II Internal Country Attractiveness or Differences International business is much more complicated than domestic business because countries differ

in many ways. Countries have different political, economic, and legal systems. Cultural practices can vary dramatically, as can the education and skill level of the population, and countries are at different stages of economic development. All these differences can and do have major implications for the practice of international business. They have a profound impact on the benefits, costs, and risks associated with doing business in different countries; the way in which operations in different countries should be managed; and the strategy international firms should pursue in different countries.

Political Systems The political system of a country shapes its economic and legal systems. As such, we need to understand the nature of different political systems before discussing economic and legal systems. By political system we mean the system of government in a nation. Political systems can be assessed according to two dimensions. The first is the degree to which they emphasize collectivism as opposed to individualism. The second is the degree to which they are democratic or totalitarian. These dimensions are interrelated; systems that emphasize collectivism tend toward totalitarian, whereas those that place a high value on individualism tend to be democratic. However, a large gray area exists in the middle. It is possible to have democratic societies that emphasize a mix of collectivism and individualism. Similarly, it is possible to have totalitarian societies that are not collectivist.

Collectivism and Individualism Collectivism refers to a political system that stresses the primacy of collective goals over individual goals. When collectivism is emphasized, the needs of society as a whole are generally viewed as being more important than individual freedoms. In such circumstances, an individuals right to do something may be restricted on the grounds that it runs counter to the good of society or to the common good. Socialism Modern socialists trace their intellectual roots to Karl Marx (181883), although socialist thought clearly predates Marx (elements of it can be traced to Plato). Marx argued that the few benefit at the expense of the many in a capitalist society where individual freedoms are not restricted. While successful capitalists accumulate considerable wealth, Marx postulated that the wages earned by the majority of workers in a capitalist society would be forced

down to subsistence levels. He argued that capitalists expropriate for their own use the value created by workers, while paying workers only subsistence wages in return. Socialism The political system that believes in state ownership of a countrys means of production, distribution, and exchange so that all can benefit. Communists In the early 20th century, the socialist ideology split into two broad camps. The communists believed that socialism could be achieved only through violent revolution and totalitarian dictatorship, whereas the social democrats committed themselves to achieving socialism by democratic means, turning their backs on violent revolution and dictatorship. Both versions of socialism waxed and waned during the 20th century. The communist version of socialism reached its high point in the late 1970s, when the majority of the worlds population lived in communist states. Individualism The opposite of collectivism, individualism refers to a philosophy that an individual should have freedom in his or her economic and political pursuits. In contrast to collectivism, individualism stresses that the interests of the individual should take precedence over the interests of the state. Like collectivism, individualism can be traced to an ancient Greek philosopher, in this case Platos disciple Aristotle (384322 BC). Democracy and Totalitarianism Democracy and totalitarianism are at different ends of a political dimension. Democracy refers to a political system in which government is by the people, exercised either directly or through elected representatives. Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties. The democratictotalitarian dimension is not independent of the collectivismindividualism dimension. Democracy and individualism go hand in hand, as do the communist version of collectivism and totalitarianism. Democracy

The pure form of democracy, as originally practiced by several city states in ancient Greece, is based on a belief that citizens should be directly involved in decision making. In complex, advanced societies with populations in the tens or hundreds of millions this is impractical. Most modern democratic states practice representative democracy. In a representative democracy, citizens periodically elect individuals to represent them. These elected representatives then form a government, whose function is to make decisions on behalf of the electorate. In a representative democracy, elected representatives who fail to perform this job adequately will be voted out of office at the next election. Totalitarianism A political system in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties. Four major forms of totalitarianism exist in the world today. Until recently, the most widespread was communist totalitarianism. Communism, however, is in decline worldwide, and most of the Communist Party dictatorships have collapsed since 1989. Communist Totalitarianism A version of collectivism advocating that socialism can only be achieved through a totalitarian Cuba. Theocratic Totalitarianism A political system in which political power is monopolized by a party, group, or individual that governs according to religious principles. Eg: Iran and Saudi Arabia. Tribal Totalitarianism A political system in which a party, group, or individual that represents the interests of a particular tribe monopolizes political power. Eg: African countries such as Zimbabwe, Tanzania, Uganda, and Kenya. Right-Wing Totalitarianism A political system in which political power is monopolized by a party, group, or individual that generally permits individual economic freedom but restricts individual dictatorship. Eg: China, Vietnam, Laos, North Korea, and

political freedom, including free speech, often on the grounds that it would lead to the rise of communism. Eg: Germany and Italy Economic Systems It should be clear from the previous section that political ideology and economic systems are connected. In countries where individual goals are given primacy over collective goals, we are more likely to find free market economic systems. In contrast, in countries where collective goals are given preeminence, the state may have taken control over many enterprises; markets in such countries are likely to be restricted rather than free. We can identify three broad types of economic systemsa market economy, a command economy, and a mixed economy. Market Economy An economic system in which the interaction of supply and demand determines the quantity in which goods and services are produced. Command Economy An economic system in which the government plans the allocation of resources, including determination of what goods and services should be produced and in what quantity. Mixed Economy Between market economies and command economies can be found mixed economies. In a mixed economy, certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning. Mixed economies were once common throughout much of the world, although they are becoming much less so. Legal System Rules that regulate behavior and the processes by which the laws of a country are enforced and through which redress of grievance is obtained. Common Law A system of law based on tradition, precedent, and custom, which is flexibly interpreted by judges as it applies to the unique circumstances of each case.

Civil Law System A system of law based on a detailed set of written laws and codes. Theocratic Law System A system of law based on religious teachings. Overall Attractiveness The overall attractiveness of a country as a potential market or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country. Generally, the costs and risks associated with doing business in a foreign country are typically lower in economically advanced and politically stable democratic nations and greater in less developed and politically unstable nations. The calculus is complicated, however, because the potential long-run benefits are dependent not only upon a nations current stage of economic development or political stability but also on likely future economic growth rates. Economic growth appears to be a function of a free market system and a countrys capacity for growth (which may be greater in less developed nations). This leads one to conclude that, other things being equal, the benefitcostrisk trade-off is likely to be most favorable in politically stable developed and developing nations that have free market systems and no dramatic upsurge in either inflation rates or private-sector debt. It is likely to be least favorable in politically unstable developing nations that operate with a mixed or command economy or in developing nations where speculative financial bubbles have led to excess borrowing. Benefits Size of economy Likely economic growth Costs Corruption Lack of infrastructure Legal costs Risks Political risks: social unrest/anti-business trends Economic risks: economic mismanagement Legal risks: failure to safeguard property rights

Culture Definitions: It is difficult to capture a relatively amorphous concept like culture in a definition, but several have been proposede.g., The collection of values, beliefs, behaviors, customs, and attitudes that distinguish a society. A learned, shared, compelling, interrelated set of orientations for members of society. Shared meanings. While memorizing definitions is not essential, note the following parts of the definition:

Learned. Culture is not genetically basedif that were the case cultures across the World would have been much more similar to each other. We learn what is considered appropriate in our culture through trial and error. If a child engages in competitive behavior, this might be rewarded in the United States with the expression of parental approval, while in Japan it might result in subtle shows of disapproval, such as lack of attention.

Shared. The beliefs, interpretations, and behaviors are shared by all or most of the people within the culture, so that it becomes a truly society-wide phenomenon.

Compelling: Culture must have implications (such as social disapproval if contradicted) in order to be considered important.

Interrelated. Although there may be conflicts between elements of culture (e.g., respect for seniority may come into conflict with a growing value of achievement in Singapore), for the most part, elements of culture constitute a coherent and relatively consistent whole. For example, the tendency for Japanese business people to bow when meeting each other and the tendency of lower level Japanese employees to show great deference to their superiors are both manifestations of a strong emphasis on respect.

Cultural lessons. We considered several cultural lessons in class; the important thing here is the big picture. For example, within the Muslim tradition, the dog is considered a dirty animal, so portraying it as mans best friend in an advertisement is counter-productive. Packaging, seen as a reflection of the quality of the real product, is considerably more important in Asia than in the U.S., where there is a tendency to focus on the contents which really count. Many cultures observe significantly greater levels of formality than that typical in the U.S., and Japanese negotiator tend to observe long silent pauses as a speakers point is considered.

Hofstedes Dimensions. Gert Hofstede, a Dutch researcher, was able to interview a large number of IBM executives in various countries, and found that cultural differences tended to center around four key dimensions:

Social orientation (Individualism vs. collectivism): To what extent do people believe in individual responsibility and reward rather than having these measures aimed at the larger group? Contrary to the stereotype, Japan actually ranks in the middle of this dimension, while Indonesia and West Africa rank toward the collectivistic side. The U.S., Britain, and the Netherlands rate toward individualism.

Power orientation (distance): To what extent is there a strong separation of individuals based on rank? Power distance tends to be particularly high in Arab countries and some Latin American ones, while it is more modest in Northern Europe and the U.S.

Goal Orientation (Masculinity vs. femininity) involves a somewhat more nebulous concept. Masculine values involve competition and conquering nature by means such as large construction projects, while feminine values involve harmony and environmental protection. Japan is one of the more masculine countries, while the Netherlands rank

relatively low. The U.S. is close to the middle, slightly toward the masculine side.

Uncertainty orientation (avoidance) involves the extent to which a structured situation with clear rules is preferred to a more ambiguous one; in general, countries with lower uncertainty avoidance tend to be more tolerant of risk. Japan ranks very high. Few countries are very low in any absolute sense, but relatively speaking, Britain and Hong Kong are lower, and the U.S. is in the lower range of the distribution.

Although Hofstedes original work did not address this, a fifth dimension of long term vs. short term orientationhas been proposed. In the U.S., managers like to see quick results, while Japanese managers are known for take a long term view, often accepting long periods before profitability is obtained. High vs. low context cultures: In some cultures, what you see is what you getthe speaker is expected to make his or her points clear and limit ambiguity. This is the case in the U.S.if you have something on your mind, you are expected to say it directly, subject to some reasonable standards of diplomacy. In Japan, in contrast, facial expressions and what is not said may be an important clue to understanding a speakers meaning. Thus, it may be very difficult for Japanese speakers to understand anothers written communication. The nature of languages may exacerbate this phenomenonwhile the German language is very precise, Chinese lacks many grammatical

features, and the meaning of words may be somewhat less precise. English ranks somewhere in the middle of this continuum. Ethnocentrism and the self-reference criterion. The self-reference criterion refers to the tendency of individuals, often unconsciously, to use the standards of ones own culture to evaluate others. For example, Americans may perceive more traditional societies to be backward and unmotivated because they fail to adopt new technologies or social customs, seeking instead to preserve traditional values. In the 1960s, a supposedly well read American psychology professor referred to Indias culture of sick because, despite severe food shortages, the Hindu religion did not allow the eating of cows. The psychologist expressed disgust that the cows were allowed to roam free in villages, although it turns out that they provided valuable functions by offering milk and fertilizing fields. Ethnocentrism is the tendency to view ones culture to be superior to others. The important thing here is to consider how these biases may come in the way in dealing with members of other cultures. Managing People across Cultures Culture tremendously impacts peoples work expectations and behavior. In the U.S., for example, individual recognition and responsibility is the norm. In more collectivistic cultures such as Japan, responsibility and reward usually goes to teams, which internally exert peer pressure to get members to contribute. Responses to treatments may also varyfor example, where a loss of face is a serious concern, managers must be careful to criticize indirectly and privately. In terms of attitudes, U.S. workers are frequently happy to take overtime at 150% of their normal pay, while this would be less acceptable in countries where people work to live rather than live to work. Perceptions may differ across cultures. For example, in the U.S., a person is typically thought to succeed because of skill, hard work, or initiative, while in some more fatalistic cultures, success is attributed to luck or connections. GATT and WTO Indian government has made the right decision in the year 1947 to become the founder member of the GATT organisation which had 23 countries as members. In the early years of our independence our country realised the importance of international trade. To begain the trade activities there must be certain common understanding among the members.

The aim is to go from a protected economic system to an open system of business. To implement this idea countries realised and came to a common decision to reduce the Tariff levels among the member nations. The important negotiations were discussed from time to time in the conferences which resulted in the General Agreement on Tariffs and Trade (GATT) among the participating countries. Eight rounds of multilateral discussions were held with participations of member countries representatives; particularly the commerce ministers took part. In each round of discussion there were a good number of tariff reductions and tariff binding worth of several billion dollars took place, as the developing nations recoganised the importance and the need for reducing the tariffs. This type of tariff reduction led to certain amount of increase in exports and imports of goods among the member countries. In the several rounds of negotiations between 1947 to 1960 the nature was to reduce the tariffs. The negotiations in other rounds of discussions included anti-dumping, quota reductions and elimination of tariffs, etc. GATT ROUNDS

S.No 1 2 3 4 5 6 7 8

Place Geneva Annecy Torquay Geneva Geneva-Dillon Geneva-Kennedy round Tokyo Punta Del Este

Nation Switzerland France England Switzerland Switzerland Switzerland Japan Uruguay

Year 1947 1949 1950-1951 1955-1956 1956-1962 1963-1967 1977-1979 1986-1994

Total Members/Agreements made 23 5000 Tariff Concessions 8700 Tariff Concessions Tariff Negotiations Covering Textiles Trade Negotiations Members - 99 117

URUGUAY ROUND (UR) AND DUNKEL DRAFT Uruguay Round (UR) of multilateral trade negotiations was started and in September 1986 and concluded on 15th September 1993.Nearly 7 years the discussion on various topics were conducted under the leadership of Arther Dunkel. Arther Dunkel the then Director General of GATT submitted the proposal on 20th December 1991 which was popularly known as Dunkel Draft or proposal. The proposal which concentrated on trade liberalisations in many areas like

Trade related intellectual property rights TRIPS Trade related investment measures TRIMS General agreement on trade in services GATS Other services, textiles, clothing and agriculture subsidies.

Trade related intellectual property rights TRIPS: Dunkel proposal regarding Trade Related Intellectual Property Rights TRIPS in respect of business and commerce which include the parameters like patents, copyrights, trademarks, industrial designs, geographical indications, undisclosed informations. This leads to protection for ones intellectual knowledge, uniqueness in their findings and to commercialise their product for a certain period of time. Trade related investment measures TRIMS: It is concerned with the removal of various controls imposed on the inflow of foreign capital. With respect to India we are receiving foreign direct investment (FDI) and foreign institutional investment (FII) with respect to many sectors. Removal of controls on foreign capital , equal rights to foreign investors , no restrictions on any area of investment , allowing upto100% in the permitted sectors , to import raw materials and export is not mandatory. We are able to see the entry of MNCs like Coca-Cola , Pepsi , P & G , Microsoft , Hyundai , Ford Motors , LG Electronics , Unilever , GE , GM , etc had entered in the form of FDI.With respect to FII the Indian share market business is receving a lot of investment and today there is a great change in the growth of Indian stock market. Which in turn makes the foreign corporate and customers to know about the Indian business environment. General agreement on trade in services GATS: Defines services as the supply of a service from one national boundary to the other. It leads to increasing level of participation of developing countries in the world trade and to have world level access to technology ,improved methods of production , distribution etc. Rules and disciplines to services, protective measures include visa, investment regulations, marketing regulations, employment of foreigners, and access to technology. The sectors included are Insurance , travel , tourism , hotel , banking , transportation ,mobility of HR, business and professional services , communication , distribution , educational , environmental , construction , engineering , finance , health . Recreational, sporting. As the

developing countries from an importer of services and creating a huge BOP deficit to a exporter and managing the BOP conditions are the result of GATT and LPG. These proposals were discussed in the final round of GATT. This round of negotiations covers a wide range of subjects like subsidies, safeguards etc. An agreement regarding multilateral trading system was finally signed in Marrakech, Morocco, on 15th April 1994. For the realisation of its objectives, GATT adopted the following principles. 1. Non-Discrimination: The principal of Non-Discrimination requires that no member country shall show partiality among the members , with regard to international trade. To ensure NonDiscrimination the member country of GATT to apply the principal of Most Favored Nation (MFN) to all kinds of Exports and Imports, and the duties charged for such countries. 2. Prohibition of Quantitative Restrictions QRs: As far as Quantitative Restrictions are concerned, the member countries to administer without favour.In order to make the movement of goods and services between member countries the GATT rules seeks to prohibit Quantitative Restrictions as far as possible and limit restrictions. Certain exceptions were given to countries with Balance of Payment (BOP) difficulties, Deficits and to the developing countries. Further, import restrictions were allowed to apply to agricultural sectors. 3. Consultations and Negotiations: To have a continuity in the agreement , and to resolve the problems with amicable settlement , so far eight rounds of trade and tariff negotiations were held under GATT. The exports of developing countries gained significantly less from the GATT rounds than the exports of the industrial nations. The trade liberalisation has been confined mostly to goods first and than to the services etc.But the focus is to have open world trade, technology, HR and other resources to transform from one economy to another. Such kinds of discussions and decisions were made till 31st December 1994.Following the UR agreement, GATT was converted from a multilateral agreement to a formal international organisation called the World Trade Organisation (WTO).
Location: Geneva, Switzerland Established: 1 January 1995 Created by: Uruguay Round negotiations (1986-94)

Membership: 153 member states

Official languages: English, French, Spanish

Budget: 189 million Swiss francs(approx. 182 million USD) in 2009 Secretariat staff: 625 Head: Mr. Pascal lamy (director-general)

The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948. The organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements which are signed by representatives of member governments and ratified by their parliaments. Most of the issues that the WTO focuses on derive from previous trade negotiations, especially from the Uruguay Round (19861994). Why Do We Need WTO The main benefits of World Trade Organization are as follows: 1. The system helps to contribute towards international peace, by helping the trade to flow smoothly and dealing with disputes over trade issues. 2. The system allows disputes to be handled constructively. With Global boundaries evading, more and more trade is taking place, and hence, leading to more chances for disputes. To put forth to the claim, around 300 cases have been filed since inception of WTO, and without peaceful and harmonious way to resolve them, they could have led to a political crisis. 3. It's a system, which is based on rules and has nothing to do with power of the nation. 4. It gives consumers more choice and a broader range of qualities to choose from. 5. The fact that there exists a forum to handle crisis, gives confidence to nations to do more and more trade, thereby increasing the income, and stimulating economic growth. Functions Among the various functions of the WTO, these are regarded by analysts as the most important:

It oversees the implementation, administration and operation of the covered agreements. It provides a forum for negotiations and for settling disputes.

Additionally, it is the WTO's duty to review and propagate the national trade policies, and to ensure the coherence and transparency of trade policies through surveillance in global economic policy-making. Another priority of the WTO is the assistance of developing, least-developed and low-income countries in transition to adjust to WTO rules and disciplines through technical cooperation and training. The WTO is also a centre of economic research and analysis: regular assessments of the global trade picture in its annual publications and research reports on specific topics are produced by the organization. Finally, the WTO cooperates closely with the two other components of the Bretton Woods system, the IMF and the World Bank. Members and observers The WTO has 153 members (almost all of the 123 nations participating in the Uruguay Round signed on at its foundation, and the rest had to get membership). The 27 states of the European Union are represented also as the European Communities. WTO members do not have to be full sovereign nation-members. Instead, they must be a customs territory with full autonomy in the conduct of their external commercial relations. Thus Hong Kong (as "Hong Kong, China" since 1997) became a GATT contracting party, and the Republic of China (ROC) (commonly known as Taiwan, whose sovereignty has been disputed by the People's Republic of China or PRC) acceded to the WTO in 2002 under the name of "Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu" (Chinese Taipei). A number of non-members (30) are observers at WTO proceedings and are currently negotiating their membership. As observers, Iran, Iraq and Russia are not yet members. Russia is the biggest economy outside WTO and after the completion of Russia's accession, Iran would be the biggest economy outside the WTO. With the exception of the Holy See, observers must start accession negotiations within five years of becoming observers. Some international

intergovernmental organizations are also granted observer status to WTO bodies. 14 states and 2 territories so far have no official interaction with the WTO. Four Steps to Become a WTO Member 1. The interested country should submit an application to become a member. A committee of any member country can review this application. 2. The interested country then makes negotiations on bilateral agreements on trade with any country it prefers. The content of these agreements will apply automatically to all members of WTO.

3. The review committee of WTO creates a draft of the terms and conditions of membership which takes account of the necessary changes in its current trade policies. 4. Two-thirds of the member nations should vote that the interested country can become a part of WTO. After the voting, the new member must ratify the membership agreement. If a country is not yet a member of WTO, they can opt to become the "observers" where they must apply for membership within five years of being an observer. The highest decision-making committee of the WTO is known as the Ministerial Conference which meets biennially. All the members of WTO attend this conference. The last Ministerial Conference was held in Geneva from November 30 to December 2, 2009. Withdrawal Any Member may withdraw from this Agreement. Such withdrawal shall apply both to this Agreement and the Multilateral Trade Agreements and shall take effect upon the expiration of six months from the date on which written notice of withdrawal is received by the Director-General of the WTO. Withdrawal from a Plurilateral Trade Agreement shall be governed by the provisions of that Agreement. Ministerial conferences The topmost decision-making body of the WTO is the Ministerial Conference, which usually meets every two years. It brings together all members of the WTO, all of which are countries or customs unions. The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements. The inaugural ministerial conference was held in Singapore in 1996. Disagreements between largely developed and developing economies emerged during this conference over four issues initiated by this conference, which led to them being collectively referred to as the "Singapore issues". The second ministerial conference was held in Geneva in Switzerland. The third conference in Seattle, Washington ended in failure, with massive demonstrations and police and National Guard crowd control efforts drawing worldwide attention. The fourth ministerial conference was held in Doha in the Persian Gulf nation of Qatar. The Doha Development Round was launched at the conference. The conference also approved the joining of China, which became the 143rd member to join. The fifth ministerial conference was held in Cancn, Mexico, aiming at forging agreement on the Doha round. An alliance of 22 southern states, the G20 developing nations (led by India, China, Brazil, ASEAN led by the Philippines), resisted demands from the

North for agreements on the so-called "Singapore issues" and called for an end to agricultural subsidies within the EU and the US. The talks broke down without progress. The sixth WTO ministerial conference was held in Hong Kong from 1318 December 2005. It was considered vital if the four-year-old Doha Development Agenda negotiations were to move forward sufficiently to conclude the round in 2006. In this meeting, countries agreed to phase out all their agricultural export subsidies by the end of 2013, and terminate any cotton export subsidies by the end of 2006. Further concessions to developing countries included an agreement to introduce duty free, tariff free access for goods from the Least Developed Countries, following the Arms initiative of the European Union but with up to 3% of tariff lines exempted. Other major issues were left for further negotiation to be completed by the end of 2010. The WTO General Council, on 26 May 2009, agreed to hold a seventh WTO ministerial conference session in Geneva from 30 November-3 December 2009. A statement by chairman Amb. Mario Matus acknowledged that the prime purpose was to remedy a breach of protocol requiring two-yearly "regular" meetings, which had lapsed with the Doha Round failure in 2005, and that the "scaled-down" meeting would not be a negotiating session, but "emphasis will be on transparency and open discussion rather than on small group processes and informal negotiating structures". The general theme for discussion was "The WTO, the Multilateral Trading System and the Current Global Economic Environment" The ten benefits The system helps promote peace Disputes are handled constructively Rules make life easier for all Freer trade cuts the costs of living It provides more choice of products and qualities Trade raises incomes Trade stimulates economic growth The basic principles make life more efficient Governments are shielded from lobbying The system encourages good government

10 common misunderstandings about the WTO The WTO dictates policy The WTO is for free trade at any cost Commercial interests take priority over development and over the environment and over health and safety The WTO destroys jobs, worsens poverty Small countries are powerless in the WTO The WTO is the tool of powerful lobbies Weaker countries are forced to join the WTO The WTO is undemocratic