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INTERNATIONAL BUSINESS

The Dimensions of InternationalBusiness


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Copyright 1999 by Harcourt Brace & Company

All rights reserved

Lecture Overview

What is International Business

Relevance of the Study of International Business

Evolution of International Business

Nature of International Business Reasons for going international

Stages of Internationalization

International Business Approaches

Advantages & Problems of International Business Major Decisions in International Business


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All rights reserved

Text

International BusinessText & Cases

Francis Cherunilam

International BusinessText & CasesRakesh Mohan Joshi

- Charles Hill

-Dr. R. Chandran


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All rights reserved

What is International Business?

International Business consists of transactions takingplace across national borders for the purpose ofsatisfying the objectives of individuals andorganizations.

International transactions export-import trade, licensing,franchising, contract manufacturing, management contracts,turnkey projects, foreign direct investments, joint-ventures,Alliances.

International Business also includes a growing service industryin areas such as Information technology, transportation, tourism,advertising, construction, retailing, wholesaling, and masscommunication.


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The Need to studyInternational Business?


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Evolution of International Business

Cross-country trade has been taking place since pre-historic times.

Post world war-II, the growth of international &multinational companies took place

International trade to International marketing

International marketing to International Business

TT to SWIFT settlement system

Movement of Capital overtaken Trade


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All rights reserved

Nature of International Business

Variations in political, social, cultural andeconomic factors in countries

Accurate and timely information requirement

Larger size of Business Geographical market segmentation

Increased potential for business because ofbroader market perspective.

Wider scope for business activities

Inter-country comparative study


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Reasons for Going International

Profit Advantage

Growth opportunities

Domestic market constraints

Competition

Government policies & regulations Political stability vs. Instability

Availability of technology & Managerial Competence

High cost of transportation

Nearness to raw material

Availability of Quality Human resource at low cost Liberalization & Globalization

Increasing market share


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All rights reserved

Stages of Internationalization

Stage-1 : Domestic Company

Stage 2 : International Company

Stage 3 : Multinational CompanyStage 4 : Global Company

Stage 5 : Transnational Company


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Ethnocentric approach Sales of domestic products in int. markets.

Domestic orientation

International Market secondary

Firm seeks markets similar to domestic.

Little adaptation of product or marketing mix.

Usually produced domestically

Polycentric approach Recognition of difference in overseas markets

Decentralization of operations

Country by country basis

Local marketing input and control


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Regiocentric approach Different regions as different markets

Strategies formulated for a region

Geocentric approach Develop product and marketing strategies for world

markets.

Standardize as far as possible, adapt where necessary.

Economies of scale transfer of knowledge and

technology, global image, and better competitiveposition.

The world is viewed as the market


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Stages of domestic to global evolution

Management

emphasis

Stage one

Domestic

Stage two

International

Stage three

Multinational

Stage four Global

Focus Domestic Ethnocentric Polycentric Geocentric

Marketing

strategy

Domestic Extension Adaptation Extension

Management

style

Domestic Centralized top

down

Decentralized

bottom up

Integrated

Manufacturing

stance

Mainly domestic Mainly domestic Host country Lowest cost

worldwide

Investment

policy

Domestic Domestic used

worldwide

Mainly in each host

country

Cross subsidization

Performance

evaluation

Domestic market

share

Against home

country market

share

Each host country

market share

Worldwide


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Advantages

Higher living standards Increased socio-economic welfare

Wider market

Reduced effects of business cycles

Reduced risks

Large scale economies

Potential untapped markets

Provides opportunities for challenges to domestic market

Division of labor and specialization

Economic growth of the world

Optimum and proper utilization of World resources

Cultural transformations Knitting the world into a closely interactive traditional villages


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Problems

Political factors Huge foreign indebtedness

Exchange instability

Entry requirements

Tariff, quotas and trade barriers

Corruption

Bureaucratic practices of government

Technological pirating

High cost

Cultural sensitivities


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Major decisions in International Business

Deciding Whether to Go Global

Deciding Which Markets to Enter Before going abroad, the company should try to define its international

marketing objectives and policies. What volume of foreign sales is desired?

How many countries to market in?

What types of countries to enter?

Choose possible countries and rank based on market size, market growth, costof doing business, competitive advantage, and risk level

How to enter (Market entry Strategies) ExportingIndirect, Direct

Joint Venturing Licensing, Franchising, Management contracting, contract manufacturing, joint

ownership, collaboration Foreign direct investmentRepresentative Office, Branch, Creating a Subsidiary,

Merger & Acquisition

Foreign Institutional Investments Yen now $ Carry Trade, Portfolioinvestments, ECBs,ADRs,GDRs, FCCB, FCEB etc


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All rights reserved

Major decisions in International Business

Deciding on the Global Marketing Mix Standardized Marketing Mix:

Selling largely the same products and using the same marketingapproaches worldwide.

Adapted Marketing Mix: Producer adjusts the marketing mix elements to each target market,

bearing more costs but hoping for a larger market share and return.

Deciding on the Global Marketing Organization Organize an export department

Create international divisions Geographical organizations

World product groups

International subsidiaries

Become a global organization


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Direction of World Trade

Worlds Merchandise Exports/Imports

Worlds Commercial Services Exports/Imports

Indias Foreign Trade Exports/Imports-Services

Balance of Trade

Balance of Payment

Constraints in Indias Foreign Trade

Terms of TradeIncoterms/Payment terms

Concept of Nostro/Vostro Accounts


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Copyright @ Oxford University Press International Business R. M. Joshi 18

Composition of World Trade

Commercial

Services

19.4%

Merchandise

80.6%


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All rights reserved

Important Trade Items

Exports Share(%)

Engineering Goods 20.91

Petrolieum procuts 15.64

Gems & Jewellery 12.36

Ready/Man Made Garments. 13.63

Electronics 11.38

Pharma & fine chemical 8.43Plastics, Coal & Minerals 10.00


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Major Trading Partners

Exports Share (%)

US 13.02

UAE 9.66

China 6.78

Spore & UK 8.50 Imports

China 11.3

Saudi Arabia 8.1

UAE 5.62 US 5.51

Iran 4.58


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GLOBALIZATION

AND

INTERNATIONAL

BUSINESS

Chapter 1


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Globalization of Business:

A Historical Perspective

In the initial years of human history, there were hardly

any formal barriers, such as tariffs or non-tariff

restrictions, for the movement of goods or visa

requirements for the people. The concept of

globalization can be traced back to the phenomenon of anation-state.


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Concept of Globalization

The process of integration and convergence of

economic, financial, cultural and political

systems across the world.


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Globalization: A Holistic Approach

Economic Globalization

The increasing integration ofnational economic systems through

growth in international trade, investment and capital flows.

Financial Globalization

The liberalization of capital movements and deregulations,

especially of financial services that led to a spurt in cross-border

capital flows.
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Cultural GlobalizationConvergence ofcultures across the world.

Political Globalization

Convergence of political systems and processes around

the world.


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Dimensions of Economic Globalization

Globalization of production

Globalization of markets

Globalization of competition

Globalization of technology

Globalization of corporations and industries


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Factors Influencing Globalization

f l b l


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Movers of Globalization

Economic liberalization

Technological breakthrough

Multilateral institutions

International economic integrations

Move towards free marketing systems

Rising research & development costs

Global expansion of business operations

Advents in logistics management

Emergence of the global customer segment


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Factors Restraining Globalization

Regulatory controls

Emerging trade barriers

Cultural factors

Nationalism

War and civil disturbances

Management myopia


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Reasons for Support of

Globalization

Maximization of Economic Efficiencies

Enhancing Trade

Increased Cross-border Capital Movement

Improves Efficiency of Local Firms

Increases Consumer Welfare


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Criticism of Globalization

Developed versus Developing Countries: Unequal Players inGlobalization:

Widening Gap between the Rich and the Poor

Wipes out Domestic Industry

Leads to Unemployment and Mass Lay-offs

Brings in Balance of Payments Problems

Increased Volatility of Markets

Diminishing Power of Nation States

Loss of Cultural Identity

Shift of Power to Multinationals


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Response Strategies to Globalization Forces for

Emerging Market Companies

Defender

Extender

Dodger (dishonest person)

Contender


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Concept of International Business

International Trade: Exports of goods and services by a

firm to a foreign-based buyer (importer)

International Marketing: It focuses on the firm-level

marketing practices across the border, including market

identification and targeting, entry mode selection, and

marketing mix and strategic decisions to compete in

international markets.


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International Investments: Cross-border transfer of

resources to carry out business activities.

International Management: Application of managementconcepts and techniques in a cross-country environment and

adaptation to different social-cultural, economic, legal,

political and technological environments.


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International Business: All those business activities which

involves cross border transactions of goods, services, and

resources between two or more nations

Global Business: Conduct of business activities in several

countries using a highly co-ordinated and single strategy

across the world.


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Reasons for International Business

Expansion

Market-Seeking Motives

Marketing opportunities due to life cycles

Uniqueness of product or service

Economic Motives Profitability

Achieving economies of scale

Spreading R&D costs

Strategic Motives

Growth

Risk spread


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Differences Between Domestic and

International Business

Economic Environment

Socio-Cultural Environment

Legal Environment

Political Environment

Competition

Infrastructure

Technology

Managing Business in the


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Managing Business in the

Globalization Era

Global strategies adopted by business enterprises may

include:

Global conception of markets

Multi-regional integration strategy

Changes in external organisation of multinational firms

Changes in internal organisation


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Foreign Direct

Investment


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Learning Objectives

To explain the concept of foreign direct

investment (FDI)

To discuss various types of FDI

To develop a conceptual understanding of the

theories of international investment

To understand policy framework to promote FDI

To discuss patterns of FDI


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Significance of FDI

International trade and foreign direct investment

(FDI) are the two most important international

economic activities integrating the world economy.With the increase in mobility of factors of

production across countries, FDI has become an

integral part of firms strategy to expandinternational business.


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Concept of FDI

In simple terms, FDI means acquiring ownership in

an overseas business entity.

Foreign direct investment occurs when an investor

based in one country (the home country) acquires an

asset in another country (the host country) with the

intent to manage it.


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Foreign Portfolio Investment (FPI)

An investment by individuals, firms, or a public

body in foreign financial instruments, such as

foreign stocks, government bonds, etc.

In FPI, the equity stake in the foreign business entity

is not significant enough to exert any management

control.


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Raison detre for FDI

Cost of transportation

Liability of foreignness


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Benefits of FDI to Host Countries

Access to superior technology

Increased competition

Increase in domestic investment

Bridging host countries foreign exchange gaps


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Negative Impacts of FDI

Market Monopoly

Crowding-out and unemployment effects

Technology dependence Profit outflow

Corruption

National security


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Factors Affecting Selection of FDI

Destinations Cost of capital input

Wage rate

Taxation regime

Cost of inputs

Cost of logistics

Market demand

f


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Types of FDI

On the Basis of Direction of Investment

Inward FDI: Foreign firms taking control over domestic

assets.

Outward FDI: Domestic firms investing overseas and

taking control over foreign assets.


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On the Basis of Types of Activity

Horizontal FDI: Overseas investment in a similar activity as carried out in

the home country.

Vertical FDI: Overseas investment so as either to provide inputs for the

firms domestic operations or sell its domestic output abroad.

Backward Vertical FDI: Direct investment aimed at providing inputs for a

firms production processes.

Forward Vertical FDI: Direct investment overseas aimed to sell the output

of a firms domestic production processes.

Conglomerate FDI: Direct investment overseas aimed at manufacturing

products not manufactured by the firm in the home country.


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On the Basis of Investment Objectives

Resource-seeking FDI: Direct investment

overseas so as to gain privileged access toresources vis--vis competitor

Market-seeking FDI: Direct investmentoverseas with sizeable market and growth in

order to protect existing markets, counteractcompetitors, and to preclude rivals fromgaining new markets

Efficiency-seeking FDI: Direct investmentoverseas so as to improve efficiency and orseek advantages of process specialization orproduct rationalization


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On the Basis of Entry Modes

Greenfield Investments: Overseas investment to

create new facilities or expansion of existing

facilities

Merger & Acquisitions (M&As):Transfer of existing

assets of a domestic firm to a foreign firm that leads

to mergers and acquisitions.


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On the Basis of Sector

Industrial FDI: Investment by a foreign firm in the

manufacturing sector.

Non-industrial FDI: Investment by a foreign firm in

services sector.


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On the Basis of Strategic Modes

Export replacement

FDI is made as a substitute for exports in response to

trade barriers of the host country, such as import

restrictions and prohibitive tariff structure.


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Export Platforms

In order to minimize a firms cost of production and

distribution, FDI is made so as to utilize the target

country to serve the global markets.


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Domestic Substitution

FDI aimed to obtain cheap inputs to support home

production.


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Theories of International Investment


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Capital Arbitrage Theory

FDI takes place due to differences in the rates of

return on capital across countries.

M k t I f ti Th


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Market Imperfection Theory

To access countries with market imperfections, such as

government policies, including import restrictions and quotas,

incentives on exports, tax regimes, and governments

participation in trade etc, FDI is often employed as a strategic

tool for international business expansion.

I t li ti Th


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Internalization Theory

When the know-how, technology, skills, or trade secrets

available with a firm are crucial to the firms

competitive advantage, it needs to protect such

knowledge base within the organization. Therefore, it

expands internationally by way of FDI.


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Monopolistic Advantage Theory

An MNE is believed to possess monopolistic advantage,

which enables it to operate overseas more profitably and

compete with local firms.


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International Product Life Cycle Theory

The theory provides an explanation as to why the

production locations are shifted across countries and

suggests that an MNE prefers those countries for

investment as manufacturing locations that have market

size large enough to support local production.


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Eclectic Theory (OLI Paradigm)

It is a blend of macro-economic theory of

international trade (L) and micro-economic

theories of the firm (O&I).


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The Ownership (O) Factor

Specific advantages possessed by a firm enabling it

to reap profits from overseas investments.

Th L ati (L) Fa t


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The Location (L) Factor

Country specific advantage contributing to relative

attractiveness of an investment destination

Th I t li ti (I) F t


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The Internalization (I) Factor

Retaining firms know-how within the organization

rather than transferring it to an unrelated firm

overseas.


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Policy Framework to Promote FDI

Attracting FDI has become a key part of national

development strategies for most countries. Such

investments are often viewed to augment domestic

capital, employment, and productivity, leading to

economic growth.


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Major Regulatory Measures & Incentives to

Promote FDI

Screening, admission, and establishment

Fiscal incentives

Financial incentives

Other incentives, such as subsidized service fees,

subsidized designated infrastructure

Performance requirements

P i f FDI i I di


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Promotion of FDI in IndiaInstitutional framework

The Department of Industrial Policy and Promotion

plays an active role in investment promotion through

dissemination of information on investment climate and

opportunities in India. It also advises potential investorsabout investment policies, procedures, and opportunities

and helps resolve problems faced by foreign investors.


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Policy Framework


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FDI Prohibited

Retail trading (Except single brand product retailing)

Atomic energy

Lottery business

Gambling and betting sector Business of chit fund and nidhi company

Plantation except tea

Trading in Transferable Development Rights (TDR)

Activity/ sector not opened to private sector investment


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FDI up to 24 per cent allowed

Manufacture of items reserved for small sector upto24 per cent


FM broadcastingUp-linking a news and current affairs TV channels

Defence production

Insurance

Publishing of news papers and periodicals

FDI upto 49 per cent allowed


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FDI upto 49 per cent allowed

BroadcastingSetting up hardware facilitiesCable network:Direct to Home (DTH):

Scheduled Air transport services Commodity exchanges

Credit information companies Refining in case of PSUs Asset reconstruction companies Aviations


Single brand product retailing



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ISP with gateways, radio-paging, and end-to-

end bandwidth

Establishment and operation of satellites

Private sector bankingTelecommunications services

Non-scheduled Air transport services, ground

handling services

Foreign direct investment up to 100 per cent allowedwithprior government approval subject to conditions:


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Trading: Courier services

Tea sector, including tea plantation: ISP without gateway, infrastructure provider, electronic

mail, and voice mail: Mining and mineral separation of titanium bearing

minerals and ores, its value addition

Cigars and cigarettes manufacture Airports- existing projects with prior governmentapproval beyond 74 per cent

Up-linking of a non-news and current affairs TVchannels

Investing companies in infrastructure/ services sector

(except telecom sector) Publishing of scientific magazines, specialty journals

and periodicals

Foreign Direct Investment allowed up to 100 per centunder automatic route


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under automatic route

Agriculture sector

Industrial sectors

Mining Manufacturing activities

Petroleum sector

Power

Special Economic Zones and Free Trade Warehousing Zones

Industrial Parks

Construction development projects

Services Civil aviation

Non banking finance companies

Trading

In sectors/ activities not listed above, FDI is permittedupto 100 per cent through automatic route

Patterns of FDI


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Patterns ofFDI

Flow of FDI: The amount of FDI undertaken over a giventime period (for example, a year). If the investment is madeby a foreign firm in a country, known as inflow of FDIwhereas investment made overseas is termed as outflow ofFDI.

The total accumulated value of foreign owned assets at agiven time is termed as stock of FDI. FDI comprises of equitycapital and re-invested earnings as per IMF norms. Besides,capacity expansion financed by firms of foreign origin as well

as short-term or long-term loans that form part of originalpackages are also treated as FDI.

Components of FDI Flows


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Components of FDI Flows

FDI is mainly financed by TNCs through

Equity capital

Intra-company loans

Reinvested earnings

FDI Performance Indices


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FDI Performance Indices

For carrying out cross-country comparison of FDI

performance and FDI potential, the UNCTADs FDI

performance and potential indices serve as useful

tools

Inward FDI Performance Index: Measure of the


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extent to which a host economy receives inward FDI

relative to its economy size.

Outward FDI performance index: The ratio of a

countrys share in global FDI outflows to its share in

the world GDP.

FDI Trends in India


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FDI Trends in India

Sector-wise Composition of FDIInflows


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InflowsFigure : Sectorwise Composition of FDI Inflows*

Me tallurgica l Indus tries

3.7%Auto mo bile Indus try

4.0%

Po wer

4.1%Housing & Real Estate

5.8%

P etro leum & Natural Gas

3.1%

Chemicals

2.3%

others

30.6%

Telecommunications

6.3%

Construction Activities

6.7%

Co mputer Software &

Hardware

11.5%

Services Sector

22.0%

*Figures for April 2000 to May 2008

Source: Fact sheet on FDI, Department of Industrial Policy and Promotion,Government of India, New Delhi, 2008

Country wise FDI Inflows


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y f

Figure: Country-wise Composition of FDI Inflows*

others

24.6%

UAE

1.1%

Japan

3.1%

Netherlands

4.0%

Germany

2.3%

Cyprus

1.7%

France

1.4%

UK

6.5%

Singapore

7.1%

USA

7.6%

Mauritius

40.6%

*Figures for April 2000 to May 2008

Source: Fact sheet on FDI, Department of Industrial Policy and Promotion, Governmentof India, New Delhi, 2008

F i Di I i R il S


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Foreign Direct Investment in Retail Sector

India is the second largest market in the world after

China and it fascinates global retailers to invest. It has

opened up FDI upto 51% in retail trade to single brand

products from Feb, 2006.


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POLITICAL AND LEGAL

ENVIRONMENT

LEARNING OBJECTIVES


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LEARNING OBJECTIVES To explain the significance of the political and legal

environment in international business

To discuss various forms of political systems

To explicate different types of legal systems

To elaborate principles of international law

To elucidate risks in international business

To explain methods of measuring and managing risks

Significance of understanding


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An international firm needs to operate in countries having

diverse political and legal frameworks that, at times, conflict

with its home country. Value judgments made from the

perspective of the home country considerably hinders

objective decision-making in the diverse international

scenario. Therefore, a thorough conceptual understanding of

political and legal environments affecting international

business operations is needed.

International Political & Legal Environment

INTERNATIONAL POLITICAL ENVIRONMENT


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INTERNATIONAL POLITICAL ENVIRONMENT

The political environment of the country of operationbecomes increasingly important for an internationalizing firm

as it moves from exports to foreign direct investment (FDI).

Cordial political relations between the firms home country

and the host countries have a direct favourable impact on its

foreign operations. As a firm expands internationally and

begins to operate in multiple countries, the political and legal

issues become increasingly complex.


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Political Ideology

A set of ideas or beliefs that people hold about their

political regime and its institutions about their

position and role in it.

Types of government: economic systems


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Communism:Form of government based on the concept of a classless

society where all the major factors of production are owned by thegovernment and shared by all the people rather than profit-seeking

enterprises, for the benefit of the society.

Socialism: A form of government where basic and heavy industries areoperated by the government so as to ensure social welfare objectives

wherein small businesses may be privately owned.

Capitalism: An economic system which provides complete freedom ofprivate ownership of productive resources and industries.

Types of government: political systems


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Democracy: Government by the people where citizens are

directly involved in decision making.

Totalitarianism: Dictatorial form of centralized

government, usually in the hands of a dictator who

regulates every aspect of the state. Various forms of

totalitarianism include: Secular totalitarianism

Fascist totalitarianism

Authoritarian totalitarianism

Communist totalitarianism Theocratic totalitarianism

Types of government: structure


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Parliamentary: The government consults its citizensfrom time to time and the parliament has power to

formulate and execute laws.

Commonwealth Countries: Countries representingconstitutional monarchies which recognize Queen

Elizabeth II as head of the sate over an independentgovernment.


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Monarchies: Countries that have monarchs as the

heads of government. There may be either

constitutional or absolute monarchies.

Theocracy: The rule of god where the civil leader is

believed to have a direct personal connection with god.


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Trade Embargos: Prohibiting trade completely with a

country so as to economically isolate it and apply

political pressure on its government.

Trade Sanctions: Imposing selective coercive

measures to restrict trade from a country .

Bureaucracy: Form of administration based on


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hierarchical structure governed by a set of written rules

and established procedures. The term is often used todescribe inefficient and obstructive administrative

process and red-tapism.

Terrorism: Systematic use of violence to create fear in

general public with an objective to achieve a political

goal or convey a political message.

INTERNATIONAL LEGAL ENVIRONMENT


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INTERNATIONAL LEGAL ENVIRONMENT

Firms operating internationally face major challenges in

conforming to different laws, regulations, and legal systems

in different countries. International mangers need to

understand the types of legal systems followed in the

countries of their operations before entering into legal

contracts.

Judicial Independence and Efficiency


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A fair judicial system also reduces political risks

in overseas markets. The level of judicial

independence and efficiency differs widely

among countries.


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International Legal Systems


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Common Law: Law based on traditions, past practices,

and legal precedents set by the courts through interpretation

of statutes, legal legislations, and past rulings. It depends less

on written statutes and codes.

Common law originated from England and it is followed in

most of the former British colonies, such as India, United

Kingdom, the United States, Canada, Australia, and New

Zealand.


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Civil Law: Law based on a comprehensive set of

written statutes. It is derived from the Roman law

and is followed in most of continental Europe, Japan,and Latin America.

Socialistic Law: Socialist law traditionally advocates


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Socialistic Law: Socialist law traditionally advocates

ownership of most property by the state or state-owned public

enterprises, prohibiting free entry to foreign firms.

This law is derived from the Marxist socialist system and

continues to influence legal framework in former communist

countries, such as the CIS, China, North Korea, Vietnam, and

Cuba.


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Theocratic Law: The legal system based on religious

doctrine, precepts, and beliefs. For instance, the

Hebrew law and the Islamic law are derived from

religious doctrines and their scholarly

interpretations.


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Principles of International Law

International law is less coherent compared to

domestic law since it embodies a multiplicity of

treaties and conventions besides the laws of

individual countries.

Principles of International Law


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Principle of Sovereignty

International Jurisdiction

Nationality Principle

Territoriality Principle

Protective Principle

Doctrine of Comity

Act of State Doctrine

Treatment and Right of Aliens

Forum for Hearing and Setting Disputes

United Nations Commission on International


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United Nations Commission on InternationalTrade Law (UNCITRAL)

Established in 1966, UNCITRAL aims to reduce and

harmonize and unify the laws of international trade.


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RISKS IN INTERNATIONAL BUSINESS


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Commercial Risks:

Risks such as non-acceptance of goods, non-

payment or insolvency of the importer.


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Economic Risks:

Restrictions imposed on business activities on the

grounds of national security, conserving human

and natural resources, scarcity of foreign

exchange, to curb unfair trade practices and to

provide protection to domestic industries.

P li i l Ri k


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Political Risks:

Possibility of political decisions, events, or

conditions in an overseas market or country

that adversely affect the internationalbusiness that include confiscation,

expropriation, nationalisation, and

domestication.

BERI Index


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It provides risk forecasts for about 50 countries

throughout the world and a broad assessment of

the countrys business climate on 15 economic,

political, and financial factors on a scale from

zero to four.

EIUs Risk Indices


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It monitors operational risks for 150 countries on a scale of 0

to 100. The overall score includes an aggregate of ten

categories of risks, such as security, political stability,government effectiveness, legal and regulatory, macro-

economic, foreign trade and payments, financial, tax policy,

labour markets, and infrastructure.

Global Political Risk Index (GPRI)


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GPRI is a comparative index to monitor political

risks in 24 emerging markets, including India, China,

Brazil, Russia, and South Africa. It serves as an

early warning system to anticipate critical trends

and provides a measure for the countrys capacity to

withstand political, economic, security-related, and

social shocks.


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Failed States Index

The Failed States Index is a useful tool to carry out the cross-

country comparison of the worlds weakest states. It uses 12

social, economic, political, and military indicators and ranks

on a scale of 0120 to assess about 177 states in order of their

vulnerability to violent internal conflict and societal

deterioration.

Managing Risks in International Business


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Strategic Management of Political Risks

Employing locals Sharing ownership

Increasing perceived economic benefits to the host country

Follow political neutrality

Assuring social responsibilityAdapting to local environment

Insurance and Guarantees

Export Credit Guarantee Corporation

MIGAs guarantees against non-commercial (political)risks

C 7


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INTERNATIONALCULTURAL

ENVIRONMENT

Learning Objectives


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Learning Objectives To understand the significance of culture in international

business decisions

To elucidate the concept of culture and its constituents

To explain comparisons of cross-cultural behaviour

To discuss cultural orientation in international business

To appreciate emic versus etic dilemma and its

operationalization

Significance of Culture


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Significance of Culture

A firm operating internationally comes across a wide

range of diverse cultural environments, which

significantly influence international business

decisions. Managers operating internationally need

to appreciate the differences among cultural

behaviours of their business partners and consumers

across various countries.

Self Reference Criterion (SRC)


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Self Reference Criterion (SRC)

An unconscious reference to ones own cultural values,

experiences, and knowledge as a basis for decision-making.

SRC significantly influences ability of international managers

to objectively evaluate environmental factors and make

business decision.

Approach to Eliminate SRCStep 1:Define the business problem or goal in home country


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Step 1:Define the business problem or goal in home-country

traits, habits, or norms.

Step 2:Define the business problem or goal in foreigncountry cultural traits, habits, or norms. Make no value

judgments.

Step 3:Isolate the SRC influence in the problem and examine it

carefully to see how it complicates the problem.Step 4:Redefine the problem without the SRC influence and solve

for the optimum business goal situation.

The Concept of Culture


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The Concept of Culture

Culture is the way of life of people, including their attitudes,

values, beliefs, arts, sciences, modes of perception, and habits

of thought and activity. Cultiral differences across the

countries significantly influence business decisions.

Constituents of Culture


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A variety of learned traits that influence human behaviour can

contribute to the culture of a social group, the major

constituents, include:

value system

norms

aesthetics

customs and traditions

language

religion

Value System


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Shared assumptions of a group about how things

ought to be or abstract ideas about what a group

believes to be good, desirable, or right.

N


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Norms

Guidelines or social rules that prescribe

appropriate behaviour in a given situation.

Aesthetics


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Ideas and perceptions that a cultural group upholds

in terms of beauty and good taste. It includes areas

related to music, dance, painting, drama,architecture, etc.

Traditions and Customs


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Traditions: The elements of culture passed down

from generation to generation.

Customs: An established pattern of behaviour within

a society.

Language


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A systematic means of communicating ideas or

feelings by the use of conventionalized signs,

gestures, marks, or especially articulate vocal

sounds.

Religion


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Religious beliefs significantly influence businessdecision making.

Religion encompasses three distinct elements:

Explanation: God seen as a firstcause behind the creation ofthe universe

A standard organization: Consisting of places of worships and

rituals

Moral rules of good behaviour

Comparison of Cross Cultural Behavior


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p f

An appreciation of cultural differences facilitates

international managers to conceptualize and implement

business strategies in view of cultural sensitivities in

various countries.

Hofstedes Cultural Classification


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f f

Power distance

The extent to which less powerful members of an

institution accept that power is distributed unequally.

High Power Distance CountriesHigh social inequalities tolerated with differences in


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High social inequalities tolerated with differences in

power and income distribution

Organizational structures are hierarchical based an

inequality among superiors and subordinates

Decision making is centralized

Juniors blindly follow the orders of their superiors

For instance, Malaysia, Mexico, Arab countries, India

etc.

Low Power Distance Countries


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Superiors and subordinates consider each other

equal

Organizations are relatively flatter

Decision making is decentralized

For instance,Austria, Sweden, Great Britain, the US

etc.

Individualism vs. Collectivism


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Individualism:

The tendency of people to look after themselves and their

immediate family.

Strong work ethics

Promotions based on merit

Involvement of employees is calculative

Countries with high individualism include, the US, Great

Britain, France, South Africa etc

Collectivisms:


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Collectivisms:

The tendency of people to belong to groups and to

look after each other in exchange for loyalty. In such

cultures, interest of groups have precedence overindividual interest

For instance, Guatemala, Pakistan, Singapore,

Malaysia etc.

Masculinity vs. femininityIn masculine societies the dominant values


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In masculine societies, the dominant values

emphasize on work goals, such as earnings,

advancement, success, and material belongings. e.g.Japan, Switzerland, Great Britain, the US etc.

In feminine societies the dominant values are

achievement of personal goals, such as quality of life,caring for others, friendly atmosphere, getting along

with boss and others.

e.g. Sweden, Norway, Denmark, Thailand etc.

Uncertainty avoidance

The extent to which people feel threatened by ambiguous


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The extent to which people feel threatened by ambiguous

situations.

In high uncertainty avoidance societies there is lack of

tolerance for ambiguity and the need for formal rules.

For instance, Greece, Portugal, Japan, France etc.

Low uncertainty avoidance countries include Singapore,

Denmark, India, the US etc.


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Trompenaars Cultural Classification

Universalism vs. Particularism


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Copyright @ Oxford University Press International Business R. M. Joshi

142

Universalism: The belief that ideas and practices can be defined

and applied everywhere without modificatione.g. the US, Australia, Germany, Sweden etc.

Particularism: The belief that unique circumstances and

relationships, rather than abstract rules are more important

considerations that determine how ideas and practices should be

applied

e.g. Venezuela, the US, Indonesia, China etc.

Individualism vs. Communitarianism


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143

Individualism: people regarding themselves as individuals.

For instance the US, Czechoslovakia, Argentina, the CIS,

Mexico, and the UK.

Communitarianism: people regarding themselves as part of a

group.

For instance, Singapore, Thailand, Japan, and Indonesia.

Neutral vs. Affective

Neutral Cultures: Cultures in which people tend to hold back


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144

p p

their emotions and try not to exhibit their feelings.

For instance, Japan, the UK, Singapore, Australia, etc.

Affective Cultures: Cultures where emotions are expressed

openly.

For instance, Mexico, Netherlands, Switzerland, China, Brazil,

etc.

Specific vs. Diffused


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145

Specific Cultures:Cultures in which individuals tend to have a

large public space which is readily shared, and a smaller private

space.

For instance,Australia, the UK, the USA and Switzerland.

Diffused Cultures: Culture in which public and private space

are more or less similar and public space is guarded more

carefully.

For instance, Venezuela, China and Spain

Achievement vs. AscriptionAchievement Cultures: Culture in which status is accorded to


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146

high achievers and high performers.

For instanceAustria, the USA, Switzerland, the UK, Sweden and

Mexico etc.

Ascription Cultures: Culture in which status is accorded to

those who naturally evoke admiration from others such as

elderly, seniors, highly qualified and skilled people.

For instance, Venezuela, Indonesia, China, the CIS, andSingapore etc.


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147

Other Cross-Cultural Classifications

High Context vs. Low Context


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148

High Context Cultures: Culture in which high significance is

given to implicit communications, such as non-verbal and subtlesituational cues.

For instance, China, Korea, Japan and Arab countries.

Low Context Cultures: Cultures in which communication is

more explicit with heavy reliance on words to convey the

meanings.

For instance, Germany, Switzerland, Scandinavia, North Americaand Britain.

Homophilous vs. Heterophilous

Homophilous Cultures: Cultures where people share


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149

Homophilous Cultures: Cultures where people share

beliefs, speak the same language, and practice the samereligion.

For instance,Japan, Korea and Scandinavian countries.

Heterophilous Cultures: Countries that have a fair

amount of differentiation in languages, beliefs, and

religions followed. For instance,India and China.

Relationship vs. Deal-focusedRelationship-focused Cultures:Cultures in which strong


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150

p g

orientation towards building relationships and developing

mutual trust.

For instance, India, Japan, China, Singapore, Saudi

Arabia, United Arab Emirates, Egypt, Brazil, Mexico, and

Russia.

Deal-focused Cultures: Task-oriented cultures with

openness to hold direct business talks with strangers.

For instance,Britain, USA, Germany, Denmark, Australia,

Canada, Finland etc.

Formal vs. informal cultures


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151

Formal Cultures: Status differences are large and valued and

formality is used to show respect.

For instance, India, UAE, Egypt, Brazil, Russia, Poland, Japan,

China,, Singapore, France, Belgium, Britain, Germany, Denmark,

Finland etc.

Informal Cultures: Status differences are not valued and

Informal behaviour is not considered disrespectful. For instance,

the USA, Canada, and Australia etc.

Polychronic vs. MonochronicPolychronic Cultures: Cultures in which time schedules and


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152

y

deadlines are flexible and relationships take precedence. Forinstance, India, Thailand, Philippines, UAE, Egypt, Brazil, Russia

etc.

Monochronic Cultures: Cultures with rigid time schedules and

deadlines with high emphasis on punctuality. For instance, Japan,

China, Singapore, Britain, USA, Canada, Australia, Germany,

Denmark etc.

Expressive vs. Reserved Cultures


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153

Expressive cultures: people are more expressive withdirect eye contact.

For instance, Russia, Poland, Romania, USA,

Australia, and Canada

Reserved cultures : people restrain their facial

expression and gesturing.

For instance, India, Japan, China, Singapore, Britain,

Germany, Denmark, Finland etc.

Parochialism vs. Simplification


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154

Parochialism:Belief that views the rest of the world

from ones own cultural perspective.

Simplification:Exhibiting same cultural orientation

towards different cultural groups.

EPRG Approach


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155

Ethnocentric orientation

The belief which considers ones own culture as superior to

others. The belief that the business strategy which has worked in

the home country would also be suitable in alien cultures.

Polycentric orientation


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y

It is based on the belief that substantial differences exist

among various countries. Therefore, a single business strategy

cannot be effective across the world and customized business

strategies need to be adapted in different countries.


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Regiocentric orientation

A firm treats the region as a uniform cultural

segment and adopts a similar business strategy

within the region but not across the region.


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Geocentric orientation

The approach considers the whole world a single market and

attempts to formulate integrated business strategies. A

geocentric firm attempts to identify cultural similarities across

countries and formulates a globally uniform business strategy.

Emic vs. Etic Dilemma

The Emic school holds that attitudes, interests, and


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behaviour are unique to a culture and best understood in

their own terms. It emphasizes studying the businessresearch problem in each countrys specific context and

identifying and understanding its unique facets.

The Etic school emphasizes identifying and assessing

universal attitudinal and behavioural concepts anddeveloping pan-cultural measures. Thus, etic is basically

concerned with measuring universal behavioural and

attitudinal traits.

Operationalisation of Emic and Etic


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Emphasis is often placed an identifying and

developing constructs that are feasible across

countries and cultures, while conducting cross

country research.

Next Lecture


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