UNIT I STUDY GUIDE

International Business Global

Framework, Part 1

Course Learning Outcomes for Unit I

Upon completion of this unit, students should be able to:

1. Differentiate international business from domestic business operations.

2. Analyze the effects of political, legal, economic, and cultural dimensions of international business on
an organization.

Required Unit Resources

In order to access the following resource, click the link below.

de Mooij, M., & Hofstede, G. (2010). The Hofstede model. International Journal of Advertising, 29(1), 85–110.
[Link]
t=true&db=bth&AN=48653916&site=ehost-live&scope=site

Unit Lesson
Globalization Has Advantages and Disadvantages

In this course, we recognize international business as a means of doing business in other parts of the world.
Advantages exist to buying, selling, and interacting with companies positioned in other countries. Of course,
disadvantages also exist. We hear the term globalization quite often, and it means the ability to interact with
other countries in a marketplace that has rules, laws, standards, and expectations of conducting business.

If we examine why doing business in another country is advantageous for companies, we will find several
reasons.

• New sources of raw materials: If one’s current source of raw materials dries up, the price has risen,
competitors lock up the market, or the government makes it hard to acquire materials because of
environmental regulations, you might find an alternative source in another country.
• New technology: If you find current technology outmoded or wish to develop new uses of a raw
material, new technology from another source might work.
• New products to sell: People in other countries have different needs and could possibly use a product
not in use domestically. Such a product might increase local sales.
• New customers: Customers in other countries have the same needs as local customers. A company
could make the product here and send it overseas.
• New partners: Capitalists in other countries look to invest in sound businesses operating locally or
internationally. A company could have an interest in acquiring capital and resources to expand its
business.
• Reduction in risk: Exposure to additional markets reduces business risk if a country experiences
economic contraction for any reason.

Advantages also exist for countries to encourage international business.

• Bigger markets: The more companies participate, the larger the marketplace. Participation promotes
the concept of a free market without excessive levies and tariffs.
• Better and varied goods: The larger the marketplace, the more products are available. Because of
competition, prices go down and quality goes up.
• Better investment opportunities: The larger the marketplace, the better the opportunity for private
participation and even public partnerships.

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 • Fills social needs: Workers have jobs, markets enhance education, and UNIT
the xgovernment
STUDY GUIDE has tax
revenue. Title
• Reduction of war: One of the original purposes behind the formation of the European Union trading
bloc aimed to reduce war. Given that World War I and World War II occurred on the European land
mass, many believed if government emphasized trade and commerce, it would make war less likely
to occur again.
• Eradication of cultural barriers: In the next section, you should give some thought to what cultural
differences lie behind the economic, political, and legal barriers that hinder and restrict trade.
International business has the motivation to overcome these barriers and make cultural problems
solvable.

Given the many advantages, we will now examine the disadvantages of doing business in another country.

• Legal issues: When a company conducts trade in another country, it must consider its laws. The
importing country and the exporting country can charge levies, tariffs, taxes, and duties depending on
their needs. In some cases, limits and quotas also exist. Some commodities are legal in some
countries, but other countries may classify that same commodity as illegal.
• Supervisory oversight: Whether a company opens a factory in another country or simply buys and
sells property, distance reduces its oversight. Although employing people who can tell you about the
status of your business in other countries is wise, it is also expensive.
• Political problems: Many people are strongly opposed to outsourcing, globalization, and other
international business practices. A company may lose some of its customer base if it begins trading in
other countries. Moreover, if a company involves itself in human rights abuses, environmental
accidents, or corruption in other countries—even if it had no idea these events had occurred—it may
subject itself to an onslaught of bad publicity and lost business. In extreme cases, government may
hold owners personally liable.

Disadvantages also exist for some countries to participate in international business.

• Exploitation of undeveloped countries: Some people claim that larger developed countries can stifle
the economic development of countries uncooperative with Western values. Poor countries get
poorer because rich countries do not pay fair value for resources.
• Monopolies and oligopolies in technology: Rich countries conspire to keep technology know-how and
capital investment from reaching undeveloped countries.
• Unemployment: If a company moves a factory overseas, it will create jobs for a foreign country. In the
meantime, the move can increase unemployment in the local community. Nike moved much of its
shoe production to China and Vietnam because of lower costs.
• Environmental degradation: Using another country’s resources solely because its environmental
standards are lower can cause environmental problems. When NAFTA went into effect in the 1990s,
many companies built their plants on the Mexican side of the border because of the cheaper utilities
that resulted from lower coal burning standards.

After reviewing the pros and cons of globalization, it is important to remember that the big difference between
a domestic business and an international business is the amount of opportunities and choices available to
grow the business and move it forward. Along with those opportunities, come bigger and more diverse risks,
which require a higher degree of specialization and yield a higher return on investment.

Cultural Differences Drive Everything

One of the main barriers to conducting business in faraway places is the inability to understand cultural
differences that might affect decision-making. Additionally, cultural differences extend to legal and political
systems.

All countries, at one time or another, have solved problems in trading with other countries. The solutions
that work for a country have, over time, been ingrained into its way of thinking, and a country’s way of thinking
is its culture. As students of international business, we need to know a country’s values and what is important
to its people so that we can work with these ideals. Hofstede (1980), a former Dutch IBM employee,
conducted one of the best studies to identify the cultural values of various nations as they compare to ours
and other countries.

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Hofstede (1980) published Culture's Consequences: International DifferencesUNIT in Work-Related Values, which
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laid the groundwork for studying the differences in international cultures. WhatTitle
Hofstede found is what we all
know: We are all different. On the outside, we all have differences: facial features, skin color, body stature,
and even our language or dialect based on where we grew up. Differences can also be found on the inside:
how we value people and relationships and how we react to power and responsibility. These differences are
our national culture.

Hofstede’s (1980) research enabled him to identify parameters in which one can label all cultures with distinct
traits and characteristics. More specifically, Hofstede’s initial research and additional research have identified
five factors in which we can categorize our differences and similarities. Here are Hofstede’s five categories
with explanations and examples:

1. Power distance
• This characteristic is the extent to which the lower ranking individuals of a society expect and
accept the distribution of power unequally. A person born and raised in a country with a high
power distance ratio would think that inequality is acceptable. An example of a high power
distance ratio is evident in work situations in which superiors tell subordinates what to do versus
those in which superiors consult with subordinates on what to do.
• Two countries that represent the opposite sides on the power distance scale are Russia and
Denmark. In Russia people believe it acceptable to treat the lower echelon workers with disdain;
however, in Denmark the workers have union councils to enforce worker participation in work
environment decisions (Hofstede, 1980).
2. Uncertainty avoidance
• Uncertainty avoidance is the extent to which employees feel threatened by ambiguous or
unknown situations and the relative importance they attach to rules, long-term employment, and
the need for a well-defined career ladder.
• One can describe a country with a high uncertainty avoidance as having little change, slow
adoption of innovations, xenophobia, staying in the same job for years, and greater bureaucratic
regulation. Countries with high and low uncertainty avoidance are Japan and China respectively
(Hofstede, 1980).
3. Individualism versus collectivism
• A person can consider individualism as a trait in which the ties between individuals are loose. An
individual looks after himself or herself and immediate family only. One can consider collectivism
as a society in which individuals from birth onwards are part of a strong societal group.
• Individualism would show up as more individual competition in the workplace and in sports.
People respect human rights, smaller core families are more common, higher divorce rates exist,
and a faster pace of life exists. One can describe collectivism as more focused on teams in the
workplace and in sports, larger core families, lower divorce rates, and a slower pace of life. The
two countries that represent those two dimensions are the USA (individualism) and China
(collectivism) (Hofstede, 1980).
4. Masculinity versus femininity
• In the context of cultural differences, masculinity refers to a society that places the greatest value
on the attributes of assertiveness, toughness, task achievement, and material success.
Femininity, on the other hand, refers to societies that value attributes such as compassion,
concern for others’ welfare, and relationships (Gladwin, 1981).
• In a masculine society, role differentiation is high, meaning that there are vast differences in the
roles assumed by men versus the roles assumed by women. Countries representing the two
distinct sets of values are Japan, which is masculine, and the Netherlands, which is more
feminine (Hofstede, 1980).
5. Long-term versus short-term orientation
• Long-term orientation stands for the fostering in a society of pragmatic virtues oriented to future
rewards, in particular perseverance, thrift, and adapting to changing circumstances. In other
words, people imbued with these values will put off immediate consumption in favor of future
consumption. The opposite trait, short-term orientation, stands for the fostering in a society of
virtues related to the past and the present, such as national pride, respect for tradition,
preservation of face, and fulfilling social obligations.
• Characteristics and descriptions of long-term orientation would include companies seeking
market share and long-term profits, families that save money over long time periods, and
secondary school students that perform well at mathematics. Countries with a short-term
orientation would report slower economic growth, lower funds for investment, and companies that

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 stress the bottom line on quarterly reports. Japan and Egypt would represent
UNIT the two
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diametrically opposed countries in this scale (Hofstede & Hofstede, n.d.).
Title
These five characteristics not only help explain why cultures are different, they also provide a means to study
potential trading partners and identify the traits that will interfere with operations and those that might help the
trading relationship to grow.

By knowing the characteristics of a country and how they might affect a business relationship or trade, a
country will find it possible to anticipate problems and opportunities before they become evident. One
practical application is to promote cultural sensitivity to help people work more effectively when interacting
with people from other countries.

References

Gladwin, T. N. (1981). [Review of the book Culture's consequences: International differences in work-related
values, by G. Hofstede]. Academy of Management Review 6(4), 681–683.

Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Sage.

Hofstede, G., & Hofstede, G. J. (n.d.). National culture. [Link]

culture/

Suggested Unit Resources

In order to access the following resource, click the link below.

In the following video Geert Hofstede shares his thoughts on the international business landscape. Please
view the video to learn more.

Smit, I. (2015). Geert Hofstede on the importance of an international perspective 2015 [Video].
[Link]

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