International Business

By Alex Martínez
Chapter 2

Differences
in Culture & National
Differences in Political
Economy
Learning objectives:
- Know what is meant by the culture of society.

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

- Identify the business and economic implications of

differences in culture.

- Understand how differences in social culture influence

values in the workplace.
 How Do Cultural Differences
Affect International Business?
 Understanding and adapting to the local cultural
is important for international companies
 cross-cultural literacy - an understanding of how
cultural differences across and within nations can
affect the way in which business is practiced
cross-cultural literacy is important for business
success (playing local rules – Guanxi)
 A relationship may exist between culture and the
costs of doing business in a country or region.
 MNEs can be agents of cultural change
 McDonald’s (Engines of cultural change)

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How Do Cultural Differences Affect International Business ?

4-5
How Do Cultural Differences Affect International Business ?

4-6
How can you adapt your company to
cultural differences?

4-7
 What Is Culture?
 Culture - a system of values and norms that are
shared among a group of people and that when
taken together constitute a design for living
where (Any differences between US and Europe?)
 values are abstract ideas about what a group believes to
be good, right, and desirable (India (Froma Case) ≠ UE)
 norms are the social rules and guidelines that prescribe
appropriate behavior in particular situations
 Society - a group of people who share a common
set of values and norms

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 What Are Values And Norms?
 Values provide the context within which a
society’s norms are established and justified and
form the bedrock (Foundations) of a culture
 Norms include
folkways - the routine conventions of everyday life
(attitude towards time); (German case vs Other
countries: Turkey)
Mores/manners - norms that are seen as central to the
functioning of a society and to its social life (drinking
alcohol, sexual behavior).

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What Are Values And Norms?

Which is the main value of the

American society ?

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 How Are Culture, Society,
And The Nation-State Related?
 The relationship between a society and a
nation state is not strictly one-to-one
 Nation-states are political creations
can contain one or more cultures
 A culture can embrace several nations
 And a nation can embrace different
cultures ( USA).

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 What Determines Culture?
 The values and norms of a culture evolve
over time
 Determinants include
religion
political and economic philosophies
education
language
social structure

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What Determines Culture?
Determinants of Culture

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 What Is A Social Structure?
 Social structure - a society’s basic social
organization
 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

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What Is A Social Structure?

4-15
What Is A Social Structure?

What do you think is better in

business, a group social
structure or an individual social
structure ?

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 How Are Individuals
And Groups Different?
 A group is an association of two or more
people 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
individuals are involved in families, work
groups, social groups, recreational groups,
etc.
 Societies place different values on groups

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 How Are Individuals
And Groups Different?
 In Western societies, there is a focus on the
individual (USA)
 individual achievement is common
 dynamism of the U.S. economy
 high level of entrepreneurship
 But, creates a lack of company loyalty and
failure to gain company specific knowledge
 competition between individuals in a company instead
of than team building (too much internal competition)
 less ability to develop a strong network of contacts
within a firm (suppliers)

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 How Are Individuals
And Groups Different?
 In many Asian societies, the group is the primary
unit of social organization (Japan Case).
discourages job switching between firms
encourages lifetime employment systems
leads to cooperation in solving business
problems ( High work commitment)
 But, might also suppress individual
creativity and initiative

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What Is A Social Structure?

What do you think is better in

business, stratified or not
stratified social structure?

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 What Is Social Stratification?
 All societies are stratified on a
hierarchical basis into social categories,
or social strata
 individuals are born into a particular stratum
 Must consider
1. mobility between strata
2. the significance placed on social strata in
business contexts

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 What Is Social Stratification?
1. Social mobility - the extent to which individuals can
move out of the strata into which they are born
 caste system - closed system of stratification in which
social position is determined by the family into which a
person is born
 change is usually not possible during an individual's
lifetime (India Case)
 class system - form of open social stratification
 position a person has by birth can be changed
through achievement or luck (UK vs USA)
 Successful individuals from humble origins are highly
respected in American society.(Roberto Goizueta)
 Social mobility – easier in Europe or USA ?

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 What Is Social Stratification?
2. The significance attached to social strata
in business contacts
 class consciousness - a condition where people tend
to perceive themselves in terms of their class
background, and this shapes their relationships with
others (Where there is lack of social mobility – UK)

 an antagonistic relationship between management

and labor raises the cost of production in countries
with significant class differences. Why?

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 How Do Religious And
Ethical Systems Differ?
 Religion - a system of shared beliefs and rituals that are
concerned with the realm of the sacred. (Set of moral
principles). ( Ethical system = product of religion).
 Four religions dominate society
1. Christianity
2. Islam
3. Hinduism
4. Buddhism
5. Confucianism is also important in influencing
behavior and culture in many parts of Asia

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 How Do Religious And
Ethical Systems Differ?

There is always a relationship between religious and ethical

systems and business practice in a society.

Barro & McCleary study shows that higher religious beliefs

stimulate economic growth.

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How Do Religious And
Ethical Systems Differ?
World Religions

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 How Do Religious And
Ethical Systems Differ?
 Ethical systems - a set of moral
principles, or values, that are used to
guide and shape behavior

 Religion and ethics are often closely

intertwined
 ex. Christian or Islamic ethics

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 What Is Christianity?
 Christianity
the world’s largest religion
found throughout Europe, the Americas, and
other countries settled by Europeans
 Economic Implications of Christiany. the
Protestant work ethic (Max Weber, 1804)
hard work, wealth creation, and frugality is the
driving force of capitalism ( South Europe vs North
Europe)
 Individual freedom – Not hierarchies.

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Whose is this Summer House?

4-29
What Is Christianity?

4-30
 What Is Islam?
 Islam
 the world’s second largest religion dating to AD 610
 there is only one true omnipotent God
 an all-embracing way of life that governs one's being
 associated in the Western media with militants,
terrorists, and violent upheavals
but, in fact teaches peace, justice, and tolerance
 fundamentalists have gained political power and
blame the West for many social problems
 people do not own property, but only act as stewards
for God
 supportive of business, but the way business is
practiced is prescribed

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 What Is Hinduism?
 Hinduism
practiced primarily on the Indian sub-continent
focuses on the importance of achieving
spiritual growth and development, which may
require material and physical self-denial
Hindus are valued by their spiritual rather than
material achievements
promotion and adding new responsibilities
may not be important, or may be infeasible
due to the employee's caste

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 What Is Buddhism?
 Buddhism
has about 350 millions followers
stresses spiritual growth and the afterlife,
rather than achievement while in this world
does not emphasize wealth creation
entrepreneurial behavior is not stressed
does not support the caste system, individuals
do have some mobility and can work with
individuals from different classes

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 What Is Confucianism?
 Confucianism
ideology practiced mainly in China
teaches the importance of attaining personal
salvation through right action
high morals, ethical conduct, and loyalty to
others are stressed
three key teachings of Confucianism - loyalty,
reciprocal obligations, and honesty - may all lead
to a lowering of the cost of doing business in
Confucian societies (Be careful with your
liabilities)

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 What Is The Role
Of Language In Culture?
 Language - the spoken and unspoken
(nonverbal communication such as facial
expressions, personal space, and hand
gestures ) means of communication
countries with more than one language often
have more than one culture
Canada, Belgium, Spain

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 What Is The Role
Of Language In Culture?
 Language is one of the defining characteristics
of culture
 Chinese is the mother tongue of the largest number of
people
 English is the most widely spoken language in the
world
 English is also becoming the language of international
business
 but, knowledge of the local language is still beneficial,
and in some cases, critical for business success
 failing to understand the nonverbal cues of another
culture can lead to communication failure

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 What Is The Role
Of Education In Culture?
 Formal education is the medium through which
individuals learn many of the language,
conceptual, and mathematical skills that are
indispensable in a modern society
 important in determining a nation’s competitive
advantage
Japan’s postwar success can be linked to its
excellent education system
 general education levels can be a good index for the
kinds of products that might sell in a country
ex. impact of literacy rates

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 How Does Culture
Impact The Workplace?
 Management processes and practices
must be adapted to culturally-determined
work-related values
 Geert Hofstede studied culture using
data collected from 1967 to 1973 for
100,000 employees of IBM
 Hofstede identified four dimensions that
summarized different cultures

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 How Does Culture
Impact The Workplace?
 Hofstede’s dimensions of culture:
1. Power distance - how a society deals with the
fact that people are unequal in physical and
intellectual capabilities
2. Uncertainty avoidance – how different cultures
deal with the uncertainty.
3. Individualism versus collectivism – dimension
focused on the relationship between the
individual and his or her fellows.
4. Masculinity versus femininity -the relationship
between gender and work roles

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 How Does Culture
Impact The Workplace?
Work-Related Values for 20 Countries

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 How Does Culture
Impact The Workplace?
 Hofstede later expanded added a fifth
dimension called Confucian dynamism or
long-term orientation
captures attitudes toward time, persistence,
ordering by status, protection of face, respect
for tradition, and reciprocation of gifts and
favors
Japan, Hong Kong, and Thailand scored high on
this dimension
the U.S. and Canada scored low

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 Was Hofstede Right?
 Hofstede’s work has been criticized for several
reasons
 made the assumption there is a one-to-one
relationship between culture and the nation-state
 study may have been culturally bound
 used IBM as sole source of information
 culture is not static – it evolves
 But, it is a starting point for understanding how
cultures differ, and the implications of those
differences for managers

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 Does Culture Change?
 Culture evolves over time
changes in value systems can be slow and
painful for a society
 Social turmoil - an inevitable outcome of
cultural change
as countries become economically stronger,
cultural change is particularly common
economic progress encourages a shift from
collectivism to individualism
globalization also brings cultural change

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 What Do Cultural Differences
Mean For Managers?
1. It is important to develop cross-cultural literacy
 companies that are ill informed about the practices
of another culture are unlikely to succeed in that
culture
 To avoid being ill-informed
 consider hiring local citizens
 transfer executives to foreign locations on a regular
basis
 Managers must also guard against
ethnocentrism
 a belief in the superiority of one's own culture

4-45
 What Do Cultural Differences
Mean For Managers?
2. There is a connection between culture
and national competitive advantage
 suggests which countries are likely to
produce the most viable competitors
 has implications for the choice of countries
in which to locate production facilities and do
business

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Learning objectives:
- Understand how the political, economical and legal
systems of countries differ.

- Be able to explain what determines the level of economic

development of a nation (company).

- Discuss the broad, general political and economic changes

taking place worldwide.
 What Is A Political Economy?
 Political economy of a nation - how the
political, economic, and legal systems of a
country are interdependent

they interact and influence each other.

they affect the level of economic well-being in
the nation.

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 What Is A Political System?
 Political system - the system of
government in a nation
 Assessed according to
the degree to which the country emphasizes
collectivism as opposed to individualism
the degree to which the country is democratic
or totalitarian

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What Is A Political System?

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 What Is Collectivism?
 Collectivism stresses the primacy of
collective goals over individual goals
can be traced to the Greek philosopher, Plato
(427-347 BC); “The Republic: property should
be owned in common”
 Today, collectivism is equated with
socialists (Karl Marx 1818-1883)
advocate state ownership of the basic means
of production, distribution, and exchange
manage to benefit society as a whole, rather
than individual capitalists

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 How Does Modern-Day
Socialism Look?
 In the early 20th century, socialism split into
1. Communism – socialism can only be achieved
through violent revolution and totalitarian
dictatorship
 in retreat worldwide by mid-1990s
2. Social democrats – socialism is achieved
through democratic means
 retreating as many countries move toward free
market economies
 state-owned enterprises have been privatized

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 What Is Individualism?
 Individualism refers to philosophy that an
individual should have freedom in his own
economic and political pursuits
 can be traced to Greek philosopher, Aristotle (384-
322 BC)
individual diversity and private ownership are
desirable
 individual economic and political freedoms are the
ground rules on which a society should be based
 “ private property is more highly productive than
communal property” ???
 implies democratic political systems and free market
economies

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 What Is Democracy?
 Democracy - a political system in which
government is by the people, exercised either
directly or through elected representatives
 usually associated with individualism
 pure democracy is based on the belief that citizens
should be directly involved in decision making
 most modern democratic states practice
representative democracy where citizens periodically
elect individuals to represent them

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 What Is Democracy?

Are & ruling a democracy ?

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 What Is Democracy?
 Democracy – Should include:

 1.- an individual´s right to freedom of expression,

opinion and organization.
 2.- free media.
 3.- regular elections, universal suffrage.
 4.- Separate system powers ( independent justice).
 5.- No political police/army.

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 What Is Totalitarianism?
 Totalitarianism - form of government in
which one person or political party
exercises absolute control over all
spheres of human life and prohibits
opposing political parties

4-57
 What Is The Link Between Political
Ideology and Economic Systems?
 Political ideology and economic systems
are connected

 countries that stress individual goals are

likely to have market based economies

 in countries where state-ownership is

common, collective goals are dominant

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What Is An Economic System?
 There are three types of economic
systems
1. Market economies - all productive
activities are privately owned and
production is determined by the
interaction of supply and demand
 government encourages free and fair
competition between private producers

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What Is An Economic System?
2. Command economies - government plans the
goods and services that a country produces, the
quantity that is produced, and the prices as which
they are sold
 all businesses are state-owned, and governments
allocate resources for “the good of society”
 because there is little incentive to control costs
and be efficient, command economies tend to
stagnate
 Can it works this economical system ? When ?
How?

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What Is An Economic System?
3. Mixed economies - certain sectors of the
economy are left to private ownership
and free market mechanisms while other
sectors have significant state ownership
and government planning

 governments tend to own firms that are

considered important to national security

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What Is An Economic System?

Which kind of economy is the US?

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What Is An Economic System?

http://www.youtube.com/watch?v=NqLwKvQ
RPS8&list=PLC6B2BBDC3E4535EB

4-63
 What Is A Legal System?

 Legal system - the rules that regulate behavior

along with the processes by which the laws are
enforced and through which redress for
grievances is obtained
 the system in a country is influenced by the
prevailing political system
 Legal systems are important for business
because they
 define how business transactions are executed
 identify the rights and obligations of parties involved
in business transactions

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 What Are The
Different Legal Systems?
 There are three types of legal systems

1. Common law – ?
2. Civic law - ?
3. Theocratic law - ?

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 What Are The
Different Legal Systems?
 There are three types of legal systems

1. Common law - based on tradition, precedent,

and custom (judgment is the important)
2. Civic law - based on detailed set of laws
organized into codes (law is the important)
3. Theocratic law - law is based on religious
teachings (Which religion?)

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 How Are Contracts Enforced
In Different Legal Systems?
 Contract - document that specifies the conditions
under which an exchange is to occur and details
the rights and obligations of the parties involved
 Contract law is the body of law that governs
contract enforcement
 under a common law system, contracts tend to be
very detailed with all contingencies spelled out
 under a civil law system, contracts tend to be much
shorter and less specific because many issues are
already covered in the civil code (Example: NDA).

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 How Are Property Rights
And Corruption Related?

 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

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 How Are Property Rights
And Corruption Related?
 Property rights can be violated through
1. Private action – theft, piracy, blackmail
2. Public action - legally - ex. excessive
taxation or illegally - ex. bribes or
blackmailing (Repsol – YPF)
 high levels of corruption reduce foreign
direct investment, the level of international
trade, and the economic growth rate in a
country.

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 How Are Property Rights
And Corruption Related?
 The Foreign Corrupt Practices Act makes it
illegal for U.S. companies to bribe foreign
government officials to obtain or maintain
business over which that foreign official has
authority
 facilitating or expediting payments to secure or
expedite routine government action are permitted

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Which Countries Are
Most Corrupt?
Rankings of Corruption by Country 2010

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4-72
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 How Can Intellectual
Property Be Protected?
 Intellectual property - property that is the product of
intellectual activity
 Can be protected using
1. Patents – exclusive rights for a defined period to the
manufacture, use, or sale of that invention. (Product
and Process).
2. Copyrights – the exclusive legal rights of authors,
composers, playwrights, artists, and publishers to
publish and disperse their work as they see fit
3. Trademarks – design and names by which merchants
or manufacturers designate and differentiate their
products

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Trademark Case
Shangai Xing Ba Ke Coffee (Xing=Star)

4-75
Why is so important to protect
the Intellectual
Property ?

4-76
 To provide an incentive for
people to search for novel
ways of doing things, and they
reward creativity.

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How Can Managers Determine A
Market’s Overall Attractiveness?

4-78
 The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
 Other things being equal, more attractive countries
have democratic political institutions, market based
economies, and strong legal systems that protect
property rights and limit corruption

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 What Determines A Country’s Level
Of Economic Development?
 Gross national income (GNI) per person
measures the total annual income received
by residents of a nation
 Japan, Sweden, Switzerland, and the U.S. have
high GNI
 China and India have low GNI
 GNI can be misleading because it does not
consider differences in the cost of living
 need to adjust GNI figures using purchasing
power parity (PPP)
How important is this issue for business?

4-80
 What Determines A Country’s Level
Of Economic Development?
 Official figures can also be misleading
because they do not account for black
economy transactions
 In addition, GNI and PPP data are static
and do not consider economic growth
rates
 So, while China and India are currently
categorized as being poor they are growing
more rapidly than many developed nations
and are expected to become among the
largest economies in the world

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How Do Countries
Compare On GNI?
Economic Data for Select Countries

4-82
 How Does Political Economy
Influence Economic Progress?
 Innovation and entrepreneurship are the engines
of long-run economic growth
 innovation includes new products, new processes,
new organizations, new management practices, and
new strategies
 entrepreneurs commercialize innovative new products
and processes
 Innovation and entrepreneurship help increase
economic activity by creating new markets and
products that did not previously exist
 innovation in production and business processes
result in more productive labor and capital further
boosting economic growth rates

4-83
 How Does Political Economy
Influence Economic Progress?
 Innovation and entrepreneurship require a
market economy
 there is little incentive to develop new innovations in
planned economies because the state owns all
means production and therefore, the gains
 There is a strong relationship between economic
freedom and economic growth
 the six countries with the highest ratings of
economic freedom from 1975 to 1995 were also
among the highest for economic growth
 Hong Kong, Switzerland, Singapore, the United States,
Canada, and Germany

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4-85
 How Does Political Economy
Influence Economic Progress?
 Innovation and entrepreneurship require
strong property rights
without strong property rights, individuals and
businesses risk having their innovations and
potential profits stolen
 Economist Hernando de Soto claims that
inadequate property protection in many
developing nations limits economic growth

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 How Does Geography Influence
Economic Development?
 Countries with favorable geography are more likely
to engage in trade, and so, be more open to
market-based economic systems, and the
economic growth they promote

 Jeffrey Sachs studied economic growth rates

between 1965 and 1990 and found that
 landlocked countries grew more slowly than coastal
economies
 being totally landlocked reduced a country’s growth rate
by 0.7% per year
 tropical countries grew more slowly than countries in
temperate zones

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How Does Education Influence
Economic Development?
 Countries that invest in education have
higher growth rates because the workforce
is more productive (South Korea)

countries in Southeast Asia have offset their

geographical disadvantages by investing in
education
Indonesia, Malaysia, and Singapore

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 How Is The Political
Economy Changing?
 Since the late 1980s, two trends have
emerged
1. Democratic revolution (late 1980s and early
1990s)
 democratically elected governments replaced
totalitarian regimes
 more committed to free market capitalism
2. A move away from centrally planned and
mixed economies
 more countries have shifted toward the market-
based model

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 How Is The Political
Economy Changing?
 Trend 1: Democracy has spread over the last
two decades
 many totalitarian regimes failed to deliver economic
progress to the vast bulk of their populations
 new information and communication technologies
have broken down the ability of the state to control
access to uncensored information
 economic advances of the last 25 years have led to
increasingly prosperous middle and working classes
who have pushed for democratic reforms (will it
happen this in China?).

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 How Free Are
Countries Politically?

Any surprise in next chart ?

4-91
 How Free Are
Countries Politically?
Political Freedom in 2010

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 How Is The Political
Economy Changing?
 Author Francis Fukuyama argues that the new
world order will be characterized by democratic
regimes and free market capitalism
 But, political scientist Samuel Huntington
argues that while many societies are
modernizing they are not becoming more
Western
 predicts a world split into different civilizations
 these civilizations will be in conflict with each
other

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 How Is The Political
Economy Changing?
 Trend 2: The spread of market-based
systems
 more countries have moved away from
centrally planned and mixed economies
toward the market-based model
 Command and mixed economies failed
to deliver the sustained economic growth
achieved in market-based countries

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 How Free Are
Countries Economically?
Economic Freedom in 2010

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 What Is The Nature Of
Economic Transformation?
 The shift toward a market-based system
involves
deregulation – removing legal restrictions to
the free play of markets, the establishment of
private enterprises, and the manner in which
private enterprises operate
privatization - transfers the ownership of state
property into the hands of private investors
the creation of a legal system to safeguard
property rights

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 What Are The Implications Of Political
Economy Differences For Managers?
 Countries with democratic regimes, market
based economic policies, and strong property
rights protection are more likely to have higher
sustained rates of economic growth
 these markets are more attractive to international
businesses
 the benefits, costs, and risks of doing business in a
country are a function of the country’s political,
economic, and legal systems

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 What Are The Implications Of Political
Economy Differences For Managers?
 The benefits of doing business in a country are a
function of
 the market’s size
 the purchasing power of its consumers
 their likely future wealth
 By identifying and investing early in potential
future economic stars, firms may be able to gain
first mover advantages (advantages that accrue
to early entrants into a market) and establish
loyalty and experience in a country
 China

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 What Are The Implications Of Political
Economy Differences For Managers?
 The costs of doing business in a country
are a function of its
political system
is it necessary to pay bribes to get market access?
economic level
are the necessary supporting business and
infrastructure in place?
legal system
it can be more costly to do business in countries
with dramatically different product, workplace, and
pollution standards, or where there is poor legal
protection for property rights

4-99
 What Are The Implications Of Political
Economy Differences For Managers?
 The risks of doing business in a country are a
function of
 Political risk - the likelihood that political forces will
cause drastic changes in a country's business
environment that adversely affects the profit and
other goals of a business enterprise
 Economic risk - the likelihood that economic
mismanagement will cause drastic changes in a
country's business environment that adversely
affects the profit and other goals of a business
enterprise
 Legal risk - the likelihood that a trading partner will
opportunistically break a contract or expropriate
property rights

4-100
How Can Managers Determine A
Market’s Overall Attractiveness?
 The overall attractiveness of a country as a
potential market and/or investment site for an
international business depends on balancing the
benefits, costs, and risks associated with doing
business in that country
 Other things being equal, the benefit-cost-risk
trade-off is likely to be most favorable in
politically stable developed and developing
nations that have free market systems and no
dramatic upsurge in either inflation rates or
private sector debt

4-101
How Can Managers Determine A
Market’s Overall Attractiveness?
Country Attractiveness

4-102
https://www.youtube.com/watch?v=SHyIW-vUhO8

46 seconds – 21 minutes 24 seconds