Professional Documents
Culture Documents
International Business
Management
WEEK 2
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Trade Theories
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Absolute Advantage
Absolute advantage refers to a situation in which a country has an
absolute advantage in the production of a product when it is more
efficient than any other country at producing it.
Countries should specialize in the production of goods for which they
have an absolute advantage and then trade these goods for goods
produced by other countries
Both countries benefit from specialization and trade
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Absolute Advantage
What if a country does not have absolute advantage in producing any good or
service?
Should it not trade?
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Comparative Advantage
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Comparative Advantage
The relative
advantage in one
economic activity
that a nation
enjoys over
others.
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Aircraft
PPF: Production possibility frontier
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Strategic Trade
Suggests that strategic government intervention in certain industries
can enhance their odds for international success.
The type of industries that benefit from government intervention tend
to be highly capital-intensive industries with high barriers to entry,
where domestic firms may have little chance of entering and
competing without government assistance.
These industries also feature substantial first-mover advantages,
advantages that first entrants enjoy and do not share with late
entrants.
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Strategic Trade
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Strategic Trade
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Government
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2. Luck
Y2K for Indian IT sector
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Thank You………..
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RBV: Firm’s
resources and Strategy Performance
capabilities
Institutions Based
View: Role of host
country
environment
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Institutions
Formal and informal policies popularly known
as “the rules of the game.”
Institution-based view on
global business - leading perspective
in which firms’ success is correlated to
monitoring, decoding, and adapting to changing
the rules of the game.
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Types Of Institutions
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Formal Institutions
Formal institutions:
laws, regulations, and rules.
Regulatory pillar:
coercive power
of governments
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Informal Institutions
Informal institutions:
norms, culture, and ethics.
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Informal Institutions
Normative institutions are norms and values that structure
choices
Emphasizing how things should be done and defining legitimate
means to accomplish them.
Closely related to professionalism
Firms that adapt to host country ‘norms’ find it easier to transact
with other organizations in the host country
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Formal Institutions
1. Political Systems – Democracy vs. Totalitarianism
2. Legal Systems – Civil, Common and Theocratic
3. Property Rights and Intellectual Property Rights
4. Economic Systems – Market, mixed and
command economy
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Political Systems
A political system refers to how a country is governed politically
Democracy - political system in which citizens elect representatives to
govern the country on their behalf.
• Supports global business by preserving individual’s right to freedom
of expression and organization.
Totalitarianism (or dictatorship) - system in which one person or party
exercises absolute political control.
• Communist totalitarianism – China, Cuba, Laos, North Korea, and
Vietnam
• Right-wing totalitarianism – Philippines, South Africa, Taiwan and
most Latin American Countries (recently democracies)
• Theocratic totalitarianism – Iran and Saudi Arabia
• Tribal totalitarianism -- Rwanda
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Legal Systems
A legal system refers to the rules of the game on how a
country’s laws are enacted and enforced. The first,
regulatory pillar that supports institutions.
Theocratic
Civil Law
Law
Common
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Legal Systems
Civil Law – Uses comprehensive statutes and codes as a primary means to form legal
judgments.
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Legal Systems
Civil Law countries Common law Theocratic law
countries countries
Argentina, Austria, Australia, Canada, Iran, Saudi Arabia,
Belgium, Brazil, Chile, Hong Kong, India, United Arab Emirates
China, Egypt, France, Ireland, Israel, Kenya, (not fully)
Germany, Greece, Malaysia, New
Indonesia, Italy, Japan, Zealand, Nigeria,
Mexico, Netherlands, Singapore, South
Russia, South Korea, Africa, Sri Lanka,
Sweden, Switzerland, United Kingdom,
Taiwan United States,
Zimbabwe
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Economic Systems
Rules of the game on how a country is governed economically.
Mixed
Economy
Market Command
Economy Economy
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Economic Systems
Market economy – characterized by the “invisible hand” of market forces
and a laissez faire approach from the government.
• Factors of production are in private hands
• Government performs functions that private firms cannot – building roads,
defense etc.
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Informal Institutions
Socially
transmitted
information,
part of the Informal
heritage institutions
we call cultures,
ethics, and
norms.
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Culture
“the collective programming of the mind which
distinguishes the members of one group or
category of people from another.”
Geert Hofstede
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Components of Culture
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Social Structure
Two dimensions explain differences among cultures
• The basic unit of social organization is the individual, as opposed to
the group
• A society is stratified into classes or castes
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Social Structure
The individual
• In many Western societies, the individual is the basic building block of
social organization.
• Emphasis on individual achievement
The group
• The primary unit of social organization in many non-Western societies
• Importance of group membership/identification
Sources of transaction costs –
• Where basis of organization is individual
◦ Lack of loyalty, difficulty in team formation
• Where basis of organization is the group
◦ Lack of entrepreneurship, slow decision making
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Social Structure
Social Structure refers to the way a society broadly organizes its
members – with rigidity or flexibility
Two key terms – social stratification and social mobility
Social Stratification – hierarchical arrangement of individuals into
social categories such as classes castes and other divisions of the
society
• Ex – caste system in India, urban-rural classification in China
Social mobility – degree to which members of a lower social strata can
move to a higher social strata
MNEs need to be careful while dealing with socially stratified countries
• The most suitable person for the job may not be technically most
qualified
• Ignorance of “social structure” may also be a reason for transaction costs
of doing business
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Religion
A major manifestation of culture
Economic implications of Christianity
• Protestant ethics promotes the spirit of capitalism
Economic implications of Islam
• Prohibits the payment or receipt of interest
Economic implications of Hinduism
• Hindus value their spiritual rather than material
considerations
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Religion
Economic implications of Buddhism
• Does not emphasize wealth creation
• Entrepreneurial behavior is not stressed culturally, but still
acceptable
• Does not support the caste system, individuals do have some
mobility and can work with individuals from different classes
Economic implications of Confucianism
•Three key teachings of Confucianism - loyalty, reciprocal
obligations, and honesty - may all lead to a lowering of the cost
of doing business in Confucian societies
•Guanxi
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Language
Spoken Language
• Language structures the way we see the world
• In English there is one word for snow, but Eskimos have 24 different
words for snow!!!
• Countries with more than one language often have more than one
culture
o In Canada, tensions between English and French speaking cultures
• Chinese is the mother tongue of the largest number of people
• English is becoming the language of international business
• Ignorance to local language can lead to higher costs of business
o Example – GM’s Chevrolet Nova, when translated into Spanish means
“No go” (no va)
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Language
Unspoken Language
• Nonverbal communication
o Raising of eyebrows, smile etc.
o Often culturally bound
o A simple Thumbs-up sign is taken as vulgar in Greece
o Personal space
o 5 to 8 feet in US, while in most American countries it is 3 to
5 feet
o Keeping 5-8 feet distance in Latin Americas maybe seen as
keeping aloof
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Education
Formal Education
• Medium through which individuals learn languages and
other skills
• Socializes the young into the values and norms of a
society
• Provides a national competitive advantage
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The underlying view of this approach is that people and firms are more comfortable doing business with
other countries within the same cluster. Having a common language, history, religion, or culture reduces
transaction costs when operating abroad.
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Sources: G. Hofstede, “Cultural constraints in management theories,” Academy of Management Executive 7, no. 1 (1993): 81–94 and G. Hosftede,
Cultures and Organizations: Software of the Mind (New York: McGraw-Hill, 1997) 25, 26, 53, 84, 113, 166. For newest update, see
http://www.geerthofstede.com.
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•Openness to Change
• Western people believe that an individual can exert control and bring change
• In many non-western countries control is considered as external; people
believe in destiny or will of God
• In societies that emphasize tradition, change may threaten way of life
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Thank You………..
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