Chapter1

Globalization

What Is Globalization?

• The world is moving away from self-contained national economies toward an interdependent,
integrated global economic system

• Globalization refers to the shift toward a more integrated and interdependent world economy

• Globalization of markets - refers to the merging of historically distinct and separate national
markets into one huge global marketplace.

• Citigroup credit cards, Coca-Cola soft drinks, Sony PlayStation video games, McDonald's
hamburgers, Starbucks coffee, and IKEA furniture are frequently held up as prototypical
examples that help to create a global market.

What Is The
Globalization of Markets?

• Historically distinct and separate national markets are merging

• It no longer makes sense to talk about the “Singapore market” or the “American market”

• Instead, there is the “global market”

– falling trade barriers make it easier to sell globally

– consumers’ tastes and preferences are converging on some global norm

– firms promote the trend by offering the same basic products worldwide

• International Business - pertains to all commercial transactions involving individuals,

companies, or governments, from different countries.

• Trade – the two-way flow of exports and imports of goods and services.

Emerging Economies

Emerging Economies – countries that are implementing more open trade and free-market policies.
(China, India, Brazil, Russia)

 Companies in emerging economies are redefining products without sacrificing quality to reduce
costs

 Ex: Tat Nano (no frills car); laptop computers from Lenovo
What Is Globalization of Production?

Globalization of production- refers to the sourcing of goods and services from locations around the
globe to take advantage of national differences in the cost and quality of factors of production (such as
labor, energy, land, and capital).

Example: Consider Boeing's 777, a commercial jet airliner. Eight Japanese suppliers make parts for the
fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three
suppliers in Italy manufacture wing flaps;

 In total, some 30 percent of the 777, by value, is built by foreign companies.

• Companies can therefore:

– lower their overall cost structure

– improve the quality or functionality of their product offering

Why Do We Need
Global Institutions?

• Institutions

– help manage, regulate, and police the global marketplace

– promote the establishment of multinational treaties to govern the global business

system

• Examples include:

– the General Agreement on Tariffs and Trade (GATT)

– the World Trade Organization (WTO)

– the International Monetary Fund (IMF)

– the World Bank

– the United Nations (UN)

What Do Global
Institutions Do?

• The World Trade Organization- (like its predecessor GATT)

– polices the world trading system

– makes sure that nation-states adhere to the rules laid down in trade treaties

– promotes lower barriers to trade and investment

• The International Monetary Fund- (founded in 1944) maintains order in the international
monetary system (188 member countries as of 2014) and is often seen as the lender of last
resort to nation-states whose economies are in turmoil and whose currencies are loosing value.
 • The World Bank (1944) promotes economic development and focuses on making low-interest
loans to cash-strapped governments.

• The United Nations (1945)

– maintains international peace and security

– develops friendly relations among nations

– cooperates in solving international problems and in promoting respect for human rights

– is a center for harmonizing the actions of nations

– G-20tx- established in 1999, it comprises the finance ministers and central bank
governors of the 19 largest economies in the world, plus representatives from the EU
and European Central Bank. It was originally established to formulate a coordinated
policy response to financial crises in developing nations.

What Is Driving Globalization?

• The decline in barriers to the free flow of goods, services, and capital that has occurred since the
end of World War II

– since 1950, average tariffs have fallen significantly

– countries have opened their markets to Foreign Direct Investment (FDI)

• International trade- occurs when a firm exports goods or services to consumers in another
country.

• Foreign direct investment (FDI)- occurs when a firm invests resources in business activities
outside its home country.

• Technological change

– microprocessors and telecommunications

– the Internet and World Wide Web

– transportation technology

– While modem communication and transportation technologies are ushering in the

"global village," significant national differences remain in culture, consumer
preferences, and business practices.

– A firm that ignores differences between countries does so at its peril.

What Does Globalization

Mean For Firms?

• Lower barriers to trade and investment mean firms can:

– view the world, rather than a single country, as their market

 – base production in the optimal location for that activity

• Technological change means:

– lower transportation costs - firms can disperse production to economical,

geographically separate locations

– lower information processing and communication costs - firms can create and manage
globally dispersed production systems

– low cost global communications networks - help create an electronic global

marketplace

– low-cost transportation - help create global markets

– global communication networks and global media - create a worldwide culture, and a
global market for consumer products

The Changing Demographics

Of The Global Economy

• There has been a drastic change in the demographics of the world economy in the last 30 years

• Four trends are important:

1. the changing World Output and World Trade picture

2. the Changing Foreign Direct Investment Picture

3. the Changing Nature of the Multinational Enterprise

4. the Changing World Order

How Has World Output And

World Trade Changed?

• In 1960, the United States accounted for over 40% of world economic activity

• By 2008, the United States accounted for just over 20% of world economic activity

• A similar trend occurred in other developed countries

• The share of world output accounted for by developing nations is rising and is expected to
account for more than 60% of world economic activity by 2020

• The Changing Demographics of World GDP and Trade

How Has Foreign Direct
Investment Changed Over Time?

• In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows

• Today, the United States accounts for less than one-fifth of worldwide FDI flows

• Other developed countries have followed a similar pattern

• In contrast, the share of FDI accounted for by developing countries has risen

• Developing countries, especially China, have also become popular destinations for FDI

• What Is A
Multinational Enterprise? A multinational enterprise (MNE) is any business that has
productive activities in two or more countries

• Since the 1960s, there has been a rise in non-U.S. multinationals, and a growth of mini-
multinationals

The Changing World Order

• Many former Communist nations in Europe and Asia are now committed to democratic politics
and free market economies

– so, there are new opportunities for international businesses

– but, there are signs of growing unrest in some countries like Russia

• China and Latin America are also moving toward greater free market reforms

– between 1983 and 2011, FDI in China increased from less than $2 billion to $100 billion
annually

– emergence of new companies increases global competition

How Will The Global Economy Of The 21st Century Look?

• The world is moving toward a more global economic system…

• But globalization is not inevitable

– there are signs of a retreat from liberal economic ideology in Russia

• Globalization brings risks:

– the financial crisis that swept through South East Asia in the late 1990s

– the recent financial crisis that started in the U.S. in 2008, and moved around the world

Is An Interdependent Global Economy A Good Thing?

• Supporters believe that increased trade and cross-border investment mean:

– lower prices for goods and services

– greater economic growth

– higher consumer income, and more jobs

• Critics worry that globalization will cause

– job losses

– environmental degradation

– the cultural imperialism of global media and MNEs

• Anti-globalization protesters now regularly show up at most major meetings of global

institutions

How Does Globalization Affect Jobs And Income?

• Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced
countries

• Supporters contend that the benefits of this trend outweigh the costs

– countries will specialize in what they do most efficiently and trade for other goods—and
all countries will benefit

How Does Globalization Affect Labor Policies And The Environment?

• Critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by
moving production to countries where such regulations do not exist, or are not enforced

• Supporters claim that tougher environmental and labor standards are associated with economic
progress

– as countries get richer from free trade, they implement tougher environmental and labor
regulations
How Does Globalization Affect National Sovereignty?

• Is today’s interdependent global economy shifting economic power away from national
governments toward supranational organizations like the WTO, the EU, and the UN?

• Critics argue that unelected bureaucrats have the power to impose policies on the
democratically elected governments of nation-states

• Supporters claim that the power of these organizations is limited to what nation-states agree to
grant

– the power of the organizations lies in their ability to get countries to agree to follow
certain actions

How Is Globalization
Affecting The World’s Poor?

• Is the gap between rich nations and poor nations is getting wider?

• Critics believe that if globalization was beneficial there should not be a divergence between rich
and poor nations

• Supporters claim that the best way for the poor nations to improve their situation is to:

– reduce barriers to trade and investment

– implement economic policies based on free market economies

– receive debt forgiveness for debts incurred under totalitarian regimes

How Does The Global Marketplace Affect Managers?

• Managing an international business differs from managing a domestic business because:

– countries are different

– the range of problems confronted in an international business is wider and the problems
more complex than those in a domestic business

– firms have to find ways to work within the limits imposed by government intervention in
the international trade and investment system

– international transactions involve converting money into different currencies

Chapter 2

The Evolution of International Business

What is International Business

International Business – all commercial transactions both private and public between nations of the
world.

The earliest and simplest form of international business is trade.

Trade – the two way flow of exports and imports of goods (merchandise trade) and services (service
trade).

Free trade - a situation where a government does not attempt to influence through quotas or duties
what its citizens can buy from another country or what they can produce and sell to another country

Benefits of Trade and Foreign Direct Investment

Benefits of International Trade to Consumers

 A greater amount of choice in the availability of goods and services

 Lower prices for goods and services consumed

 Higher living standards

Benefits of Trade and Foreign Direct Investment

Trade has influenced culture, shaped history, raised living standards, and expanded knowledge to
include ways new ways of thinking.

Foreign Direct Investment (FDI)– inflows of capital from abroad for investing in domestic plant and
equipment for the production of goods and or services as well as for buying domestic companies.

 FDI in a country brings funds and business culture from abroad, new well paying jobs, introduces
innovative technologies and enhances the skills of domestic workers.

 Outsourcing – the corporate practice of acquiring or producing quality goods or services abroad
at a lower cost there by eliminating domestic production.

Major Theories of International Trade

Mercantilism – a theory of international trade that supports the premise that a nation could only gain
from trade if it had a trade surplus----when the value of exports exceeds the value of imports.

• Practiced during the 1500–1750 period as Europe moved toward nationalism

 • Wealth—both personal and national—largely determined by the amount of precious
metal owned

• It suggests that it is in a country’s best interest to maintain a trade surplus -to export
more than it imports

• Mercantilism views trade as a zero-sum game - one in which a gain by one country
results in a loss by another

Mercantilists believed that for a nation to become wealthy, that nation must export as much as
possible, and import as little as possible.

Factors of production- endowments used to produce goods and services which consists of:

 Land (quantity, quality and mineral resources beneath it0

 Labor (quantity and skills)

 Capital (cost)

 Technology

Absolute Advantage – the ability of one country to produce a good or service more efficiently than
another.

 a country has an absolute advantage in the production of a product when it is more efficient
than any other country in producing it.

Comparative Advantage- the ability of one country that has an absolute advantage in the production of
two or more goods or services to produce one of them relatively more efficiently than the other.

 suggests that countries should specialize in the production of those goods they produce most
efficiently and buy goods that they produce less efficiently from other countries, even if this
means buying goods from other countries that they could produce more efficiently at home.

Hecksher-Ohlin (H-O) Theory – attributes the comparative advantage of a nation to its factor
endowments---the quantity and quality of factors of production that country owns--- and it predicts that
countries will export goods that make intensive use of those factors that are locally abundant, and
import goods that make intensive use of factors that are locally scarce.

 Australia is rich in minerals and thus has a global competitive advantage in the
production and exports of minerals, such as iron ore, uranium and coal.

 Factor price equalization theory

 When factors are allowed to move freely among trading nations, efficiency increases,
which leads to superior allocation of production of goods and services among countries.

 States that, given certain conditions and assumptions, free trade equalizes not only
product prices but also the prices of individual factors between the two countries
  Free mobility of factors will lead to efficient reallocation of resources (factors of
production) until price equilibrium is reached.

Porter’s Diamond Of Competitive Advantage - tried to explain why a nation achieves international
success in a particular industry and identified four attributes that promote or impede the creation of
competitive advantage. These four are:

1. Factor endowments - a nation’s position in factors of production necessary to compete in a

given industry

• can lead to competitive advantage

• can be either basic (natural resources, climate, location) or advanced (skilled labor,
infrastructure, technological know-how)

2. Demand conditions - the nature of home demand for the industry’s product or service

• influences the development of capabilities

• sophisticated and demanding customers pressure firms to be competitive

Porter’s……

3. Related and supporting industries - the presence or absence of supplier industries and related
industries that are internationally competitive

• can spill over and contribute to other industries

• successful industries tend to be grouped in clusters in countries

4. Firm strategy, structure, and rivalry - the conditions governing how companies are created,
organized, and managed, and the nature of domestic rivalry

• different management ideologies affect the development of national competitive

advantage

• vigorous domestic rivalry creates pressures to innovate, to improve quality, to reduce

costs, and to invest in upgrading advanced features

The Practice of Trade Policy

Trade Policy – all government actions that seek to alter the size of merchandise and/or service flows
from and to a country

Tariffs – taxes on imports also known as customs duties in some countries

Customs Duties – taxes on imports that are collected by a designated government agency responsible
for regulating imports

Ad Valorem Tariff – a tax levied as a constant percentage of the monetary value of one unit of the
imported good
Preferential Duties – an especially advantageous or low import tariff established by a nation for all or
some goods of certain countries and not applied to the same goods of other countries .

Generalized System of Preferences (GSP)- an agreement where a large number of developed countries
permit duty-free imports of a selected list of products that originate from specific countries.

 GSP could be based on colonial relationships or based upon helping developing

countries succeed in trade.

Export subsidy- a negative tariff or tax break aimed at boosting exports

Export Taxes- taxes meant to raise export cost and divert production for home consumption

Most Favored Nation (MFN)- an agreement among WTO countries in which any tariff concession
granted by one member to any other country will automatically be extended to all other countries of
WTO

The Practice of Trade Policy (Nontariff Barriers)

Import Quotas – are regulations that limit the amount or number of units of products that can be
imported to a country.

 When a quota is reached, that particular good can no longer be imported or purchased.

Voluntary Export Restraint – a nontariff barrier in which an efficient exporting nation agrees to limit
exports of a product to another country for a temporary period.

Domestic Content Provisions- countries require that a certain percentage of the value of the import be
domestically sourced. It is aimed to protect jobs in the home country

Current Practice of “Managed” Trade

Managed trade- refers to agreements, sometimes temporary, between countries that aim to achieve
certain trade outcomes for the countries involved. It has two rationales:

Socioeconomic Rationale

• Countertrade

• Export cartels

• Protection of infant industries

• Questionable labor practices

• Environmental considerations

• Health and safety

Geopolitical Rationale

• National security

• Protection of critical (strategic) industries

 • Embargoes

• 1. Socioeconomic Rationale. Socioeconomics explores the relative negative impact of free

trade upon society’s welfare, as well as government policy measures that are implemented to
minimize the negative outcomes to society. Several forms of managed trade are part of this
category:

A. Countertrade- an agreement in which an exporter of goods or services to another country, commits

to import goods or services of corresponding value from that country.

 The terms of export and import exchange are predetermined through negotiations.

 Countries participate in countertrade especially when they do not have adequate

amounts of foreign currencies to pay for imports, or they may not be capable of
producing goods of international quality.

B. Export Cartels- a group of countries that could effectively control export volume to keep their export
prices, revenues, and economic growth stable or high.

 Since business cycles cause fluctuations in export volume and prices, some of these countries
form export cartels to control prices and export revenues.

 For export cartels to be successful, all cartel members must agree not to cheat on the
agreement, substitutes for the good in question must not exist, and demand for a particular
product must be relatively inelastic.

C. Infant Industry Argument- temporary provision of protection to nascent industries that have good
prospects of becoming globally competitive in the medium term.

 At times when a country gets a “late start” in a particular industry where it has a potential to
become a world class competitor, short-term protection is justified.

 During this period, the firm or industry will strive to become globally competitive.

D. Questionable Labor Practices and Environmental Considerations. Developed countries often resort
to managed trade for reasons of unethical labor practices and violation of basic human rights.

 Developed countries may restrict imports from developing countries that implement
such policies. (Ex. The case of Nike in Vietnam)

 Environmental degradation brought about by slash and burn policies in the Brazilian
Amazon region to grow sugar cane for ethanol

E. Health and Safety. Every country has the right to protect the health and physical safety of its citizens
from contaminated imports.

 Food safety measures introduced to prevent the entry of harmful pests and diseases via
imported foods, animals and plants are justifiable means to protect human life and
physical health
  2. Geopolitical Rationale. The geopolitical objective is to sacrifice some economic efficiency for
the greater good of the country in terms of national security, protection of critical industries,
and international commerce. It consists of the following:

A. National Security. For national security reasons, U.S. exports of certain types of high-technology
defense equipment are generally restricted to allies and friendly countries.

 Because the need to receive government approval prevents the affected firms from
openly competing and increasing sales, these firms receive special treatment and
protection.

B. Strategic Industries. Some countries provide protection to strategic industries that have a significant
employment impact on certain sectors of an economy.

C. Embargoes. When trade sanctions are imposed upon a country for political reasons, an embargo is in
force, and trade will be restricted with that country.

 Embargoes, which may not be universally enforced, are meant to punish a country for
perceived unacceptable international behavior. (Ex. Trade embargoes on Iran, Cuba)
Chapter 3
Regional Economic Integration

What Is Regional Economic Integration?

• Regional integration

– Implementation of a multitude of economic and/or political steps by member states to

increase their global competitiveness, including preferential trade access

• Spatial transformations

– The process of allowing efficient geographic distribution of business activities within and
among countries

• The Trans-Pacific Partnership (TPP) was the centerpiece of President Barack Obama’s strategic
pivot to Asia. Before President Donald J. Trump withdrew the United States in 2017, the TPP was
set to become the world’s largest free trade deal, covering 40 percent of the global economy.

Stages of Regional Integration

1. Free Trade Area – an area in which two or more countries agree to eliminate all barriers to
trade, such as tariffs, quotas and nontariff barriers like border restrictions, while at the same
time keeping their own external tariffs against non members.

2. Custom Union – a group of free-trade member countries that have adopted a common external
tariff with non member countries

3. 3. Common Market or Single Market – a market formed when member countries of a customs
union remove all barriers to allow the movement of capital and labor within the customs union.

4. 4. Economic and Monetary Union- a union formed when members of a common market agree
to implement common social programs and coordinated macroeconomic policies that would
lead to the creation of a single regional currency and a regional apex central bank.

5. 5. Political Union – created when member countries of an economic and monetary union work
closely with one another to arrive at common defense and foreign policies and behave as a
single country.

Benefits of Regional Integration

• Creating a larger pool of consumers with growing incomes and similar culture, tastes, and social
values

• Encouraging economies of scale in production, increasing the region’s level of global

competitiveness, and enhancing economic growth through investment flows

• Freeing the flow of capital, labor, and technology to the most productive areas in the region

• Increasing cooperation, peace, and security among countries in the region

 • Encouraging member states to enhance their social welfare to match that of the most
progressive states

Cons of Regional Integration

• Undermining the most-favored-nation status rule, an essential principle of the WTO

• Imposing uniform laws and regulations that at times do not take into account national economic,
cultural, and social differences

• Eliminating jobs and increasing unemployment in protected industries

• Losing sovereignty, national independence, and identity

• Reducing the powers of the national government

• Increasing the problems of illegal drugs and terrorism due to the ease of cross-border labor
movement

The Economic Geography of Regional Integration

• Economic geography

– The study of principles that govern the efficient spatial allocation of economic resources
and the resulting consequences (i.e. market size, location, openness to trade)

The Economic Geography of Regional Integration

Start Small. Regional integration should have clear goals and initially address a narrow, well-defined
area of cooperation in which the costs and benefits are easily defined.

Think Global. Regional integration should not create unconnected or isolated countries. Instead, it
should help countries gain access to world markets.

Compensate the Least Fortunate. Regional integration will lead to a concentration of economic activity
in fewer places with increased efficiency and competitiveness. It also means that some regions will gain
more than others.

Market access is essential for economic growth, and proximity to world markets is an asset for just-in-
time production, exports of perishable goods, and tradable services

Sizeable countries that are far from large world markets can benefit by attracting industrial activities
because of their large local market.

International integration is most difficult for countries in regions that are divided, far from world
markets, and lack the economic size of a large local economy. Regional integration is paramount for
their growth

Economists are concerned that as a result of these negotiations, the prospects of creating a truly open
global economic system that benefits all countries may recede.
The European Union (EU)

• EU is most highly evolved regional integration:

– EU grew out of European Coal and Steel Community (ECSC).

– The Treaty of Rome in 1957 established the European Economic Community (EEC).

– The Maastricht Treaty in 1992 created the EU as a full economic union with free
movement of labor among its member countries.

– The euro was adopted as a common currency in 1992.

– Economic coordination and fiscal stability is challenged by the sovereign debt crisis of
some members.

The North American Free-Trade

Agreement (NAFTA)

• Canada, United States, and Mexico reached a comprehensive trade agreement in 1994.

• Major NAFTA objectives:

– Trade expansion through the phased elimination of all trade barriers

– Protection of intellectual property rights

– Creation of institutions to address unfair trade practices, trade disputes, environmental

protection, worker’s rights, competition policies, and implementation of NAFTA rules
and regulations

• NAFTA is a comprehensive free-trade agreement among Canada, the United States, and Mexico.
It addresses issues ranging from protection of workers’ rights and the environment to phased
reduction of tariff and non-tariff barriers by 2009

Association of South East Asian Nations (ASEAN)

The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok,
Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of
ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand.

• ASEAN’s objectives:

– To accelerate economic growth, social progress, and cultural development in the region

– To promote peace and stability through the rule of law in relationships among countries
in the region

• Bases for ASEAN:

– ASEAN Security Community (ASC)

– ASEAN Economic Community

 – ASEAN Sociocultural Community

• Bases for ASEAN:

• ASEAN Security Community (ASC). ASC’s objective is to ensure that countries in the region live
in peace with one another. Since ASEAN’s establishment, tension has never escalated into
armed confrontation among ASEAN members.

• ASEAN Economic Community. The ASEAN Economic Community calls for the establishment of a
single market, but it does not call for the free movement of labor across member countries.

• ASEAN Sociocultural Community. The goal is to ensure that the ASEAN workforce is well
prepared to benefit from the economic integration.

Regional Integration in Latin America

• The Treaty of Montevideo in 1960 created the Latin American Free Trade Association (LAFTA).

• Bolivia, Chile, Colombia, Ecuador, and Peru created the Andean Group in 1969.

• Treaty of Asunción in 1991 among Argentina, Brazil, Paraguay, and Uruguay, created the
Southern Cone Common Market, or MERCOSUR (Mercado Común del Sur).

• DR-CAFTA (Dominican Republic and Central American Free Trade Agreement) became effective
in 2005.

• Mercosur (in Spanish), or Mercosul (in Portuguese), officially Southern Common Market,[6] is a
South American trade bloc established by the Treaty of Asunción in 1991 and Protocol of Ouro
Preto in 1994. Its full members are Argentina, Brazil, Paraguay and Uruguay. Venezuela is a full
member but has been suspended since December 1, 2016. Associate countries are Bolivia, Chile,
Colombia, Ecuador, Guyana, Peru and Suriname.[7] Observer countries are New Zealand and
Mexico.
Chapter 5
The Cultural Environment

Defining Culture and Its Characteristics

• Culture is learned behavior; a way of life for one group of people living in a single, related, and
independent community

• Characteristics of culture

– Culture is not inherited.

– It is nearly impossible to change an entire country’s culture.

– A global firm must ascertain the level of importance of various aspects of culture in the
foreign markets it serves and recognize these aspects when doing business overseas.

– Companies’ operations need to recognize and adjust to the cultural environment in the
countries the global company serves.

Acculturation- the ability of a firm to adjust to a culture different

from its own.

Elements of Culture: Language

• Verbal communication

– A message’s actual contents intended to be conveyed to the receiver (i.e., what the
message says)

• Nonverbal communication

– Tone of voice, gestures, eye contact, body positions, facial grimaces, and other body
language that accompanies verbal communication

• Backward translation

– Translating a message from English into a foreign language, then translating it back into
English to check for accuracy

• Religion’s effects

– Business operations

– Manufacturing and marketing of products

– Observance of holidays

– Working days and working hours

• Values
 – Basic beliefs or philosophies that are pervasive in a society

• Attitudes

– Feelings or opinions either favorable or unfavorable – about objects, people, or events.

• Manners and customs

– The usual way a society does things

• Material culture

– A direct result of technology; best demonstrated by economic, social, financial, and

marketing infrastructures of a society

• Aesthetics

– Color, form, and music are the major components of aesthetics─what is perceived as
taste and beauty by a society.

Elements of Culture: Education

• The level of education of people in foreign countries is a major factor in explaining economic
growth.

• Level of education must be such that host-country personnel can work or be trained for a variety
of jobs.

• Some countries emphasize different educational specialties:

– South Korea and Japan stress education in sciences and engineering.

– Russia is strong in mathematics and computer programming.

– India emphasizes engineering and software development.

• Some countries have tiered system of higher education with prestigious colleges and
universities.

Elements of Culture: Social Institutions

• Social institutions

– The way people in a society relate to one another within group settings (Ex. Families,
churches, workplaces)

• Reference groups

– Groups that are important to individuals

• Social stratification

– The extent to which groups at the top of the social pyramid exert control over others at
lower levels of the pyramid
Clustering Countries and Regions by Culture

Hofstede’s Research – Dutch researcher Geert Hofstede pioneered into cultures with a study focusing
upon IBM employees in 64 countries and the findings led him to identify clusters and regions according
to five (5) cultural levels or dimensions:

• Individualism vs. Collectivism – the worth of an individual versus the worth of a group.

• Individualism -the degree to which people prefer to act as individuals rather than a member of
groups. North American culture is individualistic in orientation. Democracy, individual
achievement and personal capabilities are highly valued

• Collectivism- A tight social framework in which people expect others in groups of which they are
a part, to look after them and protect them. (Ex. Israeli kibbutzim and Japanese culture).

• Power Distance – the level of egalitarianism (equality) in a society. High power distance
countries are those where superiors and elders are treated with deference and respect, in
contrast to low power distance countries where relationships are more equal.

• High Power distance: extremely unequal power distribution between those with status/wealth
and those without status/wealth. Countries with High Power Distance: Malaysia, Philippines,
Mexico (High power distance results to companies having a centralized structure and autocratic
leadership).

• Titles are used, formality is the rule and authority is seldom by- passed

• Low Power Distance: relatively equal power between those with status/wealth and those
without status/wealth. Countries with Low Power Distance: Austria, Denmark and Israel

• Masculine vs. Feminine: the extent to which a society values traditionally masculine attributes
(assertiveness and competitiveness) versus traditionally feminine ones (modesty and caring for
others).

• Uncertainty Avoidance: the extent to which societies tolerate risk or are risk averse.

• Time Orientation: the extent to which a society emphasizes short-run or long-run time horizons.

Time Orientation (con’t)

• Long-term Orientation- A national culture attribute that emphasizes the future, thrift, and
persistence. They value investment in the future and are prepared to sacrifice short term profits.

• Short-term Orientation- A national culture attribute that emphasizes the present and the here
and now and values respect for tradition, and fulfilling social obligations

• Trompenaars’s Cultural Dimensions: Building on the work of Hofstede, Fons Trompenaars

added a number of cultural variables to the theory:

• Universalism vs. Particularism- refers to the importance of rules versus relationships in a

society.
 • Neutral vs. Emotional- involves the extent to which persons within a society emotionally
express themselves

• Specific vs. Diffuse- refers to the compartmentalization of roles.

• Achievement vs. Ascription- refers to how rewards in a society are handed out (based on
performance vs. based on one’s place in society)

The GLOBE Project- The Global Leadership and Organizational Behavior Effectiveness research program
is an on-going cross cultural investigation of leadership and national culture.

 Involved surveying thousands of business executives from 61 countries about nine cultural
dimensions

 It added dimensions such as Humane Orientation- the degree to which society rewards
individuals for being generous and kind to others; and Performance Orientation – the degree to
which society encourages and rewards group members for performance improvement and
excellence.

Gannon’s Cultural Metaphors

• Gauge a specific culture by using an image (“cultural metaphor” - which is any activity,
phenomenon, or institution with which members of a given culture emotionally and/or
cognitively identify.) that depicts how people in a specific culture think and behave. Examples:

– French wine—Purity; classification; composition; compatibility; maturation

– German symphony—Orchestra; conductors; performance; society; education and

politics
 – Chinese family altar

– American football

– Japanese Garden

Sources of Cultural Information

• The U.S. Department of Commerce Country Commercial Guide provides cultural information for
133 countries.

• The Economist’s Intelligence Unit contains the same type of information on 180 countries in its
Country Reports.

• Culture Grams, from Brigham Young University’s Center for International and Area Studies,
describes customs existing in 174 countries.

• Craigshead’s International Business, Travel, and Relocation Guide to 84 Countries gives cultural
information for these nations.

• Price Waterhouse Coopers Doing Business in 118 Countries contains information about 118
countries.

Cultural Dimensions of Doing Business

in Japan

• Upon meeting a Japanese executive, a slight bow and handshake are appropriate.

• Business card etiquette is important.

– Information should be in English on one side of the card.

– The other side should have the same information in Japanese.

• It is not appropriate to look directly into the eyes of your Japanese hosts.

• It is important for your Japanese hosts to know your title and rank.

• Japanese business has a group orientation, rather than an individualistic one.

• Japanese executives expect foreign business representatives to arrive prepared and to have
decision-making authority.

• New potential business partners must have been referred to Japanese business representatives
through a third party.

Cultural Dimensions of Doing Business

in Korea

• Elders are respected for their knowledge and wisdom.

• “Yangban” refers to the noble class’s culture of honor, reputation, and dignity (similar to the
concept of gravitas in Western cultures).
 • “Inwa” involves harmony among unequals: loyalty is owed to parents and authority figures, yet
superiors are responsible for the well-being of their subordinates.

• A personal relationship needs to occur before business matters can be discussed with
foreigners.

Cultural Dimensions of Doing Business

in China

• Guanxi

– A philosophy denoting friendships among unequals (as between subordinates and

superiors) and the unlimited exchanges of favors; it is utilitarian and not based on
sentiment, emotions, or a group orientation

– Exchanges are often uneven, an advantage for weaker member in the guanxi
relationship.

– Persons of low rank may be powerful and influential due to guanxi relationships with
superiors.

– Foreigners who want to conduct business in China may need to seek out lower-level
persons and obtain their favor in order to gain access to more powerful superiors who
are decision makers.

Cultural Dimensions of Doing Business

in Arab Countries

• Avoid sitting so that the sole of one’s shoe is shown.

• The left hand is viewed as “unclean.”

• Good posture is imperative.

• Foreign business representatives should not inquire about the wives of Arab business
representatives.

• Do not overly praise the possessions of Arab hosts, as this could create a perception that you
expect your hosts to give them to you.

• Arab business representatives will probably be reluctant to do business with women.

• If a woman is accepted, modest dress is appropriate.

• Arab business representatives may frequently divert from the topic initially discussed, then
return to it.

Cultural Dimensions of Doing Business

in Latin America

• Potential customers will want to develop a personal relationship before doing business with
foreign executives.
 • Latin Americans are more flexible about time than are North Americans.

• Latin Americans are not as immersed in their work as the business people in the United States.

FACTS

• In Turkey, it’s rude to cross your arms while facing someone.

• In many Middle Eastern countries, you shouldn’t eat or shake hands with the left hand because
it is considered unclean.

• In India, you should never pat anyone’s head. It’s where one’s soul is kept.

• In Brazil, your meeting may not start on time because punctuality isn’t important to the culture.

• Always use titles like Doctor, Frau, or Herr.

• Always provide food and drinks for your birthday.

• Don’t remove your jacket until your host does.

• Wear conservative business attire, anything else is considered sloppy.

• Never jaywalk.

• Always keep your hands on the table when eating.

The Importance of Culture for Managing

and Marketing in Overseas Markets

• Management styles can give rise to challenges or lead to success.

– U.S. companies have management styles that frequently conflict with the management
styles preferred in other cultures.

• When developing new products, management styles must be considered along with many other
aspects of marketing.

– Products that are wildly successful in home-country markets may need to be modified
for an international market.

• Advertising campaigns must be carefully tailored to local cultures.

• Culture has an impact on communication styles.

– The use of jargon is usually inappropriate, as it greatly increases the risk of

misunderstanding

1. EXHIBIT 5.4 U.S.-BASED BUSINESS JARGON Or IDIOMS THAT WOULD NOT BE

UNDERSTOOD BY FOREIGN BUSINESS REPRESENTATIVES“Flying by the seat of my pants.”
(Going along with things; making decisions as you go)

2. “On the same wave length.” (Having the same ideas and opinions about something)

3. “Shotgun approach.” (An approach in which the person is indiscriminate and haphazard)
4. “Run it up the flag pole.” (To present an idea tentatively and see whether it receives a
favorable reaction.)

5. “100 k.”

6. “Belly up.” (You're out of business)

7. “Overview.”

8. “If it ain’t broke, don’t fix it.” (Leave something alone; avoid attempting to correct, fix, or
improve what is already sufficient)

9. “Let’s throw it on the wall and see if it sticks. (Meant as a test to see if something was done or
ready or validated.)

10. “Let’s see how it plays out.”

11. “It ain’t over until the fat lady sings.” (Nothing is irreversible until the final act is played out)

12. “Reinvent the wheel.” (Waste a great deal of time or effort in creating something that already
exists)

MCDONALD’S:
OVER 100 CULTURES SERVED

• Attracts top-level college graduates to be trained for management spots.

• Only 8 of every 1,000 applicants actually makes it into the program!

• Malaysia: Bubur Ayam McD – Chicken strips in porridge with onions, ginger, and shallots.

• Egypt: Mcarabia – Grilled chicken with tehina sauces, lettuce, tomato and onion on Arabic
bread.

• Japan: Teritama – Teriyaki burger topped with an egg.

• Germany: Want a beer with your burger? You can order one in the German stores.

• Israel: Operates using Kosher kitchens.

LOST in TRANSLATION
Advertisements Gone Wrong

A global marketing strategy can be very difficult to implement. Look at some of the problems
these well known companies encountered in the global market.

1. Pepsico attempted a Chinese translation of “Come Alive, You’re in the Pepsi Generation” that
read to Chinese customers as “Pepsi Brings Your Ancestors Back from the Dead.”

2. Coors Brewing Company put its slogan “Turn it Loose” into Spanish and found it translated as
“Suffer from Diarrhea”.

3. Perdue Chicken used the slogan “It Takes a Strong Man to Make a Chicken Tender” which was
interpreted in Spanish as “It Takes an Aroused Man to make a Chicken Affectionate.”
4. KFC’s patented slogan “Finger-Lickin’ Good” was understood in Japanese as “Bite Your Fingers
Off”

5. Braniff Airlines’ slogan "Fly in leather” translated in Spanish as "Fly naked.”

6. Siri, Apple’s digital assistant on iPhone, is a common slang term for “butt” in Japanese.

7. In Italy, Schweppes Tonic Water was mistaken as Schweppes Toilet Water.

8. Nokia’s line of Lumia phones is Spanish for “prostitute.”