Table of Contents

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CHAP 1 : GLOBALIZATION.................................................................................................1
CHAP 2 : Cross-Cultural Business.........................................................................................6
CHAP 3 : Political Economy and Ethics...............................................................................16
CHAP 4 : Economic Development of Nations.......................................................................23

CHAP 1 : GLOBALIZATION

International Business
• Commercial transaction that crosses the borders of two or more nations
Imports
• Goods and services purchased abroad and brought into a country
Exports
• Goods and services sold abroad and sent out of a country

Def of Globalization
• Globalization: Trend toward greater economic, cultural, political, and
technological interdependence among national institutions and economies
• Globalization is characterized by denationalization (national boundaries
becoming less relevant)
• Globalization is different from internationalization (entities cooperating
across national boundaries).
Globalization of Markets
• Convergence in buyer preferences in markets around the world
Globalization of Production
• Dispersal of production activities worldwide to minimize costs or maximize
quality

Key Players in International Business

• Large companies from the wealthiest nations
• Firms from emerging markets
• Small and medium-sized companies
• Multinational corporation (M N C)
• Born global firm

• Companies of all types and sizes and in all sorts of industries become involved in
international business, yet they vary in the extent of their involvement.
• Large companies from the wealthiest nations still dominate international business. But
firms from emerging markets (such as Brazil, China, India, and South Africa) now
vigorously compete for global market share.
• Small and medium-sized companies are also increasingly active in international
business, largely because of advances in technology.
• A multinational corporation (MNC) is a business that has direct investments (in the
form of marketing or manufacturing subsidiaries) abroad in multiple countries
• International business competition has given rise to a new entity, the born global firm—
a company that adopts a global perspective and engages in international business from or
near its inception.

Globalization of Markets
Benefits of Globalization of Markets
• Reduces marketing costs: Companies that sell global products can reduce costs by
standardizing certain marketing activities. Companies can achieve further cost savings by
keeping an ad’s visual component the same for all markets but dubbing TV ads and
translating print ads into local languages.
• Creates new market opportunities: A company that sells a global product can explore
opportunities abroad if its home market is small or becomes saturated.
• Levels uneven income streams: A company that sells a product with universal, but
seasonal, appeal can use international sales to level its income stream.
• Local buyers’ needs: In the pursuit of the potential benefits of global markets, managers
must constantly monitor the match between the firm’s products and markets in order to
not overlook the needs of buyers. The benefit of serving customers with an adapted
product may outweigh the benefit of a standardized one.
• Global sustainability: Another need that multinationals must consider is the need
among all the world’s citizens for sustainability—development that meets the needs of
the present without compromising the ability of future generations to meet their own
needs.

Benefits of Globalization of Production

• Access lower-cost workers: Global production activities allow companies to reduce
overall production costs through access to low-cost labor.
• Access technical expertise: Companies also produce goods and services abroad to
benefit from technical know-how.
• Access production inputs: Globalization of production allows companies to access
resources that are unavailable or more costly at home. The quest for natural resources
draws many companies into international markets.

Forces Driving Globalization

Falling Barriers to Trade and Investment
• General Agreement on Tariffs and Trade (G A T T)
• World Trade Organization (W T O)
• Other
• International organizations
– The World Bank
– The International Monetary Fund (I M F)
• Regional trade agreements
• Trade and national output

Technological innovation
• When businesses or consumers use technology to conduct transactions, they engage in e-
business (e-commerce)—the use of computer networks to purchase, sell, or exchange
products; to service customers; and to collaborate with partners. E-business is making it
easier for companies to make their products abroad, not simply to import and export
finished goods. Let’s examine several innovations that have had a considerable impact on
globalization.
• E-mail and videoconferencing: Operating across borders and time zones complicates
the job of coordinating and controlling business activities. But technology can speed the
flow of information and ease the tasks of coordination and control. E-mail is an
indispensable tool that managers use to stay in contact with international operations and
to respond quickly to important matters. Videoconferencing allows managers in different
locations to meet in virtual face-to-face meetings.
• The Internet: Companies use the Internet to quickly and inexpensively contact managers
in distant locations. They also use the Internet to achieve longer-term goals, such as
sharpen their forecasting, lower their inventories, and improve communication with
suppliers. Additional gains arise from the ability of the Internet to cut postproduction
costs by decreasing the number of intermediaries a product passes through on its way to
the customer. Eliminating intermediaries greatly benefits online sellers of all sorts of
products, including books, music, travel services, software, and so on. Some innovative
companies use online competitions to attract fresh ideas from the brightest minds
worldwide.
• Company intranets and extranets: Internal company websites and information
networks (intranets) give employees access to company data using personal computers.
• Advancements in transportation technologies: Innovation in the shipping industry is
helping globalize markets and production by making shipping more efficient and
dependable.

Debate About Jobs and Wages

Against Globalization
So far, we have read how globalization benefits companies and nations. But not everyone views
globalization as having only positive effects.
Groups opposed to globalization blame it for eroding standards of living and ruining ways of life.
Specifically, they say globalization eliminates jobs and lowers wages in developed nations and
exploits workers in developing countries. Let’s explore each of these arguments.
 • Eliminates jobs in developed nations: Some groups claim that globalization eliminates
manufacturing jobs in developed nations. They criticize the practice of sending good-
paying manufacturing jobs abroad to developing countries where wages are a fraction of
the cost for international firms.
• Lowers wages in developed nations: Opposition groups say globalization causes worker
dislocation that gradually lowers wages. They allege that, when a manufacturing job is
lost in a wealthy nation, the new job (assuming new work is found) pays less than the
previous one. Those opposed to globalization say this decreases employee loyalty,
employee morale, and job security. They say this causes people to fear globalization and
any additional lowering of trade barriers.
• Exploits workers in developing nations: Critics charge that globalization and
international outsourcing exploit workers in low-wage nations.

For Globalization
Supporters of globalization credit it with improving standards of living and making possible new
ways of life. They argue that globalization increases wealth and efficiency in all nations,
generates labor market flexibility in developed nations, and advances the economies of
developing nations.
• Increases wealth and efficiency in all nations: Globalization supporters believe
globalization increases wealth and efficiency in both developed and developing nations.
They argue that openness to international trade increases national production (by
increasing efficiency) and raises per capita income (by passing savings on to consumers).
• Generates labor market flexibility in developed nations: Globalization supporters
believe globalization creates positive benefits by generating labor market flexibility in
developed nations.
• Advances the economies of developing nations: Those in favor of globalization argue
that globalization and international outsourcing help to advance developing nations’
economies.

Debate About Income Inequality

Perhaps no controversy swirling around globalization is more complex than the debate over its
effect on income inequality. Here, we focus on three main aspects of the debate: inequality
within nations, inequality between nations, and global inequality.
• Inequality within nations: The first aspect of the inequality debate is whether
globalization is increasing income inequality among people within nations. Opponents of
globalization argue that freer trade and investment allows international companies to
close factories in high-wage, developed nations and to move them to low-wage,
developing nations. They argue that this increases the wage gap between white-collar and
blue-collar occupations in rich nations.
• Inequality between nations: The second aspect of the inequality debate is whether
globalization is widening the gap in average incomes between rich and poor nations.
• Global inequality: The third aspect of the inequality debate is whether globalization is
increasing global inequality—widening income inequality between all people of the
world, no matter where they live.
• Summary of the income inequality debate: For the debate over inequality within
nations, studies suggest that developing nations can boost incomes of their poorest
 citizens by embracing globalization and integrating themselves into the global economy.
In the debate over inequality between nations, nations open to world trade and investment
appear to grow faster than rich nations do. Meanwhile, economies that remain sheltered
from the global economy tend to be worse off. Finally, regarding the debate over global
inequality, although experts agree inequality has fallen in recent decades, they disagree
on the extent of the drop.

Debate About Culture, Sovereignty, and the Environment

Globalization and Culture
• Globalization and Culture: National culture is a strong shaper of a people’s values,
attitudes, customs, beliefs, and communication. Whether globalization eradicates cultural
differences between groups of people or reinforces cultural uniqueness is a hotly debated
topic.
• Globalization’s detractors say that it homogenizes our world and destroys our
rich diversity of cultures.
• Supporters argue that globalization allows us all to profit from our differing
circumstances and skills. Trade allows countries to specialize in producing the
goods and services they can produce most efficiently. Nations can then trade with
one another to obtain goods and services they desire but do not produce.

Globalization and National Sovereignty

• National sovereignty generally involves the idea that a nation-state (1) is autonomous, (2)
can freely select its government, (3) cannot intervene in the affairs of other nations, (4)
can control movements across its borders, and (5) can enter into binding international
agreements.
• Globalization: menace to democracy? A main argument leveled against globalization
is that it empowers supranational institutions at the expense of national governments.
• Globalization: guardian of democracy? Globalization supporters argue that an amazing
consequence of globalization has been the spread of democracy worldwide.

Globalization and Environment

• Some environmental groups say globalization causes a “race to the bottom” in
environmental conditions and regulations. Yet, studies show that pollution-intensive U.S.
firms tend to invest in countries with stricter environmental standards.
• Most international firms today support reasonable environmental laws because (if for no
other reason) they want to expand future local markets for their goods and services. They
recognize that healthy future markets require a sustainable approach to business
expansion.

Developing Skills for Your Career

1. Critical thinking involves purposeful and goal-directed thinking used to define
and solve problems, make decisions, or form judgments related to a set of
circumstances
2. Business ethics and social responsibility are sets of guiding principles that
influence the way individuals and organizations behave within society.
 3. Communication is the use of oral, written, and nonverbal language and
technology to communicate ideas effectively and to listen effectively.
International business means doing business across national borders, across
languages, and across cultures.
4. Knowledge application and analysis refers to your ability to learn a concept and
appropriately apply that knowledge in another setting to achieve a higher level of
understanding.

CHAP 2 : Cross-Cultural Business

National Culture
• Culture: Set of values, beliefs, rules, and institutions held by a specific group of people
• Nation-states support and promote the concept of national culture.
– Building museums and monuments to preserve the legacies of important events
and people.
• Nation-states intervene in business to preserve treasures of national culture.
– Regulate culturally sensitive sectors of the economy
• Rightly or wrongly, we tend to invoke the concept of the nation-state when speaking of
culture.
• Nation-states support and promote the concept of national culture by building museums
and monuments to preserve the legacies of important events and people. Nation-states
also intervene in business to preserve treasures of national culture. Most nations, for
example, regulate culturally sensitive sectors of the economy, such as filmmaking and
broadcasting.

Subcultures
• Subculture: a group of people who share a unique way of life within a larger, dominant
culture
• A subculture can differ from the dominant culture in language, race, lifestyle, values,
attitudes, or other characteristics.
• Subcultures sometimes exist across national borders.
• Although subcultures exist in all nations, they are often glossed over by our impressions
of national cultures.
• Cultural boundaries do not always correspond to political boundaries. In other words,
subcultures sometimes exist across national borders. People who live in different nations
but who share the same subculture can have more in common with one another than with
their fellow nationals. These subcultures may share purchasing behaviors rooted in
lifestyle or values that allow marketers to address them with a single worldwide
campaign.

Physical Environment
• Land features affect personal communication in a culture.
• Physical environment affects consumers’ product needs.
• Climate can play a role in determining work habits.
 • Land features affect personal communication in a culture. Surface features such as
navigable rivers and flat plains facilitate travel and contact with others. By contrast,
treacherous mountain ranges and large bodies of water that are difficult to navigate
discourage contact.
• The physical environment of a region also affects consumers’ product needs. For
example, there is little market for Honda scooters (www.honda.com) in most
mountainous regions because a scooter’s engine is too small to climb the steep grades.
Such regions are better markets for the company’s more rugged, maneuverable, on-off
road motorcycles that have more powerful engines. Climate affects where people settle
and the distribution systems they create. In Australia, intensely hot and dry conditions in
two large deserts and jungle conditions in the northeast pushed settlement to coastal
areas. These conditions, together with the higher cost of land transport, means coastal
waters are still used to distribute products between distant cities.
• Climate can also play a role in determining work habits. The heat of the summer sun
grows intense in the early afternoon hours in the countries of southern Europe, northern
Africa, and the Middle East. For this reason, people often take afternoon breaks of one or
two hours in July and August. They use this time to perform errands or to take short naps
before returning to work until about 7 or 8 p.m. Companies operating in these regions
must adapt to this local tradition.

Need for Cultural Knowledge

• A visual depiction of culture would resemble an iceberg.
• Avoiding Ethnocentricity:
– Ethnocentricity is the belief that one’s own ethnic group or culture is superior to
that of others.
– Ethnocentricity can seriously undermine international business projects.
• Developing Cultural Literacy:
– Cultural literacy: detailed knowledge about a culture that enables a person to work
happily and effectively within it

• A visual depiction of culture would resemble an iceberg. Cultural features that we can see
are a very small portion of all that comprises it. The vast majority of a people’s cultural
makeup remains hidden from view and below the surface. It takes knowledge, effort,
understanding, and experience to uncover the essence of a culture and to develop a deep
appreciation for it.
• Avoiding Ethnocentricity: Our thoughts can harbor subconscious, unintentional, and
inaccurate perceptions of other cultures. Ethnocentricity is the belief that one’s own
ethnic group or culture is superior to that of others. Ethnocentricity can seriously
undermine international business projects. It can cause people to disregard the beneficial
characteristics of other cultures. Ethnocentricity played a role in many stories, some
retold in this chapter, of companies that failed when they tried to implement a new
business practice in a subsidiary abroad. Failure can occur when managers ignore a
fundamental aspect of the local culture. This can provoke a backlash from the local
population, its government, or nongovernmental groups. As suppliers and buyers
 increasingly treat the world as a single, interconnected marketplace, managers should
eliminate the biases inherent in ethnocentric thinking.
• Developing Cultural Literacy: As globalization continues, people directly involved in
international business increasingly benefit from a certain degree of cultural literacy—
detailed knowledge about a culture that enables a person to work happily and effectively
within it. Cultural literacy improves people’s ability to manage employees, market
products, and conduct negotiations in other countries.

Values
• Values: Ideas, beliefs, and customs to which people are emotionally attached.
• Values include concepts such as honesty, freedom, and responsibility.
• Values are important to business because they affect a people’s work ethic and desire for
material possessions.
• The influx of values from other cultures can be fiercely resisted.

Attitudes
• Attitudes reflect a people’s underlying values.
• Attitudes are positive or negative evaluations, feelings, and tendencies that individuals
harbor toward objects or concepts.
• Attitudes are learned from role models, including parents, teachers, and religious leaders.
• Attitudes differ from one country to another because they are formed within a cultural
context.

Aesthetics
• Aesthetics: what a culture considers “good taste” in the arts, the imagery evoked by
certain expressions, and the symbolism of certain colors
• Aesthetics includes the art, images, symbols, colors, and so on.
• Aesthetics are important when a company does business in another culture.
• The importance of aesthetics is just as great when going international using the Internet.

Appropriate Behavior
• Manners: Appropriate ways of behaving, speaking, and dressing in a culture are called
manners
• Customs: Habits or ways of behaving in specific circumstances that are passed down
through generations in a culture
• Folk Custom: Behavior, often dating back several generations, that is practiced by a
homogeneous group of people
• Popular Custom: Behavior shared by a heterogeneous group or by several groups
• Gift Giving Customs
– Proper type of gift varies
– Legal and ethical rules
Cultures differ in their legal and ethical rules against giving or accepting bribes. Large gifts to
business associates are particularly suspicious. The U.S. Foreign Corrupt Practices Act, which
prohibits companies from giving large gifts to government officials in order to win business
favors, applies to U.S. firms operating at home and abroad. Yet in many cultures, bribery is
woven into a social fabric that has worn well for centuries. In some cultures large gifts remain an
effective way to obtain contracts, enter markets, and secure protection from competitors.

Social Group Associations

• Collection of two or more people who identify and interact with each other
• Family: Nuclear vs. Extended
• Gender
Social Status
• Positions within the structure
• Social Stratification
Social Mobility
• Ease with which individuals can move up or down a culture’s “social ladder”
• Caste System
• Class System

• Social structure embodies a culture’s fundamental organization, including its groups and
institutions, its system of social positions and their relationships, and the process by
which its resources are distributed. Social structure plays a role in many aspects of
business, including production-site selection, advertising methods, and the costs of doing
business in a country. Three important elements of social structure that differ across
cultures are social group associations, social status, and social mobility.
• People in all cultures associate themselves with a variety of social groups—collections
of two or more people who identify and interact with each other. Social groups contribute
to each individual’s identity and self-image. Two groups that play especially important
roles in affecting business activity everywhere are family and gender.
• There are two different types of family groups: The nuclear family consists of a person’s
immediate relatives, including parents, brothers, and sisters. This concept of family
prevails in Australia, Canada, the United States, and much of Europe. The extended
family broadens the nuclear family and adds grandparents, aunts and uncles, cousins, and
relatives through marriage. It is an important social group in much of Asia, the Middle
East, North Africa, and Latin America.
• Gender refers to socially learned habits associated with, and expected of, men or women.
It includes behaviors and attitudes such as styles of dress and activity preferences.
Though many countries have made great strides toward gender equality in the workplace,
others have not.
• Another important aspect of social structure is the way a culture divides its population
according to status—that is, according to positions within the structure. Although some
cultures have only a few categories, others have many. The process of ranking people
into social layers or classes is called social stratification.
• Moving to a higher social class is easy in some cultures but difficult or impossible in
others. Social mobility is the ease with which individuals can move up or down a
culture’s “social ladder.” For much of the world’s population today, one of two systems
regulates social mobility: a caste system or a class system.
• Caste System: A caste system is a system of social stratification in which people are
born into a social ranking, or caste, with no opportunity for social mobility. India is the
classic example of a caste culture. Although the Indian constitution officially bans
 discrimination by caste, its influence persists. Little social interaction occurs between
castes, and marrying out of one’s caste is taboo. Opportunities for work and advancement
are defined within the system, and certain occupations are reserved for the members of
each caste. For example, a member of a lower caste cannot supervise someone of a higher
caste because personal clashes would be inevitable.
• Class System: A class system is a system of social stratification in which personal ability
and actions determine social status and mobility. It is the most common form of social
stratification in the world today. But class systems vary in the amount of mobility they
allow. Highly class-conscious cultures offer less mobility and, not surprisingly,
experience greater class conflict. Conversely, lower levels of class-consciousness
encourage mobility and lessen conflict. A more cooperative atmosphere in the workplace
tends to prevail when people feel that a higher social standing is within their reach.

Education
The “Brain Drain” Phenomenon
Brain Drain
• Departure of highly educated people from one profession, geographic region, or nation to
another

Religion
Christianity
• Christianity was born in Palestine around 2,000 years ago.
• Christianity boasts more than 300 denominations:
– Most Christians belong to the Roman Catholic, Protestant, or Eastern Orthodox
churches.
• With 2 billion followers, Christianity is the world’s single largest religion.
• Roman Catholic
– Refrain from placing material possessions above God and others
• Protestants
– Salvation comes from faith in God.
– Hard work gives glory to God—a tenet known widely as the “Protestant work
ethic”.
• Development of capitalism and free enterprise in nineteenth-century
Europe
• Christian organizations sometimes get involved in social causes that affect business
policy.

Islam
• With 1.3 billion adherents, Islam is the world’s second-largest religion.
• The prophet Muhammad founded Islam around A.D. 600 in Mecca.
• Islam thrives in North Africa, the Middle East, Central Asia, Pakistan, and some
Southeast Asian nations, including Indonesia.
• Muslim concentrations are also found in most European and U.S. cities.
• Islam means “submission to Allah,” and Muslim means “one who submits to Allah.”
• Islam revolves around the “five pillars”:
1. Reciting the shahada (profession of faith)
 2. Giving to the poor
3. Praying five times daily
4. Fasting during the holy month of Ramadan
5. Making the Hajj (pilgrimage) to Mecca
• Religion strongly affects the kinds of goods and services acceptable to Muslim
consumers.
• Nations governed by Islamic law sometimes segregate the sexes at certain activities and
in locations such as schools.

Hinduism
• Hinduism formed around 4,000 years ago in present-day India.
• More than 90 percent of Hinduism’s 900 million adherents live in India.
• It is also the majority religion of Nepal and a secondary religion in Bangladesh, Bhutan,
and Sri Lanka.
• Considered by some to be a way of life rather than a religion
• Hinduism recalls no founder and recognizes no central authority or spiritual leader.
Integral to the Hindu faith is the caste system described earlier in this chapter.
• Hindus believe in reincarnation—the rebirth of the human soul at the time of death.
• Highest goal of life is moksha
• Moksha: escaping from the cycle of reincarnation and entering a state of eternal
happiness called nirvana
• Hindus tend to disdain materialism.
• Strict Hindus do not eat or willfully harm any living creature because it may be a
reincarnated human soul.
• Because Hindus consider cows to be sacred animals, they do not eat beef. Yet,
consuming cow’s milk is considered a means of religious purification. Firms such as
McDonald’s (www. mcdonalds.com) must work closely with government and religious
officials in India in order to respect Hindu beliefs.

Buddhism
• Buddhism was founded about 2,600 years ago in India.
• Buddhism has around 380 million followers, mostly in China, Tibet, Korea, Japan,
Vietnam, and Thailand.
• Unlike Hinduism, Buddhism rejects the caste system of Indian society.
• Like Hinduism, Buddhism promotes a life centered on spiritual rather than worldly
matters.
• In a formal ceremony, Buddhists take refuge in the “three jewels”:
– Buddha, Dharma, and Sangha
They seek nirvana through
– Charity
– Modesty
– Compassion for others
– Restraint from violence
– General self-control
• Although monks at many temples are devoted to lives of solitary meditation and
discipline, many other Buddhist priests are dedicated to lessening the burden of human
 suffering. They finance schools and hospitals across Asia and are active in worldwide
peace movements. In Tibet, most people still acknowledge the exiled Dalai Lama as the
spiritual and political head of the Buddhist culture. In the United States, a coalition of
religious groups and human rights advocates continue to press the U.S. Congress to apply
economic sanctions against countries that are seen as practicing religious persecution.

Confucianism
• Confucius began teaching his ideas in China nearly 2,500 years ago.
• China is home to most of Confucianism’s 225 million followers.
• Confucian thought is also ingrained in the cultures of Japan, South Korea, and nations
with large numbers of ethnic Chinese.
• South Korean business practice reflects Confucian thought in its organizational structure.
• Confucian thought is also ingrained in the cultures of Japan, South Korea, and nations
with large numbers of ethnic Chinese, such as Singapore.
• South Korean business practice reflects Confucian thought in its rigid organizational
structure and unswerving reverence for authority.
• Some observers contend that the Confucian work ethic and a commitment to education
helped spur East Asia’s phenomenal economic growth. But others respond that the link
between culture and economic growth is weak.

Judaism
• More than 3,000 years old, Judaism was the first religion to preach belief in a single God.
• Judaism has roughly 18 million followers worldwide.
• Important days in the Jewish faith:
– Sabbath, Rosh Ha-Shanah, Yom Kippur, Passover, and Hanukkah
• Marketers must take into account foods that are banned among strict Jews.

• In Israel, Orthodox (“fully observant”) Jews make up 12 percent of the population and
constitute an increasingly important economic segment.
• Employers and human resource managers must be aware of important days in the Jewish
faith. Because the Sabbath lasts from sundown on Friday to sundown on Saturday, work
schedules might need adjustment. Devout Jews want to be home before sundown on
Fridays. On the Sabbath itself, they do not work, travel, or carry money. Several other
important observances are Rosh Ha-Shanah (the two-day Jewish New Year, in
September or October), Yom Kippur (the Day of Atonement, 10 days after New Year),
Passover (which celebrates the Exodus from Egypt, in March or April each year), and
Hanukkah (which celebrates an ancient victory over the Syrians, usually in December).
Marketers must take into account foods that are banned among strict Jews. Pork and shellfish
(such as lobster and crab) are prohibited. Meat is stored and served separately from milk.
Other meats must be slaughtered according to a practice called shehitah. Meals prepared
according to Jewish dietary traditions are called kosher. Most airlines offer kosher meals for
Jewish passengers on their flights.

Shinto
• Shinto (meaning “way of the gods”) arose as the native religion of the Japanese.
• Shinto can claim only about 4 million strict adherents in Japan.
• Shinto teaches sincere and ethical behavior, loyalty and respect toward others, and
enjoyment of life.
• Shinto beliefs are reflected in the workplace.

• Because modern Shinto preaches patriotism, it is sometimes said that Japan’s real
religion is nationalism. Shinto teaches sincere and ethical behavior, loyalty and respect
toward others, and enjoyment of life.
• Shinto beliefs are reflected in the workplace through the traditional practice of life-time
employment (although this is waning today) and through the traditional trust extended
between firms and customers. Japanese competitiveness in world markets has benefited
from loyal workforces, low employee turnover, and good labor–management
cooperation. The phenomenal success of many Japanese companies in recent decades
gave rise to the concept of a Shinto work ethic, certain aspects of which have been
emulated by Western managers.

Personal Communication
• Communication: System of conveying thoughts, feelings, knowledge, and information
through speech, writing, and actions
• Forms of Communication:
• Spoken and Written Language
• Implications for managers
• Language blunders
• Lingua franca
• Culture’s Body Language

• People in every culture have a communication system to convey thoughts, feelings,

knowledge, and information through speech, writing, and actions. Understanding a
culture’s spoken language gives us great insight into why people think and act the way
they do. Understanding a culture’s body language helps us avoid sending unintended or
embarrassing messages.
• Linguistically different segments of a population are often culturally, socially, and
politically distinct.
• Implications for managers:
• The importance of understanding local languages is becoming increasingly
apparent on the Internet. Roughly one-half to two-thirds of all Web pages are in
English, but about three-fourths of all Internet users are nonnative English
speakers.
• Language proficiency is crucial in production facilities where nonnative managers
supervise local employees.
• Marketers prize insights into the interests, values, attitudes, and habits of
teenagers.
• Language blunders: Advertising slogans and company documents must be translated
carefully so that messages are received precisely as intended. If they are not carefully
translated, a company can make a language blunder in its international business dealings.
• A lingua franca is a third or “link” language understood by two parties who speak
different native languages.
 • Body language communicates through unspoken cues, including hand gestures, facial
expressions, physical greetings, eye contact, and the manipulation of personal space.
Similar to spoken language, body language communicates both information and feelings
and differs greatly from one culture to another.
• Most body language is subtle and takes time to recognize and interpret.

Culture in the Global Workplace

• Perception of Time: People in many Latin American and Mediterranean cultures are
casual about their use of time. They maintain flexible schedules and would rather enjoy
their time than sacrifice it to unbending efficiency. By contrast, people in Japan and the
United States typically arrive promptly for meetings, keep tight schedules, and work long
hours.
• View of Work: Some cultures display a strong work ethic; others stress a more balanced
pace in juggling work and leisure.
• Material Culture: All the technology used in a culture to manufacture goods and
provide services is called its material culture. Material culture is often used to measure
the technological advancement of a nation’s markets or industries.
o A cultural trait is anything that represents a culture’s way of life, including gestures,
material objects, traditions, and concepts. Such traits include bowing to show respect in
Japan (gesture), a Buddhist temple in Thailand (material object), celebrating the Day of
the Dead in Mexico (tradition), and practicing democracy in the United States (concept).
o The process whereby cultural traits spread from one culture to another is called cultural
diffusion. As new traits are accepted and absorbed into a culture, cultural change occurs
naturally and, as a rule, gradually. Globalization and technological advances are
increasing the pace of both cultural diffusion and cultural change. The global spread of
media today, along with the expanding reach of the Internet and services such as
YouTube and Facebook, plays a role in cultural diffusion. These forces expose people,
some of whom are extremely isolated, to the traits and ideas of other cultures.
o Cultural imperialism: the replacement of one culture’s traditions, folk heroes, and
artifacts with substitutes from another. Fears of cultural imperialism still drive some
French to oppose the products of the Walt Disney Company (www.disney.com) and its
Disneyland Paris theme park. They fear “Mickey and Friends” could replace traditional
characters rooted in French culture.

Studying Culture in the Workplace

Kluckhohn-Strodtbeck Framework
• Relation to nature
• Time orientation
• Trust and control
• Material or spiritual
• Responsibility to others
• Public or private activities
Hofstede Framework
• Individualism versus collectivism
• Power distance
• Uncertainty avoidance
 • Masculinity vs. femininity
• Long-term orientation
• Indulgence versus restraint

• Kluckhohn–Strodtbeck framework: Framework for studying cultural differences along

six dimensions, such as focus on past or future events and belief in individual or group
responsibility for personal well-being.
• This framework compares cultures by answering the following six questions:
1. Do people believe that their environment controls them, that they control the environment, or
that they are part of nature?
2. Do people focus on past events, on the present, or on the future implications of their actions?
3. Are people easily controlled and not to be trusted, or can they be trusted to act freely and
responsibly?
4. Do people desire accomplishments in life, carefree lives, or spiritual and contemplative lives?
5. Do people believe that individuals or groups are responsible for each person’s welfare?
6. Do people prefer to conduct most activities in private or in public?
• Hofstede Framework compares cultures along five dimensions:
1. Individualism versus Collectivism. Individualist cultures value hard work and
promote entrepreneurial risk-taking. People are given freedom to focus on
personal goals but are held responsible for their actions. Collectivist cultures
emphasize a strong association with family and work groups to maintain harmony
and to work toward collective goals.
2. Power Distance. Large power distance means greater inequality between superiors
and subordinates, more hierarchical organizations, and power derives from
prestige, force, and inheritance. Small power distance implies more equally
shared prestige and rewards, and power derives from hard work and is often
considered more legitimate.
3. Uncertainty Avoidance. Cultures having large uncertainty avoidance tend to value
security, systems of rules and procedures, low employee turnover, and relatively
slower change. Those with low uncertainty avoidance are more open to change
and new ideas.
4. Masculinity versus Femininity. Cultures with high masculinity versus femininity
scores emphasize assertiveness, the accumulation of wealth, and an
entrepreneurial drive. Cultures rating low on masculinity versus femininity value
relaxed lifestyles and are more concerned for others than they are with material
gain.
5. Long-term Orientation. Cultures scoring high on long-term orientation place value
on respect for tradition, thrift, perseverance, and a sense of personal shame.
Cultures scoring low on long-term orientation tend to value individual stability
and reputation, fulfilling social obligations, and reciprocation of greetings and
gifts.
6. Indulgence versus restraint This dimension captures the extent to which a society
allows free expression. An indulgent society (one scoring high on this dimension)
allows people to rather freely satisfy human needs related to enjoying life and
having fun. By contrast, a restrained society uses varying degrees of social norms
to suppress the free satisfaction of such needs.
CHAP 3 : Political Economy and Ethics
Political Systems

• A political system includes the structures, processes, and activities by which a nation
governs itself.
• A country’s political system is rooted in the history and culture of its people. Factors such
as population, age and race composition, and per capita income influence a country’s
political system.
• We can arrange the world’s three political ideologies on a horizontal scale, with one on
either end and one in the middle. At the one extreme lies anarchism—the belief that only
individuals and private groups should control a nation’s political activities. An anarchist
views public government as unnecessary and unwanted because it tramples personal
liberties.
• At the other extreme lies totalitarianism—the belief that every aspect of people’s lives
must be controlled for a nation’s political system to be effective. Totalitarianism
disregards individual liberties and treats people as slaves of the political system. The state
reigns supreme over institutions such as family, religion, business, and labor. Totalitarian
political systems include authoritarian regimes such as communism and fascism.
• Between those two extremes lies pluralism—the belief that both private and public
groups play important roles in a nation’s political activities. Each group (consisting of
people with different ethnic, racial, class, and lifestyle backgrounds) serves to balance the
power that can be gained by the others. Pluralistic political systems include democracies,
constitutional monarchies, and some aristocracies.

Totalitarianism
• In a totalitarian system, individuals govern without the support of the people, tightly
control people’s lives, and do not tolerate opposing viewpoints.
• Totalitarian governments tend to share three features:
• Imposed Authority: An individual or group forms the political system without
the explicit or implicit approval of the people. Leaders often acquire and retain
power through military force or fraudulent elections. In some cases, they come to
power through legitimate means but then remain in office after their terms expire.
• Lack of Constitutional Guarantees: Totalitarian systems deny citizens the
constitutional guarantees woven into the fabric of democratic practice. They limit,
 abuse, or reject concepts such as freedom of expression, periodically held
elections, guaranteed civil and property rights, and minority rights.
• Restricted Participation: Political representation is limited to parties
sympathetic to the government or to those who pose no credible threat. In most
cases, political opposition is completely banned, and political dissidents are
severely punished.

• Theocratic Totalitarianism: A political system in which a country’s religious leaders

are also its political leaders is called a theocracy. The religious leaders enforce a set of
laws and regulations based on religious beliefs. A political system under the control of
totalitarian religious leaders is called theocratic totalitarianism.
• Secular Totalitarianism: A political system in which political leaders rely on military
and bureaucratic power is called secular totalitarianism. It takes three forms: communist,
tribal, and right-wing.
• Communist totalitarianism (or simply communism) is the belief that social and
economic equality can be obtained only by establishing an all-powerful
Communist party and by granting the government ownership and control over all
types of economic activity.
• Tribal totalitarianism is a system whereby one tribe (or ethnic group) imposes
its will on others with whom it shares a national identity.
Right-wing totalitarianism is a system whereby government endorses private ownership of
property and a market-based economy, but grants few (if any) political freedoms.

Democracy
• Democracy: Political system in which government leaders are elected directly by the
wide participation of the people or by their representatives. Democracy differs from
totalitarianism in nearly every respect
• Representative Democracy: Democracy in which citizens elect individuals from their
groups to represent their political views. These representatives then help govern the
people and pass laws. The people reelect representatives they approve of and replace
those they no longer want representing them.

Representative Democracy
• Freedom of Expression: A constitutional right in most democracies, freedom of
expression ideally grants the right to voice opinions freely and without fear of
punishment.
• Periodic Elections: Each elected representative serves for a period of time, after which
the people (or electorate) decide whether to retain that representative. Two examples of
periodic elections include the U.S. presidential elections (held every four years) and the
French presidential elections (held every five years).
• Full Civil and Property Rights: Civil rights include freedom of speech, freedom to
organize political parties, and the right to a fair trial. Property rights are the privileges and
responsibilities of owners of property (homes, cars, businesses, and so forth).
• Minority Rights: In theory, democracies try to preserve peaceful coexistence among
groups of people with diverse cultural, ethnic, and racial backgrounds. Ideally, the same
rights and privileges extend legally to each group, no matter how few its members.
 • Nonpolitical Bureaucracies: The bureaucracy is the part of government that implements
the rules and laws passed by elected representatives. In politicized bureaucracies,
bureaucrats tend to implement decisions according to their own political views rather
than those of the people’s representatives. This clearly contradicts the purpose of the
democratic process.

Centrally Planned Economy

Origin and Decline

Origin Decline
• Rooted in collectivism • Failure to create economic value
• Popularized by Karl Marx in the • Failure to provide incentives
nineteenth century • Failure to achieve rapid growth
• Implemented in the twentieth century • Failure to satisfy consumer needs
by means of violent upheaval

• Centrally Planned Economy: A system in which the government owns the nation’s
land, factories, and other economic resources. The government makes nearly all
economy-related decisions, including who produces what and the prices of products,
labor, and capital.
• Central planning is rooted in the ideology of collectivism. Just as collectivist cultures
emphasize group over individual goals, a centrally planned economy strives to achieve
economic and social equality for the sake of the collective, not the individual.
• German philosopher Karl Marx popularized the idea of central economic planning in the
nineteenth century.
• Different versions of Marx’s ideas were implemented in the twentieth century by means
of violent upheaval.
• Nations that relied on central control of their economies failed to achieve their objectives.
Specifically, they:
• Failed to create economic value by failing to produce quality products efficiently.
• Failed to provide incentives for businesses to maximize the outputs obtained from
resources, which slowed economic growth and lowered living standards.
• Failed to achieve rapid economic growth and witnessed themselves falling
quickly behind other nations.
• And failed to satisfy consumer needs for even basic necessities.

Origin and Decline

Goals Decline
• Low unemployment and poverty • Lack of accountability, rising costs,
• Steady economic growth and slow economic growth
• Equitable distribution of wealth • Move toward market-based systems
– Move toward privatization
 • Mixed Economy: Economic system in which land, factories, and other economic
resources are rather equally split between private and government ownership.
• In a mixed economy, ownership of economic resources is split rather evenly between
private and government entities.
• Government controls the economic sectors important to national security and stability
and provides generous welfare programs to support the unemployed and to provide health
care for the general population.
• Mixed economies strive for low unemployment and poverty, steady economic growth,
and an equitable distribution of wealth.
• Many mixed economies are hampered by government ownership that is less efficient than
private ownership, and hurt by higher prices and taxes that lower living standards.
• Many mixed economies are remaking themselves to more closely resemble free markets.
When assets are owned by the government, there seems to be less incentive to eliminate
waste or to practice innovation. Extensive government ownership on a national level
tends to result in a lack of accountability, rising costs, and slow economic growth.
• Privatization: Policy of selling government-owned economic resources to private
operators.

Market Economy
Origin, Essence, and Features
Origin and Essence Features
• Private ownership • Free choice
• Interplay of two forces: supply and – Alternative purchase options
demand • Free enterprise
• Emphasis on individualism – Firms choose products and
• Laissez-faire economics markets
• Economic freedom • Price flexibility
– Prices follow supply and
demand

• Market Economy: In a market economy, most of a nation’s land, factories, and other
economic resources are privately owned, either by individuals or businesses. This means
that who produces what and the prices of products, labor, and capital in a market
economy are determined by the interplay of two forces:
• Supply: the quantity of a good or service that producers are willing to provide at
a specific selling price
• Demand: the quantity of a good or service that buyers are willing to purchase at a
specific selling price
• Market economics is rooted in the belief that individual concerns should be placed above
group concerns.
• Laissez-faire system: an approach to national economics that calls for less government
interference in commerce and greater individual economic freedom. Loosely translated
from French as “allow them to do [without interference].”
• To function smoothly and properly, a market economy requires three things: free choice,
free enterprise, and price flexibility:
 • Free choice, which gives individuals access to alternative purchase options.
• Free enterprise, which lets companies decide what to produce and which markets
to compete in.
• And price flexibility, which allows most prices to rise and fall according to the
forces of supply and demand.
• The essence of market economies is grounded in freedom: free choice, free enterprise,
free prices, and freedom from direct intervention by government.

Government’s Role
• Enforce antitrust laws
• Preserve property rights
• Provide fiscal and monetary stability
• Preserve political stability

• In a market economy, government is to enforce antitrust (antimonopoly) laws. This

encourages the development of industries with many competing businesses, and prevents
trade-restraining monopolies that can raise prices and exploit consumers.
• Governments in market economies also strive to preserve property rights.
• By preserving and protecting individual property rights, governments encourage
individuals and companies to take risks such as inventing new technology,
inventing new products, and starting new businesses.
• Strong protection of property rights ensures entrepreneurs that their claims to
assets and future earnings are legally safeguarded.
• The government in a market economy is to provide a stable fiscal and monetary
environment.
• This is achieved through effective management of fiscal and monetary policies.
• Stability reduces overall risk in an economy, improves business forecasts, and
helps control inflation and unemployment rates.
• Finally, government in a market economy is to preserve political stability.
• This encourages the smooth operation of a market economy.
Political stability helps businesses engage in activities without worrying about terrorism,
kidnappings, and other political threats to their operations

Legal Systems
• Legal System: Set of laws and regulations, including the processes by which a country’s
laws are enacted and enforced and the ways in which its courts hold parties accountable
for their actions.
• A country’s political system also influences its legal system.
• Legal systems are frequently influenced by political moods and upsurges of nationalism.

• The common law system originated in England ten centuries ago. Common law takes
into account particular situations and circumstances. It is based on:
• Tradition, or a nation’s legal history.
• Precedent, or past cases that have come before the courts.
• And usage, or how laws are applied in specific situations.
 • Civil law can be traced to Rome in the fifth century B.C. and is the most common legal
tradition.
• It is based on a detailed set of written rules and statutes that constitute a legal
code.
• It can be less adversarial than common law because the legal code defines all
obligations, responsibilities, and privileges of the parties to a contract.
• Firms operating in countries with theocratic legal systems must be sensitive to local
values and beliefs.
• Islamic law is the most widely practiced theocratic legal system today.

Global Legal Issues

• Intellectual Property: Property that results from people’s intellectual talent and abilities
is called intellectual property. It includes graphic designs, novels, computer software,
machine-tool designs, and secret formulas, such as that for making Coca-Cola.
• Most national legal systems protect property rights—the legal rights to resources and
any income they generate.
• Globally, business software piracy averages around 39 percent and costs business
software makers nearly $52 billion annually. Figure 3.2 shows piracy rates for some
nations.
• Industrial property includes patents and trademarks, which are often a firm’s most
valuable assets.
• Patent: Property right granted to the inventor of a product or process that excludes others
from making, using, or selling the invention.
• Trademark: Property right in the form of words or symbols that distinguish a product
and its manufacturer.
• Copyright: Property right giving creators of original works the freedom to publish or
dispose of them as they choose.

• Product Safety and Liability: in most countries set standards that manufactured
products must meet. Product liability holds manufacturers, sellers, individuals, and others
responsible for damage, injury, or death caused by defective products. Injured parties can
sue for monetary compensation through civil lawsuits and for fines or imprisonment
through criminal lawsuits.
– Responsibility for damage, injury, or death
• Taxation: a tax levied on each party that adds value to a product throughout its
production and distribution.
– Income, sales, consumption, and VAT
• Antitrust Regulations: try to provide consumers with a wide variety of products at fair
prices. The United States and the European Union are the world’s strictest antitrust
regulators.
– Prevent market sharing, price fixing, and unfair advantage
• In the absence of a global antitrust enforcement agency, international companies must
concern themselves with the antitrust laws of each nation where they do business.

Ethics and Social Responsibility

Corporate Social Responsibility (CSR)
 • Traditional Philanthropy
• Risk Management
• Strategic CSR

• Businesses are expected to exercise corporate social responsibility—the practice of going

beyond legal obligations to actively balance commitments to investors, customers, other
companies, and communities.
• Corporate social responsibility (CSR) includes a wide variety of activities, including
giving to the poor, building schools in developing countries, and protecting the global
environment.
We can think of CSR as consisting of three layers of activity. The first layer is traditional
philanthropy, whereby a corporation donates money and, perhaps, employee time toward a
specific social cause. The second layer is related to risk management, whereby a company
develops a code of conduct that it will follow in its global operations and agrees to operate with
greater transparency. The third layer is strategic CSR, in which a business builds social
responsibility into its core operations to create value and build competitive advantage

Philosophies of Ethics and Social Responsibility

Philosophies
• Friedman View
• Cultural Relativist View
• Righteous Moralist View
• Utilitarian View

There are four philosophies of ethics and social responsibility.

• The Friedman view argues that a company’s sole responsibility is to maximize
profits for its owners (or shareholders) while operating within the law.
• Many people disagree with this argument and say the discussion Is not
whether a company has CSR obligations but how tit will fulfill them.
• The cultural relativist view says that a company should adopt local ethics
wherever it operates because right and wrong are determined within a cultural
context.
• “When in Rome, do as the Romans do” captures the essence of this view.
• The righteous moralist view argues that a company should maintain its home-
country ethics wherever it operates because the home–country’s view of ethics
and responsibility is superior.
• If headquarters instructs a subsidiary manager to refrain from bribing local
officials, it imposes its righteous moralist view on the local manager.
• The utilitarian view says that a company should behave in a way that maximizes
“good” outcomes and minimizes “bad” outcomes wherever it operates.
• A utilitarian manager will take the action that produces the best outcome
for all affected parties.

Key Issues
• Bribery and Corruption
• Labor Conditions and Human Rights
 • Fair Trade Practices
• Environment
– Carbon footprint

• Although businesses can create policies regarding ethics and social responsibility, issues
arise on a daily basis that can cause dilemmas for international managers.
• Bribery and corruption are detrimental to society and business because they
misallocates resources, hurt economic development, and damage the integrity of free
markets.
• Responsible businesses monitor their own behavior and that of their employees and
business partners to uphold good labor conditions and human rights.
• They may also promote fair trade practices—which involve companies working with
suppliers in more equitable, meaningful, and sustainable ways.
• Finally, companies today pursue “green” initiatives to reduce their toll on the
environment and to reduce operating costs and boost profit margins.
• Carbon footprint is the environmental impact of greenhouse gases (measured in units of
carbon dioxide) that result from human activity.

CHAP 4 : Economic Development of Nations

Economic Development
Classifying Countries
• Developed Country
• Newly Industrialized Country
• Emerging Markets
• Developing Country

• Nations are commonly classified as being developed, newly industrialized, or developing

based on a quantifiable economic measure.
• Developed Countries are highly industrialized and highly efficient whose people enjoy a
high quality of life.
• Newly Industrialized Countries are those that have recently increased the portion of
their national production and exports derived from industrial operations.
• When we combine newly industrialized countries with countries that have the potential to
become newly industrialized, we arrive at a category often called emerging markets.
• Developing Countries are nations with the poorest infrastructures and lowest personal
incomes.

National Production
Popular Indicators of Economic Development
• Gross Domestic Product (G D P)
• Gross National Product (G N P)

• Gross domestic product (GDP) is the value of all goods and services produced by a
domestic economy over a one-year period. GDP is a narrower figure than gross national
 product (GNP) in that it excludes a nation’s income generated from exports, imports,
and the international operations of its companies.
• A country’s GDP per capita is simply its GDP divided by its population to measure a
nation’s income per person.
• Marketers often use GDP or GNP per capita figures to determine whether a country’s
population is wealthy enough to begin purchasing its products.

G D P and G N P Drawbacks
• Uncounted Transactions: For a variety of reasons, many of a nation’s
transactions do not get counted in either GDP or GNP. Some activities not
included are: volunteer work, unpaid household work, illegal activities such as
gambling and black market (underground) transactions, and unreported
transactions conducted in cash. In some cases, the unreported (shadow) economy
is so large and prosperous that official statistics such as GDP per capita are almost
meaningless
• Question of Growth: Gross product figures do not tell us whether a nation’s
economy is growing or shrinking—they are simply a snapshot of one year’s
economic output.
• Problem of Averages: Recall that per capita numbers give an average figure for
an entire country. These numbers are helpful in estimating national quality of life,
but averages do not give us a very detailed picture of development.
• Pitfalls of Comparison: Country comparisons using gross product figures can be
misleading. When comparing gross product per capita, the currency of each
nation being compared must be translated into another currency unit (usually the
dollar) at official exchange rates. But official exchange rates only tell us how
many units of one currency it takes to buy one unit of another. They do not tell us
what that currency can buy in its home country. Therefore, to understand the true
value of a currency in its home country, we apply the concept of purchasing
power parity.

Human Development
United Nations’ Human Development Index (H D I)
• Long and Healthy Life
• Education
• Decent Standard of Living

Purchasing Power Parity

Purchasing Power
• Value of goods and services that can be purchased with one unit of a country’s currency
Purchasing Power Parity (P P P)
• Relative ability of two countries’ currencies to buy the same “basket” of goods in those
two countries

Economic Transition
Reforms Obstacles
• Stabilizing the economy, reducing • Managerial expertise
 budget deficits, and expanding credit • Shortage of capital
availability • Cultural differences
• Allowing prices to reflect supply and • Sustainability
demand
• Legalizing private business, selling
state-owned companies, and
supporting property rights
• Reducing barriers to trade and
investment and allowing currency
convertibility

• Over the past two decades, countries with centrally planned economies have been
remaking themselves in the image of stronger market economies. This process, called
economic transition, involves changing a nation’s fundamental economic organization
and creating entirely new free-market institutions.
• The process typically involves several key reform measures to promote economic
development:
• Stabilizing the economy, reducing budget deficits, and expanding credit
availability
• Allowing prices to reflect supply and demand
• Legalizing private business, selling state-owned companies, and supporting
property rights
• Reducing barriers to trade and investment and allowing currency convertibility
• Key obstacles for countries in transition:
• First, is a lack of managerial expertise. In central planning, there was little need
for production, distribution, and marketing strategies or for trained individuals to
devise them. Recent years are seeing higher-quality management in transitions
countries because of improved education, opportunities to study and work abroad,
and changes in work habits.
• Second, is a capital shortage. Economic transition and development are
expensive and require funding to develop a telecommunications and infrastructure
system, to create financial institutions, and to educate people in market
economics.
• Third, are cultural differences. Economic transition and development cause
cultural change and replace dependence on the government with greater emphasis
on individuals. Cuts are often needed in welfare, unemployment benefits, and
guaranteed government jobs.
• Fourth, is environmental degradation. Economic and social policies of former
communist governments were often disastrous for the natural environment.

Political Risk
• Political Risk: Likelihood that a society will undergo political change that negatively
affects local business activity
• Main sources of political risk include:
– Conflict and violence
 – Terrorism and kidnapping
– Property seizure: confiscation, expropriation, or nationalization
– Policy changes
– Local content requirements

• Conflict and violence: Local conflict can discourage international companies from
investing in a nation and set back economic development significantly. Conflict may
arise from people’s resentment toward their government; over territorial disputes between
countries; and among ethnic, racial, and religious groups.
• Terrorism and Kidnapping: Terrorist activities are a means of making political
statements. Kidnapping and the taking of hostages for ransom may be used to fund a
terrorist group’s activities. Executives of large international companies are often prime
targets for kidnappers because their employers have “deep pockets” to pay large ransoms.
• Property Seizure: Governments sometimes seize the assets of companies doing business
within their borders. Asset seizures fall into one of three categories: confiscation,
expropriation, or nationalization.
• Confiscation: Forced transfer of assets from a company to the government
without compensation.
• Expropriation: Forced transfer of assets from a company to the government with
compensation.
• Nationalization: Government takeover of an entire industry.
• Policy Changes: Government policy changes are the result of a variety of influences,
including the ideals of newly empowered political parties, political pressure from special
interests, and civil or social unrest.
• Local Content Requirements: Laws stipulating that a specified amount of a good or
service be supplied by producers in the domestic market

Managing Political Risk

Methods
Managing Political Risk
• Adaptation
• Information Gathering
• Political Influence

• Adaptation means incorporating risk into business strategies, often with the help of local
officials. Companies can incorporate risk in four ways.
• First, partnerships help companies leverage expansion plans. They can be
informal arrangements or include joint ventures, strategic alliances, and cross-
holdings of company stock.
• Second, localization entails modifying operations, the product mix, or some other
business element—even the company name—to suit local tastes and culture.
• Third, development assistance allows an international business to assist the host
country or region in improving the quality of life for locals.
• Fourth, insurance against political risk can be essential to companies entering
risky business environments.
 • Information Gathering: International firms attempt to gather information that will help
them predict and manage political risk.
• Political Influence: Lobbying is the policy of hiring people to represent a company’s
views on political matters. Lobbyists meet with a local public official to influence his or
her position on issues relevant to the company. Bribes often represent attempts to gain
political influence. But the Foreign Corrupt Practices Act forbids U.S. companies from
bribing government officials or political candidates in other nations (except when a
person’s life is in danger).

Relations Between Countries

International Relations The United Nations
• Favorable and strong political • Six main bodies
relationships – The General Assembly
– Foster stable business – The Security Council
environments – The Economic and Social
– Expand business opportunities Council
– Lower risk § UN Conference on
– Promote economic Trade and
development Development
• Multilateral agreements – The Trusteeship Council
– The International Court of
Justice
– Secretariat

• Relations among countries can influence the political economy of nations and the pace of
economic development. Favorable and strong political relationships foster stable business
environments. Favorable political relations among countries expand business
opportunities, lower risk, and promote economic development.
• To generate stable business environments, some countries have turned to multilateral
agreements—treaties concluded among several nations, each of whom agrees to abide by
treaty terms even if tensions develop.

Emerging Markets and Economic Transition

China
• Profile
– Communist after civil war ended in 1949
– Agricultural reforms began in 1979
– Township and Village Enterprises legal in 1984
– “Socialism with Chinese characteristics”
• Challenges
– Political and social problems
– Unemployment and migrant labor
– Reunification of “greater China”

Russia
• Profile
 – Operated under a staunchly communist system for about 75 years
– In the 1980s, the former Soviet Union entered a new era of freedom of thought,
freedom of expression, and economic restructuring
– Transition away from government ownership and central planning was
challenging
– Opaque legal system, a fair amount of corruption, and shifting business laws
• Challenges
– Developing managerial talent
– Political instability
– Unstable investment climate

the Vietnamese life insurance market is quite concentrated, with the top five companies
accounting for over 70% of the market share by premium income, revenue, and new business
premiums. Bao Viet Life is the largest player in the market, followed by Manulife and
Prudential.