M1S1-Introduction and Overview
Globalization
• What is Globalization?
• 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
• Global tastes
• Benefits small and large
companies
• Significant differences between
national markets
• Products that serve universal
needs are global: oil
• Competitors may not change
among nations
• What is Globalization?
• The globalization of production
• Sourcing goods to take advantage of differences in
cost and quality of factors of production
• Factors of production include labor, energy, land
capital
• Early outsourcing was confined to manufacturing
• Modern communications technology has advanced
outsourcing today for service activities
• Robert Reich and “global products”
• Impediments prevent optimal dispersion of
activities:
•
•
•
•
•
Formal and informal barriers to trade
Barriers to foreign direct investment
Transportation costs
Political and economic risk
Challenge of coordinating globally dispersed supply
chain
M1S1-Introduction and Overview
Globalization
• The emergence of global institutions
• Institutions needed to help manage,
regulate, and police global marketplace
• General Agreement of Tariffs and Trade
(GATT)
• World Trade Organization
• International Monetary Fund
• The World Bank
• The World Trade Organization
• Polices the world trading system
• Ensures nation-states adhere to the rules
• Facilitates multinational agreements among
members
• 164 nations that account for 98% of the
world trade were members as of 2019
• The International Monetary Fund
• Established to maintain order in the int’l
monetary system
• Often seen as the lender of last resort
• In return for loans, requires nation-states to
adopt specific economic policies aimed at
returning their economies to stability and
growth
• The World Bank
• Promotes economic development
• Focused on making low-interest loans to cashstrapped governments in poor nations that wish
to undertake significant infrastructure
investments
• Considered less controversial than the IMF
• The United Nations
• Promotes peace through international
cooperation and collective security
• 193 member countries
• UN Charter – four basic purposes:
• Maintain international peace and security
• Develop friendly relations among nations
• Cooperate in solving international problems and in
promoting respect for human rights
• Be a center for harmonizing the actions of nations
• Group of Twenty (G20)
• Finance ministers and central bank governors of
the 19 largest economies in the world, plus reps
from the EU and the European Central Bank
• Represents 90% of global GDP and 80% of int’l
global trade
M1S1-Introduction and Overview
Drivers of Globalization
• Declining trade and investment barriers
• 1920s to 1930s: Many barriers to int’l trade
and FDI
• Int’l trade: when a firm exports goods or
services to consumers in another country
• FDI: when a firm invests resources in business
activities outside its home country
• GATT lowered barriers
• Uruguay Round extended GATT and
established WTO
• Between 1960 and 2018 the value of the
world economy increased 9.4 times, while
the value of int’l goods increased 22.4
times
• Trade in goods and services and the value of
FDI have all been growing faster than world
output
• More firms dispersing prod’n process to
different locations around the globe
• Economies of the world’s nation-states are
becoming more intertwined
• World has become significantly wealthier in
the past two decades
• Role of Technological change
• Communications
• Dev’t of the microprocessor single most
important innovation since WWII
• Moore’s Law predicts that the power of
microprocessor technology double and its cost
of prod’n falls in half every 18 months
• The Internet
• More than half od the world’s pop’n uses the
internet
• Global e-commerce sales over $2.5 trillion
• The internet acts as an equalizer
• Transportation Techhology
• Comm’l jets, superfreighters, and
containerization have all “shrunk the globe”
• Implications for the Globalization of
Production
• Locating production in geographically separate
locations has become more economical
• Implications for Globalization of Markets
• Cultural distance has been reduced and has
brought some convergence of consumer tastes
and preferences
M1S1-Introduction and Overview
The Changing Demographics of the Global Economy
• The Changing World Output and World Trade Picture
• 1960s: US: 38.3% of world output
• 2018: US: 24% of world output
• This reflects the faster economic growth of several other countries,
particularly China
• China and BRIC countries growing more rapidly
• Developing nations may account for more than 60% of world economic activity by
2025
• The Changing FDI Picture
• As barriers to the free flow of goods and services fell, non-US firms
increasingly invested across nat’l borders
• Desire to disperse prod’n activities to optimal locations and to build a direct
presence in major foreign markets
• Outward stock of FDI: the total cumulative value of foreign investments by firms
domiciled in nations outside of that nation’s borders (2018: 35% globally)
• The Changing Nature of the Multinational Enterprise (MNE)
• MNE is any business that has productive activities in two or more countries
• Non-US multinationals
• In 2003, 38.8% of world’s 2000 largest firms were US firms.
• By 2019, 28.8% were US firms, a drop of 201 firms
• The rise of mini-multinationals
• Growth in the number of medium- and small-sized businesses
• Internet is lowering barriers that smaller firms faced in int’l trade
• The Changing World Order
• Former communist countries
present export and investment
opportunities
• Signs of growing unrest and
commitment to market-based
economic systems cannot be
assumed
• Risks of doing business in these
countries are high
• China moving to industrial
superpower
• In Latin America, debt and
inflation are down, more
private investors, expanding
economies
• Global Economy of the 21st
Century
• Barriers to the free flow of
goods, services, and capital
have been coming down
• Strengthened by the
widespread adoption of liberal
economic policies by countries
that had opposed then
• Globalization is not inevitable:
• Countries may pull back
• Risks are high
M1S1-Introduction and Overview
The Globalization Debate
• Antiglobalization Protests
• Began with 1999 protests at WTO meeting in Seattle
• Protestors now typically show up at major meetings of global
institutions
• Protesters believe globalization causes detrimental effects on
living standards, wage rates, and the environment
• Theory and evidence suggest these fears may be exaggerated
• Globalization, Jobs, and Income
• Critics of globalization argue:
• Falling trade barriers allow firms to move manufacturing activities
where wage rates are much lower  destroys mfg jobs in wealthy
advanced economies
• Services also being outsourced: contributing to higher unemployment
and lower living standards in their home nations
• Supporters argue:
• Benefits outweigh the costs
• Free trade will result in countries specializing in the prod’n of goods
and services that they can produce most efficiently, while importing
goods and services that they cannot product as efficiently
• As a result, the whole economy is better off. Companies can reduce their
cost structure, and consumers benefit
• Data suggests the share
of labor in national
income has declined over
the past two decades
• Share of national income
by skilled labor has
increased
• Unskilled labor
experienced a fall in
income, but not
necessarily standard of
living due to economic
growth
• The weak growth rate in
real wage rates for
unskilled workers is likely
due to a technologyinduced shift within
advanced economies
• Technological change has
a bigger impact than
globalization on declining
share of national income
enjoyed by labor
M1S1-Introduction and Overview
The Globalization Debate
• Globalization, Labor Policies, and the Environment
• Critics argue:
• Labor and environmental regularions increase mfg costs
• Lack of regulation can lead to abuse
• Firms move production to nations that do not have regulations
• Supporters argue:
• Tougher environmental regulations and stricter global labor standards
go hand in hand w/ economic progress
• Free trade leads to less labor exploitation and less pollution
• At $8,000 income per capita, other pollutants seems to peak and
goes down
• Globalization and Nat’l Sovereignty
• Critics argue:
• Shift of power away from nat’l gov’ts toward supranational
organizations – WTO, EU, UN
• Supporters argue:
• The power of supranational organizations is limited to what nationstates collectively agree to grant
• These organizations exist to serve the collective interests of member
states
• Globalization and the
world’s poor
• Critics argue gap
between the rich and
poor nations has gotten
wider
• Totalitarian gov’ts
• Poor economic policies
• Corruption and lack of
property rights
• Expanding populations
in developing countries
• Debt burdens
• Supporters argue best
way to change the
situation is to lower
barriers to trade and
investment and
promote free market
policies
M1S1-Introduction and Overview
Managing the Global Marketplace
• Managers
• International business is any firm that engages in international trade or
investment
• Managing an international business differs from managing a purely domestic
business
•
•
•
•
Countries are different
Range of problems is wider and problems more complex
Must find ways to work within limits imposed by government
Transactions involve converting money into different currencies
M1S2-Nat’l Differences in Political, Economic, and Legal Systems
• Political Economy
• Political, economic, and legal
systems of a country
• These systems are
interdependent
• They influence each other
• Political Systems
• The system of a gov’t in a
nation is called the political
system
• Assessed accdg to two
dimensions:
• Emphasis on collectivism or
individualism
• Degree to which they are
democratic or totalitarian
• Collectivism and Individualism
• Collectivism
• The needs of society as a whole are generally viewed
as being more important than individual freedoms
• Socialism
• Public ownership of the means of production for the
common good
• Karl Marx: The few benefit at the expense of the many
in a capitalist society where individual freedoms are
not restricted
• Communists vs social democrats
• Individualism
• An individual should have freedom in economic and
political pursuits
• The interests of the individual should take precedence
over the interests of the state
• Two tenets:
• Guarantee of individual freedom and self-expression
• Welfare of society best served by letting people pursue
their own economic self-interest
M1S2-Nat’l Differences in Political, Economic, and Legal Systems
Political Systems
• Democracy and
Totalitarianism
• Democracy: gov’t is by the
people, exercised either
directly or through elected
representatives
• Totalitarianism: one person or
political party exercises
absolute control over all
spheres of human life and
prohibits opposing political
parties
• Democracy and individualism
go hand in hand, as do the
communist version of
collectivism and totalitarianism
• Democracy
• Representative democracy: citizens periodically elect
individuals to represent them
• Includes a multitude of safeguards that are typically based
in constitutional law, including: freedom of expression, free
media, universal audit suffrage, fair court system
• Totalitarianism
• Communist totalitarianism: socialism can be achieved only
through a totalitarian dictatorship
• Theocratic totalitarianism: monopolized by a party, group,
or individual that governs according to religious principles
• Tribal totalitarianism: a party, group, or individual that
represents the interests of a particular tribe monopolizes
political power
• Right-wing totalitarianism: generally permits individual
economic freedom but restricts individual political
freedom, including free speech, on the ground that it
would to the rise of communism
• Pseudo-democracies
• Lie between pure democracies and complete
totalitarianism systems
• Authoritarian elements have captured some or much of
the machinery of state and use this to deny basic political
and civil liberties
M1S2-Nat’l Differences in Political, Economic, and Legal Systems
Economic Systems
• Market Economy
• All productive activities are
privately owned
• Production is determined by
supply and demand
• To work, supply must not be
restricted
• Role of government is to
encourage vigorous free and
fair competition
• Command Economy
• Government plans the goods and services,
quantity, and price, then allocates them for
“the good of society”
• All businesses are state owned
• Historically found in communist countries
• No incentive for individuals to look for better
ways to serve needs
• Mixed Economy
• Some sectors are privately owned, some are
government owned
• Once common in developed world, less so
now
• Government may aid troubled firms whose
operations are vital to national interests: US
helped Citigroup, General Motors
M1S2-Nat’l Differences in Political, Economic, and Legal Systems
Legal Systems
• Legal systems of a country
refer to:
• Rules or laws that regulate
behavior
• Process through which laws are
enforced
• Process through which redress
for grievances is obtained
• Influenced by the prevailing
political system
• Different legal systems
• Common law:
• Based on tradition, precedent, custom
• More flexible than other systems
• Civil law:
• Based on detailed laws organized into codes
• Less adversarial than a common law system
• Theocratic law:
• Based on religious teachings
• Most common is Islamic law
M1S2-Nat’l Differences in Political, Economic, and Legal Systems
Legal Systems
• Differences in Contract Law
• Contract: specifies conditions under which an exchange is to occur, and
details rights of parties involved
• Contract law: body of law that governs contract enforcement
• Under common law: contracts are very detailed with all contingencies spelled out.
More expensive and can be adversarial
• Under civil law: contracts tend to be much shorter and less specific
• United Nations Convention on Contracts for the Int’l Sale of Goods (CISG):
• Establishes a uniforms set of rules governing certain aspects of the making and
performance of everyday comm’l contracts between sellers and buyers who have
their places of business in different nations
• Applies automatically to all contracts for the sale of goods between different firms
based in countries that have ratified the convention, unless the parties opt out
M1S2-Nat’l Differences in Political, Economic, and Legal Systems
Legal Systems
• Property Rights and Corruption
• Property: a resource that an individual or business owns
• Land, buildings, equipment, capital, mineral rights, businesses, intellectual property
• Property rights: legal rights over the use to which a resource is put and over the use made of any
income that may be derived from that resource
• Private action: theft, piracy, blackmail by private individuals or groups
• Public action and corruption:
• Public officials extort income, resources, or property
• Can be done legally by levying excessive taxation, requiring licenses or permits from property holders, taking assets
into state ownership without compensating owners, redistributing assets without compensating prior owners
• Can be done illegally through corruption, demanding bribes
• Foreign Corrupt Practices Act (FCPA)
• Illegal to bribe a foreign gov’t official to obtain or maintain business over w/c that a foreign official has
authority
• Requires all publicly traded companies to keep detailed records that would reveal whether a violation of the
act has occurred
• Convention on Combating Bribery of Foreign Public Officials in International Business Transactions
(1997):
• Bribery of a foreign public official is a criminal offense
• Allows for facilitating or expediting payments
M1S2-Nat’l Differences in Political, Economic, and Legal Systems
Legal Systems
• The Protection of Intellectual
Property
• Refers to property that is the
product of intellectual activity,
such as computer software, a
screenplay, a music score
• Patent: inventor’s exclusive rights
for a defined period
• Copyrights: exclusive legal rights of
authors, composers, playwrights,
artists, and publishers
• Trademarks: officially registered
designs and names used to
differentiate products
• World Intellectual Property
Organization
• Paris Convention for the
Protection of Industrial Property
• 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
• Can be much greater if a product does not conform
to safety standards
• Criminal and civil laws apply
• Raises ethical issue when doing business abroad
M1S2-Nat’l Differences in Political, Economic, and Legal Systems
Focus on Managerial Implications
• The Macro Environment Influences Market Attractiveness
• Two broad implications:
• Political, economic, and legal systems of a country raise important ethical issues that have implications
for international business
• Political, economic, and legal environments of a country clearly influence the attractiveness of that
country as a market or investment site
• A country with democratic political institutions, market-based economic system, and strong legal system
clearly more attractive to do business in
M1S3-Nat’l Differences in Economic Development
• Economic Development
• Differences among nations affect
how attractive it is for doing
business
• Trends that foster greater
economic development
• Democratic forms of government
• Market-based economic reforms
• Legal systems that better enforce
property rights
• Gross National Income (GNI)
• Measures the total annual income
received by residents of a nation
• Japan, Sweden, Switzerland, and
US have high GNI
• China and India have low GNI
• GNI does not consider differences
in the cost of living
• Purchasing power parity (PPP) is an
adjustment in gross domestic
product per capita to reflect
differences in cost of living
Country
GNI per
capita, 2018
$
GNI PPP per
capita, 2018
$
Annual GDP
growth rate,
2009-18 %
Size of
Economy
GDP, 2018
$billions
Brazil
9,140
15,280
1.2
1,868
China
9,470
18,140
8.0
13,608
Germany
47,450
55,800
1.3
3,998
India
2,020
7,680
7.1
2,726
Japan
41,340
45,000
0.7
4,970
Nigeria
1,960
5,700
4.2
397
Poland
14,150
31,110
3.5
586
Russia
10,230
26,470
0.9
1,658
Switzerland
83,580
69,220
1.5
706
United
Kingdom
41,330
45,660
1.3
2,825
M1S3-Nat’l Differences in Economic Development
• The “official” figures can be misleading
• Do not account for black economy
transactions that included unrecorded
cash transactions or barter agreements
• GNI and PPP data are static and do not
consider economic growth rates
• China and India are currently relatively poor,
but their economies are growing more rapidly
than many advanced nations
• China may become the world’s largest
economy during the next decade
• India will be among the largest economies in
the world
• Broader conceptions of
development: Amartya Sen
• Economic development should be
assessed by the capabilities and
opportunities people enjoy
• Development requires the removal of
major impediments to freedom:
poverty, tyranny, poor economic
opportunities
• Economic progress requires the
democratization of political
communities to give citizens a voice
• The UN used Sen’s ideas to develop
the Human Development Index (HDI)
to measure quality of human life in
different nations
• Life expectancy at birth
• Educational attainment
• Whether average incomes are
sufficient to meet the basic needs of
life in a country
M1S3-Nat’l Differences Economic Development
Political Economy and Economic Progress
• Innovation and Entrepreneurship
(I&E) are the Engines of Growth
• Innovation – includes new products,
new processes, new organizations, new
management practices, and new
strategies
• Entrepreneurs
• First to commercialize innovative
products and processes
• Provides much of the dynamism in an
economy
• Innovation and Entrepreneurship
require a Market Economy
• Little incentive to develop new
innovations in planned economies
because the state owns all means of
production and therefore, captures the
gains
• Strong relationship between economic
freedom and economic growth
• Innovation and Entrepreneurship require Strong
Property Rights
• Without strong property rights, individuals and
businesses risk having innovations and potential
profits stolen
• This reduces the incentive for I&E
• Economist Hernando de Soto claims that inadequate
property protection in many developing nations
limits economic growth
• The Required Political System
• Democratic regimes are probably more conducive to
long-term economic growth
• China, South Korea, Taiwan, Singapore, HK all had
undemocratic gov’ts but experienced economic growth
• Property rights are only secure in well-functioning,
mature democracies
• Totalitarian states are detrimental to progress
• They limit freedom and suppress human development
M1S3-Nat’l Differences Economic Development
Political Economy and Economic Progress
• Geography, Education, Demographics and Economic Development
• Economist Jeffrey Sachs argues that countries with favorable geography are:
• More likely to engage in trade
• More open to market-based systems
• Countries that invest in education have higher growth rates because the workforce is
more productive
• Countries in SEAsia have offset their geographical disadvantage by investing in education
• In terms of demographics, countries with a young and growing population have greater
growth potential
• Growing population increases supply of labor
• Younger workers tend to consume more than older workers
• Aging population implies a stress on government finances
M1S3-Nat’l Differences Economic Development
States in Transition
• Political economy of nation-states is
marked by three trends:
1. Democratic revolutions during late
1980s, early 1990s led to greater
commitment to free market capitalism
2. A move away from centrally planned
and mixed economies toward a more
free market approach
3. Since 2005, there has been a shift back
toward greater authoritarianism in
some nations resulting in a retreat
from the free market model
• The Spread of Democracy
• In 2019, Freedom House ranked
countries into three broad categories:
• 86 countries classified as free (44%)
• 59 countries classified as partly free (30%)
• 51 countries classified as not free (26%)
• The Spread of Democracy
• Three reasons for the spread of
democracy:
1.
2.
Many totalitarian regimes failed to
deliver economic progress to the bulk of
their populations
New information and communication
technologies
• Reduced state’s ability to control access to
uncensored information
• Created new conduits for the spread of
democratic ideals
3.
Economic advances have led to a
prosperous middle class that has
pushed for democratic reforms
• Since 2005, there has been a drift back
toward more authoritarian modes of
gov’t in many nations
• Elections have been compromised, civil
liberties restricted, independent press has
been attacked, opposition parties have
been restricted – Ex. Turkey, Russia,
Ukraine, Indonesia, Ecuador, Venezuela
M1S3-Nat’l Differences Economic Development
States in Transition
• The New World Order and Global Terrorism
• Author Francis Fukuyama argues the new world order will
be characterized by democratic regimes and free market
capitalism
• Political scientist Samuel Huntington argues that while
many societies are modernizing, they are not becoming
more Western
• Predicts a world split into different civilizations that will be in
conflict making business difficult
• Political position is more likely to be somewhere between
Fukuyama and Huntington
• Huntington: global terrorism is a product of tensions
between civilizations and a clash of value systems and
ideology, ie Al Qaeda and ISIS
• Former US Secy of State Colin Powell maintains that
terrorism is one of the major threats to world peace and
economic progress
• The Spread of MarketBased Systems
• A shift from centrally
planned economies to
market-based
economies
• More than 30 countries
in the former Soviet
Union and eastern
European communist
bloc have changed
economic system
• Change also occurring
in Asia and African
states
• Command and mixed
economies failed to
deliver the sustained
economic growth
achieved in marketbased countries
M1S3-Nat’l Differences Economic Development
The Nature of Economic Transformation
• The shift toward a market-based system
involves:
• Deregulation
• Privatization
• A legal system to safeguard property rights
• Deregulation
• Removing legal restrictions to the free play of
markets, the establishment of private
enterprises, and the manner in which private
enterprises operate
• Deregulation in mixed economies involved
the same initiatives as in command
economies
• Transition was easier due to a vibrant private
sector
• Privatization
• Transfers ownership of state property
into the hands of private individuals
• Movement started in Great Britain in the
early 1980s
• In many nations economic activity is still
in the hands of state-owned enterprises
• Selling state-owned enterprises not
enough to guarantee economic growth
• For privatization to work, it must be
paired with a general deregulation and
opening of the economy
• Legal systems
• A well-functioning market economy
requires laws
• Need to protect property rights
• Mechanisms for contract enforcement
• Adoption of a legal system requires time
to function well
• Institutional weaknesses undermine
contract enforcement in most countries
• Progress being made regarding laws on
property rights
M1S3-Nat’l Differences Economic Development
Implications of Changing Political Economy
• Ideological conflict between collectivism and individualism less prevalent today
• Western ideology more widespread
• Markets formerly off-limits to Western business are now open presenting a huge potential fo
business
• Potential risks are large
•
•
•
•
Will democracy thrive during difficult times?
Will totalitarian regimes return?
Is the risk associated with investment worth it?
Is China’s financial system stable?
M1S3-Nat’l Differences Economic Development
Focus on Managerial Implications
• Benefits, Costs, Risks, and Overall Attractiveness of Doing Business
Internationally
• Countries are more likely to have higher sustained rates of economic growth when they
have:
• Democratic regimes
• Market-based economic policies
• Strong property rights protection
• These markets are more attractive to international businesses
M1S3-Nat’l Differences Economic Development
Focus on Managerial Implications
• Benefits
• Based on the size of the market, as well as
current and future purchasing power of its
consumers
• First-mover advantages enjoyed by early
entrants
• Late-mover disadvantages suffered by late
entrants
• A country’s economic system and property
rights regime good predictors of economic
prospects
• Costs
• Political system: is it necessary to pay bribes
to get market access?
• Economic level: are the necessary supporting
business and infrastructure in place?
• Legal system: how do local laws and
regulations affect business decisions? Are
there well-established contract laws?
• Risks
• Political risk: the likelihood that political forces
will cause drastic changes in a country’s business
environment that will adversely affect the profit
and other goals of a business
• Economic risk: the likelihood that economic
mismanagement will cause drastic changes in a
country’s business environment that adversely
affect the profit and other goals of a business
enterprise
• Legal risk: the likelihood that a trading partner
will opportunistically break a contract or
expropriate property rights
• Overall Attractiveness
• Based on balancing the benefits, costs, and risks
associated with doing business in that country
• Other things being equal, the benefit-cost-risk
trade-off is likely to be the most favorable in
politically stable developed and developing
nations that have free market systems and no
dramatic upsurge in either inflation rates or
private sector debt
M1S3-Nat’l Differences Economic Development
Country Attractiveness
Benefits
Size of Economy
Likely Economic Growth
Overall
Attractiveness
Costs
Risks
Corruption
Political Risk: Social Unrest/ Antibusiness Trends
Lack of Infrastructure
Economic Risks: Economic Mismanagement
Legal Costs
Legal Risks: Failure to Safeguard Property Rights
M1S4- Differences in Culture
• Understanding and adapting to the local culture
is important in international companies
• Cross-cultural literacy refers to understanding how
cultural differences across and within countries can
affect the way business is practiced
• Cultural differences create a common bond among people
• Numerous values and norms exist in these cultural systems
that might affect international business
• Culture can and does evolve
• What is Culture?
• Culture – a system of
values and norms shared
among a group of people
and that when taken
together constitute a
design for living
• Values – Ideas about what
a group believes to be
good, right, and desirable
• Norms – Social rules and
guidelines that prescribe
appropriate behavior in
particular situations
• Society – a group of
people sharing a common
set of values and norms
M1S4- Differences in Culture
What is Culture?
• Values and Norms
• Values
• Provide the context within which a society’s norms are
established and justified
• They are invested with emotional significance
• Reflected in the economic systems of a society
• Norms
• Social rules that govern people’s actions towards one
another
• Folkways are routine conventions of everyday life – ex.
Appropriate dress code, good social manners, rituals
and symbolic behavior
• Mores are norms seen as central to functioning of
society – ex. Laws against theft; have greater moral
significance than other norms
• Culture, Society and the
Nation-State
• The relationship between a
society and a nation state is not
strictly one-to-one
• Nation-states are political
creations
• A nation can have several
cultures, and a culture can
embrace several nations
• Can be different levels of
culture within a country
• Determinants of Culture
• The values and norms of a
culture evolve over time –
religion, political philosophy,
economic philosophy,
education, language, social
structure
M1S4- Differences in Culture
Social Structure
• Social Structure
• Refers to the basic social organization of a society
• Two dimensions help explain difference among cultures
1.
2.
The degree to which the basic unit of social organization is the individual, as opposed to the group
The degree to which a society is stratified into classes or castes
• Individuals and Groups
• The Individual
• In many Western societies, the individual is the basic building block of social organization – emphasis
on individual achievement
• The Group
• The group is an association of 2 or more individuals who have a shared sense of identity and interact in
structured ways based on commons expectations – the primary unit of social organization in many
non-Western societies. Importance of group membership/ identification
M1S4- Differences in Culture
Social Structure
• Social Stratification
• Social strata are hierarchical social categories often based on family background, occupation and
income
• Individuals born into a particular stratum, which affects life chances
• Four basic principles
•
•
•
•
Trait of society
Carries over into next generation
Generally universal but variable
Involves not just inequality but also benefits
• Social mobility
• Extent to which individuals can move out of the strata into which they are born – varies among societies
• Caste system is a closed system where social position is determined by family and change is usually not
possible – India has 4 main castes
• Class system is less rigid, and position can be changed through achievement and luck – UK has a more rigid
class structure than US
• Significance
• Can affect business operations
• Class consciousness is a tendency for individuals to perceive themselves in terms of their class background
• Makes it difficult to establish a competitive advantage in a global economy
M1S4- Differences in Culture
Religious and Ethical Systems
• Religion - a system of shared beliefs and rituals concerned with the realm of the sacred
• Ethical system - A set of moral principles or values that are used to guide and shape behavior
• Most ethical systems are the product of religions
• 4 dominant religions today: Christianity, Islam, Hinduism, Buddhism
• Christianity
• Most widely-practiced religion, monotheistic
• Found throughout Europe, the Americas, and other countries settled by Europeans
• Economic implications of Christianity:
• Sociologists argue that Protestant branch has most important economic implications
• Max Weber, Protestant ethics, and the spirit of capitalism
• Islam
• World’s 2nd largest religion
• Monotheistic, one true omnipotent God (Allah)
• Islamic fundamentalism
• Associated in the West with militants, terrorists
• A response to social pressures to move toward modernization and the influence of Western societies
• Economic implications of Islam
• Many pro-free enterprise principles, protection of private property, concern with social justice
• Prohibits the payment or receipt of interest
M1S4- Differences in Culture
Religious and Ethical Systems
• Hinduism
• Beliefs
• A moral force in society requires the
acceptance of certain responsibilities, called
dharma
• Rebirth into a different body, called
reincarnation
• The spiritual progression of each person’s
soul, called kharma
• Achieving a complete spiritual perfection,
called nirvana
• Economic implications of Hinduism
• Max Weber: Hindus are valued by their
spiritual rather than material achievements
• Caste system abolished in India, but still has
an effect
• Buddhism
• Has about 535mio followers
• Stresses spiritual growth and the afterlife,
rather than achievement while in this world
• Economic implications of Buddhism:
• Does not emphasize wealth creation
• Does not support the caste system,
individuals do have some mobility and can
work with individuals from different classes
• Recently, the “Zen” orientation from
Buddhism has been introduced into business
in the Western world
• Confucianism
• Practiced mainly in China, Korea, Japan
• Teaches the importance of attaining
personal salvation through right action
• High morals, ethical conduct, and loyalty to
others
• Economic implications of Confucianism:
• 3 values – loyalty, reciprocal obligations and
honesty – may all lead to lowering the cost of
doing business in Confucian societies
• Guanxi are relationship networks supposed by
reciprocal obligations
M1S4- Differences in Culture
Language and Education
• Spoken Language
•
•
•
•
Language structures the way we see the world
Countries with more than 1 language often have more than 1 culture
Mandarin (Chinese) is the mother tongue of the largest number of people
The most widely-spoken language in the world is English – becoming the international language
of business
• Unspoken Language
• Nonverbal communication refers to the use of nonverbal cues to communicate meaning
• Often culturally bound
• Personal space is the comfortable distance between a speaker and the listener – varies among cultures,
which makes it important to know in business
• Formal Education
• Medium through which individuals learn languages and other skills
• Socializes the young into the value and norms of a society
• The “hidden curriculum” in schools teaches respect for others, obedience to authority, honesty, neatness
timeliness
• Provides a national competitive advantage
• Creates a pool of skilled and knowledgeable workers
• Represents a good index of what products might sell in a country
M1S4- Differences in Culture
Culture and Business
Culture and values in the workplace studied by Geert Hofstede
• Hofstede’s dimensions of culture:
• Power distance refers to how a society deals with the fact that people are unequal in physical and
intellectual capabilities
• Individualism versus collectivism focuses on the relationship between the individual and his or
her fellows
• Uncertainty avoidance measure the extent to which different cultures socialized their members
into accepting ambiguous situations and tolerating uncertainty
• Masculinity vs femininity looks at the relationship between gender and work roles
• Long-term vs short-term orientation refers to the extent to which a culture programs its citizens
to accept delayed gratification of their material, social, and emotional needs
• Indulgence vs restraint added in 2010
• Indulgence refers to a society that allows relatively free gratification of basic and natural human drives
related to enjoying life and having fun
• Restraint refers to a society that suppresses gratification of needs and regulates it by means of strict social
norms
• Western nations tend to score high on individualism and low on power distance
• Latin American and Asian countries emphasize collectivism and score high on power distance
• Japan demonstrates strong uncertainty avoidance and high masculinity
M1S4- Differences in Culture
Culture and Business
• Hofstede’s work is the leading research on culture but has received criticism
• Assumes a 1-to-1 correspondence between culture and the nation-state when many countries have more
than 1 culture
• Research may be culturally bound
• Research focused on a single industry
Global Leadership and Organizational Behavior Effectiveness (GLOBE) Instrument
• A leader’s effectiveness is contextual
• Embedded in the societal and organizational norms, values, and beliefs of the people being led
• Established nine cultural dimensions
• Power distance, uncertainty avoidance, humane orientation, institutional collectivism, in-group
collectivism, assertiveness, gender egalitarianism, future orientation, and performance orientation
World Value Survey (WVS)
• Exlpores people’s values and norms, how they change over time, and what impact they have
in society and business
• Dimensions:
• Support for democracy; tolerance of foreigners and ethnic minorities; support for gender equality; the role
of religion and changing levels of religiosity; the impact of globalization; attitudes toward the environment,
work, family, politics, national identity, culture, diversity, and insecurity; and subjective well-being
M1S4- Differences in Culture
Cultural Change
• Culture is not a constant; it evolves over time
• In the 1960s, women in management was never heard of while today it is a welcomed
reality
• There appears to be a move toward greater individualism in Japan
• Culture may change as a society becomes wealthier
• Also evidence of countertrends:
• Shift toward Islamic fundamentalism in some countries
• Separatist movements in Canada, Russia, UK
M1S4- Differences in Culture
Focus on Managerial Implications
• Cultural Literacy and Competitive Advantage
• Cross-Cultural Literacy
• Companies must be informed about the culture of another nation when conducting int’l business
• Ethnocentrism is the belief in the superiority of one’s own ethnic group or culture
• Edward T Hall notes American tend to be informal and have a difference attitude toward time – these
can be misconstrued in an international business situation
• Culture and Competitive Advantage
• Values and norms influence costs of doing business and the costs of doing business influence ability to
establish competitive advantage
• Some say culture of modern Japan lowers the cost of doing business relative to Western nations
• Also, Japan less supportive of entrepreneurial activity
• Connection between culture and competitive advantage important for 2 reasons
• Suggests which countries are likely to produce the most viable competitors
• Has important business implications for the choice of countries in which to locate production facilities
and do business
M1S5- Ethics, CSR, and Sustainability
• Introduction
• Ethics, corporate social responsibility, and sustainability are “social” issues that arise
frequently in international business
• Ethics are the core starting point
• Business ethics are the accepted principles of right or wrong that govern the conduct of
businesspeople
• Ethical strategy refers to a strategy, or course of action, that does not violate a company’s business
ethics
• Ethics and International Business
• Many ethical issues rooted in differences in political systems, laws, economic dev’t, and
culture
• Might be normal in one country and illegal in another
• Incredibly difficult to come up with global standards
• Most common ethical issues involve:
• Employment practices, human rights, environmental regulations, corruption, moral obligations of
multinational corporations
M1S5- Ethics, CSR, and Sustainability
Employment Practices
• Suppose work conditions in a host nation are inferior to those in a
multinational’s home nation
• Which standards should apply?
• Home or host nation or something between?
• Nike case: Nike did not break the law, but the case raised questions regarding
the ethics of using sweatshop labor
• To guard against ethical abuses, firms should:
• Establish minimal acceptable standards that safeguard the basic rights and dignity of
employees
• Audit foreign subsidies and contractors regularly to ensure standards are being met
• Take corrective action as necessary
M1S5- Ethics, CSR, and Sustainability
Human Rights
• Basic human rights
found in developed
nations are not
universally accepted
worldwide
•
•
•
•
•
Freedom of association
Freedom of speech
Freedom of assembly
Freedom of movement
Freedom from political
repression
• Apartheid system in South Africa
• Mandated segregation and prohibited blacks from managing
whites
• Businesses from developed countries questioned the ethics
of doing business in South Africa
• United Nation’s SDG 2030
• General Motors adopted the Sullivan principles
• Company should not obey the apartheid rules in its
operation in South Africa
• Company should promote abolition of apartheid laws
• Repressive regimes still exist in the world
• Is it ethical for multinational corporations to do business
with repressive regimes?
• Does multinational investment bring change to these
regimes and foster economic growth and raise living
standards?
• Are some regimes so repressive that investment cannot be
justified on ethical grounds?
M1S5- Ethics, CSR, and Sustainability
• Environmental Pollution
• Problems occur when
environmental regulations differ
between host nations and home
nation
• Tragedy of the commons occurs
when a resource held in common by
all but owned by no one is overused
by individuals, resulting in its
degradation
• Global tragedy of the commons
enhanced by corporations that
move production locations where
they are free to pump pollutants
into the atmosphere or dump them
in oceans or rivers, thereby harming
these valuable global commons
• Is it ethical for a company to
escape regulations by moving
production to a nation with lax
regulations?
• Corruption
• Corruption has been a problem in almost every
society in history and continues to be one today
• US Foreign Corrupt Practices Act (FCPA)
• Regulates conduct of international business in the
taking of bribes and other unethical actions
• Amended to allow for “facilitating payments”
• The Convention on Combating Bribery of
Foreign Public Official in International Business
Transactions
• Makes the bribery of foreign officials a criminal
offense
• Ethical implications of corruption
• Are bribes the price to pay to do a greater good?
• Do bribes reduce businesses’ incentive to invest?
• Some multinationals adopting a zero-tolerance
policy
• BP and Dow Corning
M1S5- Ethics, CSR, and Sustainability
• Ethical Dilemmas
Determinants of ethical behavior
• Ethical obligations of multinational
corporations are not always clear-cut
• How should corporations handle ethical
dilemmas regarding employment, human
rights, corruption, and environmental
pollution?
• Pressure from customers and stakeholders to
be transparent in ethical decision making
• No universal worldwide agreement about what
constitutes accepted ethical principles
• Ethical dilemmas are situations in which
none of the available alternatives seem
ethically acceptable
Societal
Culture
DecisionMaking
Processes
Personal Ethics
Ethical
Behavior
Organizational
Culture
Leadership
Unrealistic
Performance
Goals
M1S5- Ethics, CSR, and Sustainability
Roots of Unethical Behavior
• Why do managers
behave
unethically?
• Six determinants
of ethical behavior
• Personal ethics
• Decision-making
processes
• Organizational
culture
• Unrealistic
performance
goals
• Leadership
• Societal culture
• Personal Ethics
• The generally accepted principles of right and wrong governing the
conduct of individuals
• Formation of ethics is guided by our parents, our schools, our
religion, and the media
• Expatriate managers may face pressure to violate their personal
ethics because they are away from their ordinary social context and
culture
• Parent company may pressure managers to meet unrealistic goals that can
only be fulfilled by acting unethically
• Decision-Making Processes
• Businesspeople may act unethically when they fail to ask “is this
decision or action ethical?”
• Problems arise in processes that do not incorporate ethical
considerations into business decision making
• Need to better understand how individuals make decisions that are
ethical or unethical in an organizational environment
M1S5- Ethics, CSR, and Sustainability
Roots of Unethical Behavior
• Organizational Culture
• The values and norms shared among an
organization’s employees
• Culture in some organizations does not
encourage people to think through ethical
consequences of decisions
• Unrealistic Performance Goals
• Pressure from parent company to meet
unrealistic performance goals by cutting
corners or acting unethically
• Leadership
• Helps to establish the culture
of an organization and set the
examples that others follow
• Employees often take their cue
from business leaders
• Societal Culture
• Cultures that emphasize
individualism and uncertainty
avoidance are most likely to
stress ethical behavior than
cultures where masculinity and
power distance are
emphasized
M1S5- Ethics, CSR, and Sustainability
Philosophical Approaches to Ethics
Straw Men
• Offer inappropriate guidelines for ethical
decision making
• The Friedman Doctrine – “the social responsibility
or business is to increase profits,” so long as the
company stays within the rules of law
• Cultural relativism – ethics are reflection of
culture
Utilitarian and Kantian Ethics
• Utilitarian approaches to ethics
• Philosophers David Hume, Jeremy
Bentham, and John Stuart Mill
• Actions are desirable if they lead to the
best possible balance of good
consequences over bad consequences
• Best decisions are those that produce the
greatest good for the greatest number of
people
• Drawbacks
• Difficult to measure benefits, costs, and risks
• Righteous moralist – home-country standards
of an action. It fails to consider justice
of ethics should be followed in foreign
• Kantian ethics
countries
• Based on the philosophy of Immanuel Kant
• Typically associated with managers from
developed nations
• Criticized for its proponents going too far
• Naïve immoralist – if a manager of a
multinational sees that firms from other
nations are not following ethical norms in a
host nation, that manager should not either
• People should be treated as ends and
never purely as means to the ends of
others
• People have dignity and need to respected
• Contemporary moral philosophers view
Kantian ethics as incomplete – system has
no place for moral sentiments such as
empathy or caring
M1S5- Ethics, CSR, and Sustainability
Philosophical Approaches to Ethics
Rights Theories
• Human beings have fundamental rights and
privileges that transcend national borders and
cultures
• Moral theorists argue that fundamental human rights form
the basis for a moral compass that managers can use in
ethical decision making
• Universal Declaration of Human Rights
• Adopted by the United Nations and ratified by almost
every country
• Lays down principles that should be adhered to
irrespective of the culture in which one is doing business
• Along with rights come obligations
• We have the right to free speech and must respect the free
speech of others
• Obligations fall on more than one class of moral agents –
any person or institution that is capable of moral action.
This includes governments and corporations
Justice Theories
• Focus on the attainment
of a just distribution of
economic goods and
services
• A just distribution is a
distribution of goods and
services that is considered
fair and equitable
• John Rawls argued that all
economic goods and
services should be
distributed equally except
when an unequal
distribution would work
to everyone’s advantage
• Veil of ignorance
• Difference principle
M1S5- Ethics, CSR, and Sustainability
Focus on Managerial Implications
Making Ethical Decisions Internationally
1. Hiring and Promotion
• Hire and promote people with a well-grounded sense
of personal ethics
• Refrain from promoting individuals who have acted
unethically
• Try to hire only people with strong ethics
• Prospective employees should find out as much as
they can about the ethical climate in an organization
prior to taking a position
2. Organizational Culture and Leadership
• Build an organizational culture that places a high value
on ethical behavior
• Articulate values that place a strong emphasis on
ethical behavior
• Emphasize the importance of a code of ethics
• Implement a system of incentives and rewards that
recognize people who engage in ethical behavior and
sanction those who do not
3. Decision-Making Processes
• Put decision-making processes in
place that require people to
consider ethical dimension of
business decisions
• Does the decision fall within the
accepted values of standards that
typically apply in the organizational
environment?
• Is there a willingness to see the
decision communicated to all
stakeholders affected by it?
• Would people close to me (family
members, friends, colleagues)
approve of the decision?
M1S5- Ethics, CSR, and Sustainability
Focus on Managerial Implications
4.
•
•
•
•
•
•
•
•
Making Ethical Decisions Internationally
• Five-step process to think through ethical
problems
• Step 1: Identify which stakeholders a decision
would affect and in what ways
• Stakeholder analysis involves moral imagination –
standing in the shoes of the stakeholder and asking
how a proposed decision might impact that
stakeholder
• Step 2: Determine whether a proposed decision
would violate the fundamental rights of any
stakeholders
• Step 3: Establish moral intent – place moral
concerns ahead of other concerns in cases where
either the fundamental rights of stakeholders or
key moral principles have been violated
• Step 4: Engage in ethical behavior
• Step 5: Audit decisions to make sure they are
consistent with ethical principles
Institute Ethics Officers to
5.
Moral Courage
•
•
•
6.
Enables managers to walk away from a decision that is profitable but unethical
Gives an employee the strength to say no to a superior who instructs
employee to pursue actions that are unethical
Gives employees the integrity to go public to the media and blow the whistle
on persistent unethical behavior in a company
Corporate Social Responsibility
•
•
•
7.
Assess the needs and risks that an ethics program must address
Develop and distribute a code of ethics
Conduct training programs for employees
Establish and maintain confidentiality of employees
Comply with government laws and regulations
Monitor and audit ethical conduct
Take action, where appropriate
Periodically reviewing and updating the code of ethics
Multinationals have the social responsibility to give something back to the
societies that enable them to grow and prosper
Advocates argue that businesses need to recognize their noblesse oblige and
give something back to the societies that have made their success possible
Power can be used in a positive way to increase social welfare, which is ethical,
or used in a manner that is ethically and morally suspect
Sustainability
•
•
•
Pursue sustainable strategies that not only help the firm make good profits but
do so without harming the environment
Core idea is that an organization’s actions do not exert a negative impact on
the ability of future generations to meet their own economic needs
Actions impart long-run economic and social benefits on stakeholders