Culture and International Trade

cultural trait

Anything that represents a culture’s way of life, including gestures, material objects, traditions, and concepts.

CULTURAL DIFFUSION

The process whereby cultural traits spread from one culture to another is called

cultural diffusion

. As new traits are accepted and absorbed into a culture, cultural change occurs naturally and, as a rule, gradually. Globalization and technological advances are increasing the pace of both cultural diffusion and cultural change. Satellite television, videoconferencing, and videos on the Internet increase the frequency of international contact and expose people of different nations to new ideas and practices.

cultural diffusion

Process whereby cultural traits spread from one culture to another.

WHEN COMPANIES CHANGE CULTURES

International companies are often agents of cultural change. As trade and investment barriers fall, for example, U.S. consumer-goods and entertainment companies are moving into untapped markets. Critics in some of these places charge that in exporting the products of such firms, the United States is practicing

cultural imperialism

—the replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another.

cultural imperialism

Replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another.

Fears of cultural imperialism still drive some French to oppose the products of the Walt Disney Company (www.disney.com) and its Disneyland Paris theme park. They fear “Mickey and Friends” could replace traditional characters rooted in French culture. McDonald’s (www.mcdonalds.com) is also sometimes charged with cultural imperialism. It is reported that the average Japanese child thinks McDonald’s was invented in Japan and exported to the United States. Chinese children consider “Uncle” McDonald “funny, gentle, kind, and understanding.” Meanwhile, politicians in Russia decried the Snickerization of their culture—a snide term that refers to the popularity of the candy bar made by Snickers (www.snickers.com). And when the Miss World Pageant was held in India, conservative groups criticized Western corporate sponsors for spreading the message of consumerism and portraying women as sex objects.

Sensitivity to the cultures in which they operate can help companies avoid charges of cultural imperialism. Firms must focus not only on meeting people’s product needs, but also on how their activities and products affect people’s traditional ways and habits. Rather than view their influence on culture as the inevitable consequence of doing business, companies can take several steps to soften those effects. For example, policies and practices that are at odds with deeply held beliefs can be introduced gradually. Managers could also seek the advice of highly respected local individuals such as elders, who fulfill key societal roles in many developing countries. And businesses should always make clear to local workers the benefits of any proposed change.

An area in which U.S. companies may be changing other cultures is fairness in the workplace. Just a few years ago, sexual harassment lawsuits were a peculiar phenomenon of U.S. culture. Increased awareness of this issue in other nations coincides with the international outsourcing of jobs. As U.S. companies outsource jobs to other nations, they are being held accountable for how these subcontractors treat their employees. In the process, U.S. companies export values of the U.S. workplace, such as what constitutes harassment.5

Here, a customer in Dubai visits an outlet of Sweden-based IKEA. Sweden historically dominated other Scandinavian nations, including Denmark. Now some in Denmark say IKEA is a “cultural imperialist” for portraying Denmark as Sweden’s doormat because it assigns Danish names to doormats and rugs, but reserves Swedish names for expensive items such as beds and chairs. IKEA says the product names are simply a coincidence.

Source: © Ed Kashi/CORBIS. All Rights Reserved.

WHEN CULTURES CHANGE COMPANIES

Culture often forces companies to adjust their business policies and practices. Managers from the United States, for example, often encounter cultural differences that force changes in how they motivate employees in other countries. Although it’s a time-consuming practice, managers sometimes use situational management—a system in which a supervisor walks an employee through every step of an assignment or task and monitors the results at each stage. This technique helps employees fully understand the scope of their jobs and clarifies the boundaries of their responsibilities.

Other types of changes might also be needed to suit local culture. Vietnam’s traditional, agriculture-based economy means people’s concept of time revolves around the seasons. The local “timepiece” is the monsoon, not the clock. Western managers, therefore, modify their approach and take a more patient, long-term view of business by modifying employee evaluation and reward systems. For example, individual criticism should be delivered privately to save employees from “losing face” among coworkers. Individual praise for good performance can be delivered either in private or in public, if done carefully. The Vietnamese place great value on group harmony, so an individual can be embarrassed if singled out publicly as being superior to the rest of the work unit.

IS A GLOBAL CULTURE EMERGING?

What does the rapid pace of cultural change worldwide mean for international business? Are we witnessing the emergence of a new, truly global culture in which all people share similar lifestyles, values, and attitudes? The rapid pace of cultural diffusion today is causing cultures to converge to some extent. The successful TV show, American Idol, where young people compete for a chance to become a celebrity, is one example of global pop culture. The U.S. show is one of 39 clones around the world based on the original British show, Pop Idol. The same company helped develop and market The Apprentice, which is seen in 16 countries.6

It might be true that people in different cultures are developing similar perspectives on certain issues. But it seems that just as often as we see signs of an emerging global culture, we discover some new habit unique to one culture. When that happens, we are reminded of the roles of history and tradition in defining culture. Though values and attitudes are under continually greater pressure from globalization, their transformation will be gradual rather than abrupt because they are deeply ingrained in culture.

Quick Study

1. What is meant by a culture’s
aesthetics
? Give several examples.

2. How can businesses incorporate aesthetics into their Web sites?

3. Compare and contrast
values
and
attitudes
. How do cultures differ in their attitudes toward time, work, and cultural change?

4. Describe the process of
cultural diffusion
. Why should international businesses be sensitive to charges of
cultural imperialism
?

Manners and Customs

When doing business in another culture, it is important to understand a people’s manners and customs. At a minimum, understanding manners and customs helps managers avoid making embarrassing mistakes or offending people. In-depth knowledge, meanwhile, improves the ability to negotiate in other cultures, market products effectively, and manage international operations. Let’s explore some important differences in manners and customs around the world.

Manners

Appropriate ways of behaving, speaking, and dressing in a culture are called
manners
. In Arab cultures that stretch from the Middle East to northwest Africa, for example, one does not extend a hand to greet an older person unless the elder first offers the greeting. In going first, a younger person would be displaying bad manners. Moreover, because Arab culture considers the left hand the one used for personal hygiene, using it to pour tea or serve a meal is considered very bad manners.

manners

Appropriate ways of behaving, speaking, and dressing in a culture.

Jack Ma founded Alibaba (www.alibaba.com) as a way for suppliers and buyers to increase efficiency by cutting through layers of intermediaries and trading companies. But he realized early that his Chinese clients needed training in business etiquette so they could cross the cultural divide and do business with people from Western cultures. Mr. Chen Xi Guo, who owns a machinery factory in Wenzhou in central China, participated in an Alibaba seminar on business manners. He now promises to spend more time chitchatting with clients. “I will work hard to be nicer,” says Mr. Chen. His seminar worksheets instruct him to sprinkle his e-mails with phrases like, “How are you?” “It was great to hear from you,” and “Can we work together?”7

Conducting business during meals is common practice in the United States. In Mexico, however, it is poor manners to bring up business at mealtime unless the host does so first. Business discussions in Mexico typically begin when coffee and brandy arrive. Likewise, toasts in the United States tend to be casual and sprinkled with lighthearted humor. In Mexico, where a toast should be philosophical and full of passion, a lighthearted toast would be offensive. See the Global Manager’s Briefcase titled, “A Globetrotter’s Guide to Manners” for additional pointers on appropriate manners when abroad on business.

Customs

When habits or ways of behaving in specific circumstances are passed down through generations, they become
customs
. Customs differ from manners in that they define appropriate habits or behaviors in specific situations. Sharing food gifts during the Islamic holy month of Ramadan is a custom, as is the Japanese tradition of throwing special parties for young women and men who turn age 20. Let’s examine two types of customs and see how instances of each vary around the world.

customs

Habits or ways of behaving in specific circumstances that are passed down through generations in a culture.

FOLK AND POPULAR CUSTOMS

A

folk custom

is behavior, often dating back several generations, that is practiced by a homogeneous group of people. The wearing of turbans by Muslims in southern Asia and the art of belly dancing in Turkey are both folk customs. A

popular custom

is behavior shared by a heterogeneous group or by several groups. Popular customs can exist in just one culture or in two or more cultures at once. Wearing blue jeans and playing golf are both popular customs across the globe. Folk customs that spread by cultural diffusion to other regions develop into popular customs.

folk custom

Behavior, often dating back several generations, that is practiced by a homogeneous group of people.

popular custom

Behavior shared by a heterogeneous group or by several groups.

GLOBAL MANAGER’S BRIEFCASE: A Globetrotter’s Guide to Manners

Large multinationals need top managers who are comfortable living, working, and traveling worldwide. Here are a few guidelines for a manager to follow when meeting colleagues from other cultures:

■ Familiarity. Avoid the temptation to get too familiar too quickly. Use titles such as “doctor” and “mister.” Switch to a first-name basis only when invited to do so and do not shorten people’s names from, say, Catherine to Cathy.

■ Personal Space. Culture dictates what is considered the appropriate distance between two people. Middle Eastern and Latin American nations close the gap significantly. And in Latin America the man-to-man embrace can occur regularly in business.

■ Religious Values. Be cautious so that your manners do not offend people. Former Secretary of State Madeline Albright acquired the nickname “The Kissing

Ambassador” for kissing the Israeli and Palestinian leaders of these two religious peoples.

■ Business Cards. In Asia, business cards are considered an extension of the individual. Business cards in Japan are typically exchanged after a bow, with two hands extended, and the wording facing the recipient. Leave the card on the table for the entire meeting—don’t quickly stuff it in your wallet or toss it into your briefcase.

■ Comedy. Use humor cautiously because it often does not translate well. Avoid jokes that rely on wordplay and puns or events in your country, of which local people might have little or no knowledge.

■
Body Language. Do not “spread out” by hanging your arms over the backs of chairs, but don’t be too stiff either. Look people in the eye lest they deem you untrustworthy, but don’t stare too intently in a challenging manner.

We can also distinguish between folk and popular food. Popular Western-style fast food, for instance, is rapidly replacing folk food around the world. Widespread acceptance of “burgers ‘n’ fries” (born in the United States) and “fish ‘n’ chips” (born in Britain) is altering deep-seated dietary traditions in many Asian countries, especially among young people. In Japan and South Korea today, these popular foods are even becoming a part of home-cooked meals. Sadly, many believe this trend is at least partly responsible for a rising proportion of overweight people in those nations.

THE BUSINESS OF GIFT GIVING

Although giving token gifts to business and government associates is customary in many countries, the proper type of gift varies. A knife, for example, should not be offered to associates in Russia, France, or Germany, where it signals the severing of a relationship. In Japan, gifts must be wrapped in such a delicate way that it is wise to ask someone trained in the practice to do the honors. It is also Japanese custom for the giver to protest that the gift is small and unworthy of the recipient and for the recipient to not open the gift in front of the giver. This tradition does not endorse trivial gifts but is simply a custom.

Cultures differ in their legal and ethical rules against giving or accepting bribes. Large gifts to business associates are particularly suspicious. The U.S. Foreign Corrupt Practices Act, which prohibits companies from giving large gifts to government officials to win business favors, applies to U.S. firms operating at home and abroad. Yet in many cultures bribery is woven into a social fabric that has worn well for centuries. In Germany, bribe payments may even qualify for tax deductions. Though many governments worldwide are adopting stricter measures to control bribery, in some cultures large gifts are still an effective way to obtain contracts, enter markets, and secure protection from competitors.

Social Structure

Social structure
embodies a culture’s fundamental organization, including its groups and institutions, its system of social positions and their relationships, and the process by which its resources are distributed. Social structure plays a role in many business decisions, including production-site selection, advertising methods, and the costs of doing business in a country. Three important elements of social structure that differ across cultures are social group associations, social status, and social mobility.

social structure

A culture’s fundamental organization, including its groups and institutions, its system of social positions and their relationships, and the process by which its resources are distributed.

Social Group Associations

People in all cultures associate themselves with a variety of
social groups
—collections of two or more people who identify and interact with each other. Social groups contribute to each individual’s identity and self-image. Two groups that play especially important roles in affecting business activity everywhere are family and gender.*

social group

Collection of two or more people who identify and interact with each other.

FAMILY

There are two different types of family groups:

■ The nuclear family consists of a person’s immediate relatives, including parents, brothers, and sisters. This concept of family prevails in Australia, Canada, the United States, and much of Europe.

■ The extended family broadens the nuclear family and adds grandparents, aunts and uncles, cousins, and relatives through marriage. It is an important social group in much of Asia, the Middle East, North Africa, and Latin America.

Extended families can present some interesting situations for businesspeople unfamiliar with the concept. In some cultures, owners and managers obtain supplies and materials from another company in which someone from the extended family works. Gaining entry into such family arrangements can be difficult because quality and price are not sufficient motives to ignore family ties.

In extended-family cultures, managers and other employees often try to find jobs for relatives inside their own companies. This practice (called “nepotism”) can present a challenge to the human resource operations of a Western company, which typically must establish explicit policies on the practice.

GENDER

Gender refers to socially learned traits associated with, and expected of, men or women. It includes behaviors and attitudes such as styles of dress and activity preferences. It is not the same thing as sex, which refers to the biological fact that a person is either male or female.

Though many countries have made great strides toward gender equality in the workplace, others have not. In countries where women are denied equal opportunity in the workplace, their unemployment rate can easily be double that for men and their pay half that for men in the same occupation. Women’s salaries can be so low and the cost of child-care so high that it simply makes more sense for mothers to stay home with their children. Caring for children and performing household duties are also likely considered women’s work and not the responsibility of the entire family.

Countries operating under Islamic law sometimes segregate women and men in public schools, universities, and social activities, and restrict women to certain professions. Yet women are sometimes allowed teaching careers in all-female classrooms only, or they can become physicians for female patients only.

Social Status

Another important aspect of social structure is the way a culture divides its population according to status—that is, according to positions within the structure. Although some cultures have only a few categories, others have many. The process of ranking people into social layers or classes is called

social stratification

.

social stratification

Process of ranking people into social layers or classes.

*We put these two “groups” together for the sake of convenience. Strictly speaking, a gender is not a group. Sociologists regard it as a category—people who share some sort of status. A key to group membership is mutual interaction. Individuals in categories know that they are not alone in holding a particular status, but the vast majority remain strangers to one another.

Three factors that normally determine social status are family heritage, income, and occupation. In most industrialized countries royalty, government officials, and top business leaders occupy the highest social layer. Scientists, medical doctors, and others with a university education occupy the middle layer. Below are those with vocational training or a secondary-school education, who dominate the manual and clerical occupations. Although rankings are fairly stable, they can and do change over time. For example, because Confucianism (a major Chinese religion) stresses a life of learning, not commerce, Chinese culture frowned on businesspeople for centuries. In modern China, however, people who have obtained wealth and power through business are now considered important role models for younger generations.

Social Mobility

Moving to a higher social class is easy in some cultures but difficult or impossible in others.
Social mobility
is the ease with which individuals can move up or down a culture’s “social ladder.” For much of the world’s population today, one of two systems regulates social mobility: a

caste system

or a

class system

.

social mobility

Ease with which individuals can move up or down a culture’s “social ladder.”

CASTE SYSTEM

A
caste system
is a system of social stratification in which people are born into a social ranking, or caste, with no opportunity for social mobility. India is the classic example of a caste culture. Although the Indian constitution officially bans discrimination by caste, its influence persists. Little social interaction occurs between castes, and marrying out of one’s caste is taboo. Opportunities for work and advancement are defined within the system, and certain occupations are reserved for the members of each caste. For example, a member of a lower caste cannot supervise someone of a higher caste because personal clashes would be inevitable.

caste system

System of social stratification in which people are born into a social ranking, or caste, with no opportunity for social mobility.

The caste system forces Western companies to make some hard ethical decisions when entering the Indian marketplace. They must decide whether to adapt to local human resource policies in India or import their own from the home country. As globalization penetrates deeper into Indian culture, the nation’s social system and international companies will face many challenges to overcome.

CLASS SYSTEM

A
class system
is a system of social stratification in which personal ability and actions determine social status and mobility. It is the most common form of social stratification in the world today. But class systems vary in the amount of mobility they allow. Highly class-conscious cultures offer less mobility and, not surprisingly, experience greater class conflict. Across Western Europe, for example, wealthy families have retained power for generations by restricting social mobility. Countries there must sometimes deal with class conflict in the form of labor–management disputes that can increase the cost of doing business.

class system

System of social stratification in which personal ability and actions determine social status and mobility.

Conversely, lower levels of class consciousness encourage mobility and lessen conflict. A more cooperative atmosphere in the workplace tends to prevail when people feel that a higher social standing is within their reach. Most U.S. citizens share the belief that hard work can improve their standard of living and social status. People attribute higher status to greater income or wealth, but often with little regard for family background.

Quick Study

1. How do
manners
and
customs
differ? Give examples of each.

2. List several manners that managers should consider when doing business abroad.

3. Define folk and popular customs. How can a folk custom become a popular custom?

4. Define
social structure
. How do social rank and
social mobility
affect business?

Religion

Human values often originate from religious beliefs. Different religions take different views of work, savings, and material goods. Identifying why they do so may help us understand business practices in other cultures. Knowing how religion affects business is especially important in countries with religious governments.

Map 2.1 shows where the world’s major religions are practiced. Religion is not confined to national political boundaries but can exist in different regions of the world simultaneously. It is also common for several or more religions to be practiced within a single nation. In the following sections, we explore Christianity, Islam, Hinduism, Buddhism, Confucianism, Judaism, and Shinto. We examine their potential effects, both positive and negative, on international business activity.

MAP 2.1 World Religions

Christianity

Christianity was born in Palestine around 2,000 years ago among Jews who believed that God sent Jesus of Nazareth to be their savior. Although Christianity boasts more than 300 denominations, most Christians belong to the Roman Catholic, Protestant, or Eastern Orthodox churches. With 2 billion followers, Christianity is the world’s single largest religion. The Roman Catholic faith asks its followers to refrain from placing material possessions above God and others. Protestants believe that salvation comes from faith in God and that hard work gives glory to God—a tenet known widely as the “Protestant work ethic.” Many historians believe this conviction to be a main factor in the development of capitalism and free enterprise in nineteenth-century Europe.

Christian organizations sometimes get involved in social causes that affect business policy. For example, some conservative Christian groups have boycotted the Walt Disney Company (www.disney.com), charging that in portraying young people as rejecting parental guidance, Disney films impede the moral development of young viewers worldwide.

The Church itself has been involved in some highly publicized controversies. Ireland-based Ryanair (www.ryanair.com), Europe’s leading low-fare airline, ruffled the feathers of the Roman Catholic Church with an ad campaign. The ad depicted the pope (the head of the Church) claiming that the fourth secret of Fatima was Ryanair’s low fares. The Church sent out a worldwide press release accusing the airline of blaspheming the pope. But much to the Church’s dismay, the press release generated an enormous amount of free publicity for Ryanair.8

In one classic case, the French Bishops’ Conference sued Volkswagen-France (www.volkswagen.fr) for a billboard ad it felt insulted Christians by parodying the famous image of Leonardo Da Vinci’s The Last Supper. The conference explained that it was reacting to increasing use of sacred things in advertising throughout Europe. The conference said ads aim for the sacred to shock people because using sex no longer worked. Volkswagen halted the $16 million ad campaign in response to the Church’s complaint.

Islam

With 1.3 billion adherents, Islam is the world’s second-largest religion. The prophet Muhammad founded Islam around A.D. 600 in Mecca, the holy city of Islam located in Saudi Arabia. Islam thrives in northwestern Africa, the Middle East, Central Asia, Pakistan, and some Southeast Asian nations, including Indonesia. Muslim concentrations are also found in most European and U.S. cities. Islam means “submission to Allah” and Muslim means “one who submits to Allah.” Islam revolves around the “five pillars”: (1) reciting the Shahada (profession of faith), (2) giving to the poor, (3) praying five times daily, (4) fasting during the holy month of Ramadan, and (5) making the Hajj (pilgrimage) to the Saudi Arabian city of Mecca at least once in one’s lifetime.

Religion strongly affects the kinds of goods and services acceptable to Muslim consumers. Islam, for example, prohibits the consumption of alcohol and pork. Popular alcohol substitutes are soda pop, coffee, and tea. Substitutes for pork include lamb, beef, and poultry (all of which must be slaughtered in a prescribed way so as to meet halal requirements). Because hot coffee and tea often play ceremonial roles in Muslim nations, the markets for them are quite large. And because usury (charging interest for money lent) violates the laws of Islam, credit card companies collect management fees rather than interest, and each cardholder’s credit line is limited to an amount held on deposit.

Nations governed by Islamic law (see Chapter 3) sometimes segregate the sexes at certain activities and in locations such as schools. In Saudi Arabia, women cannot drive cars on public streets. In orthodox Islamic nations, men cannot conduct market research surveys with women at home unless they are family members. Women visiting Islamic cultures need to be especially sensitive to Islamic beliefs and customs. In Iran, for example, the Ministry of Islamic Guidance and Culture posts a reminder to visiting female journalists: “The body is a tool for the spirit and the spirit is a divine song. The holy tool should not be used for sexual intentions.” Although the issue of hejab (Islamic dress) is hotly debated, both Iranian and non-Iranian women are officially expected to wear body-concealing garments. They are also expected to wear scarves over their hair because hair is considered enticing.

Hinduism

Hinduism formed around 4,000 years ago in present-day India, where over 90 percent of its 900 million adherents live. It is also the majority religion of Nepal and a secondary religion in Bangladesh, Bhutan, and Sri Lanka. Considered by some to be a way of life rather than a religion, Hinduism recalls no founder and recognizes no central authority or spiritual leader. Integral to the Hindu faith is the caste system described earlier.

Hindus believe in reincarnation—the rebirth of the human soul at the time of death. For many Hindus the highest goal of life is moksha—escaping from the cycle of reincarnation and entering a state of eternal happiness called nirvana. Hindus tend to disdain materialism. Strict Hindus do not eat or willfully harm any living creature because it may be a reincarnated human soul. Because Hindus consider cows sacred animals, they do not eat beef; consuming milk is considered a means of religious purification. Firms such as McDonald’s (www.mcdonalds.com) must work closely with government and religious officials in India to respect Hindu beliefs. In many regions, McDonald’s has removed all beef products from its menu and prepares vegetable and fish products in separate kitchen areas. And for those Indians who do eat red meat (but not cows because of their sacred status), the company sells the Maharaja Mac, made of lamb, in place of the Big Mac.

In India, there have been attacks on Western consumer-goods companies in the name of preserving Indian culture and Hindu beliefs. Some companies such as Pepsi-Cola (www.pepsi.com) have been vandalized, and local officials even shut down a KFC restaurant (www.kfc.com) for a time. Although it currently operates in India, Coca-Cola (www.cocacola.com) once left the market completely rather than succumb to demands that it reveal its secret formula to authorities. India’s investment environment has improved greatly in recent years. Yet labor–management relations sometimes deteriorate to such a degree that strikes cut deeply into productivity.

Buddhism instructs its followers to live a simple life void of materialistic ambitions. Buddhism also teaches that seeking pleasure for the human senses causes suffering. But as globalization pries open Asia’s markets, the products of Western multinationals are streaming in. Here a young Buddhist monk passes in front of an advertisement for Heineken beer. Do you think Asian cultures can modernize while retaining their traditional values and beliefs?

Source: Emmanuel Dunand/AFP. Getty Images, Inc.–Agence France Presse.

Buddhism

Buddhism was founded about 2,600 years ago in India by a Hindu prince named Siddhartha Gautama. Today, Buddhism has around 380 million followers, mostly in China, Tibet, Korea, Japan, Vietnam, and Thailand, and there are pockets of Buddhists in Europe and the Americas. Although founded in India, Buddhism has relatively few adherents there. Unlike Hinduism, Buddhism rejects the caste system of Indian society. But like Hinduism, Buddhism promotes a life centered on spiritual rather than worldly matters. In a formal ceremony, Buddhists take refuge in the “three jewels”: the Buddha, the dharma (his teachings), and the sangha (community of enlightened beings). They seek nirvana (escape from reincarnation) through charity, modesty, compassion for others, restraint from violence, and general self-control.

Although monks at many temples are devoted to lives of solitary meditation and discipline, many other Buddhist priests are dedicated to lessening the burden of human suffering. They finance schools and hospitals across Asia and are active in worldwide peace movements. In Tibet, where most people still acknowledge the exiled Dalai Lama as the spiritual and political head of the Buddhist culture, the Chinese communist government suppresses allegiance to any outside authority. In the United States, a coalition of religious groups, human rights advocates, and supporters of the Dalai Lama continue to press the U.S. Congress to apply economic sanctions against countries, such as China, that are seen as practicing religious persecution.

Confucianism

An exiled politician and philosopher named Kung-fu-dz (pronounced Confucius in English) began teaching his ideas in China nearly 2,500 years ago. Today, China is home to most of Confucianism’s 225 million followers. Confucian thought is also ingrained in the cultures of Japan, South Korea, and nations with large numbers of ethnic Chinese, such as Singapore.

South Korean business practice reflects Confucian thought in its rigid organizational structure and unswerving reverence for authority. Whereas Korean employees do not question strict chains of command, non-Korean managers and workers often feel differently. Efforts to apply Korean-style management in overseas subsidiaries have caused some high-profile disputes with U.S. executives and even physical confrontations with factory workers in Vietnam.

Some observers contend that the Confucian work ethic and educational commitment helped spur East Asia’s phenomenal economic growth. But others respond that the link between culture and economic growth is weak. They argue that economic, historical, and international factors are at least as important as culture. They say Chinese leaders distrusted Confucianism for centuries because they believed that it stunted economic growth. Likewise, many Chinese despised merchants and traders because their main objective (earning money) violated Confucian beliefs. As a result, many Chinese businesspeople moved to Indonesia, Malaysia, Singapore, and Thailand, where they launched successful businesses. Today, these countries (along with Taiwan) are financing much of China’s economic growth.

Judaism

More than 3,000 years old, Judaism was the first religion to preach belief in a single God. Nowadays, Judaism has roughly 18 million followers worldwide. In Israel, Orthodox (“fully observant”) Jews make up 12 percent of the population and constitute an increasingly important economic segment. In Jerusalem, there is even a modeling agency that specializes in casting Orthodox Jews in ads aimed both inside and outside the Orthodox community. Models include scholars and one rabbi. In keeping with Orthodox principles, women model only modest clothing and never appear in ads alongside men.

Employers and human resource managers must be aware of important days in the Jewish faith. Because the Sabbath lasts from sundown on Friday to sundown on Saturday, work schedules might need adjustment. Devout Jews want to be home before sundown on Fridays. On the Sabbath itself, they do not work, travel, or carry money. Several other important observances are Rosh Ha-Shanah (the two-day Jewish New Year, in September or October), Yom Kippur (the Day of Atonement, 10 days after New Year), Passover (which celebrates the Exodus from

Egypt

, in March or April each year), and Hanukkah (which celebrates an ancient victory over the Syrians, usually in December).

Marketers must take into account foods that are banned among strict Jews. Pork and shellfish (such as lobster and crab) are prohibited. Meat is stored and served separately from milk. Other meats must be slaughtered according to a practice called shehitah. Meals prepared according to Jewish dietary traditions are called kosher. Most airlines offer kosher meals for Jewish passengers on their flights.

Shinto

Shinto (meaning “way of the gods”) arose as the native religion of the Japanese. But today Shinto can claim only about four million strict adherents in Japan. Because modern Shinto preaches patriotism, it is sometimes said that Japan’s real religion is nationalism. Shinto teaches sincere and ethical behavior, loyalty and respect toward others, and enjoyment of life.

Shinto beliefs are reflected in the workplace through the traditional practice of lifetime employment (although this is waning today) and through the traditional trust extended between firms and customers. Japanese competitiveness in world markets has benefited from loyal workforces, low employee turnover, and good labor–management cooperation. The phenomenal success of many Japanese companies in recent decades gave rise to the concept of a Shinto work ethic, certain aspects of which have been emulated by Western managers.

Quick Study

1. What are the main beliefs of each of the seven religions presented above?

2. In what ways does religion affect international business activities?

3. Identify the dominant religion in each of the following countries: (a) Brazil, (b) China, (c) India, (d) Ireland, (e) Mexico, (f) Russia, and (g) Thailand.

Personal Communication

People in every culture have a

communication

system to convey thoughts, feelings, knowledge, and information through speech, writing, and actions. Understanding a culture’s spoken language gives us great insight into why people think and act the way they do. Understanding a culture’s body language helps us avoid sending unintended or embarrassing messages. Let’s examine each of these forms of communication more closely.

communication

System of conveying thoughts, feelings, knowledge, and information through speech, writing, and actions.

Spoken and Written Language

Spoken and written language is the most obvious difference we notice when traveling in another country. We overhear and engage in a number of conversations and read many signs and documents to find our way. Understanding a people’s language is often essential for success in international business because it is the key to understanding their culture.

Linguistically different segments of a population are often culturally, socially, and politically distinct. Malaysia’s population is comprised of Malay (60 percent), Chinese (30 percent), and Indian (10 percent). Although Malay is the official national language, each ethnic group speaks its own language and continues its traditions. The United Kingdom includes England, Northern Ireland, Scotland, and Wales. The native languages of Ireland and Scotland are dialects of Gaelic, and the speaking of Welsh in Wales predates the use of English in Britain. After decades of decline, Gaelic and Welsh are staging comebacks on radio and television and in school curricula.9 Read the Global Challenges feature titled, “Speaking in Fewer Tongues,” to learn about endangered languages around the world.

RELEVANCE FOR MANAGERS

The importance of understanding local languages is becoming increasingly apparent on the Internet. Roughly two-thirds of all Web pages are in English, but around three-fourths of all Internet users are nonnative English speakers. Software solutions providers are assisting companies from English-speaking countries in adapting their Web sites for global e-business. As these software companies are telling their clients, “The ‘e’ in e-business doesn’t stand for English.” Web surfers from cultures across the globe bring their own specific tastes, preferences, and buying habits online with them. The company that can provide its customer in Mexico City, Paris, or Tokyo with a quality buying experience in his or her native language will have an edge on the competition.10

GLOBAL CHALLENGES: Speaking in Fewer Tongues

One day this year, somewhere in the world, an old man or woman will die and with them will go their language. Dozens of languages have just one native speaker still living, and some blame globalization. Here are the facts, the consequences, and the challenge.

■ Some Are Losing. Of the world’s roughly 6,000 languages, about 90 percent have fewer than 100,000 speakers. By the end of this century over half of the world’s languages may be lost; perhaps fewer than 1,000 will survive. One endangered language is Aramaic, a 2,500-year-old Semitic language that was once the major language in the Middle East.

■ Some Are Gaining. Even as minority languages die out, three languages continue to grow in popularity: Mandarin, Spanish, and English. English has emerged as the universal language of business, higher education, diplomacy, science, popular music, entertainment, and international travel. Over 70 nations give special status to English and roughly one-quarter of the world’s population is fluent or competent in it.

■ The Consequences. The loss of a language can mean the loss of a people’s culture because it is the vehicle for cultural, spiritual, and intellectual life. What is lost includes prayers, myths, humor, poetry, ceremonies, conversational styles, and terms for emotions, behaviors, and habits. When a language dies, all these must be expressed in a new language with different words, sounds, and grammar. The result is that much of a culture can simply vanish.

■ The Challenge. Linguists are concerned that such a valuable part of human culture could vanish. The impending loss of more languages has linguists creating videotapes, audiotapes, and written records of endangered tongues before they disappear. Communities themselves are also taking action. In New Zealand, Maori communities set up nursery schools called kohanga reo, or “language nests,” that are staffed by elders and conducted entirely in Maori.

■ Want to Know More? Visit the Linguistic Society of America (www.lsadc.org), European Union’s Eurolang (www.eurolang.net), and Foundation for Endangered Languages (www.ogmios.org).

Language proficiency is crucial in production facilities where nonnative managers are supervising local employees. One U.S. manager in Mexico was confused when his seemingly relaxed and untroubled workers went on strike. The problem lay in different cultural perspectives. Mexican workers generally do not take the initiative in problem solving and workplace complaints. Workers concluded the plant manager knew, but did not care, about their concerns because he did not question employees about working conditions.

American-born Thomas Kwan, who now works for a health products company in Shanghai, China, says similar scenarios occur there. “Whereas Americans are encouraged to challenge their boss to explain things, I have to ask Chinese staff what they think and encourage them to speak up. A lot of [expatriate] managers fail in China because they don’t understand that Chinese don’t tell you what they think,” he says.

11

Marketers also value insights into the interests, values, attitudes, and habits of teenagers. Habbo (www.habbo.com), the world’s largest virtual hangout for teens, surveyed more than 50,000 teenagers in

31

countries to learn how they communicate with each other. The study found that although 72 percent of teens have active e-mail accounts,

76

percent communicate with friends primarily through instant messaging. Teens reserve e-mail for nonpersonal needs such as school, work, and corresponding with family members. Knowledge of these habits help marketers to better target promotions.12

LANGUAGE BLUNDERS

Advertising slogans and company documents must be translated carefully so messages are received precisely as intended. There are many stories of companies making terrible language blunders in their international business dealings. General Motors’ Chevrolet division (www.chevrolet.com) made perhaps the most well-known blunder when it first launched its Chevrolet Nova in Spanish-speaking markets. The company failed to notice beforehand that “No va” means “No go” in Spanish. Chevrolet had far greater success when it renamed the car Caribe (piranha)—the voraciously carnivorous freshwater fish native to South America that attacks and destroys living animals! In Sweden, Kellogg (www.kellogg.com) had to rename its Bran Buds cereal because the Swedish translation came out roughly as “burned farmer.” San Francisco-based start-up Evite (www.evite.com) allows visitors to its Web site to send e-mail invitations to special events. But the company’s name presents a problem internationally. In the Romance languages, such as French and Spanish, variations of the verb evite (eviter and evitar) mean “to shun or to avoid.” Apparently “Avoid My Party” couldn’t get European partygoers excited. CEO Josh Silverman concedes, “It’s a terrific brand in English, but we’re going to have to rebrand for the Romance languages.”13 Several other humorous translation blunders include the following:

■ An English-language sign in a Moscow hotel read, “You are welcome to visit the cemetery where famous Russian composers, artists, and writers are buried daily except Thursday.”

■ A sign for English-speaking guests in a Tokyo hotel read, “You are respectfully requested to take advantage of the chambermaids.”

■ An airline ticket office in Copenhagen read in English, “We take your bags and send them in all directions.”

■ A Japanese knife manufacturer labeled its exports to the United States with “Caution: Blade extremely sharp! Keep out of children.”

■ Braniff Airlines’ English-language slogan “Fly in Leather” was translated into “Fly Naked” in Spanish.

Such blunders are not the exclusive domain of humans. The use of machine translation—computer software used to translate one language into another—is booming along with the explosion in the number of nonnative English speakers using the Internet. Nowhere is this technology hotter than in Asia, although its results are often less than perfect. One Singapore-based search engine allows its users to search the Internet in English and Asian languages, translate Web pages, and compose an e-mail in one language and send it in another. The computers attempted a translation of the following: “The Chinese Communist Party is debating whether to drop its ban on private-enterprise owners being allowed to join the party.” And it came up with this in Chinese: “The Chinese Communist Party is debating whether to deny its ban in join the Party is allowed soldier enterprise owners on.”14 Various other machine translators turned the French version of “I don’t care” (“Jem’ en fou”) into “I myself in crazy,” “I of insane,” and “Me me in madman.”15

LINGUA FRANCA

A

lingua franca

is a third or “link” language understood by two parties who speak different native languages. The original
lingua franca
arose to support ancient trading activities and contained a mixture of Italian and French, along with Arabic, Greek, and Turkish. Although only 5 percent of the world’s population speaks English as a first language, it is the most common
lingua franca
in international business, followed closely by French and Spanish.

lingua franca

Third or “link” language understood by two parties who speak different native languages.

The Cantonese dialect of Chinese spoken in Hong Kong and the Mandarin dialect spoken in Taiwan and on the Chinese mainland are so different that a
lingua franca
is often preferred. And although India’s official language is Hindi, its
lingua franca
among the multitude of dialects is English because it was once a British colony. Yet many young people speak what is referred to as “Hinglish”—a combination of Hindi, Tamil, and English words mixed within a single sentence. Finally, even for the single
lingua franca
of English, differences exist. British-accented English is losing out to North American–accented English in certain locales, particularly in China and South Korea, due to their ever-expanding commercial ties with North America.16 Multinational corporations sometimes choose a
lingua franca
for official internal communications because they operate in many nations, each with its own language. Companies that use English for internal correspondence include Philips (www.philips.com) (a Dutch electronics firm), Asea Brown Boveri (www.abb.com) (a Swiss industrial giant), and Alcatel-Lucent (www.alcatel-lucent.com) (a French telecommunications firm).

Body Language

Body language
communicates through unspoken cues, including hand gestures, facial expressions, physical greetings, eye contact, and the manipulation of personal space. Similar to spoken language, body language communicates both information and feelings and differs greatly from one culture to another. Italians, French, Arabs, and Venezuelans, for example, animate conversations with lively hand gestures and other body motions. Japanese and Koreans, although more reserved, communicate just as much information through their own body languages; a look of the eye can carry as much or more meaning as two flailing arms.

body language

Language communicated through unspoken cues, including hand gestures, facial expressions, physical greetings, eye contact, and the manipulation of personal space.

Most body language is subtle and takes time to recognize and interpret. For example, navigating the all-important handshake in international business can be tricky. In the United States it is a firm grip and can include several pumps of the arm. But in the Middle East and Latin America a softer clasp of the hand with little or no arm pump is the custom. And in some countries, such as Japan, people do not shake hands at all, but bow to one another. Bows of respect carry different meanings, usually depending on the recipient. Associates of equal standing bow about 15 degrees toward one another. But proper respect for an elder requires a bow of about 30 degrees. Bows of remorse or apology should be about 45 degrees.

Proximity is an extremely important element of body language to consider when meeting someone from another culture. If you stand or sit too close to your counterpart (from their perspective), you may invade their personal space and appear aggressive. If you remain too far away, you risk appearing untrustworthy. For North Americans, a distance of about 19 inches is about right between two speakers. For Western Europeans, 14 to 16 inches seems appropriate, but someone from the United Kingdom might prefer about 24 inches. Koreans and Chinese are likely to be comfortable about 36 inches apart; people from the Middle East will close the distance to about 8 to 12 inches.

Physical gestures often cause the most misunderstanding between people of different cultures because they can convey very different meanings. The thumbs-up sign is vulgar in Italy and Greece but means “all right” or even “great” in the United States. Figure 2.1 demonstrates how the meanings of gestures vary across cultures.

FIGURE 2.1 Regional Differences in the Meaning of Gestures

Quick Study

1. Define
communication
. Why is knowledge of a culture’s spoken language important for international business?

2. Describe the threat faced by endangered languages. What is being done to help them survive?

3. What is a
lingua franca
? Describe its implications for conducting international business.

4. Why is
body language
important for international business? Give several examples of how it differs across cultures.

Education

Education is crucial for passing on traditions, customs, and values. Each culture educates its young people through schooling, parenting, religious teachings, and group memberships. Families and other groups provide informal instruction about customs and how to socialize with others. In most cultures, intellectual skills such as reading and mathematics are taught in formal educational settings. Two important topics in education are education level and brain drain.

Education Level

Data that a government provides on its people’s education level must be taken with a grain of salt. Comparisons from country to country can be difficult because many nations rely on literacy tests of their own design. Although some countries administer standardized tests, others require only a signature as proof of literacy. Yet searching for untapped markets or new factory locations can force managers to rely on such undependable benchmarks. As you can see from Table 2.1, some countries have further to go than others in increasing national literacy rates. Around 800 million adults remain illiterate globally. And although global illiteracy rates are higher for women, the gap with men is closing.17

Countries with poorly educated populations attract the lowest-paying manufacturing jobs. Nations with excellent programs for basic education tend to attract relatively good-paying industries. Those that invest in worker training are usually repaid in productivity increases and rising incomes. Meanwhile, countries with skilled, highly educated workforces attract all sorts of high-paying jobs, often called “brainpower” industries.

TABLE 2.1 Illiteracy Rates of Selected Countries

Country

Adult Illiteracy Rate (Percentage of People Age 15 and Up)

Burkina Faso

76

Niger

71

Pakistan
50

Morocco

48

Nigeria

31
Egypt

29

Cambodia

26

Saudi Arabia
17

Peru

12
Brazil
11

Zimbabwe

10
Jordan

 9

Mexico

 8

Philippines

 7

Colombia

 7

Portugal

 6

Emerging economies in Asia owe much of their rapid economic development to solid education systems. Hong Kong, South Korea, Singapore, and Taiwan focus on rigorous mathematical training in primary and secondary schooling. University education concentrates on the hard sciences and aims to train engineers, scientists, and managers. On the other hand, some experts say China’s rote-learning education system graduates many bright engineers but few managers. This could pose problems for China as quality managers are what the country needs to take its economy to a higher level.18

The “Brain Drain” Phenomenon

The quality of a nation’s education system is related to its level of economic development.
Brain drain
is the departure of highly educated people from one profession, geographic region, or nation to another. Over the years, political unrest and economic hardship forced many Indonesians to flee their homeland for other nations, particularly Hong Kong, Singapore, and the United States. Most of Indonesia’s brain drain occurred among Western-educated professionals in finance and technology—exactly the people needed for economic development.

brain drain

Departure of highly educated people from one profession, geographic region, or nation to another.

Many countries in Eastern Europe experienced high levels of brain drain early in their transition to market economies. Economists, engineers, scientists, and researchers in all fields fled westward to escape poverty. But as these nations continue their long march away from communism, some are luring professionals back to their homelands—a process known as reverse brain drain.

Physical and Material Environments

The physical environment and material surroundings of a culture heavily influence its development and pace of change. In this section, we first look at how physical environment and culture are related and then explore the effect of material culture on business.

Physical Environment

Although the physical environment affects a people’s culture, it does not directly determine it. Two aspects of the physical environment that heavily influence a people’s culture are topography and climate.

TOPOGRAPHY

All the physical features that characterize the surface of a geographic region constitute its

topography

. Some surface features such as navigable rivers and flat plains facilitate travel and contact with others. By contrast, treacherous mountain ranges and large bodies of water can discourage contact. Cultures isolated by topographical features can find themselves less exposed to the cultural traits of other peoples, which can mean slower cultural change.

topography

All the physical features that characterize the surface of a geographic region.

Topography can impact consumers’ product needs. For example, there is little market for Honda scooters (www.honda.com) in most mountainous regions because their engines are too small. These are better markets for the company’s more rugged, maneuverable motorcycles with larger engines. Thinner air at higher elevations might also entail modifications in carburetor design for gasoline-powered vehicles.

Topography can have a profound impact on personal communication in a culture. For example, mountain ranges and the formidable Gobi Desert consume two-thirds of China’s land surface. Groups living in the valleys of these mountain ranges hold on to their own ways of life and speak their own languages. Although the Mandarin dialect was decreed the national language many years ago, the mountains, desert, and vast expanse of China still impair personal communication and, therefore, the proliferation of Mandarin.

CLIMATE

Climate affects where people settle and helps direct systems of distribution. In Australia, for example, intensely hot and dry conditions in two large deserts and jungle conditions in the northeast pushed settlement to coastal areas. These climatic conditions combined with the higher cost of land transport means coastal waters are still used to distribute products between distant cities.

Climate plays a large role in lifestyle and work habits. The heat of the summer sun grows intense in the early afternoon hours in the countries of southern Europe, northern Africa, and the Middle East. For this reason, people often take afternoon breaks of one or two hours in July and August. People use this time to perform errands, such as shopping, or even take short naps before returning to work until about 7 or 8 p.m. Companies doing business in these regions must adapt to this local tradition.

Climate also impacts customs such as the type of clothing people wear. People in many tropical areas wear little clothing and wear it loosely because of the warm, humid climate. In the desert areas of the Middle East and North Africa, people also wear loose clothing, but they wear long robes to protect themselves from intense sunshine and blowing sand.

Material Culture

All the technology used in a culture to manufacture goods and provide services is called its

material culture

. Material culture is often used to measure the technological advancement of a nation’s markets or industries. Generally, a firm enters a new market under one of two conditions: demand for its products has developed or the infrastructure is capable of supporting production operations.

material culture

All the technology used in a culture to manufacture goods and provide services.

Many regions and nations lack the most basic elements of a modern society’s material culture. For example, companies are not flocking to the Southeast Asian nation of Myanmar because the nation lacks both sufficient product demand and an adequate infrastructure. Political and social problems under a repressive military government have stalled Myanmar’s economic development. Yet technology is helping some nations at the bottom of the global economic pyramid break down barriers that keep their people mired in poverty.

UNEVEN MATERIAL CULTURE

Material culture often displays uneven development across a nation’s geography, markets, and industries. For example, much of China’s recent economic progress is occurring in coastal cities. Shanghai has long played an important role in China’s international trade because of its strategic location and its superb harbor on the East China Sea. Although it is home to only 1 percent of the total population, Shanghai accounts for about 5 percent of China’s total output—including about 12 percent of both its industrial production and its financial-services output.

Likewise, Bangkok, the capital city of Thailand, houses only 10 percent of the nation’s population but accounts for about 40 percent of its economic output. Meanwhile, the northern parts of the country remain rural, consisting mostly of farms, forests, and mountains.

Quick Study

1. Why is the education level of a country’s people important to international companies?

2. What is meant by the terms
brain drain
and reverse brain drain?

3. How are a people’s culture and physical environment related?

4. What is the significance of
material culture
for international business?

Classifying Cultures

Throughout this chapter, you’ve seen how cultures can differ greatly from one another. People living in broadly different cultures tend to respond differently in similar business situations. There are two widely accepted ways to classify cultures based on differences in characteristics such as values, attitudes, social structure, and so on. Let’s now take a detailed look at each of these tools: the Kluckhohn–Strodtbeck and Hofstede frameworks.

Kluckhohn–Strodtbeck Framework

The

Kluckhohn–Strodtbeck framework

compares cultures along six dimensions. It studies a given culture by asking each of the following questions:19

■ Do people believe that their environment controls them, that they control the environment, or that they are part of nature?

■ Do people focus on past events, on the present, or on the future implications of their actions?

■ Are people easily controlled and not to be trusted, or can they be trusted to act freely and responsibly?

■ Do people desire accomplishments in life, carefree lives, or spiritual and contemplative lives?

■ Do people believe that individuals or groups are responsible for each person’s welfare?

■ Do people prefer to conduct most activities in private or in public?

Kluckhohn–Strodtbeck framework

Framework for studying cultural differences along six dimensions, such as focus on past or future events and belief in individual or group responsibility for personal well-being.

Case: Dimensions of Japanese Culture

By providing answers to each of these six questions, we can briefly apply the Kluckhohn–Strodtbeck framework to Japanese culture:

1.
Japanese believe in a delicate balance between people and environment that must be maintained.
Suppose an undetected flaw in a company’s product harms customers using it. In many countries, a high-stakes class-action lawsuit would be filed against the manufacturer on behalf of the victims’ families. This scenario is rarely played out in Japan. Japanese culture does not feel that individuals can possibly control every situation but that accidents happen. Japanese victims would receive heartfelt apologies, a promise it won’t happen again, and a relatively small damage award.

2.
Japanese culture emphasizes the future.
Because Japanese culture emphasizes strong ties between people and groups, including companies, forming long-term relationships with people is essential when doing business there. Throughout the business relationship, Japanese companies remain in close, continuous contact with buyers to ensure that their needs are being met. This relationship also forms the basis of a communication channel by which suppliers learn about the types of products and services buyers would like to see in the future.

3.
Japanese culture treats people as quite trustworthy.
Business dealings among Japanese companies are based heavily on trust. After entered into, an agreement to conduct business is difficult to break unless there are extreme uncontrollable factors at work. This is due to the fear of “losing face” if one cannot keep a business commitment. In addition to business applications, society at large reflects the Japanese concern for trustworthiness. Crime rates are quite low, and the streets of Japan’s largest cities are very safe to walk at night.

4.
Japanese are accomplishment-oriented—not necessarily for themselves, but for their employers and work units.
Japanese children learn the importance of groups early by contributing to the upkeep of their schools. They share duties such as mopping floors, washing windows, cleaning chalkboards, and arranging desks and chairs. They carry such habits learned in school into the adult workplace, where management and labor tend to work together toward company goals. Japanese managers make decisions only after considering input from subordinates. Also, materials buyers, engineers, designers, factory floor supervisors, and marketers cooperate closely throughout each stage of a product’s development.

5.
Japanese culture emphasizes individual responsibility to the group and group responsibility to the individual.
This trait has long been a hallmark of Japanese corporations. Traditionally, subordinates promise hard work and loyalty, and top managers provide job security. But to remain competitive internationally, Japanese companies have eliminated jobs and moved production to low-wage nations like China and Vietnam. As the tradition of job security falls by the wayside, more Japanese workers now consider working for non-Japanese companies, whereas others find work as temporary employees. Although this trait of loyalty is diminishing somewhat in business, it remains a very prominent feature in other aspects of Japanese society, especially family.

6.
The culture of Japan tends to be public.
You will often find top Japanese managers located in the center of a large, open-space office surrounded by the desks of many employees. By comparison, Western executives are often secluded in walled offices located on the perimeter of workspaces. This characteristic reaches deep into Japanese society—consider, for example, Japan’s continued fondness for public baths.

Hofstede Framework

The

Hofstede framework

compares cultures along five dimensions.20 Dutch psychologist, Geert Hofstede, developed the framework from a study of more than 110,000 people working in IBM subsidiaries (www.ibm.com) in 40 countries and a follow-up study of students in 23 countries. Let’s examine each of these dimensions in detail.21

Hofstede framework

Framework for studying cultural differences along five dimensions, such as individualism versus collectivism and equality versus inequality.

1.
Individualism versus collectivism.
This dimension identifies the extent to which a culture emphasizes the individual versus the group. Individualist cultures (those scoring high on this dimension) value hard work and promote entrepreneurial risk-taking, thereby fostering invention and innovation. Although people are given freedom to focus on personal goals, they are held responsible for their actions. That is why responsibility for poor business decisions is placed squarely on the shoulders of the individual in charge. At the same time, higher individualism may be responsible for higher rates of employee turnover.

On the contrary, people in collectivist cultures (those scoring low on this dimension) feel a strong association to groups, including family and work units. The goal of maintaining group harmony is probably most evident in the family structure. People in collectivist cultures tend to work toward collective rather than personal goals and are responsible to the group for their actions. In turn, the group shares responsibility for the well-being of each of its members. Thus, in collectivist cultures success or failure tends to be shared among the work unit, rather than any particular individual receiving all the praise or blame. All social, political, economic, and legal institutions reflect the group’s critical role.

2.
Power distance.
This dimension conveys the degree to which a culture accepts social inequality among its people. A culture with large power distance tends to be characterized by much inequality between superiors and subordinates. Organizations tend also to be more hierarchical, with power deriving from prestige, force, and inheritance. This is why executives and upper management in cultures with large power distance often enjoy special recognition and privileges. On the other hand, cultures with small power distance display a greater degree of equality, with prestige and rewards more equally shared between superiors and subordinates. Power in these cultures (relative to cultures with large power distance) is seen to derive more from hard work and entrepreneurial drive and is therefore often considered more legitimate.

Figure 2.2 shows how various countries rank according to these first two dimensions: power distance and individualism versus collectivism. What is striking about this figure is the tight grouping of nations within the five clusters (plus Costa Rica). You can see the concentration of mostly African, Asian, Central and South American, and Middle Eastern nations in Quadrant 1 (cultures with relatively larger power distance and lower individualism). By contrast, Quadrants 3 and 2 comprise mostly the cultures of Australia and the nations of North America and Western Europe. These nations had the highest individualism scores, and many had relatively smaller power distance scores.

3.
Uncertainty avoidance.
This dimension identifies the extent to which a culture avoids uncertainty and ambiguity. A culture with large uncertainty avoidance values security and places its faith in strong systems of rules and procedures in society. It is perhaps not surprising then that cultures with large uncertainty avoidance normally have lower employee turnover, more formal rules for regulating employee behavior, and more difficulty implementing change. Cultures scoring low on uncertainty avoidance tend to be more open to change and new ideas. This helps explain why individuals in this type of culture tend to be entrepreneurial and organizations tend to welcome the best business practices from other cultures. Because people tend to be less fearful of change, however, these cultures can also suffer from higher levels of employee turnover.

FIGURE 2.2 Power Distance and Individualism versus Collectivism

Figure 2.3 plots countries according to the second and third dimensions: power distance and uncertainty avoidance. Although the lines of demarcation are somewhat less obvious in this figure, patterns do emerge among the six clusters (plus Jamaica). Quadrant 4 contains nations characterized by small uncertainty avoidance and small power distance, including Australia, Canada, Jamaica, the United States, and many Western European nations. Meanwhile, Quadrant 2 contains many Asian, Central American, South American, and Middle Eastern nations—nations having large power distance and large uncertainty avoidance indexes.

4.
Achievement versus nurturing.
This dimension captures the extent to which a culture emphasizes personal achievement and materialism versus relationships and quality of life. Cultures scoring high on this index tend to be characterized more by personal assertiveness and the accumulation of wealth, typically translating into an entrepreneurial drive. Cultures scoring low on this dimension generally have more relaxed lifestyles, wherein people are more concerned about caring for others as opposed to material gain.

5.
Long-term orientation.
This dimension indicates a society’s time perspective and an attitude of overcoming obstacles with time, if not with will and strength. It attempts to capture the differences between Eastern and Western cultures. A high-scoring culture (strong long-term orientation) values respect for tradition, thrift, perseverance, and a sense of personal shame. These cultures tend to have a strong work ethic because people expect long-term rewards from today’s hard work. A low-scoring culture is characterized by individual stability and reputation, fulfilling social obligations, and reciprocation of greetings and gifts. These cultures can change more rapidly because tradition and commitment are not impediments to change.

Locate your country in Figures 2.2 and 2.3. In your personal experience, do you agree with the placement of your nation in these figures? Do you believe managers in your country display the types of behaviors depicted on each dimension just described?

FIGURE 2.3 Power Distance and Uncertainty Avoidance

Quick Study

1. What six dimensions comprise the
Kluckhohn–Strodtbeck framework
for classifying cultures?

2. What are the five dimensions of the
Hofstede framework
for classifying cultures?

3. Briefly explain how each framework can be used to analyze a culture.

Bottom Line FOR BUSINESS

As globalization continues to draw companies into the international arena, understanding local culture can give a company an advantage over rivals. By avoiding ethnocentric thinking, managers can avoid mistakenly disregarding the beneficial aspects of other cultures. By contrast, culturally literate managers who understand local needs and desires bring their companies closer to customers and, therefore, increase their competitiveness. They can become more effective marketers, negotiators, and production managers. Let’s explore several areas in which culture has a direct impact on international business activity.

Marketing and Cultural Literacy

Many international companies operating in local markets abroad take advantage of the public relations value of supporting national culture. Some of India’s most precious historical monuments and sites are crumbling due to a lack of government funds for upkeep. Companies are helping the government to maintain key sites and are earning the goodwill of the people.

This chapter introduced the Kluckhohn–Strodtbeck and Hofstede frameworks for classifying cultures. Local culture is important for a company exploring international markets for its products. We see the significance of power distance in the export of luxury items. A nation with large power distance accepts greater inequality among its people and tends to have a wealthy upper class that can afford luxury goods. Thus companies marketing products such as expensive jewelry, high-priced cars, and even yachts could find wealthy market segments within relatively poor nations.

Work Attitudes and Cultural Literacy

National differences in work attitudes are complex and involve other factors in addition to culture. Perceived opportunity for financial reward is no doubt a strong element in attitudes toward work in any culture. Research suggests both U.S. and German employees work longer hours when there is a greater likelihood that good performance will lead to promotion and increased pay. Yet this appears relatively less true in Germany, where wages are less variable and job security and jobless benefits (such as free national health care) are greater. Thus other aspects of German society are at least as important as culture in determining work attitudes. The culturally literate manager understands the complexity of national workplace attitudes and would incorporate this knowledge into reward systems.

Expatriates and Cultural Literacy

As stated in our discussion of classifying cultures, people living in broadly different cultures tend to respond differently in similar business situations. This is why companies that send personnel abroad to unfamiliar cultures are concerned with cultural differences. A Norwegian manager working in Japan for a European car manufacturer, but whose colleagues were mostly Japanese, soon became frustrated with the time needed to make decisions and take action. The main cause for his frustration was that the uncertainty avoidance index for Japan is much larger than that in his native Norway (see Figure 2.3). In Japan, a greater aversion to uncertainty led to the need for a greater number of consultations than would be needed in the home market. The frustrated manager eventually left Japan to return to Europe.

Gender and Cultural Literacy

In Japan, men traditionally hold nearly all positions of responsibility. Women generally serve as office clerks and administrative assistants until their mid to late twenties, when they are expected to marry and then focus on tending to family needs. Although this is still largely true today, progress is being made in expanding the role of women in Japan’s business community. Women own nearly a quarter of all businesses in Japan, but many of these businesses are very small and have little economic clout. Greater gender equality prevails in Australia, Canada, Germany, and the United States, but women in these countries still tend to earn less money than men in similar positions.

Chapter Summary

1. Describe culture and explain the significance of both national culture and subcultures.

■
Culture
is the set of values, beliefs, rules, and institutions held by a specific group of people.

■ Managers should try to avoid
ethnocentricity
(the tendency to view one’s own culture as superior to others) and develop
cultural literacy
(detailed knowledge necessary to function effectively in another culture).

■ We are conditioned to think in terms of national culture—that is, to equate a nation-state and its people with a single culture.

■ Governments promote national culture and intervene in business to protect it from the influence of other cultures.

■ Most nations are also home to numerous
subcultures
—groups of people who share a unique way of life within a larger, dominant culture.

■ Subcultures contribute greatly to national culture and must be considered in marketing and production decisions.

2. Identify the components of culture and describe their impact on international business.

■
Aesthetics
help determine which colors and symbols will be effective in promotions and advertising.

■
Values
influence a people’s
attitudes
toward time, work and achievement, and cultural change.

■ Knowledge of
manners
and
customs
is necessary for negotiating, marketing products, and managing operations in other cultures.

■
Social structure
affects business decisions including production-site selection, advertising methods, and the costs of doing business in a country.

■ Different religions take different views of work, savings, and material goods. Understanding a people’s system of personal communication provides insight into their values and behavior.

■ A culture’s education level affects the quality of the workforce and a people’s standard of living.

■ Physical and material environments influence work habits and preferences for products such as clothing and food.

3. Describe cultural change and explain how companies and culture affect each other.

■ Cultural change occurs when people integrate into their culture the gestures, material objects, traditions, or concepts of another culture through
cultural diffusion
.

■ Globalization and technology are increasing the pace of cultural change around the world.

■ Companies influence culture when they import new products, policies, and business practices into a host country.

■ Companies should try to avoid
cultural imperialism
—the replacement of one culture’s traditions, folk heroes, and artifacts with substitutes from another.

■ Cultures affect management styles, work scheduling, and reward systems.

■ Adapting to local cultures around the world means heeding the maxim “Think globally, act locally.”

4. Explain how the physical environment and technology influence culture.

■ A people’s physical environment includes
topography
and climate and how people relate to their surroundings.

■ Cultures isolated by topographical barriers, such as mountains or seas, normally change relatively slowly, and their languages are often distinct. Climate affects a people’s work hours, clothing, and food.

■
Material culture
refers to all the technology a culture uses to manufacture goods and provide services, and it can be uneven within a nation.

■ Businesspeople measure material culture to determine whether a market has developed adequate demand for a company’s products and whether it can support production activities.

5. Describe the two main frameworks used to classify cultures and explain their practical use.

■ The
Kluckhohn–Strodtbeck framework
compares cultures along six dimensions by seeking answers to questions on topics including a people’s: (1) relation to the environment; (2) focus on past, present, or future; (3) trustworthiness; (4) desire for accomplishment; (5) group-individual responsibility; and (6) public vs. private nature.

■ The
Hofstede framework
compares cultures along five dimensions including a people’s: (1) individualism versus collectivism; (2) power distance; (3) uncertainty avoidance; (4) achievement vs. nurturing; and (5) long-term orientation.

■ Taken together, these frameworks help companies understand many aspects of a culture including risk-taking, innovation, job mobility, team cooperation, pay levels, and hiring practices.

Talk It Over

1. Two students are discussing the various reasons why they are not studying international business. “International business doesn’t affect me,” declares the first student. “I’m going to stay here, not work in some foreign country.” “Yeah, me neither,” agrees the second. “Besides, some cultures are real strange. The sooner other countries start doing business our way, the better.” What counterarguments can you present to these students’ perceptions?

2. In this exercise, two groups of four students each will debate the benefits and drawbacks of individualist versus collectivist cultures. After the first student from each side has spoken, the second student questions the opponent’s arguments, looking for holes and inconsistencies. A third student attempts to reply to these counterarguments. Then a fourth student summarizes each side’s arguments. Finally, the class votes on which team presented the more compelling case.

Teaming Up

1. Research Project. Select a company in your city or town that does business internationally and make an appointment to interview the owner or a senior manager. Your team’s goal is to learn how cultural differences affect the decisions of this business as it pursues international opportunities. How does the company balance the need for global efficiency and local responsiveness in a cultural sense? Has local culture ever required the company to alter its personnel or corporate practices? Be sure to ask your interviewee for specific examples. Present a brief talk or paper on your group’s interview findings.

2. Market Entry Strategy Project. This exercise corresponds to the MESP online simulation. For the nation you are studying, list several of its people’s manners and customs. What values do people hold dear? Describe their attitude toward time, work, and cultural change. What religions are practiced there? What language(s) are spoken? What ethnicities reside in the nation, and do they form distinct subcultures? Describe the nation’s social structure and its education system. Turn to Figures 2.2 and 2.3 and either: (a) explain why you think the nation appears where it does, or (b) identify where you think it belongs on the figure and explain why. Integrate your findings into your completed MESP report.

Key Terms

aesthetics (p. 7)

yattitudes (p. 9)

body language (p. 24)

brain drain (p. 26)

caste system (p. 15)

class system (p. 15)

communication (p. 21)

cultural diffusion (p. 10)

cultural imperialism (p. 10)

cultural literacy (p. 5)

cultural trait (p. 1)

culture (p. 4)

customs (p. 1)

ethnocentricity (p. 4)

folk custom (p. 1)

Hofstede framework (p. 2)

Kluckhohn–Strodtbeck framework (p. 2)

lingua franca (p. 2)

manners (p. 1)

material culture (p. 2)

popular custom (p. 12)

social group (p. 1)

social mobility (p. 1)

social stratification (p. 1)

social structure (p. 1)

subculture (p. 6)

topography (p. 2)

values (p. 8)

Take It to the Web

1. Video Report. Visit this book’s channel on YouTube (YouTube.com/MyIBvideos). Click on “Playlists” near the top of the page and click on the set of videos labeled “Ch 02: Cross-Cultural Business.” Watch one video from the list and summarize it in a half-page report. Reflecting on the contents of this chapter, which components of culture can you identify in the video? How might a company engaged in international business act on the information contained in the video?

2. Web Site Report. Culture affects the product a company sells in a market or region, how it markets the product, its human resource practices, and so on. It is increasingly important that managers have cultural understanding of their markets in this age of globalization.

Select a well-known multinational company and visit its Web site. Locate the section of the Web site that tells about the company’s activities (usually titled “About Us”). Report on the: (1) main products or services the company offers; (2) extent to which the company pursues international business operations (often expressed as percentage of sales or assets); (3) ways that the company has adapted to cultures around the world; and (4) general policies it follows in doing business internationally.

Regarding its Internet presence, does the company offer its Web site in another widely spoken language? Find and click on several of the company’s other national Web sites. What kinds of products are advertised on the home page of the different sites? Can you identify how the company adapts its Web site to suit cultural preferences?

Ethical Challenges

1. You are the vice president of operations for a U.S.-based software firm. Your firm’s board of directors wants you to explore building a software design operation in India. Typically, when international firms enter the Indian market they quickly learn about the various ways in which a rigid caste system can affect business activities. Do you think it will be possible to uphold a U.S. management style in India? Or should your company be prepared to adjust to the local Indian managerial style and human resource practices?

2. You are the vice president of international operations for a large pharmaceutical firm that manufactures an antimalarial drug. Your firm is considering opening up a factory in a small Central American nation where malaria is still extremely common. The operation will be a cooperative venture between your firm and the local government. The majority of the people in that country cannot afford the medicine because of the high import tariffs. Yet if your plan goes through, over 200 jobs will be created and the drug’s international price will drop by over 50 percent. In a final meeting with a senior government official, the gentleman informs you that if you pay him $500,000 cash, the deal will go through. What issues must you consider? What do you do?

3. You are the public relations director for a company that recently announced its decision to close its factory in the United States and outsource the work to manufacturers in Asia and Latin America. Your firm is doing just what many other companies have already done, reducing labor costs by shifting work to low-wage countries such as China, India, Mexico, and Central American nations. Yet the media and disgruntled workers are lambasting your firm’s decision. Is there a reasonable response to charges that the companies you will hire frequently exploit child labor, force women to work 75-hour weeks, and destroy family units?

PRACTICING INTERNATIONAL MANAGEMENT CASE: A Tale of Two Cultures

Many cultures in Asia are in the midst of an identity crisis. In effect, they are being torn between two worlds. Pulling in one direction is a traditional value system derived from agriculture-based communities and extended families—that is, elements of a culture in which relatives take care of one another and state-run welfare systems are unnecessary. Pulling from the opposite direction is a new set of values emerging from manufacturing- and finance-based economies—elements of a culture in which workers must often move to faraway cities to find work, sometimes leaving family members to fend for themselves.

For decades, Western multinationals set up factories across Southeast Asia to take advantage of relatively low-cost labor. Later, local companies sprang up and became competitive global players in their own right. Spectacular rates of economic growth in a few short decades elevated living standards beyond what was thought possible. Young people in Malaysia and Thailand felt the lure of “Western” brands. Gucci handbags (www.gucci.com), Harley-Davidson motorcycles (www.h-d.com), and other global brands became common symbols of success. Many parents felt brand-consciousness among their teenage children signaled family-wide success.

Despite the growing consumer society, polls of young people show them holding steadfast to traditional values such as respect for family and group harmony. Youth in Hong Kong, for example, overwhelmingly believe that parents should have a say in how hard they study, in how they treat family members and elders, and in their choice of friends.

Now globalization is washing over India. An explosion in outsourcing jobs is causing a social revolution among India’s graduates of technical colleges and universities. Unlike India’s traditional high-tech service jobs, young call-center staffers are in direct contact with Western consumers, answering inquiries on items such as tummy crunchers and diet pills. For these young, mostly female staffers, the work means money, independence, and freedom—sometimes far away from home in big cities such as Bangalore and Mumbai. But in addition to the training in American accents and geography, they are learning new ideas about family, materialism, and relationships.

Parents are suspicious of call-center work because it must typically be performed nights in India, when consumers are awake in Canada, Europe, or the United States. When her parents objected, Binitha Venugopal quit her call-center job in favor of a “regular” daytime job. Binitha says her former coworkers are materialistic, their values are changing, and that dating and live-in relationships among them are common. Indian tradition dictates that young adults live with their parents at least until they get married (typically to someone their parents choose).

Roopa Murthy works for an Indian company that offers call-center and back-office services. Roopa moved to Bangalore from her native Mysore in 2002 armed with an accounting degree. She now earns $400 per month, which is several times what her father earned before he retired from his government job. Roopa now wears her hair short, and it is styled like that of her idol, Dana Scully from the TV show “X-Files,” whose name she also adopted as her “telephone name.” She has tossed aside her salwar kameez, the traditional loose-fitting clothing she wore back home, in favor of designer-labeled Western attire.

Although she once shunned drinking and her curfew at home was 9 p.m., Roopa now frequents a pub called Geoffrey’s, where she enjoys dry martinis and rum, and The Club, a suburban disco. After sending money home to her parents, she has enough left over to spend on imported cosmetics, jeans, a cell phone, and dinner at an American chain restaurant. Roopa confesses that she is “seeing someone” but that her parents would disapprove, adding “it is difficult to talk to Indian parents about things like boyfriends.” She said she sometimes envies her callers’ lives but that she hopes her job will help her succeed. “I may be a small-town girl, but there is no way I’m going back to Mysore after this,” she said.

Arundhati Roy, an Indian novelist and activist, argues that call centers strip young Indian workers of their cultural identities, for example, by making them use American names on the phone. She wrote that call centers show “how easily an ancient civilization can be made to abase itself completely.” Many observers wonder whether Asia can embrace modernization and yet retain traditional values.

Thinking Globally

1. If your international firm were doing business in Asia, would you feel partly responsible for these social trends? Is there anything that your company could do to ease the tensions these cultures are experiencing? Be specific.

2. In your opinion, is globalization among the causes of the increasing incidence of divorce, crime, and drug abuse in Asia? Why or why not?

3. Broadly defined, Asia comprises over 60 percent of the world’s population—a population that practices Buddhism, Confucianism, Hinduism, Islam, and numerous other religions. Given the fact that there are considerable cultural differences between countries such as China, India, Indonesia, Japan, and Malaysia, is it possible to carry on a valid discussion of “Asian” values? Why or why not?

4. Consider the following statement: “Economic development and capitalism require a certain style of doing business in the twenty-first century. The sooner Asian cultures adapt the better.” Do you agree or disagree? Explain.

(Wild 45)

Wild, John J., Kenneth L. Wild & Jerry C.Y. Han. International Business: The Challenges of Globalization, 5th Edition. Pearson Learning Solutions. .

3 Politics, Law, and Business Ethics

Learning Objectives

After studying this chapter, you should be able to

1 Describe each main type of political system.

2 Identify the origins of political risk and how managers can reduce its effects.

3 Describe each main type of legal system and the important global legal issues.

4 Explain ethics and social responsibility and key issues facing international companies.

5 Explain how international relations affect international business activities.

A LOOK BACK

Chapter 2 explored the main elements of culture and showed how they affect business practices. We learned about different methods used to classify cultures and how these methods can be applied to business.

A LOOK AT THIS CHAPTER

This chapter explores the roles of politics and law in international business. We begin by explaining different types of political systems and how managers cope with political risk. We then examine several kinds of legal systems, ethics, social responsibility, and how international relations affect business.

A LOOK AHEAD

Chapter 4 discusses the world’s different economic systems. We learn about emerging markets and development and explore challenges facing countries that are transforming their economies into free markets.

PepsiCo’s Global Challenge

Purchase, New York—Entrepreneurial despite its enormity, PepsiCo’s (www.pepsico.com) sales grew an amazing 13 percent annually for nearly half a century. To keep sales bubbling, PepsiCo is targeting the global market, especially emerging economies. International sales comprise 40 percent of PepsiCo’s total revenue and are growing three times as fast as U.S. sales.

Like all companies operating internationally, PepsiCo must carefully navigate unfamiliar political and legal systems. British regulators will pull PepsiCo’s Baked Lays brand of chips off store shelves if it fails to live up to its health claims. If PepsiCo’s bottling operations in India were to drain the water table to unacceptable levels, it would face the wrath of India’s regulators and its people. PepsiCo knows that today companies are expected to be model citizens wherever they operate.

Source: © Neville Elder/CORBIS. All Rights Reserved.

PepsiCo’s CEO, Indra Nooyi, (pictured at right) introduced the motto, “Performance with Purpose,” to reflect how the company is transforming its global businesses. She wants the company to balance its drive for profits with making healthier snacks, decreasing its impact on the environment, and taking care of its workforce. Born and raised in India, Nooyi believes it is essential that “we use corporations as a productive player in addressing some of the big issues facing the world.”

Nooyi also helped spark “green” initiatives at PepsiCo. She proved that investments in water- and heat-related conservation projects can be worthy endeavors. In addition to their environmental benefits, those projects now save the company $55 million annually. Nooyi says, “Companies today are bigger than many economies. We are little republics. We are engines of efficiency. If companies don’t do [responsible] things, who is going to?” As you read this chapter, consider how companies adapt to different political and legal systems worldwide while fulfilling their ethical and social responsibilities.1

Chapter 2 explained that an understanding of culture contributes to success in the international marketplace. Another crucial element of success is political and legal savvy. Businesses involved internationally need to overcome some tricky political and legal situations in other countries. This is true for both brick-and-mortar and online companies. Although the Web shrinks the distance between two points, it still matters where those two points are located. The Internet community consists of about 250 country domains and dozens of political and legal environments.

Just as brick-and-mortar companies have always adapted to local politics and laws in the global marketplace, so too do Internet companies. Yahoo! (www.yahoo.com) held back certain news stories from its Web site in China, though the stories appeared on the company’s U.S. site. Rupert Murdoch’s News Corp. (www.newscorp.com) removed BBC news (www.bbc.co.uk) from its Asian television broadcasts because it occasionally criticized China.2 Barnes & Noble (www.bn.com) and Amazon (www.amazon.com) stopped selling the English-language version of Mein Kampf to Germans when the German government complained—although it’s illegal only to sell the German-language version. A statement by Barnes & Noble read, “Our policy with regard to censorship remains unchanged. But as responsible corporate citizens, we respect the laws of the countries where we do business.”3

Understanding the nature of politics and laws in other countries lessens the risks of conducting international business. In this chapter, we present the basic differences between political and legal systems around the world. We explain how disputes arising from political and legal matters affect business activities and how companies can manage the associated risks. We also discuss key ethical issues for international managers and how companies fulfill their social responsibilities. We close this chapter by briefly discussing the interaction between business and international relations.

Political Systems

A

political system

includes the structures, processes, and activities by which a nation governs itself. Japan’s political system, for instance, features a Diet (Parliament) that chooses a prime minister who will carry out the operations of government with the help of Cabinet ministers. The Diet consists of two houses of elected representatives who enact the nation’s laws. These laws affect the personal lives of people living in and visiting Japan, as well as the activities of companies doing business there.

political system

Structures, processes, and activities by which a nation governs itself.

Politics and Culture

Politics and
culture
are closely related. A country’s political system is rooted in the history and culture of its people. Factors such as population, age and race composition, and per capita income influence a country’s political system.

Consider the case of Switzerland, where the political system actively encourages all eligible members of society to vote. By means of public referendums, Swiss citizens vote directly on many national issues. The Swiss system works because Switzerland consists of a relatively small population living in a small geographic area. Contrast this practice with that of most other democracies, in which representatives of the people, not the people themselves, vote on specific issues.

Political Participation

We can characterize political systems by who participates in them and to what extent they participate. Participation occurs when people voice their opinions, vote, and show general approval or disapproval of the system.

Participation can be wide or narrow. Wide participation occurs when people who are capable of influencing the political system make an effort to do so. For example, most adults living in the United States have the right to participate in the political process by voting in elections. Narrow participation occurs when few people participate. In Kuwait, for example, only citizens who can prove Kuwaiti ancestry participate in the political process.

Kuwaiti parliamentary candidate Rula Dashti (far right) prepares to vote at a polling station in Kuwait City. A group of 28 women were among 249 candidates running for the 50-seat legislative body. The heated election focused on electoral reform and corruption in the oil-rich Gulf emirate. Kuwaiti women were allowed to vote for the first time in June 2006. How do you think wide participation can benefit a country?

Source: Yasser Al-Zayyat/AFP/Getty Images.

Political Ideologies

We can arrange the world’s three political ideologies on a horizontal scale, with two on either end and one in the middle:

■ At one extreme lies totalitarianism—the belief that every aspect of people’s lives must be controlled for a nation’s political system to be effective. Totalitarianism disregards individual liberties and treats people as slaves of the political system. The state reigns supreme over institutions such as family, religion, business, and labor. Totalitarian political systems include authoritarian regimes such as communism and fascism.

■ At the other extreme lies anarchism—the belief that only individuals and private groups should control a nation’s political activities. An anarchist views public government as unnecessary and unwanted because it tramples personal liberties.

■ Between totalitarianism and anarchism lies pluralism—the belief that both private and public groups play important roles in a nation’s political activities. Each group (consisting of people with different ethnic, racial, class, and lifestyle backgrounds) serves to balance the power that can be gained by the other. Pluralistic political systems include democracies, constitutional monarchies, and some aristocracies.

To better understand the elements of politics that influence national business practices, let’s examine two prevalent political systems—totalitarianism and

democracy

.

Totalitarianism

In a

totalitarian system

, individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints. Nazi Germany under Adolf Hitler and the former Soviet Union under Joseph Stalin are historical examples of totalitarian governments. Today, Myanmar and North Korea are prominent examples of totalitarian governments. Totalitarian leaders attempt to silence those with opposing political views and, therefore, require the near-total centralization of political power. But a “pure” form of totalitarianism is not possible because no totalitarian government is capable of entirely silencing all its critics.

totalitarian system

Political system in which individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints.

Totalitarian governments tend to share three features:

■
Imposed authority.
An individual or group forms the political system without the explicit or implicit approval of the people. Leaders often acquire and retain power through military force or fraudulent elections. In some cases, they come to power through legitimate means but then remain in office after their terms expire.

■
Lack of constitutional guarantees.
Totalitarian systems deny citizens the constitutional guarantees woven into the fabric of democratic practice. They limit, abuse, or reject concepts such as freedom of expression, periodically held elections, guaranteed civil and property rights, and minority rights.

■
Restricted participation.
Political representation is limited to parties sympathetic to the government or to those who pose no credible threat. In most cases, political opposition is completely banned, and political dissidents are severely punished.

Let’s now take a detailed look at the two most common types of totalitarian political systems: theocratic and secular.

THEOCRATIC TOTALITARIANISM

A political system in which a country’s religious leaders are also its political leaders is called a

theocracy

. The religious leaders enforce a set of laws and regulations based on religious beliefs. A political system under the control of totalitarian religious leaders is called

theocratic totalitarianism

.

theocracy

Political system in which a country’s religious leaders are also its political leaders.

theocratic totalitarianism

Political system under the control of totalitarian religious leaders.

Iran is a prominent example of a theocratic totalitarian state. Iran has been an Islamic state since the 1979 revolution in which the reigning monarch was overthrown. Today, many young Iranians appear disenchanted with the strict code imposed on many aspects of their public and private lives, including stringent laws against products and ideas deemed too “Western.” They do not question their religious beliefs, but yearn for a more open society.

SECULAR TOTALITARIANISM

A political system in which political leaders rely on military and bureaucratic power is called

secular totalitarianism

. It takes three forms: communist, tribal, and right-wing.

secular totalitarianism

Political system in which leaders rely on military and bureaucratic power.

Under communist totalitarianism (referred to here simply as

communism

), the government maintains sweeping political and economic powers. The Communist Party controls all aspects of the political system, and opposition parties are given little or no voice. In general, each Party member holding office is required to support all government policies, and dissension is rarely permitted.
Communism
is the belief that social and economic equality can be obtained only by establishing an all-powerful Communist Party and by instituting

socialism

—an economic system in which the government owns and controls all types of economic activity. This includes granting the government ownership of the means of production (such as capital, land, and factories) and the power to decide what the economy produces and the prices at which goods are sold.

communism

Belief that social and economic equality can be obtained only by establishing an all-powerful Communist Party and by granting the government ownership and control over all types of economic activity.

socialism

Belief that social and economic equality is obtained through government ownership and regulation of the means of production.

However, important distinctions separate communism from socialism. Communists follow the teachings of Marx and Lenin, believe that a violent revolution is needed to seize control over resources, and wish to eliminate political opposition. Socialists believe in none of these. Thus communists are socialists, but socialists are not necessarily communist.

Under tribal totalitarianism, one tribe (or ethnic group) imposes its will on others with whom it shares a national identity. Tribal totalitarianism characterizes the governments of several African nations, including Burundi and Rwanda. When the European colonial powers departed Africa, many national boundaries were created with little regard to ethnic differences among the people. People of different ethnicities found themselves living in the same nation, whereas members of the same ethnicity found themselves living in different nations. In time, certain ethnic groups gained political and military power over other groups. Animosity among them often erupted in bloody conflict.

Although tribalism plays a role in many of Africa’s civil conflicts, it is not always the most significant factor. To explore the economic and social costs of civil wars (particularly in Africa) and how developed nations can help put an end to them, see the Global Challenges feature titled, “From Civil War to Civil Society.”

GLOBAL CHALLENGES: From Civil War to Civil Society

Today, most wars occur within nations that were once controlled and stabilized by colonial powers. If these nations are to prosper from globalization, they must break the vicious cycle whereby conflict causes poverty and poverty causes conflict.

■ War’s Root Causes. Although tribal or ethnic rivalry is typically blamed for starting civil wars, the most common causes are poverty, low economic growth, and dependency on natural resource exports. In fact, the poorest one-sixth of humanity endures four-fifths of the world’s civil wars.

■ What’s at Stake. It appears that pitched battles in Bunia, in eastern Congo, are rooted in ethnic conflict. Yet the Hema and the Lendu tribes only began annihilating each other when neighboring Uganda (to control mineral-rich Bunia) started arming rival militias in 1999. In the Darfur region of Sudan, Arab Muslims battle black non-Muslims. Depending on whom you ask, the conflict began as a fight over pastures and livestock or the oil beneath them.

■ What Is Lost. On average, a civil conflict lasts eight years. And apart from the terrible human cost in lives and health, there is also a financial cost. Health costs are $5 billion per conflict because of collapsed health systems and forced migrations (which worsen and spread disease). Gross domestic product (GDP) falls by 2.2 percent and another 18 percent of income is wasted on arms and militias. Full economic recovery takes a decade, which reduces output by about 105 percent of the nation’s prewar GDP.

■ The Challenge. Recent research offers several solutions to this global challenge. Because the risk of civil war halves when income per person doubles, conflicts may be prevented by funneling more aid to poor nations. Also, war might be limited by restricting a nation in conflict from spending the proceeds from its exports on munitions or by lowering the world market price of those exports. Finally, to halt nations from slipping back into civil war, health and education aid could be increased after war ends or a foreign power could intervene to keep the peace.

■ Want to Know More? Visit the Centre for the Study of African Economies at Oxford University (www.csae.ox.ac.uk), Copenhagen Consensus project (www.copenhagenconsensus.com), and World Bank Conflict Prevention and Reconstruction unit (www.worldbank.org).

Source: “Putting the World to Rights,” The Economist (www.economist.com), June 3, 2004; “The Price of Peace,” The Economist (www.economist.com), April 22, 2004; Paul Collier and Anke Hoeffler, The Challenge of Reducing the Global Incidence of Civil War (Oxford: Copenhagen Consensus, March 2004); “Coping with Conflict,” The Economist (www.economist.com), January 15, 2004; Copenhagen Consensus project (www.copenhagenconsensus.com).

Under right-wing totalitarianism, the government endorses private ownership of property and a market-based economy, but grants few (if any) political freedoms. Leaders generally strive for economic growth while opposing left-wing totalitarianism (communism). Argentina, Brazil, Chile, and Paraguay all had right-wing totalitarian governments in the 1980s.

Despite the inherent contradictions between communism and right-wing totalitarianism, China’s political system is currently a mix of the two ideologies. China’s leaders are engineering high economic growth by implementing certain characteristics of a capitalist economy while retaining a hard line in the political sphere. The Chinese government is selling off money-losing, state-run companies and encouraging investment needed to modernize its factories. But China’s government still has little patience for dissidents who demand greater political freedom, and it does not allow a completely free press.

DOING BUSINESS IN TOTALITARIAN COUNTRIES

What are the costs and benefits of doing business in a totalitarian nation? On the plus side, international companies can be relatively less concerned with local political opposition to their activities. On the negative side, they might need to pay bribes and kickbacks to government officials. Refusal to pay could result in loss of market access or even forfeiture of investments in the country.

In any case, doing business in a totalitarian country can be a risky proposition. In a country such as the United States, laws regarding the resolution of contractual disputes are quite specific. In totalitarian nations, the law can be either vague or nonexistent, and people in powerful government positions can interpret laws largely as they please. In China, for instance, it may not matter so much what the law states, but rather how individual bureaucrats interpret the law. The arbitrary nature of totalitarian governments makes it hard for companies to know how laws will be interpreted and applied to their particular business dealings.

Companies that operate in totalitarian nations are sometimes criticized for lacking compassion for people hurt by the oppressive policies of their hosts. Executives must decide whether to refrain from investing in totalitarian countries—and miss potentially profitable opportunities—or invest and bear the brunt of potentially damaging publicity. There are no simple answers to this controversial issue, which amounts to an ethical dilemma.

Quick Study

1. What is a
political system
? Explain the relation between political systems and culture.

2. Identify the three main features of totalitarianism.

3. Briefly explain each form of totalitarianism.

4. How might a totalitarian government affect business activities?

Democracy

A
democracy
is a political system in which government leaders are elected directly by the wide participation of the people or by their representatives. Democracy differs from totalitarianism in nearly every respect. The foundations of modern democracy go back at least as far as the ancient Greeks.

democracy

Political system in which government leaders are elected directly by the wide participation of the people or by their representatives.

The Greeks tried to practice a pure democracy, one in which all citizens participate freely and actively in the political process. But a pure democracy is more an ideal than a workable system for several reasons. Some people have neither the time nor the desire to get involved in the political process. Also, citizens are less able to participate completely and actively as a population increases and as the barriers of distance and time expand. Finally, leaders in a pure democracy may find it difficult or impossible to form cohesive policies because direct voting can lead to conflicting popular opinion.

REPRESENTATIVE DEMOCRACY

For practical reasons, most nations resort to a

representative democracy

, in which citizens elect individuals from their groups to represent their political views. These representatives then help govern the people and pass laws. The people reelect representatives they approve of and replace those they no longer want representing them.

representative democracy

Democracy in which citizens elect individuals from their groups to represent their political views.

Representative democracies strive to provide some or all of the following:

■
Freedom of expression.
A constitutional right in most democracies, freedom of expression ideally grants the right to voice opinions freely and without fear of punishment.

■
Periodic elections.
Each elected representative serves for a period of time, after which the people (or electorate) decide whether to retain that representative. Two examples of periodic elections include the U.S. presidential elections (held every four years) and French presidential elections (held every seven years).

■
Full civil and property rights.
Civil rights include freedom of speech, freedom to organize political parties, and the right to a fair trial. Property rights are the privileges and responsibilities of owners of property (homes, cars, businesses, and so forth).

■
Minority rights.
In theory, democracies try to preserve peaceful coexistence among groups of people with diverse cultural, ethnic, and racial backgrounds. Ideally, the same rights and privileges extend legally to each group, no matter how few its members.

■
Nonpolitical bureaucracies.
The bureaucracy is the part of government that implements the rules and laws passed by elected representatives. In politicized bureaucracies, bureaucrats tend to implement decisions according to their own political views rather than those of the people’s representatives. This clearly contradicts the purpose of the democratic process.

Freedom of expression is a fundamental right that most democracies strive to uphold. Here, people in Seoul, South Korea, carry banners and placards during a peaceful rally against a meeting of the Switzerland-based World Economic Forum (WEF). The more than 10,000 people that took part in the protest were expressing their view that the policies of the WEF protect the rich and increase poverty. In what ways does freedom of expression benefit societies?

Source: Chung Sung-Jun/Getty Images.

Despite such shared principles, countries vary greatly in the practice of representative democracy. Britain, for example, practices parliamentary democracy. The nation divides itself into geographical districts, and people in each district vote for competing parties rather than individual candidates. But the party that wins the greatest number of legislative seats in an election does not automatically win the right to run the country. Rather, a party must gain an absolute majority—that is, the number of representatives that a party gets elected must exceed the number of representatives elected among all other parties.

If the party with the largest number of representatives lacks an absolute majority, it can join with one or more other parties to form a coalition government. In a coalition government, the strongest political parties share power by dividing government responsibilities among themselves. Coalition governments are often formed in Italy, Israel, and the Netherlands, where a large number of political parties make it difficult for any single party to gain an absolute majority.

Nations also differ in the relative power that each political party commands. In some democratic countries, a single political party has effectively controlled the system for decades. In Japan, for example, the Liberal Democratic Party (which is actually conservative) has enjoyed nearly uninterrupted control of the government since the 1950s. In Mexico, the Institutional Revolutionary Party (PRI) ran the country for 71 years until 2001 when Vicente Fox of the conservative National Action Party (PAN) won the presidency.

DOING BUSINESS IN DEMOCRACIES

Democracies maintain stable business environments primarily through laws that protect individual property rights. In theory, commerce prospers when the

private sector

includes independently owned firms that seek to earn profits.
Capitalism
is the belief that ownership of the means of production belongs in the hands of individuals and private businesses. Capitalism is also frequently referred to as the free market. (We cover the economics of communism and capitalism in Chapter 4.)

private sector

Segment of the economic environment comprising independently owned firms that seek to earn profits.

capitalism

Belief that ownership of the means of production belongs in the hands of individuals and private businesses.

Bear in mind that, although participative democracy, property rights, and free markets tend to encourage economic growth, they do not always do so. For instance, although India is the world’s largest democracy, it experienced slow economic growth for decades until recently. Meanwhile, some countries achieved rapid economic growth under political systems that were not truly democratic. The four tigers of Asia—Hong Kong, Singapore, South Korea, and Taiwan—built strong market economies in the absence of truly democratic practices.

Political Systems in Times of Change

People around the world are demanding wider participation in the political process and forcing a move toward more democratic systems. Capitalism also seems to have won the battle over communist totalitarianism and economic socialism. Shortly after the former Soviet Union implemented its twin policies of glasnost (political openness) and perestroika (economic reform), its totalitarian government crumbled. Communist governments in Central and Eastern Europe fell soon after, and today countries such as the Czech Republic, Hungary, Poland, Romania, and Ukraine have republican governments. There are far fewer communist nations than there were two decades ago, although North Korea and Myanmar remain hard-line communist nations today.

One of the most closely watched nations in terms of its political change is China. After 1949, when the communists defeated the nationalists in China’s civil war, China imprisoned or exiled most of its capitalists. But private businesspeople are now allowed to join China’s Communist Party, and workers can now elect local representatives to the official trade union. These moves represent the leadership’s struggle to maintain order in the face of increasingly rapid economic and social change. Part of the reason for this move was explained in a government report that spoke of problems facing the nation. Difficulties reported were the collapse of state-owned industry, a social safety net unable to cope with millions of unemployed, poor relations with the nation’s ethnic minorities, an unjust legal system, and an increasingly restless peasantry.

Quick Study

1. What is
democracy
? Explain the differences between
democracy
and totalitarianism.

2. What five freedoms does a representative democracy strive to provide its people?

3. How might a democratic government affect business activities in a nation?

Political Risk

All companies doing business domestically or internationally confront

political risk

—the likelihood that a society will undergo political changes that negatively impact local business activity. Political risk abroad affects different types of companies in different ways. It can threaten the market of an exporter, the production facilities of a manufacturer, or the ability of a company to extract profits from a country in which they were earned. A solid grasp of local values, customs, and traditions can help reduce a company’s exposure to political risk.

political risk

Likelihood that a society will undergo political changes that negatively impact local business activity.

Map 3.1 shows that political risk levels vary from nation to nation. Some of the factors included in this assessment of political risk levels include government stability, internal and external conflict, military and religion in politics, corruption, law and order, and bureaucracy quality.

Types of Political Risk

The broadest categories of political risk reflect the range of companies affected. Macro risk threatens the activities of all domestic and international companies in every industry. Examples include an ongoing threat of violence against corporate assets in a nation and a rising level of government corruption. Micro risk threatens companies only within a particular industry (or more narrowly defined group). For example, an international trade war in steel affects the operations of steel producers and companies that require steel as an input to their business activities.

In addition to these two broad categories, we can classify political risk according to the actions or events that cause it to arise, including:

■ Conflict and violence

■ Terrorism and kidnapping

■ Property seizure

■ Policy changes

■ Local content requirements

Conflict and Violence

Local conflict can strongly discourage international companies from investing in a nation. Violent disturbances impair a company’s ability to manufacture and distribute products, obtain materials and equipment, and recruit talented personnel. Open conflict also threatens a company’s physical assets (such as offices and factories) and the lives of its employees.

Conflict arises from several sources. First, it may arise from people’s resentment toward their own government. When peaceful resolution of disputes between people (or factions) and the government fails, violent attempts to change political leadership can ensue. ExxonMobil (www.exxonmobil.com) suspended production of liquid natural gas at its facility in Indonesia’s Aceh province when separatist rebels targeted the complex with their violence.

Second, conflict can arise over territorial disputes between countries. For example, a dispute over the Kashmir territory between India and Pakistan resulted in major armed conflict between their two peoples several times. And a border dispute between Ecuador and Peru caused these South American nations to go to war three times—most recently in 1995.

Third, disputes among ethnic, racial, and religious groups may erupt in violent conflict. Indonesia comprises 13,000 islands, more than 300 ethnic groups, and some 450 languages. Years ago, Indonesia’s government relocated people from crowded, central islands to less populated remote ones, but without regard to ethnicity and religion. Violence among them later displaced more than one million people. Companies doing business in Indonesia today still face the possibility of ethnic and religious violence disrupting business operations.

Terrorism and Kidnapping

Terrorist activities are means of making political statements. Groups dissatisfied with the current political or social situation sometimes resort to terrorist tactics to force change through fear and destruction. On September 11, 2001, the world witnessed terrorism on a scale like never before. Two passenger planes were flown into the twin towers of the World Trade Center in New York City, one plane was crashed into the Pentagon in Washington, D.C., and one plane crashed in a Pennsylvania field. The terrorist group Al-Qaida claimed responsibility for those U.S. attacks and more recent attacks around the world. The terror organization’s stated goals are to drive Western influence out of Muslim nations and to implement Islamic law.

Kidnapping and the taking of hostages for ransom may be used to fund a terrorist group’s activities. Executives of large international companies are often prime targets for kidnappers because their employers have “deep pockets” to pay large ransoms. Latin American countries have some of the world’s highest kidnapping rates. Annual security costs for a company with a sales office in Bogotá, Colombia, can be $125,000 and up to $1 million for a company with operations in rebel-controlled areas. Top executives are forced to spend about a third of their time coordinating their company’s security in Colombia.4

MAP 3.1 Political Risk Around the World

When high-ranking executives are required to enter countries with high kidnapping rates, they should enter unannounced, meet with only a few key people in secure locations, and leave just as quickly and quietly. Some companies purchase kidnap, ransom, and extortion insurance, but security experts say that training people to avoid trouble in the first place is a far better investment. For additional ways managers can stay safe during overseas assignments, see the Global Manager’s Briefcase titled, “Your Global Security Checklist.”

Property Seizure

Governments sometimes seize the assets of companies doing business within their borders. Asset seizures fall into one of three categories:

confiscation

,

expropriation

, or

nationalization

.

The forced transfer of assets from a company to the government without compensation is called
confiscation
. Usually the former owners have no legal basis for requesting compensation or the return of assets. The 1996 Helms–Burton Law allows U.S. businesses to sue companies from other nations that use their property that Cuba confiscated in its 1959 communist revolution. But U.S. presidents repeatedly waive the law to not harm its relations with other countries. In 2008, nearly 6,000 company claims against the Cuban government were valued at $20 billion.5

confiscation

Forced transfer of assets from a company to the government without compensation.

The forced transfer of assets from a company to the government with compensation is called
expropriation
. The expropriating government normally determines the amount of compensation. There is no framework for legal appeal, and compensation is typically far below market value. Today, governments rarely resort to confiscation or expropriation because these acts can force companies to leave the nation and can jeopardize future investment in the country.

expropriation

Forced transfer of assets from a company to the government with compensation.

GLOBAL MANAGER’S BRIEFCASE: Your Global Security Checklist

■ Getting There. Take nonstop flights when possible—accidents are more likely during takeoffs and landings. Move quickly from an airport’s public and check-in areas to more secure areas beyond passport control. Report abandoned packages to airport security.

■ Getting Around. Kidnappers watch for daily routines. Vary the exit you use to leave your house, office, and hotel, and vary the time that you depart and arrive. Drive with your windows up and doors locked. Swap cars with your spouse occasionally, or take a cab one day and ride the tram/subway the next. Be discreet regarding your itinerary.

■ Keep a Low Profile. Don’t draw attention by pulling out a large wad of currency or paying with large denominations. Avoid public demonstrations. Dress like the locals when possible and leave expensive jewelry at home. Avoid loud conversation and being overheard. If you rent an automobile, avoid the flashy and choose a local, common model.

■ Guard Personal Data. Be friendly but cautious when answering questions about you, your family, and your employment. Keep answers short and vague when possible. Give out your work number only—all family members should do the same. Don’t list your home or mobile phone numbers in directories. Do not carry items in your purse or wallet that contain your home address.

■ Use Caution. Be cautious if a local asks directions or the time—it could be a mugging ploy. When possible, travel with others and avoid walking alone after dark. Avoid narrow, dimly lit streets. If you get lost, act as if you know where you are, and ask directions from a place of business, not passersby. Beware of offers by drivers of unmarked or poorly marked cabs.

■ Know Emergency Procedures. Be familiar with the local emergency procedures before trouble strikes. Keep phone numbers of police, fire, your hotel, your nation’s embassy, and a reputable taxi service in your home and with you.

Whereas expropriation involves one or several companies in an industry,
nationalization
means government takeover of an entire industry. Nationalization is more common than confiscation and expropriation. Likely candidates for nationalization include industries important to a nation’s security and those that generate large revenues. In recent years, Venezuela’s President Hugo Chavez nationalized that country’s telephone, electricity, and oil industries and threatened to nationalize many more. Businesses from other countries reacted to these moves by not investing in Venezuela.6 In general, a government may nationalize an industry to:

nationalization

Government takeover of an entire industry.

1. Use subsidies to protect an industry for ideological reasons.

2. Save local jobs in an ailing industry to gain political clout.

3. Control industry profits so they cannot be transferred to low-tax-rate countries.

4. Invest in sectors, such as public utilities, that private companies cannot afford.

The extent of nationalization varies widely from country to country. Whereas the governments of Cuba, North Korea, and Vietnam control practically every industry, those of the United States and Canada own very few. Many countries, including France, Mexico, Poland, and India, try to strike a balance between government and private ownership.

Policy Changes

Government policy changes are the result of a variety of influences, including the ideals of newly empowered political parties, political pressure from special interests, and civil or social unrest. One common policy tool restricts ownership to domestic companies or limits ownership by nondomestic firms to a minority stake. This type of policy restricted PepsiCo’s (www.pepsico.com) ownership of local companies to 49 percent when it first entered India.

Other policies relate to cross-border investments. Facing a slowdown in the technology sector, Taiwan’s businesses and politicians called for a scrapping of the nation’s “go slow, be patient” policy with China. That policy capped investments in mainland China at $50 million and banned investments in infrastructure and industries sensitive for national security reasons. Taiwan’s government responded by creating a new policy called, “active opening, effective management,” which reduced restrictions on cross-border investment.

Local Content Requirements

Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market are called

local content requirements

. These requirements can force companies to use locally available raw materials, procure parts from local suppliers, or employ a minimum number of local workers. They ensure that international companies foster local business activity and help ease regional or national unemployment. They also help governments maintain some degree of control over international companies without resorting to extreme measures such as confiscation and expropriation.

local content requirements

Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market.

But local content requirements can jeopardize an international firm’s long-term survival. First, a company required to hire local personnel might be forced to take on an inadequately trained workforce or take on excess workers. Second, a company made to obtain raw materials or parts locally can find its production costs rise or its product quality decline.

Managing Political Risk

International companies benefit from monitoring and attempting to predict political changes that can negatively impact their activities. When an international business opportunity arises in an environment plagued by extremely high risk, simply not investing in the location may be the wisest course of action. Yet when risk levels are moderate and the local market is attractive, international companies find other ways to manage political risks. Let’s now examine the three main methods of managing political risk: adaptation, information gathering, and influencing local politics.

One way to lessen political risk is to offer development assistance to poor communities. Here, students get advice from an experienced businessman at the Branson School of Entrepreneurship in Johannesburg, South Africa. The school is named for Richard Branson, founder of the Virgin Group (www.virgin.com). Branson’s not-for-profit foundation, Virgin Unite, strives to educate and inspire young leaders to unlock the potential of South Africa’s youth.

Source: © Louise Gubb/CORBIS. All Rights Reserved.

Adaptation

Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk by means of four strategies:

■ Partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. Partnering helps a company to share the risk of loss, which is especially important in emerging markets. If partners own shares (
equity
) in local operations they get cuts of the profits; if they loan cash (
debt
), they receive interest. Local partners who can help keep political forces from interrupting operations include firms, trade unions, financial institutions, and government agencies.

■ Localization entails modifying operations, the product mix, or some other business element—even the company name—to suit local tastes and culture. Consider how MTV (www.mtv.com) makes itself a smaller target for nationalists worldwide. MTV demonstrates its sensitivity to local cultural and political issues by localizing certain aspects of its programming to suit regional and national tastes.

■ Development assistance lets an international business assist the host country or region in improving the quality of life for locals. For example, by helping to develop distribution and communications networks, both a company and a nation benefit. Royal Dutch/Shell (www.shell.com), the oil company, is working in Kenya to increase the incomes of poor villagers and triple the average period of food security.7 Canon (www.canon.com), the Japanese copier and printer maker, practices kyosei (“spirit of cooperation”) to press local governments into making social and political reforms.

■ Insurance against political risk can be essential to companies entering risky business environments. The Overseas Private Investment Corporation (www.opic.gov) insures U.S. companies that invest abroad against loss and can provide project financing. Some policies protect companies when local governments restrict the convertibility of local money into home-country currency, while others insure against losses created by violent events, including war and terrorism. The Foreign Credit Insurance Association (www.fcia.com) also insures U.S. exporters against loss due to a variety of causes.

Information Gathering

International firms attempt to gather information that will help them predict and manage political risk. Two sources that companies use to conduct accurate political risk forecasting are:

■
Current employees with relevant information.
Employees who have worked in a country long enough to gain insight into local culture and politics are often good sources of information. Individuals who formerly had decision-making authority while on international assignment probably had contact with local politicians and other officials. Yet it is important that an employee’s international experience be recent because political power in a nation can shift rapidly and dramatically.

■
Agencies specializing in political-risk services.
These include banks, political consultants, news publications, and risk-assessment services. Many of these agencies publish reports detailing national levels and sources of political risk. Small companies that cannot afford to pay for some of these services can consider the many free sources of information available, notably from their federal governments. Government intelligence agencies are excellent and inexpensive sources to consult.

Political Influence

Managers must work within the established rules and regulations of each national business environment. Business law in most nations undergoes frequent change, with new laws being enacted and existing ones modified. Influencing local politics means dealing with local lawmakers and politicians directly or through lobbyists.
Lobbying
is the policy of hiring people to represent a company’s views on political matters. Lobbyists meet with a local public official to influence his or her position on issues relevant to the company. The ultimate goal of the lobbyists is to get favorable legislation enacted and unfavorable legislation rejected. Lobbyists also work to convince local officials that a company benefits the local economy, environment, workforce, and so on.

lobbying

Policy of hiring people to represent a company’s views on political matters.

Bribes often represent attempts to gain political influence. Years ago, the president of U.S.-based Lockheed Corp., now Lockheed Martin (www.lockheedmartin.com), bribed Japanese officials to obtain large sales contracts. Public disclosure of the incident resulted in passage of the 1977

Foreign Corrupt Practices Act

, which forbids U.S. companies from bribing government officials or political candidates in other nations (except when a person’s life is in danger). A bribe constitutes “anything of value”—money, gifts, and so forth—and cannot be given to any “foreign government official” empowered to make a “discretionary decision” that may be to the payer’s benefit. The law also requires firms to keep accounting records that reflect their international activities and assets. (We discuss corruption further in the later section on ethics.)

Foreign Corrupt Practices Act

A 1977 statute that forbids U.S. companies from bribing government officials or political candidates in other nations.

In our discussion of political systems and how companies deal with political uncertainty, we touched on several important legal issues. Although there is a good deal of overlap between a nation’s political and legal systems, they are distinct. Let’s now examine several types of legal systems and how they influence the activities of international companies.

Quick Study

1. What are the five main types of
political risk
? How might each affect international business activities?

2. Identify several steps managers can take to stay safe while on an international assignment.

3. Distinguish between
confiscation
,
expropriation
, and
nationalization
.

4. What three methods can businesses use to manage political risk?

Legal Systems

A country’s

legal system

is its set of laws and regulations, including the processes by which its laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions. Many cultural factors—including ideas on social mobility, religion, and individualism—influence a nation’s legal system. Likewise, many laws and regulations are enacted to safeguard cultural values and beliefs. For several examples of how legal systems differ from nation to nation, see this chapter’s Culture Matters feature titled, “Playing by the Rules.”

legal system

Set of laws and regulations, including the processes by which a country’s laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions.

A country’s political system also influences its legal system. Totalitarian governments tend to favor public ownership of economic resources and enact laws limiting entrepreneurial behavior. By contrast, democracies tend to encourage entrepreneurial activity and protect business with strong property-rights laws. The rights and responsibilities of parties to business transactions also differ from nation to nation. Political systems and legal systems, therefore, are naturally interlocked. A country’s political system inspires and endorses its legal system, and its legal system legitimizes and supports its political system.

CULTURE MATTERS: Playing by the Rules

Understanding legal systems in other countries begins with an awareness of cultural differences. Here are snapshots of several nations’ legal environments:

■ Japan. Japan’s harmony-based, consensus-driven culture considers court battles a last resort. But with growing patent disputes and a rise in cross-border mergers, Japan is discovering the value of lawyers. Japan has just 22,000 licensed attorneys compared with over one million in the United States. So Japan is now minting thousands of new lawyers every year. Japanese businesses now litigate disputes that once might have been settled between parties.

■ Saudi Arabia. Islam permeates every aspect of Saudi Arabia and affects its laws, politics, economics, and social development. Islamic law is grounded in religious teachings contained in the Koran and governs both criminal and civil cases. The Koran, in fact, is considered to be Saudi Arabia’s constitution. The king and the council of ministers exercise all executive and legislative authority within the framework of Islamic law.

■ China. Twenty-seven year-old factory worker, Luo Guangfu, and his compatriots are leading the fight to revolutionize workers’ rights in China. Labor groups are winning higher wages, better working conditions, and better housing. Workers are getting help from a flock of lawyers and law students who hold free seminars and argue labor cases in China’s courts. Although China has a long history of inadequate protection of workers’ rights, its government is improving conditions for China’s 169 million factory workers. Yet fierce battles over child labor and overtime pay are just beginning.

■ Want to Know More? Visit the Law Library of Congress (www.loc.gov/law/guide/japan.html), ArabNet (www.arab.net/saudi), and China Gate (www.chinagate.com.cn).

Source: “Our Women Must Be Protected,” The Economist, April 26, 2008, pp. 64–65; “Japan: Lawyers Wanted. No, Really,” Business Week (www.businessweek.com), April 3, 2006; Dexter Roberts, “Waking Up to Their Rights,” Business Week, August 22/29, pp. 123–128; Saudi Arabia country profile on ArabNet Web site (www.arab.net/saudi); Sjef van Erp, “Law and Culture,” Electronic Journal of Comparative Law (www.ejcl.org), Vol. 5.1, March 2001.

Legal systems are frequently influenced by political moods and upsurges of

nationalism

—the devotion of a people to their nation’s interests and advancement. Nationalism typically involves intense national loyalty and cultural pride and is often associated with drives toward national independence. In India, for example, most business laws originated when the country was struggling for “self-sufficiency.” As a result, the legal system tended to protect local businesses from international competition. Although years ago India had nationalized many industries and closely scrutinized business applications, today its government is embracing globalization by enacting pro-business laws.

nationalism

Devotion of a people to their nation’s interests and advancement.

With that brief introduction, let’s now examine the key characteristics of each type of legal system in use around the world (
common law,

civil law

, and

theocratic law

), and discuss the key legal issues facing international companies.

Common Law

The practice of common law originated in eleventh-century England and was adopted in that nation’s territories worldwide. The U.S. legal system, therefore, is based largely on the common law tradition (although it integrates some aspects of civil law). A

common law

legal system reflects three elements:

■
Tradition:
a country’s legal history

■
Precedent:
past cases that have come before the courts

■
Usage:
how laws are applied in specific situations

common law

Legal system based on a country’s legal history (tradition), past cases that have come before its courts (precedent), and how laws are applied in specific situations (usage).

Under common law, the justice system decides cases by interpreting the law on the basis of tradition, precedent, and usage. Yet each law may be interpreted somewhat differently in each case to which it is applied. In turn, each new interpretation sets a precedent that may be followed in later cases. As new precedents arise, laws are altered to clarify vague wording or to accommodate situations not previously considered.

Business contracts tend to be lengthy in common-law nations (especially the United States) because they must consider many possible contingencies and many possible interpretations of the law in case of a dispute. Companies devote considerable time to devising clear contracts and spend large sums of money on legal advice. On the positive side, common-law systems are flexible. Instead of applying uniformly to all situations, laws take into account particular situations and circumstances. The common-law tradition prevails in Australia, Britain, Canada, Ireland, New Zealand, the United States, and some nations of Asia and Africa.

Civil Law

The origins of the civil law tradition can be traced to Rome in the fifth century b.c. It is the world’s oldest and most common legal tradition. A
civil law
system is based on a detailed set of written rules and statutes that constitute a legal code. Civil law can be less adversarial than common law because there tends to be less need to interpret what a particular law states. Because all laws are codified and concise, parties to contracts tend to be more concerned only with the explicit wording of the code. All obligations, responsibilities, and privileges follow directly from the relevant code. Less time and money are typically spent, therefore, on legal matters. But civil law systems can ignore the unique circumstances of particular cases. Civil law is practiced in Cuba, Puerto Rico, Quebec, all of Central and South America, most of Western Europe, and many nations in Asia and Africa.

civil law

Legal system based on a detailed set of written rules and statutes that constitute a legal code.

Theocratic Law

A legal tradition based on religious teachings is called
theocratic law
. Three prominent theocratic legal systems are Islamic, Hindu, and Jewish law. Although Hindu law was restricted by India’s 1950 constitution, in which the state appropriated most legal functions, it does persist as a cultural and spiritual force. Likewise, although Jewish law remains a strong religious force, it has served few legal functions since the eighteenth century when most Jewish communities lost their judicial autonomy.

theocratic law

Legal system based on religious teachings.

Islamic law is the most widely practiced theocratic legal system today. Islamic law was initially a code governing moral and ethical behavior and was later extended to commercial transactions. It restricts the types of investments companies can make and sets guidelines for business transactions. According to Islamic law, for example, banks cannot charge interest on loans or pay interest on deposits. Instead, banks receive a portion of the profits earned by investors who borrow funds and pay depositors from these earnings. Likewise, because the products of alcohol- and tobacco-related businesses violate Islamic beliefs, firms abiding by Islamic law cannot invest in such companies.

Quick Study

1. What is meant by the term
legal system

2. Explain the role of
nationalism
in politics.

3. Identify the main features of each type of legal system (
common
,
civil
, and
theocratic law
).

Standardization

Companies must adapt to dissimilar legal systems because there is no clearly defined body of international law that all nations accept. There is a movement toward standardizing the interpretation and application of laws in more than one country, but this does not involve standardizing entire legal systems. Enduring differences in legal systems, therefore, can force companies to continue the costly practice of hiring legal experts in each country where they operate.

Still, international treaties and agreements exist in intellectual property rights, antitrust regulation, taxation, contract arbitration, and general matters of trade. International organizations that promote standardization include the United Nations (UN) (www.un.org), the Organization for Economic Cooperation and Development (OECD) (www.oecd.org), and the International Institute for the Unification of Private Law (www.unidroit.org). The European Union is standardizing parts of its members’ legal systems to facilitate commerce in Western Europe.

Intellectual Property

Property that results from people’s intellectual talent and abilities is called

intellectual property

. It includes graphic designs, novels, computer software, machine-tool designs, and secret formulas, such as that for making Coca-Cola. Technically, it results in

industrial property

(in the form of either a

patent

or a

trademark

) or

copyright

and confers a limited monopoly on its holder.

intellectual property

Property that results from people’s intellectual talent and abilities.

Most national legal systems protect

property rights

—the legal rights to resources and any income they generate. Similar to other types of property, intellectual property can be traded, sold, and licensed in return for fees and/or royalty payments. Intellectual property laws are designed to compensate people whose property rights are violated.

property rights

Legal rights to resources and any income they generate.

Intellectual property laws differ greatly from nation to nation. Business Software Alliance (BSA) (www.bsa.org), the trade body for business software makers, participates in an annual study of software piracy rates around the globe. Where illegal copies of business software recently made up just 20 percent of the U.S. domestic market (the lowest in the world), pirated software made up 93 percent of the market in Armenia (the highest worldwide). Globally, business software piracy averages around 38 percent and costs business software makers around $48 billion annually.8 Figure 3.1 shows piracy rates for some nations included in the BSA study.

As these figures suggest, the laws of some countries are softer than the laws of some other nations. Software companies in the United States and European Union lobby their governments to pressure other nations to adopt stronger laws, with mixed results. The BSA implemented a program in Ireland that gave cash awards to citizens who provide information about the illegal use of business software. Shortly after the program began, the BSA took legal action against seven Irish companies on behalf of Adobe (www.adobe.com) and Microsoft (www.microsoft.com), among others.

Although peddlers of pirated CDs and DVDs operate openly from sidewalk kiosks in China, its government did more to tackle piracy when China hosted the 2008 Summer Olympics. The effort was a test case in fighting piracy in the YouTube era of video sharing. Richard Cotton, a general legal counsel at NBC, says, “[Chinese officials] recognize the future of the Chinese economy depends on innovation and creativity, and they have to protect the [intellectual property] that drives it.”9

FIGURE 3.1 Business Software Piracy

Source: Adapted from Fifth Annual BSA and IDC Global Software Piracy Study (Washington, D.C.; Business Software Alliance, May 2008), Table 3, pp. 10–11, (www.bsa.org/globalstudy).

Industrial Property

Industrial property
includes patents and trademarks, which are often a firm’s most valuable assets. Laws protecting industrial property are designed to reward inventive and creative activity. Industrial property is protected internationally under the Paris Convention for the Protection of Industrial Property (www.wipo.int), to which nearly 100 countries are signatories.

industrial property

Patents and trademarks.

A
patent
is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. Current U.S. patent law went into effect on June 8, 1995, and is in line with the systems of most developed nations. Its provisions are those of the World Trade Organization (WTO), the international organization that regulates trade between nations. The WTO (www.wto.org) typically grants patents for a period of 20 years. The 20-year term begins when a patent application is filed with a country’s patent office, not when it is finally granted. Patents can be sought for any invention that is new, useful, and not obvious to any individual of ordinary skill in the relevant technical field. Patents motivate companies to pursue inventions and make them available to consumers because they protect investments companies make in research and development.

patent

Property right granted to the inventor of a product or process that excludes others from making, using, or selling the invention.

Trademarks
are words or symbols that distinguish a product and its manufacturer. The Nike (www.nike.com) “swoosh” is a trademark, as is the name “Sony” (www.sony.com). Trademark law creates incentives for manufacturers to invest in developing new products. It also benefits consumers because they know what to expect when they buy a particular brand. In other words, you would not expect a canned soft drink labeled “Coca-Cola” to taste like one labeled “Sprite.”

trademark

Property right in the form of words or symbols that distinguish a product and its manufacturer.

Trademark protection typically lasts indefinitely, provided the word or symbol continues to be distinctive. Ironically, this stipulation presents a problem for companies such as Coca-Cola (www.coca-cola.com) and Xerox (www.xerox.com), whose trademarks “Coke” and “Xerox” have evolved into generic terms for all products in their respective categories. Trademark laws differ from country to country, though some progress toward standardization is occurring. The European Union, for example, opened a trademark-protection office to police trademark infringement against firms that operate in any EU country.

Designers who own trademarks, such as Chanel (www.chanel.com), Christian Dior (www.dior.com), and Gucci (www.gucci.com), have long been plagued by shoddily made counterfeit handbags, shoes, shirts, and other products. But recently, pirated products of equal or nearly equal quality are turning up, especially in Italy. Most Italian makers of luxury leather goods and jewelry, for example, outsource production to small manufacturers. It is not hard for these same artisans to counterfeit extra copies of a high-quality product. Bootleg copies of a Prada (www.prada.com) backpack that costs $500 in New York can be bought for less than $100 in Rome. Jewelry shops in Milan can buy fake watches labeled Bulgari (www.bulgari.com) and Rolex (www.rolex.com) for $300 and sell them retail for $2,500.

Copyrights

Copyrights
give creators of original works the freedom to publish or dispose of them as they choose. A copyright is typically denoted by the well-known symbol ©, a date, and the copyright holder’s name. A copyright holder has the legal rights to:

copyright

Property right giving creators of original works the freedom to publish or dispose of them as they choose.

■ Reproduce the copyrighted work

■ Derive new works from the copyrighted work

■ Sell or distribute copies of the copyrighted work

■ Perform the copyrighted work

■ Display the copyrighted work publicly

Copyright holders include artists, photographers, painters, literary authors, publishers, musical composers, and software developers. Works created after January 1, 1978, are automatically copyrighted for the creator’s lifetime plus 50 years. Publishing houses receive copyrights for either 75 years from the date of publication or 100 years after creation, whichever comes first. Copyrights are protected under the

Berne Convention

(www.wipo.int), which is an international copyright treaty to which the United States is a member, and the 1954 Universal Copyright Convention. More than 50 countries abide by one or both of these treaties.

Berne Convention

International treaty that protects copyrights.

A copyright is granted for the tangible expression of an idea, not for the idea itself. For example, no one can copyright the idea for a movie about the sinking of the Titanic. But once a film is made that expresses its creator’s treatment of the subject, that film can be copyrighted.

Perhaps the most well-known song around the world, “Happy Birthday to You,” is actually protected by U.S. copyright law. The song was composed in 1859 and copyrighted in 1935. Although the copyright was set to expire in 2010, on the song’s 75th copyright birthday, the U.S. Congress extended it until 2030. Media empire Time Warner owns the copyright and stands to gain as much as $20 million from the extension.10

Product Safety and Liability

Product safety laws in most countries set standards that manufactured products must meet.
Product liability
holds manufacturers, sellers, individuals, and others responsible for damage, injury, or death caused by defective products. Injured parties can sue for monetary compensation through civil lawsuits and for fines or imprisonment through criminal lawsuits. Civil lawsuits are frequently settled before cases go to court.

product liability

Responsibility of manufacturers, sellers, individuals, and others for damage, injury, or death caused by defective products.

Developed nations have the toughest product liability laws, while developing and emerging countries have the weakest laws. Business insurance and legal expenses are greater in nations with strong product liability laws, where damage awards can be large. Likewise, enforcement of product liability laws differs from nation to nation. In the most developed nations, for example, tobacco companies are regularly under attack for the negative health effects of tobacco and nicotine. But in developing countries, tobacco companies are practically free from any scrutiny whatsoever by public-welfare organizations.

Taxation

National governments use income and sales taxes for many purposes. They use tax revenue to pay government salaries, build military capabilities, and shift earnings from people with high incomes to the poor. Nations may also tax imports to make them more expensive and give locally made products an advantage among price-sensitive consumers.

Nations pass indirect taxes, called “consumption taxes,” which help pay for the consequences of using particular products. Consumption taxes on products such as alcohol and tobacco help pay the health-care costs of treating illnesses that result from using these products. Similarly, gasoline taxes help pay for road and bridge repairs needed to counteract the effects of traffic and weathering.

Unlike the United States, many countries impose a

value added tax (VAT)

—a tax levied on each party that adds value to a product throughout its production and distribution. Supporters of the VAT system contend that it distributes taxes on retail sales more evenly between producers and consumers. Suppose, for example, that a shrimper sells the day’s catch of shrimp for $1 per kilogram and that the country’s VAT is 10 percent (see Table 3.1). The shrimper, processor, wholesaler, and retailer pay taxes of

$0.10

, $0.07, $0.11, and $0.10, respectively, for the value that each adds to the product as it makes its way to consumers. Consumers pay no additional tax at the point of sale because the government has already collected taxes from each party in the value chain. Still, consumers end up paying the tax because producers and distributors must increase prices to compensate for their tax burdens. So the poor are not overly burdened, many countries exclude the VAT on certain items such as children’s clothing.

value added tax (VAT)

Tax levied on each party that adds value to a product throughout its production and distribution.

Antitrust Regulations

Laws designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages are called

antitrust (antimonopoly) laws

. These laws try to provide consumers with a wide variety of products at fair prices. The United States and European Union are the world’s strictest antitrust regulators. In Japan, the Fair Trade Commission enforces antitrust laws but is often ineffective because absolute proof of wrongdoing is needed to bring charges.

antitrust (antimonopoly) laws

Laws designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages.

Companies based in strict antitrust countries often argue that they are at a disadvantage against competitors whose home countries condone market sharing, whereby competitors agree to serve only designated segments of a certain market. That is why firms in strict antitrust countries often lobby for exemptions in certain international transactions. Small businesses also argue that they could better compete against large international companies if they could join forces without fear of violating antitrust laws.

TABLE 3.1 Effect of Value-Added Taxes (VAT)

Production Stage

Selling Price

Value Added

10% VAT

Total VAT

Shrimper

$1.00

$1.00
$0.10
$0.10

Processor

 1.70

 0.70

 0.07

 0.17

Wholesaler

 2.80

 1.10

 0.11

 0.28

Retailer

 3.80

 1.00

 0.10

 0.38

In the absence of a global antitrust enforcement agency, international companies must concern themselves with the antitrust laws of each nation where they do business. In fact, a nation (or group of nations) can block a merger or acquisition between two nondomestic companies if those companies do a good deal of business there. This happened to the proposed $43 billion merger between General Electric (GE) (www.ge.com) and Honeywell (www.honeywell.com). GE wanted to marry their manufacture of airplane engines to Honeywell’s production of advanced electronics for the aviation industry. Although both companies are based in the United States, together they employed 100,000 Europeans. GE alone earned $25 billion in Europe the year before the proposed merger. The European Union blocked the merger because it believed the result would be higher prices for customers, particularly airlines.11

To learn about several agencies responsible for the enforcement of U.S. business laws, see this chapter’s Entrepreneur’s Toolkit titled, “The Long Arm of the Law.”

ENTREPRENEUR’S TOOLKIT: The Long Arm of the Law

Every government has agencies designed to monitor the nation’s business environment and enforce its laws. Several important U.S. agencies that entrepreneurs and small business owners can consult for free legal information are:

■ U.S. Patent and Trademark Office (USPTO). The USPTO is a noncommercial federal bureau within the Department of Commerce. By issuing patents, it provides incentives to invent, invest in, and disclose new technologies worldwide. By registering trademarks, it protects business investment and safeguards consumers against confusion and deception. By disseminating patent and trademark information, it facilitates the development and sharing of new technologies worldwide.

■ U.S. International Trade Commission (USITC). The USITC is an independent, quasi-judicial federal agency. It provides trade expertise to both the legislative and executive branches of government, determines the impact of imports on U.S. industries, and directs actions against certain unfair trade practices such as patent, trademark, and copyright infringement. The agency has broad investigative powers on matters of trade and is a national resource where trade data are gathered and analyzed.

■ Federal Trade Commission (FTC). The FTC enforces a variety of federal antitrust and consumer protection laws. It seeks to ensure that the nation’s markets function competitively and are vigorous, efficient, and free of undue restrictions. The commission also works to enhance the smooth operation of the marketplace by eliminating acts or practices that are unfair or deceptive. In general, the commission’s efforts are directed toward stopping actions that threaten consumers’ opportunities to exercise informed choice.

■ U.S. Consumer Product Safety Commission (CPSC). The CPSC is an independent federal regulatory agency created to protect the public from injury and death associated with some 15,000 types of consumer products, including car seats, bicycles and bike helmets, lawnmowers, toys, and walkers. It also provides information for businesses regarding the export of noncompliant, misbranded, or banned products.

■ Want to Know More? Visit the Web sites of government agencies: USPTO (www.uspto.gov), USITC (www.usitc.gov), FTC (www.ftc.gov), and CPSC (www.cpsc.gov).

Source: Federal Trade Commission Web site (www.ftc.gov); U.S. Consumer Product Safety Commission Web site (www.cpsc.gov); U.S. Patent and Trademark Office Web site (www.uspto.gov); U.S. International Trade Commission Web site (www.usitc.gov).

Quick Study

1. What are
intellectual property rights? What is the significance of such rights?

2. Explain the term
industrial property
. What are its two types?

3. What is a
copyright
? Explain its importance to international business.

4. Identify the ramifications of
antitrust (antimonopoly) laws
and
product liability laws
?

Ethics and Social Responsibility

We learned in Chapter 2 that when a company goes global, its managers encounter many unfamiliar cultural rules that govern human behavior. Although legal systems set boundaries for lawful individual and corporate behavior, they are inadequate for dilemmas of ethics and social responsibility. Frameworks for business law vary in strength from country to country. Unfortunately, the quest for profits may entice a company to exploit differences in legal standards by locating certain business operations in nations where they will be less scrutinized. In this way, national legal differences can become ethical issues for managers.

Ethical behavior
is personal behavior in accordance with guidelines for good conduct or morality. Ethical dilemmas are not legal questions. When a law exists to guide a manager toward a legally correct action, that path must be followed. In an ethical dilemma, there is no right or wrong decision. There are alternatives, however, that may be equally valid in ethical terms depending on one’s perspective.

ethical behavior

Personal behavior in accordance with guidelines for good conduct or morality.

In addition to the need for individual managers to behave ethically, businesses are expected to exercise

corporate social responsibility

—the practice of going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities. Corporate social responsibility (or CSR as it is known) includes a wide variety of activities, including giving to the poor, building schools in developing countries, and protecting the global environment.

corporate social responsibility

Practice of companies going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities.

We can think of CSR as consisting of three layers of activity. The first layer is traditional philanthropy, whereby a corporation donates money and, perhaps, employee time toward a specific social cause. The second layer is related to risk management, whereby a company develops a code of conduct that it will follow in its global operations and agrees to operate with greater transparency. The third layer is strategic CSR, in which a business builds social responsibility into its core operations to create value and build competitive advantage.12

In the next two sections, we present the main theories of ethics and responsibility and then examine several important issues of corporate social responsibility.

Philosophies of Ethics and Social Responsibility

There are four commonly cited philosophies of business ethics and social responsibility. The Friedman view—named for its main supporter, the late economist Milton Friedman—says that a company’s sole responsibility is to maximize profits for its owners (or shareholders) while operating within the law.13 Imagine a company that moves its pollution-generating operations from a country having strict and expensive environmental-protection laws to a country having no such laws. Managers subscribing to the Friedman philosophy would applaud this decision. They would argue the company is doing its duty to increase profits for owners and, moreover, is operating within the law in the foreign country. Many people disagree with this argument against socially responsible activities. Today the discussion is not whether a company has CSR obligations, but how it will fulfill them.

The cultural relativist view says that a company should adopt local ethics wherever it operates because all belief systems are determined within a cultural context. Cultural relativism sees truth, itself, as relative and argues that right and wrong are determined within a specific situation. The expression “When in Rome, do as the Romans do” captures the essence of cultural relativism. Consider a company that opens a factory in a developing market and, following local customs, employs child laborers. The cultural relativist manager would argue this company is acting appropriately and in accordance with local standards of conduct. Many people find this line of ethical reasoning appalling.

The righteous moralist view says that a company should maintain its home-country ethics wherever it operates because the home-country’s view of ethics and responsibility is superior to others’ views. Imagine a company that expands from its developed-country base to an emerging market where local managers commonly bribe officials. Suppose headquarters detests the act of bribery and instructs its subsidiary managers to refrain from bribing any local officials. In this situation, headquarters is imposing its righteous moralist view on local managers.

The utilitarian view says that a company should behave in a way that maximizes “good” outcomes and minimizes “bad” outcomes wherever it operates. The utilitarian manager asks the question, “What outcome should I aim for?” and answers, “That which produces the best outcome for all affected parties.” In other words, utilitarian thinkers say the right behavior is that which produces the greatest good for the greatest number. Consider, again, the righteous moralist company above that instructs its employees not to bribe local officials in the emerging market. Now suppose a manager learns that by bribing a local official, the company will finally obtain permission to expand its factory and create 100 well-paying jobs for the local community. If the manager pays the bribe based on her calculations that more people will benefit than will be harmed by the outcome, she is practicing utilitarian ethics.

Although businesses develop guidelines and policies regarding ethical behavior and social responsibility, issues arise on a daily basis that can cause dilemmas for international managers. Let’s now examine some of these key issues.

Corporate Social Responsibility Issues

Companies cannot produce public relations campaigns that present a business as socially responsible if it does not truly embrace CSR principles. Conscientious business leaders realize the future of their companies rests on healthy workforces and environments worldwide. For example, soft drink makers support all sorts of environmental initiatives because they understand their futures depend on an ample supply of clean drinking water. Let’s now discuss CSR as it pertains to bribery and corruption, labor conditions and human rights, fair trade practices, and the environment.

Bribery and Corruption

Similar to other cultural and political elements, the prevalence of corruption varies from nation to nation. In certain countries, bribes are routinely paid to distributors and retailers to push a firm’s products through distribution channels. Bribes can mean the difference between obtaining an important contract and being completely shut out of a market. But corruption is detrimental to society and business. Among other things, corruption can send resources toward inefficient uses, hurt economic development, distort public policy, and damage national integrity.

Map 3.2 shows how countries rate on their perceived levels of corruption. The higher a country’s score on the corruption perceptions index (CPI), the less corrupt it is perceived to be by international managers. What stands out immediately on this map is that the least developed nations tend to be perceived as being most corrupt (such as Russia, much of Africa, and areas in the Middle East). This reflects the hesitancy on the part of international companies about investing in corrupt economies.

In November 2001, Enron Corporation acknowledged in a federal filing that it had overstated its earnings. Investors fled in droves as Enron stock became worthless and the company went bankrupt. Although executives had earned millions over the years in salaries and bonuses, Enron’s rank-and-file employees saw their retirement savings disappear as the firm disintegrated. European banks lost around $2 billion that they had lent to Enron and its subsidiaries. Chairman of the board, Kenneth Lay (now deceased), and chief executive officer, Jeffrey Skilling, were convicted on criminal charges. Then a criminal indictment was filed against accounting firm Arthur Andersen, Enron’s auditor, for shredding documents related to its work for Enron. With its reputation irreparably damaged, Andersen also collapsed.

MAP 3.2 Corruption Perceptions Index

In 2002, the U.S. Congress passed the Sarbanes-Oxley Act (Sarbox) on corporate governance, which established new, stringent accounting standards and reporting practices for firms. Around the world, governments, accounting standards boards, other regulators, and interest groups won the fight for higher standards and more transparent financial reporting by companies. Businesses worldwide received the message that fudging the accounting numbers, misrepresenting the firm’s financial health, and running a company in that gray area between right and wrong is unethical and, now, illegal.14

Some people believe Sarbox needs to be reformed because of the financial burden that companies face in conforming to the act’s requirements. Regulators, securities experts, and scholars (who largely praise Sarbox) are pitted against chief financial officers—three-fourths of whom say that the act should be reformed or repealed and almost as many who say its costs outweigh its benefits. Still, clarifications and additional guidance on the act’s most troublesome sections subsequent to its passage are helping companies to comply with Sarbox.15

Labor Conditions and Human Rights

To fulfill their responsibilities to society, companies are monitoring the actions of their own employees and the employees of companies with whom they conduct business. Pressure from human rights activists drove conscientious apparel companies to introduce codes of conduct and monitoring mechanisms for their international suppliers. Levi-Strauss (www.levistrauss.com) pioneered the use of practical codes to control working conditions at contractors’ facilities. The company does business only with partners who meet its “Terms of Engagement,” which sets minimal guidelines regarding ethical behavior, environmental and legal requirements, employment standards, and community involvement.16

Consider one case publicized by human rights and labor groups investigating charges of worker abuse at the factory of one of Nike’s Vietnamese suppliers. Twelve of 56 female employees reportedly fainted when a supervisor forced them to run around the factory as punishment for not wearing regulation shoes. Nike confirmed the report and, in suspending the supervisor, took steps to implement practices more in keeping with the company’s home-country ethics.

International law says that only nations can be held liable for human rights abuses. But activist groups can file a lawsuit against a U.S. business for an alleged human rights violation under the Alien Tort Claims Act by alleging a company’s complicity in the abuse. Yahoo! (www.yahoo.com) felt the power of this law when two Chinese dissidents were jailed after the company gave data it had on them to Chinese authorities. Yahoo! reached an out-of-court settlement with the families of the jailed men in late 2007. And despite denials of any responsibility in the matter, U.S. oil company Unocal, now part of Chevron (www.chevron.com), settled out of court over allegations of complicity in government soldiers’ abuse of villagers during construction of an oil pipeline in Myanmar in the 1990s.17

Fair Trade Practices

Starbucks (www.starbucks.com) works hard to operate in a socially responsible manner by trying to ease the plight of citizens in poor coffee-producing countries. Starbucks does this by building schools, health clinics, and coffee-processing facilities to improve the well-being of families in coffee-farming communities. The company also sells what it calls “fair trade coffee.” Fair trade products are those that involve companies working with suppliers in more equitable, meaningful, and sustainable ways. For Starbucks, this means ensuring that coffee farmers earn a fair price for their coffee crop and helping them farm in environmentally friendly ways.18

TransFair USA (www.transfairusa.org) is the nonprofit organization that independently certifies fair trade products such as Starbucks coffee. The Fair Trade model of international trade benefits over one million farmers and farm laborers in 58 developing countries across Africa, Asia, and Latin America. Fair Trade products now include coffee, tea, herbs, cocoa, chocolate, fruit, rice, sugar, flowers, honey, and spices. TransFair USA certifies that a product meets the following criteria:19

■
Fair prices.
Producer groups receive a guaranteed minimum floor price.

■
Fair labor conditions.
Farms do not employ children, and workers are given freedom of association, safe working conditions, and a living wage.

■
Direct trade.
Whenever possible, importers purchase from producer groups to eliminate intermediaries.

■
Democratic community development.
Farmers and workers decide how to spend their Fair Trade premiums in social and business development projects.

■
Environmental sustainability.
Farming methods protect the health of farmers and preserve ecosystems.

Environment

Concern for the environment and ecosystem is no longer left to government agencies and nongovernmental organizations. Today companies pursue “green” initiatives to reduce their toll on the environment and to reduce operating costs and boost profit margins.
Carbon footprint
is the environmental impact of greenhouse gases (measured in units of carbon dioxide) that results from human activity. It consists of two components:20

carbon footprint

Environmental impact of greenhouse gases (measured in units of carbon dioxide) that results from human activity.

■
Primary footprint:
direct carbon dioxide emissions from the burning of fossil fuels, including domestic energy consumption and transportation (such as electricity and gasoline).

■
Secondary footprint:
indirect carbon dioxide emissions from the whole lifecycle of products (from their manufacture to eventual breakdown).

A woman in Tokyo, Japan, charges a Toyota Crayon-EV electric car. Globalization and economic development take a toll on the environment. Companies are working to create all sorts of “green” products to reduce the impact of modern economies on our ecosystem. Besides car manufacturers, can you think of other types of companies that are working to become more environmentally responsible?

Source: TWPhoto/CORBIS. All Rights Reserved.

Companies at the leading edge of the green movement are printing a number on their products that represents the grams of carbon dioxide emitted from producing and shipping them to retailers. The number signifies the environmental impact of all the materials, chemicals, and so on, used in producing and distributing a good. For example, the United Kingdom’s number-one selling snack food brand, Walker (www.walkers-crisps.co.uk), stamps “75g” on its packets of cheese- and onion-flavored potato chips, or crisps—meaning 75 grams of carbon dioxide were emitted in producing and shipping each packet. Footwear and clothing maker Timberland (www.timberland.com) is implementing a different system. It labels its products with a score ranging from 0 to 10. A score of “0” means producing and shipping a product emitted less than 2.5 kilograms of carbon dioxide; a product with a score of “10” emitted 100 kilograms of carbon dioxide—roughly equivalent to driving a car 240 miles.21

Another trendsetter in reducing its carbon footprint is Marriott International (www.marriott.com). The hotel company’s employee cafeteria replaced paper and plastic containers with real plates and biodegradable potato-based containers called Spudware. Marriott gave employees reusable plastic water bottles and lets them exchange burnt-out regular bulbs, from work or home, for energy-saving compact fluorescent bulbs. And the company has green ambassadors who remind employees to print documents double-sided and to turn off lights and electronic devices not in use.22

Boisset Family Estates (www.boisset.com), France’s third-largest winery, initiated an eco-smart alternative to the glass bottle. Boisset uses aluminum-coated paperboard similar to containers commonly used for juices and milk. Besides protecting the product from oxidation and making it easier to chill, the new packaging helps the environment and improves company profits. It used to take 28 trucks to haul enough empty glass bottles to the winery for packaging the same volume of wine that today takes just one truck hauling empty cartons. After the cartons are filled, one truck now hauls away what used to take three trucks. The savings in materials, fuel, and equipment are significant.23

On a national level, the German government has gone greener than most others. Germany’s energy law guarantees operators of windmills and solar generators prices that are above the market rate for as long as 20 years. That law, combined with German expertise in aerodynamics, is making the country a global leader in renewable energy. Today 60 companies in Germany specialize in wind systems. Former East Germany is nicknamed Solar Valley because of the large number of companies that manufacture solar cells there. Germany’s green-energy sector employs more than 235,000 people and generates $33 billion in sales annually.24

Business and International Relations

The political relations between a company’s home country and the nations in which it does business affect its international business activities. Favorable political relationships foster stable business environments and increase international cooperation in many areas, including the development of international communications and distribution infrastructures. In turn, a stable environment requires a strong legal system through which disputes can be resolved quickly and fairly. In general, favorable political relations lead to increased business opportunities and lower risk.

To generate stable business environments, some countries have turned to multilateral agreements—treaties concluded among several nations, each of whom agrees to abide by treaty terms even if tensions develop. According to the European Union’s founding treaty, goods, services, and citizens of member nations are free to move across members’ borders. Every nation must continue to abide by such terms even if it has a conflict with another member. For instance, although Britain and France disagree on many issues, neither can treat goods, services, and citizens coming and going between their two nations any differently than it treats any other member nation’s goods, services, and citizens. See Chapter 8 for a detailed presentation of the European Union.

The United Nations

Although individual nations sometimes have the power to influence the course of events in certain parts of the world, they cannot monitor political activities everywhere at once. The

United Nations (UN)

(www.un.org) was formed after the Second World War to provide leadership in fostering peace and stability around the world. The UN and its many agencies provide food and medical supplies, educational supplies and training, and financial resources to poorer member nations. The UN receives its funding from member contributions based primarily on gross national product (GNP). Practically all nations in the world are UN members—except for several small countries and territories that have observer status.

United Nations (UN)

International organization formed after World War II to provide leadership in fostering peace and stability around the world.

The UN is headed by a secretary general who is elected by all members and serves for a five-year term. The UN system consists of six main bodies:

■ All members have an equal vote in the General Assembly, which discusses and recommends action on any matter that falls within the UN Charter. It approves the UN budget and the makeup of the other bodies.

■ The Security Council consists of 15 members. Five (China, France, the United Kingdom, Russia, and the United States) are permanent. Ten others are elected by the General Assembly for two-year terms. The council is responsible for ensuring international peace and security, and all UN members are supposed to be bound by its decisions.

■ The Economic and Social Council, which is responsible for economics, human rights, and social matters, administers a host of smaller organizations and specialized agencies.

■ The Trusteeship Council consists of the five permanent members of the Security Council and administers all trustee territories under UN custody.

■ The International Court of Justice consists of 15 judges elected by the General Assembly and Security Council. It can hear disputes only between nations, not cases brought against individuals or corporations. It has no compulsory jurisdiction, and its decisions can be, and have been, disregarded by specific nations.

■ Headed by the secretary general, the Secretariat administers the operations of the UN.

An important body within the UN Economic and Social Council is the United Nations Conference on Trade and Development (UNCTAD) (www.unctad.org). The organization has a broad mandate in the areas of international trade and economic development. It hosts conferences on pressing development issues including entrepreneurship, AIDS, poverty, and national debt. Certain conferences are designed to develop the business management skills of individuals in developing nations.

Quick Study

1. Define
ethical behavior
and
corporate social responsibility
.

2. What are four commonly cited philosophies of business ethics and social responsibility?

3. List several issues of ethics and social responsibility relevant to international managers.

4. Why are international relations among countries important to international business?

Bottom Line FOR BUSINESS

Differences in political and legal systems present both opportunities and risks for international companies. Gaining complete control over events in even the most stable national business environment is extremely difficult because of the intricate connections among politics, law, and culture. Still, understanding these connections is the first step to managing the risks of doing business in unfamiliar environments.

Implications for Business in Totalitarian Nations

Political opposition to business from nongovernmental organizations is extremely unlikely if a totalitarian nation sanctions that particular commercial activity. Bribery and kickbacks to government officials will likely prevail and refusal to pay tends not to be an option. As such, business activities in totalitarian nations are inherently risky. Business law in totalitarian nations is either vague or nonexistent and interpretation of the law is highly subjective. Finally, certain groups criticize companies for doing business in or with totalitarian nations, saying they are helping sustain oppressive political regimes.

Implications for Business in Democracies

Democracies tend to provide stable business environments through laws that protect individual property rights. Commerce should prosper when the private sector comprises independently owned firms that exist to make profits. Although participative democracy, property rights, and free markets tend to encourage economic growth, they do not always do so. India is the world’s largest democracy, yet its economy grew very slowly for decades. Meanwhile, some countries achieved rapid economic growth under political systems that were not genuinely democratic.

Which Type of Government Is Best for Business?

Do democratic governments provide more “stable” national business environments than totalitarian ones? Although democracies pass laws to protect individual civil liberties and property rights, totalitarian governments could also grant such rights. The difference is that whereas democracies strive to guarantee such rights, totalitarian governments retain the power to repeal them whenever they choose.

As for a nation’s rate of economic growth, we can say only that a democracy does not guarantee high rates of economic growth and that totalitarianism does not doom a nation to slow economic growth. An economy’s growth rate is influenced by many variables other than political and civil liberties, including its tax system, openness toward investment, availability of capital, and extent of trade and investment barriers.

Implications of Legal Issues for Companies

A nation’s political system is naturally intertwined with its legal system. Its political system inspires and endorses its legal system, which legitimizes and supports the political system. Flexible business strategies help companies operate within the political and legal frameworks of nations. An area in which political and legal environments have important implications is copyright law. People today share digital files worldwide for free and directly with one another through the Internet. The introduction of a new digital technology can devastate a business because it can spread worldwide in days. Managers will benefit if they have a solid grasp of how legal systems affect company operations and strategy.

Implications of Ethical Issues for Companies

Probably every international company of at least moderate size has a policy for corporate social responsibility (CSR). Traditionally, companies practiced CSR through old-fashioned philanthropy. Indeed, donating money and time toward solving social problems helped society and bolstered a company’s public image. Companies later developed codes of conduct for their global operations to ensure they were good citizens wherever they operated. Today companies search for ways to use CSR to create value and build competitive advantage. Key CSR issues include labor conditions, human rights, bribery, corruption, fair trade practices, and the environment.

Chapter Summary

1. Describe each main type of political system.

■ A
political system
consists of the structures, processes, and activities by which a nation governs itself.

■ In a
totalitarian system
, individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints.

■ Totalitarian governments tend to impose authority, lack constitutional guarantees, and restrict participation.

■ Under
theocratic totalitarianism
, a country’s religious leaders enforce laws and regulations based on religious and totalitarian beliefs.

■ Under
secular totalitarianism
, political leaders rely on military and bureaucratic power.

■ Secular totalitarianism takes three forms: communist totalitarianism, tribal totalitarianism, and right-wing totalitarianism.

■ In a democratic system, leaders are elected directly by the wide participation of the people or by their representatives.

■ Most democracies are representative democracies, in which citizens elect individuals from their groups to represent their political views.

■ Representative democracies strive to provide: freedom of expression, periodic elections, full civil and property rights, minority rights, and nonpolitical bureaucracies.

2. Identify the origins of political risk and how managers can reduce its effects.

■
Political risk
is the likelihood that a society will undergo political changes that negatively affect local business activity.

■ Macro risk threatens the activities of all domestic and international companies in every industry, whereas micro risk threatens companies only within a particular industry or more narrowly defined group.

■ Five actions or events that cause political risk are: conflict and violence, terrorism and kidnapping, property seizure, policy changes, and local content requirements.

■ The seizure of assets by a local government can take one of three forms:
confiscation
(forced transfer of assets without compensation),
expropriation
(forced transfer with compensation), or
nationalization
(forced takeover of an entire industry).

■ Managers can reduce the effects of political risk through: adaptation (incorporating risk into business strategies), information gathering (monitoring local political events), and political influence (such as by
lobbying
local political leaders).

■ The
Foreign Corrupt Practices Act
is a 1977 statute that forbids U.S. companies from bribing government officials or political candidates in other nations.

3. Describe each main type of legal system and the important global legal issues.

■ A country’s
legal system
is its set of laws and regulations, including the processes by which its laws are enacted and enforced and the ways in which its courts hold parties accountable for their actions.

■
Common law
is a legal system based on a country’s legal history (tradition), past cases that have come before its courts (precedent), and how laws are applied in specific situations (usage).

■
Civil law
is a system based on a detailed set of written rules and statutes that constitute a legal code, from which flows all obligations, responsibilities, and privileges.

■
Theocratic law
is a system based on religious teachings.

■ Businesses prefer a legal system that protects
property rights
(legal rights to resources and any income they generate) and
intellectual property
(property that results from people’s intellectual talent and abilities).

■ Intellectual property takes the form of
industrial property
(a patent or trademark) or copyright.

■ Many nations have
product liability laws
(responsibility for damage, injury, or death caused by defective products) and antitrust laws (designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages).

4. Explain ethics and social responsibility and key issues facing international companies.

■
Ethical behavior
is personal behavior in accordance with guidelines for good conduct or morality.

■
Corporate social responsibility
is the practice of companies going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities.

■ The Friedman view of CSR says that a company’s sole responsibility is to maximize profits for its owners while operating within the law.

■ The cultural relativist view of CSR says that a company should adopt local ethics wherever it operates.

■ The righteous moralist view of CSR says that a company should maintain its home-country ethics wherever it operates.

■ The utilitarian view of CSR says that a company should behave in a way that maximizes “good” outcomes and minimizes “bad” outcomes wherever it operates.

■ Most companies focus their corporate social responsibilities in the areas of labor conditions and human rights, bribery and corruption, fair trade practices, and the environment.

5. Explain how international relations affect international business activities.

■ Political relations between a company’s home country and those with which it does business strongly affect its international activities.

■ In general, favorable political relations lead to increased opportunity and stable business environments.

■ The mission of the
United Nations (UN)
is to provide leadership in fostering peace and stability around the world.

■ Although its global peacekeeping efforts have had mixed results, the UN helps poor nations by providing food and medical supplies, educational supplies and training, and financial resources.

Talk It Over

1. The Internet and the greater access to information it can provide are forcing politicians to change their methods of governing. How might the Internet change totalitarian political systems, such as North Korea? What might the Web’s future expansion mean for nations with theocratic systems (for example, Iran)? How might technology change the way that democracies function?

2. Under a totalitarian political system, the Indonesian economy grew strongly for 30 years. Meanwhile, the economy of the world’s largest functioning democracy, India, performed poorly for decades until recently. Relying on what you learned in this chapter, do you think the Indonesian economy grew despite or because of a totalitarian regime? What might explain India’s relatively poor performance under a democratic political system?

3. Consider the following statement: “Democratic political systems, as opposed to totalitarian ones, provide international companies with more stable environments in which to do business.” Do you agree? Why or why not? Support your argument with specific country examples.

Teaming Up

1. Debate Project. Two groups of four students each will debate the ethics of doing business in countries with totalitarian governments. After the first student from each side has spoken, the second student will question the opposing side’s arguments, looking for holes and inconsistencies. The third student will attempt to answer these arguments. A fourth student will present a summary of each side’s arguments. Finally, the class will vote to determine which team has offered the more compelling argument.

2. Market Entry Strategy Project. This exercise corresponds to the MESP online simulation. For the nation you are studying, what type of political and legal systems does it have? Do free elections take place? Is the government heavily involved in the economy? Is the legal system effective and impartial? Do political and legal conditions suggest the country could be a potential market? If so, for what kinds of goods or services might the market be appealing? What is the level of corruption in the nation? Is legislation pending that may be relevant to international companies? Integrate your findings into your completed MESP report.

Key Terms

antitrust (antimonopoly) laws (p. 98)

Berne Convention (p. 97)

capitalism (p. 85)

carbon footprint (p. 105)

civil law (p. 95)

common law (p. 94)

communism (p. 82)

confiscation (p. 90)

copyright (p. 97)

corporate social responsibility (p. 100)

democracy (p. 84)

ethical behavior (p. 100)

expropriation (p. 90)

Foreign Corrupt Practices Act (p. 93)

industrial property (p. 96)

intellectual property (p. 97)

legal system (p. 93)

lobbying (p. 93)

local content requirements (p. 91)

nationalism (p. 94)

nationalization (p. 91)

patent (p. 97)

political risk (p. 86)

political system (p. 80)

private sector (p. 85)

product liability (p. 98)

property rights (p. 96)

representative democracy (p. 84)

secular totalitarianism (p. 82)

socialism (p. 82)

theocracy (p. 82)

theocratic law (p. 95)

theocratic totalitarianism (p. 82)

totalitarian system (p. 81)

trademark (p. 97)

United Nations (UN) (p. 106)

value added tax (VAT) (p. 98)

Take It to the Web

1. Video Report. Visit this book’s channel on YouTube (YouTube.com/MyIBvideos). Click on “Playlists” near the top of the page and click on the set of videos labeled “Ch 03: Politics, Law, and Business Ethics.” Watch one video from the list and summarize it in a half-page report. Reflecting on the contents of this chapter, which components of politics, law, and business ethics can you identify in the video? How might a company engaged in international business act on the information contained in the video?

2. Web Site Report. To attract investment from domestic and foreign companies, nations compete against each other to provide top-notch services. Visit the main government portal of Hong Kong, SAR (www.gov.hk) and select your preferred language. Can you identify several sections of the site that are government-to-business activities and government-to-citizen dealings? Visit the “Environment” section and read about Hong Kong’s eco-friendly initiatives. What key milestones has it achieved, and what future initiatives are planned?

List the types of services that would be available to you as: (1) a citizen of Hong Kong, (2) a tourist going to visit Hong Kong, (3) a person thinking of starting a business in Hong Kong, and (4) a company currently operating in Hong Kong. What additional services should the government offer on its Web site that it does not currently provide?

Ethical Challenges

1. You are the president of a firm that publishes textbooks for medical students in over 30 languages. On a recent trip to a university in a developing country (with a GDP per capita of under $1,000 per year), you discover that students are using bound photocopies of your best-selling medical textbook. Speaking with several students, they inform you that if they were required to pay for the actual books, they could not afford medical school. Witnessing the clear copyright violation firsthand, how do you react? What possible courses of action might you take? If additional information would be helpful to you, what would it be?

2. You are the proprietor of a fledging computer graphics company in Shanghai, China. The sophisticated business application software you need for your business normally sells for 2,900 renminbi (around $350) at computer stores in Shanghai. But with an income of just over $5,000 a year, you cannot afford to buy the original graphics software for your business. A friend has told you she can get you all the software you need, and more, at a nearby street market for only $40. Because very few people buy official software, you know the authorities will not punish you if you are caught. Is it unethical for you to purchase the pirated software? Do you believe you are justified in doing so?

3. You are the CEO of a major pharmaceutical firm that holds worldwide patents on several highly successful drugs. Your company invests heavily to develop its drugs because patents allow it to recoup its investment. But your firm has come under pressure from competitors selling cheaper alternatives and from politicians and nongovernmental groups to supply drugs to people in poor nations at reduced prices. Several senior executives in your company feel the firm is unfairly being asked to discount its drugs that treat diseases afflicting people of poor nations. Some executives suggest the firm focus on drugs to treat diseases (such as heart disease and cancer) that occur mostly in wealthy nations, but you are uneasy with such a move. Would such a course of action be ethical? Diseases such as AIDS, cancer, and heart disease all kill their victims. Should drugs for only certain diseases be exempt from patent protection?

PRACTICING INTERNATIONAL MANAGEMENT CASE: Pirates of Globalization

The piracy of intellectual property is a serious global challenge. Sophisticated pirates routinely violate patents, trademarks, and copyrights to churn out high-quality fakes of the best-known brands. Trademark counterfeiting amounts to between 5 and 7 percent of world trade or around $500 billion a year! Phony products appear in many industries, including computer software, films, books, music CDs, and pharmaceutical drugs.

Traditionally peddled by sidewalk vendors and in backstreet markets, counterfeiters now employ the latest technology. Just as honest businesses do, they are using the Internet to slash the cost of distributing their fake goods. All merchandise on some Internet sites is counterfeit, and even legitimate Web site operators, such as eBay (www.ebay.com), have difficulty rooting out pirates.

New York retailer Tiffany & Company (www any.com) recently sued eBay because counterfeits of its products appeared on eBay’s Web site. In the complaint, Tiffany said that of the 186 jewelry pieces bearing the Tiffany name that it randomly purchased on eBay, 73 percent were phony. Tiffany argues that because eBay profits significantly from the sale of fake merchandise, provides a forum for such sales, and promotes it, that the company “should bear responsibility for the sale of counterfeit merchandise on its site.” Others disagree, saying it is impractical to require online auctioneers to verify the authenticity of every product sold on its site. They compare it to ordering newspapers to verify the authenticity of everything sold through their classified ads section.

Pirates have not ignored the market for automotive parts, which loses around $12 billion annually to phony goods. Counterfeiters are making fake batteries, windshields, brakes, fluids, filters, and spark plugs. The problem is causing fears of lawsuits because of malfunctioning counterfeits and concerns of lost revenue for producers of the genuine articles. For example, if someone is in an accident because of a counterfeit product, legitimate manufacturers need to prove the product is not their own. Car manufacturers list potentially harmful fakes such as brake linings made of compressed sawdust and transmission fluid that is nothing more than cheap oil with added dye. Boxes bearing legitimate-looking labels make it difficult for consumers to tell the difference between a fake and the real deal. More fake products are recently coming into North America, but the larger market for consumption remains the Middle East.

China, India, South Korea, Malaysia, Taiwan, and Thailand are all leading sources of counterfeit products. Lax anti-piracy regulations and booming economies in China and India mean potential intellectual-property traps await companies doing business in these emerging markets. For example, Indian law gives international pharmaceutical firms five- to seven-year patents on processes used to manufacture drugs—but not on the drugs themselves. This lets Indian companies modify the patented production processes of international pharmaceutical companies to create only slightly different drugs.

In China, political protection for pirates of intellectual property remains fairly common. Government officials, people working for the government, and even the People’s Liberation Army (China’s national army) operate factories that churn out pirated goods; others operate on government-owned land. Criminals are often connected to political leaders and receive legal protection from prosecution. An international company has difficulty fighting piracy in China because filing a lawsuit can severely damage its business relations there.

Yet international opinion is divided on the root causes of rampant intellectual-property violations in China. Some argue that Chinese legislation is vaguely worded and difficult to enforce. Others say that China’s intellectual-property laws and regulations are fine, but poor enforcement is to blame for high rates of piracy. Amazingly, China’s regulatory body sometimes allows a counterfeiter to remove an infringing trademark and still sell the substandard good. Technology companies claiming China’s weak intellectual-property laws have harmed them include Microsoft (www.microsoft.com), which claims that its software is widely pirated, and Cisco Systems (www.cisco.com), which sued a Chinese hardware maker for allegedly copying and using Cisco networking software.

Designer Giorgio Armani (www.giorgioarmani.com) has not had much of a presence in China because he finds fake goods across the country emblazoned with his logo. Yet he is not put off by China, opening both an Armani boutique and an Emporio Armani store on Shanghai’s historic Bund. Despite ambitious plans to launch as many as 36 more units, Armani understands the challenges of counterfeiting. He feels pirating is flattering “because it means you are doing the right thing,” but concedes the problem requires action. In international business, and especially in emerging markets, it pays to remember that old Latin phrase, caveat emptor, “let the buyer beware.”

Thinking Globally

1. What actions can companies and governments take to ensure that products cannot be easily pirated? Be specific.

2. Do you think that the international business community is being too lax about the abuse of intellectual-property rights? Are international companies simply afraid to speak out for fear of jeopardizing access to attractive markets?

3. Increased digital communication may pose a threat to intellectual property because technology allows people to create perfect clones of original works. How do you think the Internet might affect intellectual-property laws?

4. Locate information on the Tiffany vs. eBay lawsuit mentioned in the case. Identify the arguments of the plaintiff and the defendant and who prevailed. What are the implications of that lawsuit for the sale of counterfeits in online auctions?

Source: Catherine Holahan, “Judge to Tiffany: Police Your Own Brand,” Business Week (www.businessweek.com), July 15, 2008; Randy Myers, “Counterattack,” CFO Magazine, June 2008, pp. 62–66; Russ Banham, “Chinese Checking,” CFO Magazine, September 2007, pp. 61–64; Rachel Metz, “eBay Beats Tiffany in Court Case Over Trademarks,”
CNBC.com
Web site (www.cnbc.com).

(Wild 78)

Wild, John J., Kenneth L. Wild & Jerry C.Y. Han. International Business: The Challenges of Globalization, 5th Edition. Pearson Learning Solutions. .