International trade & business (prelim).pdf

BM1917 GLOBALIZATION Globalization Globalization of Markets The globalization of markets refers to the merging of historically distinct and...

BM1917 GLOBALIZATION Globalization Globalization of Markets The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade and investment have made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping create a global market. Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, video games, McDonald’s hamburgers, Starbucks coffee, IKEA furniture, and Apple iPhones are frequently held up as prototypical examples of this trend. The firms that produce these products are more than just benefactors of this trend; they are also facilitators of it. By offering the same basic product worldwide, they help create a global market (Hill & Hult, 2018). Despite the global prevalence of Citigroup credit cards, McDonald’s hamburgers, Starbucks coffee, and IKEA stores, for example, it is important not to push too far the view that national markets are giving way to the global market. Significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. Uber, for example, the fast-growing ride-for-hire service, is finding that it needs to refine its entry strategy in many foreign cities to take the regulatory regime into account. These differences frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particular country (Hill & Hult, 2018). In many global markets, the same firms frequently confront each other as competitors in nation after nation. Coca-Cola’s rivalry with PepsiCo is a global one, as are the rivalries between Ford and Toyota; Boeing and Airbus; Caterpillar and Komatsu in earthmoving equipment; General Electric and Rolls-Royce in aero engines; Sony, Nintendo, and Microsoft in video-game consoles; and Samsung and Apple in smartphones. If a firm moves into a nation not currently served by its rivals, many of those rivals are sure to follow to prevent their competitor from gaining an advantage. As firms follow each other around the world, they bring with them many of the assets that served them well in other national markets—their products, operating strategies, marketing strategies, and brand names—creating some homogeneity across markets. Thus, greater uniformity replaces diversity. In an increasing number of industries, it is no longer meaningful to talk about “the German market,” “the American market,” “the Brazilian market,” or “the Japanese market”; for many firms, there is only the global market (Hill & Hult, 2018). Globalization of Production The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. For example, Boeing has made extensive use of outsourcing to foreign suppliers. Consider Boeing’s 777: eight (8) Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three (3) suppliers in Italy manufacture wing flaps; and so on. In total, some 30 percent of the 777, by value, is built by foreign companies. And, for its most recent jet airliner, the 787, Boeing has pushed this trend even further; some 65 percent of the total value of the aircraft is outsourced to foreign companies, 35 percent of which goes to three (3) major Japanese companies (Hill & Hult, 2018). Part of Boeing’s rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at their particular activity. A global web of suppliers yields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival, Airbus. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airlines based in that country (Hill & Hult, 2018). 01 Handout 1 *Property of STI  [email protected] Page 1 of 5  BM1917 The Emergence of Global Institutions As markets globalize and an increasing proportion of business activity transcends national borders, institutions are needed to help manage, regulate, and police the global marketplace and to promote the establishment of multinational treaties to govern the global business system. Over the past half century, a number of important global institutions have been created to help perform these functions, including the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO); the International Monetary Fund (IMF) and its sister institution, the World Bank (WB); and the United Nations (UN). All these institutions were created by voluntary agreement between individual nation-states, and their functions are enshrined in international treaties (Hill & Hult, 2018). The WTO (like the GATT before it) is primarily responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states. As of 2017, 164 nations that collectively accounted for 98 percent of world trade were WTO members, thereby giving the organization enormous scope and influence. The WTO is also responsible for facilitating the establishment of additional multinational agreements among WTO member states. Over its entire history, and that of the GATT before it, the WTO has promoted the lowering of barriers to cross-border trade and investment. In doing so, the WTO has been the instrument of its member states, which have sought to create a more open global business system unencumbered by barriers to trade and investment between countries. Without an institution such as the WTO, the globalization of markets and production is unlikely to have proceeded as far as it has. However, when we look closely at the WTO, critics charge that the organization is usurping the national sovereignty of individual nation-states (Hill & Hult, 2018). The role of WTO has been critical in addressing the impact of the Covid-19 crisis on global trade and economy of its member nations. These nations have been proposing economic measures and calling for restraint in the imposition of export/import restrictions on essential medical goods, vaccines, and other goods critical during the global health crisis. The IMF and the WB were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The IMF was established to maintain order in the international monetary system; the World Bank was set up to promote economic development. In the more than seven decades since their creation, both institutions have emerged as significant players in the global economy. The World Bank is the less controversial of the two sister institutions. It has focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (such as building dams or roads) (Hill & Hult, 2018). The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value against those of other nations. During the past two decades, for example, the IMF has lent money to the governments of troubled states, including Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, and Turkey. More recently, the IMF took a proactive role in helping countries cope with some of the effects of the 2008–2009 global financial crisis. However IMF loans come with strings attached; in return for loans, the IMF requires nation-states to adopt specific economic policies aimed at returning their troubled economies to stability and growth. These requirements have sparked controversy. Some critics charge that the IMF’s policy recommendations are often inappropriate; others maintain that by telling national governments what economic policies they must adopt, the IMF, like the WTO, is usurping the sovereignty of nation-states (Hill & Hult, 2018). The UN was established October 24, 1945, by 51 countries committed to preserving peace through international cooperation and collective security. Today, nearly every nation in the world belongs to the United Nations; membership now totals 193 countries. When states become members of the United Nations, they agree to accept the obligations of the UN Charter, an international treaty that establishes basic principles of international relations. According to the charter, the UN has four purposes: to maintain international peace and security, to develop friendly relations among nations, to cooperate in solving international problems and in promoting respect for human rights, and to be a center for harmonizing the actions of nations. Although the UN is perhaps best known for its peacekeeping role, one of the organization’s central mandates is the promotion of higher standards of living, full employment, and conditions of economic and social progress and development—all issues that are central to the creation of a vibrant global economy. As much as 70 percent of the work of the UN system is devoted to accomplishing this mandate. To do so, the UN works closely with other international 01 Handout 1 *Property of STI  [email protected] Page 2 of 5  BM1917 institutions such as the WB. Guiding the work is the belief that eradicating poverty and improving the well-being of people everywhere are necessary steps in creating conditions for lasting world peace (Hill & Hult, 2018). Drivers of Globalization Declining Trade and Investment Barriers During the 1920s and 1930s, many of the world’s nation-states erected formidable barriers to international trade and foreign direct investment. International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect domestic industries from foreign competition. One consequence, however, was “beggar thy neighbor” retaliatory trade policies, with countries progressively raising trade barriers against each other. Ultimately, this depressed world demand and contributed to the Great Depression of the 1930s (Hill & Hult, 2018). Having learned from this experience, the advanced industrial nations of the West committed themselves after World War II to progressively reducing barriers to the free flow of goods, services, and capital among nations. This goal was enshrined in the General Agreement on Tariffs and Trade. Under the umbrella of GATT, eight rounds of negotiations among member states worked to lower barriers to the free flow of goods and services. The first round of negotiations went into effect in 1948. The most recent negotiations to be completed, known as the Uruguay Round, were finalized in December 1993. The Uruguay Round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the WTO to police the international trading system (Hill & Hult, 2018). The globalization of markets and production and the resulting growth of world trade, foreign direct investment, and imports all imply that firms are finding their home markets under attack from foreign competitors. This is true in China, where U.S. companies such as Apple, General Motors, and Starbucks are expanding their presence. It is true in the United States, where Japanese automobile firms have taken market share away from General Motors and Ford over the past three decades, and it is true in Europe, where the once-dominant Dutch company Philips has seen its market share in the consumer electronics industry taken by Japan’s Panasonic and Sony and Korea’s Samsung and LG. The growing integration of the world economy into a single, huge marketplace is increasing the intensity of competition in a range of manufacturing and service industries (Hill & Hult, 2018). Technological Change Communications Perhaps the most significant innovation since World War II has been the development of the microprocessor, which enabled the explosive growth of high-power, low-cost computing, vastly increasing the amount of information that can be processed by individuals and firms. The microprocessor also underlies many recent advances in telecommunications technology. Over the past 30 years, global communications have been revolutionized by developments in satellite, optical fiber, wireless technologies, and the Internet. These technologies rely on the microprocessor to encode, transmit, and decode the vast amount of information that flows along these electronic highways. The cost of microprocessors continues to fall, while their power increases (a phenomenon known as Moore’s law, which predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months) (Hill & Hult, 2018). Internet of Things The explosive growth of the Internet since 1994, when the first web browser was introduced, is the latest expression of the development of the so-called Internet of Things. Tracing back about three (3) decades to 1990, fewer than one (1) million users were connected to the Internet. By 1995, the figure had risen to 50 million. By 2017, the Internet had 3.8 billion users, or 51 percent of the global population. As such, 2017 marked the first year that more than half of the world’s population were Internet users. It is no surprise that the Internet has developed into the information backbone of the global economy (Hill & Hult, 2018). 01 Handout 1 *Property of STI  [email protected] Page 3 of 5  BM1917 Transportation Technology In addition to developments in communications technology, several major innovations in transportation technology have occurred since the 1950s. In economic terms, the most important are probably the development of commercial jet aircraft and super freighters and the introduction of containerization, which simplifies transshipment from one mode of transport to another. The advent of commercial jet travel, by reducing the time needed to get from one location to another, has effectively shrunk the globe. In terms of travel time, New York is now “closer” to Tokyo than it was to Philadelphia in the colonial days (Hill & Hult, 2018). Managing in the Global Marketplace What does this shift toward a global economy mean for managers within an international business? 1. As their organizations increasingly engage in cross-border trade and investment, managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways (Hill & Hult, 2018). At the most fundamental level, the differences arise from the simple fact that countries are different. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development. Despite all the talk about the emerging global village and despite the trend toward globalization of markets and production, as we shall see in this text, many of these differences are very profound and enduring (Hill & Hult, 2018). 2. Differences among countries require that an international business vary its practices country by country (Hill & Hult, 2018). EXAMPLE: Marketing a product in Brazil may require a different approach from marketing the product in Germany; Managing U.S. workers might require different skills from managing Japanese workers; Maintaining close relations with a particular level of government may be very important in Mexico and irrelevant in Great Britain; and The business strategy pursued in Canada might not work in South Korea. 3. Managers in an international business must not only be sensitive to these differences but also adopt the appropriate policies and strategies for coping with them (Hill & Hult, 2018). 4. A further way in which international business differs from a domestic business is the greater complexity of managing an international business (Hill & Hult, 2018). In addition to the problems that arise from the differences between countries, a manager in an international business is confronted with a range of other issues that the manager in a domestic business never confronts. The managers of an international business must decide where in the world to site production activities to minimize costs and maximize value added. They must decide whether it is ethical to adhere to the lower labor and environmental standards found in many less-developed nations. Then they must decide how best to coordinate and control globally dispersed production activities. The managers in an international business must also decide which foreign markets to enter and which to avoid. They must choose the appropriate mode for entering a particular foreign country. o Is it best to export its product to the foreign country? o Should the firm allow a local company to produce its product under license in that country? o Should the firm enter into a joint venture with a local firm to produce its product in that country? o Or should the firm set up a wholly-owned subsidiary to serve the market in that country? 5. Conducting business transactions across national borders requires understanding the rules governing the international trading and investment system. Managers in an international business must also deal with government restrictions on international trade and investment. They must find ways to work within the limits imposed by specific governmental 01 Handout 1 *Property of STI  [email protected] Page 4 of 5  BM1917 interventions. As this text explains, even though many governments are nominally committed to free trade, they often intervene to regulate cross-border trade and investment. Managers within international businesses must develop strategies and policies for dealing with such interventions (Hill & Hult, 2018). REFERENCE Hill, C. W. & Hult, G. T. (2018). International business: Competing in the global marketplace (12th ed.). New York: McGraw-Hill Education. World Trade Organization. Retrieved on Aug. 31, 2021, https://www.wto.org/english/tratop_e/covid19_e/faqcovid19_e.htm 01 Handout 1 *Property of STI  [email protected] Page 5 of 5  BM1917 NATIONAL DIFFERENCES IN POLITICAL, ECONOMIC, AND LEGAL SYSTEMS Political Systems The political system of a country shapes its economic and legal systems. As such, the nature of different political systems must be understood before discussing economic and legal systems. By political system, it means the system of government in a nation. Political systems can be assessed according to two (2) dimensions. The first is the degree to which they emphasize collectivism as opposed to individualism. The second is the degree to which they are democratic or totalitarian. These dimensions are interrelated; systems that emphasize collectivism tend to lean toward totalitarianism, whereas those that place a high value on individualism tend to be democratic. However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist. A. Collectivism Collectivism refers to a political system that stresses the primacy of collective goals over individual goals. When collectivism is emphasized, the needs of society as a whole are generally viewed as being more important than individual freedoms. In such circumstances, an individual’s right to do something may be restricted because it runs counter to “the good of society” or to “the common good.” Advocacy of collectivism can be traced to the ancient Greek philosopher Plato (427–347 b.c.), who, in The Republic, argued that individual rights should be sacrificed for the good of the majority and that property should be owned in common. Plato did not equate collectivism with equality; he believed that society should be stratified into classes, with those best suited to rule (which for Plato, naturally, were philosophers and soldiers) administering society for the benefit of all. In modern times, the collectivist mantle has been picked up by socialists. EXAMPLE: According to the Hofstede Insights, Japanese society shows many of the characteristics of a collectivistic society: such as putting harmony of group above the expression of individual opinions and people have a strong sense of shame for losing face. One example of this is how the Emperor of Japan apologized for the crimes they committed during World War II, and how although years had already passed, the Empire of Japan still apologizes for their actions, with Prime Minister Shinzo Abe stating they have “deep repentance” for such actions. Taiwan is also seen as a collectivist country, just like other Asian countries, placing importance on a close long-term commitment to the “member” group: be that a family, extended family, or extended relationships. Countries such as Venezuela and Guatemala are among the Latin American countries that place importance on groups. It is through corporative groups that people obtain privileges and benefits which are not to be found in other cultures. Socialism Modern socialists trace their intellectual roots to Karl Marx (1818–1883), although socialist thought clearly predates Marx (elements of it can be traced to Plato). Marx argued that the few benefits at the expense of the many in a capitalist society where individual freedoms are not restricted. While successful capitalists accumulate considerable wealth, Marx postulated that the wages earned by the majority of workers in a capitalist society would be forced down to subsistence levels. He argued that capitalists expropriate for their own use the value created by workers while paying workers only subsistence wages in return. According to Marx, the pay of workers does not reflect the full value of their labor. To correct this perceived wrong, Marx advocated state ownership of the basic means of production, distribution, and exchange (i.e., businesses). His logic was that if the state owned the means of production, the state could ensure that workers were fully compensated for their labor. Thus, the idea is to manage state-owned enterprise to benefit society as a whole, rather than individual capitalists. 02 Handout 1 *Property of STI  [email protected] Page 1 of 9  BM1917 In the early twentieth century, the socialist ideology split into two (2) broad camps. The communists believed that socialism could be achieved only through violent revolution and totalitarian dictatorship, whereas the social democrats committed themselves to achieving socialism by democratic means, turning their backs on violent revolution and dictatorship. Both versions of socialism waxed and waned during the twentieth century. EXAMPLE: Socialism in the Republic of China: In the late 70s, a moderate named Deng Xiaoping came to power. His administration was marked by various economic reforms that he collectively named “socialism with Chinese Characteristics.” Agriculture was de-collectivized, and farmers gained the right to sell their surplus. Special economic zones like allowing foreign investment and reducing state regulation were created. Price controls were relaxed for urban industries. Private businesses were allowed to exist again for the first time in decades. The Shanghai Stock exchange reopened, and many state corporations were privatized. In short, socialism in China fuses state control of the commanding heights of the economy with a high amount of foreign investment and regulated capitalism (Hendricks, 2019). B. Individualism The opposite of collectivism, individualism refers to a philosophy that an individual should have freedom in his or her economic and political pursuits. In contrast to collectivism, individualism stresses that the interests of the individual should take precedence over the interests of the state. Like collectivism, individualism can be traced to an ancient Greek philosopher, in this case Plato’s disciple Aristotle (384– 322 B.C.). In contrast to Plato, Aristotle argued that individual diversity and private ownership are desirable. In a passage that might have been taken from a speech by contemporary politicians who adhere to a free market ideology, he argued that private property is more highly productive than communal property and will thus stimulate progress. According to Aristotle, communal property receives little care, whereas property that is owned by an individual will receive the greatest care and therefore be most productive. Individualism is built on two (2) central principles. The first is an emphasis on the importance of guaranteeing individual freedom and self-expression. The second is that the welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body (such as government) dictating what is in society’s best interest. Or, as Adam Smith put it in a famous passage from The Wealth of Nations, “an individual who intends his own gain is led by an invisible hand to promote an end that was no part of his intention. Nor is it always worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. This author has never known much good done by those who effect to trade for the public good.” The central message of individualism, therefore, is that individual economic and political freedoms are the ground rules on which a society should be based. This puts individualism in conflict with collectivism. Collectivism asserts the primacy of the collective over the individual; individualism asserts the opposite. EXAMPLE: This underlying ideological conflict shaped much of the recent history of the world. The Cold War, for example, was in many respects a war between collectivism, championed by the former Soviet Union, and individualism, championed by the United States. From the late 1980s until about 2005, the waning of collectivism was matched by the ascendancy of individualism. Democratic ideals and market economics replaced socialism and communism in many states. Also, the global financial crisis of 2008–2009 caused some reevaluation of the trends towards individualism, and it remains possible that the pendulum might tilt back the other way. a. Democracy The pure form of democracy, as originally practiced by several city-states in ancient Greece, is based on a belief that citizens should be directly involved in decision making. Democracy is a political system with institutions that allow citizens to express their political preferences, has constraints on the power of the executive, and provides a guarantee of civil liberties. 02 Handout 1 *Property of STI  [email protected] Page 2 of 9  BM1917 EXAMPLE: Although the Philippines is a democratic country, it is classified as a partly-free country in the recent Freedom in the World report with an aggregate score of 62 over 100. The organization said that while government institutions are well-developed in the country, its long history of impunity and insurgency continue to affect freedom enjoyed by citizens. Advantages 1. Democracy encourages public. The people can vote for the right candidates with the right policies and against the other. Whatever the result may be, they can express their personal opinion through voting. This process allows each community to work on their own benefit: if the system did not earn any faith, then they can easily change the governing body in the next election. 2. Democracy provides equal and fair justice. Democracy promotes equality in society and has laws that maintain peace too. These laws are applied to every citizen of the country whatever his power and status in society. Every culprit is treated equally in the court and the person who sits in the judge’s chair is given full power to decide who is the culprit observing the case and evidence provided to him. Whoever the culprit may be policemen to high political leaders to burglar all are treated the same in democracy. 3. Democracy eliminates violence. Democracy maintains peace in the time of disagreements within the political parties. Not only the citizens but the political parties also have to stay within certain rules and barriers while taking any action. It doesn’t invoke the violence, cause all the members of parliament, government, as well as parties, are voted by the public. They believed them to work in favor of community and country and maintain peace. So, extremism is not an option for the parties as they are responsible for whatever the situation occurs to be during the crisis. Thus encouraging negotiating, discussing and voting to solve the issues is popular in democracy. Disadvantages 1. Lack of knowledge. Many people are unknown about the voting process they just know to go and cast a vote. People should know the importance of their vote, they should know about the candidates and why to vote on that ballot. It is very important for people to have knowledge about it. Due to lack of knowledge, the wrong candidate will be chosen and they need to suffer his whole term. 2. Encourages mob rule. The con of democracy is mob rule, politicians parties keep the mob on their side. Each party will have one group on their side during the election to make some interference or force voters to vote for them. Having the backhand of political parties gives them the privilege to do many crimes in the future too. Mob once hired by the party himself cannot make them go away as party members were also invisibly connected in the crime. Mob’s criminal activities and their illegal works are sanctioned and protected, which is harmful to society and the country. 3. Selfishness. The disadvantage that hampers both the country and society is the citizen being compromised. People tend to vote based on their interest or favor rather than voting for the right candidate and a better future. Election basically means individual right no one can force them but people should be aware of their power, when people vote according to personal interest, it creates discrimination in a society where the majority suppresses a minority. They vote based on how their account, taxes or overall cost of living is being affected. b. Totalitarianism In a totalitarian country, all the constitutional guarantees on which representative democracies are built—an individual’s right to freedom of expression and organization, a free media, and regular elections—are denied to the citizens. In most totalitarian states, political repression is widespread, free and fair elections are lacking, media are heavily censored, basic civil liberties are denied, and those who question the right of the rulers to rule find themselves imprisoned or worse. EXAMPLES: Soviet Union under Joseph Stalin, Nazi Germany under Adolf Hitler, People’s Republic of China under Mao Zedong, and North Korea under the Kim Dynasty 02 Handout 1 *Property of STI  [email protected] Page 3 of 9  BM1917 c. Pseudo-Democracies Many of the world’s nations are neither pure democracies nor iron-clad totalitarian states. Rather they lie between pure democracies and complete totalitarian systems of government. They might be described as imperfect or pseudo-democracies, where authoritarian elements have captured some or much of the machinery of state and use this in an attempt to deny basic political and civil liberties. EXAMPLE: In the Russia of Vladimir Putin, for example, elections are still held, people compete through the ballot box for political office, and the independent press does not always tow the official line. However, Putin has used his position to systematically limit the political and civil liberties of opposition groups. His control is not yet perfect, though. Voices opposing Putin are still heard in Russia, and in theory, elections are still contested. But in practice, it is becoming increasingly difficult to challenge a man and régime that has systematically extended its political, legal, and economic power over the past 15 years. Economic Systems A. Market Economy In a typical pure market economy, all productive activities are privately owned, as opposed to being owned by the state. The goods and services that a country produces are not planned by anyone. Production is determined by the interaction of supply and demand and signaled to producers through the price system. If demand for a product exceeds supply, prices will rise, signaling producers to produce more. If supply exceeds demand, prices will fall, signaling producers to produce less. In this system, consumers are sovereign. The purchasing patterns of consumers, as signaled to producers through the mechanism of the price system, determine what is produced and in what quantity. For a market to work in this manner, supply must not be restricted. A supply restriction occurs when a single firm monopolizes a market. In such circumstances, rather than increasing the output in response to increased demand, a monopolist might restrict output and let prices rise. This allows the monopolist to take a greater profit margin on each unit it sells. Although this is good for the monopolist, it is bad for the consumer, who has to pay higher prices. It also is probably bad for the welfare of society. Because a monopolist has no competitors, it has no incentive to search for ways to lower production costs. Rather, it can simply pass on cost increases to consumers in the form of higher prices. The net result is that the monopolist is likely to become increasingly inefficient, producing high-priced, low-quality goods, and society suffers as a consequence. Advantages of a Market Economy (Amadeo, U.S. Economy and News: Economic Theory: Market Economy, Its Characteristics, Pros, and Cons, with Examples, 2019) 1. It ensures that the most desired goods and services are produced. Consumers are willing to pay the highest price for the things they want the most. Businesses will only create those things that return a profit. 2. Goods and services are produced in the most efficient way possible. The most productive companies will earn more than less productive ones. 3. It rewards innovation. Creating new products will meet the needs of consumers in better ways that existing goods and services. These cutting-edge technologies will spread to other competitors so they, too, can be more profitable. 4. The most successful business invest in other top-notch companies. That gives them a leg up and leads to increased quality of production. Disadvantages of a Market Economy 1. The key mechanism of a market economy is competition. As a result, it has no system to care for those who are at an inherent competitive disadvantage. That includes the elderly, children, and people with mental or physical disabilities. 02 Handout 1 *Property of STI  [email protected] Page 4 of 9  BM1917 2. The caretakers of those people are also at a disadvantage. Their energies and skills go toward caretaking, not competing. Many of these people might become contributors to the economy's overall comparative advantage if they weren't caretakers. 3. The human resources of the society may not be optimized. For example, a child who might otherwise discover the cure for cancer might instead work at McDonald's to support her low-income family. 4. The society reflects the values of the winners in the market economy. A market economy may produce private jets for some while others starve and are homeless. A society based on a pure market economy must decide whether it's in its larger self-interest to care for the vulnerable. B. Command Economy In a pure command economy, the government plans the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold. Consistent with the collectivist ideology, the objective of a command economy is for government to allocate resources for “the good of society.” In addition, in a pure command economy, all businesses are state-owned, the rationale being that the government can then direct them to make investments that are in the best interests of the nation as a whole rather than in the interests of private individuals. Historically, command economies were found in communist countries where collectivist goals were given priority over individual goals. Since the demise of communism in the late 1980s, the number of command economies has fallen dramatically. Some elements of a command economy were also evident in a number of democratic nations led by socialist-inclined governments. France and India both experimented with extensive government planning and state ownership, although government planning has fallen into disfavor in both countries. While the objective of a command economy is to mobilize economic resources for the public good, the opposite often seems to have occurred. In a command economy, state-owned enterprises have little incentive to control costs and be efficient because they cannot go out of business. Also, the abolition of private ownership means there is no incentive for individuals to look for better ways to serve consumer needs; hence, dynamism and innovation are absent from command economies. Instead of growing and becoming more prosperous, such economies tend to stagnate. Advantages 1. Planned economies can quickly mobilize economic resources on a large scale. They can execute massive projects, create industrial power, and meet social goals. They aren't slowed down by lawsuits from individuals or environmental impact statements. 2. Command economies can wholly transform societies to conform to the government's vision. The new administration nationalizes private companies. Its previous owners attend "re-education" classes. Workers receive new jobs based on the government's assessment of their skills. Disadvantages 1. This rapid mobilization often means command economies mow down other societal needs. For example, the government tells workers what jobs they must fulfill. It discourages them from moving. The goods it produces aren’t always based on consumer demand. But citizens find a way to fulfill their needs. They often develop a shadow economy or black market. It buys and sells the things the command economy isn't producing. Leaders' attempts to control this market weakens support for them. 2. They often produce too much of one thing and not enough of another. It's difficult for the central planners to get up-to-date information about consumers' needs. Also, prices are set by the central plan. They no longer measure or control demand. Instead, rationing often becomes necessary. 3. Command economies discourage innovation. They reward business leaders for following directives. This doesn’t allow for taking the risks required to create new solutions. Command economies struggle to produce the right exports at global market prices. It's challenging for central planners to meet the needs of the domestic market. Meeting the needs of international markets is even more complex. C. Mixed Economy Mixed economies can be found between markets and command economies. In a mixed economy, certain sectors of the economy are left to private ownership and free market mechanisms, while other sectors have 02 Handout 1 *Property of STI  [email protected] Page 5 of 9  BM1917 significant state ownership and government planning. Mixed economies were once common throughout much of the developed world, although they are becoming less so. Until the 1980s, Great Britain, France, and Sweden were mixed economies, but extensive privatization has reduced state ownership of businesses in all three nations. A similar trend occurred in many other countries where there was once a large state- owned sector, such as Brazil, Italy, and India (although there are still state-owned enterprises in all of these nations). As a counterpoint, the involvement of the state in economic activity has been on the rise again in countries such as Russia and Venezuela, where authoritarian regimes have seized control of the political structure, typically by first winning power through democratic means and then subverting those same structures to maintain their grip on power. Advantages 1. It distributes goods and services to where they are most needed. It allows prices to measure supply and demand. 2. It rewards the most efficient producers with the highest profit. That means customers get the best value for their dollar. 3. It encourages innovation to meet customer needs more creatively, cheaply or efficiently. 4. It automatically allocates capital to the most innovative and efficient producers. They, in turn, can invest the capital in more businesses like them. Disadvantages A mixed economy can also take on all the disadvantages of the other types of economies. It just depends on which characteristics the mixed economy emphasizes. For example, if the market has too much freedom, it can leave the less competitive members of society without any government support. However, central planning of government industries also creates problems. The defense industry could become a government-subsidized monopoly or oligarchy system. That could put the country into debt, slowing down economic growth in the long run. Successful businesses can lobby the government for more subsidies and tax breaks. The government could protect the free market so much that it doesn’t regulate enough. For example, businesses that took on too much risk could receive taxpayer-funded bailouts. Legal Systems The legal system of a country refers to the rules, or laws, that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained. The legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. The legal environments of countries differ in significant ways. As we shall see, differences in legal systems can affect the attractiveness of a country as an investment site or market. A. Common Law The common law system evolved in England (part of the United Kingdom (UK) of Great Britain) over hundreds of years. It is now found in most of UK’s former colonies, including the United States. Common law is based on tradition, precedent, and custom. Tradition refers to a country’s legal history, precedent to cases that have come before the courts in the past, and custom to how laws are applied in specific situations. When law courts interpret common law, they do so with regard to these characteristics. This gives a common law system a degree of flexibility that other systems lack. Judges in a common law system have the power to interpret the law so that it applies to the unique circumstances of an individual case. In turn, each new interpretation sets a precedent that may be followed in future cases. As new precedents arise, laws may be altered, clarified, or amended to deal with new situations. B. Civil Law A civil law system is based on a detailed set of laws organized into codes such as those covering corporate law, administrative law, tax law, and constitutional law. When law courts interpret civil law, they do so with 02 Handout 1 *Property of STI  [email protected] Page 6 of 9  BM1917 regard to these codes. Countries following a civil law system are typically those that were former French, Dutch, German, Spanish, or Portuguese colonies or protectorates. A civil law system tends to be less adversarial than a common law system because the judges rely on detailed legal codes rather than interpreting tradition, precedent, and custom. Judges under a civil law system have less flexibility than those under a common law system; they merely establish the facts of a case and apply remedies found in the codified law. Thus, judges in a common law system have the power to interpret the law, whereas judges in a civil law system have the power only to apply the law. C. Theocratic Law A theocratic law system is one in which the law is based on religious teachings. Islamic law is the most widely practiced theocratic legal system in the modern world, although usage of both Hindu and Jewish law persisted into the twentieth century. Islamic law is primarily a moral rather than a commercial law and is intended to govern all aspects of life. The foundation for Islamic law is the holy book of Islam, the Koran, along with the Sunnah, or decisions and sayings of the Prophet Muhammad, and the writings of Islamic scholars who have derived rules by analogy from the principles established in the Koran and the Sunnah. Because the Koran and Sunnah are holy documents, the basic foundations of Islamic law cannot be changed. However, in practice, Islamic jurists and scholars are constantly debating the application of Islamic law to the modern world. In reality, many Muslim countries have legal systems that are a blend of Islamic law and a common or civil law system. Although Islamic law is primarily concerned with moral behavior, it has been extended to cover certain commercial activities. An example is the payment or receipt of interest, which is considered usury and outlawed by the Koran. To the devout Muslim, acceptance of interest payments is seen as a grave sin; the giver and the taker are equally damned. This is not just a matter of theology; in several Islamic states, it has also become a matter of law. In the 1990s, for example, Pakistan’s Federal Shariat Court, the highest Islamic lawmaking body in the country, pronounced interest to be un-Islamic and, therefore illegal and demanded that the government amend all financial laws accordingly. In 1999, Pakistan’s Supreme Court ruled that Islamic banking methods should be used in the country after July 1, 2001. By the late 2000s, there were about 500 Islamic financial institutions in the world, and as of 2014, they collectively managed more than $1 trillion in assets. In addition to Pakistan, Islamic financial institutions are found in many of the Gulf States, Egypt, Malaysia, and Iran. D. Private Action In terms of violating property rights, private action refers to theft, piracy, blackmail, and the like by private individuals or groups. Although theft occurs in all countries, a weak legal system allows a much higher level of criminal activity. For example, in the chaotic period following the collapse of communism in Russia, an outdated legal system, coupled with a weak police force and judicial system, offered both domestic and foreign businesses scant protection from blackmail by the “Russian Mafia.” Successful business owners in Russia often had to pay “protection money” to the Mafia or face violent retribution, including bombings and assassinations (about 500 contract killings of businessmen occurred per year in the 1990s). Russia is not alone in having organized crime problems (and the situation in Russia has improved since the 1990s). The Mafia has a long history in the United States (Chicago in the 1930s was similar to Moscow in the 1990s). In Japan, the local version of the Mafia, known as the yakuza, runs protection rackets, particularly in the food and entertainment industries. However, there was a big difference between the magnitude of such activity in Russia in the 1990s and its limited impact in Japan and the United States. It arose because the legal enforcement apparatus, such as the police and court system, was weak in Russia following the collapse of communism. Many other countries, from time to time, have had problems similar to or even greater than those experienced by Russia. E. Public Action and Corruption Public action to violate property rights occurs when public officials, such as politicians and government bureaucrats, extort income, resources, or the property itself from property holders. This can be done through legal mechanisms such as levying excessive taxation, requiring expensive licenses or permits from property holders, taking assets into state ownership without compensating the owners, or redistributing assets 02 Handout 1 *Property of STI  [email protected] Page 7 of 9  BM1917 without compensating the prior owners. It can also be done through illegal means, or corruption, by demanding bribes from businesses in return for the rights to operate in a country, industry, or location. Corruption has been well documented in every society, from the banks of the Congo River to the palace of the Dutch royal family, from Japanese politicians to Brazilian bankers, and from government officials in Zimbabwe to the New York City Police Department. The government of the late Ferdinand Marcos in the Philippines was famous for demanding bribes from foreign businesses wishing to set up operations in that country. The same was true of government officials in Indonesia under the rule of former President Suharto. No society is immune to corruption. However, there are systematic differences in the extent of corruption. In some countries, the rule of law minimizes corruption. Corruption is seen and treated as illegal, and when discovered, violators are punished by the full force of the law. In other countries, the rule of law is weak and corruption by bureaucrats and politicians is rife. Corruption is so endemic in some countries that politicians and bureaucrats regard it as a perk of office and openly flout laws against corruption. The Protection of Intellectual Property Intellectual property refers to property that is the product of intellectual activity, such as computer software, a screenplay, a music score, or the chemical formula for a new drug. Patents, copyrights, and trademarks establish ownership rights over intellectual property. A patent grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks are officially registered designs and names by which merchants or manufacturers designate and differentiate their products (e.g., Christian Dior clothes). In the high-technology “knowledge” economy of the twenty-first century, intellectual property has become an increasingly important source of economic value for businesses. Protecting intellectual property has also become increasingly problematic, particularly if it can be rendered in a digital form and then copied and distributed at very low cost via pirated DVDs or over the Internet (e.g., computer software, music, and video recordings). The philosophy behind intellectual property laws is to reward the originator of a new invention, book, musical record, clothes design, restaurant chain, and the like for his/her idea and effort. Such laws stimulate innovation and creative work. They provide an incentive for people to search for novel ways of doing things, and they reward creativity. For example, consider innovation in the pharmaceutical industry. A patent will grant the inventor of a new drug a 20-year monopoly in the production of that drug. This gives pharmaceutical firms an incentive to undertake the expensive, difficult, and time-consuming basic research required to generate new drugs (it can cost $1 billion in R&D and take 12 years to get a new drug on the market). Without the guarantees provided by patents, companies would be unlikely to commit themselves to extensive basic research. The protection of intellectual property rights differs greatly from country to country. Although many countries have stringent intellectual property regulations on their books, the enforcement of these regulations has often been lax. This has been the case even among many of the 185 countries that are now members of the World Intellectual Property Organization, all of which have signed international treaties designed to protect intellectual property, including the oldest such treaty, the Paris Convention for the Protection of Industrial Property, which dates to 1883 and has been signed by more than 170 nations. Weak enforcement encourages piracy (theft) of intellectual property. China and Thailand have often been among the worst offenders in Asia. Pirated computer software is widely available in China. Similarly, the streets of Bangkok, Thailand’s capital, are lined with stands selling pirated copies of Rolex watches, Levi’s jeans, DVDs, and computer software. Product Safety and Product Liability Product safety laws set certain safety standards to which a product must adhere. Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage. Product liability can be much greater if a product does not conform to the required safety standards. Both civil and criminal product liability laws exist. Civil laws call for payment and monetary damages. Criminal liability laws result in fines or imprisonment. Both civil and criminal liability laws are probably more extensive in the United States than in any other country, although many other Western nations also have comprehensive liability laws. Liability laws are typically the least extensive in less developed nations. A boom in product liability suits and awards in the United States resulted in a dramatic increase in the cost of liability insurance. Many business executives argue that the high costs of liability insurance make American businesses less competitive in the global marketplace. 02 Handout 1 *Property of STI  [email protected] Page 8 of 9  BM1917 In addition to the competitiveness issue, country differences in product safety and liability laws raise an important ethical issue for firms doing business abroad. When product safety laws are tougher in a firm’s home country than in a foreign country or when liability laws are laxer, should a firm doing business in that foreign country follow the more relaxed local standards or should it adhere to the standards of its home country? While the ethical thing to do is undoubtedly to adhere to home-country standards, firms have been known to take advantage of lax safety and liability laws to do business in a manner that would not be allowed at home. REFERENCES Amadeo, K. (2019, December 16). Economic theory: Mixed economy with pros, cons, and examples. Retrieved from The Balance: https://www.thebalance.com/mixed-economy-definition-pros-cons-examples- 3305594 Amadeo, K. (2019, December 16). U.S. economy and news: Economic theory: Market economy, its characteristics, pros, and cons, with examples. Retrieved from The Balance: https://www.thebalance.com/market-economy-characteristics-examples-pros-cons-3305586 Amadeo, K. (2019, December 7). US economy and news: Economic theory: Command economy, its characteristics, pros, and cons. Retrieved from The Balance: https://www.thebalance.com/command- economy-characteristics-pros-cons-and-examples-3305585 Evangelista, A. (2018, December 20). Philippine democracy in 2018: Where do we fall in world rankings?: Rappler. Retrieved from Rappler: https://www.rappler.com/newsbreak/iq/219156-philippine- democracy-world-ranking-yearend-2018 Hendricks, S. (2019, January 23). What is socialism like in China. Retrieved from https://bigthink.com/politics- current-affairs/what-is-socialism-like-in-china Hill, C. W., & Hult, G. T. (2018). International business: Competing in the global marketplace (12th ed.). New York: McGraw-Hill Education. 02 Handout 1 *Property of STI  [email protected] Page 9 of 9  BM1917 DIFFERENCES IN CULTURE Culture Values and Norms Values form the bedrock of a culture. It includes the following: Society’s attitude towards individual freedom, democracy, truth, justice, honesty, loyalty, social obligations, collective responsibility, women, love, sex, marriage, and so on. Norms are the social rules that govern people’s actions toward one another. It is subdivided into the following: Folkways are the routine conventions of everyday life. Generally, folkways are actions of little moral significance. Rather, they are social conventions that deal with things like appropriate dress code in a particular situation, good social manners, eating with correct utensils, neighborly behavior, and so on. Although folkways define the way people are expected to behave, violation of them is not normally a serious matter. People who violate folkways may be thought of as eccentric or ill-mannered, but they are not usually considered to be evil or bad. In many countries, foreigners may initially be excused for violating folkways. However, traveling managers are increasingly expected to know about specific dress codes, social and professional manners, eating with the correct utensils, and business etiquette. The evolution of norms now demands that business partners at least try to behave according to the folkways of the country in which they are doing business (Hill & Hult, 2018). EXAMPLE: An example of folkways that perhaps is not immediately thought of as a culture issue is people’s attitudes toward time. People are very aware of what time it is, the passage of time, and the importance of time in, for example, the United States and northern European cultures such as Germany, Netherlands, and the Scandinavian countries (Denmark, Finland, Iceland, Norway, and Sweden). In these cultures, businesspeople are very conscious about scheduling their time and are quickly irritated when time is wasted because a business associate is late for a meeting or if they are kept waiting. Time is really money in the minds of these businesspeople (Hill & Hult, 2018). In the opposite of the time-conscious Americans, Germans, and Scandinavians, businesspeople in many Arabic, Latin, and African cultures view time as more elastic. Keeping to a schedule is viewed as less important than building a relationship or finishing an interaction with people. For example, an American businessperson might feel slighted if he/she is kept waiting for 30 minutes outside the office of a Latin American executive before a meeting. However, the Latin American person may simply be completing an interaction with an associate and view the information gathered from this as more important than sticking to a rigid schedule. The Latin American executive intends no disrespect, but due to a mutual misunderstanding about the importance of time, the American may see things differently. Similarly, Saudi Arabian attitudes toward time have been shaped by their nomadic Bedouin heritage, in which precise time played no real role and arriving somewhere “tomorrow” might mean next week. Like Latin Americans, many Saudis are unlikely to understand Westerners’ obsession with precise times and schedules. Filipinos, on the other hand, have the concept of a “Filipino time” wherein they come minutes (or sometimes hours) late of the original schedule (Hill & Hult, 2018). Folkways also include rituals and symbolic behavior. Rituals and symbols are the most visible manifestations of a culture and constitute the outward expression of deeper values. EXAMPLE: Upon meeting a foreign business executive, a Japanese executive will hold his business card in both hands and bow while presenting the card to the foreigner. This ritual behavior is loaded with deep cultural symbolism. The card specifies the rank of the Japanese executive, which is a very important piece of information in a hierarchical society such as Japan. The bow is a sign of respect, and the deeper the angle of the bow, the greater the reverence one person shows for the other. The person receiving the card is expected to examine it carefully (Japanese often have business cards with 03 Handout 1 *Property of STI  [email protected] Page 1 of 11  BM1917 Japanese printed on one side and English printed on the other), which is a way of returning respect and acknowledging the card giver’s position in the hierarchy. The foreigner is also expected to bow when taking the card and to return the greeting by presenting the Japanese executive with his/her own card, similarly bowing in the process. To not do so and to fail to read the card that he/she has been given, instead casually placing it in a jacket, pocket, or purse, violates this important folkway and is considered rude (Hill & Hult, 2018). Mores is a term that refers to norms that are more widely observed, have greater moral significance than other norms, and are central to the functioning of a society and to its social life. This means that mores have a much greater significance than folkways. Violating mores can bring serious retribution, ill will, and the collapse of any business deal. Mores include such drastic factors as indictments against theft, adultery, incest, and cannibalism. In many societies, certain mores are so drastic that they have been enacted into law (Hill & Hult, 2018). EXAMPLE: All advanced societies have laws against theft, incest, and cannibalism. However, there are also many mores that differ across cultures. In the United States, for example, drinking alcohol is widely accepted, whereas, in Saudi Arabia, the consumption of alcohol is viewed as violating important social mores and is punishable by imprisonment (as some Western citizens working in Saudi Arabia have discovered). That said, countries like Saudi Arabia and the United Arab Emirates are becoming more tolerant of Westerners behaving like Westerners in their countries—such as drinking in if they do not flaunt it. In some way, mores are being implemented differently depending on where you are and who you are (Hill & Hult, 2018). Culture, Society, and the Nation-State Society refers to a group of people who share a common set of values and norms—that is, people who are bound together by a common culture. There is not a strict one-to-one correspondence between a society and a nation-state. Nation-states are political creations. While these nation-states are often studied for their “national identity,” “national character,” and even “competitive advantage of nations,” in reality they may contain a single culture or several subcultures (Hill & Hult, 2018). EXAMPLE: Representative of a single culture setting, the French nation can be thought of as the political embodiment of French culture. However, the nation of Canada has at least three (3) cultures—an Anglo culture, a French-speaking “Quebecois” culture, and a Native American culture. Similarly, many of the 55 African nations have important cultural differences among tribal groups, as exhibited in the early 1990s when Rwanda dissolved into a bloody civil war between two (2) tribes, the Tutsis and Hutus. Africa is not alone in this regard. India, for example, is composed of many distinct cultural groups with their own rich history and traditions (e.g., Andhras, Gonds, Gujaratis, Marathas, Oriya, Rajputs, and Tamils) (Hill & Hult, 2018). It is also possible to talk about culture at different levels. It is reasonable to talk about “American society” and “American culture,” but there are several societies within America, each with its own culture. For example, in the United States, one can talk about African American culture, Cajun culture, Chinese American culture, Hispanic culture, Indian culture, Irish American culture, Southern culture, and many more cultural groups. In some way, this means that the relationship between culture and country is often ambiguous. Even if a country can be characterized as having a single homogeneous culture, often that national culture is a mosaic of subcultures. To abide by these cultural nuances, businesspeople need to be aware of the delicate issues that pertain to folkways, and they also need to make sure not to violate mores in the country in which they intend to do business. Increased globalization has meant an increased number of business relationships across countries and cultures but not necessarily an increased cultural understanding. Culture is still a complex phenomenon with multiple dimensions and multiple levels (Hill & Hult, 2018). Social Structure Social structure refers to its basic social organization. In essence, it refers to how a society is organized in terms of its values, norms, and relationships that are part of the society’s fabric (Hill & Hult, 2018). 03 Handout 1 *Property of STI  [email protected] Page 2 of 11  BM1917 Dimensions of social structure Degree to which the basic unit of a social organization is the individual, as opposed to the group, or even company for which a person works In general, Western societies tend to emphasize the importance of the individual, whereas groups tend to figure much larger in many other societies. Degree to which a society is stratified into classes or castes Some societies are characterized by a relatively high degree of social stratification and relatively low mobility between strata (e.g., India); other societies are characterized by a low degree of social stratification and high mobility between strata (e.g., the United States) (Hill & Hult, 2018). Individuals and Groups A group is an association of two (2) or more individuals who have a shared sense of identity and who interact with each other in structured ways based on a common set of expectations about each other’s behavior. EXAMPLE: Human social life is group life. Individuals are involved in families, work groups, social groups, recreational groups, and potentially a myriad of other groups. In a way, social media have expanded the boundaries of what is included in group life and placed an added emphasis on what we can call the extended social groups. Social media clearly did not enter into the equation of what was possible in terms of group life. But, social media as a vehicle to the creation of group life has unique possibilities that affect both individuals within a social group and the group itself (Hill & Hult, 2018). EXAMPLE: Consumers are significantly more likely to buy from the brands they follow on Instagram, Twitter, Facebook, or LinkedIn, or that they get exposed to via Snapchat, due to group influences. However, while groups are found in all societies, some societies differ according to the degree to which the group is viewed as the primary means of social organization. In some societies, individual attributes and achievements are viewed as being more important than group membership; in others, the reverse is true (Hill & Hult, 2018). Individualism can also be a political philosophy. However, it is more than just an abstract political philosophy. In many Western societies, the individual is the basic building block of social organization. This is reflected not just in the political and economic organization of society but also in the way people perceive themselves and relate to each other in social and business settings. The value systems of many Western societies, for example, emphasize individual achievement. The social standing of individuals is not so much a function of whom they work for as of their individual performance in whatever work setting they choose. More and more, individuals are regarded as “independent contractors,” even though they belong to and work for a company. These individuals, in essence, build their personal brands by the knowledge, skills, and experience that they have, which often translates to increased salaries and promotions at the current company or another company that believes that it can benefit from that person’s capabilities. In science, the label “star scientist” has become synonymous with these individualistic high producers of innovative products based on their knowledge, skills, and experience (Hill & Hult, 2018). In contrast to the Western emphasis on the individual, the group is the primary unit of social organization in many other societies. For example, in Japan, the social status of an individual has traditionally been determined as much by the standing of the group to which he/she belongs as by his/her individual performance. In traditional Japanese society, the group was the family or village to which an individual belonged. Today, the group has frequently come to be associated with the work team or business organization. In a now-classic study of Japanese society, Nakane noted how this expresses itself in everyday life: “When a Japanese faces the outside (confronts another person) and affixes some position to himself socially, he is inclined to give precedence to institution over kind of occupation. Rather than saying, “I am a typesetter” or “I am a filing clerk,” he is likely to say, “I am from B Publishing Group” or “I belong to S company (Hill & Hult, 2018)” 03 Handout 1 *Property of STI  [email protected] Page 3 of 11  BM1917 The Philippines is considered as a collectivist type of country. This is mostly seen in maintaining close long- term commitment to a family, extended family, or relationships. Loyalty in collectivist culture is paramount, and over-rides most other societal rules and regulations. Employer/employee relationships are perceived in moral terms, like a family link (Hill & Hult, 2018). Social Stratification All societies are stratified on a hierarchical basis into social categories—that is, into social strata. These strata are typically defined based on socioeconomic characteristics such as family background, occupation, and income. Individuals are born into a particular stratum. They become a member of the social category to which their parents belong. Individuals born into a stratum toward the top of the social hierarchy tend to have better life chances than those born into a stratum toward the bottom of the hierarchy. They are likely to have better education, health, standard of living, and work opportunities. Although all societies are stratified to some degree, they differ in two (2) related ways. First, they differ from each other with regard to the degree of mobility between social strata. Second, they differ with regard to the significance attached to social strata in business contexts. Overall, social stratification is based on four (4) basic principles: 1. Social stratification is a trait of society, not a reflection of individual differences; 2. Social stratification carries over a generation to the next generation; 3. Social stratification is generally universal but variable; and 4. Social stratification involves not just inequality but also beliefs (Hill & Hult, 2018). Social Mobility The term social mobility refers to the extent to which individuals can move out of the strata into which they are born. Social mobility varies significantly from society to society. The most rigid system of stratification is a caste system (Hill & Hult, 2018). A caste system is a closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual’s lifetime. Often, a caste position carries with it a specific occupation. Members of one caste might be shoemakers, members of another might be butchers, and so on. These occupations are embedded in the caste and passed down through the family to succeeding generations. Although the number of societies with caste systems diminished rapidly during the twentieth century, one partial example still remains. India has four (4) main castes and several thousand subcastes. Even though the caste system was officially abolished in 1949, two (2) years after India became independent, it is still a force in rural Indian society where occupation and marital opportunities are still partly related to caste (Hill & Hult, 2018). A class system is a less rigid form of social stratification in which social mobility is possible. It is a form of open stratification in which the position a person has by birth can be changed through his/her own achievements or luck. Individuals born into a class at the bottom of the hierarchy can work their way up; conversely, individuals born into a class at the top of the hierarchy can slip down (Hill & Hult, 2018). From a business perspective, the stratification of a society is significant if it affects the operation of business organizations. In American society, the high degree of social mobility and the extreme emphasis on individualism limit the impact of class background on business operations. The same is true in Japan, where most of the population perceives itself to be middle class. In a country such as the United Kingdom or India, however, the relative lack of class mobility and the differences between classes have resulted in the emergence of class consciousness. Class consciousness refers to a condition by which people tend to perceive themselves in terms of their class background, and this shapes their relationships with members of other classes (Hill & Hult, 2018). Religious and Ethical Systems Religion may be defined as a system of shared beliefs and rituals that are concerned with the realm of the sacred (Hill & Hult, 2018). An ethical system refers to a set of moral principles, or values, that are used to guide and shape behavior. Most of the world’s ethical systems are the product of religions. 03 Handout 1 *Property of STI  [email protected] Page 4 of 11  BM1917 Christianity Christianity is the most widely practiced religion in the world, with some 2.20 billion followers. The vast majority of Christians live in Europe and the Americas, although their numbers are growing rapidly in Africa. Christianity grew out of Judaism. Like Judaism, it is a monotheistic religion (monotheism is the belief in one God). A religious division in the eleventh century led to the establishment of two (2) major Christian organizations—the Roman Catholic Church and the Orthodox Church. Today, the Roman Catholic Church accounts for more than half of all Christians, most of whom are found in southern Europe and Latin America. The Orthodox Church, while less influential, is still of major importance in several countries (e.g., Greece and Russia). In the sixteenth century, the Reformation led to a further split with Rome; the result was Protestantism. The nonconformist nature of Protestantism has facilitated the emergence of numerous denominations under the Protestant umbrella (e.g., Baptist, Methodist, Calvinist) (Hill & Hult, 2018). Islam With about 1.60 billion adherents, Islam is the second-largest of the world’s major religions. Islam dates to AD 610 when the Prophet Muhammad began spreading the word, although the Muslim calendar begins in AD 622 when, to escape growing opposition, Muhammad left Mecca for the oasis settlement of Yathrib, later known as Medina. Adherents of Islam are referred to as Muslims. Muslims constitute a majority in more than 40 countries and inhabit a nearly contiguous stretch of land from the northwest coast of Africa, through the Middle East, to China and Malaysia in the Far East (Hill & Hult, 2018). Islam has roots in both Judaism and Christianity (Islam views Jesus Christ as one of God’s prophets). Like Christianity and Judaism, Islam is a monotheistic religion. The central principle of Islam is that there is but the one true omnipotent God (Allah). Islam requires unconditional acceptance of the uniqueness, power, and authority of God and the understanding that the objective of life is to fulfill the dictates of His will in the hope of admission to paradise. According to Islam, worldly gain and temporal power are an illusion. Those who pursue riches on earth may gain them, but those who forgo worldly ambitions to seek the favor of Allah may gain the greater treasure: entry into paradise (Hill & Hult, 2018). Obvious parallels exist with many of the central principles of both Judaism and Christianity. Islam is an all-embracing way of life governing the totality of a Muslim’s being. As God’s surrogate in this world, a Muslim is not a totally free agent but is circumscribed by religious principles—by a code of conduct for interpersonal relations—in social and economic activities. Religion is paramount in all areas of life. The Muslim lives in a social structure that is shaped by Islamic values and norms of moral conduct. The ritual nature of everyday life in a Muslim country is striking to a Western visitor. Among other things, orthodox Muslim ritual requires prayer five (5) times a day (business meetings may be put on hold while the Muslim participants engage in their daily prayer ritual), demands that women should be dressed in a certain manner, and forbids the consumption of pork and alcohol (Hill & Hult, 2018). Hinduism Hinduism has approximately 1.10 billion adherents, most of them on the Indian subcontinent. Hinduism began in the Indus Valley in India more than 4,000 years ago, making it the world’s oldest major religion. Unlike Christianity and Islam, its founding is not linked to a particular person. Nor does it have an officially sanctioned sacred book such as the Bible or the Koran. Hindus believe that a moral force in society requires the acceptance of certain responsibilities, called dharma. Hindus believe in reincarnation, or rebirth into a different body, after death. Hindus also believe in karma, the spiritual progression of each person’s soul. A person’s karma is affected by the way he/she lives. The moral state of an individual’s karma determines the challenges he/she will face in the next life. By perfecting the soul in each new life, Hindus believe that an individual can eventually achieve nirvana, a state of complete spiritual perfection that renders reincarnation no longer necessary. Many Hindus believe that the way to achieve nirvana is to lead a severe ascetic lifestyle of material and physical self-denial, devoting life to a spiritual rather than material quest (Hill & Hult, 2018). Max Weber, famous for expounding on the Protestant work ethic, also argued that the ascetic principles embedded in Hinduism do not encourage the kind of entrepreneurial activity in pursuit of wealth creation 03 Handout 1 *Property of STI  [email protected] Page 5 of 11  BM1917 that we find in Protestantism. According to Weber, traditional Hindu values emphasize that individuals should be judged not by their material achievements but by their spiritual achievements. Hindus perceive the pursuit of material well-being as making the attainment of nirvana more difficult. Given the emphasis on an ascetic lifestyle, Weber thought that devout Hindus would be less likely to engage in entrepreneurial activity than devout Protestants (Hill & Hult, 2018). Mahatma Gandhi, the famous Indian nationalist and spiritual leader, was certainly the embodiment of Hindu asceticism. It has been argued that the values of Hindu asceticism and self-reliance that Gandhi advocated had a negative impact on the economic development of post-independence India. But we must be careful not to read too much into Weber’s rather old arguments. Modern India is a very dynamic entrepreneurial society, and millions of hardworking entrepreneurs form the economic backbone of the country’s rapidly growing economy, especially in the information technology sector (Hill & Hult, 2018). Historically, Hinduism also supported India’s caste system. The concept of mobility between castes within an individual’s lifetime makes no sense to traditional Hindus. Hindus see mobility between castes as something that is achieved through spiritual progression and reincarnation. An individual can be reborn into a higher caste in his/her next life if he/she achieves spiritual development in this life (Hill & Hult, 2018). Buddhism Buddhism, with some 535 million adherents, was founded in the sixth century BC by Siddhartha Gautama in what is now Nepal. Siddhartha renounced his wealth to pursue an ascetic lifestyle and spiritual perfection. His adherents claimed he achieved nirvana but decided to remain on earth to teach his followers how they, too, could achieve this state of spiritual enlightenment. Siddhartha became known as the Buddha (which means “the awakened one”). Today, most Buddhists are found in Central and Southeast Asia, China, Korea, and Japan. According to Buddhism, suffering originates in people’s desires for pleasure. Cessation of suffering can be achieved by following a path for transformation. Siddhartha offered the Noble Eightfold Path as a route for transformation. This emphasizes right seeing, thinking, speech, action, living, effort, mindfulness, and meditation. Unlike Hinduism, Buddhism does not support the caste system. Nor does Buddhism advocate the kind of extreme ascetic behavior that is encouraged by Hinduism. Nevertheless, like Hindus, Buddhists stress the afterlife and spiritual achievement rather than involvement in this world (Hill & Hult, 2018). Confucianism Confucianism was founded in the fifth century B.C. by K’ung-Fu-tzu, more generally known as Confucius. For more than 2,000 years until the 1949 communist revolution, Confucianism was the official ethical system of China. While observance of Confucian ethics has been weakened in China since 1949, many people still follow the teachings of Confucius, principally in China, Korea, and Japan. Confucianism teaches the importance of attaining personal salvation through right action. Although not a religion, Confucian ideology has become deeply embedded in the culture of these countries over the centuries and, through that, has an impact on the lives of many millions more. Confucianism is built around a comprehensive ethical code that sets down guidelines for relationships with others. High moral and ethical conduct and loyalty to others are central to Confucianism. Unlike religions, Confucianism is not concerned with the supernatural and has little to say about the concept of a supreme being or an afterlife (Hill & Hult, 2018). Language Spoken Language Language does far more than just enable people to communicate with each other. The nature of a language also structures the way we perceive the world. The language of a society can direct the attention of its members to certain features of the world rather than others (Hill & Hult, 2018). Because language shapes the way people perceive the world, it also helps define culture. Countries with more than one language often have more than one culture (Hill & Hult, 2018). 03 Handout 1 *Property of STI  [email protected] Page 6 of 11  BM1917 While it does not necessarily follow that language differences create differences in culture and, therefore, separatist pressures (e.g., witness the harmony in Switzerland, where four languages are spoken), there certainly seems to be a tendency in this direction (Hill & Hult, 2018). Mandarin (Chinese) is the mother tongue of the largest number of people, followed by English and Hindi, which is spoken in India. However, the most widely spoken language in the world is English, followed by French, Spanish, and Mandarin (i.e., many people speak English as a second language). And, importantly, English is increasingly becoming the language of international business throughout the world, as it has been in much of the developed world for years. When Japanese and German businesspeople get together to do business, it is almost certain that they will communicate in English. However, although English is widely used, learning the local language yields considerable advantages. Most people prefer to converse in their own language, and being able to speak the local language can build rapport and goodwill, which may be very important for a business deal. International businesses that do not understand the local language can make major blunders through improper translation (Hill & Hult, 2018). EXAMPLE: The Sunbeam Corporation used the English words for its “Mist-Stick” mist-producing hair- curling iron when it entered the German market, only to discover after an expensive advertising campaign that mist means excrement in German. General Motors was troubled by the lack of enthusiasm among Puerto Rican dealers for its new Chevrolet Nova. When literally translated into Spanish, nova means star. However, when spoken it sounds like “no va,” which in Spanish means “it doesn’t go.” General Motors changed the name of the car to Caribe. Ford made a similar and somewhat embarrassing mistake in Brazil. The Ford Pinto may well have been a good car, but the Brazilians wanted no part of a car called “pinto,” which is slang for tiny male genitals in Brazil. Even the world’s largest furniture manufacturer, IKEA from Sweden, ran into branding issues when it named a plant pot “Jättebra” (which means great or superbly good in Swedish). Unfortunately, Jättebra resembles the Thai slang word for sex! Pepsi’s slogan “come alive with the Pepsi Generation” did not quite work in China. People in China took it literally to mean “bring your ancestors back from the grave (Hill & Hult, 2018).” Unspoken Language Unspoken language refers to nonverbal communication. We all communicate with each other by a host of nonverbal cues. The raising of eyebrows, for example, is a sign of recognition in most cultures, while a smile is a sign of joy. Many nonverbal cues, however, are culturally bound. A failure to understand the nonverbal cues of another culture can lead to a communication failure. For example, making a circle with the thumb and the forefinger is a friendly gesture in the United States, but it is a vulgar sexual invitation in Greece and Turkey. Similarly, while most Americans and Europeans use the thumbs-up gesture to indicate that “it’s all right,” in Greece, the gesture is obscene (Hill & Hult, 2018). Education From an international business perspective, one important aspect of education is its role as a determinant of national competitive advantage. The availability of a pool of skilled and knowledgeable workers is a major determinant of the likely economic success of a country (Hill & Hult, 2018). EXAMPLE: In analyzing the competitive success of Japan, Harvard Business School Professor Michael Porter notes that after the last World War, Japan had almost nothing except for a pool of skilled and educated human resources: “With a long tradition of respect for education that borders on reverence, Japan possessed a large pool of literate, educated, and increasingly skilled human resources.... Japan has benefited from a large pool of trained engineers. Japanese universities graduate many more engineers per capita than in the United States.... A first-rate primary and secondary education system in Japan operates based on high standards and emphasizes math and science. Primary and secondary education is highly competitive.... Japanese education provides most students all over Japan with a sound higher education and training. A Japanese high school graduate knows as much about math as most American college graduates (Hill & Hult, 2018).” Porter’s point is that Japan’s excellent education system is an important factor explaining the country’s postwar economic success. Not only is a good education system a determinant of national competitive advantage, but it is also an important factor guiding the location choices of international businesses. The recent trend to 03 Handout 1 *Property of STI  [email protected] Page 7 of 11  BM1917 outsource information technology jobs to India, for example, is partly due to the presence of significant numbers of trained engineers in India, which in turn is a result of the Indian education system. It would make little sense to base production facilities that require highly skilled labor in a country where the education system was so poor that a skilled labor pool was not available, no matter how attractive the country might seem on other dimensions. It might make sense to base production operations that require only unskilled labor in such a country. The general education level of a country is also a good index of the kind of products that might sell in a country and of the type of promotional material that should be used. As a direct example, a country where more than 50 percent of the population is illiterate is unlikely to be a good market for popular books. But perhaps more importantly, promotio