2 Cross-Cultural BusinessLearning ObjectivesHelsinki, Finland—.docx

2 Cross-Cultural Business
Learning Objectives
Helsinki, Finland—Nokia Corporation (www.nokia.com) is the
world’s number one manufacturer of mobile handsets. The
company’s 112,000 employees in more than 150 countries
generate $79 billion in sales annually. Nokia uses its knowledge
of cultures to control 40 percent of the global handset market.
Nokia is especially talented at detecting consumer needs in
emerging markets. China and India represent Nokia’s first and
second largest markets ahead of third-place United States.
Nokia knows that in India a buyer selects a handset that has the
right look and style and projects the right image. But for a
consumer in China, a handset needs to be the right bargain. And
Nokia recently finished a year-long study of the handset needs
of people who live in Accra, capital city of the African nation
Ghana.
Source: Jeffrey Barbee.
Nokia spends around $8 billion a year on research and
development. Anthropologists and psychologists first travel the
globe for Nokia to learn how people behave and communicate.
Personnel at Nokia’s headquarters in Finland then blend these
unique insights with emerging global trends to design new
handsets. Finally, the company develops phones suitable for a
variety of markets but localizes each one with colors, surface
textures, services, and ring-tones.
Nokia maintains its competitive edge through careful cultural
research. For example, company anthropologists learned that
people in rural areas of emerging markets need a phone that can
be shared among many users. So Nokia added the capability to
save each person’s contacts separately and installed a call
tracker that imposes a time or cost limit on each call. Handsets
designed for emerging markets also feature menus in local
languages, a one-touch flashlight in case of power outages, and

a demo program for those who have never used a mobile phone.
As you read this chapter, consider how culture influences
international business and how company actions affect
cultures.1
This chapter is the first of three that describe the links between
international business activity and a nation’s business
environment. We introduce these topics early because of their
strong influence on how commerce is conducted in different
countries. In fact, success in international business can often be
traced directly to a deep understanding of some aspect of a
people’s commercial environment. This chapter explores the
influence of culture on international business activity. Chapter
3 presents the roles of political and legal systems, and Chapter
4 examines the impact of economic systems and emerging
markets on international business.
An assessment of any nation’s overall business climate is
typically the first step in analyzing its potential as a host for
international commercial activity. This means addressing some
important questions, such as the following: What language(s) do
the people speak? What is the climate like? Are the local people
open to new ideas and new ways of doing business? Do
government officials and the people want our business? Is the
political situation stable enough so that our assets and
employees are not placed at unacceptable levels of risk?
Answers to these kinds of questions—plus statistical data on
items such as income level and labor costs—allow companies to
evaluate the attractiveness of a location as a place for doing
business.
We address culture first in our discussion of national business
environments because of its pivotal role in all international
commercial activity. Whether we are discussing an entrepreneur
running a small import/export business or a huge global firm
directly involved in over 100 countries, people are at the center
of all business activity. When people from around the world
come together to conduct business, they bring with them
different backgrounds, assumptions, expectations, and ways of

communicating—in other words, culture.
We begin this chapter by exploring the influence of nation-
states and subcultures on a people’s overall cultural image.
Next we learn the importance of values, attitudes, manners, and
customs in any given culture. We then examine ways in which
social institutions, religion, language, and other key elements of
culture affect business practices and national competitiveness.
We close this chapter with a look at two alternative methods for
classifying cultures.
What Is Culture?
When traveling in other countries, we often perceive differences
in the way people live and work. In the United States dinner is
commonly eaten around 6:00 p.m.; in Spain it’s not served until
8:00 or 9:00 p.m. In the United States most people shop in large
supermarkets once or twice a week; Italians tend to shop in
smaller local grocery stores nearly every day. Essentially, we
are experiencing differences in culture—the set of values,
beliefs, rules, and institutions held by a specific group of
people. Culture is a highly complex portrait of a people. It
includes everything from high tea in England to the tropical
climate of Barbados, to Mardi Gras in Brazil, to segregation of
the sexes in Saudi Arabian schools.
culture
Set of values, beliefs, rules, and institutions held by a specific
group of people.
Before we learn about the individual components of culture,
let’s look at one important concept that should be discouraged
and one that should be fostered.
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. It causes
people to view other cultures in terms of their own and,
therefore, 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.
The failures occurred because managers ignored a fundamental
aspect of the local culture, which provoked a backlash from the
local population, their 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. For more information
on how companies can foster a non-ethnocentric perspective,
see this chapter’s Culture Matters feature titled, “Creating a
Global Mind-set.”
ethnocentricity
Belief that one’s own ethnic group or culture is superior to that
of others.
CULTURE MATTERS: Creating a Global Mind-set
In this era of globalization, companies need employees who
function without the blinders of ethnocentricity. Here are some
ways managers can develop a global mind-set:
■Cultural Adaptability. Managers need the ability to alter their
behavior when working with people from other cultures. The
first step in doing this is to develop one’s knowledge of
unfamiliar cultures. The second step is to act on that knowledge
to alter behavior appropriately in response to cultural
expectations. This can help managers to evaluate others in a
culturally unbiased way and to motivate and lead multicultural
teams.
■Bridging the Gap. A large gap can emerge between theory and
practice when Western management ideas are applied in Eastern
cultures. “U.S. management principles may be accepted
throughout the world, but Anglo-Saxon business customs and
practices [on which they are based] may not be,” says
management adviser Kim Tae Woo. In Asia, Western managers
may try implementing “collective leadership” practices more in
line with Asian management styles.
■Building Global Mentality. Companies can apply personality-
testing techniques to measure the global aptitude of managers.
The Global Mentality Test evaluates an individual’s openness

and flexibility in mind-set, understanding of global principles
and terminology, and strategic implementation abilities. It also
identifies areas in which training is needed and generates a list
of recommended programs.
■Flexibility Is Key. The more behavioral are the issues, the
greater is the influence of local cultures. Japanese and Korean
managers are more likely than U.S. managers to wait for
directions and consult peers on decisions. And Western
managers posted in the Middle East must learn to work within a
rigid hierarchy to be successful. Although showing respect for
others is universally valued, respect is defined differently from
country to country.
■Want to Know More? Visit the Center for Creative Leadership
(www.ccl.org), Intercultural Business Center (www.ib-c.com),
and Transnational Management Associates
(www.tmaworld.com).
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 function effectively within it. Cultural
literacy improves people’s ability to manage employees, market
products, and conduct negotiations in other countries. Global
brands such as Procter & Gamble (www.pg.com) and Sony
(www.sony.com) provide a competitive advantage because
consumers know and respect these highly recognizable names.
Yet cultural differences often dictate alterations in some aspect
of a business to suit local tastes and preferences. The culturally
literate manager who compensates for local needs and desires
brings his or her company closer to customers and improves the
firm’s competitiveness.
cultural literacy
Detailed knowledge about a culture that enables a person to
function effectively within it.
As you read through the concepts and examples in this chapter,
try to avoid reacting with ethnocentricity while developing your

own cultural literacy. Because these two concepts are central to
the discussion of many international business topics, you will
encounter them throughout this book. In the book’s final
chapter (Chapter 16), we explore specific types of cultural
training that companies use to develop their employees’ cultural
literacy.
National Culture and Subcultures
Rightly or wrongly, we tend to invoke the concept of the nation-
state when speaking of culture. In other words, we usually refer
to British and Indonesian cultures as if all Britons and all
Indonesians were culturally identical. We do this because we
are conditioned to think in terms of national culture. But this is
at best a generalization. In Great Britain, campaigns for greater
Scottish and Welsh independence continue to make progress.
And people in remote parts of Indonesia build homes in treetops
even as people in the nation’s developed regions pursue
ambitious economic development projects. Let’s now take a
closer look at the diversity that lies beneath the veneer of
national culture.
National 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 national culture. Most nations,
for example, regulate culturally sensitive sectors of the
economy, such as filmmaking and broadcasting. France
continues to voice fears that its language is being tainted with
English and its media with U.S. programming. To stem the
English invasion, French laws limit the use of English in
product packaging and storefront signs. At peak listening times,
at least 40 percent of all radio station programming is reserved
for French artists. Similar laws apply to television broadcasting.
The French government even fined the local branch of a U.S.
university for failing to provide a French translation on its
English-language Web site.
Cities, too, get involved in enhancing national cultural

attractions, often for economic reasons. Lifestyle enhancements
to a city can help it attract companies, which benefit by having
an easier task retaining top employees. The Guggenheim
Museum in Bilbao, Spain (www.guggenheim-bilbao.es),
designed by Frank Gehry, revived that old Basque industrial
city. And Hong Kong’s government enhanced its cultural
attractions by building a Hong Kong Disney to lure businesses
that may otherwise locate elsewhere in Asia.
Subcultures
A group of people who share a unique way of life within a
larger, dominant culture is called a subculture. A subculture can
differ from the dominant culture in language, race, lifestyle,
values, attitudes, or other characteristics.
subculture
A group of people who share a unique way of life within a
larger, dominant culture.
Although subcultures exist in all nations, they are often glossed
over by our impressions of national cultures. For example, the
customary portrait of Chinese culture often ignores the fact that
China’s population includes more than 50 distinct ethnic
groups. Decisions regarding product design, packaging, and
advertising should consider each group’s distinct culture.
Marketing campaigns also need to recognize that Chinese
dialects in the Shanghai and Canton regions differ from those in
the country’s interior; not everyone is fluent in the official
Mandarin dialect.
Subculture members define themselves by their style (such as
clothing, hair, tattoos) and rebel against mass consumerism.
London, England’s Camden district is famous for its historic
markets and as a gathering place for alternative subcultures
such as goth, punk, and emo. Businesses like YouTube help
subcultures to spread quickly worldwide. Can you think of a
company that targets an international subculture with its
products?
Source: © Hemis/CORBIS. All Rights Reserved.

A multitude of subcultures also exists within the United States.
Of 300 million U.S. residents, around 80 million are black,
Hispanic, and Asian. Frito Lay (www.fritolay.com) was initially
disheartened that 46 million U.S. Hispanics were not buying its
Latin-flavored versions of Lay’s and Doritos chips. The
company looked south of the border to its Mexican subsidiary,
Sabritas, and brought four popular brands into the U.S. market,
including Sabritones Chile & Lime Puffed Wheat Snacks. The
gamble paid off as sales of Frito’s Sabritas brand doubled to
more than $100 million over a two-year period.2
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. Arab culture, for
example, extends from northwest Africa to the Middle East,
with pockets of Arabs in many European countries and the
United States. Because Arabs share a common language and
tend to share purchasing behaviors related to Islamic religious
beliefs, marketing to Arab subcultures can sometimes be
accomplished with a single marketing campaign.
Quick Study
1.Define culture. How does ethnocentricity distort one’s view of
other cultures?
2.What is cultural literacy? Why should businesspeople
understand other cultures?
3.How do nation-states and subcultures influence a nation’s
cultural image?
Components of Culture
The actions of nation-states and the presence of subcultures
help define the culture of a group of people. But a people’s
culture also includes what they consider beautiful and tasteful,
their underlying beliefs, their traditional habits, and the ways in
which they relate to one another and their surroundings. Let’s
take a detailed look at each main component of culture:
aesthetics, values and attitudes, manners and customs, social

structure, religion, personal communication, education, and
physical and material environments.
Aesthetics
What a culture considers “good taste” in the arts (including
music, painting, dance, drama, and architecture), the imagery
evoked by certain expressions, and the symbolism of certain
colors is called aesthetics.
aesthetics
What a culture considers “good taste” in the arts, the imagery
evoked by certain expressions, and the symbolism of certain
colors.
Aesthetics are important when a company does business in
another culture. The selection of appropriate colors for
advertising, product packaging, and even work uniforms can
improve the odds of success. For example, green is a favorable
color in Islam and adorns the national flags of most Islamic
nations, including Jordan, Pakistan, and Saudi Arabia.
Companies take advantage of the emotional attachment to the
color green in these countries by incorporating it into a product,
its packaging, or its promotion. Across much of Asia, on the
other hand, green is associated with sickness. In Europe,
Mexico, and the United States, the color of death and mourning
is black; in Japan and most of Asia, it’s white.
Shoe manufacturer Nike (www.nike.com) experienced firsthand
the importance of imagery and symbolism in international
marketing. The company emblazoned a new line of shoes with
the word “Air” written to resemble flames or heat rising off
blacktop. The shoes were given various names, including Air
Bakin’, Air Melt, Air Grill, and Air BQue. But what Nike did
not realize was that the squiggly lines of the “Air” logo
resembled Arabic script for “Allah,” the Arabic name for God.
Under threat of a worldwide boycott by Muslims, who
considered it a sacrilege, Nike apologized and recalled the
shoes.
Music is deeply embedded in culture and, when used correctly,
can be a clever and creative addition to a promotion; if used

incorrectly, it can offend the local population. The architecture
of buildings and other structures should also be researched to
avoid making cultural blunders attributable to the symbolism of
certain shapes and forms.
The importance of aesthetics is just as great when going
international using the Internet. Many companies exist that
teach corporations how to globalize their Internet presence.
These companies often provide professional guidance on how to
adapt Web sites to account for cultural preferences such as
color scheme, imagery, and slogans.3 The advice of specialist
firms can be particularly helpful for entrepreneurs and small
businesses because they rarely have in-house employees well-
versed in other cultures. To read how small business owners can
tailor a Web site to suit local aesthetics and other cultural
variables, see the Entrepreneur’s Toolkit titled, “Localize Your
Web Site.”
Values and Attitudes
Ideas, beliefs, and customs to which people are emotionally
attached are called values. Values include concepts such as
honesty, marital faithfulness, freedom, and responsibility.
Values are important to business because they affect a people’s
work ethic and desire for material possessions. For example,
whereas people in Singapore value hard work and material
success, people in Greece value leisure and a modest lifestyle.
The United Kingdom and the United States value individual
freedom; Japan and South Korea value group consensus.
values
Ideas, beliefs, and customs to which people are emotionally
attached.
The influx of values from other cultures can be fiercely resisted.
Many Muslims believe drugs, alcohol, and certain kinds of
music and literature will undermine important Islamic values.
This is why nations under Islamic law (including Iran and Saudi
Arabia) exact severe penalties against anyone possessing illegal
items such as drugs and alcohol. Deeply held conservative
values are why the Arab world’s reality TV programs tend to be

short-lived. In Bahrain, the local version of “Big Brother” was
canceled after people objected to the program’s format, which
involved young unmarried adults of both sexes living under the
same roof. The Lebanon-based program “Hawa Sawa” (“On Air
Together”) was shut down because its “elimidate” format (in
which a young man would gradually eliminate young women to
finally select a date) was perceived by many people as too
Western.4
ENTREPRENEUR’S TOOLKIT: Localize Your Web Site
When going global with an Internet presence, the more a
company localizes, the better. Online customers want an
experience corresponding to their cultural context offline. Here
are a few tips for entrepreneurs launching an online presence.
■Choosing Colors. A black-and-white Web site is fine for many
countries, but in Asia visitors may think you are inviting them
to a funeral. In Japan and across Europe, Web sites in pastel
color schemes often work best.
■Selecting Numbers. Many Chinese-speaking cultures consider
the number four unlucky, although eight and nine symbolize
prosperity. Be careful that your Web address and phone
numbers do not send the wrong signal.
■Watching the Clock. If marketing to countries that use the 24-
hour clock, adjust times stated on the site so it reads, “Call
between 9:00 and 17:00” instead of “Call between 9 a.m. and 5
p.m.”
■Avoiding Slang. English in Britain is different from that in the
United States, Spanish in Spain is different from that in Mexico,
and French in France is different from that in Quebec. Avoid
slang to lessen the potential negative impact of such
differences.
■Waving the Flag. Using national flags as symbols for buttons
that access different language versions of your site should be
done carefully. Mexican visitors to your site may be put off by a
Spanish flag to signify the site’s Spanish-language version, for
example.
■Doing the Math. Provide conversions into local currencies for

buyer convenience. For online ordering, be sure your site
calculates any shipping costs, tax rates, tariffs, and so on. Also
allow enough blanks on the order form to accommodate longer
international addresses.
■Getting Feedback. Finally, talk with customers to know what
they want to accomplish on your Web site. Then thoroughly test
the site to ensure it functions properly.
Attitudes are positive or negative evaluations, feelings, and
tendencies that individuals harbor toward objects or concepts.
Attitudes reflect underlying values. For example, a Westerner
would be expressing an attitude if he or she were to say, “I do
not like the Japanese purification ritual because it involves
being naked in a communal bath.” The Westerner quoted here
might hold conservative beliefs regarding exposure of the body.
attitudes
Positive or negative evaluations, feelings, and tendencies that
individuals harbor toward objects or concepts.
Similar to values, attitudes are learned from role models,
including parents, teachers, and religious leaders. Attitudes also
differ from one country to another because they are formed
within a cultural context. But unlike values (which generally
concern only important matters), people hold attitudes toward
both important and unimportant aspects of life. And whereas
values remain quite rigid over time, attitudes are more flexible.
It seems a “European” attitude has sunk into the psyche of
young people there as companies from different countries
merge, industries consolidate, and nations grow closer together
in the European Union. Many young people in Europe today
consider themselves to be “European” as much as they identify
with their individual national identities. Still, the underlying
values of young Europeans tend to remain similar to those of
their parents. Such cultural knowledge can help managers
decide whether to adapt promotions to local attitudes for
maximum effectiveness.
Let’s now look at how people’s attitudes differ toward three
important aspects of life that directly affect business activities:

time, work and achievement, and cultural change.
Attitudes Toward 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. Businesspeople, for example, may arrive after the
scheduled meeting time and prefer to build personal trust before
discussing business. Not surprisingly, it usually takes longer to
conduct business in these parts of the world than in the United
States or northern Europe.
By contrast, people in Japan and the United States typically
arrive promptly for meetings, keep tight schedules, and work
long hours. The emphasis on using time efficiently reflects the
underlying value of hard work in both these countries. Yet
people in Japan and the United States sometimes differ in how
they use their time at work. For example, U.S. employees strive
toward workplace efficiency and may leave work early if the
day’s tasks are done, reflecting the value placed on producing
individual results. But in Japan, although efficiency is prized, it
is equally important to look busy in the eyes of others even
when business is slow. Japanese workers want to demonstrate
their dedication to superiors and coworkers—an attitude
grounded in values such as the concern for group cohesion,
loyalty, and harmony.
Attitudes Toward Work
Whereas some cultures display a strong work ethic, others stress
a more balanced pace in juggling work and leisure. People in
southern France like to say they work to live, while people in
the United States live to work. They say work is a means to an
end for them, whereas work is an end in itself in the United
States. Not surprisingly, the lifestyle in southern France is
slower-paced. People tend to concentrate on earning enough
money to enjoy a relaxed, quality lifestyle. Businesses
practically close down during August, when many workers take
month-long paid holidays, usually outside the country.
People tend to launch their own businesses when capital is

available for new business start-ups and when the cultural
stigma of entrepreneurial failure is low. In European countries,
start-ups are considered quite risky and capital for
entrepreneurial ventures can be scarce. Moreover, if an
entrepreneur’s venture goes bust, he or she can find it very hard
to obtain financing for future projects because of the stigma of
failure. This remains true despite some progress recently. The
opposite attitude tends to prevail in the United States.
Reference to prior bankruptcy in a business plan is sometimes
considered a valuable learning experience (assuming lessons
were learned). As long as U.S. bankers or venture capitalists see
promising business plans, they are generally willing to loan
money. Today, many European nations are working to foster an
entrepreneurial spirit similar to that of the United States.
Attitudes Toward Cultural Change
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),
relaxing in a tearoom in Kuwait (tradition), and practicing
democracy in the United States (concept). Let’s look more
closely at the role of cultural traits in causing cultural change
over time and the relation between international companies and
cultural change.
cultural trait
Anything that represents a culture’s way of life, including
gestures, material objects, traditions, and concepts.
CULTURAL DIFFUSION
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. Satellite television, videoconferencing, and
videos on the Internet increase the frequency of international
contact and expose people of different nations to new ideas and

practices.
cultural diffusion
Process whereby cultural traits spread from one culture to
another.
WHEN COMPANIES CHANGE CULTURES
International companies are often agents of cultural change. As
trade and investment barriers fall, for example, U.S. consumer-
goods and entertainment companies are moving into untapped
markets. Critics in some of these places charge that in exporting
the products of such firms, the United States is practicing
cultural imperialism—the replacement of one culture’s
traditions, folk heroes, and artifacts with substitutes from
another.
cultural imperialism
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. McDonald’s (www.mcdonalds.com) is also sometimes
charged with cultural imperialism. It is reported that the
average Japanese child thinks McDonald’s was invented in
Japan and exported to the United States. Chinese children
consider “Uncle” McDonald “funny, gentle, kind, and
understanding.” Meanwhile, politicians in Russia decried the
Snickerization of their culture—a snide term that refers to the
popularity of the candy bar made by Snickers
(www.snickers.com). And when the Miss World Pageant was
held in India, conservative groups criticized Western corporate
sponsors for spreading the message of consumerism and
portraying women as sex objects.
Sensitivity to the cultures in which they operate can help
companies avoid charges of cultural imperialism. Firms must
focus not only on meeting people’s product needs, but also on
how their activities and products affect people’s traditional

ways and habits. Rather than view their influence on culture as
the inevitable consequence of doing business, companies can
take several steps to soften those effects. For example, policies
and practices that are at odds with deeply held beliefs can be
introduced gradually. Managers could also seek the advice of
highly respected local individuals such as elders, who fulfill
key societal roles in many developing countries. And businesses
should always make clear to local workers the benefits of any
proposed change.
An area in which U.S. companies may be changing other
cultures is fairness in the workplace. Just a few years ago,
sexual harassment lawsuits were a peculiar phenomenon of U.S.
culture. Increased awareness of this issue in other nations
coincides with the international outsourcing of jobs. As U.S.
companies outsource jobs to other nations, they are being held
accountable for how these subcontractors treat their employees.
In the process, U.S. companies export values of the U.S.
workplace, such as what constitutes harassment.5
Here, a customer in Dubai visits an outlet of Sweden-based
IKEA. Sweden historically dominated other Scandinavian
nations, including Denmark. Now some in Denmark say IKEA is
a “cultural imperialist” for portraying Denmark as Sweden’s
doormat because it assigns Danish names to doormats and rugs,
but reserves Swedish names for expensive items such as beds
and chairs. IKEA says the product names are simply a
coincidence.
Source: © Ed Kashi/CORBIS. All Rights Reserved.
WHEN CULTURES CHANGE COMPANIES
Culture often forces companies to adjust their business policies
and practices. Managers from the United States, for example,
often encounter cultural differences that force changes in how
they motivate employees in other countries. Although it’s a
time-consuming practice, managers sometimes use situational
management—a system in which a supervisor walks an
employee through every step of an assignment or task and

monitors the results at each stage. This technique helps
employees fully understand the scope of their jobs and clarifies
the boundaries of their responsibilities.
Other types of changes might also be needed to suit local
culture. Vietnam’s traditional, agriculture-based economy
means people’s concept of time revolves around the seasons.
The local “timepiece” is the monsoon, not the clock. Western
managers, therefore, modify their approach and take a more
patient, long-term view of business by modifying employee
evaluation and reward systems. For example, individual
criticism should be delivered privately to save employees from
“losing face” among coworkers. Individual praise for good
performance can be delivered either in private or in public, if
done carefully. The Vietnamese place great value on group
harmony, so an individual can be embarrassed if singled out
publicly as being superior to the rest of the work unit.
IS A GLOBAL CULTURE EMERGING?
What does the rapid pace of cultural change worldwide mean for
international business? Are we witnessing the emergence of a
new, truly global culture in which all people share similar
lifestyles, values, and attitudes? The rapid pace of cultural
diffusion today is causing cultures to converge to some extent.
The successful TV show, American Idol, where young people
compete for a chance to become a celebrity, is one example of
global pop culture. The U.S. show is one of 39 clones around
the world based on the original British show, Pop Idol. The
same company helped develop and market The Apprentice,
which is seen in 16 countries.6
It might be true that people in different cultures are developing
similar perspectives on certain issues. But it seems that just as
often as we see signs of an emerging global culture, we discover
some new habit unique to one culture. When that happens, we
are reminded of the roles of history and tradition in defining
culture. Though values and attitudes are under continually
greater pressure from globalization, their transformation will be
gradual rather than abrupt because they are deeply ingrained in

culture.
Quick Study
1.What is meant by a culture’s aesthetics? Give several
examples.
2.How can businesses incorporate aesthetics into their Web
sites?
3.Compare and contrast values and attitudes. How do cultures
differ in their attitudes toward time, work, and cultural change?
4.Describe the process of cultural diffusion. Why should
international businesses be sensitive to charges of cultural
imperialism?
Manners and Customs
When doing business in another culture, it is important to
understand a people’s manners and customs. At a minimum,
understanding manners and customs helps managers avoid
making embarrassing mistakes or offending people. In-depth
knowledge, meanwhile, improves the ability to negotiate in
other cultures, market products effectively, and manage
international operations. Let’s explore some important
differences in manners and customs around the world.
Manners
Appropriate ways of behaving, speaking, and dressing in a
culture are called manners. In Arab cultures that stretch from
the Middle East to northwest Africa, for example, one does not
extend a hand to greet an older person unless the elder first
offers the greeting. In going first, a younger person would be
displaying bad manners. Moreover, because Arab culture
considers the left hand the one used for personal hygiene, using
it to pour tea or serve a meal is considered very bad manners.
manners
Appropriate ways of behaving, speaking, and dressing in a
culture.
Jack Ma founded Alibaba (www.alibaba.com) as a way for
suppliers and buyers to increase efficiency by cutting through
layers of intermediaries and trading companies. But he realized
early that his Chinese clients needed training in business

etiquette so they could cross the cultural divide and do business
with people from Western cultures. Mr. Chen Xi Guo, who owns
a machinery factory in Wenzhou in central China, participated
in an Alibaba seminar on business manners. He now promises to
spend more time chitchatting with clients. “I will work hard to
be nicer,” says Mr. Chen. His seminar worksheets instruct him
to sprinkle his e-mails with phrases like, “How are you?” “It
was great to hear from you,” and “Can we work together?”7
Conducting business during meals is common practice in the
United States. In Mexico, however, it is poor manners to bring
up business at mealtime unless the host does so first. Business
discussions in Mexico typically begin when coffee and brandy
arrive. Likewise, toasts in the United States tend to be casual
and sprinkled with lighthearted humor. In Mexico, where a toast
should be philosophical and full of passion, a lighthearted toast
would be offensive. See the Global Manager’s Briefcase titled,
“A Globetrotter’s Guide to Manners” for additional pointers on
appropriate manners when abroad on business.
Customs
When habits or ways of behaving in specific circumstances are
passed down through generations, they become customs.
Customs differ from manners in that they define appropriate
habits or behaviors in specific situations. Sharing food gifts
during the Islamic holy month of Ramadan is a custom, as is the
Japanese tradition of throwing special parties for young women
and men who turn age 20. Let’s examine two types of customs
and see how instances of each vary around the world.
customs
Habits or ways of behaving in specific circumstances that are
passed down through generations in a culture.
FOLK AND POPULAR CUSTOMS
A folk custom is behavior, often dating back several
generations, that is practiced by a homogeneous group of
people. The wearing of turbans by Muslims in southern Asia
and the art of belly dancing in Turkey are both folk customs. A
popular custom is behavior shared by a heterogeneous group or

by several groups. Popular customs can exist in just one culture
or in two or more cultures at once. Wearing blue jeans and
playing golf are both popular customs across the globe. Folk
customs that spread by cultural diffusion to other regions
develop into popular customs.
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.
GLOBAL MANAGER’S BRIEFCASE: A Globetrotter’s Guide
to Manners
Large multinationals need top managers who are comfortable
living, working, and traveling worldwide. Here are a few
guidelines for a manager to follow when meeting colleagues
from other cultures:
■Familiarity. Avoid the temptation to get too familiar too
quickly. Use titles such as “doctor” and “mister.” Switch to a
first-name basis only when invited to do so and do not shorten
people’s names from, say, Catherine to Cathy.
■Personal Space. Culture dictates what is considered the
appropriate distance between two people. Middle Eastern and
Latin American nations close the gap significantly. And in Latin
America the man-to-man embrace can occur regularly in
business.
■Religious Values. Be cautious so that your manners do not
offend people. Former Secretary of State Madeline Albright
acquired the nickname “The Kissing
Ambassador” for kissing the Israeli and Palestinian leaders of
these two religious peoples.
■Business Cards. In Asia, business cards are considered an
extension of the individual. Business cards in Japan are
typically exchanged after a bow, with two hands extended, and
the wording facing the recipient. Leave the card on the table for
the entire meeting—don’t quickly stuff it in your wallet or toss
it into your briefcase.

■Comedy. Use humor cautiously because it often does not
translate well. Avoid jokes that rely on wordplay and puns or
events in your country, of which local people might have little
or no knowledge.
■Body Language. Do not “spread out” by hanging your arms
over the backs of chairs, but don’t be too stiff either. Look
people in the eye lest they deem you untrustworthy, but don’t
stare too intently in a challenging manner.
We can also distinguish between folk and popular food. Popular
Western-style fast food, for instance, is rapidly replacing folk
food around the world. Widespread acceptance of “burgers ‘n’
fries” (born in the United States) and “fish ‘n’ chips” (born in
Britain) is altering deep-seated dietary traditions in many Asian
countries, especially among young people. In Japan and South
Korea today, these popular foods are even becoming a part of
home-cooked meals. Sadly, many believe this trend is at least
partly responsible for a rising proportion of overweight people
in those nations.
THE BUSINESS OF GIFT GIVING
Although giving token gifts to business and government
associates is customary in many countries, the proper type of
gift varies. A knife, for example, should not be offered to
associates in Russia, France, or Germany, where it signals the
severing of a relationship. In Japan, gifts must be wrapped in
such a delicate way that it is wise to ask someone trained in the
practice to do the honors. It is also Japanese custom for the
giver to protest that the gift is small and unworthy of the
recipient and for the recipient to not open the gift in front of the
giver. This tradition does not endorse trivial gifts but is simply
a custom.
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 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 Germany, bribe payments may even qualify for tax
deductions. Though many governments worldwide are adopting
stricter measures to control bribery, in some cultures large gifts
are still an effective way to obtain contracts, enter markets, and
secure protection from competitors.
Social Structure
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
business decisions, 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.
social structure
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 Group Associations
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.*
social group
Collection of two or more people who identify and interact with
each other.
FAMILY
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.
Extended families can present some interesting situations for
businesspeople unfamiliar with the concept. In some cultures,
owners and managers obtain supplies and materials from
another company in which someone from the extended family
works. Gaining entry into such family arrangements can be
difficult because quality and price are not sufficient motives to
ignore family ties.
In extended-family cultures, managers and other employees
often try to find jobs for relatives inside their own companies.
This practice (called “nepotism”) can present a challenge to the
human resource operations of a Western company, which
typically must establish explicit policies on the practice.
GENDER
Gender refers to socially learned traits associated with, and
expected of, men or women. It includes behaviors and attitudes
such as styles of dress and activity preferences. It is not the
same thing as sex, which refers to the biological fact that a
person is either male or female.
Though many countries have made great strides toward gender
equality in the workplace, others have not. In countries where
women are denied equal opportunity in the workplace, their
unemployment rate can easily be double that for men and their
pay half that for men in the same occupation. Women’s salaries
can be so low and the cost of child-care so high that it simply
makes more sense for mothers to stay home with their children.
Caring for children and performing household duties are also
likely considered women’s work and not the responsibility of
the entire family.
Countries operating under Islamic law sometimes segregate
women and men in public schools, universities, and social
activities, and restrict women to certain professions. Yet women

are sometimes allowed teaching careers in all-female
classrooms only, or they can become physicians for female
patients only.
Social Status
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.
social stratification
Process of ranking people into social layers or classes.
*We put these two “groups” together for the sake of
convenience. Strictly speaking, a gender is not a group.
Sociologists regard it as a category—people who share some
sort of status. A key to group membership is mutual interaction.
Individuals in categories know that they are not alone in
holding a particular status, but the vast majority remain
strangers to one another.
Three factors that normally determine social status are family
heritage, income, and occupation. In most industrialized
countries royalty, government officials, and top business leaders
occupy the highest social layer. Scientists, medical doctors, and
others with a university education occupy the middle layer.
Below are those with vocational training or a secondary-school
education, who dominate the manual and clerical occupations.
Although rankings are fairly stable, they can and do change
over time. For example, because Confucianism (a major Chinese
religion) stresses a life of learning, not commerce, Chinese
culture frowned on businesspeople for centuries. In modern
China, however, people who have obtained wealth and power
through business are now considered important role models for
younger generations.
Social Mobility
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.
social mobility
Ease with which individuals can move up or down a culture’s
“social ladder.”
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.
caste system
System of social stratification in which people are born into a
social ranking, or caste, with no opportunity for social mobility.
The caste system forces Western companies to make some hard
ethical decisions when entering the Indian marketplace. They
must decide whether to adapt to local human resource policies
in India or import their own from the home country. As
globalization penetrates deeper into Indian culture, the nation’s
social system and international companies will face many
challenges to overcome.
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.

Across Western Europe, for example, wealthy families have
retained power for generations by restricting social mobility.
Countries there must sometimes deal with class conflict in the
form of labor–management disputes that can increase the cost of
doing business.
class system
System of social stratification in which personal ability and
actions determine social status and mobility.
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. Most U.S. citizens share
the belief that hard work can improve their standard of living
and social status. People attribute higher status to greater
income or wealth, but often with little regard for family
background.
Quick Study
1.How do manners and customs differ? Give examples of each.
2.List several manners that managers should consider when
doing business abroad.
3.Define folk and popular customs. How can a folk custom
become a popular custom?
4.Define social structure. How do social rank and social
mobility affect business?
Religion
Human values often originate from religious beliefs. Different
religions take different views of work, savings, and material
goods. Identifying why they do so may help us understand
business practices in other cultures. Knowing how religion
affects business is especially important in countries with
religious governments.
Map 2.1 shows where the world’s major religions are practiced.
Religion is not confined to national political boundaries but can
exist in different regions of the world simultaneously. It is also
common for several or more religions to be practiced within a
single nation. In the following sections, we explore

Christianity, Islam, Hinduism, Buddhism, Confucianism,
Judaism, and Shinto. We examine their potential effects, both
positive and negative, on international business activity.
MAP 2.1 World Religions
Christianity
Christianity was born in Palestine around 2,000 years ago
among Jews who believed that God sent Jesus of Nazareth to be
their savior. Although 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.
The Roman Catholic faith asks its followers to refrain from
placing material possessions above God and others. Protestants
believe that salvation comes from faith in God and that hard
work gives glory to God—a tenet known widely as the
“Protestant work ethic.” Many historians believe this conviction
to be a main factor in the development of capitalism and free
enterprise in nineteenth-century Europe.
Christian organizations sometimes get involved in social causes
that affect business policy. For example, some conservative
Christian groups have boycotted the Walt Disney Company
(www.disney.com), charging that in portraying young people as
rejecting parental guidance, Disney films impede the moral
development of young viewers worldwide.
The Church itself has been involved in some highly publicized
controversies. Ireland-based Ryanair (www.ryanair.com),
Europe’s leading low-fare airline, ruffled the feathers of the
Roman Catholic Church with an ad campaign. The ad depicted
the pope (the head of the Church) claiming that the fourth secret
of Fatima was Ryanair’s low fares. The Church sent out a
worldwide press release accusing the airline of blaspheming the
pope. But much to the Church’s dismay, the press release
generated an enormous amount of free publicity for Ryanair.8
In one classic case, the French Bishops’ Conference sued
Volkswagen-France (www.volkswagen.fr) for a billboard ad it

felt insulted Christians by parodying the famous image of
Leonardo Da Vinci’s The Last Supper. The conference
explained that it was reacting to increasing use of sacred things
in advertising throughout Europe. The conference said ads aim
for the sacred to shock people because using sex no longer
worked. Volkswagen halted the $16 million ad campaign in
response to the Church’s complaint.
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, the holy city of Islam located in Saudi Arabia.
Islam thrives in northwestern 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, and (5) making the
Hajj (pilgrimage) to the Saudi Arabian city of Mecca at least
once in one’s lifetime.
Religion strongly affects the kinds of goods and services
acceptable to Muslim consumers. Islam, for example, prohibits
the consumption of alcohol and pork. Popular alcohol
substitutes are soda pop, coffee, and tea. Substitutes for pork
include lamb, beef, and poultry (all of which must be
slaughtered in a prescribed way so as to meet halal
requirements). Because hot coffee and tea often play ceremonial
roles in Muslim nations, the markets for them are quite large.
And because usury (charging interest for money lent) violates
the laws of Islam, credit card companies collect management
fees rather than interest, and each cardholder’s credit line is
limited to an amount held on deposit.
Nations governed by Islamic law (see Chapter 3) sometimes
segregate the sexes at certain activities and in locations such as
schools. In Saudi Arabia, women cannot drive cars on public

streets. In orthodox Islamic nations, men cannot conduct market
research surveys with women at home unless they are family
members. Women visiting Islamic cultures need to be especially
sensitive to Islamic beliefs and customs. In Iran, for example,
the Ministry of Islamic Guidance and Culture posts a reminder
to visiting female journalists: “The body is a tool for the spirit
and the spirit is a divine song. The holy tool should not be used
for sexual intentions.” Although the issue of hejab (Islamic
dress) is hotly debated, both Iranian and non-Iranian women are
officially expected to wear body-concealing garments. They are
also expected to wear scarves over their hair because hair is
considered enticing.
Hinduism
Hinduism formed around 4,000 years ago in present-day India,
where over 90 percent of its 900 million adherents live. 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.
Hindus believe in reincarnation—the rebirth of the human soul
at the time of death. For many Hindus the highest goal of life is
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 sacred animals, they do not
eat beef; consuming 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 to respect Hindu beliefs. In many regions, McDonald’s
has removed all beef products from its menu and prepares
vegetable and fish products in separate kitchen areas. And for
those Indians who do eat red meat (but not cows because of
their sacred status), the company sells the Maharaja Mac, made
of lamb, in place of the Big Mac.

In India, there have been attacks on Western consumer-goods
companies in the name of preserving Indian culture and Hindu
beliefs. Some companies such as Pepsi-Cola (www.pepsi.com)
have been vandalized, and local officials even shut down a KFC
restaurant (www.kfc.com) for a time. Although it currently
operates in India, Coca-Cola (www.cocacola.com) once left the
market completely rather than succumb to demands that it
reveal its secret formula to authorities. India’s investment
environment has improved greatly in recent years. Yet labor–
management relations sometimes deteriorate to such a degree
that strikes cut deeply into productivity.
Buddhism instructs its followers to live a simple life void of
materialistic ambitions. Buddhism also teaches that seeking
pleasure for the human senses causes suffering. But as
globalization pries open Asia’s markets, the products of
Western multinationals are streaming in. Here a young Buddhist
monk passes in front of an advertisement for Heineken beer. Do
you think Asian cultures can modernize while retaining their
traditional values and beliefs?
Source: Emmanuel Dunand/AFP. Getty Images, Inc.–Agence
France Presse.
Buddhism
Buddhism was founded about 2,600 years ago in India by a
Hindu prince named Siddhartha Gautama. Today, Buddhism has
around 380 million followers, mostly in China, Tibet, Korea,
Japan, Vietnam, and Thailand, and there are pockets of
Buddhists in Europe and the Americas. Although founded in
India, Buddhism has relatively few adherents there. Unlike
Hinduism, Buddhism rejects the caste system of Indian society.
But like Hinduism, Buddhism promotes a life centered on
spiritual rather than worldly matters. In a formal ceremony,
Buddhists take refuge in the “three jewels”: the Buddha, the
dharma (his teachings), and the sangha (community of
enlightened beings). They seek nirvana (escape from
reincarnation) through charity, modesty, compassion for others,

restraint from violence, and 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, where most people still
acknowledge the exiled Dalai Lama as the spiritual and political
head of the Buddhist culture, the Chinese communist
government suppresses allegiance to any outside authority. In
the United States, a coalition of religious groups, human rights
advocates, and supporters of the Dalai Lama continue to press
the U.S. Congress to apply economic sanctions against
countries, such as China, that are seen as practicing religious
persecution.
Confucianism
An exiled politician and philosopher named Kung-fu-dz
(pronounced Confucius in English) began teaching his ideas in
China nearly 2,500 years ago. Today, 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, such as
Singapore.
South Korean business practice reflects Confucian thought in its
rigid organizational structure and unswerving reverence for
authority. Whereas Korean employees do not question strict
chains of command, non-Korean managers and workers often
feel differently. Efforts to apply Korean-style management in
overseas subsidiaries have caused some high-profile disputes
with U.S. executives and even physical confrontations with
factory workers in Vietnam.
Some observers contend that the Confucian work ethic and
educational commitment helped spur East Asia’s phenomenal
economic growth. But others respond that the link between
culture and economic growth is weak. They argue that
economic, historical, and international factors are at least as
important as culture. They say Chinese leaders distrusted

Confucianism for centuries because they believed that it stunted
economic growth. Likewise, many Chinese despised merchants
and traders because their main objective (earning money)
violated Confucian beliefs. As a result, many Chinese
businesspeople moved to Indonesia, Malaysia, Singapore, and
Thailand, where they launched successful businesses. Today,
these countries (along with Taiwan) are financing much of
China’s economic growth.
Judaism
More than 3,000 years old, Judaism was the first religion to
preach belief in a single God. Nowadays, Judaism has roughly
18 million followers worldwide. In Israel, Orthodox (“fully
observant”) Jews make up 12 percent of the population and
constitute an increasingly important economic segment. In
Jerusalem, there is even a modeling agency that specializes in
casting Orthodox Jews in ads aimed both inside and outside the
Orthodox community. Models include scholars and one rabbi. In
keeping with Orthodox principles, women model only modest
clothing and never appear in ads alongside men.
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. But today Shinto can claim only about four
million strict adherents in Japan. 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 lifetime 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.
Quick Study
1.What are the main beliefs of each of the seven religions
presented above?
2.In what ways does religion affect international business
activities?
3.Identify the dominant religion in each of the following
countries: (a) Brazil, (b) China, (c) India, (d) Ireland, (e)
Mexico, (f) Russia, and (g) Thailand.
Personal Communication
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. Let’s examine
each of these forms of communication more closely.
communication

System of conveying thoughts, feelings, knowledge, and
information through speech, writing, and actions.
Spoken and Written Language
Spoken and written language is the most obvious difference we
notice when traveling in another country. We overhear and
engage in a number of conversations and read many signs and
documents to find our way. Understanding a people’s language
is often essential for success in international business because it
is the key to understanding their culture.
Linguistically different segments of a population are often
culturally, socially, and politically distinct. Malaysia’s
population is comprised of Malay (60 percent), Chinese (30
percent), and Indian (10 percent). Although Malay is the official
national language, each ethnic group speaks its own language
and continues its traditions. The United Kingdom includes
England, Northern Ireland, Scotland, and Wales. The native
languages of Ireland and Scotland are dialects of Gaelic, and the
speaking of Welsh in Wales predates the use of English in
Britain. After decades of decline, Gaelic and Welsh are staging
comebacks on radio and television and in school curricula.9
Read the Global Challenges feature titled, “Speaking in Fewer
Tongues,” to learn about endangered languages around the
world.
RELEVANCE FOR MANAGERS
The importance of understanding local languages is becoming
increasingly apparent on the Internet. Roughly two-thirds of all
Web pages are in English, but around three-fourths of all
Internet users are nonnative English speakers. Software
solutions providers are assisting companies from English-
speaking countries in adapting their Web sites for global e-
business. As these software companies are telling their clients,
“The ‘e’ in e-business doesn’t stand for English.” Web surfers
from cultures across the globe bring their own specific tastes,
preferences, and buying habits online with them. The company
that can provide its customer in Mexico City, Paris, or Tokyo
with a quality buying experience in his or her native language

will have an edge on the competition.10
GLOBAL CHALLENGES: Speaking in Fewer Tongues
One day this year, somewhere in the world, an old man or
woman will die and with them will go their language. Dozens of
languages have just one native speaker still living, and some
blame globalization. Here are the facts, the consequences, and
the challenge.
■Some Are Losing. Of the world’s roughly 6,000 languages,
about 90 percent have fewer than 100,000 speakers. By the end
of this century over half of the world’s languages may be lost;
perhaps fewer than 1,000 will survive. One endangered
language is Aramaic, a 2,500-year-old Semitic language that
was once the major language in the Middle East.
■Some Are Gaining. Even as minority languages die out, three
languages continue to grow in popularity: Mandarin, Spanish,
and English. English has emerged as the universal language of
business, higher education, diplomacy, science, popular music,
entertainment, and international travel. Over 70 nations give
special status to English and roughly one-quarter of the world’s
population is fluent or competent in it.
■The Consequences. The loss of a language can mean the loss
of a people’s culture because it is the vehicle for cultural,
spiritual, and intellectual life. What is lost includes prayers,
myths, humor, poetry, ceremonies, conversational styles, and
terms for emotions, behaviors, and habits. When a language
dies, all these must be expressed in a new language with
different words, sounds, and grammar. The result is that much
of a culture can simply vanish.
■The Challenge. Linguists are concerned that such a valuable
part of human culture could vanish. The impending loss of more
languages has linguists creating videotapes, audiotapes, and
written records of endangered tongues before they disappear.
Communities themselves are also taking action. In New
Zealand, Maori communities set up nursery schools called
kohanga reo, or “language nests,” that are staffed by elders and
conducted entirely in Maori.

■Want to Know More? Visit the Linguistic Society of America
(www.lsadc.org), European Union’s Eurolang
(www.eurolang.net), and Foundation for Endangered Languages
(www.ogmios.org).
Language proficiency is crucial in production facilities where
nonnative managers are supervising local employees. One U.S.
manager in Mexico was confused when his seemingly relaxed
and untroubled workers went on strike. The problem lay in
different cultural perspectives. Mexican workers generally do
not take the initiative in problem solving and workplace
complaints. Workers concluded the plant manager knew, but did
not care, about their concerns because he did not question
employees about working conditions.
American-born Thomas Kwan, who now works for a health
products company in Shanghai, China, says similar scenarios
occur there. “Whereas Americans are encouraged to challenge
their boss to explain things, I have to ask Chinese staff what
they think and encourage them to speak up. A lot of [expatriate]
managers fail in China because they don’t understand that
Chinese don’t tell you what they think,” he says.11
Marketers also value insights into the interests, values,
attitudes, and habits of teenagers. Habbo (www.habbo.com), the
world’s largest virtual hangout for teens, surveyed more than
50,000 teenagers in 31 countries to learn how they communicate
with each other. The study found that although 72 percent of
teens have active e-mail accounts, 76 percent communicate with
friends primarily through instant messaging. Teens reserve e-
mail for nonpersonal needs such as school, work, and
corresponding with family members. Knowledge of these habits
help marketers to better target promotions.12
LANGUAGE BLUNDERS
Advertising slogans and company documents must be translated
carefully so messages are received precisely as intended. There
are many stories of companies making terrible language
blunders in their international business dealings. General
Motors’ Chevrolet division (www.chevrolet.com) made perhaps

the most well-known blunder when it first launched its
Chevrolet Nova in Spanish-speaking markets. The company
failed to notice beforehand that “No va” means “No go” in
Spanish. Chevrolet had far greater success when it renamed the
car Caribe (piranha)—the voraciously carnivorous freshwater
fish native to South America that attacks and destroys living
animals! In Sweden, Kellogg (www.kellogg.com) had to rename
its Bran Buds cereal because the Swedish translation came out
roughly as “burned farmer.” San Francisco-based start-up Evite
(www.evite.com) allows visitors to its Web site to send e-mail
invitations to special events. But the company’s name presents a
problem internationally. In the Romance languages, such as
French and Spanish, variations of the verb evite (eviter and
evitar) mean “to shun or to avoid.” Apparently “Avoid My
Party” couldn’t get European partygoers excited. CEO Josh
Silverman concedes, “It’s a terrific brand in English, but we’re
going to have to rebrand for the Romance languages.”13 Several
other humorous translation blunders include the following:
■An English-language sign in a Moscow hotel read, “You are
welcome to visit the cemetery where famous Russian
composers, artists, and writers are buried daily except
Thursday.”
■A sign for English-speaking guests in a Tokyo hotel read,
“You are respectfully requested to take advantage of the
chambermaids.”
■An airline ticket office in Copenhagen read in English, “We
take your bags and send them in all directions.”
■A Japanese knife manufacturer labeled its exports to the
United States with “Caution: Blade extremely sharp! Keep out
of children.”
■Braniff Airlines’ English-language slogan “Fly in Leather”
was translated into “Fly Naked” in Spanish.
Such blunders are not the exclusive domain of humans. The use
of machine translation—computer software used to translate one
language into another—is booming along with the explosion in
the number of nonnative English speakers using the Internet.

Nowhere is this technology hotter than in Asia, although its
results are often less than perfect. One Singapore-based search
engine allows its users to search the Internet in English and
Asian languages, translate Web pages, and compose an e-mail in
one language and send it in another. The computers attempted a
translation of the following: “The Chinese Communist Party is
debating whether to drop its ban on private-enterprise owners
being allowed to join the party.” And it came up with this in
Chinese: “The Chinese Communist Party is debating whether to
deny its ban in join the Party is allowed soldier enterprise
owners on.”14 Various other machine translators turned the
French version of “I don’t care” (“Jem’ en fou”) into “I myself
in crazy,” “I of insane,” and “Me me in madman.”15
LINGUA FRANCA
A lingua franca is a third or “link” language understood by two
parties who speak different native languages. The original
lingua franca arose to support ancient trading activities and
contained a mixture of Italian and French, along with Arabic,
Greek, and Turkish. Although only 5 percent of the world’s
population speaks English as a first language, it is the most
common lingua franca in international business, followed
closely by French and Spanish.
lingua franca
Third or “link” language understood by two parties who speak
different native languages.
The Cantonese dialect of Chinese spoken in Hong Kong and the
Mandarin dialect spoken in Taiwan and on the Chinese
mainland are so different that a lingua franca is often preferred.
And although India’s official language is Hindi, its lingua
franca among the multitude of dialects is English because it was
once a British colony. Yet many young people speak what is
referred to as “Hinglish”—a combination of Hindi, Tamil, and
English words mixed within a single sentence. Finally, even for
the single lingua franca of English, differences exist. British-
accented English is losing out to North American–accented
English in certain locales, particularly in China and South

Korea, due to their ever-expanding commercial ties with North
America.16 Multinational corporations sometimes choose a
lingua franca for official internal communications because they
operate in many nations, each with its own language.
Companies that use English for internal correspondence include
Philips (www.philips.com) (a Dutch electronics firm), Asea
Brown Boveri (www.abb.com) (a Swiss industrial giant), and
Alcatel-Lucent (www.alcatel-lucent.com) (a French
telecommunications firm).
Body Language
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.
Italians, French, Arabs, and Venezuelans, for example, animate
conversations with lively hand gestures and other body motions.
Japanese and Koreans, although more reserved, communicate
just as much information through their own body languages; a
look of the eye can carry as much or more meaning as two
flailing arms.
body language
Language communicated through unspoken cues, including hand
gestures, facial expressions, physical greetings, eye contact, and
the manipulation of personal space.
Most body language is subtle and takes time to recognize and
interpret. For example, navigating the all-important handshake
in international business can be tricky. In the United States it is
a firm grip and can include several pumps of the arm. But in the
Middle East and Latin America a softer clasp of the hand with
little or no arm pump is the custom. And in some countries,
such as Japan, people do not shake hands at all, but bow to one
another. Bows of respect carry different meanings, usually
depending on the recipient. Associates of equal standing bow
about 15 degrees toward one another. But proper respect for an
elder requires a bow of about 30 degrees. Bows of remorse or

apology should be about 45 degrees.
Proximity is an extremely important element of body language
to consider when meeting someone from another culture. If you
stand or sit too close to your counterpart (from their
perspective), you may invade their personal space and appear
aggressive. If you remain too far away, you risk appearing
untrustworthy. For North Americans, a distance of about 19
inches is about right between two speakers. For Western
Europeans, 14 to 16 inches seems appropriate, but someone
from the United Kingdom might prefer about 24 inches. Koreans
and Chinese are likely to be comfortable about 36 inches apart;
people from the Middle East will close the distance to about 8
to 12 inches.
Physical gestures often cause the most misunderstanding
between people of different cultures because they can convey
very different meanings. The thumbs-up sign is vulgar in Italy
and Greece but means “all right” or even “great” in the United
States. Figure 2.1 demonstrates how the meanings of gestures
vary across cultures.
FIGURE 2.1 Regional Differences in the Meaning of Gestures
Quick Study
1.Define communication. Why is knowledge of a culture’s
spoken language important for international business?
2.Describe the threat faced by endangered languages. What is
being done to help them survive?
3.What is a lingua franca? Describe its implications for
conducting international business.
4.Why is body language important for international business?
Give several examples of how it differs across cultures.
Education
Education is crucial for passing on traditions, customs, and
values. Each culture educates its young people through
schooling, parenting, religious teachings, and group
memberships. Families and other groups provide informal
instruction about customs and how to socialize with others. In

most cultures, intellectual skills such as reading and
mathematics are taught in formal educational settings. Two
important topics in education are education level and brain
drain.
Education Level
Data that a government provides on its people’s education level
must be taken with a grain of salt. Comparisons from country to
country can be difficult because many nations rely on literacy
tests of their own design. Although some countries administer
standardized tests, others require only a signature as proof of
literacy. Yet searching for untapped markets or new factory
locations can force managers to rely on such undependable
benchmarks. As you can see from Table 2.1, some countries
have further to go than others in increasing national literacy
rates. Around 800 million adults remain illiterate globally. And
although global illiteracy rates are higher for women, the gap
with men is closing.17
Countries with poorly educated populations attract the lowest-
paying manufacturing jobs. Nations with excellent programs for
basic education tend to attract relatively good-paying industries.
Those that invest in worker training are usually repaid in
productivity increases and rising incomes. Meanwhile, countries
with skilled, highly educated workforces attract all sorts of
high-paying jobs, often called “brainpower” industries.
TABLE 2.1 Illiteracy Rates of Selected Countries
Country
Adult Illiteracy Rate (Percentage of People Age 15 and Up)
Burkina Faso
76
Niger
71
Pakistan
50
Morocco
48
Nigeria

31
Egypt
29
Cambodia
26
Saudi Arabia
17
Peru
12
Brazil
11
Zimbabwe
10
Jordan
9
Mexico
8
Philippines
7
Colombia
7
Portugal
6
Emerging economies in Asia owe much of their rapid economic
development to solid education systems. Hong Kong, South
Korea, Singapore, and Taiwan focus on rigorous mathematical
training in primary and secondary schooling. University
education concentrates on the hard sciences and aims to train
engineers, scientists, and managers. On the other hand, some
experts say China’s rote-learning education system graduates
many bright engineers but few managers. This could pose
problems for China as quality managers are what the country
needs to take its economy to a higher level.18
The “Brain Drain” Phenomenon
The quality of a nation’s education system is related to its level
of economic development. Brain drain is the departure of highly

educated people from one profession, geographic region, or
nation to another. Over the years, political unrest and economic
hardship forced many Indonesians to flee their homeland for
other nations, particularly Hong Kong, Singapore, and the
United States. Most of Indonesia’s brain drain occurred among
Western-educated professionals in finance and technology—
exactly the people needed for economic development.
brain drain
Departure of highly educated people from one profession,
geographic region, or nation to another.
Many countries in Eastern Europe experienced high levels of
brain drain early in their transition to market economies.
Economists, engineers, scientists, and researchers in all fields
fled westward to escape poverty. But as these nations continue
their long march away from communism, some are luring
professionals back to their homelands—a process known as
reverse brain drain.
Physical and Material Environments
The physical environment and material surroundings of a
culture heavily influence its development and pace of change.
In this section, we first look at how physical environment and
culture are related and then explore the effect of material
culture on business.
Physical Environment
Although the physical environment affects a people’s culture, it
does not directly determine it. Two aspects of the physical
environment that heavily influence a people’s culture are
topography and climate.
TOPOGRAPHY
All the physical features that characterize the surface of a
geographic region constitute its topography. Some 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 can discourage contact.
Cultures isolated by topographical features can find themselves
less exposed to the cultural traits of other peoples, which can

mean slower cultural change.
topography
All the physical features that characterize the surface of a
geographic region.
Topography can impact consumers’ product needs. For example,
there is little market for Honda scooters (www.honda.com) in
most mountainous regions because their engines are too small.
These are better markets for the company’s more rugged,
maneuverable motorcycles with larger engines. Thinner air at
higher elevations might also entail modifications in carburetor
design for gasoline-powered vehicles.
Topography can have a profound impact on personal
communication in a culture. For example, mountain ranges and
the formidable Gobi Desert consume two-thirds of China’s land
surface. Groups living in the valleys of these mountain ranges
hold on to their own ways of life and speak their own
languages. Although the Mandarin dialect was decreed the
national language many years ago, the mountains, desert, and
vast expanse of China still impair personal communication and,
therefore, the proliferation of Mandarin.
CLIMATE
Climate affects where people settle and helps direct systems of
distribution. In Australia, for example, intensely hot and dry
conditions in two large deserts and jungle conditions in the
northeast pushed settlement to coastal areas. These climatic
conditions combined with the higher cost of land transport
means coastal waters are still used to distribute products
between distant cities.
Climate plays a large role in lifestyle and 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. People use this time to
perform errands, such as shopping, or even take short naps
before returning to work until about 7 or 8 p.m. Companies
doing business in these regions must adapt to this local

tradition.
Climate also impacts customs such as the type of clothing
people wear. People in many tropical areas wear little clothing
and wear it loosely because of the warm, humid climate. In the
desert areas of the Middle East and North Africa, people also
wear loose clothing, but they wear long robes to protect
themselves from intense sunshine and blowing sand.
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. Generally, a firm enters a new
market under one of two conditions: demand for its products has
developed or the infrastructure is capable of supporting
production operations.
material culture
All the technology used in a culture to manufacture goods and
provide services.
Many regions and nations lack the most basic elements of a
modern society’s material culture. For example, companies are
not flocking to the Southeast Asian nation of Myanmar because
the nation lacks both sufficient product demand and an adequate
infrastructure. Political and social problems under a repressive
military government have stalled Myanmar’s economic
development. Yet technology is helping some nations at the
bottom of the global economic pyramid break down barriers that
keep their people mired in poverty.
UNEVEN MATERIAL CULTURE
Material culture often displays uneven development across a
nation’s geography, markets, and industries. For example, much
of China’s recent economic progress is occurring in coastal
cities. Shanghai has long played an important role in China’s
international trade because of its strategic location and its
superb harbor on the East China Sea. Although it is home to
only 1 percent of the total population, Shanghai accounts for
about 5 percent of China’s total output—including about 12

percent of both its industrial production and its financial-
services output.
Likewise, Bangkok, the capital city of Thailand, houses only 10
percent of the nation’s population but accounts for about 40
percent of its economic output. Meanwhile, the northern parts of
the country remain rural, consisting mostly of farms, forests,
and mountains.
Quick Study
1.Why is the education level of a country’s people important to
international companies?
2.What is meant by the terms brain drain and reverse brain
drain?
3.How are a people’s culture and physical environment related?
4.What is the significance of material culture for international
business?
Classifying Cultures
Throughout this chapter, you’ve seen how cultures can differ
greatly from one another. People living in broadly different
cultures tend to respond differently in similar business
situations. There are two widely accepted ways to classify
cultures based on differences in characteristics such as values,
attitudes, social structure, and so on. Let’s now take a detailed
look at each of these tools: the Kluckhohn–Strodtbeck and
Hofstede frameworks.
Kluckhohn–Strodtbeck Framework
The Kluckhohn–Strodtbeck framework compares cultures along
six dimensions. It studies a given culture by asking each of the
following questions:19
■Do people believe that their environment controls them, that
they control the environment, or that they are part of nature?
■Do people focus on past events, on the present, or on the
future implications of their actions?
■Are people easily controlled and not to be trusted, or can they
be trusted to act freely and responsibly?
■Do people desire accomplishments in life, carefree lives, or
spiritual and contemplative lives?

■Do people believe that individuals or groups are responsible
for each person’s welfare?
■Do people prefer to conduct most activities in private or in
public?
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.
Case: Dimensions of Japanese Culture
By providing answers to each of these six questions, we can
briefly apply the Kluckhohn–Strodtbeck framework to Japanese
culture:
1.Japanese believe in a delicate balance between people and
environment that must be maintained. Suppose an undetected
flaw in a company’s product harms customers using it. In many
countries, a high-stakes class-action lawsuit would be filed
against the manufacturer on behalf of the victims’ families. This
scenario is rarely played out in Japan. Japanese culture does not
feel that individuals can possibly control every situation but
that accidents happen. Japanese victims would receive heartfelt
apologies, a promise it won’t happen again, and a relatively
small damage award.
2.Japanese culture emphasizes the future. Because Japanese
culture emphasizes strong ties between people and groups,
including companies, forming long-term relationships with
people is essential when doing business there. Throughout the
business relationship, Japanese companies remain in close,
continuous contact with buyers to ensure that their needs are
being met. This relationship also forms the basis of a
communication channel by which suppliers learn about the types
of products and services buyers would like to see in the future.
3.Japanese culture treats people as quite trustworthy. Business
dealings among Japanese companies are based heavily on trust.
After entered into, an agreement to conduct business is difficult
to break unless there are extreme uncontrollable factors at work.
This is due to the fear of “losing face” if one cannot keep a

business commitment. In addition to business applications,
society at large reflects the Japanese concern for
trustworthiness. Crime rates are quite low, and the streets of
Japan’s largest cities are very safe to walk at night.
4.Japanese are accomplishment-oriented—not necessarily for
themselves, but for their employers and work units. Japanese
children learn the importance of groups early by contributing to
the upkeep of their schools. They share duties such as mopping
floors, washing windows, cleaning chalkboards, and arranging
desks and chairs. They carry such habits learned in school into
the adult workplace, where management and labor tend to work
together toward company goals. Japanese managers make
decisions only after considering input from subordinates. Also,
materials buyers, engineers, designers, factory floor
supervisors, and marketers cooperate closely throughout each
stage of a product’s development.
5.Japanese culture emphasizes individual responsibility to the
group and group responsibility to the individual. This trait has
long been a hallmark of Japanese corporations. Traditionally,
subordinates promise hard work and loyalty, and top managers
provide job security. But to remain competitive internationally,
Japanese companies have eliminated jobs and moved production
to low-wage nations like China and Vietnam. As the tradition of
job security falls by the wayside, more Japanese workers now
consider working for non-Japanese companies, whereas others
find work as temporary employees. Although this trait of
loyalty is diminishing somewhat in business, it remains a very
prominent feature in other aspects of Japanese society,
especially family.
6.The culture of Japan tends to be public. You will often find
top Japanese managers located in the center of a large, open-
space office surrounded by the desks of many employees. By
comparison, Western executives are often secluded in walled
offices located on the perimeter of workspaces. This
characteristic reaches deep into Japanese society—consider, for
example, Japan’s continued fondness for public baths.

Hofstede Framework
The Hofstede framework compares cultures along five
dimensions.20 Dutch psychologist, Geert Hofstede, developed
the framework from a study of more than 110,000 people
working in IBM subsidiaries (www.ibm.com) in 40 countries
and a follow-up study of students in 23 countries. Let’s examine
each of these dimensions in detail.21
Hofstede framework
Framework for studying cultural differences along five
dimensions, such as individualism versus collectivism and
equality versus inequality.
1.Individualism versus collectivism. This dimension identifies
the extent to which a culture emphasizes the individual versus
the group. Individualist cultures (those scoring high on this
dimension) value hard work and promote entrepreneurial risk-
taking, thereby fostering invention and innovation. Although
people are given freedom to focus on personal goals, they are
held responsible for their actions. That is why responsibility for
poor business decisions is placed squarely on the shoulders of
the individual in charge. At the same time, higher individualism
may be responsible for higher rates of employee turnover.
On the contrary, people in collectivist cultures (those scoring
low on this dimension) feel a strong association to groups,
including family and work units. The goal of maintaining group
harmony is probably most evident in the family structure.
People in collectivist cultures tend to work toward collective
rather than personal goals and are responsible to the group for
their actions. In turn, the group shares responsibility for the
well-being of each of its members. Thus, in collectivist cultures
success or failure tends to be shared among the work unit,
rather than any particular individual receiving all the praise or
blame. All social, political, economic, and legal institutions
reflect the group’s critical role.
2.Power distance. This dimension conveys the degree to which a
culture accepts social inequality among its people. A culture
with large power distance tends to be characterized by much

inequality between superiors and subordinates. Organizations
tend also to be more hierarchical, with power deriving from
prestige, force, and inheritance. This is why executives and
upper management in cultures with large power distance often
enjoy special recognition and privileges. On the other hand,
cultures with small power distance display a greater degree of
equality, with prestige and rewards more equally shared
between superiors and subordinates. Power in these cultures
(relative to cultures with large power distance) is seen to derive
more from hard work and entrepreneurial drive and is therefore
often considered more legitimate.
Figure 2.2 shows how various countries rank according to these
first two dimensions: power distance and individualism versus
collectivism. What is striking about this figure is the tight
grouping of nations within the five clusters (plus Costa Rica).
You can see the concentration of mostly African, Asian, Central
and South American, and Middle Eastern nations in Quadrant 1
(cultures with relatively larger power distance and lower
individualism). By contrast, Quadrants 3 and 2 comprise mostly
the cultures of Australia and the nations of North America and
Western Europe. These nations had the highest individualism
scores, and many had relatively smaller power distance scores.
3.Uncertainty avoidance. This dimension identifies the extent to
which a culture avoids uncertainty and ambiguity. A culture
with large uncertainty avoidance values security and places its
faith in strong systems of rules and procedures in society. It is
perhaps not surprising then that cultures with large uncertainty
avoidance normally have lower employee turnover, more formal
rules for regulating employee behavior, and more difficulty
implementing change. Cultures scoring low on uncertainty
avoidance tend to be more open to change and new ideas. This
helps explain why individuals in this type of culture tend to be
entrepreneurial and organizations tend to welcome the best
business practices from other cultures. Because people tend to
be less fearful of change, however, these cultures can also
suffer from higher levels of employee turnover.

FIGURE 2.2 Power Distance and Individualism versus
Collectivism
Figure 2.3 plots countries according to the second and third
dimensions: power distance and uncertainty avoidance.
Although the lines of demarcation are somewhat less obvious in
this figure, patterns do emerge among the six clusters (plus
Jamaica). Quadrant 4 contains nations characterized by small
uncertainty avoidance and small power distance, including
Australia, Canada, Jamaica, the United States, and many
Western European nations. Meanwhile, Quadrant 2 contains
many Asian, Central American, South American, and Middle
Eastern nations—nations having large power distance and large
uncertainty avoidance indexes.
4.Achievement versus nurturing. This dimension captures the
extent to which a culture emphasizes personal achievement and
materialism versus relationships and quality of life. Cultures
scoring high on this index tend to be characterized more by
personal assertiveness and the accumulation of wealth, typically
translating into an entrepreneurial drive. Cultures scoring low
on this dimension generally have more relaxed lifestyles,
wherein people are more concerned about caring for others as
opposed to material gain.
5.Long-term orientation. This dimension indicates a society’s
time perspective and an attitude of overcoming obstacles with
time, if not with will and strength. It attempts to capture the
differences between Eastern and Western cultures. A high-
scoring culture (strong long-term orientation) values respect for
tradition, thrift, perseverance, and a sense of personal shame.
These cultures tend to have a strong work ethic because people
expect long-term rewards from today’s hard work. A low-
scoring culture is characterized by individual stability and
reputation, fulfilling social obligations, and reciprocation of
greetings and gifts. These cultures can change more rapidly
because tradition and commitment are not impediments to
change.

Locate your country in Figures 2.2 and 2.3. In your personal
experience, do you agree with the placement of your nation in
these figures? Do you believe managers in your country display
the types of behaviors depicted on each dimension just
described?
FIGURE 2.3 Power Distance and Uncertainty Avoidance
Quick Study
1.What six dimensions comprise the Kluckhohn–Strodtbeck
framework for classifying cultures?
2.What are the five dimensions of the Hofstede framework for
classifying cultures?
3.Briefly explain how each framework can be used to analyze a
culture.
Bottom Line FOR BUSINESS
As globalization continues to draw companies into the
international arena, understanding local culture can give a
company an advantage over rivals. By avoiding ethnocentric
thinking, managers can avoid mistakenly disregarding the
beneficial aspects of other cultures. By contrast, culturally
literate managers who understand local needs and desires bring
their companies closer to customers and, therefore, increase
their competitiveness. They can become more effective
marketers, negotiators, and production managers. Let’s explore
several areas in which culture has a direct impact on
international business activity.
Marketing and Cultural Literacy
Many international companies operating in local markets abroad
take advantage of the public relations value of supporting
national culture. Some of India’s most precious historical
monuments and sites are crumbling due to a lack of government
funds for upkeep. Companies are helping the government to
maintain key sites and are earning the goodwill of the people.
This chapter introduced the Kluckhohn–Strodtbeck and
Hofstede frameworks for classifying cultures. Local culture is
important for a company exploring international markets for its

products. We see the significance of power distance in the
export of luxury items. A nation with large power distance
accepts greater inequality among its people and tends to have a
wealthy upper class that can afford luxury goods. Thus
companies marketing products such as expensive jewelry, high-
priced cars, and even yachts could find wealthy market
segments within relatively poor nations.
Work Attitudes and Cultural Literacy
National differences in work attitudes are complex and involve
other factors in addition to culture. Perceived opportunity for
financial reward is no doubt a strong element in attitudes
toward work in any culture. Research suggests both U.S. and
German employees work longer hours when there is a greater
likelihood that good performance will lead to promotion and
increased pay. Yet this appears relatively less true in Germany,
where wages are less variable and job security and jobless
benefits (such as free national health care) are greater. Thus
other aspects of German society are at least as important as
culture in determining work attitudes. The culturally literate
manager understands the complexity of national workplace
attitudes and would incorporate this knowledge into reward
systems.
Expatriates and Cultural Literacy
As stated in our discussion of classifying cultures, people living
in broadly different cultures tend to respond differently in
similar business situations. This is why companies that send
personnel abroad to unfamiliar cultures are concerned with
cultural differences. A Norwegian manager working in Japan for
a European car manufacturer, but whose colleagues were mostly
Japanese, soon became frustrated with the time needed to make
decisions and take action. The main cause for his frustration
was that the uncertainty avoidance index for Japan is much
larger than that in his native Norway (see Figure 2.3). In Japan,
a greater aversion to uncertainty led to the need for a greater
number of consultations than would be needed in the home
market. The frustrated manager eventually left Japan to return

to Europe.
Gender and Cultural Literacy
In Japan, men traditionally hold nearly all positions of
responsibility. Women generally serve as office clerks and
administrative assistants until their mid to late twenties, when
they are expected to marry and then focus on tending to family
needs. Although this is still largely true today, progress is being
made in expanding the role of women in Japan’s business
community. Women own nearly a quarter of all businesses in
Japan, but many of these businesses are very small and have
little economic clout. Greater gender equality prevails in
Australia, Canada, Germany, and the United States, but women
in these countries still tend to earn less money than men in
similar positions.
Chapter Summary
1.Describe culture and explain the significance of both national
culture and subcultures.
■Culture is the set of values, beliefs, rules, and institutions held
by a specific group of people.
■Managers should try to avoid ethnocentricity (the tendency to
view one’s own culture as superior to others) and develop
cultural literacy (detailed knowledge necessary to function
effectively in another culture).
■We are conditioned to think in terms of national culture—that
is, to equate a nation-state and its people with a single culture.
■Governments promote national culture and intervene in
business to protect it from the influence of other cultures.
■Most nations are also home to numerous subcultures—groups
of people who share a unique way of life within a larger,
dominant culture.
■Subcultures contribute greatly to national culture and must be
considered in marketing and production decisions.
2.Identify the components of culture and describe their impact
on international business.
■Aesthetics help determine which colors and symbols will be
effective in promotions and advertising.

■Values influence a people’s attitudes toward time, work and
achievement, and cultural change.
■Knowledge of manners and customs is necessary for
negotiating, marketing products, and managing operations in
other cultures.
■Social structure affects business decisions including
production-site selection, advertising methods, and the costs of
doing business in a country.
■Different religions take different views of work, savings, and
material goods. Understanding a people’s system of personal
communication provides insight into their values and behavior.
■A culture’s education level affects the quality of the workforce
and a people’s standard of living.
■Physical and material environments influence work habits and
preferences for products such as clothing and food.
3.Describe cultural change and explain how companies and
culture affect each other.
■Cultural change occurs when people integrate into their culture
the gestures, material objects, traditions, or concepts of another
culture through cultural diffusion.
■Globalization and technology are increasing the pace of
cultural change around the world.
■Companies influence culture when they import new products,
policies, and business practices into a host country.
■Companies should try to avoid cultural imperialism—the
replacement of one culture’s traditions, folk heroes, and
artifacts with substitutes from another.
■Cultures affect management styles, work scheduling, and
reward systems.
■Adapting to local cultures around the world means heeding the
maxim “Think globally, act locally.”
4.Explain how the physical environment and technology
influence culture.
■A people’s physical environment includes topography and
climate and how people relate to their surroundings.
■Cultures isolated by topographical barriers, such as mountains

or seas, normally change relatively slowly, and their languages
are often distinct. Climate affects a people’s work hours,
clothing, and food.
■Material culture refers to all the technology a culture uses to
manufacture goods and provide services, and it can be uneven
within a nation.
■Businesspeople measure material culture to determine whether
a market has developed adequate demand for a company’s
products and whether it can support production activities.
5.Describe the two main frameworks used to classify cultures
and explain their practical use.
■The Kluckhohn–Strodtbeck framework compares cultures
along six dimensions by seeking answers to questions on topics
including a people’s: (1) relation to the environment; (2) focus
on past, present, or future; (3) trustworthiness; (4) desire for
accomplishment; (5) group-individual responsibility; and (6)
public vs. private nature.
■The Hofstede framework compares cultures along five
dimensions including a people’s: (1) individualism versus
collectivism; (2) power distance; (3) uncertainty avoidance; (4)
achievement vs. nurturing; and (5) long-term orientation.
■Taken together, these frameworks help companies understand
many aspects of a culture including risk-taking, innovation, job
mobility, team cooperation, pay levels, and hiring practices.
Talk It Over
1.Two students are discussing the various reasons why they are
not studying international business. “International business
doesn’t affect me,” declares the first student. “I’m going to stay
here, not work in some foreign country.” “Yeah, me neither,”
agrees the second. “Besides, some cultures are real strange. The
sooner other countries start doing business our way, the better.”
What counterarguments can you present to these students’
perceptions?
2.In this exercise, two groups of four students each will debate
the benefits and drawbacks of individualist versus collectivist
cultures. After the first student from each side has spoken, the

second student questions the opponent’s arguments, looking for
holes and inconsistencies. A third student attempts to reply to
these counterarguments. Then a fourth student summarizes each
side’s arguments. Finally, the class votes on which team
presented the more compelling case.
Teaming Up
1.Research Project. Select a company in your city or town that
does business internationally and make an appointment to
interview the owner or a senior manager. Your team’s goal is to
learn how cultural differences affect the decisions of this
business as it pursues international opportunities. How does the
company balance the need for global efficiency and local
responsiveness in a cultural sense? Has local culture ever
required the company to alter its personnel or corporate
practices? Be sure to ask your interviewee for specific
examples. Present a brief talk or paper on your group’s
interview findings.
2.Market Entry Strategy Project. This exercise corresponds to
the MESP online simulation. For the nation you are studying,
list several of its people’s manners and customs. What values do
people hold dear? Describe their attitude toward time, work, and
cultural change. What religions are practiced there? What
language(s) are spoken? What ethnicities reside in the nation,
and do they form distinct subcultures? Describe the nation’s
social structure and its education system. Turn to Figures 2.2
and 2.3 and either: (a) explain why you think the nation appears
where it does, or (b) identify where you think it belongs on the
figure and explain why. Integrate your findings into your
completed MESP report.
Key Terms
aesthetics (p. 7)
yattitudes (p. 9)
body language (p. 24)
brain drain (p. 26)
caste system (p. 15)
class system (p. 15)

communication (p. 21)
cultural diffusion (p. 10)
cultural imperialism (p. 10)
cultural literacy (p. 5)
cultural trait (p. 1)
culture (p. 4)
customs (p. 1)
ethnocentricity (p. 4)
folk custom (p. 1)
Hofstede framework (p. 2)
Kluckhohn–Strodtbeck framework (p. 2)
lingua franca (p. 2)
manners (p. 1)
material culture (p. 2)
popular custom (p. 12)
social group (p. 1)
social mobility (p. 1)
social stratification (p. 1)
social structure (p. 1)
subculture (p. 6)
topography (p. 2)
values (p. 8)
Take It to the Web
1.Video Report. Visit this book’s channel on YouTube
(YouTube.com/MyIBvideos). Click on “Playlists” near the top
of the page and click on the set of videos labeled “Ch 02: Cross-
Cultural Business.” Watch one video from the list and
summarize it in a half-page report. Reflecting on the contents of
this chapter, which components of culture can you identify in
the video? How might a company engaged in international
business act on the information contained in the video?
2.Web Site Report. Culture affects the product a company sells
in a market or region, how it markets the product, its human
resource practices, and so on. It is increasingly important that
managers have cultural understanding of their markets in this
age of globalization.

Select a well-known multinational company and visit its Web
site. Locate the section of the Web site that tells about the
company’s activities (usually titled “About Us”). Report on the:
(1) main products or services the company offers; (2) extent to
which the company pursues international business operations
(often expressed as percentage of sales or assets); (3) ways that
the company has adapted to cultures around the world; and (4)
general policies it follows in doing business internationally.
Regarding its Internet presence, does the company offer its Web
site in another widely spoken language? Find and click on
several of the company’s other national Web sites. What kinds
of products are advertised on the home page of the different
sites? Can you identify how the company adapts its Web site to
suit cultural preferences?
Ethical Challenges
1.You are the vice president of operations for a U.S.-based
software firm. Your firm’s board of directors wants you to
explore building a software design operation in India.
Typically, when international firms enter the Indian market they
quickly learn about the various ways in which a rigid caste
system can affect business activities. Do you think it will be
possible to uphold a U.S. management style in India? Or should
your company be prepared to adjust to the local Indian
managerial style and human resource practices?
2.You are the vice president of international operations for a
large pharmaceutical firm that manufactures an antimalarial
drug. Your firm is considering opening up a factory in a small
Central American nation where malaria is still extremely
common. The operation will be a cooperative venture between
your firm and the local government. The majority of the people
in that country cannot afford the medicine because of the high
import tariffs. Yet if your plan goes through, over 200 jobs will
be created and the drug’s international price will drop by over
50 percent. In a final meeting with a senior government official,
the gentleman informs you that if you pay him $500,000 cash,
the deal will go through. What issues must you consider? What

do you do?
3.You are the public relations director for a company that
recently announced its decision to close its factory in the United
States and outsource the work to manufacturers in Asia and
Latin America. Your firm is doing just what many other
companies have already done, reducing labor costs by shifting
work to low-wage countries such as China, India, Mexico, and
Central American nations. Yet the media and disgruntled
workers are lambasting your firm’s decision. Is there a
reasonable response to charges that the companies you will hire
frequently exploit child labor, force women to work 75-hour
weeks, and destroy family units?
PRACTICING INTERNATIONAL MANAGEMENT CASE:A
Tale of Two Cultures
Many cultures in Asia are in the midst of an identity crisis. In
effect, they are being torn between two worlds. Pulling in one
direction is a traditional value system derived from agriculture-
based communities and extended families—that is, elements of
a culture in which relatives take care of one another and state-
run welfare systems are unnecessary. Pulling from the opposite
direction is a new set of values emerging from manufacturing-
and finance-based economies—elements of a culture in which
workers must often move to faraway cities to find work,
sometimes leaving family members to fend for themselves.
For decades, Western multinationals set up factories across
Southeast Asia to take advantage of relatively low-cost labor.
Later, local companies sprang up and became competitive
global players in their own right. Spectacular rates of economic
growth in a few short decades elevated living standards beyond
what was thought possible. Young people in Malaysia and
Thailand felt the lure of “Western” brands. Gucci handbags
(www.gucci.com), Harley-Davidson motorcycles (www.h-
d.com), and other global brands became common symbols of
success. Many parents felt brand-consciousness among their
teenage children signaled family-wide success.
Despite the growing consumer society, polls of young people

show them holding steadfast to traditional values such as
respect for family and group harmony. Youth in Hong Kong, for
example, overwhelmingly believe that parents should have a say
in how hard they study, in how they treat family members and
elders, and in their choice of friends.
Now globalization is washing over India. An explosion in
outsourcing jobs is causing a social revolution among India’s
graduates of technical colleges and universities. Unlike India’s
traditional high-tech service jobs, young call-center staffers are
in direct contact with Western consumers, answering inquiries
on items such as tummy crunchers and diet pills. For these
young, mostly female staffers, the work means money,
independence, and freedom—sometimes far away from home in
big cities such as Bangalore and Mumbai. But in addition to the
training in American accents and geography, they are learning
new ideas about family, materialism, and relationships.
Parents are suspicious of call-center work because it must
typically be performed nights in India, when consumers are
awake in Canada, Europe, or the United States. When her
parents objected, Binitha Venugopal quit her call-center job in
favor of a “regular” daytime job. Binitha says her former
coworkers are materialistic, their values are changing, and that
dating and live-in relationships among them are common. Indian
tradition dictates that young adults live with their parents at
least until they get married (typically to someone their parents
choose).
Roopa Murthy works for an Indian company that offers call-
center and back-office services. Roopa moved to Bangalore
from her native Mysore in 2002 armed with an accounting
degree. She now earns $400 per month, which is several times
what her father earned before he retired from his government
job. Roopa now wears her hair short, and it is styled like that of
her idol, Dana Scully from the TV show “X-Files,” whose name
she also adopted as her “telephone name.” She has tossed aside
her salwar kameez, the traditional loose-fitting clothing she
wore back home, in favor of designer-labeled Western attire.

Although she once shunned drinking and her curfew at home
was 9 p.m., Roopa now frequents a pub called Geoffrey’s,
where she enjoys dry martinis and rum, and The Club, a
suburban disco. After sending money home to her parents, she
has enough left over to spend on imported cosmetics, jeans, a
cell phone, and dinner at an American chain restaurant. Roopa
confesses that she is “seeing someone” but that her parents
would disapprove, adding “it is difficult to talk to Indian
parents about things like boyfriends.” She said she sometimes
envies her callers’ lives but that she hopes her job will help her
succeed. “I may be a small-town girl, but there is no way I’m
going back to Mysore after this,” she said.
Arundhati Roy, an Indian novelist and activist, argues that call
centers strip young Indian workers of their cultural identities,
for example, by making them use American names on the phone.
She wrote that call centers show “how easily an ancient
civilization can be made to abase itself completely.” Many
observers wonder whether Asia can embrace modernization and
yet retain traditional values.
Thinking Globally
1.If your international firm were doing business in Asia, would
you feel partly responsible for these social trends? Is there
anything that your company could do to ease the tensions these
cultures are experiencing? Be specific.
2.In your opinion, is globalization among the causes of the
increasing incidence of divorce, crime, and drug abuse in Asia?
Why or why not?
3.Broadly defined, Asia comprises over 60 percent of the
world’s population—a population that practices Buddhism,
Confucianism, Hinduism, Islam, and numerous other religions.
Given the fact that there are considerable cultural differences
between countries such as China, India, Indonesia, Japan, and
Malaysia, is it possible to carry on a valid discussion of “Asian”
values? Why or why not?
4.Consider the following statement: “Economic development
and capitalism require a certain style of doing business in the

twenty-first century. The sooner Asian cultures adapt the
better.” Do you agree or disagree? Explain.
(Wild 45)
Wild, John J., Kenneth L. Wild & Jerry C.Y. Han.
International Business: The Challenges of Globalization, 5th
Edition. Pearson Learning
Solution
s. <vbk:0558570569#outline(9)>.
3 Politics, Law, and Business Ethics
Learning Objectives
After studying this chapter, you should be able to
1Describe each main type of political system.
2Identify the origins of political risk and how managers can
reduce its effects.
3Describe each main type of legal system and the important
global legal issues.
4Explain ethics and social responsibility and key issues facing
international companies.
5Explain how international relations affect international
business activities.
A LOOK BACK
Chapter 2 explored the main elements of culture and showed
how they affect business practices. We learned about different
methods used to classify cultures and how these methods can be

applied to business.
A LOOK AT THIS CHAPTER
This chapter explores the roles of politics and law in
international business. We begin by explaining different types
of political systems and how managers cope with political risk.
We then examine several kinds of legal systems, ethics, social
responsibility, and how international relations affect business.
A LOOK AHEAD
Chapter 4 discusses the world’s different economic systems. We
learn about emerging markets and development and explore
challenges facing countries that are transforming their
economies into free markets.
PepsiCo’s Global Challenge
Purchase, New York—Entrepreneurial despite its enormity,
PepsiCo’s (www.pepsico.com) sales grew an amazing 13
percent annually for nearly half a century. To keep sales
bubbling, PepsiCo is targeting the global market, especially
emerging economies. International sales comprise 40 percent of
PepsiCo’s total revenue and are growing three times as fast as
U.S. sales.
Like all companies operating internationally, PepsiCo must
carefully navigate unfamiliar political and legal systems. British
regulators will pull PepsiCo’s Baked Lays brand of chips off
store shelves if it fails to live up to its health claims. If
PepsiCo’s bottling operations in India were to drain the water

table to unacceptable levels, it would face the wrath of India’s
regulators and its people. PepsiCo knows that today companies
are expected to be model citizens wherever they operate.
Source: © Neville Elder/CORBIS. All Rights Reserved.
PepsiCo’s CEO, Indra Nooyi, (pictured at right) introduced the
motto, “Performance with Purpose,” to reflect how the company
is transforming its global businesses. She wants the company to
balance its drive for profits with making healthier snacks,
decreasing its impact on the environment, and taking care of its
workforce. Born and raised in India, Nooyi believes it is
essential that “we use corporations as a productive player in
addressing some of the big issues facing the world.”
Nooyi also helped spark “green” initiatives at PepsiCo. She
proved that investments in water- and heat-related conservation
projects can be worthy endeavors. In addition to their
environmental benefits, those projects now save the company
$55 million annually. Nooyi says, “Companies today are bigger
than many economies. We are little republics. We are engines of
efficiency. If companies don’t do [responsible] things, who is
going to?” As you read this chapter, consider how companies
adapt to different political and legal systems worldwide while
fulfilling their ethical and social responsibilities.1
Chapter 2 explained that an understanding of culture contributes
to success in the international marketplace. Another crucial

element of success is political and legal savvy. Businesses
involved internationally need to overcome some tricky political
and legal situations in other countries. This is true for both
brick-and-mortar and online companies. Although the Web
shrinks the distance between two points, it still matters where
those two points are located. The Internet community consists
of about 250 country domains and dozens of political and legal
environments.
Just as brick-and-mortar companies have always adapted to
local politics and laws in the global marketplace, so too do
Internet companies. Yahoo! (www.yahoo.com) held back certain
news stories from its Web site in China, though the stories
appeared on the company’s U.S. site. Rupert Murdoch’s News
Corp. (www.newscorp.com) removed BBC news
(www.bbc.co.uk) from its Asian television broadcasts because it
occasionally criticized China.2 Barnes & Noble (www.bn.com)
and Amazon (www.amazon.com) stopped selling the English-
language version of Mein Kampf to Germans when the German
government complained—although it’s illegal only to sell the
German-language version. A statement by Barnes & Noble read,
“Our policy with regard to censorship remains unchanged. But
as responsible corporate citizens, we respect the laws of the
countries where we do business.”3
Understanding the nature of politics and laws in other countries
lessens the risks of conducting international business. In this

chapter, we present the basic differences between political and
legal systems around the world. We explain how disputes
arising from political and legal matters affect business activities
and how companies can manage the associated risks. We also
discuss key ethical issues for international managers and how
companies fulfill their social responsibilities. We close this
chapter by briefly discussing the interaction between business
and international relations.
Political Systems
A political system includes the structures, processes, and
activities by which a nation governs itself. Japan’s political
system, for instance, features a Diet (Parliament) that chooses a
prime minister who will carry out the operations of government
with the help of Cabinet ministers. The Diet consists of two
houses of elected representatives who enact the nation’s laws.
These laws affect the personal lives of people living in and
visiting Japan, as well as the activities of companies doing
business there.
political system
Structures, processes, and activities by which a nation governs
itself.
Politics and Culture
Politics and culture are closely related. 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.
Consider the case of Switzerland, where the political system
actively encourages all eligible members of society to vote. By
means of public referendums, Swiss citizens vote directly on
many national issues. The Swiss system works because
Switzerland consists of a relatively small population living in a
small geographic area. Contrast this practice with that of most
other democracies, in which representatives of the people, not
the people themselves, vote on specific issues.
Political Participation
We can characterize political systems by who participates in
them and to what extent they participate. Participation occurs
when people voice their opinions, vote, and show general
approval or disapproval of the system.
Participation can be wide or narrow. Wide participation occurs
when people who are capable of influencing the political system
make an effort to do so. For example, most adults living in the
United States have the right to participate in the political
process by voting in elections. Narrow participation occurs
when few people participate. In Kuwait, for example, only
citizens who can prove Kuwaiti ancestry participate in the
political process.
Kuwaiti parliamentary candidate Rula Dashti (far right)
prepares to vote at a polling station in Kuwait City. A group of

28 women were among 249 candidates running for the 50-seat
legislative body. The heated election focused on electoral
reform and corruption in the oil-rich Gulf emirate. Kuwaiti
women were allowed to vote for the first time in June 2006.
How do you think wide participation can benefit a country?
Source: Yasser Al-Zayyat/AFP/Getty Images.
Political Ideologies
We can arrange the world’s three political ideologies on a
horizontal scale, with two on either end and one in the middle:
■At one 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.
■At the other 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.
■Between totalitarianism and anarchism 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 other. Pluralistic political systems include democracies,
constitutional monarchies, and some aristocracies.
To better understand the elements of politics that influence
national business practices, let’s examine two prevalent
political systems—totalitarianism and democracy.
Totalitarianism
In a totalitarian system, individuals govern without the support
of the people, tightly control people’s lives, and do not tolerate
opposing viewpoints. Nazi Germany under Adolf Hitler and the
former Soviet Union under Joseph Stalin are historical examples
of totalitarian governments. Today, Myanmar and North Korea
are prominent examples of totalitarian governments.
Totalitarian leaders attempt to silence those with opposing
political views and, therefore, require the near-total
centralization of political power. But a “pure” form of
totalitarianism is not possible because no totalitarian
government is capable of entirely silencing all its critics.
totalitarian system
Political system in which 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.
Let’s now take a detailed look at the two most common types of
totalitarian political systems: theocratic and secular.
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.
theocracy
Political system in which a country’s religious leaders are also
its political leaders.

theocratic totalitarianism
Political system under the control of totalitarian religious
leaders.
Iran is a prominent example of a theocratic totalitarian state.
Iran has been an Islamic state since the 1979 revolution in
which the reigning monarch was overthrown. Today, many
young Iranians appear disenchanted with the strict code imposed
on many aspects of their public and private lives, including
stringent laws against products and ideas deemed too
“Western.” They do not question their religious beliefs, but
yearn for a more open society.
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.
secular totalitarianism
Political system in which leaders rely on military and
bureaucratic power.
Under communist totalitarianism (referred to here simply as
communism), the government maintains sweeping political and
economic powers. The Communist Party controls all aspects of
the political system, and opposition parties are given little or no
voice. In general, each Party member holding office is required
to support all government policies, and dissension is rarely
permitted. Communism is the belief that social and economic

equality can be obtained only by establishing an all-powerful
Communist Party and by instituting socialism—an economic
system in which the government owns and controls all types of
economic activity. This includes granting the government
ownership of the means of production (such as capital, land, and
factories) and the power to decide what the economy produces
and the prices at which goods are sold.
communism
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.
socialism
Belief that social and economic equality is obtained through
government ownership and regulation of the means of
production.
However, important distinctions separate communism from
socialism. Communists follow the teachings of Marx and Lenin,
believe that a violent revolution is needed to seize control over
resources, and wish to eliminate political opposition. Socialists
believe in none of these. Thus communists are socialists, but
socialists are not necessarily communist.
Under tribal totalitarianism, one tribe (or ethnic group) imposes
its will on others with whom it shares a national identity. Tribal
totalitarianism characterizes the governments of several African

nations, including Burundi and Rwanda. When the European
colonial powers departed Africa, many national boundaries were
created with little regard to ethnic differences among the
people. People of different ethnicities found themselves living
in the same nation, whereas members of the same ethnicity
found themselves living in different nations. In time, certain
ethnic groups gained political and military power over other
groups. Animosity among them often erupted in bloody conflict.
Although tribalism plays a role in many of Africa’s civil
conflicts, it is not always the most significant factor. To explore
the economic and social costs of civil wars (particularly in
Africa) and how developed nations can help put an end to them,
see the Global Challenges feature titled, “From Civil War to
Civil Society.”
GLOBAL CHALLENGES: From Civil War to Civil Society
Today, most wars occur within nations that were once
controlled and stabilized by colonial powers. If these nations
are to prosper from globalization, they must break the vicious
cycle whereby conflict causes poverty and poverty causes
conflict.
■War’s Root Causes. Although tribal or ethnic rivalry is
typically blamed for starting civil wars, the most common
causes are poverty, low economic growth, and dependency on
natural resource exports. In fact, the poorest one-sixth of
humanity endures four-fifths of the world’s civil wars.

■What’s at Stake. It appears that pitched battles in Bunia, in
eastern Congo, are rooted in ethnic conflict. Yet the Hema and
the Lendu tribes only began annihilating each other when
neighboring Uganda (to control mineral-rich Bunia) started
arming rival militias in 1999. In the Darfur region of Sudan,
Arab Muslims battle black non-Muslims. Depending on whom
you ask, the conflict began as a fight over pastures and
livestock or the oil beneath them.
■What Is Lost. On average, a civil conflict lasts eight years.
And apart from the terrible human cost in lives and health, there
is also a financial cost. Health costs are $5 billion per conflict
because of collapsed health systems and forced migrations
(which worsen and spread disease). Gross domestic product
(GDP) falls by 2.2 percent and another 18 percent of income is
wasted on arms and militias. Full economic recovery takes a
decade, which reduces output by about 105 percent of the
nation’s prewar GDP.
■The Challenge. Recent research offers several solutions to this
global challenge. Because the risk of civil war halves when
income per person doubles, conflicts may be prevented by
funneling more aid to poor nations. Also, war might be limited
by restricting a nation in conflict from spending the proceeds
from its exports on munitions or by lowering the world market
price of those exports. Finally, to halt nations from slipping
back into civil war, health and education aid could be increased

after war ends or a foreign power could intervene to keep the
peace.
■Want to Know More? Visit the Centre for the Study of African
Economies at Oxford University (www.csae.ox.ac.uk),
Copenhagen Consensus project
(www.copenhagenconsensus.com), and World Bank Conflict
Prevention and Reconstruction unit (www.worldbank.org).
Source: “Putting the World to Rights,” The Economist
(www.economist.com), June 3, 2004; “The Price of Peace,” The
Economist (www.economist.com), April 22, 2004; Paul Collier
and Anke Hoeffler, The Challenge of Reducing the Global
Incidence of Civil War (Oxford: Copenhagen Consensus, March
2004); “Coping with Conflict,” The Economist
(www.economist.com), January 15, 2004; Copenhagen
Consensus project (www.copenhagenconsensus.com).
Under right-wing totalitarianism, the government endorses
private ownership of property and a market-based economy, but
grants few (if any) political freedoms. Leaders generally strive
for economic growth while opposing left-wing totalitarianism
(communism). Argentina, Brazil, Chile, and Paraguay all had
right-wing totalitarian governments in the 1980s.
Despite the inherent contradictions between communism and
right-wing totalitarianism, China’s political system is currently
a mix of the two ideologies. China’s leaders are engineering
high economic growth by implementing certain characteristics

of a capitalist economy while retaining a hard line in the
political sphere. The Chinese government is selling off money-
losing, state-run companies and encouraging investment needed
to modernize its factories. But China’s government still has
little patience for dissidents who demand greater political
freedom, and it does not allow a completely free press.
DOING BUSINESS IN TOTALITARIAN COUNTRIES
What are the costs and benefits of doing business in a
totalitarian nation? On the plus side, international companies
can be relatively less concerned with local political opposition
to their activities. On the negative side, they might need to pay
bribes and kickbacks to government officials. Refusal to pay
could result in loss of market access or even forfeiture of
investments in the country.
In any case, doing business in a totalitarian country can be a
risky proposition. In a country such as the United States, laws
regarding the resolution of contractual disputes are quite
specific. In totalitarian nations, the law can be either vague or
nonexistent, and people in powerful government positions can
interpret laws largely as they please. In China, for instance, it
may not matter so much what the law states, but rather how
individual bureaucrats interpret the law. The arbitrary nature of
totalitarian governments makes it hard for companies to know
how laws will be interpreted and applied to their particular
business dealings.

Companies that operate in totalitarian nations are sometimes
criticized for lacking compassion for people hurt by the
oppressive policies of their hosts. Executives must decide
whether to refrain from investing in totalitarian countries—and
miss potentially profitable opportunities—or invest and bear the
brunt of potentially damaging publicity. There are no simple
answers to this controversial issue, which amounts to an ethical
dilemma.
Quick Study
1.What is a political system? Explain the relation between
political systems and culture.
2.Identify the three main features of totalitarianism.
3.Briefly explain each form of totalitarianism.
4.How might a totalitarian government affect business
activities?
Democracy
A democracy is a 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. The foundations of modern democracy go
back at least as far as the ancient Greeks.
democracy
Political system in which government leaders are elected
directly by the wide participation of the people or by their
representatives.

The Greeks tried to practice a pure democracy, one in which all
citizens participate freely and actively in the political process.
But a pure democracy is more an ideal than a workable system
for several reasons. Some people have neither the time nor the
desire to get involved in the political process. Also, citizens are
less able to participate completely and actively as a population
increases and as the barriers of distance and time expand.
Finally, leaders in a pure democracy may find it difficult or
impossible to form cohesive policies because direct voting can
lead to conflicting popular opinion.
REPRESENTATIVE DEMOCRACY
For practical reasons, most nations resort to a representative
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
Democracy in which citizens elect individuals from their groups
to represent their political views.
Representative democracies strive to provide some or all of the
following:
■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 French presidential elections (held every seven
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.
Freedom of expression is a fundamental right that most
democracies strive to uphold. Here, people in Seoul, South
Korea, carry banners and placards during a peaceful rally

against a meeting of the Switzerland-based World Economic
Forum (WEF). The more than 10,000 people that took part in
the protest were expressing their view that the policies of the
WEF protect the rich and increase poverty. In what ways does
freedom of expression benefit societies?
Source: Chung Sung-Jun/Getty Images.
Despite such shared principles, countries vary greatly in the
practice of representative democracy. Britain, for example,
practices parliamentary democracy. The nation divides itself
into geographical districts, and people in each district vote for
competing parties rather than individual candidates. But the
party that wins the greatest number of legislative seats in an
election does not automatically win the right to run the country.
Rather, a party must gain an absolute majority—that is, the
number of representatives that a party gets elected must exceed
the number of representatives elected among all other parties.
If the party with the largest number of representatives lacks an
absolute majority, it can join with one or more other parties to
form a coalition government. In a coalition government, the
strongest political parties share power by dividing government
responsibilities among themselves. Coalition governments are
often formed in Italy, Israel, and the Netherlands, where a large
number of political parties make it difficult for any single party
to gain an absolute majority.
Nations also differ in the relative power that each political party

commands. In some democratic countries, a single political
party has effectively controlled the system for decades. In
Japan, for example, the Liberal Democratic Party (which is
actually conservative) has enjoyed nearly uninterrupted control
of the government since the 1950s. In Mexico, the Institutional
Revolutionary Party (PRI) ran the country for 71 years until
2001 when Vicente Fox of the conservative National Action
Party (PAN) won the presidency.
DOING BUSINESS IN DEMOCRACIES
Democracies maintain stable business environments primarily
through laws that protect individual property rights. In theory,
commerce prospers when the private sector includes
independently owned firms that seek to earn profits. Capitalism
is the belief that ownership of the means of production belongs
in the hands of individuals and private businesses. Capitalism is
also frequently referred to as the free market. (We cover the
economics of communism and capitalism in Chapter 4.)
private sector
Segment of the economic environment comprising
independently owned firms that seek to earn profits.
capitalism
Belief that ownership of the means of production belongs in the
hands of individuals and private businesses.
Bear in mind that, although participative democracy, property
rights, and free markets tend to encourage economic growth,

they do not always do so. For instance, although India is the
world’s largest democracy, it experienced slow economic
growth for decades until recently. Meanwhile, some countries
achieved rapid economic growth under political systems that
were not truly democratic. The four tigers of Asia—Hong Kong,
Singapore, South Korea, and Taiwan—built strong market
economies in the absence of truly democratic practices.
Political Systems in Times of Change
People around the world are demanding wider participation in
the political process and forcing a move toward more
democratic systems. Capitalism also seems to have won the
battle over communist totalitarianism and economic socialism.
Shortly after the former Soviet Union implemented its twin
policies of glasnost (political openness) and perestroika
(economic reform), its totalitarian government crumbled.
Communist governments in Central and Eastern Europe fell
soon after, and today countries such as the Czech Republic,
Hungary, Poland, Romania, and Ukraine have republican
governments. There are far fewer communist nations than there
were two decades ago, although North Korea and Myanmar
remain hard-line communist nations today.
One of the most closely watched nations in terms of its political
change is China. After 1949, when the communists defeated the
nationalists in China’s civil war, China imprisoned or exiled
most of its capitalists. But private businesspeople are now

allowed to join China’s Communist Party, and workers can now
elect local representatives to the official trade union. These
moves represent the leadership’s struggle to maintain order in
the face of increasingly rapid economic and social change. Part
of the reason for this move was explained in a government
report that spoke of problems facing the nation. Difficulties
reported were the collapse of state-owned industry, a social
safety net unable to cope with millions of unemployed, poor
relations with the nation’s ethnic minorities, an unjust legal
system, and an increasingly restless peasantry.
Quick Study
1.What is democracy? Explain the differences between
democracy and totalitarianism.
2.What five freedoms does a representative democracy strive to
provide its people?
3.How might a democratic government affect business activities
in a nation?
Political Risk
All companies doing business domestically or internationally
confront political risk—the likelihood that a society will
undergo political changes that negatively impact local business
activity. Political risk abroad affects different types of
companies in different ways. It can threaten the market of an
exporter, the production facilities of a manufacturer, or the
ability of a company to extract profits from a country in which

they were earned. A solid grasp of local values, customs, and
traditions can help reduce a company’s exposure to political
risk.
political risk
Likelihood that a society will undergo political changes that
negatively impact local business activity.
Map 3.1 shows that political risk levels vary from nation to
nation. Some of the factors included in this assessment of
political risk levels include government stability, internal and
external conflict, military and religion in politics, corruption,
law and order, and bureaucracy quality.
Types of Political Risk
The broadest categories of political risk reflect the range of
companies affected. Macro risk threatens the activities of all
domestic and international companies in every industry.
Examples include an ongoing threat of violence against
corporate assets in a nation and a rising level of government
corruption. Micro risk threatens companies only within a
particular industry (or more narrowly defined group). For
example, an international trade war in steel affects the
operations of steel producers and companies that require steel as
an input to their business activities.
In addition to these two broad categories, we can classify
political risk according to the actions or events that cause it to
arise, including:

■Conflict and violence
■Terrorism and kidnapping
■Property seizure
■Policy changes
■Local content requirements
Conflict and Violence
Local conflict can strongly discourage international companies
from investing in a nation. Violent disturbances impair a
company’s ability to manufacture and distribute products,
obtain materials and equipment, and recruit talented personnel.
Open conflict also threatens a company’s physical assets (such
as offices and factories) and the lives of its employees.
Conflict arises from several sources. First, it may arise from
people’s resentment toward their own government. When
peaceful resolution of disputes between people (or factions) and
the government fails, violent attempts to change political
leadership can ensue. ExxonMobil (www.exxonmobil.com)
suspended production of liquid natural gas at its facility in
Indonesia’s Aceh province when separatist rebels targeted the
complex with their violence.
Second, conflict can arise over territorial disputes between
countries. For example, a dispute over the Kashmir territory
between India and Pakistan resulted in major armed conflict
between their two peoples several times. And a border dispute
between Ecuador and Peru caused these South American nations

to go to war three times—most recently in 1995.
Third, disputes among ethnic, racial, and religious groups may
erupt in violent conflict. Indonesia comprises 13,000 islands,
more than 300 ethnic groups, and some 450 languages. Years
ago, Indonesia’s government relocated people from crowded,
central islands to less populated remote ones, but without regard
to ethnicity and religion. Violence among them later displaced
more than one million people. Companies doing business in
Indonesia today still face the possibility of ethnic and religious
violence disrupting business operations.
Terrorism and Kidnapping
Terrorist activities are means of making political statements.
Groups dissatisfied with the current political or social situation
sometimes resort to terrorist tactics to force change through fear
and destruction. On September 11, 2001, the world witnessed
terrorism on a scale like never before. Two passenger planes
were flown into the twin towers of the World Trade Center in
New York City, one plane was crashed into the Pentagon in
Washington, D.C., and one plane crashed in a Pennsylvania
field. The terrorist group Al-Qaida claimed responsibility for
those U.S. attacks and more recent attacks around the world.
The terror organization’s stated goals are to drive Western
influence out of Muslim nations and to implement Islamic law.
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. Latin American countries have some of the world’s
highest kidnapping rates. Annual security costs for a company
with a sales office in Bogotá, Colombia, can be $125,000 and up
to $1 million for a company with operations in rebel-controlled
areas. Top executives are forced to spend about a third of their
time coordinating their company’s security in Colombia.4
MAP 3.1 Political Risk Around the World
When high-ranking executives are required to enter countries
with high kidnapping rates, they should enter unannounced,
meet with only a few key people in secure locations, and leave
just as quickly and quietly. Some companies purchase kidnap,
ransom, and extortion insurance, but security experts say that
training people to avoid trouble in the first place is a far better
investment. For additional ways managers can stay safe during
overseas assignments, see the Global Manager’s Briefcase
titled, “Your Global Security Checklist.”
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.
The forced transfer of assets from a company to the government
without compensation is called confiscation. Usually the former

owners have no legal basis for requesting compensation or the
return of assets. The 1996 Helms–Burton Law allows U.S.
businesses to sue companies from other nations that use their
property that Cuba confiscated in its 1959 communist
revolution. But U.S. presidents repeatedly waive the law to not
harm its relations with other countries. In 2008, nearly 6,000
company claims against the Cuban government were valued at
$20 billion.5
confiscation
Forced transfer of assets from a company to the government
without compensation.
The forced transfer of assets from a company to the government
with compensation is called expropriation. The expropriating
government normally determines the amount of compensation.
There is no framework for legal appeal, and compensation is
typically far below market value. Today, governments rarely
resort to confiscation or expropriation because these acts can
force companies to leave the nation and can jeopardize future
investment in the country.
expropriation
Forced transfer of assets from a company to the government
with compensation.
GLOBAL MANAGER’S BRIEFCASE: Your Global Security
Checklist
■Getting There. Take nonstop flights when possible—accidents

are more likely during takeoffs and landings. Move quickly
from an airport’s public and check-in areas to more secure areas
beyond passport control. Report abandoned packages to airport
security.
■Getting Around. Kidnappers watch for daily routines. Vary the
exit you use to leave your house, office, and hotel, and vary the
time that you depart and arrive. Drive with your windows up
and doors locked. Swap cars with your spouse occasionally, or
take a cab one day and ride the tram/subway the next. Be
discreet regarding your itinerary.
■Keep a Low Profile. Don’t draw attention by pulling out a
large wad of currency or paying with large denominations.
Avoid public demonstrations. Dress like the locals when
possible and leave expensive jewelry at home. Avoid loud
conversation and being overheard. If you rent an automobile,
avoid the flashy and choose a local, common model.
■Guard Personal Data. Be friendly but cautious when answering
questions about you, your family, and your employment. Keep
answers short and vague when possible. Give out your work
number only—all family members should do the same. Don’t
list your home or mobile phone numbers in directories. Do not
carry items in your purse or wallet that contain your home
address.
■Use Caution. Be cautious if a local asks directions or the
time—it could be a mugging ploy. When possible, travel with

others and avoid walking alone after dark. Avoid narrow, dimly
lit streets. If you get lost, act as if you know where you are, and
ask directions from a place of business, not passersby. Beware
of offers by drivers of unmarked or poorly marked cabs.
■Know Emergency Procedures. Be familiar with the local
emergency procedures before trouble strikes. Keep phone
numbers of police, fire, your hotel, your nation’s embassy, and
a reputable taxi service in your home and with you.
Whereas expropriation involves one or several companies in an
industry, nationalization means government takeover of an
entire industry. Nationalization is more common than
confiscation and expropriation. Likely candidates for
nationalization include industries important to a nation’s
security and those that generate large revenues. In recent years,
Venezuela’s President Hugo Chavez nationalized that country’s
telephone, electricity, and oil industries and threatened to
nationalize many more. Businesses from other countries reacted
to these moves by not investing in Venezuela.6 In general, a
government may nationalize an industry to:
nationalization
Government takeover of an entire industry.
1.Use subsidies to protect an industry for ideological reasons.
2.Save local jobs in an ailing industry to gain political clout.
3.Control industry profits so they cannot be transferred to low-
tax-rate countries.

4.Invest in sectors, such as public utilities, that private
companies cannot afford.
The extent of nationalization varies widely from country to
country. Whereas the governments of Cuba, North Korea, and
Vietnam control practically every industry, those of the United
States and Canada own very few. Many countries, including
France, Mexico, Poland, and India, try to strike a balance
between government and private ownership.
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. One common policy tool restricts ownership to
domestic companies or limits ownership by nondomestic firms
to a minority stake. This type of policy restricted PepsiCo’s
(www.pepsico.com) ownership of local companies to 49 percent
when it first entered India.
Other policies relate to cross-border investments. Facing a
slowdown in the technology sector, Taiwan’s businesses and
politicians called for a scrapping of the nation’s “go slow, be
patient” policy with China. That policy capped investments in
mainland China at $50 million and banned investments in
infrastructure and industries sensitive for national security
reasons. Taiwan’s government responded by creating a new
policy called, “active opening, effective management,” which

reduced restrictions on cross-border investment.
Local Content Requirements
Laws stipulating that a specified amount of a good or service be
supplied by producers in the domestic market are called local
content requirements. These requirements can force companies
to use locally available raw materials, procure parts from local
suppliers, or employ a minimum number of local workers. They
ensure that international companies foster local business
activity and help ease regional or national unemployment. They
also help governments maintain some degree of control over
international companies without resorting to extreme measures
such as confiscation and expropriation.
local content requirements
Laws stipulating that a specified amount of a good or service be
supplied by producers in the domestic market.
But local content requirements can jeopardize an international
firm’s long-term survival. First, a company required to hire
local personnel might be forced to take on an inadequately
trained workforce or take on excess workers. Second, a
company made to obtain raw materials or parts locally can find
its production costs rise or its product quality decline.
Managing Political Risk
International companies benefit from monitoring and attempting
to predict political changes that can negatively impact their
activities. When an international business opportunity arises in

an environment plagued by extremely high risk, simply not
investing in the location may be the wisest course of action. Yet
when risk levels are moderate and the local market is attractive,
international companies find other ways to manage political
risks. Let’s now examine the three main methods of managing
political risk: adaptation, information gathering, and
influencing local politics.
One way to lessen political risk is to offer development
assistance to poor communities. Here, students get advice from
an experienced businessman at the Branson School of
Entrepreneurship in Johannesburg, South Africa. The school is
named for Richard Branson, founder of the Virgin Group
(www.virgin.com). Branson’s not-for-profit foundation, Virgin
Unite, strives to educate and inspire young leaders to unlock the
potential of South Africa’s youth.
Source: © Louise Gubb/CORBIS. All Rights Reserved.
Adaptation
Adaptation means incorporating risk into business strategies,
often with the help of local officials. Companies can
incorporate risk by means of four strategies:
■Partnerships help companies leverage expansion plans. They
can be informal arrangements or include joint ventures,
strategic alliances, and cross-holdings of company stock.
Partnering helps a company to share the risk of loss, which is

especially important in emerging markets. If partners own
shares (equity) in local operations they get cuts of the profits; if
they loan cash (debt), they receive interest. Local partners who
can help keep political forces from interrupting operations
include firms, trade unions, financial institutions, and
government agencies.
■Localization entails modifying operations, the product mix, or
some other business element—even the company name—to suit
local tastes and culture. Consider how MTV (www.mtv.com)
makes itself a smaller target for nationalists worldwide. MTV
demonstrates its sensitivity to local cultural and political issues
by localizing certain aspects of its programming to suit regional
and national tastes.
■Development assistance lets an international business assist
the host country or region in improving the quality of life for
locals. For example, by helping to develop distribution and
communications networks, both a company and a nation benefit.
Royal Dutch/Shell (www.shell.com), the oil company, is
working in Kenya to increase the incomes of poor villagers and
triple the average period of food security.7 Canon
(www.canon.com), the Japanese copier and printer maker,
practices kyosei (“spirit of cooperation”) to press local
governments into making social and political reforms.
■Insurance against political risk can be essential to companies
entering risky business environments. The Overseas Private

Investment Corporation (www.opic.gov) insures U.S. companies
that invest abroad against loss and can provide project
financing. Some policies protect companies when local
governments restrict the convertibility of local money into
home-country currency, while others insure against losses
created by violent events, including war and terrorism. The
Foreign Credit Insurance Association (www.fcia.com) also
insures U.S. exporters against loss due to a variety of causes.
Information Gathering
International firms attempt to gather information that will help
them predict and manage political risk. Two sources that
companies use to conduct accurate political risk forecasting are:
■Current employees with relevant information. Employees who
have worked in a country long enough to gain insight into local
culture and politics are often good sources of information.
Individuals who formerly had decision-making authority while
on international assignment probably had contact with local
politicians and other officials. Yet it is important that an
employee’s international experience be recent because political
power in a nation can shift rapidly and dramatically.
■Agencies specializing in political-risk services. These include
banks, political consultants, news publications, and risk-
assessment services. Many of these agencies publish reports
detailing national levels and sources of political risk. Small
companies that cannot afford to pay for some of these services

can consider the many free sources of information available,
notably from their federal governments. Government
intelligence agencies are excellent and inexpensive sources to
consult.
Political Influence
Managers must work within the established rules and
regulations of each national business environment. Business law
in most nations undergoes frequent change, with new laws being
enacted and existing ones modified. Influencing local politics
means dealing with local lawmakers and politicians directly or
through lobbyists. 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. The ultimate goal of the
lobbyists is to get favorable legislation enacted and unfavorable
legislation rejected. Lobbyists also work to convince local
officials that a company benefits the local economy,
environment, workforce, and so on.
lobbying
Policy of hiring people to represent a company’s views on
political matters.
Bribes often represent attempts to gain political influence.
Years ago, the president of U.S.-based Lockheed Corp., now
Lockheed Martin (www.lockheedmartin.com), bribed Japanese
officials to obtain large sales contracts. Public disclosure of the

incident resulted in passage of the 1977 Foreign Corrupt
Practices Act, which forbids U.S. companies from bribing
government officials or political candidates in other nations
(except when a person’s life is in danger). A bribe constitutes
“anything of value”—money, gifts, and so forth—and cannot be
given to any “foreign government official” empowered to make
a “discretionary decision” that may be to the payer’s benefit.
The law also requires firms to keep accounting records that
reflect their international activities and assets. (We discuss
corruption further in the later section on ethics.)
Foreign Corrupt Practices Act
A 1977 statute that forbids U.S. companies from bribing
government officials or political candidates in other nations.
In our discussion of political systems and how companies deal
with political uncertainty, we touched on several important
legal issues. Although there is a good deal of overlap between a
nation’s political and legal systems, they are distinct. Let’s now
examine several types of legal systems and how they influence
the activities of international companies.
Quick Study
1.What are the five main types of political risk? How might
each affect international business activities?
2.Identify several steps managers can take to stay safe while on
an international assignment.
3.Distinguish between confiscation, expropriation, and

nationalization.
4.What three methods can businesses use to manage political
risk?
Legal Systems
A country’s legal system is its set of laws and regulations,
including the processes by which its laws are enacted and
enforced and the ways in which its courts hold parties
accountable for their actions. Many cultural factors—including
ideas on social mobility, religion, and individualism—influence
a nation’s legal system. Likewise, many laws and regulations
are enacted to safeguard cultural values and beliefs. For several
examples of how legal systems differ from nation to nation, see
this chapter’s Culture Matters feature titled, “Playing by the
Rules.”
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.
Totalitarian governments tend to favor public ownership of
economic resources and enact laws limiting entrepreneurial
behavior. By contrast, democracies tend to encourage
entrepreneurial activity and protect business with strong
property-rights laws. The rights and responsibilities of parties
to business transactions also differ from nation to nation.

Political systems and legal systems, therefore, are naturally
interlocked. A country’s political system inspires and endorses
its legal system, and its legal system legitimizes and supports
its political system.
CULTURE MATTERS: Playing by the Rules
Understanding legal systems in other countries begins with an
awareness of cultural differences. Here are snapshots of several
nations’ legal environments:
■Japan. Japan’s harmony-based, consensus-driven culture
considers court battles a last resort. But with growing patent
disputes and a rise in cross-border mergers, Japan is discovering
the value of lawyers. Japan has just 22,000 licensed attorneys
compared with over one million in the United States. So Japan
is now minting thousands of new lawyers every year. Japanese
businesses now litigate disputes that once might have been
settled between parties.
■Saudi Arabia. Islam permeates every aspect of Saudi Arabia
and affects its laws, politics, economics, and social
development. Islamic law is grounded in religious teachings
contained in the Koran and governs both criminal and civil
cases. The Koran, in fact, is considered to be Saudi Arabia’s
constitution. The king and the council of ministers exercise all
executive and legislative authority within the framework of
Islamic law.
■China. Twenty-seven year-old factory worker, Luo Guangfu,

and his compatriots are leading the fight to revolutionize
workers’ rights in China. Labor groups are winning higher
wages, better working conditions, and better housing. Workers
are getting help from a flock of lawyers and law students who
hold free seminars and argue labor cases in China’s courts.
Although China has a long history of inadequate protection of
workers’ rights, its government is improving conditions for
China’s 169 million factory workers. Yet fierce battles over
child labor and overtime pay are just beginning.
■Want to Know More? Visit the Law Library of Congress
(www.loc.gov/law/guide/japan.html), ArabNet
(www.arab.net/saudi), and China Gate (www.chinagate.com.cn).
Source: “Our Women Must Be Protected,” The Economist, April
26, 2008, pp. 64–65; “Japan: Lawyers Wanted. No, Really,”
Business Week (www.businessweek.com), April 3, 2006; Dexter
Roberts, “Waking Up to Their Rights,” Business Week, August
22/29, pp. 123–128; Saudi Arabia country profile on ArabNet
Web site (www.arab.net/saudi); Sjef van Erp, “Law and
Culture,” Electronic Journal of Comparative Law
(www.ejcl.org), Vol. 5.1, March 2001.
Legal systems are frequently influenced by political moods and
upsurges of nationalism—the devotion of a people to their
nation’s interests and advancement. Nationalism typically
involves intense national loyalty and cultural pride and is often
associated with drives toward national independence. In India,

for example, most business laws originated when the country
was struggling for “self-sufficiency.” As a result, the legal
system tended to protect local businesses from international
competition. Although years ago India had nationalized many
industries and closely scrutinized business applications, today
its government is embracing globalization by enacting pro-
business laws.
nationalism
Devotion of a people to their nation’s interests and
advancement.
With that brief introduction, let’s now examine the key
characteristics of each type of legal system in use around the
world (common law, civil law, and theocratic law), and discuss
the key legal issues facing international companies.
Common Law
The practice of common law originated in eleventh-century
England and was adopted in that nation’s territories worldwide.
The U.S. legal system, therefore, is based largely on the
common law tradition (although it integrates some aspects of
civil law). A common law legal system reflects three elements:
■Tradition: a country’s legal history
■Precedent: past cases that have come before the courts
■Usage: how laws are applied in specific situations
common law
Legal system based on a country’s legal history (tradition), past

cases that have come before its courts (precedent), and how
laws are applied in specific situations (usage).
Under common law, the justice system decides cases by
interpreting the law on the basis of tradition, precedent, and
usage. Yet each law may be interpreted somewhat differently in
each case to which it is applied. In turn, each new interpretation
sets a precedent that may be followed in later cases. As new
precedents arise, laws are altered to clarify vague wording or to
accommodate situations not previously considered.
Business contracts tend to be lengthy in common-law nations
(especially the United States) because they must consider many
possible contingencies and many possible interpretations of the
law in case of a dispute. Companies devote considerable time to
devising clear contracts and spend large sums of money on legal
advice. On the positive side, common-law systems are flexible.
Instead of applying uniformly to all situations, laws take into
account particular situations and circumstances. The common-
law tradition prevails in Australia, Britain, Canada, Ireland,
New Zealand, the United States, and some nations of Asia and
Africa.
Civil Law
The origins of the civil law tradition can be traced to Rome in
the fifth century b.c. It is the world’s oldest and most common
legal tradition. A civil law system is based on a detailed set of
written rules and statutes that constitute a legal code. Civil law

can be less adversarial than common law because there tends to
be less need to interpret what a particular law states. Because
all laws are codified and concise, parties to contracts tend to be
more concerned only with the explicit wording of the code. All
obligations, responsibilities, and privileges follow directly from
the relevant code. Less time and money are typically spent,
therefore, on legal matters. But civil law systems can ignore the
unique circumstances of particular cases. Civil law is practiced
in Cuba, Puerto Rico, Quebec, all of Central and South
America, most of Western Europe, and many nations in Asia
and Africa.
civil law
Legal system based on a detailed set of written rules and
statutes that constitute a legal code.
Theocratic Law
A legal tradition based on religious teachings is called
theocratic law. Three prominent theocratic legal systems are
Islamic, Hindu, and Jewish law. Although Hindu law was
restricted by India’s 1950 constitution, in which the state
appropriated most legal functions, it does persist as a cultural
and spiritual force. Likewise, although Jewish law remains a
strong religious force, it has served few legal functions since
the eighteenth century when most Jewish communities lost their
judicial autonomy.
theocratic law

Legal system based on religious teachings.
Islamic law is the most widely practiced theocratic legal system
today. Islamic law was initially a code governing moral and
ethical behavior and was later extended to commercial
transactions. It restricts the types of investments companies can
make and sets guidelines for business transactions. According to
Islamic law, for example, banks cannot charge interest on loans
or pay interest on deposits. Instead, banks receive a portion of
the profits earned by investors who borrow funds and pay
depositors from these earnings. Likewise, because the products
of alcohol- and tobacco-related businesses violate Islamic
beliefs, firms abiding by Islamic law cannot invest in such
companies.
Quick Study
1.What is meant by the term legal system
2.Explain the role of nationalism in politics.
3.Identify the main features of each type of legal system
(common, civil, and theocratic law).
Standardization
Companies must adapt to dissimilar legal systems because there
is no clearly defined body of international law that all nations
accept. There is a movement toward standardizing the
interpretation and application of laws in more than one country,
but this does not involve standardizing entire legal systems.
Enduring differences in legal systems, therefore, can force

companies to continue the costly practice of hiring legal experts
in each country where they operate.
Still, international treaties and agreements exist in intellectual
property rights, antitrust regulation, taxation, contract
arbitration, and general matters of trade. International
organizations that promote standardization include the United
Nations (UN) (www.un.org), the Organization for Economic
Cooperation and Development (OECD) (www.oecd.org), and the
International Institute for the Unification of Private Law
(www.unidroit.org). The European Union is standardizing parts
of its members’ legal systems to facilitate commerce in Western
Europe.
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.
Technically, it results in industrial property (in the form of
either a patent or a trademark) or copyright and confers a
limited monopoly on its holder.
intellectual property
Property that results from people’s intellectual talent and
abilities.
Most national legal systems protect property rights—the legal
rights to resources and any income they generate. Similar to

other types of property, intellectual property can be traded,
sold, and licensed in return for fees and/or royalty payments.
Intellectual property laws are designed to compensate people
whose property rights are violated.
property rights
Legal rights to resources and any income they generate.
Intellectual property laws differ greatly from nation to nation.
Business Software Alliance (BSA) (www.bsa.org), the trade
body for business software makers, participates in an annual
study of software piracy rates around the globe. Where illegal
copies of business software recently made up just 20 percent of
the U.S. domestic market (the lowest in the world), pirated
software made up 93 percent of the market in Armenia (the
highest worldwide). Globally, business software piracy averages
around 38 percent and costs business software makers around
$48 billion annually.8Figure 3.1 shows piracy rates for some
nations included in the BSA study.
As these figures suggest, the laws of some countries are softer
than the laws of some other nations. Software companies in the
United States and European Union lobby their governments to
pressure other nations to adopt stronger laws, with mixed
results. The BSA implemented a program in Ireland that gave
cash awards to citizens who provide information about the
illegal use of business software. Shortly after the program
began, the BSA took legal action against seven Irish companies

on behalf of Adobe (www.adobe.com) and Microsoft
(www.microsoft.com), among others.
Although peddlers of pirated CDs and DVDs operate openly
from sidewalk kiosks in China, its government did more to
tackle piracy when China hosted the 2008 Summer Olympics.
The effort was a test case in fighting piracy in the YouTube era
of video sharing. Richard Cotton, a general legal counsel at
NBC, says, “[Chinese officials] recognize the future of the
Chinese economy depends on innovation and creativity, and
they have to protect the [intellectual property] that drives it.”9
FIGURE 3.1 Business Software Piracy
Source: Adapted from Fifth Annual BSA and IDC Global
Software Piracy Study (Washington, D.C.; Business Software
Alliance, May 2008), Table 3, pp. 10–11,
(www.bsa.org/globalstudy).
Industrial Property
Industrial property includes patents and trademarks, which are
often a firm’s most valuable assets. Laws protecting industrial
property are designed to reward inventive and creative activity.
Industrial property is protected internationally under the Paris
Convention for the Protection of Industrial Property
(www.wipo.int), to which nearly 100 countries are signatories.
industrial property
Patents and trademarks.

A patent is a right granted to the inventor of a product or
process that excludes others from making, using, or selling the
invention. Current U.S. patent law went into effect on June 8,
1995, and is in line with the systems of most developed nations.
Its provisions are those of the World Trade Organization
(WTO), the international organization that regulates trade
between nations. The WTO (www.wto.org) typically grants
patents for a period of 20 years. The 20-year term begins when
a patent application is filed with a country’s patent office, not
when it is finally granted. Patents can be sought for any
invention that is new, useful, and not obvious to any individual
of ordinary skill in the relevant technical field. Patents motivate
companies to pursue inventions and make them available to
consumers because they protect investments companies make in
research and development.
patent
Property right granted to the inventor of a product or process
that excludes others from making, using, or selling the
invention.
Trademarks are words or symbols that distinguish a product and
its manufacturer. The Nike (www.nike.com) “swoosh” is a
trademark, as is the name “Sony” (www.sony.com). Trademark
law creates incentives for manufacturers to invest in developing
new products. It also benefits consumers because they know
what to expect when they buy a particular brand. In other

words, you would not expect a canned soft drink labeled “Coca-
Cola” to taste like one labeled “Sprite.”
trademark
Property right in the form of words or symbols that distinguish
a product and its manufacturer.
Trademark protection typically lasts indefinitely, provided the
word or symbol continues to be distinctive. Ironically, this
stipulation presents a problem for companies such as Coca-Cola
(www.coca-cola.com) and Xerox (www.xerox.com), whose
trademarks “Coke” and “Xerox” have evolved into generic
terms for all products in their respective categories. Trademark
laws differ from country to country, though some progress
toward standardization is occurring. The European Union, for
example, opened a trademark-protection office to police
trademark infringement against firms that operate in any EU
country.
Designers who own trademarks, such as Chanel
(www.chanel.com), Christian Dior (www.dior.com), and Gucci
(www.gucci.com), have long been plagued by shoddily made
counterfeit handbags, shoes, shirts, and other products. But
recently, pirated products of equal or nearly equal quality are
turning up, especially in Italy. Most Italian makers of luxury
leather goods and jewelry, for example, outsource production to
small manufacturers. It is not hard for these same artisans to
counterfeit extra copies of a high-quality product. Bootleg

copies of a Prada (www.prada.com) backpack that costs $500 in
New York can be bought for less than $100 in Rome. Jewelry
shops in Milan can buy fake watches labeled Bulgari
(www.bulgari.com) and Rolex (www.rolex.com) for $300 and
sell them retail for $2,500.
Copyrights
Copyrights give creators of original works the freedom to
publish or dispose of them as they choose. A copyright is
typically denoted by the well-known symbol ©, a date, and the
copyright holder’s name. A copyright holder has the legal rights
to:
copyright
Property right giving creators of original works the freedom to
publish or dispose of them as they choose.
■Reproduce the copyrighted work
■Derive new works from the copyrighted work
■Sell or distribute copies of the copyrighted work
■Perform the copyrighted work
■Display the copyrighted work publicly
Copyright holders include artists, photographers, painters,
literary authors, publishers, musical composers, and software
developers. Works created after January 1, 1978, are
automatically copyrighted for the creator’s lifetime plus 50
years. Publishing houses receive copyrights for either 75 years
from the date of publication or 100 years after creation,

whichever comes first. Copyrights are protected under the Berne
Convention(www.wipo.int), which is an international copyright
treaty to which the United States is a member, and the 1954
Universal Copyright Convention. More than 50 countries abide
by one or both of these treaties.
Berne Convention
International treaty that protects copyrights.
A copyright is granted for the tangible expression of an idea,
not for the idea itself. For example, no one can copyright the
idea for a movie about the sinking of the Titanic. But once a
film is made that expresses its creator’s treatment of the
subject, that film can be copyrighted.
Perhaps the most well-known song around the world, “Happy
Birthday to You,” is actually protected by U.S. copyright law.
The song was composed in 1859 and copyrighted in 1935.
Although the copyright was set to expire in 2010, on the song’s
75th copyright birthday, the U.S. Congress extended it until
2030. Media empire Time Warner owns the copyright and stands
to gain as much as $20 million from the extension.10
Product Safety and Liability
Product safety laws 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. Civil lawsuits are frequently settled before cases go to
court.
product liability
Responsibility of manufacturers, sellers, individuals, and others
for damage, injury, or death caused by defective products.
Developed nations have the toughest product liability laws,
while developing and emerging countries have the weakest
laws. Business insurance and legal expenses are greater in
nations with strong product liability laws, where damage awards
can be large. Likewise, enforcement of product liability laws
differs from nation to nation. In the most developed nations, for
example, tobacco companies are regularly under attack for the
negative health effects of tobacco and nicotine. But in
developing countries, tobacco companies are practically free
from any scrutiny whatsoever by public-welfare organizations.
Taxation
National governments use income and sales taxes for many
purposes. They use tax revenue to pay government salaries,
build military capabilities, and shift earnings from people with
high incomes to the poor. Nations may also tax imports to make
them more expensive and give locally made products an
advantage among price-sensitive consumers.
Nations pass indirect taxes, called “consumption taxes,” which
help pay for the consequences of using particular products.

Consumption taxes on products such as alcohol and tobacco
help pay the health-care costs of treating illnesses that result
from using these products. Similarly, gasoline taxes help pay
for road and bridge repairs needed to counteract the effects of
traffic and weathering.
Unlike the United States, many countries impose a value added
tax (VAT)—a tax levied on each party that adds value to a
product throughout its production and distribution. Supporters
of the VAT system contend that it distributes taxes on retail
sales more evenly between producers and consumers. Suppose,
for example, that a shrimper sells the day’s catch of shrimp for
$1 per kilogram and that the country’s VAT is 10 percent (see
Table 3.1). The shrimper, processor, wholesaler, and retailer
pay taxes of $0.10, $0.07, $0.11, and $0.10, respectively, for
the value that each adds to the product as it makes its way to
consumers. Consumers pay no additional tax at the point of sale
because the government has already collected taxes from each
party in the value chain. Still, consumers end up paying the tax
because producers and distributors must increase prices to
compensate for their tax burdens. So the poor are not overly
burdened, many countries exclude the VAT on certain items
such as children’s clothing.
value added tax (VAT)
Tax levied on each party that adds value to a product throughout
its production and distribution.

Antitrust Regulations
Laws designed to prevent companies from fixing prices, sharing
markets, and gaining unfair monopoly advantages are called
antitrust (antimonopoly) laws. These laws try to provide
consumers with a wide variety of products at fair prices. The
United States and European Union are the world’s strictest
antitrust regulators. In Japan, the Fair Trade Commission
enforces antitrust laws but is often ineffective because absolute
proof of wrongdoing is needed to bring charges.
antitrust (antimonopoly) laws
Laws designed to prevent companies from fixing prices, sharing
markets, and gaining unfair monopoly advantages.
Companies based in strict antitrust countries often argue that
they are at a disadvantage against competitors whose home
countries condone market sharing, whereby competitors agree to
serve only designated segments of a certain market. That is why
firms in strict antitrust countries often lobby for exemptions in
certain international transactions. Small businesses also argue
that they could better compete against large international
companies if they could join forces without fear of violating
antitrust laws.
TABLE 3.1 Effect of Value-Added Taxes (VAT)
Production Stage
Selling Price
Value Added

10% VAT
Total VAT
Shrimper
$1.00
$1.00
$0.10
$0.10
Processor
1.70
0.70
0.07
0.17
Wholesaler
2.80
1.10
0.11
0.28
Retailer
3.80
1.00
0.10
0.38
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. In fact, a

nation (or group of nations) can block a merger or acquisition
between two nondomestic companies if those companies do a
good deal of business there. This happened to the proposed $43
billion merger between General Electric (GE) (www.ge.com)
and Honeywell (www.honeywell.com). GE wanted to marry
their manufacture of airplane engines to Honeywell’s
production of advanced electronics for the aviation industry.
Although both companies are based in the United States,
together they employed 100,000 Europeans. GE alone earned
$25 billion in Europe the year before the proposed merger. The
European Union blocked the merger because it believed the
result would be higher prices for customers, particularly
airlines.11
To learn about several agencies responsible for the enforcement
of U.S. business laws, see this chapter’s Entrepreneur’s Toolkit
titled, “The Long Arm of the Law.”
ENTREPRENEUR’S TOOLKIT: The Long Arm of the Law
Every government has agencies designed to monitor the nation’s
business environment and enforce its laws. Several important
U.S. agencies that entrepreneurs and small business owners can
consult for free legal information are:
■U.S. Patent and Trademark Office (USPTO). The USPTO is a
noncommercial federal bureau within the Department of
Commerce. By issuing patents, it provides incentives to invent,
invest in, and disclose new technologies worldwide. By

registering trademarks, it protects business investment and
safeguards consumers against confusion and deception. By
disseminating patent and trademark information, it facilitates
the development and sharing of new technologies worldwide.
■U.S. International Trade Commission (USITC). The USITC is
an independent, quasi-judicial federal agency. It provides trade
expertise to both the legislative and executive branches of
government, determines the impact of imports on U.S.
industries, and directs actions against certain unfair trade
practices such as patent, trademark, and copyright infringement.
The agency has broad investigative powers on matters of trade
and is a national resource where trade data are gathered and
analyzed.
■Federal Trade Commission (FTC). The FTC enforces a variety
of federal antitrust and consumer protection laws. It seeks to
ensure that the nation’s markets function competitively and are
vigorous, efficient, and free of undue restrictions. The
commission also works to enhance the smooth operation of the
marketplace by eliminating acts or practices that are unfair or
deceptive. In general, the commission’s efforts are directed
toward stopping actions that threaten consumers’ opportunities
to exercise informed choice.
■U.S. Consumer Product Safety Commission (CPSC). The
CPSC is an independent federal regulatory agency created to
protect the public from injury and death associated with some

15,000 types of consumer products, including car seats, bicycles
and bike helmets, lawnmowers, toys, and walkers. It also
provides information for businesses regarding the export of
noncompliant, misbranded, or banned products.
■Want to Know More? Visit the Web sites of government
agencies: USPTO (www.uspto.gov), USITC (www.usitc.gov),
FTC (www.ftc.gov), and CPSC (www.cpsc.gov).
Source: Federal Trade Commission Web site (www.ftc.gov);
U.S. Consumer Product Safety Commission Web site
(www.cpsc.gov); U.S. Patent and Trademark Office Web site
(www.uspto.gov); U.S. International Trade Commission Web
site (www.usitc.gov).
Quick Study
1.What are intellectual property rights? What is the significance
of such rights?
2.Explain the term industrial property. What are its two types?
3.What is a copyright? Explain its importance to international
business.
4.Identify the ramifications of antitrust (antimonopoly) laws
and product liability laws?
Ethics and Social Responsibility
We learned in Chapter 2 that when a company goes global, its
managers encounter many unfamiliar cultural rules that govern
human behavior. Although legal systems set boundaries for
lawful individual and corporate behavior, they are inadequate

for dilemmas of ethics and social responsibility. Frameworks
for business law vary in strength from country to country.
Unfortunately, the quest for profits may entice a company to
exploit differences in legal standards by locating certain
business operations in nations where they will be less
scrutinized. In this way, national legal differences can become
ethical issues for managers.
Ethical behavior is personal behavior in accordance with
guidelines for good conduct or morality. Ethical dilemmas are
not legal questions. When a law exists to guide a manager
toward a legally correct action, that path must be followed. In
an ethical dilemma, there is no right or wrong decision. There
are alternatives, however, that may be equally valid in ethical
terms depending on one’s perspective.
ethical behavior
Personal behavior in accordance with guidelines for good
conduct or morality.
In addition to the need for individual managers to behave
ethically, 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 (or
CSR as it is known) includes a wide variety of activities,
including giving to the poor, building schools in developing
countries, and protecting the global environment.

corporate social responsibility
Practice of companies going beyond legal obligations to
actively balance commitments to investors, customers, other
companies, and communities.
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.12
In the next two sections, we present the main theories of ethics
and responsibility and then examine several important issues of
corporate social responsibility.
Philosophies of Ethics and Social Responsibility
There are four commonly cited philosophies of business ethics
and social responsibility. The Friedman view—named for its
main supporter, the late economist Milton Friedman—says that
a company’s sole responsibility is to maximize profits for its
owners (or shareholders) while operating within the law.13
Imagine a company that moves its pollution-generating
operations from a country having strict and expensive
environmental-protection laws to a country having no such

laws. Managers subscribing to the Friedman philosophy would
applaud this decision. They would argue the company is doing
its duty to increase profits for owners and, moreover, is
operating within the law in the foreign country. Many people
disagree with this argument against socially responsible
activities. Today the discussion is not whether a company has
CSR obligations, but how it will fulfill them.
The cultural relativist view says that a company should adopt
local ethics wherever it operates because all belief systems are
determined within a cultural context. Cultural relativism sees
truth, itself, as relative and argues that right and wrong are
determined within a specific situation. The expression “When in
Rome, do as the Romans do” captures the essence of cultural
relativism. Consider a company that opens a factory in a
developing market and, following local customs, employs child
laborers. The cultural relativist manager would argue this
company is acting appropriately and in accordance with local
standards of conduct. Many people find this line of ethical
reasoning appalling.
The righteous moralist view says that a company should
maintain its home-country ethics wherever it operates because
the home-country’s view of ethics and responsibility is superior
to others’ views. Imagine a company that expands from its
developed-country base to an emerging market where local
managers commonly bribe officials. Suppose headquarters

detests the act of bribery and instructs its subsidiary managers
to refrain from bribing any local officials. In this situation,
headquarters is imposing its righteous moralist view on local
managers.
The utilitarian view says that a company should behave in a way
that maximizes “good” outcomes and minimizes “bad” outcomes
wherever it operates. The utilitarian manager asks the question,
“What outcome should I aim for?” and answers, “That which
produces the best outcome for all affected parties.” In other
words, utilitarian thinkers say the right behavior is that which
produces the greatest good for the greatest number. Consider,
again, the righteous moralist company above that instructs its
employees not to bribe local officials in the emerging market.
Now suppose a manager learns that by bribing a local official,
the company will finally obtain permission to expand its factory
and create 100 well-paying jobs for the local community. If the
manager pays the bribe based on her calculations that more
people will benefit than will be harmed by the outcome, she is
practicing utilitarian ethics.
Although businesses develop guidelines and policies regarding
ethical behavior and social responsibility, issues arise on a daily
basis that can cause dilemmas for international managers. Let’s
now examine some of these key issues.
Corporate Social Responsibility Issues
Companies cannot produce public relations campaigns that

present a business as socially responsible if it does not truly
embrace CSR principles. Conscientious business leaders realize
the future of their companies rests on healthy workforces and
environments worldwide. For example, soft drink makers
support all sorts of environmental initiatives because they
understand their futures depend on an ample supply of clean
drinking water. Let’s now discuss CSR as it pertains to bribery
and corruption, labor conditions and human rights, fair trade
practices, and the environment.
Bribery and Corruption
Similar to other cultural and political elements, the prevalence
of corruption varies from nation to nation. In certain countries,
bribes are routinely paid to distributors and retailers to push a
firm’s products through distribution channels. Bribes can mean
the difference between obtaining an important contract and
being completely shut out of a market. But corruption is
detrimental to society and business. Among other things,
corruption can send resources toward inefficient uses, hurt
economic development, distort public policy, and damage
national integrity.
Map 3.2 shows how countries rate on their perceived levels of
corruption. The higher a country’s score on the corruption
perceptions index (CPI), the less corrupt it is perceived to be by
international managers. What stands out immediately on this
map is that the least developed nations tend to be perceived as

being most corrupt (such as Russia, much of Africa, and areas
in the Middle East). This reflects the hesitancy on the part of
international companies about investing in corrupt economies.
In November 2001, Enron Corporation acknowledged in a
federal filing that it had overstated its earnings. Investors fled
in droves as Enron stock became worthless and the company
went bankrupt. Although executives had earned millions over
the years in salaries and bonuses, Enron’s rank-and-file
employees saw their retirement savings disappear as the firm
disintegrated. European banks lost around $2 billion that they
had lent to Enron and its subsidiaries. Chairman of the board,
Kenneth Lay (now deceased), and chief executive officer,
Jeffrey Skilling, were convicted on criminal charges. Then a
criminal indictment was filed against accounting firm Arthur
Andersen, Enron’s auditor, for shredding documents related to
its work for Enron. With its reputation irreparably damaged,
Andersen also collapsed.
MAP 3.2 Corruption Perceptions Index
In 2002, the U.S. Congress passed the Sarbanes-Oxley Act
(Sarbox) on corporate governance, which established new,
stringent accounting standards and reporting practices for firms.
Around the world, governments, accounting standards boards,
other regulators, and interest groups won the fight for higher
standards and more transparent financial reporting by

companies. Businesses worldwide received the message that
fudging the accounting numbers, misrepresenting the firm’s
financial health, and running a company in that gray area
between right and wrong is unethical and, now, illegal.14
Some people believe Sarbox needs to be reformed because of
the financial burden that companies face in conforming to the
act’s requirements. Regulators, securities experts, and scholars
(who largely praise Sarbox) are pitted against chief financial
officers—three-fourths of whom say that the act should be
reformed or repealed and almost as many who say its costs
outweigh its benefits. Still, clarifications and additional
guidance on the act’s most troublesome sections subsequent to
its passage are helping companies to comply with Sarbox.15
Labor Conditions and Human Rights
To fulfill their responsibilities to society, companies are
monitoring the actions of their own employees and the
employees of companies with whom they conduct business.
Pressure from human rights activists drove conscientious
apparel companies to introduce codes of conduct and monitoring
mechanisms for their international suppliers. Levi-Strauss
(www.levistrauss.com) pioneered the use of practical codes to
control working conditions at contractors’ facilities. The
company does business only with partners who meet its “Terms
of Engagement,” which sets minimal guidelines regarding
ethical behavior, environmental and legal requirements,

employment standards, and community involvement.16
Consider one case publicized by human rights and labor groups
investigating charges of worker abuse at the factory of one of
Nike’s Vietnamese suppliers. Twelve of 56 female employees
reportedly fainted when a supervisor forced them to run around
the factory as punishment for not wearing regulation shoes.
Nike confirmed the report and, in suspending the supervisor,
took steps to implement practices more in keeping with the
company’s home-country ethics.
International law says that only nations can be held liable for
human rights abuses. But activist groups can file a lawsuit
against a U.S. business for an alleged human rights violation
under the Alien Tort Claims Act by alleging a company’s
complicity in the abuse. Yahoo! (www.yahoo.com) felt the
power of this law when two Chinese dissidents were jailed after
the company gave data it had on them to Chinese authorities.
Yahoo! reached an out-of-court settlement with the families of
the jailed men in late 2007. And despite denials of any
responsibility in the matter, U.S. oil company Unocal, now part
of Chevron (www.chevron.com), settled out of court over
allegations of complicity in government soldiers’ abuse of
villagers during construction of an oil pipeline in Myanmar in
the 1990s.17
Fair Trade Practices
Starbucks (www.starbucks.com) works hard to operate in a

socially responsible manner by trying to ease the plight of
citizens in poor coffee-producing countries. Starbucks does this
by building schools, health clinics, and coffee-processing
facilities to improve the well-being of families in coffee-
farming communities. The company also sells what it calls “fair
trade coffee.” Fair trade products are those that involve
companies working with suppliers in more equitable,
meaningful, and sustainable ways. For Starbucks, this means
ensuring that coffee farmers earn a fair price for their coffee
crop and helping them farm in environmentally friendly ways.18
TransFair USA (www.transfairusa.org) is the nonprofit
organization that independently certifies fair trade products
such as Starbucks coffee. The Fair Trade model of international
trade benefits over one million farmers and farm laborers in 58
developing countries across Africa, Asia, and Latin America.
Fair Trade products now include coffee, tea, herbs, cocoa,
chocolate, fruit, rice, sugar, flowers, honey, and spices.
TransFair USA certifies that a product meets the following
criteria:19
■Fair prices. Producer groups receive a guaranteed minimum
floor price.
■Fair labor conditions. Farms do not employ children, and
workers are given freedom of association, safe working
conditions, and a living wage.
■Direct trade. Whenever possible, importers purchase from

producer groups to eliminate intermediaries.
■Democratic community development. Farmers and workers
decide how to spend their Fair Trade premiums in social and
business development projects.
■Environmental sustainability. Farming methods protect the
health of farmers and preserve ecosystems.
Environment
Concern for the environment and ecosystem is no longer left to
government agencies and nongovernmental organizations.
Today companies 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
results from human activity. It consists of two components:20
carbon footprint
Environmental impact of greenhouse gases (measured in units of
carbon dioxide) that results from human activity.
■Primary footprint: direct carbon dioxide emissions from the
burning of fossil fuels, including domestic energy consumption
and transportation (such as electricity and gasoline).
■Secondary footprint: indirect carbon dioxide emissions from
the whole lifecycle of products (from their manufacture to
eventual breakdown).
A woman in Tokyo, Japan, charges a Toyota Crayon-EV electric

car. Globalization and economic development take a toll on the
environment. Companies are working to create all sorts of
“green” products to reduce the impact of modern economies on
our ecosystem. Besides car manufacturers, can you think of
other types of companies that are working to become more
environmentally responsible?
Source: TWPhoto/CORBIS. All Rights Reserved.
Companies at the leading edge of the green movement are
printing a number on their products that represents the grams of
carbon dioxide emitted from producing and shipping them to
retailers. The number signifies the environmental impact of all
the materials, chemicals, and so on, used in producing and
distributing a good. For example, the United Kingdom’s
number-one selling snack food brand, Walker (www.walkers-
crisps.co.uk), stamps “75g” on its packets of cheese- and onion-
flavored potato chips, or crisps—meaning 75 grams of carbon
dioxide were emitted in producing and shipping each packet.
Footwear and clothing maker Timberland
(www.timberland.com) is implementing a different system. It
labels its products with a score ranging from 0 to 10. A score of
“0” means producing and shipping a product emitted less than
2.5 kilograms of carbon dioxide; a product with a score of “10”
emitted 100 kilograms of carbon dioxide—roughly equivalent to
driving a car 240 miles.21
Another trendsetter in reducing its carbon footprint is Marriott

International (www.marriott.com). The hotel company’s
employee cafeteria replaced paper and plastic containers with
real plates and biodegradable potato-based containers called
Spudware. Marriott gave employees reusable plastic water
bottles and lets them exchange burnt-out regular bulbs, from
work or home, for energy-saving compact fluorescent bulbs.
And the company has green ambassadors who remind employees
to print documents double-sided and to turn off lights and
electronic devices not in use.22
Boisset Family Estates (www.boisset.com), France’s third-
largest winery, initiated an eco-smart alternative to the glass
bottle. Boisset uses aluminum-coated paperboard similar to
containers commonly used for juices and milk. Besides
protecting the product from oxidation and making it easier to
chill, the new packaging helps the environment and improves
company profits. It used to take 28 trucks to haul enough empty
glass bottles to the winery for packaging the same volume of
wine that today takes just one truck hauling empty cartons.
After the cartons are filled, one truck now hauls away what used
to take three trucks. The savings in materials, fuel, and
equipment are significant.23
On a national level, the German government has gone greener
than most others. Germany’s energy law guarantees operators of
windmills and solar generators prices that are above the market
rate for as long as 20 years. That law, combined with German

expertise in aerodynamics, is making the country a global leader
in renewable energy. Today 60 companies in Germany
specialize in wind systems. Former East Germany is nicknamed
Solar Valley because of the large number of companies that
manufacture solar cells there. Germany’s green-energy sector
employs more than 235,000 people and generates $33 billion in
sales annually.24
Business and International Relations
The political relations between a company’s home country and
the nations in which it does business affect its international
business activities. Favorable political relationships foster
stable business environments and increase international
cooperation in many areas, including the development of
international communications and distribution infrastructures.
In turn, a stable environment requires a strong legal system
through which disputes can be resolved quickly and fairly. In
general, favorable political relations lead to increased business
opportunities and lower risk.
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. According to the European Union’s
founding treaty, goods, services, and citizens of member nations
are free to move across members’ borders. Every nation must
continue to abide by such terms even if it has a conflict with

another member. For instance, although Britain and France
disagree on many issues, neither can treat goods, services, and
citizens coming and going between their two nations any
differently than it treats any other member nation’s goods,
services, and citizens. See Chapter 8 for a detailed presentation
of the European Union.
The United Nations
Although individual nations sometimes have the power to
influence the course of events in certain parts of the world, they
cannot monitor political activities everywhere at once. The
United Nations (UN) (www.un.org) was formed after the Second
World War to provide leadership in fostering peace and stability
around the world. The UN and its many agencies provide food
and medical supplies, educational supplies and training, and
financial resources to poorer member nations. The UN receives
its funding from member contributions based primarily on gross
national product (GNP). Practically all nations in the world are
UN members—except for several small countries and territories
that have observer status.
United Nations (UN)
International organization formed after World War II to provide
leadership in fostering peace and stability around the world.
The UN is headed by a secretary general who is elected by all
members and serves for a five-year term. The UN system
consists of six main bodies:

■All members have an equal vote in the General Assembly,
which discusses and recommends action on any matter that falls
within the UN Charter. It approves the UN budget and the
makeup of the other bodies.
■The Security Council consists of 15 members. Five (China,
France, the United Kingdom, Russia, and the United States) are
permanent. Ten others are elected by the General Assembly for
two-year terms. The council is responsible for ensuring
international peace and security, and all UN members are
supposed to be bound by its decisions.
■The Economic and Social Council, which is responsible for
economics, human rights, and social matters, administers a host
of smaller organizations and specialized agencies.
■The Trusteeship Council consists of the five permanent
members of the Security Council and administers all trustee
territories under UN custody.
■The International Court of Justice consists of 15 judges
elected by the General Assembly and Security Council. It can
hear disputes only between nations, not cases brought against
individuals or corporations. It has no compulsory jurisdiction,
and its decisions can be, and have been, disregarded by specific
nations.
■Headed by the secretary general, the Secretariat administers
the operations of the UN.
An important body within the UN Economic and Social Council

is the United Nations Conference on Trade and Development
(UNCTAD) (www.unctad.org). The organization has a broad
mandate in the areas of international trade and economic
development. It hosts conferences on pressing development
issues including entrepreneurship, AIDS, poverty, and national
debt. Certain conferences are designed to develop the business
management skills of individuals in developing nations.
Quick Study
1.Define ethical behavior and corporate social responsibility.
2.What are four commonly cited philosophies of business ethics
and social responsibility?
3.List several issues of ethics and social responsibility relevant
to international managers.
4.Why are international relations among countries important to
international business?
Bottom Line FOR BUSINESS
Differences in political and legal systems present both
opportunities and risks for international companies. Gaining
complete control over events in even the most stable national
business environment is extremely difficult because of the
intricate connections among politics, law, and culture. Still,
understanding these connections is the first step to managing
the risks of doing business in unfamiliar environments.
Implications for Business in Totalitarian Nations
Political opposition to business from nongovernmental

organizations is extremely unlikely if a totalitarian nation
sanctions that particular commercial activity. Bribery and
kickbacks to government officials will likely prevail and refusal
to pay tends not to be an option. As such, business activities in
totalitarian nations are inherently risky. Business law in
totalitarian nations is either vague or nonexistent and
interpretation of the law is highly subjective. Finally, certain
groups criticize companies for doing business in or with
totalitarian nations, saying they are helping sustain oppressive
political regimes.
Implications for Business in Democracies
Democracies tend to provide stable business environments
through laws that protect individual property rights. Commerce
should prosper when the private sector comprises independently
owned firms that exist to make profits. Although participative
democracy, property rights, and free markets tend to encourage
economic growth, they do not always do so. India is the world’s
largest democracy, yet its economy grew very slowly for
decades. Meanwhile, some countries achieved rapid economic
growth under political systems that were not genuinely
democratic.
Which Type of Government Is Best for Business?
Do democratic governments provide more “stable” national
business environments than totalitarian ones? Although
democracies pass laws to protect individual civil liberties and

property rights, totalitarian governments could also grant such
rights. The difference is that whereas democracies strive to
guarantee such rights, totalitarian governments retain the power
to repeal them whenever they choose.
As for a nation’s rate of economic growth, we can say only that
a democracy does not guarantee high rates of economic growth
and that totalitarianism does not doom a nation to slow
economic growth. An economy’s growth rate is influenced by
many variables other than political and civil liberties, including
its tax system, openness toward investment, availability of
capital, and extent of trade and investment barriers.
Implications of Legal Issues for Companies
A nation’s political system is naturally intertwined with its
legal system. Its political system inspires and endorses its legal
system, which legitimizes and supports the political system.
Flexible business strategies help companies operate within the
political and legal frameworks of nations. An area in which
political and legal environments have important implications is
copyright law. People today share digital files worldwide for
free and directly with one another through the Internet. The
introduction of a new digital technology can devastate a
business because it can spread worldwide in days. Managers
will benefit if they have a solid grasp of how legal systems
affect company operations and strategy.
Implications of Ethical Issues for Companies

Probably every international company of at least moderate size
has a policy for corporate social responsibility (CSR).
Traditionally, companies practiced CSR through old-fashioned
philanthropy. Indeed, donating money and time toward solving
social problems helped society and bolstered a company’s
public image. Companies later developed codes of conduct for
their global operations to ensure they were good citizens
wherever they operated. Today companies search for ways to
use CSR to create value and build competitive advantage. Key
CSR issues include labor conditions, human rights, bribery,
corruption, fair trade practices, and the environment.
Chapter Summary
1.Describe each main type of political system.
■A political system consists of the structures, processes, and
activities by which a nation governs itself.
■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 impose authority, lack
constitutional guarantees, and restrict participation.
■Under theocratic totalitarianism, a country’s religious leaders
enforce laws and regulations based on religious and totalitarian
beliefs.
■Under secular totalitarianism, political leaders rely on military
and bureaucratic power.

■Secular totalitarianism takes three forms: communist
totalitarianism, tribal totalitarianism, and right-wing
totalitarianism.
■In a democratic system, leaders are elected directly by the
wide participation of the people or by their representatives.
■Most democracies are representative democracies, in which
citizens elect individuals from their groups to represent their
political views.
■Representative democracies strive to provide: freedom of
expression, periodic elections, full civil and property rights,
minority rights, and nonpolitical bureaucracies.
2.Identify the origins of political risk and how managers can
reduce its effects.
■Political risk is the likelihood that a society will undergo
political changes that negatively affect local business activity.
■Macro risk threatens the activities of all domestic and
international companies in every industry, whereas micro risk
threatens companies only within a particular industry or more
narrowly defined group.
■Five actions or events that cause political risk are: conflict and
violence, terrorism and kidnapping, property seizure, policy
changes, and local content requirements.
■The seizure of assets by a local government can take one of
three forms: confiscation (forced transfer of assets without
compensation), expropriation (forced transfer with

compensation), or nationalization (forced takeover of an entire
industry).
■Managers can reduce the effects of political risk through:
adaptation (incorporating risk into business strategies),
information gathering (monitoring local political events), and
political influence (such as by lobbying local political leaders).
■The Foreign Corrupt Practices Act is a 1977 statute that
forbids U.S. companies from bribing government officials or
political candidates in other nations.
3.Describe each main type of legal system and the important
global legal issues.
■A country’s legal system is its set of laws and regulations,
including the processes by which its laws are enacted and
enforced and the ways in which its courts hold parties
accountable for their actions.
■Common law is a legal system based on a country’s legal
history (tradition), past cases that have come before its courts
(precedent), and how laws are applied in specific situations
(usage).
■Civil law is a system based on a detailed set of written rules
and statutes that constitute a legal code, from which flows all
obligations, responsibilities, and privileges.
■Theocratic law is a system based on religious teachings.
■Businesses prefer a legal system that protects property rights
(legal rights to resources and any income they generate) and

intellectual property (property that results from people’s
intellectual talent and abilities).
■Intellectual property takes the form of industrial property (a
patent or trademark) or copyright.
■Many nations have product liability laws (responsibility for
damage, injury, or death caused by defective products) and
antitrust laws (designed to prevent companies from fixing
prices, sharing markets, and gaining unfair monopoly
advantages).
4.Explain ethics and social responsibility and key issues facing
international companies.
■Ethical behavior is personal behavior in accordance with
guidelines for good conduct or morality.
■Corporate social responsibility is the practice of companies
going beyond legal obligations to actively balance commitments
to investors, customers, other companies, and communities.
■The Friedman view of CSR says that a company’s sole
responsibility is to maximize profits for its owners while
operating within the law.
■The cultural relativist view of CSR says that a company should
adopt local ethics wherever it operates.
■The righteous moralist view of CSR says that a company
should maintain its home-country ethics wherever it operates.
■The utilitarian view of CSR says that a company should
behave in a way that maximizes “good” outcomes and

minimizes “bad” outcomes wherever it operates.
■Most companies focus their corporate social responsibilities in
the areas of labor conditions and human rights, bribery and
corruption, fair trade practices, and the environment.
5.Explain how international relations affect international
business activities.
■Political relations between a company’s home country and
those with which it does business strongly affect its
international activities.
■In general, favorable political relations lead to increased
opportunity and stable business environments.
■The mission of the United Nations (UN) is to provide
leadership in fostering peace and stability around the world.
■Although its global peacekeeping efforts have had mixed
results, the UN helps poor nations by providing food and
medical supplies, educational supplies and training, and
financial resources.
Talk It Over
1.The Internet and the greater access to information it can
provide are forcing politicians to change their methods of
governing. How might the Internet change totalitarian political
systems, such as North Korea? What might the Web’s future
expansion mean for nations with theocratic systems (for
example, Iran)? How might technology change the way that
democracies function?

2.Under a totalitarian political system, the Indonesian economy
grew strongly for 30 years. Meanwhile, the economy of the
world’s largest functioning democracy, India, performed poorly
for decades until recently. Relying on what you learned in this
chapter, do you think the Indonesian economy grew despite or
because of a totalitarian regime? What might explain India’s
relatively poor performance under a democratic political
system?
3.Consider the following statement: “Democratic political
systems, as opposed to totalitarian ones, provide international
companies with more stable environments in which to do
business.” Do you agree? Why or why not? Support your
argument with specific country examples.
Teaming Up
1.Debate Project. Two groups of four students each will debate
the ethics of doing business in countries with totalitarian
governments. After the first student from each side has spoken,
the second student will question the opposing side’s arguments,
looking for holes and inconsistencies. The third student will
attempt to answer these arguments. A fourth student will
present a summary of each side’s arguments. Finally, the class
will vote to determine which team has offered the more
compelling argument.
2.Market Entry Strategy Project. This exercise corresponds to
the MESP online simulation. For the nation you are studying,

what type of political and legal systems does it have? Do free
elections take place? Is the government heavily involved in the
economy? Is the legal system effective and impartial? Do
political and legal conditions suggest the country could be a
potential market? If so, for what kinds of goods or services
might the market be appealing? What is the level of corruption
in the nation? Is legislation pending that may be relevant to
international companies? Integrate your findings into your
completed MESP report.
Key Terms
antitrust (antimonopoly) laws (p. 98)
Berne Convention (p. 97)
capitalism (p. 85)
carbon footprint (p. 105)
civil law (p. 95)
common law (p. 94)
communism (p. 82)
confiscation (p. 90)
copyright (p. 97)
corporate social responsibility (p. 100)
democracy (p. 84)
ethical behavior (p. 100)
expropriation (p. 90)
Foreign Corrupt Practices Act (p. 93)
industrial property (p. 96)

intellectual property (p. 97)
legal system (p. 93)
lobbying (p. 93)
local content requirements (p. 91)
nationalism (p. 94)
nationalization (p. 91)
patent (p. 97)
political risk (p. 86)
political system (p. 80)
private sector (p. 85)
product liability (p. 98)
property rights (p. 96)
representative democracy (p. 84)
secular totalitarianism (p. 82)
socialism (p. 82)
theocracy (p. 82)
theocratic law (p. 95)
theocratic totalitarianism (p. 82)
totalitarian system (p. 81)
trademark (p. 97)
United Nations (UN) (p. 106)
value added tax (VAT) (p. 98)
Take It to the Web
1.Video Report. Visit this book’s channel on YouTube
(YouTube.com/MyIBvideos). Click on “Playlists” near the top

of the page and click on the set of videos labeled “Ch 03:
Politics, Law, and Business Ethics.” Watch one video from the
list and summarize it in a half-page report. Reflecting on the
contents of this chapter, which components of politics, law, and
business ethics can you identify in the video? How might a
company engaged in international business act on the
information contained in the video?
2.Web Site Report. To attract investment from domestic and
foreign companies, nations compete against each other to
provide top-notch services. Visit the main government portal of
Hong Kong, SAR (www.gov.hk) and select your preferred
language. Can you identify several sections of the site that are
government-to-business activities and government-to-citizen
dealings? Visit the “Environment” section and read about Hong
Kong’s eco-friendly initiatives. What key milestones has it
achieved, and what future initiatives are planned?
List the types of services that would be available to you as: (1)
a citizen of Hong Kong, (2) a tourist going to visit Hong Kong,
(3) a person thinking of starting a business in Hong Kong, and
(4) a company currently operating in Hong Kong. What
additional services should the government offer on its Web site
that it does not currently provide?
Ethical Challenges
1.You are the president of a firm that publishes textbooks for
medical students in over 30 languages. On a recent trip to a

university in a developing country (with a GDP per capita of
under $1,000 per year), you discover that students are using
bound photocopies of your best-selling medical textbook.
Speaking with several students, they inform you that if they
were required to pay for the actual books, they could not afford
medical school. Witnessing the clear copyright violation
firsthand, how do you react? What possible courses of action
might you take? If additional information would be helpful to
you, what would it be?
2.You are the proprietor of a fledging computer graphics
company in Shanghai, China. The sophisticated business
application software you need for your business normally sells
for 2,900 renminbi (around $350) at computer stores in
Shanghai. But with an income of just over $5,000 a year, you
cannot afford to buy the original graphics software for your
business. A friend has told you she can get you all the software
you need, and more, at a nearby street market for only $40.
Because very few people buy official software, you know the
authorities will not punish you if you are caught. Is it unethical
for you to purchase the pirated software? Do you believe you
are justified in doing so?
3.You are the CEO of a major pharmaceutical firm that holds
worldwide patents on several highly successful drugs. Your
company invests heavily to develop its drugs because patents
allow it to recoup its investment. But your firm has come under

pressure from competitors selling cheaper alternatives and from
politicians and nongovernmental groups to supply drugs to
people in poor nations at reduced prices. Several senior
executives in your company feel the firm is unfairly being asked
to discount its drugs that treat diseases afflicting people of poor
nations. Some executives suggest the firm focus on drugs to
treat diseases (such as heart disease and cancer) that occur
mostly in wealthy nations, but you are uneasy with such a move.
Would such a course of action be ethical? Diseases such as
AIDS, cancer, and heart disease all kill their victims. Should
drugs for only certain diseases be exempt from patent
protection?
PRACTICING INTERNATIONAL MANAGEMENT
CASE:Pirates of Globalization
The piracy of intellectual property is a serious global challenge.
Sophisticated pirates routinely violate patents, trademarks, and
copyrights to churn out high-quality fakes of the best-known
brands. Trademark counterfeiting amounts to between 5 and 7
percent of world trade or around $500 billion a year! Phony
products appear in many industries, including computer
software, films, books, music CDs, and pharmaceutical drugs.
Traditionally peddled by sidewalk vendors and in backstreet
markets, counterfeiters now employ the latest technology. Just
as honest businesses do, they are using the Internet to slash the
cost of distributing their fake goods. All merchandise on some

Internet sites is counterfeit, and even legitimate Web site
operators, such as eBay (www.ebay.com), have difficulty
rooting out pirates.
New York retailer Tiffany & Company (www.tiffany.com)
recently sued eBay because counterfeits of its products
appeared on eBay’s Web site. In the complaint, Tiffany said
that of the 186 jewelry pieces bearing the Tiffany name that it
randomly purchased on eBay, 73 percent were phony. Tiffany
argues that because eBay profits significantly from the sale of
fake merchandise, provides a forum for such sales, and
promotes it, that the company “should bear responsibility for
the sale of counterfeit merchandise on its site.” Others disagree,
saying it is impractical to require online auctioneers to verify
the authenticity of every product sold on its site. They compare
it to ordering newspapers to verify the authenticity of
everything sold through their classified ads section.
Pirates have not ignored the market for automotive parts, which
loses around $12 billion annually to phony goods.
Counterfeiters are making fake batteries, windshields, brakes,
fluids, filters, and spark plugs. The problem is causing fears of
lawsuits because of malfunctioning counterfeits and concerns of
lost revenue for producers of the genuine articles. For example,
if someone is in an accident because of a counterfeit product,
legitimate manufacturers need to prove the product is not their
own. Car manufacturers list potentially harmful fakes such as

brake linings made of compressed sawdust and transmission
fluid that is nothing more than cheap oil with added dye. Boxes
bearing legitimate-looking labels make it difficult for
consumers to tell the difference between a fake and the real
deal. More fake products are recently coming into North
America, but the larger market for consumption remains the
Middle East.
China, India, South Korea, Malaysia, Taiwan, and Thailand are
all leading sources of counterfeit products. Lax anti-piracy
regulations and booming economies in China and India mean
potential intellectual-property traps await companies doing
business in these emerging markets. For example, Indian law
gives international pharmaceutical firms five- to seven-year
patents on processes used to manufacture drugs—but not on the
drugs themselves. This lets Indian companies modify the
patented production processes of international pharmaceutical
companies to create only slightly different drugs.
In China, political protection for pirates of intellectual property
remains fairly common. Government officials, people working
for the government, and even the People’s Liberation Army
(China’s national army) operate factories that churn out pirated
goods; others operate on government-owned land. Criminals are
often connected to political leaders and receive legal protection
from prosecution. An international company has difficulty
fighting piracy in China because filing a lawsuit can severely

damage its business relations there.
Yet international opinion is divided on the root causes of
rampant intellectual-property violations in China. Some argue
that Chinese legislation is vaguely worded and difficult to
enforce. Others say that China’s intellectual-property laws and
regulations are fine, but poor enforcement is to blame for high
rates of piracy. Amazingly, China’s regulatory body sometimes
allows a counterfeiter to remove an infringing trademark and
still sell the substandard good. Technology companies claiming
China’s weak intellectual-property laws have harmed them
include Microsoft (www.microsoft.com), which claims that its
software is widely pirated, and Cisco Systems
(www.cisco.com), which sued a Chinese hardware maker for
allegedly copying and using Cisco networking software.
Designer Giorgio Armani (www.giorgioarmani.com) has not had
much of a presence in China because he finds fake goods across
the country emblazoned with his logo. Yet he is not put off by
China, opening both an Armani boutique and an Emporio
Armani store on Shanghai’s historic Bund. Despite ambitious
plans to launch as many as 36 more units, Armani understands
the challenges of counterfeiting. He feels pirating is flattering
“because it means you are doing the right thing,” but concedes
the problem requires action. In international business, and
especially in emerging markets, it pays to remember that old
Latin phrase, caveat emptor, “let the buyer beware.”

Thinking Globally
1.What actions can companies and governments take to ensure
that products cannot be easily pirated? Be specific.
2.Do you think that the international business community is
being too lax about the abuse of intellectual-property rights?
Are international companies simply afraid to speak out for fear
of jeopardizing access to attractive markets?
3.Increased digital communication may pose a threat to
intellectual property because technology allows people to create
perfect clones of original works. How do you think the Internet
might affect intellectual-property laws?
4.Locate information on the Tiffany vs. eBay lawsuit mentioned
in the case. Identify the arguments of the plaintiff and the
defendant and who prevailed. What are the implications of that
lawsuit for the sale of counterfeits in online auctions?
Source: Catherine Holahan, “Judge to Tiffany: Police Your Own
Brand,” Business Week (www.businessweek.com), July 15,
2008; Randy Myers, “Counterattack,” CFO Magazine, June
2008, pp. 62–66; Russ Banham, “Chinese Checking,” CFO
Magazine, September 2007, pp. 61–64; Rachel Metz, “eBay
Beats Tiffany in Court Case Over Trademarks,” CNBC.com
Web site (www.cnbc.com).
(Wild 78)
Wild, John J., Kenneth L. Wild & Jerry C.Y. Han.

International Business: The Challenges of Globalization, 5th
Edition. Pearson Learning

2 Cross-Cultural BusinessLearning ObjectivesHelsinki, Finland—.docx

More Related Content

Similar to 2 Cross-Cultural BusinessLearning ObjectivesHelsinki, Finland—.docx

More from eugeniadean34240

Recently uploaded

2 Cross-Cultural BusinessLearning ObjectivesHelsinki, Finland—.docx