principal ingredient in chocolate. Suppose cocoa consump- tion suddenly rises in large cocoa-consuming nations such as Britain, Japan, and the United States. Suppose further that disease and pests plague crops in cocoa-producing countries such as Brazil, Ghana, and the Ivory Coast. As worldwide consumption of cocoa begins to outstrip production, market pressure is felt on both the demand side (consumers) and the supply side (producers). Falling worldwide reserves of cocoa then force the price of cocoa higher.

ORiginS Of ThE maRkET ECOnOmy Market economics is rooted in the belief that individual concerns should be placed above group concerns. According to this view, the group benefits when individuals receive incentives and rewards to act in certain ways. It is argued that people take better care of property they own and that individuals have fewer incentives to care for property under a system of public ownership.

Laissez-Faire economics For many centuries, the world’s dominant economic philosophy supported government control of a significant portion of a society’s assets and government involvement in its international trade. But in the mid-1700s a new approach to national economics called for less government interference in commerce and greater individual economic freedom. This approach became known as a laissez-faire system, loosely translated from French as “allow them to do [without interference].”

Canada and the United States are examples of contemporary market economies. It is no accident that both these countries have individualist cultures (although Canada to a somewhat lesser extent than the United States). As much as an emphasis on individualism fosters a demo- cratic form of government, it also supports a market economy.

fEaTURES Of a maRkET ECOnOmy To function smoothly and properly, a market economy requires three things: free choice, free enterprise, and price flexibility.

• Free choice gives individuals access to alternative purchase options. In a market economy, few restrictions are placed on consumers’ ability to make their own decisions and exercise free choice. For example, a consumer shopping for a new car is guaranteed a variety from which to choose. The consumer can choose among dealers, models, sizes, styles, colors, and mechanical specifications such as engine size and transmission type.

• Free enterprise gives companies the ability to decide which goods and services to produce and the markets in which to compete. Companies are free to enter new and different lines of business, select geographic markets and customer segments to pursue, hire workers, and advertise their products. They are, therefore, guaranteed the right to pursue interests profit- able to them.

• Price flexibility allows most prices to rise and fall to reflect the forces of supply and demand. By contrast, nonmarket economies often set and maintain prices at stipulated levels. Inter- fering with the price mechanism violates a fundamental principle of the market economy.

gOvERnmEnT’S ROlE in a maRkET ECOnOmy In a market economy, the government has relatively little direct involvement in business activities. Even so, it usually plays four important roles: enforcing antitrust laws, preserving property rights, providing a stable fiscal and monetary environment, and preserving political stability. Let’s look briefly at each of these activities.

enforcing Antitrust Laws When one company is able to control a product’s supply—and, therefore, its price—it is considered a monopoly. Antitrust (antimonopoly) laws are designed to encourage the development of industries with as many competing businesses as the market will sustain. (These laws are explained fully in Chapter 3.) In competitive industries, prices are kept low by the forces of competition. By enforcing antitrust laws, governments prevent trade- restraining monopolies and business combinations that exploit consumers and constrain the growth of commerce.

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ChaPter 4 • eCoNomiCs aNd emergiNg markets 137

The Federal Trade Commission (FTC) of the U.S. government seeks to ensure the competi- tive and efficient functioning of the nation’s markets. But the FTC (www.ftc.gov) can also eval- uate proposed deals outside the United States when the U.S. market is likely to be affected. For example, the FTC reviewed the proposed acquisition of Sweden’s Svedala Industri by Finland’s Metso Corporation (www.metso.com). Metso and Svedala were the world’s two largest sup- pliers of rock-processing equipment at the time. In response to FTC concerns over potential anticompetitive effects in the global market for rock-processing equipment, the two companies agreed to sell parts of the combined business to third parties in return for FTC approval of the acquisition.

Preserving Property rights A smoothly functioning market economy rests on a legal system that safeguards individual property rights. By preserving and protecting individual property rights, governments encourage individuals and companies to take risks such as investing in technology, inventing new products, and starting new businesses. Strong protection of property rights ensures entrepreneurs that their claims to assets and future earnings are legally safeguarded. This protection also supports a healthy business climate in which a market economy can flourish.

Providing a Stable Fiscal and Monetary environment Unstable economies are often characterized by high inflation and unemployment. These forces create general uncertainty about a nation’s suitability as a place to do business. Governments can help control inflation through effective fiscal policies (policies regarding taxation and government spending) and monetary policies (policies controlling money supply and interest rates). A stable economic environment helps companies make better forecasts of costs, revenues, and the future of the business in general. Such conditions reduce the risks associated with future investments, such as new product development and business expansion.

Preserving Political Stability A market economy depends on a stable government for its smooth operation and, indeed, for its future existence. Political stability helps businesses engage in activities without worrying about terrorism, kidnappings, and other political threats to their operations. (See Chapter 3 for extensive coverage of political risk and stability.)

ECOnOmiC fREEdOm So far we have discussed the essence of market economies as being grounded in freedom: free choice, free enterprise, free prices, and freedom from direct intervention by government. Map 4.1 classifies countries according to their levels of economic freedom. Factors making up each country’s rating include trade policy, government intervention in the economy, property rights, black markets, and wage and price controls. Most developed economies are completely or mostly free, but most emerging markets and developing nations are far less free.

Recall from Chapter 3 that the connection between political freedom and economic growth is not at all certain. Likewise, we can say only that countries with the greatest economic freedom tend to have the highest standards of living, whereas those with the lowest freedom tend to have the lowest standards of living. But greater economic freedom does not guarantee a high per capita income. A country can rank very low on economic freedom yet have a higher per capita income than a country with far greater freedom.

QuiCk study 2 1. What is a mixed economy? Explain the origin of mixed economies. 2. Explain the changes occurring in mixed economies and the role of privatization. 3. Define what is meant by market economy, and identify its three required features. 4. What is the role of government in a market economy?

Development of nations The economic well-being of one nation’s people as compared with that of another nation’s peo- ple is reflected in the country’s level of economic development. It reflects several economic and human indicators, including a country’s economic output (agricultural and industrial), infrastruc- ture (power and transportation facilities), and its people’s physical health and level of education.

economic development Measure for gauging the economic well-being of one nation’s people as compared with that of another nation’s people.

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138 Part 2 • NatioNal BusiNess eNviroNmeNts

BAHAMAS

JAMAICA HAITI

CUBA

BARBADOS

TRINIDAD & TOBAGO

DOMINICAN REPUBLIC

NICARAGUA

COSTA RICA PANAMA

HONDURAS

VENEZUELA

COLOMBIA

DUTCH ANTILLES

PUERTO RICO

Level of economic freedom

80-100% free

70-79.9% free

60-69.9% free

50-59.9% free

0-49.9% free

Not ranked

A L A S K A

C A N A D A

M E X I C O CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICO

GUATEMALA

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

G R E E N L A N D

ICELAND

FINLAND

DENMARK

NETHERLANDS

UNITED KINGDOM

IRELAND

FRANCE

BELGIUM

LUXEMBOURG

GERMANY POLAND

BELARUS RUSSIA

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ. LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B YA

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST G

H A

N A

T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N ERITREA

E T H I O P I A CENTRAL AFRICAN REPUBLICCAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA

BURUNDI

UGANDA KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA

LEBANON ISRAEL

JORDAN

IRAQ IRAN

SAUDI ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

VIETNAM

M A L AY S I A BRUNEI

P H I L I P P I N E S

TAIWAN

HONG KONG

I N D O N E S I A PAPUA NEW GUINEA

SOLOMON ISLANDS

FIJI VANUATU

NEW CALEDONIAA U S T R A L I A

NEW ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPAN C H I N A

ANDORRAU N I T E D S TAT E S O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

DJBOUTI

GALAPAGOS ISLANDS

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

MYANMAR (BURMA)

GUYANA

LATVIA

LITHUANIA

F R A N C E

BELGIUM

NETHER- LANDS

G E R M A N Y

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA

HUNGARY

CROATIA SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B YA

TUNISIA

MALTA

ANDORRA

MONACO SAN

MARINO

I TA LY

DENMARK

SWEDEN

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

BAHRAIN CAPE VERDE MALTA MAURITIUS

S O U T H S U D A N

MAP 4.1 Countries Ranked by Levels of Economic Freedom

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ChaPter 4 • eCoNomiCs aNd emergiNg markets 139

BAHAMAS

JAMAICA HAITI

CUBA

BARBADOS

TRINIDAD & TOBAGO

DOMINICAN REPUBLIC

NICARAGUA

COSTA RICA PANAMA

HONDURAS

VENEZUELA

COLOMBIA

DUTCH ANTILLES

PUERTO RICO

Level of economic freedom

80-100% free

70-79.9% free

60-69.9% free

50-59.9% free

0-49.9% free

Not ranked

A L A S K A

C A N A D A

M E X I C O CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICO

GUATEMALA

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

G R E E N L A N D

ICELAND

FINLAND

DENMARK

NETHERLANDS

UNITED KINGDOM

IRELAND

FRANCE

BELGIUM

LUXEMBOURG

GERMANY POLAND

BELARUS RUSSIA

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ. LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B YA

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST G

H A

N A

T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N ERITREA

E T H I O P I A CENTRAL AFRICAN REPUBLICCAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA

BURUNDI

UGANDA KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA

LEBANON ISRAEL

JORDAN

IRAQ IRAN

SAUDI ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

VIETNAM

M A L AY S I A BRUNEI

P H I L I P P I N E S

TAIWAN

HONG KONG

I N D O N E S I A PAPUA NEW GUINEA

SOLOMON ISLANDS

FIJI VANUATU

NEW CALEDONIAA U S T R A L I A

NEW ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPAN C H I N A

ANDORRAU N I T E D S TAT E S O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

DJBOUTI

GALAPAGOS ISLANDS

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

MYANMAR (BURMA)

GUYANA

LATVIA

LITHUANIA

F R A N C E

BELGIUM

NETHER- LANDS

G E R M A N Y

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA

HUNGARY

CROATIA SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B YA

TUNISIA

MALTA

ANDORRA

MONACO SAN

MARINO

I TA LY

DENMARK

SWEDEN

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

BAHRAIN CAPE VERDE MALTA MAURITIUS

S O U T H S U D A N

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140 Part 2 • NatioNal BusiNess eNviroNmeNts

Cultural, political, legal, and economic differences among nations can cause great differences in economic development.

Economic development is an increasingly important topic as international companies pur- sue business opportunities in emerging markets. Although much of the population in these coun- tries is poor, there is often a thriving middle class and ambitious development programs.

Productivity is a key factor that drives economic growth and rising living standards. Produc- tivity is simply the ratio of outputs (what is created) to inputs (resources used to create output). We can speak about the productivity of a business, an industry, or an entire economy. For a com- pany to boost its productivity, it must increase the value of its outputs using the same amount of inputs, create the same value of outputs with fewer inputs, or do both at the same time.

Raising living standards in an economy depends in large part on unlocking the gains that productivity offers. Mixed economies in Western Europe continue to privatize state-owned com- panies in order to boost productivity and competitiveness. Former centrally planned economies in Eastern Europe implemented free market reforms in order to raise living standards. Even North Korea (with one of the lowest standards of living outside Africa) is being compelled to consider economic reform.

Managers can use a variety of measures to estimate a country’s level of economic develop- ment. But it is wise to consider a combination of measures when analyzing potential markets because each measure has advantages and disadvantages. Let’s now look at a few of the main gauges of economic development.

National Production Recall from Chapter 1 that the broadest measure of economic development is gross national product (GNP), which is the value of all goods and services produced by a country’s domestic and international activities over a one-year period. Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy over a one-year period. GDP is a narrower figure that excludes a nation’s income generated from exports, imports, and the inter- national operations of its companies. A country’s GDP per capita is simply its GDP divided by its population. GNP per capita is calculated similarly. Both GDP per capita and GNP per capita measure a nation’s income per person. Map 4.2 on pages 142–143 shows how the World Bank (www.worldbank.org) classifies countries according to gross national income (GNI) per capita—a measure that is similar to GNP per capita.

Marketers often use GDP or GNP per capita figures to determine whether a country’s popu- lation is wealthy enough to begin purchasing its products. For example, the Asian nation of Myanmar, with a GDP per capita of about $120 per year, is very poor. You won’t find computer companies marketing laptops or designer-apparel firms selling expensive clothing there. Yet sev- eral large makers of personal-care products are staking out territory in Myanmar. Companies like Colgate-Palmolive (www.colgate.com) and Unilever (www.unilever.com) are traditional explorers of uncertain but promising markets in which they can offer relatively inexpensive, everyday items such as soap and shampoo. As multinational companies enter such markets, they often try to satisfy the needs of people who live at the bottom of the pyramid—the world’s poor- est populations with the least purchasing power.

Although GDP and GNP are the most popular indicators of economic development, they have several important drawbacks. We detail each of these in the following sections.

UnCOUnTEd TRanSaCTiOnS For a variety of reasons, many of a nation’s transactions do not get counted in either GDP or GNP. Some activities not included are:

• Volunteer work • Unpaid household work • Illegal activities such as gambling and black market (underground) transactions • Unreported transactions conducted in cash

In some cases, the unreported (shadow) economy is so large and prosperous that official statistics such as GDP per capita are almost meaningless. Government statistics can mask a thriving shadow economy driven by differences between official and black-market currency exchange rates. In many wealthy nations, the shadow economy is from one-tenth to one-fifth as large as the official economy. But in more than 50 countries, the shadow economy is at least

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ChaPter 4 • eCoNomiCs aNd emergiNg markets 141

40 percent the size of the documented GDP. In the Eurasian country of Georgia, for example, unreported transactions are estimated to equal as much as 73 percent of reported transactions. Whereas Georgia’s official GDP is around $20.3 billion, its shadow economy is worth another $14.8 billion.9

One way in which goods and services flow through shadow economies is through barter— the exchange of goods and services for other goods and services instead of money. In one clas- sic incident, Pepsi-Cola (www.pepsi.com) traded soft drinks in the former Soviet Union for 17 submarines, a cruiser, a frigate, and a destroyer. Pepsi then converted its payment into cash by selling the military goods as scrap metal.10 Russians still use barter extensively because of a lack of currency. In another classic, and bizarre, case, the Russian government paid 8,000 teachers in the Altai republic (1,850 miles east of Moscow) their monthly salaries with 15 bottles of vodka each. Teachers had previously refused an offer to receive part of their salaries in toilet paper and funeral accessories.11

QUESTiOn Of gROwTh Gross product figures do not tell us whether a nation’s economy is growing or shrinking—they are simply a snapshot of one year’s economic output. Managers will want to supplement this data with information on expected future economic performance. A nation with moderate GDP or GNP figures inspires greater investor confidence and attracts more investment if its expected growth rate is high.

PROblEm Of avERagES Recall that per capita numbers give an average figure for an entire country. These numbers are helpful in estimating national quality of life, but averages do not give us a very detailed picture of development. Urban areas in most countries are more developed and have higher per capita income than rural areas. In less advanced nations, regions near good harbors or other transportation facilities are usually more developed than interior regions. Likewise, an industrial park that boasts companies with advanced technology in production or design can generate a disproportionate share of a country’s earnings.

For example, GDP or GNP per capita figures for China are misleading because Shanghai and coastal regions of China are far more developed than the country’s interior. Although luxury cars are sold in many of China’s coastal cities and regions, bicycles and simple vehicles are still the transportation of choice in China’s interior.

PiTfallS Of COmPaRiSOn Country comparisons using gross product figures can be misleading. When comparing gross product per capita, the currency of each nation being compared must be translated into another currency unit (usually the dollar) at official exchange rates. But official exchange rates only tell us how many units of one currency it takes to buy one unit of another. They do not tell us what that currency can buy in its home country. Therefore, to understand the true value of a currency in its home country, we apply the concept of purchasing power parity.

Purchasing Power Parity Using gross product figures to compare production across countries does not account for the different cost of living in each country. Purchasing power is the value of goods and services that can be purchased with one unit of a country’s currency. Purchasing power parity (PPP) is the relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries. This basket of goods is representative of ordinary, daily-use items such as apples, rice, soap, toothpaste, and so forth. Estimates of gross product per capita at PPP allow us to see what a currency can actually buy in real terms.

Let’s see what happens when we compare the wealth of several countries to that of the United States by adjusting GDP per capita to reflect PPP. If we convert Swiss francs to dollars at official exchange rates, we estimate Switzerland’s GDP per capita at $47,900. This is higher than the official GDP per capita of the United States ($39,700). But adjusting Switzerland’s GDP per capita for PPP gives us a revised figure of $34,700, which is lower than the U.S. GDP figure of $39,700. Why the difference? GDP per capita at PPP is lower in Switzerland because of that nation’s higher cost of living. It simply costs more to buy the same basket of goods in Switzerland than it does in the United States. The opposite phenomenon occurs in the case of the Czech Republic. Because the cost of living there is lower than in the United States, the Czech Republic’s GDP per capita rises from $10,600 to $18,600 when PPP is considered.12 We discuss PPP in greater detail in Chapter 10.

purchasing power Value of goods and services that can be purchased with one unit of a country’s currency.

purchasing power parity (PPP) Relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries.

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142 Part 2 • NatioNal BusiNess eNviroNmeNts

7,490 or more

2,350 − 7,490

1,110 − 2,350

430 − 1,110

less than 430

no data available

GNI in US dollars

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

HAWAII

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM

NETHERLANDS

LUXEMBOURG

GERMANY

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ.

LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B Y A

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

G H

A N

A T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

ERITREA

E T H I O P I ACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJBOUTI

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

GALAPAGOS ISLANDS

MYANMAR (BURMA)

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

F R A N C E

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

S O U T H S U D A N

Map 4.2 Gross National Income

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ChaPter 4 • eCoNomiCs aNd emergiNg markets 143

7,490 or more

2,350 − 7,490

1,110 − 2,350

430 − 1,110

less than 430

no data available

GNI in US dollars

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

HAWAII

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM

NETHERLANDS

LUXEMBOURG

GERMANY

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ.

LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B Y A

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

G H

A N

A T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

ERITREA

E T H I O P I ACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJBOUTI

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

GALAPAGOS ISLANDS

MYANMAR (BURMA)

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

F R A N C E

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

S O U T H S U D A N

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144 Part 2 • NatioNal BusiNess eNviroNmeNts

QuiCk study 3 1. What is meant by the term economic development? Explain the relationship between

productivity and living standards. 2. Describe two measures of economic development, and list their advantages and

disadvantages. 3. Explain the concept of purchasing power parity. What are its implications for a nation’s

relative income per capita?

Human Development The PPP concept does a fairly good job of revealing differences between national levels of eco- nomic development. Unfortunately, it is a poor indicator of a people’s total well-being. Table 4.1 shows how selected countries rank according to the United Nations’ human development index (HDI)—the measure of the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living.

Table 4.1 also illustrates the disparity that can be present between a nation’s wealth and the HDI. For example, we see that the United States ranks 10th in terms of gross national income (GNI) per capita but ranks 4th in providing health care, education, and a decent standard of liv- ing. A conspicuous example in the table is the entry for South Africa; the country ranks 79th in terms of GNI per capita but ranks 123rd in terms of HDI. Perhaps most striking is the column showing each nation’s life expectancy at birth. We see that the people of first-ranked Norway have a life expectancy that is nearly 33 years longer than the people of last-ranked Democratic Republic of the Congo.

human development index (hdi) Measure of the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living.

TAbLe 4.1 human development index (hdi)

hdi rank

Country

hdi value

gNi per Capita rank

life expectancy at Birth (Years)

Very High Human Development

1 Norway 0.943 7 81.1

4 United States 0.910 10 78.5

6 Canada 0.908 16 81.0

9 Germany 0.905 17 80.4

11 Switzerland 0.903 11 82.3

12 Japan 0.901 23 83.4

20 France 0.884 24 81.5

28 United Kingdom 0.863 21 80.2

45 Argentina 0.797 54 75.9

High Human Development

57 Mexico 0.770 59 77.0

66 Russia 0.755 53 68.8

84 Brazil 0.718 77 73.5

Medium Human Development

101 China 0.687 94 73.5

118 Botswana 0.633 62 53.2

123 South Africa 0.619 79 52.8

Low Human Development

172 Afghanistan 0.398 159 48.7

187 Congo, DPR 0.286 186 48.4

Source: Based on data obtained from Human Development Report 2011 (New York: United Nations Development Programme, 2011), Table 1, available at www.undp.org.

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ChaPter 4 • eCoNomiCs aNd emergiNg markets 145

Unlike other measures we have discussed, the HDI looks beyond financial wealth. By stressing the human aspects of economic development, it demonstrates that high national income alone does not guarantee human progress—although the importance of national income should not be underestimated. Countries need money to build good schools, provide quality health care, support environmentally friendly industries, and underwrite other programs designed to improve the quality of life.

The spread of communicable diseases in the world’s poorest nations is especially worrying. These diseases cause human and economic loss, social disintegration, and political instability. The health care costs required to combat such diseases can significantly impair efforts toward sustainable development. To read about the costs of three particularly lethal diseases, see the Global Sustainability feature, titled “Public Health Goes Global.”

Classifying Countries Nations are commonly classified as being developed, newly industrialized, or developing. These classifications are based on indicators such as national production, the portion of the economy devoted to agriculture, the amount of exports in the form of industrial goods, and overall eco- nomic structure. There is no single, agreed-on list of countries in each category, however, and borderline countries are often classified differently in different listings. Let’s take a closer look at each of these classifications.

dEvElOPEd COUnTRiES Countries that are highly industrialized and highly efficient, and whose people enjoy a high quality of life, are developed countries. People in developed countries usually receive the finest health care and benefit from the best educational systems in the world. Most developed nations also support aid programs for helping poorer nations to improve their economies and standards of living. Countries in this category include Australia, Canada, Japan, New Zealand, the United States, and all western European nations.

nEwly indUSTRializEd COUnTRiES Countries that have recently increased the portion of their national production and exports derived from industrial operations are newly industrialized countries (NICs). The NICs are located primarily in Asia and Latin America. Most listings of

developed country Country that is highly industrialized and highly efficient, and whose people enjoy a high quality of life.

newly industrialized country (niC) Country that has recently increased the portion of its national production and exports derived from industrial operations.

beyond the human suffering, three communicable diseases put a drag on economic development and social sustainability.

• HiV/aiDS.  This disease has killed nearly as many people as the plague that struck fourteenth-century Europe. AIDS has already killed at least 22 million worldwide, and at least 40 million are infected with HIV. In Africa alone, 20 million have died and 30 million are infected. The disease has cut GDP growth by 2.6 percent in some African countries and could decrease South Africa’s average household income by 8 percent.

• Tuberculosis.  Each year, tuberculosis (TB) kills 1.7 million people and sickens another 8 million. More than 90 percent of TB cases occur in low- and lower-middle-income countries across Southeast Asia, Eastern Europe, and sub-Saharan Africa. TB is on the rise because of economic hardship, broken health systems, and the emergence of drug-resistant TB. This disease depletes the incomes of the poorest nations by about $12 billion.

• Malaria.  Each year, malaria kills one million people and indirectly causes the deaths of up to three million. Malaria is prevalent in Vietnam’s Mekong Delta, central Africa, and Brazil’s Amazon Basin. Central and sub-Saharan Africa account

Global sustainability Public Health Goes Global

for 90 percent of all malaria deaths (mostly children and pregnant women) and is where around 20 percent of all chil- dren die of malaria before age five. In the worst-affected African nations, malaria costs about 1.3 percent of GDP.

• The Challenge.  To combat HIV/AIDS, rich nations could donate money to train doctors and nurses in poor nations and could invest more in research. To battle tuberculosis, more aid money could purchase drugs that cost just $10 per person for the full six-to-eight-month treatment. To fight malaria, better distribu- tion of insecticide-treated bed nets could reach the 98 percent of Africa’s children who do not sleep under such nets.

• Want to Know More?  Visit the Global Business Coali- tion (www.gbchealth.org); the Global Fund to fight AIDS, Tuberculosis, and Malaria (www.theglobalfund.org); the Malaria Foundation International (www.malaria.org); and the World Health Organization TB site (www.who.int/gtb).

Source: “Altogether Now,” The Economist (www.economist.com), June 3, 2010; Tom Randall, “J&J, Sanofi, Pfizer Speed Testing for New Tuberculosis Drug,” Bloomberg Businessweek (www.businessweek.com), March 18, 2010; “Twenty-Five Years of AIDS,” The Economist, June 3, 2006, pp. 24–25; Malaria Foundation International (www.malaria. org), various reports.

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146 Part 2 • NatioNal BusiNess eNviroNmeNts

NICs include Asia’s “four tigers” (Hong Kong, South Korea, Singapore, and Taiwan), Brazil, China, India, Malaysia, Mexico, South Africa, and Thailand. Depending on the pivotal criteria used for classification, a number of other countries could be placed in this category, including Argentina, Brunei, Chile, the Czech Republic, Hungary, Indonesia, the Philippines, Poland, Russia, Slovakia, Turkey, and Vietnam.

When we combine newly industrialized countries with countries that have the potential to become newly industrialized, we arrive at a category often called emerging markets. Generally, emerging markets have developed some (but not all) of the operations and export capabilities associated with NICs. Debate continues, however, over the defining characteristics of such clas- sifications as newly industrialized country and emerging market.

dEvElOPing COUnTRiES Nations with the poorest infrastructures and lowest personal incomes are called developing countries (also called less-developed countries). These countries often rely heavily on one or a few sectors of production, such as agriculture, mineral mining, or oil drilling. They might show potential for becoming newly industrialized countries, but they typically lack the necessary resources and skills to do so. Most lists of developing countries include many nations in Africa, the Middle East, and the poorest formerly communist nations in Eastern Europe and Asia.

Developing countries (and NICs as well) are sometimes characterized by a high degree of technological dualism—use of the latest technologies in some sectors of the economy coupled with the use of outdated technologies in others. By contrast, developed countries typically incor- porate the latest technological advancements in all manufacturing sectors.

QuiCk study 4 1. Explain the value of the Human Development Index (HDI) in measuring a nation’s level of

development. 2. Identify the main characteristics of (a) developed countries, (b) newly industrialized coun-

tries, (c) emerging markets, and (d) developing countries.

economic transition Over the past two decades, countries with centrally planned economies have been remaking themselves in the image of stronger market economies. This process, called economic transition, involves changing a nation’s fundamental economic organization and creating entirely new free- market institutions. Some nations take transition further than others do, but the process typically involves several key reform measures:

• Stabilizing the economy, reducing budget deficits, and expanding credit availability • Allowing prices to reflect supply and demand • Legalizing private business, selling state-owned companies, and supporting property

rights • Reducing barriers to trade and investment and allowing currency convertibility

Obstacles to Transition Transition from central planning to free-market economics generates tremendous international business opportunities. Yet, difficulties arising from years of socialist economic principles ham- pered progress from the start, and some countries still endure high unemployment rates. Let’s examine the key remaining obstacles for countries in transition: lack of managerial expertise, shortage of capital, cultural differences, and environmental degradation.

laCk Of managERial ExPERTiSE In central planning, there was little need for production, distribution, and marketing strategies or for trained individuals to devise them. Central planners decided all aspects of the nation’s commercial activities. There was no need to investigate consumer wants and no need for market research. Little thought was given to product pricing or to the need for experts in operations, inventory, distribution, or logistics. Factory managers at government-owned firms had only to meet production requirements set by central planners. In fact, some products rolled off assembly lines merely to be stacked outside the factory because

emerging markets Newly industrialized countries plus those with the potential to become newly industrialized.

developing country Nation that has a poor infrastructure and extremely low personal incomes. Also called less-developed countries.

technological dualism Use of the latest technologies in some sectors of the economy coupled with the use of outdated technologies in other sectors.

economic transition Process by which a nation changes its fundamental economic organization and creates new free-market institutions.

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knowing where they were to go after production—and who took them there—was not the factory manager’s job.

Recent years, however, are seeing higher-quality management in transition countries. Reasons for this trend include improved education, opportunities to study and work abroad, and changes in work habits caused by companies investing locally. Some managers from former communist nations are even finding managerial opportunities in Western Europe and the United States with large multinational corporations.

ShORTagE Of CaPiTal Not surprisingly, economic transition is expensive. To facilitate the process and ease the pain, governments usually spend a great deal of money to:

• Develop a telecommunications and infrastructure system, including highways, bridges, rail networks, and sometimes subways.

• Create financial institutions, including stock markets and a banking system. • Educate people in the ways of market economics.

The governments of many countries in transition cannot afford all the investments required of them. Outside sources of capital are available, however, including national and international companies, other governments, and international financial institutions, such as the World Bank, the International Monetary Fund (IMF), and the Asian Development Bank. Some transition countries owe substantial amounts of money to international lenders, but this is becoming less of a problem today than it was earlier in the era of transition economies.13

CUlTURal diffEREnCES Economic transition and reform make deep cultural impressions on a nation’s people. As we saw in Chapter 2, some cultures are more open to change than others. Likewise, certain cultures welcome economic change more easily than others do. Transition replaces dependence on the government with greater emphasis on individual responsibility, incentives, and rights. But sudden deep cuts in welfare payments, unemployment benefits, and guaranteed government jobs can present a major shock to a nation’s people.

Importing modern management practices into the culture of a transition country can be dif- ficult. South Korea’s Daewoo Motors (www.daewoo.com) faced a culture clash when it entered Central Europe. Korea’s management system is based on a rigid hierarchical structure and an intense work ethic. Managers at Daewoo’s car plants in South Korea arrived early for work to stand and greet workers at the company gates. But problems arose when Daewoo’s managers did not fully comprehend the culture at its factories in Central Europe. Daewoo bridged the cultural and workplace gaps by sending central European workers to staff assembly lines in Korea and sent Korean managers and technicians to work in Central and Eastern Europe.

EnviROnmEnTal dEgRadaTiOn The economic and social policies of former communist governments in Central and Eastern Europe were disastrous for the natural environment. The direct effects of environmental destruction were evident in high levels of sickness and disease, including asthma, blood deficiencies, and cancer—which lowered productivity in the workplace. Countries in transition often suffer periods during which the negative effects of a market economy seem to outweigh its benefits. In other words, it is hard to enjoy a larger paycheck when smokestacks are polluting the air and the parks and rivers are polluted. But as transition continues, the wider population begins to enjoy the benefits of a market economy.

Emerging Market Focus: Russia Russia’s experience with communism began in 1917. For the next 75 years, factories, distribu- tion, and all other facets of operations, as well as the prices of labor, capital, and products, were controlled by the government. While China was experimenting with private farm ownership and a limited market-price system, Russia and other nations in the Soviet Union remained staunchly communist under a system of complete government ownership. The total absence of market institutions meant that, unlike China, Russia endured massive political change along with eco- nomic reform when it embarked on its transition.

ROUgh TRanSiTiOn In the 1980s, the former Soviet Union entered a new era of freedom of thought, freedom of expression, and economic restructuring. For the first time since 1917, people could speak freely about their lives under economic socialism, and speak freely they did.

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People vented their frustrations over a general lack of consumer goods, poor-quality products, and long lines at banks and grocery stores.

But transition away from government ownership and central planning has been challeng- ing. Except for politicians, bureaucrats, and wealthy businesspeople (called “oligarchs” in Russia), ordinary people are having difficulty maintaining their standard of living and afford- ing many basic items. Some Russians are doing well financially because they were factory managers under the old system and retained their jobs in the new system. Others have turned to the black market to amass personal wealth. Still others are working hard to build legiti- mate companies but find themselves forced into making “protection” payments to organized crime.

An opaque legal system, rampant corruption, and shifting business laws make Russia a place where non-Russian businesspeople must operate cautiously. Yet some ambitious manag- ers and foreign entrepreneurs are not deterred by such obstacles. For some insights on how to do business in today’s Russia, see the Manager’s Briefcase feature, titled “Russian Rules of the Game.”

ChallEngES ahEad fOR RUSSia As in so many other transitional economies, Russia needs to foster managerial talent. Years of central planning delayed the development of managerial skills needed in a market-based economy. Russian managers must improve their skills in every facet of management practice, including financial control, research and development, human resource management, and marketing strategy.

Political instability, especially in the form of intensified nationalist sentiment, is another potential threat to progress. Russia and Georgia had a military confrontation in the summer of 2008 over two of Georgia’s restive republics that wanted to align themselves closer to Russia. Strong ethnic and nationalist sentiments in the region can cause misunderstandings to spiral out of control quickly. The lack of security for Russia’s nuclear weapons stockpile is also a potential cause of instability. These weapons in the hands of terrorists would threaten global security.

An unstable investment climate is another concern within the international business com- munity. Tense uneasiness characterizes relations between Russia’s government and its business community. The uneasiness stems from the Russian government’s attacks on both business own- ers who disagree with official policy and on businesses that it wants to control.

although business in Russia can be brutal at times, some go-get- ting entrepreneurs and brave managers are venturing into this rugged land. If you are one of them, or just an interested observer, here are a few pointers on doing business in Russia:

• Getting Started. A visit to your country’s local chamber of commerce in Russia should be high on your list. The best organized and managed of these hold regularly scheduled luncheons at which you can make contacts with Russians and others wanting to do business. They might also of- fer programs on getting acquainted with the business cli- mate in Russia. Many businesses get started in Moscow, St.  Petersburg, or Vladivostok, depending in part on their line of business.

• Be adventurous. The kind of person who will succeed in Russia thrives on adventure and enjoys a challenge. He or she also should not demand predictability in day-to-day activities— Russia is anything but predictable. Initially, knowledge of Russian is helpful, though not essential, but eventual proficiency will be

ManaGer’s briefCase Russian Rules of the Game

necessary. Prior experience working and living in Eastern Europe would be a big plus.

• Office Space. Doing business in Russia demands a personal touch. Locating an office in Russia is crucial if you eventually want to receive income from your operations. Your office does not need to be a suite off Red Square. Almost any local address will do, and a nice flat can double as an office at the start. For business services, upscale hotels commonly have business cen- ters in them. Eventually, renting an average Russian-style office would be more than adequate.

• Making Deals. Business in Russia takes time and patience. The Russian negotiating style, like the country itself, is tough and ever changing. During negotiations, emotional outbursts, walkouts, or threats to walk out from your Russian counterparts should not be unexpected. Finally, signed contracts in Russia are not always followed to the letter, as your Russian associate may view new circumstances as a chance to renegotiate terms. All in all, the personalities of individuals involved in business dealings count for much in Russia.

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The root of many of Russia’s problems appears to be corrupt law enforcement. Officials of the government, such as the Russian Interior Ministry, are accused of raiding the offices of com- panies for documents and computers. Records are then falsified and signatures forged to make it appear that another company—one controlled by government officials—has massively overpaid taxes and is due a government refund. Meanwhile, the owners and managers of the raided busi- nesses often find themselves behind Russian prison bars.14

The Russian government confiscated oil giant Yukos and threw its chief, Mikhail Khodorkovsky, in jail on charges of fraud, embezzlement, and tax evasion. Observers of events in Russia say that Khodorkovsky’s problems were based in his refusal to bow to Russia’s bureaucrats and that he ran Yukos as if it were a private company. He also tried to create a new class of people in Russia who would one day push for political reforms there by financing boarding schools for orphans, computer classes for village schools, and civil-society programs for journalists and pol- iticians. His actions clearly made him a threat to the state.15 If Russia truly wishes to become a location of choice for international companies, it will need to meddle less in business and begin to safeguard property rights.

QuiCk study 5 1. What are several reform measures involved in economic transition? 2. Describe some of the remaining obstacles to businesses in transitional economies. 3. Explain Russia’s experience with economic transition.

bottoM line for business

This completes our three-chapter coverage of national business environments. This chapter showed us that economic freedom tends to generate higher standards of living. This relationship is causing mixed economies to remove unnecessary regulation and government interference. Formerly centrally planned economies continue free- market reforms in order to drive domestic entrepreneurial activity and attract international investors. These trends are changing the face of global capitalism. Two topics are likely to dominate conversations on development—the race between China and India and the productivity gap between the United States and Europe.

Economic development in China versus india Both China and India have immense potential for growth, and it is only a matter of time before each has a middle class larger than the entire U.S. population. Whether the organic-led path of India or the investment-led path of China is best for a particular nation depends on that nation’s circumstances.

Every nation on earth has so far followed a path to development that relied on its natural resources and/or its relatively cheap labor— the model China is following. China’s top-down approach to develop- ment and India’s bottom-up approach reflect their political systems: India is a democracy, whereas China is not. Although China is grow- ing rapidly, it needs homegrown entrepreneurs and Western-style managerial skills to take it to the next level of global competitiveness.

If India can achieve sustained economic growth, it will become the first developing nation to advance economically by relying on the brainpower of its people. India’s growth came largely from native competitive firms in cutting-edge, knowledge-based industries. Although India has a long reputation for high taxes and

burdensome regulations, it also has had the foundations of a market economy, such as private enterprise, democratic government, and Western accounting practices. India also has a relatively advanced legal system, fairly efficient capital markets, and many talented entrepreneurs.

Productivity in the United States versus Europe Productivity growth is a key driver of living standards in any nation. Although productivity growth in Europe kept pace with that in the United States for decades, it has fallen behind in recent years. But why is there a productivity gap at all?

Several explanations have been proposed. First, despite its benefits, information technology (IT) spending in Europe lags behind that in the United States. Europeans may be discouraged from spending on IT for reasons related to European business law. Second, stronger labor laws in Europe relative to the United States make it more difficult and costly to shed workers. Thus, even if European companies invest in IT to increase labor productivity, overall productivity gains may be hampered by their inability to rid themselves of excess workers. Third, whereas the U.S. tech sector is a big driver behind higher U.S. productivity growth, the tech sector in Europe is far smaller by comparison. Fourth, Europe spends far less overall on R&D, even though spending on R&D is a big boost to productivity growth.

Strong productivity growth means higher profits, better living standards, and stable prices. Many European officials are calling for a greater shift toward free-market reform to boost productivity. Euro- pean officials understand that robust productivity growth is the only way for their citizens to close the gap with their U.S. counterparts.

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Chapter Summary

1. Describe what is meant by a centrally planned economy and explain why its use is declining. • In a centrally planned economy, the government owns land, factories, and other eco-

nomic resources and plans nearly all economic-related activities. • The philosophy of central planning stresses the group over individual well-being and

strives for economic and social equality. • One reason for the decline of central planning is that scarce resources were wasted

because central planners paid little attention to product quality and buyers’ needs. • Second, a lack of incentives to innovate resulted in little or no economic growth and

consistently low standards of living. • Third, central planners realized that other economic systems were achieving far

higher growth rates for other countries. • Fourth, consumers became fed up with a lack of basic necessities such as adequate

food, housing, and health care. 2. Identify the main characteristics of a mixed economy and explain the emphasis on

privatization. • In a mixed economy, land, factories, and other economic resources are split between

private and government ownership. • In mixed economies, governments tend to control economic sectors crucial to

national security and long-term stability. • Proponents of mixed economies say that a successful economic system not only must

be efficient and innovative, but also must protect society from unchecked individual- ism and organizational greed.

• Many mixed economies are engaging in privatization (the sale of government- owned economic resources) in order to become more efficient in how they use resources.

3. Explain how a market economy functions and identify its distinguishing features. • In a market economy, private individuals or businesses own the majority of land,

factories, and other economic resources. • Economic decisions in a market economy are influenced by the interplay of supply

and demand. • Market economics is rooted in the belief that individual concerns are paramount and

that the group benefits when individuals receive proper incentives and rewards. • To function smoothly, a market economy requires free choice (in buyers’ purchasing

options), free enterprise (in producers’ competitive decisions), and price flexibility (reflecting supply and demand).

• Government’s role in a market economy involves enforcing antitrust laws, preserving property rights, providing a stable fiscal and monetary environment, and preserving political stability.

4. Describe the different ways to measure a nation’s level of development. • Economic development refers to the economic well-being of one nation’s people

compared with that of another nation’s people. • One method for gauging economic development is national production, which

includes measures such as gross national product and gross domestic product. • A second method is purchasing power parity (PPP), which refers to the relative ability

of two countries’ currencies to buy the same “basket” of goods in those two countries. • PPP is used to correct international comparisons made at official exchange rates. • A third method is the United Nations’ human development index (HDI), which mea-

sures the extent to which a people’s needs are satisfied and addressed equally across the population.

5. Discuss the process of economic transition and identify the obstacles for business. • Economic transition is the process whereby a nation changes its fundamental

economic organization to create free-market institutions.

MyManagementLab Go to www.mymanagementlab.com to complete the problem marked with this icon .

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Talk It Over 1. The Internet has penetrated many aspects of business and culture in developed countries,

but it is barely available in many poor countries. Do you think this technology will widen the economic development gap between rich and poor countries? Why or why not? Is there a way for developing countries to use such technologies as tools for economic development?

2. Imagine that you are the director of a major international lending institution supported by funds from member countries. What one area in newly industrialized and developing economies would be your priority for receiving development aid? Do you suspect that any member country will be politically opposed to aid in this area? Why or why not?

centrally planned economy (p. 130) demand (p. 135) developed country (p. 145) developing country (also called less-

developed country) (p. 146) economic development (p. 137) economic system (p. 130)

economic transition (p. 146) emerging markets (p. 146) human development index (HDI)

(p. 144) market economy (p. 135) mixed economy (p. 134) newly industrialized country (NIC) (p. 145)

privatization (p. 135) purchasing power (p. 141) purchasing power parity (PPP)

(p. 141) supply (p. 135) technological dualism (p. 146)

Key Terms

• Economic transition typically involves several reform measures: (1) stabilizing the economy; (2) instituting market-based pricing; (3) legalizing business, privatizing state-run businesses, and supporting property rights; and (4) removing barriers to trade, investment, and currency flows.

• One obstacle to transition is a lack of managerial expertise because central planners made virtually all business decisions.

• A second obstacle is a shortage of capital to pay for new communications and infra- structure, new financial institutions, and education.

• A third obstacle is cultural differences between transition economies and the West that can make introducing modern management practices difficult.

• A fourth obstacle is environmental degradation that can lower productivity due to poor health conditions.

Teaming Up 1. Debate Project. In this project, two groups of four students each will debate the benefits

and drawbacks of both market and mixed economies. After the first student from each side has spoken, the second student will question the opposing side’s arguments, looking for holes and inconsistencies. The third student will attempt to answer these arguments. A fourth student will present a summary of each side’s arguments. Finally, the class will vote on which team has offered the more compelling argument.

2. Market Entry Strategy Project. This exercise corresponds to the MESP online simula- tion. For the country your team is researching, what type of economic system does it have? Has it always had this type of economic system? Is it a developed, newly industrializing, emerging, or developing country? How does it rank on the various measures of economic development? Has it undergone any form of economic transition within the past 20 years? If so, how has that transition affected the culture and the country’s political, legal, and economic systems? Integrate your findings into your completed MESP report.

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Ethical Challenge 1. You are the CEO of a Lebanese bank. Your bank has been accused by U.S. federal pros-

ecutors of helping to launder at least $329 million for a Lebanese political party, Hezbol- lah, accused of terrorism, in a scheme that involved buying and selling used cars from the United States within Lebanon. Cash from the car sales, as well as proceeds of narcotics trafficking, were supposedly funneled to Lebanon through the scheme.

The U.S. prosecutors claim that the funds came from a U.S. account of a Beirut-based bank, which is holding money in escrow from the $580-million sale of your defunct bank to another bank in Lebanon used by Hezbollah. Your bank has filed a lawsuit with the pros- ecuting office in Beirut so that a proper investigation can be conducted as soon as possible. You have been called in front of the national investigation committee of the central bank of Lebanon to defend your situation. You are a Lebanese banker and you know that the major- ity of your clients support that party. How can you defend your bank from being accused of facilitating Hezbollah’s activities? Do you think that businesses should have any involve- ment with political issues in their respective countries? What can you do to save your bank when it is in such a position?

Take It to the Web 1. Video Report. Visit this book’s channel on YouTube (www.YouTube.com/MyIBvideos).

Click on “Videos” near the top of the page, and click on the set of videos labeled “Ch 04: Economics and Emerging Markets.” Watch one video from the list, and then summarize it in a half-page report. Reflecting on the contents of this chapter, which components of economic systems and development can you identify in the video? How might a company engaged in international business act on the information contained in the video?

2. Website Report. Governments across Western Europe are privatizing state-owned compa- nies, and nations in Eastern Europe are transitioning toward market-based economies.

Go to the European Union (EU) website (www.europa.eu), and search for information regarding its progress on issues presented in this chapter. Possible topics include privatiza- tion, economic and social development, global competition, and national infrastructure. For the topic(s) of your choice, what are the EU’s goals? What specific policies will help the EU achieve those goals? Does the EU directly address the challenges (such as increased competition) that globalization presents to its companies?

Some countries (such as Estonia, Hungary, and Poland) outperformed others (such as Bulgaria and Romania) during their post-communist transitions. For your topic(s), what specific policies does the EU have in place to help nations in transition develop? Identify as many economic, social, and cultural efforts as you can.

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Practicing International Management Case

The Role of Social and Political Factors in the Lebanese Economy

Lebanon is a nation that tolerates and respects multiple cultures, religions, and ethnicities while its economy today tries to follow its past preferences of favoring strong fiscal and monetary free- doms as well as developing a labor market that is highly flexible.

Prior to the Lebanese Civil War between 1975 and 1990, the country had enjoyed relative calm and prosperity. Tourism, agri- culture, small- and medium-sized manufacturers, education, and banking all promoted a successful economy. Lebanon became known as the finance and banking capital of the Arab world and the “Paris of the Middle East.” Before the war, Lebanon had a compet- itive and free market environment and a strong laissez-faire com- mercial tradition. There were no restrictions on foreign exchange or capital movement. Bank secrecy was strictly enforced, and there were practically no restrictions on foreign investment. Corporate tax rates and inflation were relatively low. The financial sector was well developed prior to the civil war and has since developed again into a system aligned to fit the demands of the region, including a range of private banks and services.

The civil war seriously damaged Lebanon’s economic infra- structure, cut national output by half, and ruined a wide range of businesses in service and manufacturing sectors. It ultimately ended Lebanon’s position as a Middle Eastern banking hub. The subsequent period of relative peace enabled the central govern- ment to restore control in Beirut, but how was this achieved? Steps were taken to reestablish its taxation system and to regain access to key port and government facilities. Furthermore, economic recovery had been helped by a financially sound banking system and resilient small- and medium-sized enterprises, with family remittances, banking services, manufactured and farm exports, and international aid as the main sources of foreign exchange.

Immediately following the end of the civil war, there were extensive efforts to revive the economy and rebuild the national infrastructure. By early 2006, a considerable degree of stability had been achieved throughout most parts of the country, Beirut’s reconstruction was almost complete, and an increasing number of foreign tourists from all around the world were beginning to head toward Lebanon’s resorts. As a result, GDP increased from $2.838 billion in 1990 to $22438 billion in 2006 (an increase of nearly 700 percent in 16 years), and unemployment dropped to 8.1 per- cent in 2004.

But a new shock to the country’s economy occurred in 2006. After only a month of fighting with Israel in July 2006, Lebanon suffered significant damage to businesses and infrastructure. Many countries struggled to get as many of their citizens as pos- sible out of the country safely and quickly. The tourism industry faced a massive loss. Lebanon was in crisis again. In September

2006, Rafiq Hariri International Airport in Beirut reopened, and efforts to revive the Lebanese economy were to begin once more. Major investors to the reconstruction of Lebanon included the European Union and Saudi Arabia as well as many other countries across the world. Lebanon’s recent economic his- tory has been a series of taking one step forward and two steps back yet there is still promise for a bright future if peace can be maintained.

Toward achieving its targets, Lebanon has received external support as well. International support in humanitarian demining programs and victims’ assistance programs have been significant. Moreover, there are external contributions and involvements in the reconstruction of Lebanon. A program of relief, rehabilitation, and recovery has been in force from 1975 to 2005 and has totaled more than $400 million in aid to Lebanon by the United States. For relief, recovery, rebuilding, and security in the wake of the 2006 war, the U.S. government substantially stepped up this program, pledging well over $1 billion in additional assistance for the 2006 and 2007 fiscal years.

From an internal perspective, liberalization of the economy, investment, and business activities are confronted by other chal- lenges. Intrusive bureaucracy and chaotic regulatory regimes slow down local businesses and discourage foreign investment. Besides, fair adjudication of property rights is not guaranteed because the Lebanese courts are subject to significant influence from the Lebanese security services, government, or even the police. More importantly, in order to create a productive and stable business environment, it is essential for Lebanon to work diligently on improving its ability to stamp out fraud—for example, Lebanon has recently adopted new laws to combat money laundering.

Thinking globally 1. Why do you think Lebanon is in need of foreign direct

investment (FDI)? Discuss enablers and barriers to FDI in Lebanon.

2. Do some research on Lebanon and its current socioeco- nomic status. Discuss how social and political situations may affect the Lebanese economy.

3. How do you think the transition to a normal economy in Lebanon, after the war in 2006, would differ from the experiences of European countries after World War II?

4. The Lebanese government prohibited all imports from Israel. Discuss the socioeconomic aspects of this decision.

Source: Kirk D. Hoppe, “Case Study on Lebanon: Can the U.S. Build upon Socio-economic Influences in Order to Foster Good Citizenship Versus Insur- gency?”, Naval Postgraduate School, Monterey, California (2007).

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322

A Look Ahead Chapter 13 describes the selection and management issues surrounding the different entry modes available to companies going international. We examine the importance of an export strategy for exporters and the pros and cons of each entry mode.

A Look at This Chapter This chapter begins with an explanation of how managers screen potential new markets and new sites for operations. We then discuss the main difficulties of conducting international market research. We also identify the information required in the screening process and where managers can go to obtain such information.

A Look Back Chapter 11 showed us how companies plan and organize themselves for international operations. We explored the different types of strategies and organizational structures that international companies use to accomplish their strategic goals.

Analyzing International Opportunities

ChApter twelve

leArnIng ObjeCtIves After studying this chapter, you should be able to

3. Identify the main sources of secondary international data and explain their usefulness.

4. Describe the main methods used to conduct primary international research.

1. Explain each of the four steps in the market- and site-screening process.

2. Describe the three primary difficulties of conducting international market research.

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323

Rovio SoaRS Globally

Source: © Urbanmyth/Alamy

MyManagementLab® Improve Your Grade!

Over 10 million students improved their results using the Pearson MyLabs. Visit www.mymanagementlab.com for simulations, tutorials, and end-of-chapter problems.

ESPOO, Finland—Rovio (www.rovio.com) is the company behind the Angry Birds phenomena. The company began in 2003 as a developer for mobile games and has since expanded into an entertainment media company. Angry Birds was launched in 2009, but did not catch on with the global audience until 2010. Since then, the Angry Birds games have been downloaded over 1 billion times, and new synergies are being created continuously to keep the franchise moving forward.

Rovio’s strategy on how to go global focused on becoming successful in its home market of Finland and then expanding into similar smaller markets. The game caught on in Sweden and Denmark and then in the Czech Republic and Greece. This opened the door for entry into the lucrative English- speaking markets.

After gaining success in Europe, Angry Birds was featured as a “game of the week” by Apple in its UK App Store. Three days after the game being featured, Rovio released a free version of Angry Birds with a limited number of levels, which helped the game soar from 600th in popularity to first.

The global appeal of the game is its simplicity. The game is multilayered, which means the game has built-in difficulties that cater to different types of gamers, from the casual player who wants to complete a level and move on to the more hardcore player who wants to find the perfect shot to obtain the maximum number of points.

To keep people playing, Rovio offers free updates. This creates a lasting relation- ship with its customers.

The Angry Birds franchise continues to grow, with toys, clothing, and theme parks, as well as new collaborations, such as Angry Birds Star Wars.

As you explore this chapter, consider the different ways a firm may analyze the market based on its industry.1

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324 Part 5 • InternatIonal BusIness ManageMent

Companies traditionally become involved in international business by choosing to enter familiar, nearby countries first. Managers feel comfortable entering nearby markets be-cause they likely have already interacted with the people of those cultures and have at least some understanding of them. Companies in Canada, Mexico, and the United States often gain their initial international experiences in one another’s markets. Likewise, businesses in Asia often seek out opportunities in one another’s markets before pursuing investment opportunities out- side the region.

Yet, companies today find themselves bridging the gaps presented by space and culture far more often than in the past. For one thing, technological advances in communication and trans- portation continue to open markets around the globe. Some companies can realistically consider nearly every location on earth either as a potential market or as a site for business operations. The expansion of regional markets (such as the European Union) also causes companies to an- alyze opportunities farther from home. Businesses locate production facilities within regional markets because producing in one of a region’s countries provides duty-free access to every consumer in the trade bloc.

The rapidly changing global marketplace forces companies to view business strategies from a global perspective. Businesses today formulate production, marketing, and other strategies as components of integrated plans. For example, to provide a continuous flow of timely informa- tion into the production process, more and more firms locate research and development (R&D) facilities near their production sites abroad. Managers also find themselves screening and ana- lyzing locations as potential markets and as potential sites for operations simultaneously. When Mercedes (www.mercedes.com) introduced the M-class sport utility vehicle to the U.S. market, executives also decided to build the vehicle there. The company did not merely estimate the size of the potential market for the vehicle but simultaneously selected a suitable production site.

This chapter presents a systematic screening process for both markets and sites. After describing important cultural, political, legal, and economic forces affecting the screening process, we explain the difficulties of conducting international research. We then explore the central sources of existing market data and the prime methods for conducting international research firsthand.

screening potential Markets and sites Two important issues concern managers during the market- and site-screening process. First, they want to keep search costs as low as possible. Second, they want to examine every potential market and every possible location. To accomplish these two goals, managers can segment the screening of markets and sites into the following four-step process (see Figure 12.1):

1. Identify basic appeal. 2. Assess the national business environment. 3. Measure market or site potential. 4. Select the market or site.

This screening process involves spending more time, money, and effort on the markets and sites that remain in the later stages of screening. Expensive feasibility studies (conducted later in the process) are performed on a few markets and sites that hold the greatest promise. This ap- proach creates a screening process that is cost effective yet does not overlook potential locations. Let’s now discuss each of the four steps in detail.

Step 1: Identify Basic Appeal We have already seen that companies go international either to increase sales (and thus profits) or to access resources. The first step in identifying potential markets is to assess the basic de- mand for a product. Similarly, the first step in selecting a site for a facility to undertake produc- tion, R&D, or some other activity is to explore the availability of the resources required.

Determining Basic DemanD The first step in searching for potential markets means finding out whether there is a basic demand for a company’s product. Important in determining this basic appeal is a country’s climate. For example, no company would try to market snowboards in Indonesia, Sri Lanka, or Central America because they receive no snowfall. The same

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product, on the other hand, is well suited for markets in the Canadian Rockies, northern Japan, and the Swiss Alps. Although this stage seems simple, it cannot be taken too lightly. A classic example is when, during its initial forays into international business, Walmart (www.walmart. com) found ice-fishing huts in its Puerto Rico inventory and no snowshoes at its stores in Ontario, Canada.

Certain countries also ban specific goods. Islamic countries, for instance, forbid the impor- tation of alcoholic products, and the penalties for smuggling are stiff. Although alcohol is avail- able on the planes of international airlines such as British Airways (www.ba.com) and KLM (www.klm.com), it cannot leave the airplane, and consumption cannot take place until the plane has left the airspace of the country operating under Islamic law.

Determining availaBility of resources Companies that require particular resources to carry out local business activities must be sure they are available. Raw materials needed for manufacturing either must be found in the national market or must be imported. Yet imports may encounter tariffs, quotas, or other government barriers. Managers must consider the additional costs of importing to ensure that total product cost does not rise to unacceptable levels.

The availability of labor is essential to production in any country. Many companies choose to relocate to countries where workers’ wages are lower than they are in the home country. This practice is most common among makers of labor-intensive products—those for which labor accounts for a large portion of total cost. Companies considering local production must determine whether there is enough labor available locally for production operations.

Companies that hope to secure financing in a market abroad must determine the availability and cost of local capital. If local interest rates are too high, a company might be forced to obtain financing in its home country or in other markets in which it is active. On the other hand, access to low-cost financing may provide a powerful inducement to a company that is seeking to expand internationally. British entrepreneur Richard Branson opened several of his Virgin (www.virgin. com) Megastores in Japan despite its reputation as a tough market to crack. One reason for Branson’s initial attraction to Japan was a local cost of capital that was roughly one-third the cost in Britain.

Markets and sites that fail to meet a company’s requirements for basic demand or resource availability in Step 1 are removed from further consideration.

Figure 12.1 screening Process for Potential markets and sites

Step 1: Identify Basic Appeal • Suitability of climate, absolute bans • Access to materials, labor, financing

Step 2: Assess the National Business Environment • Language, attitudes, religious beliefs, traditions, work ethic • Government regulation, government bureaucracy, political stability • Fiscal and monetary policies, currency issues • Cost of transporting goods, country image

Step 3: Measure Market or Site Potential • Current sales, income elasticity, market potential indicator • Quality of workforce, materials, infrastructure

Step 4: Select the Market or Site • Field trips • Competitor analysis

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Step 2: Assess the National Business Environment If the business environments of all countries were the same, deciding where to market or produce products would be rather straightforward. Managers could rely on data that report the performance of the local economy and analyze expected profits from proposed investments. But as we saw in earlier chapters, countries differ significantly in their cultures, politics, laws, and economies. International managers must work to understand these differences and to incorpo- rate their understanding into market- and site-selection decisions. Let’s examine how domestic forces in the business environment actually affect the location-selection process.

cultural forces Although countries display cultural similarities, they differ in language, attitudes toward business, religious beliefs, traditions, customs, and countless other ways. Some products are sold in global markets with little or no modification. These products include industrial machinery such as packaging equipment, consumer products such as toothpaste and soft drinks, and many other types of goods and services. Yet many products must undergo extensive adaptation to suit local preferences, such as books, magazines, ready-to-eat meals, and others.

Cultural elements can influence what kinds of products are sold and how they are sold. A company must assess how the local culture in a candidate market might affect the salability of its product. Consider Coca-Cola’s (www.coca-cola.com) experience in China. Many Chinese take a traditional medicine to fight off flu and cold symptoms. As it turns out, the taste of this tradi- tional medicine—which most people do not find appealing—is similar to that of Coke. Because of Coca-Cola’s global marketing policy of one taste worldwide, the company had to overcome the aversion to the taste of Coke among Chinese consumers. It did so by creating a marketing campaign that associated drinking a Coke with experiencing a piece of American culture. What initially looked like an unattractive market for Coke became very successful through a carefully tailored marketing campaign.

Cultural elements in the business environment can also affect site-selection decisions. When substantial product modifications are needed for cultural reasons, a company might choose to establish production facilities in the target market itself. Yet serving customers’ special needs in a target market must be offset against any potential loss of economies of scale due to producing in several locations rather than just one. Today, companies can minimize such losses through the use of flexible manufacturing methods. Although cellular phone manufacturer Nokia (www. nokia.com) produces in locations worldwide, it ensures that each one of its facilities can start producing any one of its mobile phones for its different markets within 24 hours.

A qualified workforce is important to a company no matter what activity it is to undertake at a particular site. Also, a strong work ethic among the local workforce is essential to hav- ing productive operations. Managers must assess whether an appropriate work ethic exists in each potential country for the purposes of production, service, or any other business activity. An adequate level of educational attainment among the local workforce for the planned busi- ness activity is also very important. Although product-assembly operations may not require an advanced education, R&D, high-tech production, and certain services normally will require ex- tensive higher education. If the people at a potential site do not display an appropriate work ethic or educational attainment, the site will be ruled out for further consideration.

Political anD legal forces Political and legal forces also influence the market and site- location decision. Important factors include government regulation, government bureaucracy, and political stability. Let’s take a brief look at each of these factors.

government regulation As we saw in earlier chapters, a nation’s culture, history, and current events cause differences in attitudes toward trade and investment. Some governments take a strong nationalistic stance, whereas others are quite receptive to international trade and investment. A government’s attitude toward trade and investment is reflected in the quantity and types of restrictions it places on imports, exports, and investment in its country.

Government regulations can quickly eliminate a market or site from further consideration. First of all, they can create investment barriers to ensure domestic control of a company or in- dustry. One way in which a government can accomplish this is by imposing investment rules on matters such as business ownership—for example, forcing foreign companies into joint ven- tures. Governments can extend investment rules to bar international companies entirely from

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competing in certain sectors of the domestic economy. The practice is usually defended as a matter of national security. Economic sectors commonly declared off-limits include TV and radio broadcasting, automobile manufacturing, aircraft manufacturing, energy exploration, military-equipment manufacturing, and iron and steel production. Such industries are protected either because they are culturally important, are engines for economic growth, or are essential to any potential war effort. Host governments often fear that losing control in these economic sectors means placing their fate in the hands of international companies.

Second, governments can restrict international companies from freely removing prof- its earned in the nation. This policy can force a company to hold cash in the host country or to reinvest it in new projects there. Such policies are normally rooted in the inability of the host-country government to earn the foreign exchange needed to pay for badly needed imports. For instance, Chinese subsidiaries of multinational companies must convert the local currency (renminbi) to their home currency when remitting profits back to the parent company. Multina- tionals can satisfy this stipulation only as long as the Chinese government agrees to provide it with the needed home-country currency.

Third, governments can impose very strict environmental regulations. In most industrial countries, factories that produce industrial chemicals as their main output or as byproducts must adhere to strict pollution standards. Regulations typically demand the installation of expensive pollution-control devices and close monitoring of nearby air, water, and soil quality. While protecting the environment, such regulations also increase short-term production costs. Many developing and emerging markets have far less strict environmental regulations. Regrettably, some companies are alleged to have moved production of toxic materials to emerging markets in order to take advantage of lax environmental regulations and, in turn, of lower production costs. Although such behavior is roundly criticized as highly unethical, it will occur less often as nations continue cooperating to formulate common environmental protection policies.

Finally, governments can also require that companies divulge certain information. Coca- Cola actually left India when the government demanded that it disclose its secret Coke formula as a requirement for doing business there. Coca-Cola returned only after the Indian government dropped its demand.

government Bureaucracy A lean and smoothly operating government bureaucracy can make a market or site more attractive. On the other hand, a bloated and cumbersome system of obtaining approvals and licenses from government agencies can make it less appealing. In many developing countries, what should be a relatively simple matter of obtaining a license to establish a retail outlet often means acquiring numerous documents from several agencies. The bureaucrats in charge of these agencies generally are little concerned with providing businesses with high-quality service. Managers must be prepared to deal with administrative delays and a maze of rules. For example, country managers for Millicom International Cellular (www.millicom.com) in Tanzania needed to wait 90 days to get customs clearance on the monthly import of roughly $1 million in cellular telephone equipment. Millicom endured this bureaucratic obstacle because of the local market’s potential.

Companies will endure a cumbersome bureaucracy if the opportunity is sufficient to off- set any potential delays and expenses. Companies entering China cite the patience needed to navigate a maze of government regulations that often contradict one another, and they com- plain about the large number of permissions required from different agencies. The trouble stems from the fact that China is continually revising and developing its system of business law as its economy develops. But an unclear legal framework and inefficient bureaucracy are not deterring investment in China because the opportunities for both marketers and manufacturers are simply too great to ignore.

Political Stability Every nation’s business environment is affected to some degree by political risk. As we saw in Chapter 3, political risk is the likelihood that a society will undergo political changes that negatively affect local business activity. Political risk can threaten the market of an exporter, the production facilities of a manufacturer, or the ability of a company to remove profits from the country in which they were earned.

The key element of political risk that concerns companies is unforeseen political change. Political risk tends to rise if a company cannot estimate the future political environment with a fair degree of accuracy. An event with a negative impact that is expected to occur in the future is

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not, in itself, bad for companies because the event can be planned for and necessary precautions taken. It is the unforeseen negative events that create political risk for companies.

Managers’ perceptions of a market’s political risk are often affected by their memories of past political unrest in the market. Yet managers cannot let past events blind them to future op- portunities. International companies must try to monitor and predict political events that threaten operations and future profits. By investigating the political environment proactively, managers can focus on political risk and develop action plans for dealing with it.

But where do managers get the information to answer such questions? They may assign company personnel to gather information on the level of political risk in a country, or they may obtain it from independent agencies that specialize in providing political-risk services. The advice of country and regional specialists who are knowledgeable about the current political climate of a market can be especially helpful. Such specialists can include international bankers, political consultants, reporters, country-risk specialists, international relations scholars, political leaders, union leaders, embassy officials, and other local businesspeople currently working and living in the country in question.

economic anD financial forces Managers must carefully analyze a nation’s economic policies before selecting it as a new market or site for operations. The poor fiscal and monetary policies of a nation’s central bank can cause high rates of inflation, increasing budget deficits, a depreciating currency, falling productivity levels, and flagging innovation. Such consequences typically lower investor confidence and force international companies to scale back or cancel proposed investments. For instance, India’s government finally reduced its restrictive trade and investment policies and introduced more-open policies. These new policies encouraged investment by multinationals in production facilities and R&D centers, especially in the computer software industry.

Currency and liquidity problems pose special challenges for international companies. Vola- tile currency values make it difficult for firms to predict future earnings accurately in terms of the home-country currency. Wildly fluctuating currency values also make it difficult to calculate how much capital a company needs for a planned investment. Unpredictable changes in currency values can also make liquidating assets more difficult because the greater uncertainty will likely reduce liquidity in capital markets—especially in countries with relatively small capital markets, such as Bangladesh and Slovakia.

In addition to their home government’s resources, managers can obtain information about economic and financial conditions from institutions such as the World Bank, the International Monetary Fund, and the Asian Development Bank. Other sources of information include all types of business and economic publications and the many sources of free information on the Internet.

Stability can attract international business, but social unrest can severely disrupt operations and drive out international firms. Here, a man throws a rock at police during a riot in Paranaque City south of the capital Manila in the Philippines. Riots erupted as hundreds of families who claimed they were legally allowed to occupy land resisted demolition teams. illegal demolition is frequent in these urban centers where many impoverished rural workers reside.

Source: imago stock&people/Newscom

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other forces Transport costs and country image also play important roles in the assessment of national business environments. Let’s take a brief look at each of these forces.

Cost of Transporting Materials and goods The cost of transporting materials and finished goods affects any decision about where to locate manufacturing facilities. Some products cost very little to transport through the production and distribution process, whereas others cost a great deal. Logistics refers to management of the physical flow of products from the point of origin as raw materials to end users as finished products. Logistics weds production activities to the activities needed to deliver products to buyers. It includes all modes of transportation, storage, and distribution.

To realize the importance of efficient logistics, consider that global logistics is a $400 bil- lion industry. We often think of the United States as an efficient logistics market because of its extensive interstate road system and rail lines that stretch from east to west. But because of overcrowded highways, 2 billion people-hours are lost to gridlock each year. That translates into $48 billion in lost productivity. Transport companies and cargo ports strenuously advertise their services precisely because of the high cost to businesses of inefficient logistics.

Country image Because country image embodies every facet of a nation’s business environment, it is highly relevant to the selection of sites for production, R&D, or any other activity. For example, country image affects the location of manufacturing or assembly operations because products must typically be stamped with labels identifying where they were made or assembled—such as “Made in China” or “Assembled in Brazil.” Although such labels do not affect all products to the same degree, they can present important positive or negative images and boost or dampen sales.

Products made in relatively developed countries tend to be evaluated more positively than products from less-developed countries.2 This relation is due to the perception among consum- ers that the workforces of certain nations have superior skills in making particular products. For example, consumer product giants Procter & Gamble (www.pg.com) and Unilever (www.unilever. com) have manufacturing facilities in Vietnam. But Vietnamese consumers tend to shun these companies’ locally made Close-Up toothpaste and Tide detergent, instead seeking out iden- tical products and brands produced in neighboring countries, such as Thailand. As one young Vietnamese shopper explained, “Tide from Thailand smells nicer.” A general perception among Vietnamese consumers is that goods from Japan or Singapore are the best, followed by Thai goods. Unfortunately for Procter & Gamble and Unilever in Vietnam, many goods from other countries are smuggled in and sold on the black market, thereby denying the companies local sales revenue.

A country’s image can be positive in one product class but negative in another. For example, the fact that Volkswagen’s (www.volkswagen.com) new Beetle is made in Mexico for the U.S. market has not hurt the Beetle’s sales. But would affluent consumers buy a hand-built Rolls- Royce (www.rolls-roycemotorcars.com) automobile if it were produced in Bolivia? Because Rolls-Royce buyers pay for the image of a brilliantly crafted luxury car, the Rolls-Royce image probably would not survive intact if the company were to produce its cars in Bolivia.

Finally, note that country image can and does change over time. For example, “Made in India” has traditionally been associated with low-technology products such as soccer balls and many types of textile products. But today, world-class computer software companies increas- ingly rely on the software-development skills of engineers located in and around Madras and Bangalore in southern India.

Throughout our discussion of Step 2 of the screening process (assessing the national busi- ness environment), we have presented many factors central to traditional business activities. To explore issues specific to entering international markets successfully over the Internet, see the Manager’s Briefcase, titled “Conducting Global e-Business.”

Quick Study 1 1. What are the four steps in the screening process? 2. Identify the main factors to investigate when identifying the basic appeal of a market or site

for operations. 3. What key forces should be examined when assessing a nation’s business environment? 4. How do transport costs and country image affect the location decision?

logistics Management of the physical flow of products from the point of origin as raw materials to end users as finished products.

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Step 3: Measure Market or Site Potential Markets and sites passing the first two steps in the screening process undergo further analysis in order for companies to arrive at a more manageable number of potential locations. Despite the presence of a basic need for a product and an adequately stable national business environment, potential customers might not be ready or able to buy a product for a variety of reasons. Despite the availability of resources, certain sites may be unable to supply a given company with the level of resources it needs. Let’s explore the factors that further influence the potential suitability of markets and sites for operations.

measuring market Potential As barriers to trade are reduced worldwide, companies are looking to increase sales in industrialized and emerging markets alike. But businesses can seldom create one marketing plan that will cover every market in which they sell their products. Nations enjoy different levels of economic development that affect what kinds of goods are sold, the manner in which they are sold, and their inherent features. Likewise, different levels of economic development require varying approaches to researching market potential. But how do managers estimate potential demand for particular products? Let’s look at the factors managers consider when analyzing industrialized markets and then examine a special tool for analyzing emerging markets.

industrialized Markets The information needed to estimate the market potential for a product in industrialized nations tends to be more readily available than for emerging markets. In fact, for the most-developed markets, research agencies exist for the sole purpose of supplying market data to companies. Euromonitor (www.euromonitor.com) is one such company with an extensive global reach in consumer goods. The company sells reports and does company- specific studies for many international corporations and entrepreneurs. Some of the information in a typical industry analysis includes the following:

• Names, production volumes, and market shares of the largest competitors • Volume of exports and imports of the product • Structure of the wholesale and retail distribution networks

generating sales in new geographic markets over the Internet is an increasingly popular method of expansion for large multinationals and entrepreneurs alike. Here are some issues managers should con- sider when entering new markets using the Internet.

Market Access

• Infrastructure. Before investing heavily in e-business, investi- gate whether your potential customers have easy access to the Internet. Determine whether their government is developing advanced digital networks.

• Content. Companies must be informed about the different poli- cies of each country through which their information travels in order to avoid liability. Key topics are truth in advertising, fraud prevention, and violent, seditious, or graphic materials.

• Standards. It is not always entirely clear which country has the power to establish standards of operations for e-business. Standards might be set up as trade barriers to keep international companies out of a domestic market.

Legal issues

• Privacy. One strength of e-business is that consumer data can be collected easily and used to generate sales. But consumer groups in some countries view the collection of such data as an

invasion of privacy. Consumers are particularly vehement if they are unaware that this information is being collected and of how it is being used.

• Security. Companies must ensure their data communications are safe from unauthorized access or modification. Security technology, such as encryption, password controls, and firewalls, still needs support from a global infrastructure.

• Intellectual Property. International agreements govern and protect copyrights, databases, patents, and trademarks. Yet these issues will remain a global concern for e-business until a widely accepted legal framework is established for the Internet.

Financial Matters

• Electronic Payments. Online use of credit cards remains a se- curity concern for many consumers. Global electronic payment systems such as stored-value, smart cards, and other systems are in various stages of development and will alleviate many security issues.

• Tariffs and Taxation. International policies regarding which party in an international e-business transaction owes taxes to which nation are not yet fully developed. Countries differ widely on how these matters should be treated.

MAnAger’S BrieFcASe Conducting Global e-Business

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• Background on the market, including population figures and key social trends • Total expenditure on the product (and similar products) in the market • Retail sales volume and market prices of the product • Future outlook for the market and potential opportunities

The value of such information supplied by specialist agencies is readily apparent—these reports provide a quick overview of the size and structure of a nation’s market for a product. Reports vary in their cost (depending on the market and product), but many can be had for around $750 to $1,500. The company also allows online purchase of reports in small seg- ments for as little as $20 each. We discuss other sources for this type of market data later in this chapter.

Thus, companies that enter the market in industrialized countries often have a great deal of data available on that particular market. What becomes important then is the forecast for the growth or contraction of a potential market. One way of forecasting market demand is by determining a product’s income elasticity—the sensitivity of demand for a product relative to changes in income. The income-elasticity coefficient for a product is calculated by dividing a percentage change in the quantity of a product demanded by a percentage change in income. A coefficient greater than 1.0 conveys an income-elastic product, or one for which demand increases more relative to an increase in income. These products tend to be discretionary pur- chases, such as computers, video games, jewelry, or expensive furniture—generally not consid- ered essential items. A coefficient less than 1.0 conveys an income-inelastic product, or one for which demand increases less relative to an increase in income. These products are considered essential and include food, utilities, and beverages. To illustrate, if the income-elasticity coef- ficient for carbonated beverages is 0.7, the demand for carbonated beverages will increase 0.7 percent for every 1.0 percent increase in income. Conversely, if the income-elasticity coef- ficient for smartphones is 1.3, the demand for smartphones will increase 1.3 percent for every 1.0 percent increase in income.

emerging Markets The biggest emerging markets are more important today than ever. Nearly every large company engaged in international business is either already in or is considering entering the big emerging markets such as China and India. With their large consumer bases and rapid growth rates, they whet the appetite of marketers around the world. Although these markets are surely experiencing speed bumps along their paths of economic development, in the long term they cannot be ignored.

Companies considering entering emerging markets often face special problems related to a lack of information. Data on market size or potential may not be available, for example, because of undeveloped methods for collecting such data in a country. But there are ways companies can assess potential in emerging markets. One way is for them to rank different locations by developing a so-called market-potential indicator for each. This method, how- ever, is only useful to companies considering exporting. Companies considering investing in an emerging market must look at other factors, which we examine next in the discussion of measuring site potential. The main variables commonly included in market-potential analyses are as follows:3

• Market Size. This variable provides a snapshot of the size of a market at any point in time. It does not estimate the size of a market for a particular product but rather the size of the overall economy. Market-size data allows managers to rank countries from largest to small- est, regardless of a particular product. Market size is typically estimated from a nation’s total population or the amount of energy it produces and consumes.

• Market Growth Rate. This variable reflects the fact that, although the overall size of the market (economy) is important, so too is its rate of growth. It helps managers avoid mar- kets that are large but shrinking and instead target those that are small but rapidly expand- ing. It is generally obtained through estimates of growth in gross domestic product (GDP) and energy consumption.

• Market Intensity. This variable estimates the wealth or buying power of a market from the expenditures of both individuals and businesses. It is estimated from per capita private consumption and/or per capita gross domestic product (GDP) at purchasing power parity (see Chapter 4).

income elasticity Sensitivity of demand for a product relative to changes in income.

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• Market Consumption Capacity. The purpose of this variable is to estimate spending capacity. It is often estimated from the percentage of a market’s population that is in the middle class, thereby concentrating on the core of an economy’s buying power.

• Commercial Infrastructure. This factor attempts to assess channels of distribution and communication. Variables may include the number of telephones, TVs, fax machines, or personal computers per capita; the density of paved roads or number of vehicles per capita; and the population per retail outlet. An increasingly important variable for businesses rely- ing on the Internet for sales is the number of Internet hosts per capita. But because these data become outdated quickly, care must be taken to ensure accurate information from the most current sources.

• Economic Freedom. This variable attempts to estimate the extent to which free-market principles predominate. It is typically a summary of government trade policies, government involvement in business, the enforcement of property rights, and the strength of the black market. A useful resource is the annual Freedom in the World report published by Freedom House (www.freedomhouse.org).

• Market Receptivity. This variable attempts to estimate market “openness.” One way it can be estimated is by determining a nation’s volume of international trade as a percentage of GDP. If a company wants to see how receptive a market is to goods from its home country, it can ascertain the amount of per capita imports entering the market from the home coun- try. Managers can also examine the growth (or decline) in these imports.

• Country Risk. This variable attempts to estimate the total risk of doing business, includ- ing political, economic, and financial risks. Some market-potential estimation techniques include this variable in the market-receptivity variable. This factor is typically obtained from one of the many services that rate the risk of different countries, such as Political Risk Services Group (www.prsgroup.com).

After each of these factors is analyzed, they are assigned values according to their impor- tance to the demand for a particular product. Potential locations are then ranked (assigned a market-potential indicator value) according to their appeal as a new market. As you may re- call, we discussed several of these variables earlier in the book under the topics of national and international business environments. For example, country risk levels are shown in Map 3.1 (pages 106–107), economic freedom is shown in Map 4.1 (pages 138–139), and market recep- tivity (or openness) is shown in Map 5.1 (pages 158–159). Map 12.1 (pages 334–335) captures one other variable, commercial infrastructure, by showing the number of fixed-line and mobile phone subscribers per 1,000 people in each nation. This variable is an important indicator of a nation’s overall economic development. Other variables that are also good proxies for this vari- able include the portion of a nation’s roads that are paved or the number of personal computers, fax machines, and Internet hosts it has. One key cautionary note, however, is that emerging markets often either lack such statistics or, in the case of paved roads, international comparison is difficult.

measuring site Potential In this step of the site-screening process, managers must carefully assess the quality of the locally available resources. For many companies, the most important of these will be human resources—both labor and management. Wages are lower in certain markets because labor is abundant, relatively less skilled (though perhaps well educated), or both. Employees may or may not be adequately trained to manufacture a given product or to perform certain R&D activities. If workers are not adequately trained, the site-selection process must consider the additional money and time needed to train them.

Training local managers also requires a substantial investment of time and money. A lack of qualified local managers sometimes forces companies to send managers from the home market to the local market. This adds to costs because home-country managers must often receive sig- nificant bonuses for relocating to the local market. Companies must also assess the productivity of local labor and managers. After all, low wages tend to reflect low productivity levels of a workforce.

Managers should also examine the local infrastructure, including roads, bridges, airports, seaports, and telecommunications systems, when assessing site potential. Each of these sys- tems can have a major impact on the efficiency with which a company transports materials and

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products. Of chief importance to many companies today is the state of a country’s telecommu- nications infrastructure. Much business today is conducted through e-mail, and many businesses relay information electronically about matters such as sales orders, inventory levels, and produc- tion strategies, which must be coordinated among subsidiaries in different countries. Managers, therefore, must examine each potential site to determine how well it is prepared for contempo- rary communications.

Step 4: Select the Market or Site This final step in the screening process involves the most intensive efforts to assess the remain- ing potential markets and sites—typically less than a dozen, sometimes just one or two. At this stage, managers normally want to visit each remaining location in order to confirm earlier ex- pectations and to perform a competitor analysis. In the final analysis, managers normally evalu- ate each potential location’s contribution to cash flows by undertaking a financial evaluation of a proposed investment. The specialized and technical nature of this analysis can be found in most textbooks on corporate finance.

fielD triPs The importance of top managers making a personal visit to each remaining potential market or site cannot be overstated. Such trips typically involve attending strings of meetings and engaging in tough negotiations. The trip represents an opportunity for managers to see firsthand what they have so far seen only on paper. It gives them an opportunity to experience the culture, observe in action the workforce that they might soon employ, or make personal contact with potential new customers and distributors. Any remaining issues tend to be thoroughly investigated during field trips so that the terms of any agreement are precisely known in the event that a particular market or site is chosen. Managers can then usually return to the chosen location to put the terms of the final agreement in writing.

comPetitor analysis Because competitor analysis was covered in detail in Chapter 11, we offer only a few comments here. Intensely competitive markets typically put downward pressure on the prices that firms can charge their customers. In addition, intensely competitive sites for production and R&D activities often increase the costs of doing business. Naturally, lower prices and higher costs due to competitive forces must be balanced against the potential benefits offered by each market and site under consideration. At the very least, then, competitor analysis should address the following issues:

• Number of competitors in each market (domestic and international) • Market share of each competitor • Whether each competitor’s product appeals to a small market segment or has mass appeal • Whether each competitor focuses on high quality or low price • Whether competitors tightly control channels of distribution • Customer loyalty commanded by competitors • Potential threat from substitute products • Potential entry of new competitors into the market • Competitors’ control of key production inputs (such as labor, capital, and raw materials)

So far, we have examined a model that many companies follow when selecting new markets or sites for operations. We have seen what steps companies take in the screening process, but we have yet to learn how they undertake such a complex task. Let’s now explore the types of situa- tions companies encounter when conducting research in an international setting and the specific tools used in their research.

Quick Study 2 1. What is the significance of income elasticity in measuring market potential? 2. Identify each component of a market-potential indicator. Why is each component useful in

assessing emerging markets? 3. What are the most important factors to consider when measuring site potential? 4. Explain why a field trip and competitor analysis are useful in the final stage of the

screening process.

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more than 1,500

1,000–1,499

500–999

300–499

100–299

less than 100

no data available

Fixed lines and mobile phones (per 1,000 people)

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

HAWAII

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM

NETHERLANDS

LUXEMBOURG

GERMANY

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ.

LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B Y A

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

G H

A N

A T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

S O U T H S U D A N

ERITREA

E T H I O P I ACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

HONG KONG

VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJBOUTI

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

GALAPAGOS ISLANDS

MYANMAR (BURMA)

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

F R A N C E

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

MaP 12.1 Nations’ Commercial Infrastructure

334 Part 5 • InternatIonal BusIness ManageMent

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ChaPter 12 • analyzIng InternatIonal oPPortunItIes 335

more than 1,500

1,000–1,499

500–999

300–499

100–299

less than 100

no data available

Fixed lines and mobile phones (per 1,000 people)

A L A S K A

C A N A D A

MEXICO CUBA

JAMAICA

BELIZE

DOMINICAN REPUBLIC

HAITI PUERTO RICOGUATEMALA

HAWAII

COSTA RICA

NICARAGUA

HONDURAS

EL SALVADOR

PANAMA

COLOMBIA

VENEZUELA

TRINIDAD & TOBAGO

GUYANA

SURINAME

FRENCH GUIANA

ECUADOR

B R A Z I L

PERU

BOLIVIA

PARAGUAY

ARGENTINA

URUGUAY

FALKLAND/MALVINAS ISLANDS

GREENLAND

ICELAND

FINLAND

DENMARKUNITED KINGDOM

IRELAND

FRANCE

BELGIUM

NETHERLANDS

LUXEMBOURG

GERMANY

LITHUANIA RUSSIA

POLAND BELARUS

U K R A I N E

SPAIN PORTUGAL

CZECH REP.

AUSTRIA

SWITZ.

LICHT.

MONACO

ITALY

SLOVAKIA

HUNGARY

SERBIA AND MONTENEGRO

BULGARIA

ROMANIA

MOLDOVA

GREECE TURKEY

CYPRUS

MOROCCO

WESTERN SAHARA

A L G E R I A L I B Y A

TUNISIA

MAURITANIA

SENEGAL GAMBIA

GUINEA-BISSAU GUINEA

SIERRA LEONE

LIBERIA

M A L I

BURKINA FASO

IVORY COAST

G H

A N

A T O

G O

B E

N IN NIGERIA

N I G E R C H A D

E G Y P T

S U D A N

S O U T H S U D A N

ERITREA

E T H I O P I ACENTRAL AFRICAN REPUBLIC

CAMEROON

EQUATORIAL GUINEA

GABON

CONGO REPUBLIC

RWANDA BURUNDI

UGANDA

KENYA

SOMALIA

ANGOLA

NAMIBIA

ZAMBIA

TANZANIA

MALAWI

ZIMBABWE

BOTSWANA

MOZAMBIQUE

MADAGASCAR

SWAZILAND

LESOTHOSOUTH AFRICA

MAURITIUS

RÉUNION

GEORGIA

ARMENIA AZERBAIJAN

SYRIA LEBANON

ISRAEL JORDAN

IRAQ I R A N

SAUDI

ARABIA

QATAR

OMAN

YEMEN

I N D I A

AFGHANISTAN

PAKISTAN

TURKMENISTAN

UZBEKISTAN KYRGYZSTAN

TAJIKISTAN

KAZAKHSTAN

SRI LANKA

NEPAL BHUTAN

BANGLADESH

LAOS

THAILAND

CAMBODIA

HONG KONG

VIETNAM

M A L AY S I A BRUNEI

PHILIPPINES

TAIWAN

I N D O N E S I A PAPUA NEW

GUINEA SOLOMON ISLANDS

FIJIVANUATU

NEW CALEDONIAA U S T R A L I A

NEW

ZEALAND

R U S S I A

MONGOLIA

NORTH KOREA

SOUTH KOREA

JAPANC H I N A

ANDORRA U N I T E D S TAT E S

O F A M E R I C A

C H

I L

E

N O

R W

A

Y

S W

E D

E N

LATVIA

ESTONIA

BOSNIA- HERZEGOVINA

ALBANIA MACEDONIA

KUWAIT

DJBOUTI

SLOVENIA

SINGAPORE

A R C T I C O C E A N

S O U T H

AT L A N T I C

O C E A N

I N D I A N

O C E A N

PA C I F I C

O C E A N

N O R T H

AT L A N T I C

O C E A N

PA C I F I C

O C E A N

UNITED ARAB EMIRATES

CROATIA

GALAPAGOS ISLANDS

MYANMAR (BURMA)

CONGO DEMOCRATIC

REPUBLIC (ZAIRE)

F R A N C E

BELGIUM

NETHERLANDS

GERMANY

LUXEMBOURG

P O L A N D

RUSSIA LITHUANIA

LATVIA

BELARUS

CZECH REP.

SLOVAKIA

AUSTRIA SWITZERLAND

SLOVENIA HUNGARY

CROATIA

SERBIA AND MONTENEGRO

R O M A N I A

BULGARIA MACEDONIA

U K R A I N E

MOLDOVA

T U R K E Y GREECE

ALBANIA

CYPRUS

L I B Y A

TUNISIA MALTA

ANDORRA

MONACO

SAN MARINO

I TA LY

DENMARK

S W E D E N

ALGERIA

LICHTENSTEIN

B l a c k S e aBOSNIA- HERZEGOVINA

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336 Part 5 • InternatIonal BusIness ManageMent

Conducting International research Increasing global competition forces companies to engage in high-quality research and analysis before selecting new markets and sites for operations. Companies are finding that such research helps them to better understand both buyer behavior and business environments abroad. Market research is the collection and analysis of information used to assist managers in making in- formed decisions. We define market research here to apply to the assessment of both potential markets and sites for operations. International market research provides information on national business environments, including cultural practices, politics, regulations, and the economy. It also informs managers about a market’s potential size, buyer behavior, logistics, and distribution systems.

Conducting market research on new markets is helpful in designing all aspects of marketing strategy and understanding buyer preferences and attitudes. What works in France, for example, might not work in Singapore. Market research also lets managers learn about aspects of local business environments such as employment levels, wage rates, and the state of the local infra- structure before committing to the new location. It supplies managers with timely and relevant market information so that they can anticipate market shifts, changes in current regulations, and the potential entry of new competitors.

In this section, we first learn about several common problems that confront companies when conducting international research. We then explore some actual sources that managers use to assess potential new locations. We then examine some methods commonly used for conducting international research firsthand.

Difficulties of Conducting International Research Market research serves essentially the same function in all nations. Unique conditions and cir- cumstances, however, present certain difficulties that often force adjustments in the way research is performed in different nations. It is important for companies that are conducting market research themselves to be aware of potential obstacles so that their results are reliable. Companies that hire outside research agencies must also be aware of such difficulties. After all, they must evaluate the research results and assess their relevance to the location-selection decision. The following are three main difficulties associated with conducting international market research that we will examine:

1. Availability of data 2. Comparability of data 3. Cultural differences

availaBility of Data When trying to target specific population segments, marketing managers require highly detailed information. Fortunately, companies are often spared the time, money, and effort of collecting firsthand data for the simple reason that it has already been gathered. This is particularly true in highly industrialized countries, including Australia, Canada, Japan, those in Western Europe, and the United States, where both government agencies and private research firms supply information. Three of these information suppliers are ACNielsen (www.nielsen.com), SymphonyIRI Group (www.symphonyiri.com), and Survey Research Group (www.surveyresearchgroup.com). Table 12.1 lists the world’s top market research firms.

In many emerging and developing countries, however, previously gathered quality infor- mation is hard to obtain. Even when market data is available, its reliability is questionable. For example, analysts sometimes charge the governments of certain emerging markets with trying to lure investors by overstating estimates of gross income and consumption levels. In addition to deliberate misrepresentation, tainted information can also result from improper local collection methods and analysis techniques. But research agencies in emerging and developing markets that specialize in gathering data for clients in industrialized countries are developing higher-quality techniques of collection and analysis. For example, informa- tion supplier and pollster Gallup (www.gallup.com) is aggressively expanding its operations throughout Southeast Asia in response to the need among Western companies for more accurate market research.

market research Collection and analysis of information used to assist managers in making informed decisions.

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ChaPter 12 • analyzIng InternatIonal oPPortunItIes 337

comParaBility of Data Data obtained from other countries must be interpreted with great caution. Because terms such as poverty, consumption, and literacy differ greatly from one country to another, such data must be accompanied by precise definitions. In the United States, for example, a family of four is said to be below the poverty line if its annual income is $23,050.4 The equivalent income for a Vietnamese family of four would place it in the upper class.

The different ways in which countries measure data also affect comparability across bor- ders. For instance, some countries state the total quantity of foreign direct investment in their nations in terms of its monetary value. Others specify it in terms of the number of investment projects implemented during the year. But a single foreign direct investment into an industrial- ized nation can be worth many times what several or more projects are worth in a developing nation. To gather a complete picture of a nation’s investments, researchers will often need to obtain both figures. Moreover, reported statistics may not distinguish between foreign direct investment (accompanied by managerial control) and portfolio investment (which is not accompanied by managerial control). Misinterpreting data because one does not know how they are compiled or measured can sabotage even the best marketing plans and production strategies.

cultural Differences Marketers who conduct research in unfamiliar markets must pay attention to the ways in which cultural variables influence information. Perhaps the single most important variable is language. For example, if researchers are unfamiliar with a language in the market they are investigating, they might be forced to rely on interpreters. Interpreters might unintentionally misrepresent certain comments or be unable to convey the sentiment with which statements are made.

Researchers might also need to survey potential buyers through questionnaires written in the local language. To avoid any misstatement of questions or results, questionnaires must be translated into the language of the target market and the responses then translated back into the researcher’s language. Written expressions must be highly accurate so that results do not become meaningless or misleading. The potential to conduct written surveys is also affected by the illiteracy rates among the local population. A written survey is generally impossible to conduct in countries with high illiteracy rates such as Burkina Faso (71 percent), Morocco (44 percent), and Nigeria (39 percent).5 Researchers would probably need to choose a different in- formation-gathering technique, such as personal interviews or observation of retail purchases.

Companies that have little experience in an unfamiliar market often hire local agencies to perform some or all of their market research. Local researchers know the cultural terrain. They understand which practices are acceptable and which types of questions can be asked. And they typically know whom to approach for certain types of information. Perhaps most importantly, they know how to interpret the information they gather and are likely to understand its reliabil- ity. But a company that decides to conduct its own market research must, if necessary, adapt its research techniques to the local market. Many cultural elements that are taken for granted in the home market must be reassessed in the host business environment.

TaBle 12.1 top global market research firms

Rank Company name Country

1 Nielsen Holdings N.V. United States

2 The Kantar Group United Kingdom

3 Ipsos-Synovate France/United Kingdom

4 Westat, Inc. United States

5 SymphonyIRI Group United States

6 Arbitron Inc. United States

7 GfK Group Germany

8 IMS Health Inc. United States

9 The NPD Group United States

10 ICF International Inc. United States

Source: Based on “honomichl top 50,” Marketing News, June 30, 2012, pp. 25–26.

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338 Part 5 • InternatIonal BusIness ManageMent

Sources of Secondary International Data Companies can consult a variety of sources to obtain information on a nation’s business environment and markets. The particular source that managers should consult depends on the company’s industry, the national markets they are considering, and how far along they are in their location-screening process. The process of obtaining information that already exists within the company or that can be obtained from outside sources is called secondary market research. Managers often use information gathered from secondary research activities to broadly estimate market demand for a product or to form a general impression of a nation’s business environment. Secondary data are relatively inexpensive because they have already been collected, analyzed, and summarized by another party. Let’s take a look at the main sources of secondary data that help managers make more-informed location-selection decisions.

international organizations There are excellent sources of free and inexpensive information about product demand in particular countries. For example, the International Trade Statistics Yearbook published by the United Nations (www.un.org) lists the export and import volumes of different products for each country. It also furnishes information on the value of exports and imports on an annual basis for the most recent five-year period. The International Trade Center (www.intracen.org), based in Geneva, Switzerland, also provides current import and export figures for more than 100 countries.

International development agencies, such as the World Bank (www.worldbank.org), the International Monetary Fund (www.imf.org), and the Asian Development Bank (www.adb.org), also provide valuable secondary data. For example, the World Bank publishes annual data on each member nation’s population and economic growth rate. Today, most secondary sources supply downloadable data through the Internet or through traditional printed media.

government agencies Commerce departments and international trade agencies of most countries typically supply information about import and export regulations, quality standards, and the size of various markets. This data is normally available directly from these departments, from agencies within each nation, and from the commercial attaché in each country’s embassy abroad. In fact, visiting embassies and attending their social functions while visiting a potential location are excellent ways of making contact with prospective future business partners.

Granted, the attractively packaged information supplied by host nations often ignores many potential hazards in a nation’s commercial environment—governments typically try to present their countries in the best possible light. By the same token, such sources are prone to paint

secondary market research Process of obtaining information that already exists within the company or that can be obtained from outside sources.

initial analyses of foreign market potential do not involve sending researchers to distant markets. instead, companies acquire secondary market research. obtaining secondary data is a cost-effective way to begin exploring potential markets. From its home base, a company can get an initial feel for buyer behavior in an unfamiliar market. Here, a woman browses clothing displayed at a newly opened store of Spanish clothing retailer Zara in Johannesburg, South africa. The Spanish retail chain hopes to target the country’s increasingly diverse middle class.

Source: ALEXANDER JOE/Getty Images/ Newscom

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ChaPter 12 • analyzIng InternatIonal oPPortunItIes 339

incomplete or one-sided portraits of the home market. It is important for managers to seek additional sources that take a more objective view of a potential location.

One source that takes a fairly broad view of markets is the Central Intelligence Agency’s World Factbook (www.cia.gov). This source can be a useful tool throughout the entire market- or site-screening process because of its wealth of facts on each nation’s business environment. It identifies each nation’s geography, climate, terrain, natural resources, land use, and important environmental issues in detail. It also examines each nation’s culture, system of government, and economic conditions, including government debt and exchange-rate conditions. It also provides an overview of the quality of each country’s transportation and communication systems.

The Trade Information Center (TIC; www.export.gov), operated by the U.S. Department of Commerce, is a first stop for many importers and exporters. The TIC details product standards in other countries and offers advice on opportunities and best prospects for U.S. companies in individual markets. It also offers information on federal export-assistance programs that can be essential for first-time exporters. Other TIC information includes the following:

• National trade laws and other regulations • Trade shows, trade missions, and special events • Export counseling for specific countries • Import tariffs and customs procedures • The value of exports to other countries

The Chilean Trade Commission within Chile’s Ministry of Foreign Affairs has been particularly aggressive in recent years in promoting Chile to the rest of the world. ProChile (www.chileinfo.com) has 35 commercial offices worldwide. The organization assists in develop- ing the export process, establishing international business relationships, fostering international trade, attracting investment, and forging strategic alliances. It offers a wealth of information on all of Chile’s key industries and provides business environment information such as risk ratings. It also provides details on important trade regulations and standards of which exporters, import- ers, and investors must be aware.6

Commercial offices of the states and provinces of many countries also typically have offices in other countries to promote trade and investment. These offices usually encourage investment in the home market by companies from other countries and will sometimes even help companies in other countries export to the home market. For example, the Lorraine Development Corporation in Atlanta is the investment-promotion office of the Lorraine region of France. This corporation helps U.S. companies evaluate location opportunities in the Lorraine region—a popular area for industrial investment. It supplies information on sites, buildings, financing options, and conditions in the French and European Union business environment and conducts 10 to 20 site-selection studies per year for investors.

Finally, many governments open their research libraries to businesspeople from all coun- tries. For example, the Japanese External Trade Organization (JETRO; www.jetro.go.jp) in central Tokyo has a large library full of trade data that is available to international companies already in Japan. In addition, the JETRO website is useful for companies screening the potential of the Japanese market for future business activities from any location. The organization is dedi- cated to serving companies interested in exporting to or investing in Japan in addition to assist- ing Japanese companies in going abroad.

inDustry anD traDe associations Companies often join associations composed of firms within their own industry or trade. In particular, companies trying to break into new markets join such associations in order to make contact with others in their field. The publications of these organizations keep members informed about current events and help managers to keep abreast of important issues and opportunities. Many associations publish special volumes of import and export data for domestic markets. They frequently compile directories that list each member’s top executives, geographic scope, and contact information such as phone numbers and addresses. Today, many associations also maintain informative websites. Two interesting examples are the websites of the National Pasta Association (www.ilovepasta.org) and the National Onion Association (www.onions-usa.org).

Sometimes industry and trade associations commission specialized studies of their industries, the results of which are then offered to their members at subsidized prices. These types of studies

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340 Part 5 • InternatIonal BusIness ManageMent

typically address particularly important issues or explore new opportunities for international growth. The National Confectioners Association (www.candyusa.com) of the United States, together with the state of Washington’s Washington Apple Commission (www.bestapples.com), once hired a research firm to study the sweet tooth of Chinese consumers. The findings of the study were then made available to each organization’s members to act on as they saw fit.

service organizations Many international service organizations in fields such as banking, insurance, management consulting, and accounting offer information to their clients on cultural, regulatory, and financial conditions in a market. For example, the accounting firm of Ernst & Young (www.ey.com) publishes a “Doing Business In” series for most countries. Each booklet contains information on a nation’s business environment, regulations regarding foreign investment, legal forms of businesses, labor force, taxes, and culture. Other companies provide specific and overall information on world markets. Managers can consult such organizations for specialized reports on market demographics, lifestyles, consumer data, buyer behavior, and advertising.

internet Companies engaged in international business are quickly realizing the wealth of secondary research information available on the Internet and the World Wide Web. These electronic resources are usually user friendly and have vast amounts of information.

LEXIS-NEXIS (www.lexisnexis.com) is a leading online provider of market information. This database of full-text news reports from around the world is updated continually. It also offers special services such as profiles of executives and products and information on the financial conditions, marketing strategies, and public relations of many international companies. Other popular online providers of global information include DIALOG (www.dialog.com) and Dow Jones (www.dowjones.com). Internet search engines such as Google (www.google.com) and Yahoo! (www.yahoo.com) are also helpful in narrowing down the plethora of information available electronically.

The Internet can be especially useful in seeking information about potential production sites. Because field trips to the most likely candidates are expensive, online information can be enormously helpful in saving both time and money. For example, you can begin a search for information on a particular country or region with most large online information providers. Nar- rowing your search to a more manageable list of subjects—say, culture, economic conditions, or perhaps a specific industry—can yield clues about sites that are promising and those that are not.

Quick Study 3 1. Identify the benefits associated with conducting international secondary market research. 2. What are the three main difficulties of conducting research in international markets?

Explain each briefly. 3. Identify some of the main sources of secondary market research data.

Methods of Conducting Primary International Research Although secondary information is very useful in the early stages of the screening process, sometimes more-tailored data on a location is needed. Under such circumstances, it might be necessary to conduct primary market research—the process of collecting and analyzing origi- nal data and applying the results to current research needs. This type of information is very help- ful in filling in the blanks left by secondary research. Yet, it is often more expensive to obtain than secondary research data because studies must be conducted in their entirety. Let’s explore some of the more common methods of primary research used by companies in the location- screening process.

traDe shows anD traDe missions An exhibition at which members of an industry or group of industries showcase their latest products, study activities of rivals, and examine recent trends and opportunities is called a trade show. Trade shows are held on a continuing basis in virtually all markets and normally attract companies from around the globe. They are typically held by national or global industry trade associations or by government agencies. An excellent source of information about trade shows and exhibitions worldwide is Expo Central (www.expocentral.com).

primary market research Process of collecting and analyzing original data and applying the results to current research needs.

trade show Exhibition at which members of an industry or group of industries showcase their latest products, study activities of rivals, and examine recent trends and opportunities.

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Not surprisingly, the format and scope of trade shows differ from country to country. For example, because of its large domestic market, shows in the United States tend to be oriented toward business opportunities within the U.S. market. In line with U.S. culture, the atmosphere tends to be fairly informal. Conversely, because of the relatively smaller market of Germany and its participation in the European Union, trade shows there tend to showcase business opportuni- ties in markets all across Europe and tend to be quite formal.

National culture plays a role in the extent to which companies take advantage of trade shows and other tools to become successful abroad. The entrepreneurial culture of the United States ensures that trade groups actively encourage small businesses to pursue international opportuni- ties. To see how two small U.S. companies pursued opportunities to go international, read this chapter’s Culture Matters feature, titled “Is the World Your Oyster?”

A trade mission is an international trip by government officials and businesspeople that is organized by agencies of national or provincial governments for the purpose of exploring inter- national business opportunities. Businesspeople who attend trade missions are typically intro- duced both to important business contacts and to well-placed government officials.

Small and medium-sized companies often find trade missions very appealing for two reasons. First, the support of government officials gives them additional clout in the target country as well as access to officials and executives whom they would otherwise have little opportunity to meet. Sec- ond, although such trips can sometimes be expensive for the smallest of businesses, they are generally worth the money because they almost always reap cost-effective rewards. Trade missions to faraway places sometimes involve visits to several countries in order to maximize the return for the time and money invested. For instance, a trade mission for European businesspeople to Latin America may include stops in Argentina, Brazil, Chile, and Mexico. A trade mission to Asia for North American or European companies might include stops in China, Hong Kong, Japan, South Korea, and Thailand.

interviews anD focus grouPs Although industry data are useful to companies early in the screening process for potential markets, subsequent steps must assess buyers’ emotions, attitudes, and cultural beliefs. Industry data cannot tell us how individuals feel about a company or its product. This type of buyer information is required when deciding whether to enter a market and when developing an effective marketing plan. Therefore, many companies supplement the large-scale collection of country data with other types of research such as interviews with prospective customers. Interviews, of course, must be conducted carefully if they are to yield reliable and unbiased information. Respondents in some cultures might be unwilling to answer certain questions or may intentionally give vague or misleading answers in order to avoid getting too personal. For example, although individuals in the United States are renowned for their willingness to divulge all sorts of information about their shopping habits and even their personal lives, this is very much the exception among other countries.

trade mission International trip by government officials and businesspeople that is organized by agencies of national or provincial governments for the purpose of exploring international business opportunities.

cuLture MAtterS Is the World Your Oyster?

the business culture of every nation supports the international expansion efforts of its businesses to some degree. But what kinds of actions and information are useful to companies? Here are a few helpful pointers followed by two company examples:

• Small companies must first do lots of homework before jumping into the global marketplace. Going international is a long-term investment, and preparedness is a critical success factor. Compa- nies must plan on investing a good deal of cash. A typical small business can expect to pay anywhere from $10,000 to $20,000 to perform basic market research, to attend a trade show, and to visit one or two countries.

• Lucille Farms, Inc., of Montville, New Jersey, produces and mar- kets cheese products. Alfonso Falivene, Lucille’s chief executive, is taking a cautious approach to going international. He recently joined the U.S. Dairy Export Council, which offers members,

among other things, international trips to study new business opportunities and the competition. The council also offers its members a great deal of free information on international mar- kets. Falivene says the council supplied market information that would have cost him thousands of dollars to obtain on his own.

• Meter-Man, Inc., of Winnebago, Minnesota, manufactures agricultural measuring devices. When Meter-Man decided to go international, it saw trade shows as a great way to gain market intelligence and establish contacts. At a five-day agricultural fair in Paris, company executives held 21 meetings with potential customers and sealed an agreement with a major distributor that covers the Parisian market for Meter-Man’s products. Meter-Man’s sales and marketing director was on a flight to a trade show in Barcelona, Spain, and struck up a conversation with the man next to him. The man wound up ordering $200,000 of Meter-Man’s products and is today a major South American distributor for the company.

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An unstructured but in-depth interview of a small group of individuals (8 to 12 people) by a moderator in order to learn the group’s attitudes about a company or its product is called a focus group. Moderators guide a discussion on a topic and interfere as little as possible with the free flow of ideas. The interview is recorded for later evaluation to identify recurring or prominent themes among the participants. This type of research helps marketers to uncover negative perceptions among buyers and to design corrective marketing strategies. Because subtle differences in verbal and body language could go unnoticed, focus group interviews tend to work best when moderators are natives of the countries in which the interview is held. Ironically, it is sometimes difficult to conduct focus groups in collectivist cultures (see Chapter 2) because people have a tendency to agree with others in the group. In such instances, it might be advisable to conduct a consumer panel—research in which people record in personal diaries information on their attitudes, behaviors, or purchasing habits.

surveys Research in which an interviewer asks current or potential buyers to answer written or verbal questions in order to obtain facts, opinions, or attitudes is called a survey. For example, if Saucony (www.saucony.com) wants to learn about consumer attitudes toward its latest women’s running shoe, it could ask a sample of women about their attitudes toward the shoe. Verbal questioning could be done in person or over the telephone, whereas written questioning could be done in person, through the mail, or through forms completed at Saucony’s website. The results would then be tabulated, analyzed, and applied to the development of a marketing plan.

The single greatest advantage of survey research is the ability to collect vast amounts of data in a single sweep. But as a rule, survey methods must be adapted to local markets. For example, survey research can be conducted by any technological means in industrialized markets, such as over the telephone or the Internet. But telephone interviewing would yield poor results in Bangladesh because only a small percentage of the general population has telephones. Also, although a survey at a website is an easy way to gather data, it must be remembered that even in some industrialized nations users still represent mostly middle- to upper-income households.

Written surveys can also be hampered by other problems. Some countries’ postal services are unreliable to the point that parcels are delivered weeks or months after arriving at post offices, or they never arrive at all because they are stolen or simply lost. Naturally, written surveys are impractical to conduct in countries with high rates of illiteracy, although this problem can perhaps be overcome by obtaining verbal responses to spoken questions.

environmental scanning An ongoing process of gathering, analyzing, and dispensing information for tactical or strategic purposes is called environmental scanning. The environmental scanning process entails obtaining both factual and subjective information on the business environments in which a company is operating or considering entering. The continuous monitoring of events in other locations keeps managers aware of potential business opportunities and threats. Environmental scanning contributes to making well-informed decisions and to the development of effective strategies. It also helps companies develop contingency plans for a particularly volatile environment.

Quick Study 4 1. How does primary market research differ from secondary market research? 2. Describe each main method used to conduct primary market research. 3. What are some of the difficulties of conducting international market research?

A Final word To keep pace with an increasingly hectic and competitive global business environment, compa- nies should follow a systematic screening process that incorporates high-quality research meth- ods. This chapter provides a systematic way to screen potential locations as new markets or sites for business operations. But these issues constitute only the first step in the process of “going international.” The next step involves actually accomplishing the task of entering selected mar- kets and establishing operations abroad. In the following chapters, we survey the types of entry modes available to companies, how they acquire the resources needed to carry out their activities, and how they manage their sometimes far-flung international business operations.

focus group Unstructured but in-depth interview of a small group of individuals (8 to 12 people) by a moderator in order to learn the group’s attitudes about a company or its product.

consumer panel Research in which people record in personal diaries information on their attitudes, behaviors, or purchasing habits.

survey Research in which an interviewer asks current or potential buyers to answer written or verbal questions in order to obtain facts, opinions, or attitudes.

environmental scanning Ongoing process of gathering, analyzing, and dispensing information for tactical or strategic purposes.

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ChaPter 12 • analyzIng InternatIonal oPPortunItIes 343

Chapter Summary

1. Explain each of the four steps in the market- and site-screening process. • Step 1 involves identifying basic appeal for potential markets (e.g., basic product

demand) and/or assessing availability of resources for production (e.g., raw materials, labor, capital).

• Step 2 involves examining the local culture, political and legal forces (e.g., government bureaucracy, political stability), and economic variables (e.g., fiscal and monetary policies).

• Step 3 is to measure the potential of each market (e.g., market size and growth, market-potential indicator) and/or suitability of a site for operations (e.g., availability of workers, managers, raw materials, infrastructure).

• Step 4 involves visiting each remaining location to make a final decision (e.g., competitor analysis, financial evaluation).

2. Describe the three primary difficulties of conducting international market research. • Unique conditions and circumstances often force adjustments in the way market

research is performed in different nations. • Availability of data: In addition to the problem of deliberate misrepresentation,

obtaining high-quality, untainted, and reliable information can be difficult because of improper collection methods and analysis techniques.

• Comparability of data: Definitions of terms such as poverty, consumption, and literacy differ across markets and so do ways of measuring variables.

• Cultural differences: Companies entering unfamiliar markets often hire local agencies to do their market research for them because locals understand acceptable practices, types of questions to ask, and how to interpret information and its reliability.

3. Identify the main sources of secondary international data and explain their usefulness. • Secondary market research is the process of obtaining information that already exists

within the company or that can be obtained from outside sources. • International organizations that offer free or inexpensive information about product

demand in a particular country include international development agencies, such as the World Bank and the International Monetary Fund.

• Government agencies such as commerce departments and international trade agencies have information on import–export regulations, quality standards, and the sizes of markets.

• Industry and trade associations of firms within an industry or trade often publish reports to keep managers abreast of important issues and opportunities.

• International service organizations in fields such as banking, insurance, management consulting, and accounting offer clients information on a market’s cultural, regulatory, and financial conditions.

4. Describe the main methods used to conduct primary international research. • Primary market research is the process of collecting and analyzing original data and

applying the results to current research needs. • A trade show is an exhibition where members of an industry or group of industries

showcase their latest products, see what rivals are doing, and learn about recent trends and opportunities.

• A trade mission is an international trip by government officials and businesspeople that is organized by agencies of national or provincial governments for the purpose of exploring international business opportunities.

• Companies can use interviews to assess potential buyers’ emotions, attitudes, and cultural beliefs.

• A focus group is an unstructured but in-depth interview of a small group of individuals by a moderator in order to learn the group’s attitudes about a company or its product.

• In surveys, interviewers obtain facts, opinions, or attitudes by asking current or potential buyers to answer written or verbal questions.

• Ongoing gathering, analyzing, and dispensing of information for tactical or strategic purposes is called environmental scanning.

MyManagementLab Go to www.mymanagementlab.com to complete the problem marked with this icon .

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344 Part 5 • InternatIonal BusIness ManageMent

Talk It Over 1. Although Sony’s (www.sony.com) MiniDisc recorder/player was a huge hit in Japan, ini-

tial response to the MiniDisc in the U.S. market was lukewarm. When Sony mounted its third official attempt to launch its MiniDisc in the United States, it thought it finally had the right formula. A Sony executive noted, “This time around, we’ve done our homework, and we’ve found out what’s in consumers’ heads.” What type of research do you think Sony used to “get inside the heads” of its target market? Do you think different cultures prefer to conduct certain types of market research? Explain.

Key Terms consumer panel (p. 342) environmental scanning (p. 342) focus group (p. 342) income elasticity (p. 331)

logistics (p. 329) market research (p. 336) primary market research

(p. 340)

secondary market research (p. 338) survey (p. 342) trade mission (p. 341) trade show (p. 340)

Take It to the Web 1. Video Report. Visit this book’s channel on YouTube (www.YouTube.com/MyIBvideos).

Click on “Videos” near the top of the page, and click on the set of videos labeled “Ch 12: Analyzing International Opportunities.” Watch one video from the list, and then summarize it in a half-page report. Reflecting on the contents of this chapter, which aspects of interna- tional-opportunity analysis can you identify in the video? How might a company engaged in international business act on the information contained in the video?

2. Website Report. Because the U.S. market absorbs the vast majority of Mexico’s exports, the fact that the fates of the two economies are closely related is no surprise. Yet, the rela- tively high cost of Mexico’s economy means that some Western companies are heading instead to Asia.

Research Mexico’s economy on the Internet (both Mexican and U.S. publications if possible) and update its performance using the business press and statistical databases. (Hint: You may begin your Internet research by visiting some of the many websites listed in this chapter.) If wages are rising, why are companies still investing in Mexico? If wages are rising, is it across the board or just in specific sectors? From what sectors are invest- ments flowing into Mexico, and from where are they coming?

Select a country that competes with Mexico for foreign direct investment. What char- acteristics make Mexico a better production base? What makes it a worse production base? Compare the two countries in terms of their long-term market potential.

Teaming Up 1. Research Project. As a group, visit your college’s library and consult the Encyclopedia of

Associations or a similar organization on the web. Select one or two industry associations of interest to your group. Write or call the association(s) and request an information packet, and then compile a summary of the information you received. Compare the information your group receives with information sent by trade associations researched by the other student groups. Rank the trade associations in terms of the usefulness of their information.

2. Emerging Markets Project. Select an emerging market that your team would like to learn more about. Start by compiling fundamental country data, and then do additional research, following the steps in this chapter, to flesh out the nature of the market opportunity offered by this country or its suitability as a manufacturing site. Make a list of the international companies pursuing market opportunities in the country, and identify the products or brands that the companies are marketing. Are their reasons for doing business in the coun- try consistent with the market opportunity as you have researched it? Determine whether these companies have established facilities for manufacturing, sales, or both.

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ChaPter 12 • analyzIng InternatIonal oPPortunItIes 345

Ethical Challenges 1. You are an economic adviser to the chancellor of Germany. You have been asked to

assemble a council to assess the moral basis for outsourcing manufacturing jobs to less economically developed nations. Many globalization protesters argue that multinational corporations based in wealthy countries endanger the global economic system by investing capital in developing countries and eliminating domestic jobs. They say that globalization pits the interests of workers in wealthy countries against the interests of workers in developing countries. It is also argued that the practice pits nations against one another as companies shift between developing countries in search of lower wages or bigger market opportunities. Do multinationals have an ethical obligation to preserve jobs for workers in their home-country markets? How will you advise the chancellor on this issue?

2. You are the owner of a multinational office supply company. Your profit margin has increased significantly since the company began outsourcing manufacturing to Indonesia. This move has helped the Indonesian economy as well, creating lots of new jobs. The cost of Indonesian labor is increasing as the economy improves. Cheaper labor is available elsewhere, but your company has developed a relationship with its Indonesian manufacturing division. Do you pull your company out of Indonesia in favor of cheaper labor in another country? Do you maintain your loyalty to your Indonesian partners, as they have proved to be a valuable business partner? Is it possible to come up with a solution that will reward your Indonesian workers and simultaneously utilize less expensive labor in other developing countries? Devise a potential solution to this ethical dilemma.

3. After working in a market research firm for nine years, you have been promoted to head of the Ethical Business Assurance Department. The department’s previous head developed a companywide code that forbids practices such as discriminating in respondent recruitment and offering kickbacks in exchange for business. The code also calls for all research to be conducted for legitimate purposes, not as a front for product promotion. Collected data are not to be doctored to boost sales. What do you think is the purpose of such a code? Why is this particularly important for a market research firm? Do you think that this code will be helpful in reducing unethical practices? What amendments would you propose to this code? If you are given the chance, would you increase the scope of your department?

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Practicing International Management Case

Singapore Rises to Prominence in the World Market

Since becoming an independent nation in 1965, Singapore has been on the rise economically. Although it occupies a small geographical area, its busy port has aided Singapore in gaining economic power. The per capita GNP is one of the highest in the world. Major exports include electronics and chemicals, creating profits that allow for the purchase of raw materials that are not native to the country. As a result, Singapore relies heavily on a strategy similar to entrepôt trading, which involves importing raw materials and refining them into goods to be exported.

Singapore’s economy is considered to be free market, and it is developing at a very rapid pace. A strong educational system develops a large, skilled workforce, and the business environment up to this point has been relatively corruption free. Government intervention is generally kept to a minimum, but the government has undertaken several measures to promote further economic growth. Heavy investment in the diversification of the economy— namely the promotion of tourism and funding of the pharmaceutical industry—has served the economy well. For example, the Marina Bay Sands Casino opened in April 2010, attracting many foreign tourists and providing plenty of job opportunities for Singapore citizens.

Things haven’t always been so easy for Singapore. The country hit an economic slump from 2000 to 2003, due to a series of events outside its control. Economic recession in the United States and the European Union had harmful effects on economic growth. The rebound, however, was a complete success, as Singapore posted a 7.5 percent growth in gross domestic product in 2007. The recovery went smoothly due to good economic strategy, a high percentage of skilled workers, and copious foreign investment. The assistance of government-linked corporations was also important in rebounding from the worldwide slump.

As the busiest trading hub in Southeast Asia, Singapore occupies an enviable position in the world economy. Although this is a position of leverage and power, Singapore is also considered the most business-friendly economy in the world. Other countries’ desire to trade with Singapore is high and shows no signs of dwindling. Along with South Korea, Hong Kong, and Taiwan, Singapore is one of the “Four Asian Tigers,” a title that refers to their economic strength and acumen.

The number of wealthy residents of the country has risen at a rapid rate as a result of the general economic success. In 2004, the number of Singapore’s U.S. dollar millionaires rose by 22.4 percent. The growth has slowed since its peak in 2004, but the number of affluent residents is still on the rise. Singapore has now overtaken Hong Kong as the country with the highest concentration of millionaires in the world.

The economic climate of the world is changing, as smaller countries are becoming more powerful financially and closing in on larger countries with greater economic power. Globalization is providing the opportunity for countries like Singapore to step to the forefront of the trade market. If Singapore continues to employ the economic strategies it has up to this point, its future financial success is all but guaranteed.

Thinking globally 1. As the economic adviser to the president of a small,

developing country, what lessons can you take from Singapore’s economic approach to apply to your own country? Your country also has a functional, but not overly busy, port. What steps would you take to encourage trade with foreign countries?

2. Do you think that the economy of Singapore will be greatly affected by changes in the financial status of tra- ditional economic superpowers? Why or why not? If the economy is affected, will it be positive or negative?

3. Why do you think the strategy of extended entrepôt trading—importing raw materials, refining them, then exporting them to foreign countries—is effective?

4. Is it possible for a country as small as Singapore to be- come a worldwide economic superpower? What factors must be considered in answering this question? In the new global economy, does the size of a country matter at all if the economic strategy is effective? Is having a busy port enough of an economic boost to lift a small country to economic prominence?

Source: “Singapore Economy,” EconomyWatch.com website (http://www. economywatch.com/world_economy/singapore/), December 18, 2008.

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