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ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

1.

Kindly provide FIVE (5) examples on why culture is very important in


international business.
Introduction:
It is interesting to see how culture can adversely effect international business
transaction. Due to globalization, many companies today cannot afford to lose
their customers to competitors. Hence, to survive in a massive marketplace,
they have to venture into international markets but with very little experience
and understanding of how the local markets work.
The Definitions of Culture:
Culture refers to the knowledge, experience, beliefs, values, attitudes,
meanings, hierarchies, religion, notions of time, roles, spatial relations,
concepts of the universe, and professions acquired by a group of people in the
course of generations through individuals and the group. Culture is the systems
of knowledge shared by relatively large group of people. Culture is
communication and vice versa.
Dimension of Culture
Geert Hofstede, a Danish psychologist is the pioneer in culture studies in
business and organization. In his studies, he interviewed thousands of IBM
employees in 50 countries during his employment and subsequently developed
a cultural model which he claims summaries the different cultures.
Hofstedes study is especially significant to managers in determining different
cultural characteristics involved in international business settings. His model
contains five (5) dimensions of culture.
I.

Individualism versus collection.


This dimension looks at the relationship between individuals and others in
their society. Indivualism, focus on oneself and ones individual identity.
Value is put on being self-sufficient. Independence is greatly stressed
and valued. In general, people tend to distance themselves
psychologically and emotionally from each other. One may choose to join
groups, but group membership is not pertaining to ones identity or
success.
For example, in United States, an individual who performs well in his or
her job will be rewarded individually. However, this reward and incentive
scheme will not work well among Japanese workers because their
society values group efforts and group rewards more highly. This is how
the culture really involved/influenced the society.

II.

Power distance.
This dimension quantity how well individuals accept the different levels of
power that may be evident among them. In some nations, subordinates
are expected to obey instructions blindly from their superiors. In example
of this dimension, Malaysia ranks number one in the world in power

DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

distance. What this means is that many Malaysian employees tend to


wait for instructions from their superiors instead of taking their own
initiative because they respect the hierarchy systems. In contrast,
countries such as Sweden and Norway have low power distance. In
these countries, it is common for the managers to delegate their decisionmaking authority to their subordinates.
III.

Uncertainty avoidance.
This dimension is looks as how well individuals accept ambiguous
situations and risk. Japan scores very high in uncertainty avoidance. This
can easily be seen from how this society runs their daily chores. Many of
their actions are regimented and ritualized. They follow specific rules from
bowing to show respect to others to how they should sit down and eat.
However, this is not the case in countries such as India, which has a
lower rank in uncertainty avoidance. They are less structured in their
activities and less bound by written rules in India. Taking a risk is seen as
the norm.

IV.

Masculinity versus femininity.


This dimension ranks the extent to which a society embraces masculine
values (assertiveness, status, financial rewards) versus feminine values
(quality of life). Societies with a stronger masculine culture tend to
emphasize the differences in the role of the sexes. In masculine cultures
such as Italy, they are fewer women in qualified jobs. In feministic
cultures such as Sweden, they tend to emphasize social rewards and
benefits in the workplace. In short, companies in Sweden normally take
care of and show concern for their employees needs.

V.

Long-term orientation (LTO) versus short-term orientation (STO).


This dimension was added later in the 1970s when Asia started to play
an important role in a global market. This dimension helps to distinguish
the difference in thinking between Eastern and Western societies. In LTO
cultures, companies such as Toyota in Japan are likely willing to defer
returns on investment from the overseas market for a longer period in
exchange for establishing a strong foothold and brand loyalty. However,
this is total opposite to STO cultures such as U.S companies like General
Motors where results must be achieved within a short time span.

DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

2.

In international business, knowledge about political environments is very


important. Why? Please provide examples.
INTRODUCTION
The legal/political aspect is very important in international business.
"International law" can be defined as rules and principles that states and
nations consider binding upon themselves. This raises two interesting
characteristics of international law. The first is that "law" belongs to individual
nations and international law only exists to the degree that individual nations
are willing to relinquish their rights. The second is the lack of an adequate
international judicial and administrative framework or a body of law, which
would form the basis of a truly comprehensive international legal system.
The international business is also subject to political decrees made by
governments both in "home" and "host" countries. Home governments can
apply pressure not to deal with disapproved parties. These measures may take
the refusal to grant an export license, or withdrawal of export guarantee cover.
The host government may take measures like taxation, ownership controls,
operating restrictions or expropriation.
Laws, rules, and standards
All agricultural exports operate within an institutional environment, which is
made up of a set of political, social and legal ground rules. These ground rules
form the laws of all production, exchange and distribution and give rise to
certain expectations and assurances about the actions of others, and give
order and stability to the means of doing business. The most important rules in
any system are those defining, allocating and enforcing property rights, and
rules and conventions defining allowable and non-allowable forms of
cooperation and competition (standards, rules of contract, fair trading etc).
Well-defined and enforced systems regarding property rights are essential.
Articulated ownership and rights to use, trade and alter assets is vital to market
development, since this assigns to individuals the right to benefits and losses in
production and marketing activities.
Rules and conventions specifying entry conditions and boundaries on
cooperative and competitive policies also facilitate exchange and coordination.
The establishment and enforcement of standards can reduce transaction costs
by increasing the available information to buyers and consumers. Standards
may include basic weights, measures, quality grades and contract forms.
Quality standards may be mandatory or voluntary and minimum or multiple
grades. These standards help where trade is at a distance. The EU has a strict
set of standards regarding horticultural products for example, including
hygiene, quality and certificates of origin.
Licensing also facilitates marketing agencies and producers by reducing
transaction costs. This occurs when the criteria for licensing revolves around
asset holdings, financial solvency and so on. Performance standards are built
in to maintain the licensing agreement.

DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

Increasingly, consumer and trading bodies like the EU are enforcing the
disclosure of more and more information. Particularly, these efforts revolve
around packaging, labeling and information, for example, pesticides used on
horticultural produce. As this trend to disclosure of information grows, along
with the phenomenon of product liability, regulations regarding certain tests or
inspection of products, handling and processing procedures may be enforced.
So may ingredient and nutrition information. This is becoming an increasingly
important issue as food products become more complex and varied. One of the
problems with this noble effort to inform the consumer is that producers may
lose their competitive differentiation advantage through divulging information to
competitors.
The EU has gone to extraordinary lengths to inform the consumer, issuing
directives on product descriptions and pricing. For example the EU directive on
the pricing of cabbages runs to hundreds of pages and, what constitutes
"chocolate" and a "sausage" to name but two products, is quite revealing. The
following case proves the point.
The EU is also very strict, as is the USA, on food additives or flavour
substitutes. It is particularly so for any substance which may have long-term
harmful effects. The EU produces "E numbers" standards for product additives
and artificial colorants or flavorings.
Issues
Most issues in the legal/political environment centre around the following:i)

"Institutional environment" - made up of political, social and legal ground


rules within which the global marketer must operate.

ii)

Property rights - patents, trademarks.

iii)

Taxation - what taxation schemes will be faced abroad?

iv)

Recourse - possibility and length of action with the possibility of image


damaging necessitating arbitration.

v)

Movement of equity and expropriation threats - often necessitating


protocols or the signing of trade frame working agreements.

Efforts to regulate the international legal system include individual country


efforts, like the USA International Trade Commission and the GATT system.
The GATT system is a set of norms and procedures, which member
governments have accepted to create order and predictability in international
trade relations.

DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

The three basic principles are:


i) Nondiscrimination - each member country must treat the trade of all other
member countries equally
ii) Open markets which are encouraged by GATT through a prohibition of all
forms of protection except customs tariffs, and

iii) Fair trade, which prohibits export subsidies on, manufactured products and
limits the use of export subsidies on primary products.
None of these principles is fully realized, simply because it is impossible to
"police" all sovereign governments and dictate what is or is not tariff or nontariff discriminating. The need to systematically evaluate the legal/political
environment cannot be overemphasized. This can be done by reference to the
appropriate embassy or government agency or via magazines like "Foreign
Affairs" and even by reference to a domestic agency in the host country.
The political environment
Checks can be made on the legal/political system as to its ideology,
nationalism, stability and international relations.
Ideology:
A country's ideological leaning may be capitalism, socialism, a mixture or other
form. In the last years remarkable changes have been taking place in the
ideologies of many countries. The most dramatic example has been the
collapse of the communist USSR and Eastern Europe and its replacement with
market led policies and ideologies. Similarly, many African countries are
abandoning their centrist leanings in favor of market led economies, for
example, Zimbabwe and Tanzania.
Nationalism:
Much was said about nationalism in the previous section. Whilst, primarily a
phenomenon of the developing countries, Yugoslavia has shown it is not
entirely so. Nationalism can lead to expropriation of foreign held assets.
Stability:
Changes in regime, violence and cultural divisions based on language or other
factors can lead to a very uncertain environment in which to conduct business.
The current uncertainty in Liberia and Rwanda, the violence of Somalia and
Yugoslavia increase the risk and diminish the confidence of doing business in
these countries.
International relations:
In general international relations have improved over the last twenty years. The
developments of GATT, NATO and the EU have gone a long way to reduce the
element of "foreignness".

DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

Expropriation
Expropriation is an extreme form of political action. It may occur for a number
of reasons, including the desire to retain national assets, as a "hostage"
situation in international disputes, for example the seizure of Union Carbide's
assets after the Bhopal disaster in India. Other government activity, which
affects capital investment, includes joint venturing insistence and repatriation of
funds. "Partnering" remains widespread (inward investment in tandem with a
domestic company) as does restrictions on repatriation of funds. In Zimbabwe,
for example, HJ Heinz, the multinational food agent, has entered into
partnership with Olivine industries. Over time, even if initially the investment is
not favorable, the Government may relax its conditions as it sees the benefits.
If expropriation is a real possibility then the investor should seek to minimize
risk by:
i)

Relatively rapid depreciation of assets and repatriation of funds by


manipulated transfer prices

ii)

Establish a local supply infrastructure so that any adverse action


damages the host economy

iii)

Raise as much investment capital in the country as possible

iv)

Retain control of critical inputs and minimize local stocks of these.

However these measures may increase the risk of expropriation or reduce the
potential success of the venture.
Incentives
Many countries try to reduce perceived risk by promoting inward investment
through the provision of tax breaks, free ports, and enterprise zones etc., which
are not tied as in partnering. The key is to look at what the disadvantages are.
If the government mainly wishes to attract the mobile investor, or overcome say
poor local skills, one has to assess what would happen if the scheme was
withdrawn once the capital had been committed. Similarly if viability depends
on incentives rather than real return on investment, the question is, is the
venture really worth it?
Assessing political vulnerability
Using a systematic checklist should assess political vulnerability. Such a
checklist should include the following:

The firm's own country's relations with other countries


Sensitivity of the product or industry
Size and location of operation - the bigger the more vulnerable
Visibility of firm - is it high profile say via advertising?
Host country's political situation
Company behavior - is it a good corporate citizen?
Contribution to host country, for example, employment

DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

Localisation of operations
Subsidiary dependence.

Depending on the answers to these checkpoints, the amount of risk, real or


perceived, can be assessed and fed into the investment discussion.
Marketing implications
Political factors give rise to a number of marketing implications. These include
the following:

Is the product ever subject to political debate regarding, say, adequacy of


supply, for example, oil?
Is the product a critical input for other industries, for example, cement?
Is the product socially or politically sensitive, for example, food?
Is the product of national defense significance?
Is the product taking a disproportional amount of capital repayment?
Is the product leading to the locus of control being held outside of the
host country?

Again, the answers to these questions will enable the marketer to assess the
degree to which the product being marketed has to be priced and resourced,
so as to either avoid or reduce the risk of expropriation or other political
reactions.
The legal environment
As indicated in the introduction to this section, the international legal framework
is somewhat confused. Most controls or regulations revolve around export and
import controls, transfer pricing, taxes, regulation of corrupt practices,
embargoed nations, antitrust, expropriation and distribution of equity, patents
and trademarks. The following touches on a number of these issues and in
particular the import/export regulations (terms of access).
International law
To many, the supreme body is the International Court of Justice, situated in
The Hague, Holland. Here a number of international disputes may be taken for
ultimate adjudication. However, a series of other bodies and legislation exists.
a)

FCN (Friendship, Commerce and Navigation) and Tax Treaties primarily


US based and concerned with giving protection of trading rights and
avoiding double taxation.

b)

IMF and GATT already discussed in the previous section and concerned
with member nations international trade restrictions and dumping.

c)

UNCITRAL (UN) international trade law commission set up with the intent
to provide a uniform commercial code for the whole world, particularly
international sales and payments, commercial arbitration and shipping
legislation. Works with international chambers of commerce and
Governments.

DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

d)

ISO (International Standards Organisation) often works with ILO, WHO


etc. and contains technical committees working on uniform standards.

e)

Patents and trademarks there is no such thing as international patent.


The most important patent agreement is the International Convention for
the Protection of Industrial Property, first signed in 1983 and now
honored by 45 countries.
A patent cooperation treaty (PCT) and a European Patent Convention are
also in effect. The PCT has 39 countries including the USA, Japan and
Brazil. The EU convention covers 15 countries and gives patent
protection in all 15 if signified in one.

f)

Air transport is covered mainly by IATA (International Air Transport


Authority), ICAA (International Civil Aviation Authority) and ITU
(International Telecommunication Company).

g)

Codes of conduct, like those in the OECP, are not technical law but
important. Member countries produce guidelines for multinational
enterprises covering aspects of general policy, disclosure of information,
competition, financing, taxation, employment and industrial relations.

h)

Recourse arbitration is an attempt to reduce disputes by consultation.


Some of the most widely used are the International Chamber of
Commerce, the American Arbitration Association, the London Court of
Arbitration and the Liverpool Cotton Exchange.

Marketing implications
The implications of international law on marketing operations are legion. The
principal ones are as follows:

Product decisions - physical, chemical, safety, performance, packaging,


labeling, warranty
Pricing decisions - price controls, resale price maintenance, price
freezes, value added systems and taxation
Distribution - contracts for agents and distribution, physical distribution,
insurance
Promotion - advertising codes of practice, product restriction, sales
promotion and,
Market research - collection, storage and transmission of data.

Other areas affected are obviously in currency and payments but these will be
dealt with in later sections.
Terms of access
One particular area where international marketers feel legal/political effects is
in the terms of access, so the rest of this section will be given over to a
DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

discussion of these. The phrase "terms of access" refers to all the conditions
that apply to the importation of goods from a foreign country. The major
instruments covered by this phrase include import duties, import restrictions or
quotas, foreign exchange regulations and preference arrangements.
Other import charges
Variable import levies:
Several countries, including Sweden and the European Union, apply a system
of variable import levies to their imports of various agricultural products. The
objective of these levies is to raise the price of imported products to the
domestic price level.
Temporary import surcharges:
Temporary surcharges have been introduced from time to time by certain
countries, such as the UK and the USA, to provide additional protection for
local industry and, in particular, in response to balance of payments deficits.
Compensatory import taxes:
In theory these taxes correspond with various international taxes, such as
value-added taxes and sales taxes. Such "border tax adjustments" must not,
according to GATT, amount to additional protection for domestic producers or
to a subsidy for exports. In practice, one of the major tax inequities today is the
fact that manufacturers in value-added tax (VAT) countries do not pay a value
added tax on sales to non-VAT countries such as the USA while USA
manufacturers who pay income taxes in the USA must also pay VAT taxes on
sales in VAT countries. For example, EU imposition of a tax on imported
horticultural products.
Adaptation to meet local requirements:
The impact of adaptation to conform to local safety and other requirements can
be crippling. For example, a Jaguar car made in the UK and sold in Japan
would be three times its UK value. An alternative approach to the Japanese
market would be to begin with the Japanese customer to identify the
customer's wants and needs and to design a product for that market or to adapt
the design to a world design that would fit the needs and wants in both the
domestic and the Japanese markets. The implementation of such a program
would involve major marketing investments by the Jaguar Motor Company in
establishing distribution, advertising and promotion, training and developing
organisations to market the car in Japan. It would also involve significant
expenditures in designing the car to appeal to the needs of the Japanese
customer.
Non-tariff barriers
With the success of the Uruguay Round tariff negotiations; attention has
naturally turned to the remaining non-tariff obstacles to trade. Economists
define a non-tariff trade barrier as any measure, public or private that causes
internationally traded goods and services to be allocated in such a way as to
reduce potential real-world income. Potential real-world income is the
DUE DATE: 17 NOVEMBER 2014

ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

attainable level when resources are allocated in the most economically efficient
manner. To the businessman a non-tariff barrier is any measure, other than
tariffs, that provides a barrier or obstacle to the sale of his products in a foreign
market. The major non-tariff trade barriers are as follows:
Quotas and trade control:
These are specific limits and controls. The trade distortion of a quota is even
more severe than a tariff because once the quota has been filled; the price
mechanism is not allowed to operate. The good is simply unavailable at any
price. "State trading" refers to the practice of monopolising trade in certain
commodities. In communist countries all commodities are monopolised, but
there are many examples of non-communist government monopolies: the
Swedish government controls the import of all alcoholic beverages and tobacco
products, and the French government controls all imports of coal.
Discriminatory government and private procurement policies:
These are the rules and regulations that discriminate against foreign supplies
and are commonly referred to as "Buy British" or "Buy American" policies.
Restrictive customs procedures
The rules and regulations for classifying and valuing commodities as a basis for
levying import duties can be administered in a way that makes compliance
difficult and expensive.
Selective monetary controls and discriminatory exchange rate policies
Discriminatory exchange rate policies distort trade in much the same way as
selective import duties and export subsidies. Selective monetary policies are
definite barriers to trade. For example, many countries from time to time require
importers to place on deposit at no interest an amount equal to the value of
imported goods. These regulations in effect raise the price of foreign goods by
the cost of money for the term of the required deposit.
Restrictive administrative and technical regulations
These include anti-dumping regulations, size regulations and safety and health
regulations. Some of these regulations are intended to keep out foreign foods
while others are directed towards legitimate domestic objectives. For example,
the safety and pollution regulations being developed in the United States for
automobiles are motivated almost entirely by legitimate concerns about
highway safety and pollution. However, an effect of the regulations, particularly
on smaller foreign manufacturers, has been to make it so expensive to comply
with US safety requirements that they have withdrawn from the market.
Winds of change
The emergence of Japan in the 1970s and 80s, coupled with more trade
between developing countries, harmed the balance of payments of the Western
economies. Coupled with oil shocks and debt crises, attitudes to trade changed
somewhat in the 1980s. In effect free trade was reversed. The Industry and
Development Global Report (1988/89) made a series of observations showing
that whilst expansion of demand was there, it was patchy and therefore in
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ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

some sectors excess occurred. Coupled with schemes like the CAP of the EU
(Common Agricultural Policy of the European Union) which produced
"mountains" of butter, sugar, etc., this excess led to downward pressure on
prices which newly emerging nations may be better equipped to deal with if raw
materials are banned in country. The growth of economic unions like the EU
which are limited multilateral organisations have undermined the strength of
GATT agreements but only in so far as non-tariff barriers are concerned. Such
non-tariff barriers may merely be devices to soften up foreign rivals and force
them into regulatory voluntary restrictions on trade.
The main non-tariff barriers of recent times have been countervailing duty and
anti-dumping. Protectionist measures like these can reduce global
opportunities in direct ways (imposition of quotas, Health and Safety
Standards, etc.), affect the attractiveness of marketing offers to intermediaries
by affecting market price (tariffs), volume (voluntary restraints) and uncertainty
("proved" dumping cases) or they reduce opportunities by affecting the
attractiveness of your offer to end users (cancelling out price advantages).
Anti dumping is the worst form of protection because anti-dumping creates
uncertainty for producers and intermediaries, one needs not be "guilty" to be
penalized for it. Anyone entering the industry after a charge of dumping against
it will face the highest rate of levy. They can be fined and therefore be driven
away and as a result consumers will suffer.
In order to circumvent protection, options include avoiding certain commodities
or industries, teaming up with local contacts, producing from inside the market
or self-regulation.
The legal/political system is a minefield, with few international standards or
regulations to fall back on. Thankfully, for many agricultural products and agribusinesses like timber, fish, livestock and so on, the rules are fairly well
defined. However, change can occur very quickly. The imposition of a transport
levy by the South Africans affected Zimbabwe's drought relief programme
costs, and the increase of duties by 40% by the same country are hitting
Zimbabwe's clothing exports there very hard. Zimbabwe and Botswana, who
enjoy large beef quotas with the EU, can be affected overnight by a ban. On a
number of occasions the EU has imposed a ban on beef exports from
Zimbabwe because of a so-called "foot and mouth" outbreak in Zimbabwe,
although minor in scale, its consequences can be major for the industry.
Marketers are beholden to always keep a constant watch on changes, which
are and could occur in the legal/political environment.
Summary
Probably, the most important "Environmental variables" are the political and
legal aspects. Laws regarding property rights and regulations regarding
permissible and non-permissible forms of cooperation and competition are
possibly the greatest challenge facing multinational marketers when attempting
to cross international boundaries. Individual country policies, terms of access,
tariff and non tariff barriers, and rules and regulations regarding standards of
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ISMANIDA ISMAIL | 2013194683 | GROUP NBMHF2D - ASSIGNMENT 2

quality, quantity and so on, are so vital that often expert help is required to deal
with them. The new GATT Round, operational from 1995 and effected by the
newly constituted World Trade Organisation, is one of the most far reaching
trade agreements to date and proposes to boost world trade considerably over
the next decade.

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