INTERNATIONAL BUSINESS MANAGEMENT TEST [6 HOURS DURATION]

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National Differences

WEEK 3: National Differences in Legal Systems and Culture

Dr Manjit Sandhu

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Learning Objectives

Understand how the legal systems of countries differ and its impact on IB activities

Understand how the culture of countries differ and its impact on IB activities

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Legal Systems

The legal system of a country refers to the rules, or laws, that regulate behavior, along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained

A country’s legal system is important because laws:

Regulate business practice

Define the manner in which business transactions are to be executed

Set down the rights and obligations of those involved in business transactions

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LO 2-3 Understand how the legal systems of countries differ.

Legal Systems

Different Legal Systems

Common law: based on tradition, precedent, and custom

Found in most of Great Britain’s former colonies, including the United States

Civil law: based on detailed set of laws organized into codes

Found in more than 80 countries, including Germany, France, Japan, and Russia

Theocratic law: based on religious teachings

Islamic law is the most widely practiced

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Tradition refers to a country’s legal history, precedent to cases that have come before the courts in the past, and custom to the ways in which laws are applied in specific situations.

Legal Systems

Different Legal Systems

Common law: based on tradition, precedent, and custom

Found in most of Great Britain’s former colonies, including the United States

Civil law: based on detailed set of laws organized into codes

Found in more than 80 countries, including Germany, France, Japan, and Russia

Theocratic law: based on religious teachings

Islamic law is the most widely practiced

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Tradition refers to a country’s legal history, precedent to cases that have come before the courts in the past, and custom to the ways in which laws are applied in specific situations.

Legal Systems

Differences in Contract Law

They approach contract law (the body of law that governs contract enforcement) differently

A contract specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved

In a common law state, contracts are very detailed with all contingencies spelled out

In a civil law state, contracts are shorter and much less specific

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Legal Systems

Property Rights and Corruption

Property rights: the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource

Private action: theft, piracy, blackmail, and the like by private individuals or groups

Public action: public officials extort income or resources from property holders

Excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners

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There are systematic differences in the extent of corruption. In some countries, the rule of law minimizes corruption. Corruption is seen and treated as illegal, and when discovered, violators are punished by the full force of the law. In other countries, the rule of law is weak and corruption by bureaucrats and politicians is rife. Corruption is so endemic in some countries that politicians and bureaucrats regard it as a perk of office and openly flout laws against corruption.

Legal Systems

The Protection of Intellectual Property

Intellectual property: property that is the product of intellectual activity

Patents: give the inventor exclusive rights to the manufacture, use, or sale of that invention

Copyrights: exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and dispose of their work as they see fit

Trademarks: designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products

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Internet Extra: National Intellectual Property Rights Coordination Center is the U.S government’s web page on intellectual property rights. The site is at {http://www.iprcenter.gov/}.

Legal Systems

The Protection of Intellectual Property continued

The protection of intellectual property rights differs greatly from country to country

185 nations are members of the World Intellectual Property Organization

Paris Convention for the Protection of Industrial Property: agreement signed by 170+ countries to protect intellectual property rights

Enforcement is lax in many nations especially in China and Thailand

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Legal Systems

The Foreign Corrupt Practices Act limits corruption in the U.S

It is illegal to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority

All publicly traded companies must keep detailed records so that it is clear whether a violation of the act has occurred

Facilitating or expediting payments to secure the performance of routine government actions are permitted

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Management Focus: Did Walmart Violate the Foreign Corrupt Practices Act?

Summary

This feature explores corruption at Walmart’s Mexico division where managers allegedly bribed Mexican government officials to obtain permission to build the San Juan Teotihuacan store in the early 2000s. After leaders at Walmart’s headquarters were alerted of the situation, Walmart launched an internal investigation. However, the investigation was turned over to Walmart Mexico to complete and only after a 2012 New York Times article again raised questions about the situation did Walmart reopen the investigation. Today, the company has spent more than $300 million on lawyers looking into the issue and Walmart is also facing scrutiny by the SEC and the U.S. Department of Justice.

Suggested Discussion Questions

1. Discuss the concept of property rights protection and why it is so important to companies. What does the court ruling against Xing Ba Ke mean for other companies that are already doing business in China, or are considering entering the market?

Discussion Points: Most students will recognize that firms that depend on proprietary property such a brand name or technology for their competitive advantage probably also rely on property rights protection to ensure that competitors cannot benefit from their efforts. The finding against Xing Ba Ke is a symbol that property rights protection should be taken seriously, and that blatant violations of property rights will not be tolerated.

2. How important is the Chinese market to Starbucks? Does the presence of look-alike companies like Xing Ba Ke deter firms from entering the market?

Discussion Points: With its growing middle class, the potential in the Chinese market is vast. Some students might argue that the presence of Xing Ba Ke is actually a positive force for Starbucks in that the coffee shop helps to promote the idea of coffee consumption in the Starbucks’ way. Most students however, will probably suggest that companies like Xing Ba Ke are a nuisance because they could potentially damage the reputation of Starbucks if customers have a negative experience at the stores, and because they require constant monitoring, are a drain on profits.

Lecture Note: To extend this discussion, consider {http://www.businessweek.com/articles/2014-04-03/starbuckss-howard-schultz-on-mobile-payments-china-and-oprah} and {http://www.businessweek.com/news/2014-09-24/starbucks-expanding-into-russia-s-urals-even-as-sanctions-mount}.

Teaching Tip: To explore Starbucks in more depth, go to the company’s web site at {http://www.starbucks.com/}. Click on “International” to explore individual country sites.

National Differences

Differences in Culture

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Listening to changing customer demands and monitoring your environment allow you and the firm to identify potential growth opportunities.

Introduction

Cross-cultural literacy - an understanding of how cultural differences across and within nations can affect the way in which business is practiced

There may be a relationship between culture and the costs of doing business in a country or region

Culture is not static – it can and does evolve

Multinational enterprises can be engines of cultural change

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Cross cultural literacy is important to success in international business. The actions of MNEs can contribute to cultural change.

Did You Know?

Did you know arriving late is expected in some cultures?

Click to play video

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What is Culture?

Scholars have not been able to agree on a simple definition

Culture is a system of values and norms that are shared among a group of people and that when taken together constitute a design for living

Society is a group of people sharing a common set of values and norms

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LO 4-1 Explain what is meant by the culture of a society.

Values refer to abstract ideas about what a group believes to be good, right, and desirable.

Norms are the social rules and guidelines that prescribe appropriate behavior in particular situations.

What is Culture?

Values and Norms

Values - provide the context within which a society’s norms are established and justified

Norms - the social rules that govern the actions of people toward one another

Folkways - the routine conventions of everyday life

Mores - norms that are seen as central to the functioning of a society and to its social life

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A good example of folkways concerns attitudes toward time in different countries. People are keenly aware of the passage of time in the United States and northern European cultures such as Germany, Netherlands, and the Scandinavian countries. Businesspeople are very conscious about scheduling their time and are quickly irritated when their time is wasted because a business associate is late for a meeting or if they are kept waiting.

Mores include such factors as indictments against theft, adultery, incest, and cannibalism. In many societies, certain mores have been enacted into law.

Planning on Doing Business Internationally?

If a company is planning to start exporting a product, there are two basic questions that need to be asked.

Is the product ready to be exported?

And, is the company ready to export the product?

Culturally, the product is either ready for a global market or not (and, if not, the company can modify it if the market is important enough).

Company readiness is much more culturally sensitive. Having the appropriate cultural knowledge and skills are important.

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What is Culture?

Culture, Society, and the Nation-State

Society reflects people who are bound together by a common culture

Nation-states are political creations that can contain a single culture or several cultures

Some cultures embrace several nations

Also possible to talk about culture at different levels within societies

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To complicate things further, it is also possible to talk about culture at different levels. It is reasonable to talk about “American society” and “American culture,” but there are several societies within America, each with its own culture. For example, in the United States of America, which is one country, one can talk about African American culture, Cajun culture, Chinese American culture, Hispanic culture, Indian culture, Irish American culture, and Southern culture.

The Determinants of Culture

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Social Structure

A society's social structure is its basic social organization

Two dimensions to consider

The degree to which the basic unit of social organization is the individual, as opposed to the group

The degree to which a society is stratified into classes or castes

Group - an association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other’s behavior

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Social Structure

The Individual

Emphasized in Western countries

Individual achievement and entrepreneurship are promoted

Fosters managerial mobility

Encourages job switching, competition between individuals rather than team building, and a lack of loyalty to the firm

The Group

Emphasized in non-Westernized countries (Japan)

Cooperation and team work are encouraged and life time employment is common

Individual initiative and creativity may be suppressed

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In a now-classic study of Japanese society, Nakane noted how this expresses itself in everyday life. Nakane goes on to observe that the primacy of the group to which an individual belongs often evolves into a deeply emotional attachment in which identification with the group becomes all-important in one’s life. One central value of Japanese culture is the importance attached to group membership

Social Structure

Social Stratification

All societies are stratified on a hierarchical basis into social categories, or social strata

Usually defined by characteristics such as family background, occupation, and income

Societies differ in terms of

The degree of mobility between social strata

The significance attached to social strata in a business context

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LO 4-2 Identify the forces that lead to differences in social culture.

Country Focus: Using IT to Break India’s Caste System

Summary

This feature explores India’s caste system and the implications of the system. While many urban middle class citizens are not affected in a significant way by the caste system, for India’s rural population, the influence of the system is readily apparent. The government is strongly encouraging private companies to hire more lower caste individuals.

Suggested Discussion Questions

1. India’s castes system has been around for many years. Explain why its influence has diminished among educated urban middle class Indians.

Discussion Points: The caste system in India was officially abolished in 1949. However, it seems that urban citizens have benefited the most from its abolishment. For many rural Indians, the system is still very much in effect. Educated, urban middle class Indians make up the majority of employees in India’s high tech economy. They may work for large multinationals like Infosys and Wipro. Many students will probably attribute the relative freedom of these individuals to the presence of these large companies, and their need to hire the best people regardless of caste. In rural areas though, the caste system still has significant influence in daily life. One female engineer working for Infosys notes for example that as a member of a lower caste, she was not able to enter the homes of higher caste individuals. Yet the same engineer, a beneficiary of an Infosys training programs, now works for Infosys in a “higher caste” position.

2. Why are many private companies in India resisting the hiring quotas suggested by the government? Why might it be necessary to hire lower caste individuals?

Discussion Points: The Indian government has suggested that private companies make an effort to employ lower caste individuals. However, many companies are resisting the request using the argument that they want to hire qualified people who want to work hard, and not people who are available simply because of a quota system. Some companies however, recognize that there may be a place for lower caste individuals, especially has business grows. Infosys for example, offers special training to low caste members.

Lecture Note: To extend this discussion, consider {http://news.bbc.co.uk/2/hi/south_asia/7914229.stm} and {http://news.bbc.co.uk/2/hi/south_asia/6125940.stm}.

Lecture Note: For more on India’s caste system, go to {http://www.npr.org/programs/specials/racism/010828.caste.html}.

Social Structure

Social Stratification continued

Significance

In cultures where class consciousness (where people tend to perceive themselves in terms of their class background) is high, the way individuals from different classes work together may be prescribed

Evident in British society

Antagonism between labor and management can raise the costs of doing business (INDUSTRIAL DISPUTES)

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LO 4-3 Identify the business and economic implications of differences in culture.

Class consciousness shapes peoples’ relationships with others.

Religious and Ethical Systems

Religion - a system of shared beliefs and rituals that are concerned with the realm of the sacred

Ethical system – a set of moral principles, or values, that are used to guide and shape behavior

Religions with the greatest following

Christianity (2.20 billion adherents)

Islam (1.60 billion adherents)

Hinduism (1.10 million adherents)

Buddhism (535 million adherents)

Confucianism shapes culture in many parts of Asia

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LO 4-2 Identify the forces that lead to differences in social culture.

Islamic Banks

Islamic banks function differently than conventional banks in the world, as the Islamic banks cannot pay or charge interest.

Source: © Ali Al Saadi/AFP/Getty Images

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Religion

Religions influence lifestyles, beliefs, values and attitudes and can have a dramatic effect on the way people in a society act toward each other and towards those in other societies.

Religion also influences:

the work habits of people;

the work and social customs (from the days of the week on which people work to their dietary habits);

politics and business.

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Religion

Religion is a major manifestation of culture, and it is the source of some of the differences in norms and values that we discussed before.

Knowledge about religions is crucial even for non-religious managers –tend to raise emotions.

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Religious differences, more than any other differences, tend to raise emotions – and thus are challenging to handle for businesses.

Showing respect for other religions and associated values will help you avoiding conflict and creating a basis for doing business.

Religion

Religious beliefs and activities affect business through:

religious festivals,

daily and weekly routines

activities and objects with symbolic values

Religious differences, more than any other differences, tend to raise emotions – and thus are challenging to handle for businesses.

Showing respect for other religions and associated values will help you avoiding conflict and creating a basis for doing business.

Language

Countries differ in terms of language or means of communication

There are two forms language:

Spoken

Unspoken

Language is one of the defining characteristics of culture

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Language

Language is critical to culture because it is the primary means used to transmit information and ideas.

Knowledge of local language can:

permit a clearer understanding of a situation;

provide access to local people;

allows the person to pick up nuances, implied meanings, and other information that is not stated outright.

Language

Chinese is the world’s largest in terms of the number of native speakers. English is a distant second, followed by Hindi and Spanish.

To facilitate communication, many MNEs have adopted an (official or unofficial) corporate language.

Language

Unspoken Language

Unspoken language - nonverbal cues

Examples include facial expressions and hand gestures

Can be important for communication

Personal space

Many nonverbal cues are culturally bound and because they may be interpreted differently, can result in misunderstandings

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Education

The general education level of a country is a good indicator of the types of products that might sell in that location or the type of promotional materials that might be successful

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LO 4-2 Identify the forces that lead to differences in social culture.

Culture and Business

Geert Hofstede isolated five dimensions that summarized different cultures

Power distance

Individualism versus collectivism

Uncertainty avoidance

Masculinity versus femininity

Long-term versus short-term orientation

A move to add a sixth dimension: indulgence versus restraint

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LO 4-4 Recognize how differences in social culture influence values in business.

Hofstede’s power distance dimension focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities

The individualism versus collectivism dimension focused on the relationship between the individual and his or her fellows

Hofstede’s uncertainty avoidance dimension measured the extent to which different cultures socialized their members into accepting ambiguous situations and tolerating uncertainty.

Hofstede’s masculinity versus femininity dimension looked at the relationship between gender and work roles

The long-term versus short-term orientation dimension refers to the extent to which a culture programs its citizens to accept delayed gratification of their material, social, and emotional needs.

Indulgence refers to a society that allows relatively free gratification of basic and natural human drives related to enjoying life and having fun. Restraint refers to a society that suppresses gratification of needs and regulates it by means of strict social norms.

Culture and Business

Hofstede’s work has been criticized

Assumes a one-to-one relationship between culture and nation-state

Research may be culturally bound

Informants only worked within a single industry – computers – and within one company – IBM.

Certain social classes excluded from research

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Cultural Change

Culture evolves over time, although changes in value systems can be slow and painful for a society

Social turmoil is an inevitable outcome of cultural change

Cultural change is particularly common as countries become economically stronger

As countries get richer, there is a shift from “traditional values” to “secular rational” values and from “survival values” to “well-being values”

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LO 4-5 Demonstrate an appreciation for the economic and business implications of cultural change.

For another illustration of cultural change, consider Japan. Some academics argue that a major cultural shift has been occurring in Japan, with a move toward greater individualism.74 The model Japanese office worker, or “salaryman,” is characterized as being loyal to his boss and the organization to the point of giving up evenings, weekends, and vacations to serve the organization, which is the collective the employee is a member of. However, a new generation of office workers may not fit this model.

Impact of culture on business activities

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LO 4-4 Recognize how differences in social culture influence values in business.

Hofstede’s power distance dimension focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities

The individualism versus collectivism dimension focused on the relationship between the individual and his or her fellows

Hofstede’s uncertainty avoidance dimension measured the extent to which different cultures socialized their members into accepting ambiguous situations and tolerating uncertainty.

Hofstede’s masculinity versus femininity dimension looked at the relationship between gender and work roles

The long-term versus short-term orientation dimension refers to the extent to which a culture programs its citizens to accept delayed gratification of their material, social, and emotional needs.

Impact of culture on business activities

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Lecture Script 6-41

LO 4-4 Recognize how differences in social culture influence values in business.

Hofstede’s power distance dimension focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities

The individualism versus collectivism dimension focused on the relationship between the individual and his or her fellows

Hofstede’s uncertainty avoidance dimension measured the extent to which different cultures socialized their members into accepting ambiguous situations and tolerating uncertainty.

Hofstede’s masculinity versus femininity dimension looked at the relationship between gender and work roles

The long-term versus short-term orientation dimension refers to the extent to which a culture programs its citizens to accept delayed gratification of their material, social, and emotional needs.

Focus on Managerial Implications

Cross-Cultural Literacy

Firms that are ill-informed about the practices of another culture are unlikely to succeed in that culture

Individuals must also beware of ethnocentric behavior

Belief in the superiority of one's own culture

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