Chapter 2
The Cultural Environments
Facing Business
WHAT IS CULTURE?
“A system of values and norms that are shared
among a group of people and that when taken
together constitute a design for living.”
Ethnocentricity
Belief that one’s own ethnic group or culture
Is superior to that of others
Cultural literacy
Detailed knowledge of a culture that enables a
person to function effectively within it
Culture is an integral part of a nation’s operating
environment
-every business function is subject to potential
cultural differences
CULTURAL ADJUSTMENTS
-Companies need to decide when to make
cultural adjustments
-Fostering cultural diversity can allow a company
to gain a global competitive advantage by bringing
together people of diverse backgrounds and
experience
CULTURAL COLLISION
Cultural collision can occur …..
-when a company implements practices that are
less effective
-when employees encounter distress because of
difficulty in accepting or adjusting to foreign
behaviors
AVOIDING CULTURAL COLLISIONS
□ People on both sides of the context barrier
must be trained to make adjustments.
□ Background information is essential when
explaining anything. Cultural Awareness
□ Do not assume the newcomer is self-
reliant.
□ Need to make an effort to become more
self- adjusted.
□ Country-by-country analysis can be difficult
because subcultures exist within
nation- Need to focus on relevant groups
HOW CULTURES FORM AND CHANGE
□ Cultural value systems are established
early in life but may change through
-Change by choice – one’s own decision. Social
and economic situations present people with
new alternatives
-Change by imposition – involves imposing
certain elements from an alien culture that,
over time becomes part of the subject culture
(cultural imperialism)
Cultural diffusion- contact with other culture
brings change
Creolization-mixing culture element
PATTERNS OF DIFFUSION
- Diffusion refers to how something spreads.
A drop of ink, for example, will spread
through a glass of water until the ink and
water blend into a single mixture.
IMPACT OF CULTURAL DIFFUSION
Positive Impacts
□ Access to information and ideas
□ Access to products
□ New entertainment
Negative Impacts
□ Loss of local businesses
□ Loss of cultural identity
CULTURAL DIFFUSION
- The spread of cultural ideas, practices, or
goods from one group of people to another
BEHAVIORAL PRACTICES AFFECTING BUSINESS
1. Issues in Social Stratification
2. Work Motivation
3. Relationship Preferences
4. Risk-taking Behavior
5. Information and Task Processing
6. Communications

1. SOCIAL STRATIFICATION
Group affiliations can be
□ Ascribed group memberships
- based on gender, family, age, caste, and
ethnic or national origin
□ Acquired group memberships
- based on religion, political affiliation,
professional association
□ Two other factors that are important
- education and social connections
SOCIAL STRATIFICATION
Caste system
• A form of closed system of stratification in
which social position is determined by:
~ the family into which a person is born
• Change in that position is usually not
possible during an individual's lifetime
Immobility and inherited status
• Examples: Japan, India
Five different levels of the Indian caste system:
1. Priest
2. Ruler, Warrior, Landowner
3. Merchants
4. Artisans, Farmers
5. Outside class system - known as
‘Untouchables’
SOCIAL STRATIFICATION: PERFORMANCE
ORIENTATION
□ Employment : In US individual competence
--- to avoid discrimination rules are set
□ Whereas in Japan cooperation is stressed
2. WORK MOTIVATION
□ The motivation to work differs across
cultures
□ Studies show
■ the desire for material wealth is a
prime motivation to work
■ people are more eager to work
when the rewards for success are
high
■ In countries with high work
centrality, people tend to work
more hours per week
■ High levels of work centrality may
lead to dedicated workers
- In some culture LESS value on Leisure
time and more on Productivity
- Example of FRANCE and US (OECD research 30
countries)
- Among 30 countries, France have most
vacations,135 min per day drinking and eating and
530 min sleeping
- American spend 74 min per day in eating and
drinking and 518 minutes in sleeping
Masculinity-femininity index
- high masculinity score prefers “to live to
work” than “to work to live”
- Austria High Masculinity and SWEDEN
Femininity
Hierarchy of needs theory
□ Hierarchy of needs theory
- fill lower-level needs before moving to
higher level needs
□ The ranking of needs differs among cultures
Maslow’s Hierarchy of Needs
 - Privileges for managers are expected-
Wide range of salaries
- Formal social interaction
MASLOW'S THEORY &
International Managers

□ Managers in U.S., U.K, Europe and Latin

America report that autonomy and self-
actualization are the most important but
least satisfied needs.
□ Some East Asian managers think that
hierarchy of needs is western-oriented and
focuses on the individual

3. RELATIONSHIP PREFERENCES

□ Relationship preferences differ by culture

□ Power distance
■ high power distance implies little High individualism countries:
superior- subordinate interaction
(e.g., Mexico, South Korea, India) (e.g., U.S., Canada, Sweden)
■ low power distance implies High collectivism countries: – (e.g., Indonesia,
consultative style e.g., Austria, Pakistan)
Finland, Ireland)

Low power distance culture

- Boss and employees treat one another as
equals + equals rights
- Decentralisation of the power The ideal
boss is a democrat
- Subordinates expect to be consulted /
- Boss expect initiatives from employees
- People disapprove of status- Narrow range
of salaries
- Less formal social interaction
Hofstede’s Cultural Dimensions:
High power Distance culture Uncertainty Avoidance - people feel threatened
by ambiguous situations
- Employees respect managers and
managers expect obedience
High uncertainty avoidance countries:
- Centralization of the power The ideal boss
is an autocrat - high need for security- people worried
- strong belief in experts and their knowledge
- Subordinates expect to be told what to - structure organizational activities
do / - more written rules
- Boss is expected to take all the initiatives - less managerial risk taking
(e.g., Germany, Japan, Spain)
Low uncertainty avoidance countries:
-people more willing to accept risks of the
unknown
-less structured organizational activities
-fewer written rules
-more managerial risk taking
-more ambitious employees
(e.g., Denmark and Great Britain)
RISK-TAKING BEHAVIOR
2. Trust
□ Where trust is high, business costs tend to
be lower.
□ Degree of trust may differ between what
people consider their in-group and their
out-group.
3. Future Orientation
□ Cultures differ in their perceptions of the
risks from delaying gratification.
□ Delayed compensation programs –
retirement plans
4. Fatalism
□ If people are fatalistic – they believe every
event in life is inevitable – they are less
likely to accept the basic cause-and-effect
relationship between work and reward.
□ In countries that rate high on fatalism,
people plan less for contingencies.
INFORMATION AND TASK PROCESSING
2. Obtaining Information: Low-Context versus
High-Context Cultures
□ Low-context cultures – people generally
regard as relevant only first-hand
information that bears directly on the
subject at hand.
□ High-context cultures – people tend to
regard seemingly peripheral information as
pertinent and infer meanings from things
said either indirectly or casually.
High-context vs Low-context cultures
□ High-context cultures
■ Emphasize on establishing and
strengthening relationships in the
communication process
■ Non-verbal communication is as
important as verbal communication
■ Examples: Asians, Arabians, Latin
Americans
■ Low-context cultures
■ Emphasize on exchanging
information and is less focused on
building relationships
■ Pay more attention on spoken words
and less attention on non-verbal
communication (body language, eye
movement
■ Examples: Americans, Canadians,
Australians, Germans
3. Information Processing
❏ Every culture has its own systems for
ordering and classifying information.
4. Monochronic versus Polychronic Cultures
❏ Cultural differences also affect
people’s comfort with different
degrees of multi-tasking.
❏ In monochromic cultures people may
prefer to work sequentially.
❏ In polychromic culture people are
more comfortable when working
simultaneously on a variety of tasks.
MONOCHRONIC VS. POLYCHRONIC
■ Monochronic cultures
 Like to do just one thing at a time
 Orderliness
 They do not value interruptions.
 The Germans tend to be monochronic
■ Polychronic cultures
 Like to do multiple things at the same time.
 A manager's office in a polychronic culture
typically has an open door, a ringing phone
and a meeting all going on at the same
time.
 Polychronic cultures include the French and
the Americans.
COMMUNICATION
❏ Silent Language
• Colors. For a product to succeed, its colors
obviously must be consistent with the
consumer’s frame or reference.
• Distance. Another aspect of silent language
is the accustomed distance people maintain
during conversations or when conducting
business.
• Time and Punctuality. Culturally, there are
different ways of looking at time, some
values it more than the others.
• Body Language. Body language or kinesics
also differs among cultures.
• Prestige. It relates to a person’s status,
particularly in an organizational setting.
CROSS-CULTURAL MEANINGS AND
ASSOCIATIONS OF INDIVIDUAL COLORS
□ GREEN: Represents danger or disease in
Malaysia, envy in Belgium, happiness in
Japan and sincerity, trustworthiness in
China.
□ BLACK: In western countries black is colour
of mourning whereas in some countries is
associated with power.
□ WHITE: Symbolizes mourning or death in
East Asia, but happiness and purity in
Australia, New Zealand and USA
DEALING WITH CULTURAL DIFFERENCES
Do managers have to alter their customary
practices to succeed in countries with different
cultures?
❏ Must consider
• Host society acceptance
• Degree of cultural differences and distance-
Cultural Friction
• Cultural Shock-Ability to adjust
• Reverse culture shock
• Company and management orientation
HOST SOCIETY ACCEPTANCE
❑ Host cultures do not always expect
foreigners to adjust to them.
❑ Sometimes the local society regards
foreigners and domestic citizens differently.
DEGREE OF CULTURAL DIFFERENCES
❑ When doing business in a similar culture,
companies
• usually have to make fewer adjustments
• may overlook subtle differences.
❑ Culture Distance. When a company moves
into a culturally similar foreign country, it
should encounter fewer cultural
adjustments than when entering a dissimilar
country.
❑ Hidden Cultural Attitudes. Even if the home
and host countries have seemingly similar
cultures, people in the host country may
reject the influx of foreign practices because
they see them as threat to the self-
identities.
ABILITY TO ADJUST: CULTURE SHOCK

❑ Culture shock is the frustration that results

from having to absorb a vast array of new
cultural cues and expectations.
❑ Some people get frustrated when entering a
different culture.
❑ Reverse culture shock – is the emotional
and psychological distress suffered by some
people when they return home after a
number of years overseas.

❑ Polycentrism
• A polycentric organization tends to believe
that its business units abroad should act like
local companies.
• Polycentrist management may be so
overwhelmed by national differences that it
will not introduce workable changes.

❏ Ethnocentrism
• Ethnocentrism reflects the conviction that
one’s own culture is superior to that of
other countries.
• Ethnocentrist management overlooks
national differences, ignores important
factors, believes home country objectives
should prevail and thinks acceptance by
other cultures is easy,

❑ Geocentrism
• Between the extremes of polycentrism and
ethnocentrism, there is an approach to
international business which integrates
company and host-country practices as well
as some entirely new ones.
• Geocentric management often uses
business practices that are hybrids of home
and foreign norms.
Chapter 3 ECONOMIC FREEDOM
Economic Systems and Market Methods
□ Economic freedom – people have the right
INTERNATIONAL ECONOMIC ANALYSIS to work, produce, consume, save, and
invest the way they prefer
- A universal assessment of economic ■ measured across business freedom,
environments is difficult because of:
monetary freedom, fiscal freedom,
System Complexity
investment freedom, freedom from
• Identifying proper indicators is difficult
corruption, property rights, trade
Market Dynamism
freedom, government size, financial
• New economic circumstances
freedom, and labor freedom
Market Interdependence
• Markets influence each other
Global Distribution of Economic Freedom
Data Overload
• Complicates decision-making

Economic Factors Affecting International Business

Operations
VALUE OF ECONOMIC FREEDOM MARKET ECONOMY

□ Economic freedom affects □ In a market economy individuals rather than

■ Growth rates governments make most economic decisions

■ Productivity ■ Capitalism
■ Income levels
□ private ownership of capital
■ Inflation
■ Employment ■ Laissez-faire
■ Life expectancy
□ governmental noninterference in
■ Literacy
economic affairs
■ Political openness
■ Environmental sustainability Characteristics of Capitalism
1. Consumer sovereignty
Trends in Economic Freedom
2. Freedom of enterprise
□ The trend toward increased economic freedom
3. Limited government intervention
is no longer certain
■ Questions about the legitimacy of free 4. High degree of Competition
markets 5. Private ownership of resources
■ The benefits of more state control

TYPES OF ECONOMIC SYSTEMS COMMAND ECONOMY

□ In a command economy the visible hand

□ An economic system refers to the mechanism
of the state supersedes the invisible hand
that deals with the production, distribution, of individuals
and consumption of goods and services
■ Government
□ Types
□ owns and controls resources
■ Market economy
□ determines prices
■ Command economy
□ Communism
■ Mixed economy

MIXED ECONOMY

□ Most economies are mixed economies

■ fall between market and command

economies
 ■ the number of people in a country
□ Socialism ■ the local cost of living

■ regulate economic activity with a focus BROADER CONCEPTIONS OF PERFORMANCE AND

on social equality and a fair distribution
of wealth
ECONOMIC DEVELOPMENT, PERFORMANCE, AND
POTENTIAL
□ Broad classes of countries include
■ developing countries
□ largest number of countries
□ low per capita income
■ emerging economies
□ fast growing, relatively
prosperous
□ BRICs – Brazil, Russia, India, and
China
■ developed countries
POTENTIAL
□ Green economics
■ gauge economic performance in terms
of the effect of current choices on long-
term sustainability
□ Sustainable development
■ meet the needs of the present without
compromising the ability of future
generations to meet their own needs
□ Happynomics
■ importance of emotional prosperity in
addition to financial prosperity
ECONOMIC ANALYSIS
□ Managers should also consider

□ high per capita income and ■ Inflation

standard of living ■ Unemployment
□ like the U.S., Japan, France, ■ Debt
Australia ■ Income distribution
■ Poverty
Gross national income (GNI)
■ Balance of payments
■ the broadest measure of economic
activity for a country
Gross national product (GNP) □ Inflation
■ the total value of all final goods and ■ a measure of the increase in the cost
services produced within a nation in of living
a particular year □ Deflation
Gross domestic product (GDP) ■ when prices for products go down
■ the total market value of goods and not up
services produced by workers and □ Reflation
capital within a nation’s borders
■ increase the money supply and
reduce taxes to accelerate economic
Improving Analysis
activity
GNI data should be adjusted for □ Unemployment rate
■ the growth rate of the economy
 ■ share of unemployed workers ■ Frugal engineering
seeking employment for pay relative
to the total civilian labor force □ Balance of payments
□ Misery index ■ reports a country’s trade and
■ the sum of a country’s inflation and financial transactions with the rest
unemployment rates of the world
□ Current account
DEBT ■ tracks merchandise trade
■ the total of a government’s financial
□ Capital account
obligations
■ tracks loans given to foreigners and
■ internal debt – debt owed to
loans received by citizens
domestic residents
■ external debt – debt owed to
foreign creditors and denominated
in foreign currency
□ Growing public debt signals
■ tax increases
■ reduced growth
■ rising inflation
■ increasing austerity

□ Income distribution
■ estimates the proportion of the
population that earns various levels
of income
□ Gini coefficient
■ measures the extent to which the
distribution of resources deviates
from a perfectly equal distribution

□ Poverty the state of having little or no

money and few or no material possessions
■ extreme poverty
□ less than $1.25 per day
■ moderate poverty
□ less than $2.00 per day
□ Today the world population is 80% poor,
10% middle income, and 10% rich
□ Base of the Pyramid

IV. POLITICAL AND LEGAL SYSTEMS
THE POLITICAL ENVIRONMENT
□ Managers evaluate, monitor, and forecast
political environments
□ A country’s political system refers to the
structural dimensions and power dynamics
of its government that specify institutions,
organizations, and interest groups, and
define the norms that govern political
activities
INDIVIDUALISM VS. COLLECTIVISM
□ Individualism
■ primacy of the rights and role of the
individual
□ Collectivism
■ primacy of the rights and role of the
community
POLITICAL IDEOLOGY
□ A political ideology stipulates how society
ought to function and outlines the methods by
which it will do so
□ Most modern societies are pluralistic
■ different groups champion competing
political ideologies
□ Democrats vs. Republicans in
the United States
□ Democratic Party vs. Liberal
Party in Japan
SPECTRUM ANALYSIS
□ A political spectrum outlines the various
forms of political ideology
□ Political freedom measures
■ the degree to which fair and
competitive elections occur
■ the extent to which individual and
group freedoms are guaranteed
■ the legitimacy ascribed to the
general rule of law
■ the freedom expression
DEMOCRACY
□ In a democracy
■ all citizens are politically and legally
equal
■ all are equally entitled to freedom of
thought, opinion, belief, speech, and
association
■ all equally command sovereign power
over public officials
□ Prominent types of democracy include
■ Representative
■ Multiparty
■ Parliamentary
TOTALITARIANISM
□ A totalitarian system subordinates the
individual to the interests of the collective
■ dissent is eliminated through
indoctrination, persecution,
surveillance, propaganda, censorship,
and violence
□ Prominent types of totalitarianism include
■ Authoritarianism
■ Fascism
■ Secular
■ Theocratic
 ■ Distributive
THE STANDARD OF FREEDOM ■ Catastrophic

□ Freedom House, an independent watchdog

organization, assesses political and civil
freedom around the world
□ Freedom House recognizes three types of
political systems
■ Free
■ Partly free
■ Not free

THIRD WAVE OF DEMOCRATIZATION

number of democracies doubled in two decades
Engines of Democracy THE LEGAL ENVIRONMENT
1. The failure of totalitarian regimes to deliver
economic progress □ The legal system is the mechanism for creating,
2. Improved communications technology interpreting, and enforcing the laws in a
3. Economic dividends of increasing political specified jurisdiction
freedom □ Types:
■ Common law
DEMOCRACY: RECESSION AND RETREAT
■ Civil law
□ Democracy’s retreat
■ Theocratic law
■ just 26 of the world’s democracies
are full democracies ■ Customary law
□ Engines of Authoritarianism ■ Mixed systems
■ Political economy of growth
TRENDS IN LEGAL SYSTEMS
■ Economic problems
■ Who defines Democracy? □ What is the basis of rule in a country?
■ The rule of man
POLITICAL RISK
□ legal rights derive from the
□ Political risk refers to the risk that political individual who commands the
power to impose them
decisions or events in a country negatively
affect the profitability or sustainability of an ■ The rule of law
investment □ systematic and objective laws
□ Types: applied by public officials who
■ Systemic are held accountable for their
administration
■ Procedural
□ associated with a democratic
system
OPERATIONAL CONCERNS

□ Operational issues
■ Starting a business
■ Making and enforcing contracts
■ Hiring and firing local workers
■ Closing down the business
□ In general
■ rich countries regulate less
■ poor countries regulate more

INTELLECTUAL PROPERTY: RIGHTS AND

PROTECTION

□ Intellectual property refers to creative ideas,

expertise, or intangible insights that grant its
owner a competitive advantage
□ Intellectual property rights refer to the right to
control and derive the benefits from writing,
inventions, processes, and identifiers
■ no “global” patent, trademark or
copyright exists