Cultural, Economic and Legal
Environment of International
Business
Dr. (Mrs.) Vijaya Katti
Dean Administration (Academics)
Indian Institute of Foreign Trade
New Delhi
SIB : 15-12-19
Objectives
• To understand the significance of Political,
Legal and Cultural Environment for Global
business.
• To examine select case studies in each
context
• To apply the knowledge for undertaking
business in different countries.
What makes global marketing so
different from domestic
marketing?
– While marketers use essentially the same
strategic elements (the 4 p’s) to market their
products the environment
(PELFREC, plus
geography) of different markets (countries)
affect how these elements can be used
WHAT ISSUES ARISE WHEN DOING
BUSINESS GLOBALLY?
• International business relationships
can prove challenging
• Legal Issues
• Language Issues
• Cultural Barriers
• Supervisory Oversight
• Political Problems
REGULATING INTERNATIONAL
BUSINESS
Introduction
• An IBE is affected by laws and
regulations from many sources, not
just the laws of its home country or
state. Of course, an IBE must comply
with the laws of the city, county,
state, and nation that is considered
its home or principal place of doing
business
International Controls
• International agreements, treaties,
and conventions are becoming
increasingly important to IBEs. The
scope of international conventions is
no longer limited to relationships
between governments
• A major international institution that
affects international business is the
World Trade Organization, formed in
1995 and charged with the
responsibility of enforcing the
General Agreement on Tariffs and
Trade (GATT).
• Several other international bodies
seek to control the activities of IBEs
through the use of codes of conduct.
• The Tripartite Declaration of Principles
Concerning
• Multi-National Enterprises and Social Policies was
adopted by the International Labor Organization.
• This declaration deals with issues of labor
relations, such as working conditions, training,
and employment. It also deals with issues of
social policy.
• The United Nations General assembly passed a
resolution adopting the Restrictive Business
Practices Code.
• The purpose of this code is to protect competition
as well as social welfare and consumer interests.
• The United Nations Conference on
Trade and Development is working
on an international code of conduct
for the transfer of technology.
• One purpose of this code is to set up
standards for technology transfer
with respect to the interest of
developing nations.
• The
Organization
of
Economic
Cooperation
and
Development
(OECD) has issued Guidelines for
International
Investment
and
Multinational Enterprises.
• The member governments of the
OECD
have
adopted
guidelines
regarding
the
disclosure
of
information by IBEs, competition,
employment
and
industrial
relationship, financing, and taxation.
POLITICAL ENVIRONMENT
• Politics has to do with the way
power is gained and used and it
is closely related to the legal
system since governments, and
the
courts
they
appoint,
determine the laws and the
eventual application of those
laws and regulations
Political Vulnerability
• Some products are more vulnerable
than others in that the product
receives more political attention and
therefore create more risk for the
firm. For example, in times of rising
prices oil becomes a politically
sensitive product
Since political risk increases if the product is
politically sensitive marketers must find out or
detect the degree of vulnerability by addressing
the following:
– Is the product critical to the economic debate in the
foreign market?
– Is the product critical to the political debate in the
foreign market?
– Is the product in an industry that employs most of the
people in the country?
– Do other local industries depend on your output?
– Is your product essential to national security?
– Are you competing with local/domestic industry in the
foreign market?
– Is your product a danger to health or the environment?
– Does your product drain resources?
– Does your product or firm drain foreign exchange?
Forecasting Political Risk
– Firms can use quantitative or qualitative
methods to assess political risk.
Political risk assessment helps in
deciding about risk insurance, data
gathering and intelligence networking,
development of contingency planning,
establishment of early warning system.
• Types of Political Risk
– Confiscation (take-over without
reimbursement)
– Restriction
– Price Controls
– Labor Policy
– Expropriation (takeover/unwilling sale
with full or partial payment)
– Domestication (local ownership,
management, material inputs)
– Nationalization (government ownership
of industry)
Economic Risk
In the political setting, economic risk comes
under the banner of:
– National security
– Protection of infant industry
– Protection of foreign exchange (exchange
Controls)
– Tax/Revenue controls
– Price controls
– Import/Export (Trade) restrictions
– Political sanctions
– Violence and Labor problems
– Political Reprisals
Avoiding Political Risk
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Refrain from political activity
Maintain a low profile in the foreign market
Integrate the firm into the economy/society
View net contribution to the host country
Use joint ventures
Expand investment base (use several investors including
locals)
Licensing
Control of global marketing & distribution
Planned domestication
Development of local suppliers
Adopt a low-key reactive style rather than an aggressive
management style in the foreign market
Develop and maintain a global image
Resist pressure to pay bribes and or take sides in
political contests
Keep an eye on the local environment
Legal Issues
– The legal system varies from nation to
nation - - no uniform system of laws
exists.
The notion that there is
“International Law” is a myth
Issues
– Jurisdiction: In the case of a trade
disagreement, which set of laws should
the disputing parties use to settle the
dispute?
Intellectual Property
Patents and trademarks do not
receive universal protection simply
because they are registered in one
country (note that to some extent
this is changing as the WTO seeks to
expand global trade
Bribery and Corruption
Bribery is often used to buy influence
and lessen political and other kinds
of risk.
Conflict Resolution Options
– Conflicts between trading partners does
not always have to end up in court. The
parties to an agreement can stipulate
how and where conflicts will be handled.
Regulating Global Trade
– Much of the world’s trade is regulated
by
regional
and
or
international
organizations.
Much of the world is
divided into huge trading blocks
(Europe, Central Europe, the Americas,
Asian pacific Rim, Africa, Middle East)
with subdivisions within these major
blocks.
INTERNATIONAL CULTURAL
ENVIRONMENT
• A firm operating internationally
comes across
a
wide range of
diverse cultural environment, which
significantly influence international
business decisions.
• International managers need to develop
cultural sensitivities in the countries of
their operations and adapt their business
strategies accordingly.
• The failure of Euro Disneyland is a classic
example of the failure to understand a
foreign culture and is often described as a
‘Cultural Chernobyl’. Disney’s insensitivity
to French culture in terms of product
designs, consumer habits, and local norms
made the company enter into troubled
waters in its French venture..
• Another
example
of
cultural
insensitivity was witnessed in May
2001 when a wave of anger erupted
among
vegetarian and Hindu
consumers
across
the
world,
especially in India, within hours of
receiving the news of McDonald’s
using beef extract for cooking its
fries.
The Concept of Culture
• The word culture is derived from the
Latin cultura which is related to cult
or worship Culture is the way of life
of people, including their attitudes,
values, beliefs, arts, sciences, modes
of perception, and habits of thought
and activity.
Constituents of Culture
• As culture is an integrated sum of
learned behaviour shared by a group
of people that differentiates it from
others, it becomes imperative to
understand various constituents that
contribute to the sum total of learned
behaviour.
Value system
• Values are shared assumptions of a
group regarding what is good or bad,
right or wrong, and important or
unimportant.
• Values are learnt by a person while
being reared in a culture, which
significantly
influences
one’s
behaviour.
Business behaviour is
considerably affected by a country’s
value systems.
Traditions and customs
• The word trdition is derived from the
Latin word traditio, which means ‘to
hand down’ or ‘to hand over’.
Traditions are the elements of
culture passed on from generation to
generation.
• International managers are required
to learn customs and traditions of
the cultures being dealt with,
appreciate them, and integrate the
strategic response in the business
strategy.
Language
• Language can be described as a
‘systematic means of communicating
ideas or feelings by the use of
conventionalized signs, gestures,
marks, or especially articulate vocal
sounds.
• Language is the most important
element that sets human beings
apart from the animals.
Why Culture Matters in
International
Business
• Effective handling of the cross-cultural
interface is a critical source of a firm’s
competitive advantage. Managers need to
develop not only empathy and tolerance
toward cultural differences, but also
acquire a sufficient degree of factual
knowledge about the beliefs and values of
foreign
counterparts.
Cross-cultural
proficiency
is
paramount
in
many
managerial tasks, including:
• cross-cultural differences may complicate
workplace issues
• Teamwork.
• Lifetime employment
• Pay-for-performance system
• Organizational structure
• Union-Management relationships
• Attitudes toward ambiguity
Importance of Cultural Awareness
Training in International Business
• Communication is very important while
people interact with one another. Just
being able to speak the same language is
not enough. Understanding the barriers
among people is essential. Culture is one
such difference. The response of a
person to a communication is different
from another person’s response
• Working in a multicultural
environment requires basic culture
awareness training
Why is Cultural awareness
necessary?
• Cultural awareness is important to help
members of a multicultural team identify
where things may be going wrong or how
to best leverage their differences. Without
some sort of formal cross cultural
awareness training it is difficult for
multicultural teams to identify areas that
need attention.
• Build your cultural knowledge:
• Treat people as individuals
• Implement your cultural
Knowledge
• Withhold assumptions
• Avoid Blame
• Listen Actively
• Relay your knowledge
Summary
• Entrepreneurs and business persons
needs to understand the significance
of each aspects influencing business
environment.
• Cultural, Political and Legal aspects
play an important role.
• Success or failure depends on proper
interpretation of opportunities.
Thank
you