Cross cultural literacy
An understanding of how cultural differences across and within nations can affect the way in which business is practiced.
Culture
Evolutionary; A system of values and norms that are shared among a group of people and that when taken together constitute a design for living. The fundamental building blocks of culture are values and norms.
Values
Abstract ideas about what a group believes to be good, right, and desirable.
Norms
The social rules and guidelines that prescribe appropriate behavior in particular situations.
Folkways
Routine conventions of everyday life (ex. good social manners, neighborly behavior, being on time, rituals such as Japanese business card exchange)
Mores
Norms that are seen as central to the functioning of a society and to its social life (ex. Theft, Adultery, consumption of alcohol in Saudi Arabia)
Society
A group of people who share a common set of values and norms.
Determinants of Culture
Include six determinants (language, religion, education, political philosophy, economic philosophy, and social structure)
1. Social structure
The basic social organization of a society.
Two dimensions differences between social structures.
1. social organization is individual Vs. group.
2. classes or castes. (i.e. degree of social stratification and mobility between strata)
Individuals and Groups
Emphasis on individual achievement
Pro- new products and new ways of doing business
Con- lack of company loyalty, failure to gain company specific knowledge, competition between individuals in a company rather than team building, and limit people's ability to develop a strong network of contacts within a firm
Groups
a group is an association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other's behavior.
Social strata
Hierarchical social categories often based on family background, occupation, and income.
Social mobility
The extent to which individuals can move out of one strata into which they are born.
Caste system
A closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual's lifetime
Class System
An open system of social stratification in which the position a person has by birth can be changed through his or her achievement or luck
Class consciousness
Tendency for people to perceive themselves in terms of their class background, and this shapes their relationships with others. In cultures where there is a great deal of consciousness over the class of others, the way individuals from different classes work together (i.e. management and labor) may be very prescribed and strained in some cultures (i.e. Britain), or have almost no significance in others (i.e. Japan).
2. Religion
A system of shared beliefs and rituals that are concerned with the realm of the sacred.
Ethical Systems
A set of moral principles or values that are used to guide and shape behavior.
World Religions
top five; Christianity , Islam, Hinduism, Buddhism, Confucianism.
Christianity
most widely practiced religion in the world (approximately 20%, 1.7 billion Christians)
"Protestant work ethic" - belief that focus on hard work, wealth creation, and frugality encourages capitalism
Islam
second largest religion (1 billion Muslims) (major principles on page 106.) Forbids consumption or pork or alcohol.
"Islamic fundamentalist" - associated in the media with militants, terrorists, and violent upheavals. However, this characterization may be misleading as the vast majority of Muslims point out that Islam teaches peace, justice, and tolerance. Fundamentalists demand a rigid commitment to traditional religious beliefs and rituals.
Hinduism
most in Indian sub-continent (750 million Hindus). Believe in karma, reincarnation, and nirvana. Cow is a sacred gift of the Gods to the human race. Most devout Hindus do not eat beef.
Buddhism
350 million followers, stresses afterlife and spiritual achievement rather than involvement in this world.
Confucianism
(not officially a religion - has little to say about a supreme being or an afterlife) 200 million followers mainly in China, Korea, and Japan. Attaining personal salvation through right action. Stresses loyalty, reciprocal obligations, and honesty in dealings with others.
3. Language
While English may be the language of international business, Chinese is spoken the largest number of people in the world, followed by English, and Hindi (spoken in India). Learning a second or third language will only help you in international business. International business people need to be careful with unspoken language as well. (Example, OK or thumbs up can mean different things, p 114)
4. Education
Cultural norms are often taught directly and indirectly in schools. The strength of a country's education system can be a major determinant of a nation's competitive advantage or likelihood of economic success.
Hofstede's Cultural dimensions
Most famous study of how culture relates to values in the workplace - Geert Hofstede collected data from 100,000 IBM employees across 40 countries from 1967-1973. Results provide a starting point for managers who are trying to understand cultural differences.
1.Power Distance
2.Individualism Vs. Collectivism
3.Uncertainty Avoidance
4. Masculinity Vs. Femininity
5. Confucian dynamism
Power Distance
focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities. High power distance cultures let inequalities grow over time into inequalities of power and wealth.
Individualism Vs. Collectivism
Could summarize differences in cultures; focused on the relationship between the individual and his or her fellows. In individualistic societies, individual achievement and freedom are highly valued (Australia).
Uncertainty Avoidance
Measures the willingness of people in a culture to tolerate uncertainty. High uncertainty avoidance cultures place a premium on job security, career patterns, retirement benefits, etc
Masculinity Vs. Femininity
looks at the relationship between gender and work roles and the differentiation between men and women in the same job.
Confucian dynamism
captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors
beware of ethnocentrism or ethnocentric behavior
A belief in the superiority of one's own culture. Individuals who are ethnocentric frequently demonstrate disregard or contempt for other cultures.
Free trade
Absence of government barriers to the free flow of goods and services between countries. Refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country
Trade Theories (5)
Mercantilism, Absolute advantage , Theory of comparative advantage, Heckscher-Ohlin, Product Life-Cycle Theory
1. Mercantilism
A sixteenth century English economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. Its principle assertion was that it is in a country's best interest (accumulation of wealth - gold and silver) to maintain a trade surplus, to export more than it imports. Consistent with this belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade.
Zero-sum game
A situation in which an economic gain by one country results in a loss by another. It was left to Adam Smith and David Ricardo to show the shortsightedness of this approach and to demonstrate that trade is a positive-sum game. As an economic philosophy, mercantilism is problematic and not valid.
2. Absolute advantage
A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries. The text provides a numerical example of Smith's theory.
3. Theory of comparative advantage
It makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself. The textbook provides a detailed example to explain the rationale of this theory.
Constant returns to specialization
The units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier.
4. Heckscher-Ohlin
Heckscher and Ohlin argued that comparative advantage arises from differences in national factor endowments (land, labor, and capital). As a result, the Heckscher-Ohlin theory predicts that countries will export goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce
The Leontief Paradox
Using the Heckscher-Ohlin theory, Leontief, in 1953 postulated that since the United States was relatively abundant in capital compared to other nations, the United States would be an exporter of capital intensive goods and an importer of labor-intensive goods. To his surprise, however, he found that U.S. exports were less capital intensive than U.S. imports. Since this result was at variance with the predictions of the theory, it has become known as the Leontief Paradox.
5. Product Life-Cycle Theory
According to the theory as products mature, both the location of sales and the optimal production location will change affecting the flow and direction of trade. While the product life cycle theory accurately explains what has happened for products like photocopiers and a number of other high technology products developed in the United States in the 1960s and 1970s, the increasing globalization and integration of the world economy has made this theory less valid in today's world.
New trade theory
Theory that sometimes countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms. So a country's pattern of trade may be a reflection of the ability of firms in that nation to capture first-mover advantages and economies of scale.
First mover advantages
Economic and strategic advantages that accrue to early entrants into an industry.
Economies of scale
(v. dis-economies of scale)
Unit cost reductions associated with a large scale of output
(area where total costs per unit are rising per additional unit of production)
National Competitive Advantage:
Porter's Diamond
Porter's 1990 study tried to explain why a nation achieves international success in a particular industry. This study found four broad attributes - factor endowments, demand conditions, relating and supporting industries, and "firm strategy, structure, and rivalry" - that promote or impede the creation of competitive advantage. These are shown as a diamond in Figure 5.6. Porter argues that firms are most likely to succeed in industries where the diamond is favorable.
Factor Endowments
a nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry.
Demand Conditions
the nature of home demand for the industry's product or service.
Relating and Supporting Industries
the presence or absence of supplier industries and related industries that are internationally competitive.
Firm Strategy, Structure, and Rivalry
the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry.
Foreign Direct Investment
A direct investment in business operations in a foreign country.
FDI occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a multinational enterprise.
Greenfield Investment
[v. Merger/acquisition]
Involves the establishment of a wholly new operation in a foreign country [versus acquiring or merging with an existing firm in the foreign country. There are three types of acquisitions: minority (10 percent to 49 percent stake), majority 50 percent to 99 percent), or full (100 percent)]
Flow of FDI
The amount of FDI undertaken over a given time period (normally a year) viewed in terms of outflow and inflow.
Outflow of FDI
The flow of FDI out of a country
Inflow of FDI
The flow of FDI into a country
Stock of FDI
The total accumulated value of foreign-owned assets at a given time.
Gross Fixed Capital Formation
Summarizes the total amount of capital invested in factories, stores, office buildings, and the like. The greater the capital investment in an economy, the more favorable its future growth prospects. Measuring the inward flows of FDI as a percentage of gross fixed capital formation may support FDI role as an important driver of a country's economic growth. (E.g. Inward flows = $ of FDI/Gross fixed capital formation x 100.)
FDI Theory (4 parts)
Internalization Theory, Strategic behavior in Oligopolistic industries, Eclectic Paradigm, Product life Cycle
Exporting
Producing goods at home and then shipping them to the receiving country for sale. The viability of exporting is often constrained by transportation costs and trade barriers.
Licensing
Granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells
1. Internalization theory
There is a branch of economic theory known as internalization theory (also known as the market imperfections approach) that seeks to explain why firms often prefer foreign direct investment to licensing as a strategy for entering foreign markets. According to internationalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities.
Internalization theory step 1
) First, licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor.
Internalization theory step 2
) Second, licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
Internalization theory step 3
Third, a problem arises with licensing when the firm's competitive advantage is based not so much on its products as on the management, marketing, and manufacturing capabilities that produce those products. Such capabilities are often not amenable to licensing
2. Strategic behavior in Oligopolistic industries.
Theory based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. F.T. Knickerbocker that FDI may be a result of imitative behavior in an oligopoly.
Oligopoly
Industry composed of a limited number of large firms. (e.g. US cell phone providers)
Multipoint Competition
When two or more enterprises encounter each other in different regional markets, national markets, or industries.
3. Eclectic Paradigm
The eclectic paradigm attempts to combine the other two perspectives into a single holistic explanation of FDI (championed by the British economist John Dunning). Dunning argues that in addition to the various factors discussed above, location-specific advantages (that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets) and externalities (knowledge spillovers that occur when companies in the same industry locate in the same area) are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment.
Location-Specific advantages
Arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets
Externalities
Knowledge spillovers that occur when companies in the same industry locate in the same area (e.g. High tech FDI in silicon valley, Automotive FDI in Southeast KY/TN/SC/AL/MS)
4. Product life Cycle
Raymond Vernon's product life cycle theory (chapter 5) is also used to explain FDI. Vernon argued that often the same firms that pioneer a product in their home markets may undertake FDI to produce a product for consumption in foreign markets.
Balance-of-payments accounts
A record of a country's payments to and receipts from other countries. (discussed in detail in Appendix A, pp. 197-201)
Current account
The current account is a record of a country's export and import of goods and services.
Offshore production
FDI undertaken to serve the home market.
Government's attitudes towards FDI (3)
The Radical View, Free Market View, Pragmatic Nationalism
The Radical View
MNE are tools for exploiting host countries to the exclusive benefit of capitalist/imperialist home countries.
Free Market View
Argues that international production should be distributed among countries according to the theory of comparative advantage. Within this framework, FDI is an instrument used by MNE's for dispersing the production of goods and services to the most efficient locations around the globe.
Pragmatic Nationalism
Ideology between the two above extremes. The pragmatic nationalist view is that FDI has both benefits (such as inflows of capital, technology, skills and jobs) and costs (such as repatriation of profits to the home country and a negative balance of payments effect). According to this view, FDI should be allowed only if the benefits outweigh the costs.
Classless Society
When a country (like Britain in recent years) shows signs of a reduction in class consciousness, it finds itself moving towards a...
Cultural Change
The popularity of an aspect of a certain culture seen in another culture (Indian food gaining popularity in Britain and vise versa).