CULTURAL ASPECTS IN INTERNATIONAL BUSINESS
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 1
The previous chapter discussed three important aspects of international business. These
are the legal and political aspects, the economic aspects, and the cultural aspects. Chapter 2
specifically discusses the cultural aspect and its role in international business activities. This
cultural aspect plays a very important role in all commercial activities carried out by business
people. In conducting international business activities, an entrepreneur will certainly meet
many people who come from different backgrounds. Not only backgrounds, each person also
has different assumptions, expectations, and ways of communication. Each of these elements
is a core part of culture.
1.1 The Significance of Culture in International Business
Culture is a set of values, beliefs, norms and institutions held by a group of people Of
course. Each country has different cultural characteristics. Not only that, the culture of a
particular country can also be broken down into sub-cultures that represent specific groups of
people within that country. Each country has a high tendency to support and protect their
national culture. One of the steps taken is to intervene in business activities in various sectors
to protect national cultural treasures. Some sectors of the economy such as the filmmaking
sector receive special attention in many countries because they are considered culturally
sensitive sectors. Various regulations imposed on these business sectors further affect the
business activities carried out.
The physical environment, including the climate in an area, also influences the product
needs of people in that area. For example, people who live in areas with tropical climates will
need sunblock products more than people who live in colder climates. Therefore, companies
operating on an international scale must also pay attention to the various conditions and
characteristics of the community in order to be able to adjust the products offered to the needs
and desires of consumers in certain regions. This is important because if the products offered
do not match the needs and desires of consumers, then there is a possibility that the products
will not be purchased.
1.2 Cultural Components and Their Impact on International Business
The previous section explained the meaning of culture and its role in international
business activities. Next, we will discuss the various components of culture and the influence
of each component on international business practices.
Figure 2.1 shows the four main components of culture consisting of values, behaviors,
aesthetics and appropriate behaviors. The following describes each of these cultural
components.
1. Values
Values are a set of ideas, beliefs and customs that are closely held by a certain group of
people. Not only that, people are also emotionally attached to the values they hold. These
include the concepts of honesty, freedom and responsibility. Values play an important role in
international business as they influence work ethics as well as employee motivation. For
example, Singaporeans place a high value on hard work and materialistic success, while
Greeks place a high value on leisure time and a simple lifestyle.
2. Attitudes
Behavior reflects the basic values of a person. Behaviors are a form of positive or
negative evaluations, feelings, and tendencies that a person has towards certain objects or
concepts. Similar to values, behaviors can also be learned from various role models such as
parents, teachers and religious leaders. The behavior of one country is also different from the
behavior of another country because it is formed in a specific cultural context. Unlike values
that only cover certain important aspects, behaviors cover various aspects of life, both
important and unimportant. Also, unlike values that tend to be solid, behaviors are more
flexible over time.
3. Aesthetics
Aesthetics is what is considered "good taste" in art, the imagery of certain expressions
and the symbolism of certain colors. In other words, aesthetics includes art, images, symbols,
colors and other things that are upheld by a particular culture. Aesthetics play an important
role when a company does business in different cultures. In this case, the selection of colors
in marketing media, product packaging design, and even worker uniforms must take into
account the aesthetic values of the local community.
4. Appropriate Behavior
When doing business in a country or region with a different culture, it is important to
understand the characteristics of that culture and behave accordingly. At the very least,
entrepreneurs doing international business should understand the basic types of appropriate
behavior (manners) and customs of the local culture. Manners are the appropriate ways of
behavior, speech and dress within a particular culture. For example, it is common to have
business discussions over a meal in America, but it is described as bad behavior in Mexico.
On the other hand, habits that are passed down from generation to generation are known as
customs. Customs differ from manners in that customs describe habits or behaviors that are
appropriate in certain situations.
1.3 Culture and Multinational Enterprises: Mutual Influence
International companies are often agents of cultural change. With fewer barriers to trade
and investment, many international companies have begun to expand their businesses in
developing countries. Some argue that the exporting of these companies has the potential to
result in cultural imperialism, which is the replacement of one country's traditions and culture
with another. Sensitivity to the cultures in which companies operate can help them avoid the
demands of cultural imperialism. This means that companies should not only focus on
meeting the needs of society, but also on the impact of their activities and products on the
lives and customs of local communities. International companies can avoid cultural
imperialism by slowly introducing culturally distinctive policies and practices. In addition,
companies can also seek advice from local people in fulfilling their social roles.
The previous section discussed how international companies can influence the culture of
a particular country. But in reality, culture can also influence international companies. It is
not uncommon for per-Companies are required to adapt their practices and policies to the
local culture. Company managers sometimes use situational management, a system where
employees are supervised at every stage of their duties. This technique helps employees
understand the scope of their work and the boundaries and responsibilities they must
maintain. The cultural differences between one country and another require companies to
make changes to adapt to the local culture.
Study 2
Local Culture in Multinational Companies
The interaction between local cultures in the corporate environment, especially
multinational companies, is important in international business activities. Because when these
two things run separately, it will create conflict between the company and the local
community. In order to avoid the possibility of creating conflicts with local communities,
multinational companies usually try to blend the values, vision and mission of the company
with the local culture of the community. This strategy is often chosen by multinational
companies in countries that have high nationalism and thick local culture such as Indonesia.
The blending of local culture with the company's vision and mission is done in various
ways. An example is product development by utilizing local culture such as developing food
products according to the tastes of local communities. Another example is incorporating local
culture into the company's work environment such as the use of batik uniforms in the work
environment or conducting Corporate Social Responsibility (CSR) based on local culture.
These activities also have another positive impact, namely increasing the positive sympathy
of the local community towards the company, so that a positive image or assessment of the
company and the brand in it will be created.
1.4 Corporate Environment and Technology in Influencing Culture
The corporate environment comprising social, economic, legal/political environments,
including technological developments can greatly influence corporate culture. It is important
for international companies to understand the various business environments that vary
between countries. This is because the complexity of the business environment, globalization,
technological advances, and multiculturalism can cause a shift in the cultural values adopted
by the company. Technological developments have a significant impact on various aspects of
life, including the way we communicate. Globalization and technological innovation can
accelerate the process of cultural diffusion and change. Cultural diffusion can be defined as
the process of spreading values and characteristics from one culture to another. Currently, the
process of spreading cultural values is greatly encouraged by the development of the internet
and social media platforms such as Instagram, Youtube, Facebook, Twitter, Tiktok and so on.
1.5 Conclusion
This chapter discusses one of the most important aspects of international business:
culture. Each component of culture, which consists of values, attitudes, aesthetics, and
appropriate behavior, has different implications for the policies and practices of international
business. In addition, this chapter also discusses the relationship between culture and
international companies where the two can influence each other. When the activities of a
foreign company cause changes to the local culture, this is known as cultural imperialism.
However, culture can also influence the way in which foreign firms conduct their business
conducting their business. Companies that conduct business operations in areas with different
cultures must make various adjustments to their business practices.
1.6 Important Terms
⚫
Culture
⚫
Sub-culture
⚫
Value
⚫
Behavior
⚫
Aesthetics
⚫
Appropriate behavior
⚫
Cultural imperialism
⚫
Situational management
⚫
Cultural diffusion
1.7 Review Concept
1. What is the difference between culture and subculture?
2. Describe the effect of the physical environment on
company's business operations!
3. Name and explain the various components in bu- power!
4. Explain what the este- tics component is and how it affects international business!
5. What is cultural imperialism?
Explain!
1.8 Problem- Problem:
1. Choose an international company in Indonesia and observe how it adapts its products to fit
the local culture!
2. Find an example of cultural imperialism and explain how companies can influence the
culture of local communities!
3. Choose one of the cultural components and explain how it affects international companies!
(Please use an example of an international company in Indonesia.)
POLITICAL, LEGAL, AND ETHICAL ASPECTS OF BUSINESS IN
INTERNATIONAL BUSINESS
Companies involved in inter-national business must understand the different types of
political systems and how they work. This applies not only to traditional brick-and-mortar
businesses, but also to internet-based companies and other types of service companies. In
Chapter 2 we discussed the importance of cultural aspects of doing business in different
countries. Another important element that contributes to the success of international business
is the ability to understand the different political, legal and economic systems of each
country.
3.1 System Types Political:
The political system includes the structures, processes and activities that govern the
running of a country. A country's political system is closely related to the history and culture
of the country. society. Factors such as population, age and racial composition, and per capita
income can influence a country's political system. There are three types of political ideologies
that can be ranked along a horizontal line. At one extreme is anarchism and at the other
extreme is totalitarianism (Figure 3.1).
Anarchism is the belief that individuals or groups cannot control the political activities of
a country. Supporters of this ideology believe that people do not need and want government
because it can limit personal freedom. Totalitarianism is the belief that every aspect of a
country's life should be monitored by the political system. This ideology does not consider
the existence of individual freedom. Totalitarianism political systems include communism
and fascism. In between these two extremes lies the ideology of pluralism, which is the belief
that both public and private groups play an important role in a country's political activity. The
following discusses each political system in more depth.
1. Totalitarianism
In a totalitarianism political system, the government has the freedom to organize the life
of the country (society) without support or supervision from other parties. South Korea is an
example of a country that adheres to a totalitarianism system. Governments that embrace this
political system generally have three main characteristics. First, there is imposed authority. A
particular individual or group establishes a political system without the explicit or implicit
consent of others. Leaders usually gain power through military force or unfair selection.
Second, totalitarianism denies the existence of constitutional guarantees. In other words, it
limits or rejects the concepts of freedom of expression, periodic elections, civil rights and
minority rights. Third, political representation is limited to those sympathetic to the
government. Totalitarianism can be divided into two types, namely theocratic totalitarianism
and secular totalitarianism.
Theocratic totalitarianism is a totalitarianism political system led by a religious figure.
Meanwhile, in secular totalitarianism, political leaders rely on military and bureaucratic
power. The secular totalitarianism political system can be divided into three forms, namely
communist, tribal, and right-wing. Communism is the belief that social and economic justice
can be achieved through the establishment of a communist party that has full power. In
addition, social justice can also be achieved by implementing a system of socialism, where
the government regulates and holds full ownership of all economic activities. The main
difference between communism and socialism is seen in the communists' belief that in order
to gain power over resources, the government must have full ownership of the resources and
to crush the opposition through rebellion. Socialists do not believe in these forms of rebellion.
Thus, communists are also socialists, but socialists are not necessarily communists.
Furthermore, in the tribal form of totalitarianism, certain tribal (ethnic) groups impose their
will on other groups. Whereas in right-wing totalitarianism, the government holds ownership
of private property, but still provides political freedom.
There are various advantages and disadvantages for international companies when doing
business in a totalitarian state. One of the advantages is that international companies do not
have to worry about opposition parties resisting their business presence. One of the main
disadvantages is that the company may have to pay money (bribe) to government officials.
Conducting business operations in a totalitarian state also carries a high degree of risk.
Companies doing business in these countries are sometimes perceived as not caring about the
people who are oppressed by government policies. This requires business executives to
choose between refusing to invest in a totalitarian state (losing business opportunities) or
continuing to invest and bearing the burden of potentially damaging the company's image.
2. Democracy
Democracy is a political system in which the government is directly elected by the
people or their representatives. It differs from totalitarianism in almost every aspect. In this
political system, there is what is known as representative democracy, which is a system of
democracy in which the people elect several individuals. This system is characterized by
freedom of expression, periodic elections, property rights, rights, rights for minorities, and no
nonpolitical bureaucracy. Representative democracy is characterized by freedom of
expression, periodic elections, property rights, human rights, rights for minorities, and the
absence of a non-political bureaucracy. Despite having the same principles, this democratic
system can be divided into different practices such as parliamentary democracy adopted by
the UK. Democratic systems maintain a stable business environment through policies and
regulations that protect individual property rights. In theory, businesses have a greater chance
of succeeding when the private sector includes independently owned, profit-oriented
companies.
3.2 Political Risk and Its Impact on Business International
All companies that do business, both nationally and internationally, are always faced
with political risk. Political risk can be defined as the possibility of political changes that can
have a negative impact on the business activities carried out. Political risks in different
countries have different impacts on international companies. This risk can be in the form of
threats from exporting markets, or production facilities owned by foreign companies. A
strong understanding of local values, customs and traditions can help reduce a company's
exposure to political risk. The following describes some of the forms and sources of political
risk and their impact on international business.
Figure 3.1 shows the different types of political risks that can affect international
business practices and investors' intentions to invest in a country. These political risks can
include conflict and violence, terrorism and kidnapping, property seizures, policy changes
and local content requirements. An explanation of each type of risk is as follows.
1. Conflict and Violence:
Local conflicts can discourage international companies from investing in a country.
Disruptions and threats of violence can hamper the ability of companies to manufacture and
distribute their products. Other activities such as sourcing raw materials and recruiting
employees may also be hampered. Open conflict can threaten a company's physical assets
such as office buildings and factories as well as the safety of employees. It also undermines a
country's economic development.
2. Terrorism and Kidnapping
Acts of terrorism are intended to make a politics. These actions occur because groups of
people are dissatisfied with the existing political and economic conditions. This encourages
them to devise insurgency tactics in order to force change through destruction. These terrorist
groups carry out kidnappings to fund their activities. Executives from international
companies are commonly targeted for kidnapping because they are more likely to pay
ransom. Some companies even purchase kidnapping and snatching insurance premiums to
reduce the impact of this risk.
3. Property Foreclosure
Governments sometimes engage in asset and property seizures from companies doing
business in their country. These seized assets can be categorized into three categories. The
first category is confiscation, which is the process of taking and transferring company assets
to the government without compensation. However, if the government seizes assets and
provides compensation, it is categorized as expropriation. The amount of compensation is
determined by the government and generally has a lower value than the market price. The
third category is known as nationalization, where the government takes over all industries in
a country. In the short term, these three forms of property seizure can help the economy. But
in the long run, foreign investors will tend to refuse to invest in the country, thus slowing
down its economic growth.
4. Policy Changes
Changes in political policy can be caused by a variety of influences, including ideas
embraced by new political parties, political pressure emanating from certain stakeholders,
and social unrest. In addition, certain policies may limit company ownership for foreign
investors. This has resulted in a much larger percentage of ownership of domestic companies
compared to foreign companies. However, there are other policy changes that have a positive
impact on business. One of them is a policy that encourages cross-border investment which
can reduce the level of political risk.
5. Local Content Requirements
Local content requirements are a form of regulation that requires companies to purchase
a certain amount of goods or services from domestic producers or suppliers. They require
companies to use locally available raw materials for production or hire a certain number of
local employees. These regulations are intended to ensure that international companies
encourage local economic activity and help alleviate national unemployment problems. This
helps the government to monitor the activities of foreign companies in the country.
3.3 Types of Legal Systems and the Importance of Legal Systems Global
The legal system is a set of rules and regulations, including the process by which laws
are established and implemented. A country's legal system is influenced by many cultural
factors such as ideas about social mobility and religion. Likewise, various regulations are
established with the aim of maintaining cultural values and beliefs. Not only that, a country's
legal system is also influenced by the political system. Governments that embrace
totalitarianism tend to favor public ownership of economic resources hence regulations that
restrict the behavior of private entrepreneurs. On the other hand, democratic political systems
tend to implement regulations that limit the behavior of private entrepreneurs which
encourages entrepreneurial activity and protects property rights. In addition, nationalism also
influences a country's legal system. Nationalism can be defined as people's loyalty to the
interests and progress of their country. With this explanation, the main characteristics of
common law, civil law and theocratic law are explained next.
1. Common Law
Common law is a legal system based on the legal history of a country (tradition),
previous court cases (precedent), and how the law is applied to certain conditions or
situations (usage). Every case brought before the court will be interpreted based on these
three elements. However, each rule may be interpreted differently in different cases. Instead,
each new interpretation will serve as a foundation for future cases. Countries that adopt
common law generally have lengthy business contracts because they have to consider various
possibilities and interpretations.
2. Civil Law:
Civil law is a legal system based on a set of written rules that make up a country's legal
code. Civil law is the oldest and most commonly used legal system. All rules have a clear and
concise legal code so that parties need only draft contracts in accordance with what is
explicitly stated in the code. All obligations and responsibilities directly follow the relevant
legal code.
3. Theocratic Law
Theocratic law can be defined as a legal tradition based on religious teachings. There are
three main theocracies based on Islam, Hinduism and Judaism. Today, theocratic laws based
on the Islamic religion are most widely used compared to those based on Hinduism and
Judaism. Islamic theocratic law was originally a code that regulated the ethical and moral
behavior of society. Subsequently, these laws were also applied in commercial transactions.
3.4 Business and Corporate Ethics Multinationals
Ethical behavior is individual behavior that is in accordance with morality or guidelines
for good behavior. The ethical dilemma that occurs is not a legal issue. This is because every
business person or manager has an obligation to behave in accordance with existing
guidelines. In an ethical dilemma there is no right and wrong decision. But there are other
alternatives depending on the perspective of each individual. In addition to ethical behavior,
businesses are also expected to perform social responsibility in the form of corporate social
responsibilities (CSR). CSR is a business practice beyond legal obligations to actively
balance business commitments to interested parties (stakeholders). These stakeholders
include investors, customers, other companies, and the community. CSR practices can take
the form of various social activities such as charitable giving for the underprivileged,
establishing schools in developing countries, and protecting the global environment. Some
corporate leaders realize that the future of their company depends on a healthy environment
and workforce. CSR practices consist of three layers of activities. The first layer is known as
traditional philanthropy where companies donate some money and some employee time to
social causes. The second layer relates to risk management where the company draws up a
certain code of behavior and agrees with the company to operate with a higher level of
transparency. The last layer is strategic CSR where companies build social responsibility into
their core operations in order to create value and build competitive advantage.
Study 3
CSR Program Practices in Indonesian Multinational Companies
CSR programs in Indonesia are explicitly regulated in Law (UU) No. 25 /2007 in article 74.
The regulation states that every company that runs its business in the field of/related to
natural resources must implement CSR programs as a form of social and environmental
responsibility. This regulation also causes CSR to be viewed not only as a corporate
obligation but also a sanction. In practice, CSR programs are carried out based on economic
democracy to solve social problems that exist in society.
In the development of CSR program activities carried out by companies, there are "pro" and
"con" views in Indonesia and globally. The mandatory implementation of CSR programs in
Indonesia has created opposing views towards CSR programs. Experts believe that CSR
programs that are enforced in the long run will be used as a new political instrument for
interested parties, such as for the needs of certain parties, companies, and communities only
because of the coercive nature of the rules. This is certainly not in accordance with business
ethics, democratic principles, and the purpose of enacting related regulations. However,
experts who are in favor of the imposition of CSR programs consider CSR programs as one
of the development and equity policies as well as an instrument to limit the exploitation of
natural resources for economic interests carried out by the Indonesian government. In
addition, CSR programs are expected to be able to solve social problems and meet
community needs that cannot be met by the government with equally innovative approaches
and solutions.
3.5 Conclusion
This chapter discusses the different types of political systems and their relationship with
international business activities. Each political system, consisting of totalitarianism and
democracy, has its own advantages and disadvantages for international companies. Any
company doing business nationally or internationally is also faced with political risks. These
political risks consist of various conflicts and violence, terrorism, property seizures, policy
changes, and content requirements. In addition, a country's legal system consisting of
common law, civil law and theocratic law also influences international business practices.
Furthermore, to maintain business sustainability in the long term, companies should pay
attention to various ethics in conducting business. One way to do this is by practicing
corporate social responsibilities (CSR).
3.6 Important Terms
⚫
Political system
⚫
Anarchism
⚫
Totalitarianism
⚫
Pluralism
⚫
Theocratic totalitarianism
⚫
Secular totalitarianism
⚫
Tribal totalitarianism
⚫
Communism
⚫
Socialism
⚫
Democracy
⚫
Political risk
⚫
Legal system
⚫
Common law
⚫
Civil law
⚫
Theocratic law
⚫
Ethical behavior
⚫
Corporate social responsibility
⚫
Traditional philanthropy
⚫
CSR risk management
⚫
Strategic CSR
3.7 Review Concept
1. Explain the difference between the political system of totalitarianism
and anarchism!
2. What are the advantages of a democratic poli- tic system for international companies?
Explain!
3. Name and explain the types of political risk!
4. What is the difference between communism and socialism? Explain!
5. Describe three types of totalitarianism political systems!
6. Explain what is meant by the legal system!
7. What factors affect the legal system? Explain!
8. Why are business ethics important? Explain!
9. Describe three types of CSR!
3.8 Problem- Problem
1. Describe the political system adopted by Indonesia and explain its impact on international
companies in Indonesia!
2. What are the political risks in Indonesia? How do they impact foreign and domestic
companies?
3. Find a company that is active in CSR activities in Indonesia. Describe what activities are
carried out! What is the impact of these activities on the company?
ECONOMIC ASPECTS OF INTERNATIONAL BUSINESS
Chapter 2 discusses the importance of cultural aspects in conducting international
business activities. Chapter 3 discussed the political and legal aspects and their influence on
the business practices of international companies. This chapter continues these two chapters
by discussing the third aspect of international business. The discussion covers various
economic systems and their impact on international companies. In addition, this chapter also
discusses various indicators in measuring the economic development of a country.
4.1 Economic Systems Adopted by Countries of the World:
A country's economic system consists of the structures and processes used to allocate
resources and conduct commercial activities. Each economic system reflects a tendency
towards individualist or collective economic values that reflect the country's economic
system. cultural values of a nation. Cultures that favor theories based on individual freedom
and responsibility will establish a capitalist economic system. On the other hand, other
cultures that favor collective ideas tend to build socialist or even communist economic
systems. National economic systems can be depicted on a horizontal line or scale that has two
extreme points. At one point there is a centralized (pure) economic system or what is known
as a centrally planned economy. On the other side there is a pure market economic system or
what is known as a market economy. Between the two points is a mixed economic system
known as a mixed economy.
Figure 4.1 shows the economic systems of various countries. The economic systems are
spread between two extremes consisting of a centralized economic system (left) and a market
economic system (right). An explanation of the characteristics of each economic system is as
follows.
4.2 Main Characteristics of a Centralized Economic System :
A centrally planned economy is an economic system in which the government holds
ownership of the land, factories and other resources available in a country. All economic
activities and decisions are regulated by the government, including product types, product
prices, labor and capital. In this case, there is a centralized agency that specifies production
goals for factories and other production units and sets the prices of the products produced.
The main objective of a centralized economic system is to achieve a set of political, social
and economic goals. This is done by taking full control of production and distribution
activities.
The centralized economic system is rooted in the ideology of collectivism. Just as
collectivists prioritize group interests over individual interests, the centralized economic
system seeks to achieve social and economic justice. This idea was formulated and
popularized by Karl Marx when he witnessed the suffering of workers in Europe during the
industrial revolution. As seen in Figure 4.1, some of the countries that initially adopted a
centralized economic system were Russia (1917), China and South Korea (1940), and Cuba
(1959). In addition, in 1970, this centralized economic system began to develop in parts of
central and Eastern Europe. However, since the late 1980s, countries began to abandon this
economic system in favor of a market economy. One of the reasons for the decline of this
system was its failure to create economic value. In addition, it failed to provide incentives for
businesses to maximize output and failed to achieve rapid economic growth. Another reason
was that the centralized economic system was unable to satisfy the desires of consumers.
4.3 Key System Characteristics Market:
In a market economy, most land, power and other economic resources are privately
owned, either by individuals or businesses. This means that all decisions regarding products,
prices and capital in the economy are determined by market mechanisms. The market
mechanism is the interaction between demand and supply. This interaction between demand
and supply will determine the price of products and services. The lower the price, the more
the amount of goods or services demanded, and vice versa. Similarly, the lower the price, the
fewer goods and services the company is willing to produce. In addition, product prices can
also be determined by market forces and other natural forces that are beyond the control of
the company.
The market economy system is rooted in the belief that individual interests should be
prioritized over group interests. According to this view, the whole society benefits when
individuals are incentivized to do certain things. This is because individuals tend to have
higher motivation to care for their private property and less incentive to care for public
property. For several centuries, economic philosophy famously supported government
intervention to manage some assets. But in the mid-1700s, a new approach emerged known
as the laissez-faire system. This system did not favor government intervention in commercial
activities. In other words, this economic system favors individual freedom in carrying out
economic activities.
The market economy system has three main characteristics. First, there is freedom of
choice. This gives individuals access to a wide range of alternative options purchase. In a
market economy, there are fewer barriers to individual decision-making. Secondly, a market
economy gives firms and businesses freedom in determining the types of goods and services
they produce. Firms have the freedom to enter different lines of business, choose the market
segments and customers to pursue, hire employees, and market their products. In other words,
companies are free to pursue their interests in maximizing profits. The third characteristic is
price flexibility that allows price movements. In contrast, a non-market economic system
tends to keep prices at a certain level.
In a market economy, the government has less direct intervention in business than in
centralized and mixed economies. However, the government has several important roles in a
market economy. One of them is the government's role in enforcing antitrust laws. Antitrust
laws are laws that prevent certain companies from gaining various advantages in an unfair
way. In addition, the government also plays a role in safeguarding individual property rights.
To maintain economic stability, the government also plays a role in shaping a stable fiscal
and monetary environment and maintaining political stability.
4.4 Mixed Economic System and Multinational Companies :
A mixed economic system is one in which the government and the private sector share
ownership of land, factories and other economic resources equally. In a mixed economic
system, the government holds less ownership rights over economic resources compared to a
centralized economic system. However, the role of the government is still considered
important in overseeing the private sector economy and maintain national security and
stability in the long run. Some of the European countries that adopt a mixed economic system
are Denmark, France, Spain, Norway. In addition, this economic system is also adopted by
several countries in Asia such as India, Indonesia, Malaysia, Pakistan and South Korea. Some
other countries that adopt a mixed economic system are Argentina and South Africa.
Although it does not fully control economic activity, the government still influences
economic activity by providing incentives in the form of subsidies to various key industries
and is involved in the economy.
Proponents of a market economy argue that the success of an economic system is not
only in its efficiency and innovation, but also in its ability to protect society from individual
greed. The goal of this economic system is to achieve low unemployment, low poverty, stable
economic growth and a fair distribution of wealth. However, some argue that mixed
economic systems do not increase productivity levels. Today, most countries that have
adopted a mixed economic system are starting to make changes towards an economic system
that is similar to a market economy. This is because when assets are owned by the
government, there tends to be little incentive to reduce waste and innovate.
Study 4
Pancasila Economic System Supports International Business Practices
The development of the economic system in a country is often influenced by the culture and
legal basis that applies in that country. This condition almost occurs in all countries and
Indonesia is no exception. Based on its history, in the old order era Indonesia used a market
economic system, which was then replaced by a centralized economic system in the new
order era, the last is the reform era (currently) Indonesia uses the Pancasila Economic System
(SEP). SEP is a mixed economic system based on the culture and laws prevailing in
Indonesia, namely Pancasila. The practice of SEP in Indonesia is more inclined towards a
market economy, because Indonesia is very open to international trade activities and fully
supports the export of local products as one of the national economic resilience strategies.
One of the roles of SEP towards international business practices is through Indonesia's
participation in AEC (ASEAN Economic Community). Through AEC, Indonesians will find
it easier to compete in the Southeast Asian market due to the reduction of financial and non-
financial (tariff and non-tariff) export barriers. Conversely, there are also facilities for
Southeast Asian countries to enter Indonesia, such as the ease of making investments in the
form of investment funds and the establishment of multinational companies in Indonesia. In
addition to this, the SEP also supports the exchange of technology, knowledge and culture. It
can be concluded that the SEP's openness to international economic activity through the AEC
will increase foreign investment, exports, employment and the quality of Indonesia's Human
Resources (HR).
4.5 Various Measures of a Country's Economic Development:
Economic development includes various economic developments in people's lives such
as improvements in physical health, life expectancy, education and literacy, poverty,
infrastructure, environmental sustainability and so on. Thus, economic development includes
both quantitative and qualitative measurements. However, economic development requires
economic growth, which is a measure of the increase in the value of goods and services
produced. The following describes some measurements of a country's economic
development.
1. National Production:
Measuring economic development can use gross domestic product (GDP) or gross
national product (GNP). GDP is the value of all products and services produced by the
domestic economy in a given period (one year). GDP is a narrower measurement than GNP
because it does not take into account income derived from exports, imports and international
operations of companies. If the value of GDP is divided by the population of a country, the
value of GDP per capita will be obtained. GDP per capita is used to measure the income of
individuals in a country.
Although GDP and GNP are the most commonly used indicators in measuring economic
development, they have some shortcomings. One of them is that there are several types of
transactions that are not counted in GDP and GNP. These transactions can range from
voluntary work to illicit transactions conducted on the black market. In addition, comparisons
of economic growth using GDP and GNP values can be misleading. This is because the
comparison does not take into account the value of the currency and the cost of living of each
country.
2. Purchasing Power Parity (PPP):
The use of gross domestic product in comparing the value of production of each country
does not take into consideration take into account the cost of living that varies between
countries. Purchasing power is the value of goods and services that can be purchased with
one unit of a particular currency. Purchasing power parity measures the relative ability of
two countries' currencies to purchase the same set of goods in both countries.
3. Human Development:
The concept of purchasing power parity (PPP) has been able to show different levels of
economic development, but this indicator cannot describe the welfare of society. To illustrate
human development, the human development index (HDI) can be used. This index measures
the extent to which a government is able to provide equal opportunities for its citizens to
obtain a healthy life, education and a decent standard of living.
4.6 Economies in Transition and Possible International Business Barriers:
In the last two decades, countries with centralized economic systems have begun to
make changes towards a market economy. This process is known as economic transition.
Economic transition involves changing the fundamentals of economic organization and
creating new free-market institutions. The process of economic transition generally aims to
promote economic progress in the form of economic stabilization, price movements that
reflect demand and supply, legalizing business activities carried out by private parties, selling
state-owned companies, supporting property rights and reducing barriers to trade and
investment. The economic transition to a pa- sar economic system generates international
business opportunities. However Thus, difficulties stemming from the experience of using the
philosophy of the socialist economic system will be an obstacle. The following describes
some of the obstacles to economic transition.
1. Managerial Expertise:
In a centralized economic system, production, distribution and marketing strategies are
almost unnecessary. This is because all commercial aspects and activities are controlled by
the government. In this case, companies do not need marketing research. Companies also do
not think about pricing and do not need experts in operations, inventory, distribution or
logistics. However, in recent years, there has been a rapid improvement in the quality of
management in countries undergoing economic transition. This is due to improvements in the
quality of education, opportunities to study and work abroad and changes brought about by
foreign companies investing in the country.
2. Capital Shortage:
Facilitating the economic transition process requires considerable capital. The
government needs funds to build infrastructure and telecommunication systems, including
toll roads, bridges, network facilities, and other facilities. In addition, governments also need
funds to build financial institutions and educate the public about the market economy system.
Some countries that are unable to fund all these investments may seek alternatives through
loans from national and international companies and other financial institutions.
3. Cultural Differences:
Economic transitions and reform efforts make a deep cultural impression on a nation.
Transition The economy will release people's dependence on the government and emphasize
individual responsibility, incentives and rights. Changes such as cuts and even termination of
benefits and job security will come as a shock to people.
4. Sustainability:
Countries in econo- mi transition often suffer from the negative impacts of changes in
the economic system. In the short term, countries will feel the negative impacts more than the
benefits of economic transition. However, as the economic transition effort progresses, more
and more of the population will share in the benefits of a market economy.
4.7 Conclusion:
There are three known economic systems in the world. The centralized economic system
is characterized by the government holding full ownership rights over various resources
owned. This gives the government the power to make decisions on all economic activities
carried out. On the other hand, there is a market economic system that supports property
ownership rights for private parties, both individuals and businesses. The market economy
system rejects government intervention in various economic activities. However, the role of
the government is still needed in certain aspects. In between these two economic systems,
there is a mixed economic system that supports the equitable sharing of property ownership
between the government and the private sector. Since 1980, many countries that originally
adopted a centralized economic system have begun to switch to a market economic system.
This process is known as economic transition. Some obstacles in the transition process
Economic development is related to managerial skills, capital availability, cultural differences
and long-term sustainability. Furthermore, the chapter discusses various indicators of
economic development including national income, purchasing power parity and the human
development index.
4.8 Key Terms
⚫
Economic system
⚫
Centralized economic system
⚫
Market economy system
⚫
Mixed economic system
⚫
Gross domestic product (GDP)
⚫
Gross national product (GNP)
⚫
GDP per capita
⚫
Purchasing power parity
⚫
Human development index
⚫
Economic transition
4.9 Concept Review
1. What is a centralized economic system? Explain!
2. Explain the role of government in a market economy!
3. What are the characteristics of a market economy? Explain!
4. Explain the difference between a centralized economic system and a mixed economic
system!
5. Describe the characteristics of a centralized economic system!
6. What are the indicators used in measuring economic development? Explain!
7. Explain the shortcomings of the GDP indicator!
8. What is an economic transition?
9. What are the objectives of economic transition? Explain!
10. Explain the barriers to economic transition!
4.10 Questions
1. South Korea is one of the countries that is still strongly characterized by a centralized
economic system. Find out about some of its economic activities. What is the role of
the government?
2. Explain the role of the government in the Indonesian economy? Does the government
intervene in commercial activities? Explain!
3. Explain the benefits of an economic transition in the long run!
