Business Environment

Dr. Sanjay Kumar,

SHIATS
I. The Legal Environment
 National legal systems vary dramatically for
historical , cultural, political, and religious
reasons. The rule of law, the role of lawyers, the
burden of proof, the right to judicial review, and
of course, the laws themselves differ from
country to country.
 E.g. in U.S, in times of economic distress firms
can lay of workers with minimum notice and
severance package. In Belgium they need to
give three months notice and three months pay
 Access to legal system may also vary from
country to country. In U.S easy availability of
lawyers and non discriminatory access to its
legal system is helpful in settling disputes
with suppliers and customers. In South Korea
shortage of lawyers forces international
businesses to settle disputes privately rather
than utilize South Korean courts. India?
….Portugal?
Differences in Legal Systems
Common Law
 Common Law is the foundation of all legal systems of
U.K and its former colonies. It is based on cumulative
wisdom of judges’ decision on individual cases
through history. These cases create legal precedents
which other judges use to decide similar cases.
 Common law it self evolved differently in each of the
common law country. For e.g. manufacturers of
defective products are more vulnerabale to lawsuits in
U.S than in U.K as a result of evolutionary difference
in the two countries Case law
 With in the common law , Statutory law also
vary among common law countries. ( Secrecy
laws in U.S and U.K)
 Even the administration of the law may vary.
For e.g. in U.S both plaintiff and defendant
generally pay their own legal fee. In U.K the
looser pays legal expenses of both the
parties. Less scope for frivolous lawsuits in
U.K
Religious Law
 Religious law is based on the officially established
rules governing the faith and practice of a particular
religion. A country that applies religious law to civil
and criminal conduct is called a theocracy. Religious
laws can create interesting problems for firms.
 E.g.. Muslim religion denounces charging interest on
loans as unfair exploitation of the poor. Hence Muslim
firms and financial institutions had to develop
alternative financial arrangements to acquire finance
and capital. – leasing arrangement, upfront fee in
Iran, and Islamic banking in Pakistan
 Countries relying on religious law often have other
features, such as an absence of due process and
appeal procedure, which should make outsiders
cautious.
 In Saudi Arabia, all firms must have a local
representative or sponsor typically a government
agency or member of a person connected with
Royal family. In the event of a commercial dispute
the local representative can have the foreigner
detained by the local police. Similarly banks have to
maintain two retail branches separately one for
males and another for females- ladies only fast food
restaurants.
 International business people must be aware
of these general differences in legal systems
to avoid costly misunderstandings. They
should also rely on the expertise of local
lawyers in each country in which they operate
to help them comply with the specific
requirements of local laws and to council
them on substantive differences in due
process, legal liabilities, and procedural
safeguards
Domestically oriented laws

 The laws of the countries in which an

international business operates play a major role
in shaping the opportunities available to that
firm. Some of these laws are primarily designed
to regulate the domestic economic environment.
Such laws affect all facets of a firm’s domestic
operations.
 Managing workforce (recruitment, compensation,
and labor relations laws)
II. Cultural Environment

‘Culture is the way of life of the people,

including their attitudes, values, beliefs, arts,
sciences, modes of perception, and habits of
thought and activity. It is the collective
programming of the mind, which distinguishes
the members of one group from the others.’
Constituents of Culture

 Value system
 Norms
 Aesthetics (ideas)
 Traditions and Customs
 Language
 Religion
1. Values
 Values are shared assumptions of a group
regarding what is good or bad, right or
wrong, and important or unimportant.
Some examples:
 In India consumers often attempts to emulate

his peer group and tries to do better than

them. In China competitive aspect of life is
downplayed. Ads like Safedi aisi,ki nazar lag
jaaye and ‘Neighbours envy and owners pride’
make little sense in china unlike in India.
Comparative advertising is difficult in china.
 Ad used by P&G for Camay soap, a man meeting a woman
for the first time compares her skin to that of a fine
porcelain doll. This worked well in Europe and South
America, but failed miserably in Japan, where it was
considered unsophisticated and rude to a Japanese woman.
 Attitudes about time differ dramatically across cultures. In
Anglo Saxon culture ‘Time is money’ In Latin America very
few would think it unusual if a meeting begins an hour late.
 In US it is business from beginning and in Japan and Saudi
lot of time is spent in exchanging pleasantries assessing the
qualities of the potential business partners.
 Age matters a lot in Japanese Chinese and Arab cultures
where as US prefers young ‘Fast trakers’
2. Norms
International managers should be able to differentiate
between what is acceptable and what is not and familiarize
themselves with the essential ones.

1. Cultural imperatives: must be followed, eg. prolonged eye

contact must in Latin America and Arab world and an ill
manners in Japan
2. Cultural exclusives: refers to behavior patterns appropriate
for local but not expected from foreigners e.g.. Discussion on
internal politics, social customs an practices.
3. Cultural adiaphora: customs and manners mandatory for
locals but optional for foreigners. e.g. bowing among
Japanese
3. Aesthetics
Ideas and perceptions that a cultural group upholds in
terms of beauty and good taste is referred to as aesthetics.
e.g.: Colors have different manifestations for different
cultures. America’s corporate color blue is associate with
evil in many African countries. In china red is lucky while it
is associated with death in many African countries. Black
represents death in U.S and European countries while
white represents death in Japan, while it represents joy in
Ghana.
4. Traditions and Customs.
 Traditions are the elements of culture passed on
from one generation to another – An established
pattern of behavior is known as custom
 Americans prefer blend chocolates, French
dark ones and Dutch white ones
 Defatted milk is costly in the west in contrast to
milk with fat.
 Indian vegetarianism is too complex to
understand
5 Language
Is a systematic means of communicating ideas or
feelings by use of conventional signs, gestures, marks, or
sounds.
 Verbal and non verbal communication

 Lack of understanding linguistic nuances has

resulted in marketing blunders.
 Coca cola was named Ke-kou-ke-La which means ‘ ‘female
horse stuffed with wax’. Subsequently the company after
researching 40thousand Chinese characters named it Ko-
kou-ko-le which means’ ‘happiness in the mouth’
 Chevrolet’s highly popular US car ,Nova failed miserably in
Latin America as it means ‘ it does not go’ in Spanish
 Honda’s introduction of ‘Fitta’ in nordic countries means a
vulgar word and had to be renamed ‘Fitta Jazz’
 The Swedish vacuum cleaner Electrolux introduced the
same print ad’ Nothing sucks like an Electrolux’ in the
US market and in US culture suck means really bad
 Pepsi’s slogan ‘ Come alive with the Pepsi generation’
backfired in Taiwan and China as it translates to ‘Pepsi
will bring your ancestors back from the dead’
 Parkers pens ad for its ink ‘Avoid embaressment - use
quink mens in latin america ‘ Avoid pregnancy use
Quink’
 P&G vicks in German has explicitly vulgal connotation-
had to be changed to wicks
 Ford’s compact with a certain name in Scandinavia
means big fat lady
 Nodding ones head means ‘yes’ in US but no in Bulgaria
 Yes in Japan Just means ‘I am listening’ O.K in Thailand
 Silence is abhorred in meetings in U.S or in
private conversations believing that silence
reflects an inability to communicate. In Japan
silence may indicate nothing more than thinking.
 U.S managers demonstrate leadership by
dominating group discussions and Japanese by
allowing their subordinates to talk more.
 Gift giving, and purpose differ in Japan and
Arab world
6. Religion
 Gillette found it very difficulty to place an ad in news paper as
Islam in Iran prohibits shaving.
 McDonald’s printing of flags of 24 succor teams including Saudi's
on takeaway bags created a major furor.
 S&P developed a ‘ SHARIA Indices for Islamic countries
 Nikes stylized flame symbol resembled a sacred Muslim symbol-
had to apologize and withdrawn all the stocks.
 In Arabian countries the dolls Sara and Leila that compete with
Barbie have ‘brother dolls’ and not boyfriend dolls.
 All meat products have to conform to Halal
 Work stop five times a day in Saudi and job opportunities are
limited for woman- Islamic banking
 Protestant ethic influences work ethics differently
 Caste system has all pervasive influence in India.
Five Profiles of Cultural Intelligence
Profiles Characteristics
The Local A person who works well with people from similar background
but does not work effectively with people from different cultural
backgrounds
The Analyst A person who observes and learns from others and plans a
strategy for interacting with people from different cultural
backgrounds
The Neutral A person who relies on intuition rather than on a systematic
learning style when interacting with people from different
cultural backgrounds
The Mimic A person who creates a comfort zone for people from different
cultural background by adopting their general postures and
communication style. This is not pure imitation, which may be
regarded as mocking
The Chameleon A person who may be mistaken for a native of the foreign
country. He /she may achieve results that natives cannot, due
to his/her insider’s skills and outsider’s perspective. This is very
rare
Implications for Action: Six rules of
Thumb when venturing abroad
 Be prepared
 Slow down
 Establish contact
 Understand the importance of language
 Respect cultural differences
 Understand that no culture is inherently
superior in all aspects
III. Political Environment
‘The political system of a country comprise various stake
holders such as government, political parties with different
ideologies, labor unions, religious organizations, environmental
groups, and various NGO’s’
 The type of economic system
 The structure of the govt. like Parliamentary, Monarchies etc has
influence on business
 Ideology of political parties exerts lot of influence on trade.
 Power of different pressure groups
 Terrorism, Crime, and Violence, including cyber terrorism –
Business cost of crime and violence is 2.8 in Brazil, 4 in Russia,
4.4 in US, 4.4 in China, 5.2 in India, 6.3 in Singapore, 6.4 in
Germany on a 7 point scale.( 1 is most significant 7 least)
 Index of economic freedom – Hongkong first rank, Bolivia 123
last and India at a rank of 115 ( year 2011)
Examples of Political Risks
Type Impact on Firms
Expropriation Loss of future profits
(forcing)

Campaign against Loss of sales, Increased costs of public relations, efforts to

Foreign firms improve public image

Mandatory labor Increased operating costs, increased managerial costs,

benefits legislation lower productivity

Civil Wars Destruction of property, Lost sales, Disruption of production,

increased security costs, Lower productivity
Inflation Higher operating costs
Repatriation Inability to transfer funds freely
Currency Reduced value of repatriated earnings
devaluations
Increased Taxation Lower after-tax profits
Measures to protect against political Risks

 Seek information form employees- valuable

source of political risk information
 Decide on nature of investment- short term or
long-term
 Might build domestic citizen by being a good
corporate citizen and buying local inputs
 Insure political risks e.g. Overseas Private
Investment Corporation of US, and Multilateral
investment Guarantee Agency of WB
IV. Economic Environment
 Economic System
 Economic policies
 GDP growth rates
 Balance of payments position
 Per capita and National Income
 Growth strategy
 Money and Capital markets
 Infrastructure