MBA book international business environment

7 International Business1.2.5 Foreign Direct Investment without Alliances 1.2.6 Foreign Direct Investment with Strategic Alliance 1.3 External Influence in International Trade 1.0 AIMS A

International Business Environment

MBA Second Year (International Business)

School of Distance Education Bharathiar University, Coimbatore - 641 046

Authors: B Murali Krishna and V V Vara Prasad Copyright © 2008, Bharathiar University

All Rights Reserved

Produced and Printed

by EXCEL BOOKS PRIVATE LIMITED A-45, Naraina, Phase-I,

Page No UNIT I

UNIT II

UNIT III

Lesson 6 Convertibility, Exchange Restrictions and International Monetary System 66

UNIT IV Lesson 7 Legal Environment International Law in International Marketing 83

UNIT V

CONTENTS

INTERNATIONAL BUSINESS ENVIRONMENT

-UNIT V

Law of environment-Environmental protection - International policy on natures-land,forest, water

5 International Business

UNIT 1

UNIT I

7 International Business

1.2.5 Foreign Direct Investment without Alliances

1.2.6 Foreign Direct Investment with Strategic Alliance

1.3 External Influence in International Trade

1.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:

z Study the process of international trade

z Know the factors influence to international trade

1.1 INTRODUCTION

We have studied the introduction to international business in the first lesson Now, we

shift our focus from macro aspects to micro aspects of international business Global

company has to formulate strategies based on its missions, objectives and goals

Strategy formulation is a must for a global company to make decisions regarding the

markets to enter, product/service range to introduce in the foreign countries and the

like Further, the severe and intensified competition in the global market makes the

strategy formulation a challenging task

8

International Business Environment The fundamental basis for strategy formulation is the environmental analysis

Environment provides the opportunities to the business to produce and sell a particular product For example, the present day business environment provides wide opportunity for internet Similarly, environment in India provides opportunity for production and selling of fuel saving motor bicycles European climatic condition provides the opportunity for woolen and leather garments

Environment, sometimes poses threats and challenges to the business Business should enhance its strengths in order to face the challenges posed by the environment For example, china dumped steel at cheap prices in the Indian market and posed a threat to the Indian steel industry particularly to SAIL and TISCO Consequently, Indian steel industry improved its technology in order to meet the challenges

Study of environment helps the business to formulate strategies and run the business efficiently in the competitive global market We understand the environment has significant and crucial impact on the business Thus, business depends on environmental dynamics Now, we study the meaning of business environment

1.2 MODES OF INTERNATIONAL BUSINESS

1.2.1 Exporting

Exporting is the simplest and widely used mode of entering foreign markets

The advantages of exporting include:

Need for Limited Finance: If the company selects a company in the host country to

distribute, the company can enter international market with no or less financial resources, alternatively, if the company chooses to distribute on its own, it needs to invest financial resources, but this amount would be quite less compared to that would

be necessary under other modes

Less Risk: Exporting involves less risk as the company understands the culture,

customer and the market of the host country gradually The company can enter the host country on a full scale, if the product is accepted by the host country’s market British company selected this mode to export jams to Japan

Motivation for Exporting: Motivations for exporting are proactive and reactive

Proactive motivations are opportunities available in the host country San Antonio’s

pace, Inc., producing Tex-Mex food products exported its products to Mexico as Mexicans relished the taste of its products

Reactive motivations are those efforts taken by the company to export the product to a foreign due to the decline in demand for its product in the home country

Toto Ltd., of Japan started exporting its products, i.e., Porcelain bathroom fixtures to China when the Japanese economy started slowing down in 1990s

Forms of Exporting

Forms of exporting include: indirect exporting, direct exporting and intra corporate transfers

1 Indirect Exporting: Indirect exporting is exporting the products either in their

original form or in the modified form to a foreign country through another domestic company Various publishers in India including Himalaya Publishing House sell their products, i.e., books to UBS publishers of India, which in turn exports these books to various foreign countries

2 Direct Exporting: Direct exporting is selling the products in a foreign country

directly through its distribution arrangements or through a host country’s company Baskin Robbins initially exported its ice-cream to Russia in 190 and

9 International Business

later opened 74 outlets with Russian partners Finally in 1995 it established its ice

ream plant in Moscow

3 Intra corporate Transfers: Inter corporate transfers are selling of products by a

company to its affiliated company in host country (another country) Selling of

products by Hindustan Lever in India to Unilever in USA This transaction is

treated as exports in India and imports in USA

Factors to be considered: The company, while exporting, should consider the

following factors:

foreign exchange etc

customer, customer awareness and customer preferences

warehousing cost, packaging, transporting, inventory carrying costs etc

country’s companies Japanese’s companies like Sony, Minolta and Hitachi rely

on the distribution networks of their subsidiaries in the host country

Export Intermediaries: Export intermediaries perform a variety of functions and

enable the small companies to export their goods to foreign countries Their functions

include: handling transportation, documentation, taking ownership of foreign-bound

goods, assuming total responsibility for exporting and financing Types of export

intermediaries include:

client) These companies act as commission agents for exports or they take title to

the goods

z Co-operative society: The domestic companies desire to export the goods form a

cooperative society, which undertakes the exporting operations of its members

z International Trading Company: This company is engaged in directly exporting

and importing It buys the goods from the domestic companies and exports

Therefore, the companies can export their goods by selling them to the

international trading company

z Manufacture’s Agents: They work on a commission basis They solicit domestic

orders for foreign manufacturers

z Manufacture’s Export Agents: These agents also work on a commission basis

They sell the domestic manufacturers’ products in the foreign markets and act as

their foreign sales department

z Export and Import Brokers: The brokers bridge the gap between exporters and

importers and bring these two parties together

z Freight Forwarders: Freight forwarders help the domestic manufactures in

exporting their goods by performing various functions like physical transportation

of goods, arranging customs documents and arranging transportation services

1.2.2 Licensing

International Licensing

In this mode of entry, the domestic manufacturer leases the right to use its intellectual

property, i.e., technology, work methods, patents, copyright, brand names, trade

market etc, to a manufacturer in a foreign country for a fee Here the manufacturer in

10

International Business Environment the domestic country is called ‘licensor’ and the manufacturer in the foreign country is

called ‘licensee.’ The process of the licensing is as shown in the figure 1.1

Licensing is popular method of entering foreign markets The cost of entering foreign markets through this mode is less costly The domestic company need not invest any capital as it has already developed intellectual property As such, the domestic company earns revenue without additional investment Hence, most of the companies prefer this mode of foreign entry

Licensor Licensor Leases the Right to use the Intellectual

Property

Receives Royalty Money

Uses the Intellectual Property to Produce Products for Sales in his Country

Pays Royalty

To the Licensor for Using Intellectual Property Licensee Licensee

Figure 1.1

The domestic company can choose any international location and enjoy the advantages without incurring any obligations and responsibilities of ownership, managerial, investment etc Kirin Brewery – Japan’s largest beer producer entered Canada by granting license to Molson and British market by granting license to Charles Wells Brewery

Basic Issues in International Licensing

Companies should consider various factors in deciding negotiations Each international licensing is unique and has to be decided separately However, there are certain common factors, which affect most of the international licenses They are: specifying the agreement’s boundaries, determining the royalty, determining right, privileges and constraints, defining dispute resolution methods, specifying the duration of the contract Now, we shall discuss these factors in detail

z Boundaries of the Agreements: The companies should clearly define the

boundaries of agreements They determine which rights and privileges are being

onvey4d in the agreement

Pepsi-Cola granted license to Heineken of Netherlands with exclusive rights of producing and selling Pepsi-Cola in Netherlands Under this agreement the boundaries are (i) Heineken should not export Pepsi-Cola to any other country, (ii) Pepsi supplies concentrated cola syrup and Heineken adds carbonated water to produce beverage, and (iii) Pepsi can grant license to other companies in Netherlands to produce other products of Pepsi like Potato chips

z Determination of Royalty: The most important factor in deciding the license is

the amount of royalty It is needless to mention that the licensor expects high rate

of royalty while the licensee would be unwilling to pay much royalty However, both the parties negotiate for a fair royalty for both the sides in order to implement

the contract more successfully

z Determining Rights, Privileges and Constraints: Another important factor, in

granting license is determining clearly and specifically the right, privilege and constraints For example, if the Indian licensee of Aiwa TV uses interior inputs in order to reduce price, boost up sales and profits, the image of the Japanese

licensor would be damaged

11 International Business

z Another constraint is that the licensee may under report the volume of the sales in

order to reduce the royalty payment to the licensor Therefore, the licensing

agreement clearly and specifically indicates the rights, privileges etc., of both the

parties and reduces the freedom of the licensee in order to reduce the hurdles in

the implementation of the agreement

z Dispute Settlement Mechanism: The licensee and licensor should clearly mention

the mechanism to settle the disputes as disputes are bound to crop up This is

because, settlement of disputes in courts is costly, time consuming and hinders

business interests

z Agreement Duration: The two parties of the agreement specify the duration of the

agreement Licensing cannot be a short-term strategy Hence, the duration of the

licensing should not be of the short-term It would always be appropriate to have

long duration of the licensing Tokyo Disneyland demanded on a 100-year

licensing agreement with The Walt Disney Company

disadvantages of licensing

1.2.3 Franchising

Now, we shall discuss the next mode of going abroad, i.e., international franchising

International Franchising

Franchising is a form of licensing The franchisor can exercise more control over the

franchised compared to that in licensing International franchising is growing at a fast

rate

Under franchising, an independent organization called the franchisee operates the

business under the name of another company called the franchisor Under this

agreement the franchisee pays a fee to the franchisor The franchisor provides the

following services to the franchisee:

z Product reputations

services, and quality assurance programs

Basic Issues in Franchising

successful in USA due to the popular menu and fast and efficient services

countries

z The franchiser may have the experience in franchising in the home country before

going for international franchising

z Foreign investors should come forward for introducing the product on franchising

12

International Business Environment z Franchisee should agree to adhere to follow the franchisor’s requirements like

appearance, financial reporting, operating procedures, customer service etc

services facilities, provide expertise, advertising, corporate image etc

z Franchisor allows the franchisee some degree of flexibility in order to meet the local tastes and preferences McDonald restaurants in Germany sell beet also and McDonald restaurants in Germany sell beet also and McDonald restaurants in France sell wine also

Franchising is more popular in USA Fast food companies like McDonalds, Dairy Queen, Domino’s Pizza Hut, KFC have franchised restaurants worldwide NIIT has the franchised computer training centers in entire India

Hotels like Hilton and Marriott, rental cars like Hertz and Avis also have international franchisees

Like every mode, franchising also has advantages and disadvantages Let us now discuss the advantages and disadvantages of franchising

• Franchisor leans more lessons from the experiences of the franchisees, which he could not experience from the home country’s market

McDonald benefited from the world wide learning phenomenon

McDonald is convinced to open a restaurant in inner-city office building in Japan This location has become a more successful one

Based on this lesson, McDonald opened its restaurants in downtown locations in various countries

• Franchisee can early start a business with low risk as he selects

an established and proven product and operating system

• Franchise gets the benefits of R &

D with low cost

• Franchisee escapes form the risk of product failure

• International franchising may be more complicated than domestic franchising

McDonald taught the Russian farmers the methods of growing potatoes to meet its standards

• It is difficult to control the international franchisee As one of the French investor did not maintain the stores as per the standards, McDonald did revoke the franchise

• Franchising agents reduce the market opportunities for both the franchisor and franchisee

• Both the parties have the responsibilities

to maintain product quality and product promotion

• There is scope for misunderstanding between the parties

• There is a problem of leakage of trade secrets

13 International Business

Contract Manufacturing

Some companies outsource their part of or entire production and concentrate on

marketing operations This practice is called the contract manufacturing or

outsourcing

Nike has contracted with a number of factories in South-east Asia to produce its

athletic foot ware and it concentrates on marketing Bata also contracted with a

number of cobblers in India to produce its foot ware and concentrate on marketing

Mega Toys – a Los Angeles based company contracts with Chinese plants to produce

Toys and Mega Toys concentrates on marketing

The advantages and disadvantages of contract manufacturing include:

Table 1.2: Advantages and Disadvantages of Contract Manufacturing

Advantages Disadvantages

z International business can focus on the

part of the value chain where it has

distinctive competence

z It reduces the cost of production as the

host country’s companies with their

relative cost advantage produce at low

cost

z Small and medium industrial units in the

host country can also develop as most of

the production activities take in these

units

z The international company gets the

location advantages generated by the host

country’s production

z Host country’s companies may take up the marketing activities also, hindering the interest of the international company

z Host country’s companies may not strictly adhere to the production design, quality standard etc These factors result in quality problems, design problem and other surprises

z The poor working countries in the host country’s companies affect the company’s image For example, Nike has suffered a string of blows to its public image because of reports of unsafe and harsh working conditions in Vietnamese factories churning our Nike foot ware

Management Contracts

The companies with low level technology and managerial expertise may seek the

assistance of a foreign company Then the foreign company may agree to provide

technical assistance and managerial expertise This agreement between these two

companies is called the management contract

A management contract is an agreement between two companies, whereby one

company provides managerial assistance, technical expertise and specialized services

to the second company of the argument for a certain agreed period in return for

monetary compensation Monetary compensation may be in the form of:

z A flat fee,

measures

Management contracts are mostly due to governmental inventions The Government

of the Kingdom of Saudi Arabia nationalized Armco and requested the former owners

to mange the company Exxon and other former owners of Armco accepted the offer

Delta, Air France and KLM often provide technical and managerial assistance to the

small airlines companies owned by the Governments

Turnkey Project

Indonesian Government during 1974 invited global tenders for construction of a sugar

factory in the country Indonesia government received the tenders from the companies

14

International Business Environment of USA, UK, France, Germany and Japan One of the Japanese Company quoted

highest price compared to all other companies

Indonesian Government studied the quotation of this Japanese company This quotation includes: development of the fields for growing sugarcane, development of seedlings, construction of sugar factory, roads, communication, power, water etc., connecting the factory, train the local people, development of the distribution channels

in Indonesia, production of by-products and their market, plans for the export of surplus sugar etc it also made a provision for the transfer of the factory along with the tool package to the Indonesian Government and follow-up the activities after it is transferred to the Indonesian Government

Indonesian Government was very much satisfied with the total package and invited the Japanese company to implement the project The Japanese company and Indonesian Government entered and agreement for implantation of this project by the Japanese company for a price This project is called ‘Turnkey Project.”

A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for remuneration The form of remuneration includes:

z A fixed price (firm plans to implement the project below this price)

z Payment on cost plus basis (i.e., total cost incurred plus profit) This form of pricing allows the company to shift the risk of inflation/enhanced costs

to the purchaser

International turnkey projects include nuclear power plants, airports, oil refinery, national highways, railway lines etc Hence, they are large and multiyear projects International companies involve in such projects include: Bechtel, Brown and Root, Hyundai Group, Kennengen, Friedrich Krupp Gmb H etc

The companies normally approach the host country’s Governments or International Finance Corporations, Export-import Bank of USA and the like for financial assistance, as the turnkey projects require huge finances

The recent approach of turnkey projects is Build, Operate and Transfer (B-O-T) The company builds the manufacturing/services facility, operates it for some time and then transfers it to the host country’s Government In this approach, the contractor will not

be paid the remuneration Government of Gabon and the Electricity Supply Board International of Ireland and Campagnic General des Eaux of France agreed to establish electric supply system and water system in Gabon and operate for twenty five years and then transfer the ownership of these projects to the Government of Gabon

So far, we have discussed the various indirect methods of entering foreign markets Now, we shall discuss the direct method, i.e., Foreign Direct Investment

1.2.5 Foreign Direct Investment without Alliances

Some companies, enter the foreign markets through exporting, licensing, franchising etc., get the knowledge and awareness of the foreign markets, culture of the country, customers’ preferences, political situation of the country etc., and then establish manufacturing facilities by ownership in the foreign countries Baskin-Robbins’ in Russia followed this strategy In contrast, some other companies enter the foreign market through ownership and control of assets in host countries

Companies, which enter the international markets though Foreign Direct Investment (FDI), invest their money, establish manufacturing and marketing facilities though ownership and control

15 International Business

Foreign firm needs to control the operations when:

z It has foreign firm’s need to control the operations when it has subsidiaries to

achieve strategic synergies

potentialities and their full utilization needs planned exploitation

The US companies transferred their managerial expertise and technological skills to

their subsidiaries operating in UK and hence these subsidiaries have become

successful competitors to the UK companies

Now we analyze the advantages and disadvantages of FDI

Table 1.3: Advantages and Disadvantages of FDI Advantages Disadvantages

Mostly, the customers of the host country

prefer the products produced in their

country like—‘be American, buy

American,’ Be Indian,’ ‘be Indian, Buy

Indian in such cases FDI helps the

company to gain market through this

mode rather than other modes

Purchase mangers of most of the

companies prefer to buy local production

in order to ensure certainty of supply,

faster services, quality dependability and

better communication with the suppler

The company can produce based on the

local environment and changing

preferences of the customers

FDI exposes the company (to a fullest extent)

to the host country’s political, and economic risks

FDI also exposes the company to the exchange-rate fluctuations

Some countries discourage the entry of foreign companies through FDI in order to protect the domestic industry

Changing Government policies of the host country may create uncertainties to the company

Host country Governments, sometime, ban the acquisition of local companies by foreign companies, impose restrictions on repatriation of dividends and capital India has allowed 100% convertibility

Greenfield Strategy

The term Greenfield refers to starting with a virgin green site and then building on it

Thus, Greenfield strategy is starting of the operations of a company from form scratch

in a foreign market The company conducts the market survey, elects the location,

buys or leases land, creates the new facilities, erects the machinery, remits or transfers

the human resources and starts the operations and marketing activities This strategy is

followed by Fuji in locating its manufacturing facilities in South Carolina, by

Mercedes-Benz in locating automobile assembly plant in Alabama and by Nissan in

locating its factory in Sunderland, England

Disney management faced the problems in building Disneyland in Paris

These problems include:

z Problems in dealing with French construction contractors

z Communication difficulties with painters

threatened the opening

z Local employees resisted the firm’s attempt to impose its US work values

The next one is the FDI with strategic alliances

Now, we discuss the advantages and disadvantages of Greenfield strategy

ƒ The company can have latest models

of the buildings, machinery and equipment technology

ƒ The company can have its gestation period to understand and adjust of the new culture of the host country Thus,

it can avoid the cultural shock

ƒ This strategy results in a longer gestation period

as the successful implementation takes time and patience

ƒ Some companies may not get the land in the location of its choice

ƒ The company has to follow the rules and regulations imposed by the host country’s Government in case of construction of the factory buildings

ƒ Host country’s Government may impose conditions that the company should recruit local people and train them, if necessary, to meet the company’s requirements

1.2.6 Foreign Direct Investment with Strategic Alliances

Innovations, creations, productivity, growth, expansions and diversifications, in the recent years, are mostly accomplished by the strategic alliances adopted by various companies like mergers, acquisitions, and joint-ventures

Strategic alliance is a co-operative and collaborative approach to achieve the larger goals Strategic alliance takes different forms like licensing, franchising, contract manufacturing, joint-ventures etc alliance is a strategy to explore a new market, which the companies individually cannot do For example, Xerox of USA and Fuji of Japan collaborated to explore new markets in Europe and Pacific Rim

Two companies join hands in order to align their distinctive and different strengths

Dunlop and Pirelli—the two type making corporations—joined together in order to synergies the strength of marketing capabilities of Dunlop and R&D capabilities of Pirelli

Check Your Progress 1

Define the following:

1.3 EXTERNAL INFLUENCE IN INTERNATIONAL TRADE

There are different factors (variables) in the macro environment that have an influence

on the business Some of these variables are: technology, the economy, social activities, physical factors, legal issues, politics, the government and international trade

Let’s look at each of these variables individually:

1.3.1 Technology

It is very important for the business to make effectively use of advance technology

Sophisticated electronics and computers to produce the necessary products and

17 International Business

services replace machinery and some labour Businesses cannot control this variable

but only adjust to changes in this environment

1.3.2 Economy

Forces such as levels of employment, interest rates, the economic growth rate and

exchange rates cannot be controlled by a business The business can however have

some influence on this environment by creating jobs and help with the increase in the

economic growth rate

1.3.3 Social Environment

Businesses need to get involve in social responsibility programmes E.g A company

sponsoring food and blankets to a poverty stricken community

1.3.4 Physical Factors

The business also has a responsibility regarding its physical environment It needs to

minimize or avoid pollution, and implement waste management Remember, there are

only limited resources available, so therefore we need to manage it well!

1.3.5 Legal Environment

This environment includes all the rules, laws and restrictions that all business and

individuals need to adhere to Some of these laws (Acts) are: the Labour Relations

Act, the Employment Equity Act etc

1.3.6 Political Environment

During elections citizens of the country elect certain individuals to form a government

to represent them All businesses need to adhere to all legislation set by this elected

government

1.3.7 Government

This is also known as the institutional environment They play an important role in the

economic and social environment of the country The government has certain

objectives for the country such as: sustainable economic growth increase in the

employment rate etc All businesses need to support the government in these

objectives

1.3.8 International Trade

This variable includes trade with other countries South Africa needs to import certain

products from other countries and we earn foreign currency by exporting products to

other countries All businesses need to make sure that they produce good quality

products and build good relationships with foreign businesses

Check Your Progress 2

Fill in the blanks:

……… and bring these two parties together

their goods by performing various functions like physical transportation

of goods, arranging customs documents and arranging transportation

services

1.4 INTERNATIONALIZATION PROCESS

"Internationalization is a process that prepares the community for successful

participation in an increasingly interdependent world The process should infuse all

18

International Business Environment facets of the post-secondary system, fostering global understanding and developing

skills for effective living and working in a diverse world”

The two principles of effective internationalization:

1 The internationalization process gathers momentum and achieves greater stability when a number of different international activities, programs and initiatives work together in a mutually strengthening ways

2 The internationalization process is effective and sustained to the degree it is integrated with the institution's primary functions of teaching, research and service

The Mechanisms of Internationalization include:

M e c h a n i s m F a c i l i t a t e s I n t e r n a t i o n a l i z a t i o n b y :

Curriculum Development Infusing an international/multicultural dimension across the

curriculum; internationalizing general education in order to expose more students to the international dimensions of their studies;

addressing international aspects of academic disciplines, professional, technical, and vocational training

Professional Development of Faculty, Staff and

International Development Projects

Providing international experience for faculty, staff and students in developing countries in areas of technology transfer, human resource development, institutional strengthening, international consultancies; can lead to further collaborations in international research,

development of joint courses or programs, and new institution linkages

institution-to-Institutional Linkages Establishing international partnerships to promote inter-institutional

exchanges of students, faculty, scholars; may also lead to development of international practicums, joint courses, collaborations in research, publications; enhances international prestige and reputation of both institutions

Community Linkages Forming partnerships with individuals, local businesses, agencies, or

organizations for overseas missions and projects; internationalizing continuing education courses; establishing international student home stay programs; organizing an international speaker's bureau; drawing on knowledge and experience of multicultural and First Nations community groups to support campus-wide

internationalization

International Student Programs

Supporting and integrating a geographically and culturally diverse corps of international students and scholars into campus life to enhance education for all students; providing opportunities for international understanding and cross-cultural/intercultural learning

in the classroom; internationalizing wider community via home stay and host family programs

Exchange Programs Providing opportunities for study/work abroad for domestic students,

scholars, faculty and staff; promoting access to international practicums and co-op placements; can lead to development of international diplomas, joint degrees and other forms of international collaboration and exchange

19 International Business

1.5 LET US SUM UP

International trade is the exchange of capital, goods and services across international

boundaries or territories In most countries, it represents a significant share of GDP

While international trade has been present throughout much of history, its economic,

social, and political importance has been on the rise in recent centuries

Industrialization, advanced transportation, globalization, multinational corporations,

and outsourcing are all having a major impact on the international trade system

Increasing international trade is crucial to the continuance of globalization

International trade is a major source of economic revenue for any nation that is

considered a world power Without international trade, nations would be limited to the

goods and services produced within their own borders

International trade is in principle not different from domestic trade as the motivation

and the behavior of parties involved in a trade does not change fundamentally

depending on whether trade is across a border or not The main difference is that

international trade is typically more costly than domestic trade The reason is that a

border typically imposes additional costs such as tariffs, time costs due to border

delays and costs associated with country differences such as language, the legal

system or a different culture

1.6 LESSON END ACTIVITY

Prepare a study note on the process of internationalization

1.7 KEYWORDS

International Trading Company: This company is engaged in directly exporting and

importing It buys the goods from the domestic companies and exports Therefore, the

companies can export their goods by selling them to the international trading

company

Manufacture’s Agents: They work on a commission basis They solicit domestic

orders for foreign manufacturers

Manufacture’s Export Agents: These agents also work on a commission basis They

sell the domestic manufacturers’ products in the foreign markets and act as their

foreign sales department

1.8 QUESTIONS FOR DISCUSSION

1 What are the different modes of international trade?

2 What are the factors influence the trade?

3 Explain about the internationalization process

Check Your Progress: Model Answers

CYP 1

1 Franchising: Under franchising, an independent organization called the

franchisee operates the business under the name of another company

called the franchisor Under this agreement the franchisee pays a fee to

the franchisor

2 Turnkey Project: A turnkey project is a contract under which a firm

agrees to fully design, construct and equip a manufacturing

/business/service facility and turn the project over to the purchaser when

it is ready for operation for remuneration

Contd…

20

International Business Environment 3 Greenfield Strategy: The term Greenfield refers to starting with a virgin

green site and then building on it Thus, Greenfield strategy is starting of

the operations of a company from form scratch in a foreign market

Schaffer, “International Business Law and its Environment”, Thomson, 2002

Onkwist and Shaw, “International Marketing”

Philip R Careora, “International Marketing”

21 Macro Environment and Micro Environment

2.1.4 Mutual Economic Dependence

2.2 Micro Economic Environment

2.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:

z Study the trade investment

2.1 INTRODUCTION

A country’s economy includes sources of domestic livelihood and the allocation of

resources Because not all of the world’s economies operate at the same level of

efficiency, it is necessary to form a clear idea of the economic situation of a particular

host country in order to develop an appropriate marketing strategy

2.1.1 Concept of Economic Advancement

Developing countries are becoming important markets According to the concept of

international product life cycle more and more and more developing countries may be

expected to become significant markets It would be desirable for a marketer,

therefore, to keep abreast of countries slowly reaching that point where market

potential becomes worthwhile GNP per capita should not be relied on as the sole

22

International Business Environment measure of the economic viability of a market, although it does provide a resole

estimate of the market in cases where detailed analysis is not feasible

Economic advancement is characterized by such factors as comparatively small allocation of labor force to agriculture; energy available in large amounts at low cost per unit; high level of gross national product and income; high levels of per capita consumption; relatively low rates of population growth; complex modern facilities for transportation, communication, and exchange; a substantial amount of capital for investment; urbanization based on production as well as exchange; diversified manufacturing that accounts for an important share of the labor force; numerous tertiary occupations; specialization of both physical and mental labor; surpluses of both goods and services; and a highly developed technology that includes ample media and methods for experiment These factors can be utilized to examine economic standing Needless to say a large variety of information is needed to categorize countries on an economic development scale For many characteristics, hard data may not be available and judgment becomes the determining factor

As a generalization, the conditions in underdeveloped economies would be the mirror image, or reverse, of those that characterizes economic advancement This raises an interesting question Can poor countries be converted into advanced countries through reversing the conditions that hamper economic progress the answer to such a question

is far from simple because economic development is not a simple, discrete process? Many historical, geographic, political, and cultural factors are intimately related to the economic well being of nation For example extent helped the United States Achieve its present economic greatness The impact of this factor has been thoroughly covered elsewhere

2.1.2 Structure of Consumption

Nations’ overall patterns of consumption can be viewed not only on the basis of potential but also on the basis of structure While it is important to measure the volume of consumption among various cultures, nations, and societies, the characteristics of the consumption reveal its structures Particularly conspicuous in this respect are differences in emphasis Depending on economic factors, a country may have to emphasize producer goods over consumer goods Also, what are considered necessities in one economy may be luxuries in another? In addition, consumption in most advanced countries is characterized by a higher proportion of expenditures devoted to capital goods than consumption in poor countries, where substantially more is spent on consumer goods

However, proportionate expenditures for producer goods within a given economy are only moderately high if that economy enjoys the benefits of past (preferably long-term) capital accumulation When a less-developed economy decides to become technically and economically more advanced, an extraordinary percentage of national income must be diverted to producer goods, especially if that economy is unable to attract substantial amounts of foreign currency in the form of direct investment, loans,

or other aid This is one important reason why less developed economies find the transition period to technical advancement so difficult

The structural differences with regard to expenditures among nations can be explained

by a theory propounded by the German statistician Engle The law of consumption (Engle’s law) States that poorer families and societies tend to spend a greater proportion of their incomes on food than well-to-do people It shown is the percentage

of per capita income spent for food, housing, clothing, and other purposes in selected countries Third World Countries like the Philippines and Kenya are shown to spend a larger percentage on food than countries like the United States Further, in any country, rural people spend a larger percentage on food than urban dwellers Housing,

23 Macro Environment and Micro Environment

in particular, receives a much smaller share of income in underdeveloped countries

than in the advanced nations

The structure of consumption varies among developed countries too While the

average American home covers 1583 square feet and the typical European dwelling is

more than 1050 square feet, Japanese families manage with 925 square feet The U.S

nuclear family boasts 2.2 cars on average; comparable households in the European

community average 1.3 cars In Japan, the average is 0.88 And while food costs

absorb 26 percent of the typical Japanese household’s income, the amount is less than

15 percent for the average American family, and about 20 percent for the Europeans

2.1.3 Economic Systems

The economic system of a country is another important economic factor that a

marketer must understand Traditionally, there are two types of economic systems,

capitalist systems and state-owned systems The United States comes close to being a

pure capitalist system The state-owned, or Marxist, system is pursued in communist

countries where all activities related to production and distributions are controlled by

the state Between the two extremes are many countries that flow mixed economic

systems where certain industries are allowed to run freely while others are strictly or

partially controlled

The nature of economic systems affects the political/regulatory control of the

economy Today, the pure capitalistic system propounded by Adam Smith is a thing of

the past Even in the United States, there are some laws and conditions imposed on

various businesses The nature of the laws and other government regulations and

controls will be examined

An interesting development of the recent past appears to have given rise to an

economic system that is new to the modern would and links economic life with

religion Some Moslem countries have adopted a national economic perspective based

on Islam While the trend, led by Iran, is still emerging, it is difficult to say how far it

will go or what impact it will have on marketer interested in doing business with

Moslem countries, although insights into the Islamic type of economic system are

provided by Pakistan’s efforts

2.1.4 Mutual Economic Dependence

The U.S economy is profoundly related to the economies of other nations,

particularly those of the advanced countries The U.S market is so large that despite

its ability to supply most of its needs from domestic output, it is also a dominant factor

in international trade For example, what happens in Western Europe cannot be

ignored by the United States While there may be a time lag, happenings there are

bound ultimately to affect the U.S economy It has been estimated that a recession in

Western Europe affects the United States after a lag of about six months Thus, when

performing an economic analysis, an international marketer needs to consider the

economic perspectives of the overall world economy, particularly those of its major

trading partners and the host country

The depth of economic analysis varies from case to case For example, if the

enterprise concerns Saudi Arabia, economic development in the Pacific region can be

discounted On the other hand, if a project is related to Japanese industries, the

economic environment in emerging countries of Southeast Asia must be reviewed

2.2 MICRO ECONOMIC ENVIRONMENT

Microeconomic environment refer to the environment surrounding a product and or

market of interest to accompany An examination of microenvironment indicates

24

International Business Environment whether the company can successfully enter the market Essentially the micro

economic environment concerns competition

2.2.1 Sources of Competition

A U.S company may face competition in an international market from three different sources: local business, other U.S corporations, and other foreign companies For example, if Chrysler Corporation were to consider entering the German market, it would compete against General Motors, Volkswagen, and Honda Motors of Japan, Different competitors, however, may satisfy different type demand existing demand, latent demand, or incipient demand Existing demand refers to a product bought to satisfy a particular need Latent demand applies in a situation where a particular need has been recognized, but no products have been offered Incipient demand describes a projected need that will emerge when customers become aware of it sometime in the future To illustrate the point, consider demand in the computer industry Overall, IBM may be strong in, let us say, Spain But a firm like Next Inc avoids direct confrontation with IBM and Apple, at least in the short run

Competition can also be analyzed by the characteristics of products Three product categories are considered here breakthrough products Competitive products, and improved products A breakthrough product is a unique innovation that is mainly technical in nature, such as a digital watch, a color television ort a jet plane A competitive product is one of many brands currently available in the market and has

no special advantage over the competing products An improved product is not unique but is generally superior to many existing brands

The nature of the competition that a company faces in entering an overseas market can

be determined by relating the three types of products to the three type of demand Upon examining the competition, a company should be able to ascertain which product/market it is most capable of pursuing For example, let us assume Procter & Gamble is interested in manufacturing hair shampoo in Egypt and seeks entry into the emerging Arab market The company finds that in addition to a number of local brands, Johnson & Johnson’s baby shampoo and Helene Curtis Industries Suave shampoo are the competitive products in the is considered an improved product Most

of the competition appears to be addressing the existing demand No attempts have been made to satisfy latent demand or incipient demand After reviewing various considerations, Procter & Gamble may decide to fulfill latent demand with an improved offering through its Head & Shoulder brand Based on market information, the company reasons No brand had addressed itself to that problem Even Gillette’s new entry mainly emphasizes silkiness of hair Thus, analysis of the competition with reference to product offerings and demand enables Procter & Gamble to determine its entry point into the Arab market

2.2.2 Competitive Advantage

The above analysis indicates an open space in the market for entry But this in itself is not enough Competitors may follow right on the heels of Procter & Gamble’s entry steps Thus, further analysis is needed to figure out the competitive advantage the company has over rivals, existing and potential The following questions could be raised to analyze the competition:

z Who are the competition now, and who will they be in the future?

z What are the key competitor’s strategies, objectives, and goals?

enough to continue to invest?

25 Macro Environment and Micro Environment

z What changes are likely in the competitors’ future strategies?

z What are the implications of competitors’ strategies on the market, the industry,

and one’s own company?

While it may be relatively easy to pinpoint current competition in an international

market, analysis of competition in the future is difficult because there is no way to

figure out which companies from different parts of the world may become interested

in the market in the future In any event, the best way to examine competition is to

draw up a demographic profile of the industry Markets dominated by small

single-industry businesses or small national competitors differ significantly from those

dominated by multi-industry companies, and those in turn are different from those

controlled by multinational or foreign companies

Obviously a U.S MNC with multi-industry interests would have certain inherent

strengths that a single-industry foreign national company could not match For

example, MNC’s can often provide consumers with better and cheaper products or

services, react faster to changing economic conditions, and more adroitly overcome or

capitalize on market distortions created by governments than can national firms

These large companies have the resources to sacrifice profits in one country in order

to penetrate or gain position there while using profits from another country to support

this aggressiveness They have the ability to work with governments, select the least

costly source of supply, and even negotiate favorable trade concessions

However, it is a mistake to believe that MNCs always have superior leverage Local

foreign competitors may be small, but they can be helped by their governments For

example, governments can require that foreign competitors reduce profitability in

order to increase local employment levels or maintain the balance of trade

Governments can also ban a multinational firm from obtaining supplies in low-cost

areas Further discussion on the role of the government will be takes up

A simple listing of major competitors is no enough It is also important to learn about

their goals and aspirations In fact, an attempt should be made to know competitors

total financial situations, including their serious problems as well as their advantages

and opportunities

Further, the competitor’s relative strengths and weaknesses should be examined Note

that most areas of strength either are related to the excellence of personnel or are

resource based Not all factors have the same the critical factors that could directly or

indirectly bear on a product’s performance in a given market For example, adequate

distribution may be critical in a developing country with inadequate means of

transportation and communications, while research and development would be

strategic to gain the competitive edge in Western Europe

An example of strength is provided by BMW Car Company It is commonly know

that selling foreign cars in Japan is not easy Yet, in 1987, BMW sold almost 50,000

cars to the Japanese, and the number was expects to be four times as high in 1990

With Japanese consumers’ increasing interest in luxury car, a new market segment has

been emerging that was not being tapped by the Japanese companies BMW took

advantage of the situation Avoiding the pitfalls that make doing business in Japan

difficult, it established a comfortable in niche for itself After buying its won dealer

network and expanding it, the company advertised heavily, set up a service-and-parts

system, and lowered interest rates to single digits (5 %), when consumer interest rates

were 15 percent In brief, despite the fact that Japan is difficult market to enter,

analysis of the microeconomic environment showed that BMW could successfully

seek entry into the Japanese market

Japanese auto companies, in turn, have captured a major share (in 1985,

approximately 24 percent) of the U.S auto market Let us assume Ford Motor

Company decides to retaliate by exploring the possibility of entering the Japanese

26

International Business Environment market Despite all its strengths and experience in international business, how ever,

Ford may find itself greatly constrained in its endeavors by one weakness—cost structure Studies show that because of U.S wage-price and managerial efficiency differentials, the Japanese companies can, at 1984’s exchange rate, build a car and ship it to the United States for $2,000 to $2,300 less than it costs Detroit to produce an equivalent vehicle Thus, even if Ford were to assemble cars in Japans, other things being equal, it would still be severely handicapped because of the cost advantage of the local companies Granted Ford will pay lower wages in Japan, but this advantage would be wiped out by the experience that the Japanese have in Japan In this instance, analysis of the microeconomic environment paints a discouraging picture for Ford’s entry into the Japanese market

2.3 MACRO ENVIRONMENT

There are many factors in the macro-environment that will effect the decisions of the managers of any organisation Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of macro change To help analyse these factors managers can categorise them using the PESTEL model This classification distinguishes between:

z Political factors: These refer to government policy such as the degree of

intervention in the economy What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system

z Economic factors: These include interest rates, taxation changes, economic

growth, inflation and exchange rates As you will see throughout the "Foundations

of Economics" book economic change can have a major impact on a firm's behaviour For example:

™ higher interest rates may deter investment because it costs more to borrow

™ a strong currency may make exporting more difficult because it may raise the price in terms of foreign currency

z Social factors: Changes in social trends can impact on the demand for a firm's

products and the availability and willingness of individuals to work In the UK, for example, the population has been ageing This has increased the costs for firms who are committed to pension payments for their employees because their staff are living longer It also means some firms such as Asda have started to recruit older employees to tap into this growing labour pool The ageing population also has impact on demand: for example, demand for sheltered accommodation and medicines has increased whereas demand for toys is falling

z Technological factors: New technologies create new products and new processes

MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances Online shopping, bar coding and computer aided design are all improvements to the way we do business as a result

of better technology Technology can reduce costs, improve quality and lead to innovation These developments can benefit consumers as well as the organisations providing the products

z Environmental factors: Environmental factors include the weather and climate

change Changes in temperature can impact on many industries including farming,

27 Macro Environment and Micro Environment

tourism and insurance With major climate changes occurring due to global

warming and with greater environmental awareness this external factor is

becoming a significant issue for firms to consider The growing desire to protect

the environment is having an impact on many industries such as the travel and

transportation industries (for example, more taxes being placed on air travel and

the success of hybrid cars) and the general move towards more environmentally

friendly products and processes is affecting demand patterns and creating business

opportunities

z Legal factors: These are related to the legal environment in which firms operate

In recent years in the UK there have been many significant legal changes that

have affected firms' behaviour The introduction of age discrimination and

disability discrimination legislation, an increase in the minimum wage and greater

requirements for firms to recycle are examples of relatively recent laws that affect

an organisation's actions Legal changes can affect a firm's costs (e.g if new

systems and procedures have to be developed) and demand (e.g if the law affects

the likelihood of customers buying the good or using the service)

Different categories of law include:

z Consumer laws: These are designed to protect customers against unfair practices

such as misleading descriptions of the product

z Competition laws: These are aimed at protecting small firms against bullying by

larger firms and ensuring customers are not exploited by firms with monopoly

power

z Employment laws: These cover areas such as redundancy, dismissal, working

hours and minimum wages They aim to protect employees against the abuse of

power by managers

z Health and safety legislation: These laws are aimed at ensuring the workplace is

as safe as is reasonably practical They cover issues such as training, reporting

accidents and the appropriate provision of safety equipment

Typical PESTEL factors to consider include:

Table 2.1 Factor Could include:

Political e.g EU enlargement, the euro, international trade, taxation policy

Economic e.g interest rates, exchange rates, national income, inflation, unemployment,

Stock Market Social e.g ageing population, attitudes to work, income distribution

Technological e.g innovation, new product development, rate of technological obsolescence

Environmental e.g global warming, environmental issues

Legal e.g competition law, health and safety, employment law

By using the PESTEL framework we can analyse the many different factors in a firm's

macro environment In some cases particular issues may fit in several categories For

example, the creation of the Monetary Policy Committee by the Labour government in

1997 as a body that was independent of government but had the ability to set interest

rates was a political decision but has economic consequences; meanwhile government

economic policy can influence investment in technology via taxes and tax credits If a

factor can appear in several categories managers simply make a decision of where

they think it best belongs

However, it is important not to just list PESTEL factors because this does not in itself

tell managers very much What managers need to do is to think about which factors

are most likely to change and which ones will have the greatest impact on them i.e

28

International Business Environment each firm must identify the key factors in their own environment For some such as

pharmaceutical companies government regulation may be critical; for others, perhaps firms that have borrowed heavily, interest rate changes may be a huge issue Managers must decide on the relative importance of various factors and one way of doing this is

to rank or score the likelihood of a change occurring and also rate the impact if it did The higher the likelihood of a change occurring and the greater the impact of any change the more significant this factor will be to the firm's planning

It is also important when using PESTEL analysis to consider the level at which it is applied When analysing companies such as Sony, Chrysler, Coca Cola, BP and Disney it is important to remember that they have many different parts to their overall business - they include many different divisions and in some cases many different brands Whilst it may be useful to consider the whole business when using PESTEL in that it may highlight some important factors, managers may want to narrow it down to

a particular part of the business (e.g a specific division of Sony); this may be more useful because it will focus on the factors relevant to that part of the business They may also want to differentiate between factors, which are very local, other which are national, and those, which are global

For example, a retailer undertaking PESTEL analysis may consider:

z Local factors such as planning permission and local economic growth rates

z National factors such as UK laws on retailer opening hours and trade descriptions

legislation and UK interest rates

z Global factors such as the opening up of new markets making trade easier The

entry of Bulgaria and Rumania into the European Union might make it easier to enter that market in terms of meeting the various regulations and provide new expansion opportunities It might also change the labour force within the UK and recruitment opportunities

This version of PESTEL analysis is called LONGPESTEL This is illustrated below:

Table 2.2

POLITICAL Provision of services by

ECONOMIC Local income UK interest rates Overseas economic

growth SOCIAL Local population growth Demographic change

(e.g ageing population)

ENVIRONMENTAL Local waste issues UK weather Global climate change LEGAL Local licenses/ planning

permission

UK law International agreements

on human rights or environmental policy

In "Foundations of Economics" we focus on the economic environment We examine issues such as the effect of interest rate changes, change in exchange rates, changes in trade policy, government intervention in an economy via spending and taxation and economic growth rates These can be incredibly important factors in a firm's macro-environment The growth of China and India, for example, has already had massive effects on many organisations Firms can relocate production there to benefit from lower costs; these emerging markets are also providing enormous markets for firms to aim their products at With a population of over 1 billion, for example, the Chinese

29 Macro Environment and Micro Environment

market is not one you would want to ignore; at the same time Chinese producers

should not be ignored either However, the relative importance of economic factors

compared to other factors will depend on the particular position of a business

Exchange rate fluctuations may be critically important to a multinational but less

significant to a local window cleaner Rapid economic growth or economic decline

may be very significant to a construction business that depends heavily on the level of

income in the economy but may be slightly less significant to a milk producer whose

product is less sensitive to income So whilst the economy is important to all firms on

both the supply side (e.g unemployment levels affect the ease of recruitment) and

demand side (e.g income tax affects spending power) the relative importance of

specific economic factors and the relative importance of the economy compared to,

say, regulation or social trends will vary Whilst we hope this book provides a good

insight into the economy and the possible effects of economic change on a business

these must be considered in the light of other macro and micro factors that influence a

firms' decisions and success

Check Your Progress 1

1 What do you understand by microeconomic environment?

2.4 TRADE AND INVESTMENTS

Foreign trade and foreign direct investment (FDI) are mutually influential

FDI in the natural resource sectors, including plantations, in developing countries

increases trade FDIs in several other sectors also increase international trade in many

cases Due to factors like foreign production by FDI substitutes foreign trade in many

cases Due to factors like foreign exchange problems, desire to industrialize fast, etc

The polices of many developing countries prefer foreign investment (for import

substitution) to imports As pointed out in the sales of firms established by FDI fat

exceed the world exports A part of this represents substitution of foreign production

for trade and a part of this generates trade—about one-third of the world trade in

manufactures is intra-company trade

Due to the protectionism and some other factors, large amounts of FDI have been

taking place in the developed countries leading to substitution of foreign production

for substitute production for trade For example, many foreign companies have been

setting up manufacturing and assembly facilities in the European Community to

overcome the fortress EC-92

It may also be pointed out that, to a considerable extent, such investments are made

possible by the past trade; the funds generated by trade are ploughed back to

investment n the foreign markets The massive foreign investments made by the

Japanese companies since the mid-1980s deserve a special mention in this context

While the international investment replaces international trade in certain products, it

may generate trade in some other products Drucker, who observes that although

traditionally investment has followed trade, trade is increasingly becoming dependent

on investment, points out that US exports in the years of the over-valued dollar would

have been even lower had the European subsidiaries of American companies and

American joint ventures in Japan not continued to buy machinery, chemicals, and

30

International Business Environment parts from the US Similarly, the foreign subsidiaries of America’s financial

institutions, such as the major banks, accounted for something like one half of US service income during those dismal years Foreign investment has been significantly contribution to the export performance of some countries The case of China deserves

a special mention here

Check Your Progress 2

Fill in the blanks:

and or market of interest to accompany

2.5 LET US SUM UP

Microeconomic environment refer to the environment surrounding a product and or market of interest to accompany An examination of microenvironment indicates whether the company can successfully enter the market Essentially the micro economic environment concerns competition

2.6 LESSON END ACTIVITY

Prepare a study note on the micro and macro environment in international business

2.7 KEYWORDS

Political factors: It refers to government policy such as the degree of intervention in

the economy

Economic factors: These include interest rates, taxation changes, economic growth,

inflation and exchange rates

2.8 QUESTIONS FOR DISCUSSION

1 Distinguish between the trade and investment

2 What is the micro economic environment?

Check Your Progress: Model Answers

CYP 1

1 Microeconomic environment refer to the environment surrounding a product and or market of interest to accompany An examination of microenvironment indicates whether the company can successfully enter the market Essentially the micro economic environment concerns competition

2 Tax changes, new laws, trade barriers, demographic change and

government policy changes are all examples of macro change

CPY 2

1 Microeconomic

2 Foreign trade and foreign direct investment

31 Macro Environment and Micro Environment

2.9 SUGGESTED READINGS

Daniels, D and Radebangh H., “International Business”, Pearson Education Asia, New Delhi,

2002

Griffin and Pustay, “International Business”, Pearson Education Asia, New Delhi, 2002

Subba Rao, “International Business”, Himalaya, Mumbai, 2001

Schaffer, “International Business Law and its Environment”, Thomson, 2002

Onkwist and Shaw, “International Marketing”

Philip R Careora, “International Marketing”

33 Social and Cultural Environment

UNIT 1

UNIT II

35 Social and Cultural Environment

3.2.9 Cultural Attitude and International Business

3.2.10 Culture and Thinking Process

3.2.11 Cross-Cultural Communication Process and Negotiations

3.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:

z Study the culture, religious and languages

z Learn about the attitude and values

3.1 INTRODUCTION

Social and cultural factors in various countries of the globe affect the international

business These factors include attitude of the people to work, attitude to wealth,

family, marriage, religion, education, ethics, human relations, social responsibilities

etc

36

International Business Environment Culture is, “the thought and behavior patterns that member of a society learns through

language and other forms of symbolic interaction—their customs, habits, beliefs and values, the common viewpoints which bind them together as a social entity… cultures change gradually picking up new ideas and dropping old ones, but many of the cultures of the past have been so persistent and self contained that the impact of such sudden change has torn them apart, uprooting their people psychologically.”

3.2 CULTURE

Culture is:

economic conditions of the country

z A set of traditional beliefs and values, which are transmitted and shared in a given society

3.2.2 Socially Shared

Culture is based on social interaction and creation In fact, it is out of necessity For example, child marriages in India during the 18th and 19th centuries were to protect the teenaged girls Chinese parents, at one time preferred their female children to have small feet The practice of the Sikhs wearing turbans and keeping a knife was originally out of the necessity of protecting themselves from the invaders from other countries

3.2.3 Culture Facilitates Communication

Culture brings common habits of thought and feeling among people Concern for other human beings, concern for physically disadvantaged people etc are the common feelings of Indians while uncaring for others are the common habit of the Europeans Thus, culture makes communication easier among diversified groups Therefore, common advertisements in foreign countries fail to communicate

3.2.4 Learned

Culture is acquired through learning but not inherited genetically If a person absorbs

or learns the culture of the society where he is raised, that learning is called socialization or enculturation However, some people learn the culture of the society other than the one in which they are raised Such learning is called ‘acculturation.’ The societies of Asian and African countries complain that their cultures are being contaminated by the Western influences

3.2.5 Subjective

Culture is subjective in the sense that people of different cultures have different ideas about the same object Regarding the object of marriage the parents of the bridegrooms in many countries offer money (dowry) to the parents of the bride

37 Social and Cultural Environment

whereas the situation in India is quite opposite This is because, the patents of

bridegrooms in other countries pay dowry as a compensation for raising the bride

while the parents of bride in India pay dowry to the bridegroom to meet the expenses

of establishing a new family

3.2.6 Enduring

Culture is relatively stable as it is passed from generation to generation Taking care

of the old people, respecting the elders and offering food first to the guests, next to old

people and children and last to the young people are the practices from generations

together in Indian society Failure of birth control in India and China is due to culture

3.2.7 Cumulative

Uncertainty of rains, crop and thereby income in developing countries over years

resulted in the culture of saving for to the next years Thus, culture is based on the

accumulated circumstances over the hundreds or even thousands of years

3.2.8 Dynamic

Culture is not immune to change It goes on changing New ideas are added and old

ideas are dropped The present generation youth want to become slim Therefore, they

reduced fat contents in all the food items unlike the previous generations Further, the

present generation youth would like to work smart but not hard unlike their parents

Japanese tastes have been changing from rice and fish to meat and dairy products

3.2.9 Cultural Attitude and International Business

Dressing habits, living styles, eating habits and other consumption patterns, priority of

needs are dictated/influenced by culture Some Thai and Chinese and most of the

Indians do not consume beef Thailand Chinese believe that consumption of beef is

improper and Indians (particularly Hindus) believe that eating beef is a sin as they

believe cow is sacred (Kamadhenu)

The eating habits vary widely Chinese eat fish stomachs and bird’s nest soup,

Japanese eat uncooked seafood, Iraqis eat dried, salted locusts and snakes while

drinking The French eat snails, Americans and Europeans eat mostly non-vegetarian

food Indians eat mostly vegetarian food It was surprising to the rest of the world to

know that there were pure vegetarians in India

Similarly, dressing habits also vary from country to country based on their culture We

observe different dress styles of West, Middle East, India, and Pacific etc Wearing

‘sari’ by Indian women is a peculiar dressing habit, which is influenced by the culture

Similarly, wearing ‘burka/parda’ by the women of Middle East is another example for

the influence of culture on the dressing habit

3.2.10 Culture and Thinking Process

When foreigners visit the universities in India, the professors receive them at the

airport, take them to the hotel, and make them feel comfortable When I went to

France, I expected the same In the sense that I expected someone from my host

institution to receive me at the airport This phenomenon is known as the

Self-reference Criterion (SRC) Self-Self-reference criterion indicates that we observed foreign

cultures by making reference, perhaps unconsciously, back to personal cultural values

When Indian-Hindus observe foreigners eating beef, they feel bad by referring it to

their own culture of worshipping the cows Americans treat dogs as their family

members, whereas Arabs view dogs as filthy animals

The international businessmen should eliminate the SRC effect in order to understand

the foreign cultures, as they have to carry on business under the existing cultures

38

International Business Environment Most of the businessmen of USA react to the methods in ethnocentric terms and prefer

to conduct business on Western lines though they know the cultures of Asia and Africa The businessman should eliminate the influence of SRC as it helps to prevent

a transfer of personal culture to the overseas market This awareness helps the manager to formulate customer-oriented strategies and avoid the possible failures

3.2.11 Cross-Cultural Communication Process and Negotiations

In some countries like USA, Canada, Germany and Switzerland the messages that the people convey are explicit and clear They use the actual works to convey the information These cultures are called ‘low-context cultures.’

In countries like India, Japan, Saudi Arabia, and other Middle Eastern Arab countries, communication is mostly indirect and the expressive manner in which the message delivered becomes critical Much of the information is transmitted through non-verbal communication These messages can be understood only with the reference to the content Such cultures are referred to as, “high-context cultures.”

Accordingly to hall, cultures also vary based on the manner of information processing Cultures, which handle information in a direct, linear fashion, are called,

“monochromic.” Americans are more monochromic Americans’ fast tempo and demand for instant responses are viewed as pushy and impatient The other type of culture is ‘polychromic.’ In this culture people work on several forms simultaneously, instead of pursuing a single task Japanese and Indians belong to polychromic culture

Check Your Progress 1

When an American fast food chain was planning to enter India, one political party state that it would oppose the marketing of beef product in the country by the multinational In a country where the cow is regarded as sacred, although there were some protests against the slaughter of cow, a sizeable population consumes beef, and the number of the beef consumers in India is larger than the total population of many countries It may, therefore, look ironic that a foreign firm should encounter this kind

of a situation Pork is banned in Muslims remain closed during daytime Muslims would consume the meat of only those animals/birds slaughtered following the prescribed religious rituals Many Christians do not normally consume non-vegetarian during the lent (50 days preceding Easter) during the 24 days preceding Christmas and

on Fridays During these periods, Christians do not conduct marriages and other celebrations like baptism Hence, the weeks following Christmas and Easter are seasons of such celebrations However, it is interesting to note that although according

to the Bible, Christians are expected to fast on Sundays (the Sabbath day) and devote the whole day to God, and not to indulge in any worldly activities, most of them rather eat merrily and celebrate this holy-day A Buddhist monk from Thailand, studying in

39 Social and Cultural Environment

an Indian University, who was found to be a regular non-vegetarian, was asked how

the disciple of the lord who preached ahimsa could be a meat eater His answer was

that as a Buddhist he was expected not to kill for meat, but if meat was available in the

market, he could buy and consume

Religion may also influence the attitude towards work and wealth In the United

States, it is common to hear people talk about the Protestant work ethics, which holds

that people should work hard, be industrious, and save their money This work ethic

helped to develop capitalism in the United States because of the importance it

assigned to saving and to reinvestment of capital However, Americans are not the

only people who work hard In Asian countries where Confucianism is strong, this

attitude is known the Confucian work ethics In Japan, it is called the Shinto work

ethics A renowned Indian economist has described the moderate growth rate the

Indian economy achieved in the earlier Five years Plans as the Hindu Growth rate

Religion may also play a role in deciding the weekly holiday, other holidays and

working hours In several countries religious festival times are great business times

People working hours, in several countries religious festival time are great business

times People buy new cloths, exchange gifts, spend a lot on food, etc companies

doing heavy promotions, including discounts and other incentive schemes, have

become very common during festive seasons in Indian

Many religious groups consider certain days of the week or certain periods auspicious

for launching new ventures On the other hand, certain days and periods are regarded

as bad Interestingly, certain days considered auspicious by some community are

considered bad days by some others Many people, particularly Hindus, do not

commence any auspicious thing or start out for any important matter during Rahu

Kala; important matters have to be done or commenced at Shubha Muhurta

Many years ago, a foreign bank in Chennai introduced a promotion scheme to attract

new customers The scheme ran for a month Although there were many enthusiastic

enquiries about the details, when the period of the scheme approached then, the bank

management was disappointed that the number of new accounts opened was nowhere

near satisfactory It was then that the management realized that they chose the wrong

period for the promotion The scheme was, therefore, extended for some more time

The Islamic holy book Koran prohibits payment or acceptance of interest (interest is

considered riba or usury) Islamic banks do not pay regular predetermined interest to

depositors nor do they charge predetermined interest rates to borrowers Rather, the

banks take a share of the profits (or loss), which are again shared with depositors

What makes profit sharing, unlike interest, permissible in Islam is that only the profit

sharing ratio, not the rate of return itself, is predetermined Islamic banks now handle

more than $ 100 billion in assets worldwide and asset growth at Islamic banking

institutions has been well over 10 per cent per year in the 1990s Even some large

Western banks now have Islamic braches Muslims in other countries, however, do

banking in the normal system prevailing there

The influence of religion on politics is on the increase in many parts of the world And

politics often plays an important role in shaping economic policies and business

regulation and promotion In a number of countries, religion and government are

inseparably united

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What is the main feature of Islamic Bank?

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40

International Business Environment 3.4 ATTITUDE AND VALUES

The needs, capacities, and wishes of the various peoples of the world appear everywhere to be much alike and, in the presence of similar situations, have given rise

to similar culture facts Everywhere man has developed the same cultural patterns and organized similar institutional forms for the expression of the organic needs and for the regulation of the human wishes There are, of course, wide and marked differences

in detail The conditions of life are not everywhere the same and each group has, as a result of its unique life-experiences, evolved a set of social practices and developed a group of institutional arrangements peculiar to it

This fund of values—the institutions, practices, beliefs, etc., the sum and coordination

of which makes up the objective culture of any group comprise any and all data that have a meaning for human activity The fund of values differs from group to group and more or less from person to person An object, whether the content be sensual or imaginary, may be an object of desire to one group, an objection of aversion to a second, and to a third remain indifferent—that is, be not a value at all And to the same person, an object that is one time indifferent may take on either a positive or a negative value The fund of social values is thus subject to change; a thing that at one time occupies a place in the culture of the group may presently disappear or be replaced by a different value Within a century dueling has disappeared as a value in Western society In the present decade, prize fighting has been reintroduced as a moral value into American culture

Whatever the nature of the social values—the content of the culture complex—the members of the group are responsive to them The values are objects of human desire This appreciation of the social value is an attitude If it is general in the group, as a result of communication, it is a social attitude It is, indeed, as a result of this human responsive reaction that any object becomes a value The attitude may be one of desire

or one of aversion but in no case may it be one of indifference else the object drops out of the culture of the group and ceases to be a value The attitude is thus the subjective element in the culture; complex, the individual counterpart of the social value It is the individual tendency to react, either positively or negatively, to a given social value

Certain of the human behavior tendencies appear to be natural in the sense that they are the expression of general human need or the sublimate of racial experience They correspond to something stable and uniform in the physical conditions of life Some fear responses, for example, appear to be of this nature Certain disgusts appear to be

of the nature of organic attitudes, and a limited number of other behavior tendencies appear to have their origin in the complex of heritable characters These, as a result of experience, tend to become defined into social attitudes Attitudes of this type may be general in the group without being social They are of concern in the study of the individual but interest the sociologist only in so far as they are culturally conditioned

or result in behavior of cultural significance For example, disgust as an organic attitude is not of direct interest to the student of social behavior It comes within the orbit of his interest to the extent that it is an element of importance in determining attitudes that are social The attitude of society toward women is a social attitude But the peculiar nature of this attitude, in at least some of its historic expressions, appears not to be susceptible of explanation without the aid of the natural organic disgust reaction toward things unclean Again, racial prejudice is a cultural attitude and, in the main, to be explained in historic and cultural terms But if, and to the extent that, the characteristic body odor of one race is offensive to persons of a different race and arouses a disgust reaction, the natural attitude becomes a thing of social significance and of interest to the sociologist since it is then a vital element in the determination of social behavior

41 Social and Cultural Environment

It is of course true that variations in temperament play some part in the determination

of attitudinal differences But the biological disposition of individuals is in general

subject to indefinite modification through conformity to the social code The human

being is the most plastic of organisms He is born into a social order with relatively

fixed and definite behavior patterns to which he must conform Whatever his original

individuality of wish and temperament, he is moulded by the social framework into

which he must fit and the social order becomes a part of him as he becomes a part of

it Society provides the code of behavior, a definition of the situation that covers all

phases of life and has become fixed as a result of experience, and from this social

code, rather than from original nature, the individual values and attitudes have their

rise The code does not correspond to the natural disposition of any person and to the

extent that persons react alike to the stimuli set by the society it is because of social

training, because of their assimilation to the traditional rules of behavior Most of the

attitudes are fixed below the region of consciousness and are passed on by the social

inheritance

The importance of the attitude lies in the fact that it determines the behavior of the

person and provides the mechanism of social control It is by definition a tendency

toward activity Toward any value in the society there are possible or actual a variety

of attitudes The actual attitude always represents an effort on the part of the

individual to get some sort of recognition in the group organization Life organization

demands membership in a group and the attitudes are the expression of a desire for

status The attitude is thus vital from the point of view of social control The overt

activity of the individual not only expresses a preexisting attitude, it arouses on the

part of the group an attitude of approval or of condemnation according as it is in

conformity with or in violation of the social code The approval and recognition of his

fellows reinforces conventional behavior and so the attitude of conformity The social

disapproval of the non-conformist person operates as the strongest and generally as

the only effective inhibiting force to the repetition of a type of activity socially

unacceptable

When the social code lacks uniformity, as is usual in the larger societies of complex

organization, the behavior of the person may provoke on the part of some an attitude

of approval and on the part of others an attitude of disapproval The subsequent

activity of the person' is then determined by the group in which he desires status and

recognition Acts of vandalism express preexisting attitudes; they arouse on the part of

the organized group attitudes of condemnation But they may bring applause and

coveted recognition from the fellow members of the gang Subsequent behavior is

here determined by whether the individual is more desirous of status in the one group

or in the other Any effective control depends upon so changing the attitudes that they

will lead to activity in conformity with the social code; by so modifying them that the

incipient criminal will desire the approval of the social group rather than that of the

criminal group

Changes in attitude are accompanied always by the appearance of new values The

changes may be slight or profound, gradual or abrupt, concern a single or a few

attitudes or a large related group An abrupt change that involves a radical

modification of many attitudes is commonly spoken of as a conversion It is a radical

departure made in order to secure recognition and approval in a new group and is

followed, if the change is to be permanent, by the gradual habituation and

accommodation of the person to the fund of values characteristic of the new group

But the acceptance of most attitudes lies in the region of the unconscious, and changes

usually and normally go on by the imperceptible modifications of a single or a few

attitudes rather than by a sudden and violent reorganization of the whole system