International Business 5 Pertinent Topics the Cultural

International Business 5 Pertinent Topics

The Cultural Effect on International Business

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Political Issues Affecting International Business

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Regional Economic Integration AND INTERNATIONAL Business

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Impact of Exchange Rates on International Business

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Corporate Strategy in International Business

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An Analysis of International Business Today

No one can dispute the fact that the world economy is increasingly globalizing as we move into the 21st century. As this internationalization of business grows, there is an increasing challenge being faced to deal with cultural differences. In one survey, cultural differences ranked first among all eight issues listed as potential barriers, including law, price competition, information, language, delivery, foreign currency, time differences, and cultural differences. Great opportunities have been created for global collaboration but these opportunities are accompanied by a unique set of problems and issues relating to effective management in the international environment. The social and cultural nuances that enter the picture when dealing with foreign business partners may make for entertaining conversation in subsequent years, but the daily effort that is required for operations can sometimes be hard on business relationships, especially in the early stages.

This paper looks at five articles covering major areas of concern to international business. The first article in this look at international business looks at the cultural differences between China and the West, using five dimensions, including power distance, individualism / collectivism, masculinity/femininity, uncertainty avoidance, and long-term/short-term orientation.

China and the U.S. appear to differ greatly in nearly all the aspects examined here. It is clear to see that these cultural differences have already had, and will continue to have, a great impact on Sino-American business relationships.

The second article talks about the political aspects of international business, via a discussion about a trade dispute between Intel and China regarding the Chinese government's deadline for compliance with standards for Wi-Fi chips (specialized chips allow PCs and various other electronic devices wirelessly connect to the World Wide Web).

Beijing has demanded that its own standard for wireless security be incorporated into any chips sold in China by June 1, 2004.

Intel and other chip manufacturers are reluctant to give proprietary technology to one of 24 Chinese government sanctioned companies, which is what compliance will mean. There is a concern in the Silicon Valley that China is actually politically motivated by a desire to boost its own chip industry, which is still in its infancy. China denies that allegation and maintains that its purpose is solely to ensure the security of any Wi-Fi technology used in China.

The third article examined here is on the topic of regional economic integration and looks at NAFTA. The North American Free Trade Agreement was put in place on January 1, 1994, accompanied by fears of job losses in the U.S. And revolutionary rhetoric in the south of Mexico. In a single decade, Canada, Mexico and the U.S. have managed to build a market larger than the 15-nation European Union. Trade and investment levels have almost tripled, and the three countries have enjoyed very high degree of social and economic integration. Two crises, the Mexican peso devaluation of 1995 and the terrorist attacks of September 11, 2001, have nearly destroyed the integration experiment. NAFTA has failed to deal with some of the challenges of integration, which may prevent the group from making further progress.

Fourth, an article on outsourcing of legal services to India illustrates the issue of dealing with exchange rates. American firms are increasingly turning to offshore sources for employees, spurred primarily by the large cost savings that are involved, due to favorable exchange. While computer programmers, radiologists and tax preparers have all experienced this phenomena, lawyers have not until recently been subjected to such a situation.

But today, Indian-trained lawyers in Bombay are willing and able to do legal work for American firms for substantially lower fees. Since this trend to outsource legal work is just beginning, the types of work tends toward basic legal research and routine legal matters. Some firms are pioneering another way to take advantage of the disparity in prices generated by exchange rates between countries, setting up businesses directly, enabling them to take advantage not only of cost savings but also of time differences.

And finally, the last article looks at corporate strategy in international business, through the experiences of Macquarie Bank, Australia's sixth-largest finance house. Macquarie's foray into Asia is driven by entrepreneurial spirit, as opposed to a grand vision for regional investment. Macquarie's strategy is to work close to the ground, rather than from a top-down perspective. Macquarie typically enters a market very cautiously, first establishing an alliance with a seasoned institution, then carefully considering the ramifications of opening its own doors. It makes serious efforts to build contacts and trust with the various governments of the countries it wishes to do business in. Macquarie makes its first priority investor returns, not always what politicians worrying about road-toll fees and other infrastructure charges want to hear. Introduction No one can dispute the fact that the world economy is increasingly globalizing as we move into the 21st century. As this internationalization of business grows, there is an increasing challenge being faced to deal with cultural differences. In one survey, cultural differences ranked first among all eight issues listed as potential barriers, including law, price competition, information, language, delivery, foreign currency, time differences, and cultural differences.

Great opportunities have been created for global collaboration but these opportunities are accompanied by a unique set of problems and issues relating to effective management in the international environment. The social and cultural nuances that enter the picture when dealing with foreign business partners may make for entertaining conversation in subsequent years, but the daily effort that is required for operations can sometimes be hard on business relationships, especially in the early stages.

For starters, there are the predictable complications like time zone issues, language issues, and currency issues. Less anticipated and much more challenging are the cultural issues which, when they surface, often blindside Americans. In managing a global business, few core competencies will prove more important than the ability to handle a longer-than expected start-up period. A lot of Americans have not anticipated the teaching function that is required overseas.

Hard-driving U.S. executives often mistakenly think that consensus has been reached when it hasn't. What is heard is not necessarily what is meant.

The first principle is patience. Investments are going to be required to get global sources up to speed and the learning curve is invariably steeper than anticipated.

It is usually advisable to factor a slower pace to the anticipated payout than might first be expected. American companies often like to think that know exactly how to behave abroad and how to transact business on an international basis, but they are relative newcomers to international trade.

They still tend to think the American way is the only way. A lurking danger is that miscommunication can trigger a completely unintended conflict. To successfully lead an international business to profitability, the lesson for global managers is to think about everything else first and the labor component last. It is important to be alert to the different "rules of engagement" that prevail in different places.

In China, for example, trade practices are less consistent than those in Japan and are subject to great regional variation. The Dutch tend to be as confrontational and adversarial as Americans (and some would say, even more so). With them, pushing back is very much part of the business game. In Brazil, conditions are constantly changing, tariffs and customs and labor situations may differ from day-to-day, so doing business there requires that flexibility be built into transactions as a pre-condition for success. It is important to take into account the reality that when a company does business overseas, it is no longer on an accustomed playing field.

All of these elements can have a huge impact on whether or not a business is successful in the international marketplace today. This paper will take a look at five different areas that can specifically impact the likelihood of success. The first is the effect that cultural variations can have, from the perspective of the cross-cultural challenges found when doing business in China. The second focus is how political issues can impact an international business, examined through the prism of a current trade dispute between the U.S. And China over new Wi-Fi standards. Third is an analysis of regional economic integration, with a close look at where NAFTA stands today in terms of effectiveness in promoting trade between the three nations of North America. The fourth perspective is on how exchange rates affect the way companies do business internationally, taking a look at the phenomena of corporate America's outsourcing legal work to India. Finally, the fifth area is corporate strategy, with an analysis of the manner in which Macquarie Bank, Australia's sixth-largest finance house, has handled its "Move on Asia."

The Cultural Effect on International Business

Cross-cultural Challenges when Doing Business in China by Pan Fan and Zhang Zigang, in Singapore Management Review, Volume 26, Issue 1, 2004.

Description

This article clarifies the differences between China and the West, using Hofstede's four cultural dimensions and Bond's fifth dimension. Hofstede explained that culturally-based values systems were made up of four dimensions: power distance, individualism/collectivism, masculinity/femininity, and uncertainty avoidance. Bond added a fifth "Eastern" dimension called long-term/short-term orientation. By these measurements, Western countries seem to be generally lower than China in power distance.

In terms of individualism, Western countries are generally much higher than China. Western countries also have a much shorter-term orientation vs. China's longer-term orientation. China and the U.S. appear to differ greatly in nearly all the aspects examined here. It is clear to see that these cultural differences have already had, and will continue to have, a great impact on Sino-American business relationships. Where Chinese managers tend to favor cooperative strategies, American managers believe strongly in contractual safeguards. Chinese managers are more likely to use indirect forms of influence, involving assistance from a third party, to resolve conflicts, while Americans gravitate toward direct and open forms. Chinese managers will err on the side of making a less risky decision, whenever possible, than will American managers. Chinese mangers will also utilize a much more non-participatory approach to decision-making than their American counterparts. The Chinese spend much more time building social and interpersonal relations than do Americans. Chinese managers are much more motivated by being part of a group than by individual achievement, which is the hallmark of American managers.

Analysis

China and the U.S. are vastly different in terms of their economic systems, political systems, social values, and laws. U.S. managers rely heavily on individualism in making decisions. They prefer to work alone and are reluctant to cooperate because they view cooperation as a sign of weakness and loss of control. The Chinese manager will depend more on groups or institutions to govern what do and will definitely emphasize loyalty to the group. The Chinese value system honors duty to the group and harmony among members. The pursuit of personal goals is a negative concept in China. There appears to be a great divergence between Chinese and American managers in their attitudes toward taking risks. Chinese managers usually not make immediate decisions if they feel the circumstances are at all uncertain, while American managers are more likely to consider risks as natural.

When Chinese managers face conflict, they prefer to use negotiation and compromise, whereas American managers prefer to use the tactic of confrontation, rational arguments, factual evidence, and suggested solutions. American managers are reluctant to take the time that is needed to enlist the help of other people. Chinese managers tend to pay more attention to relationships than contracts, preferring to use indirect forms of influence to avoid losing face and damaging guanxi (social and interpersonal relationships).

Chinese managers will spend time to build guanxi before ever entering into a business relationship. American managers focus on the task rather than the relationships, in order to build confidence. Americans put great emphasis on individual achievement. In contrast, Chinese managers believe a sense of belonging and devotion to the group is more important. Many American managers are not patient enough to build personal relationships with Chinese partners when they invest in China. They do not seem to understand how important these relationships are to the Chinese and their business.

Political Issues Affecting International Business

Why China is Making the Valley Fret by Cliff Edwards, Jim Kerstetter and Bruce Einhorn.

A in Business Week, 29 Mar 2004.

Description trade dispute between Intel and China erupted onto the front page on March 10, 2004.

Intel Corporation announced that it would not comply with the Chinese government's deadline for Wi-Fi chips. These specialized chips allow PCs and various other electronic devices wirelessly connect to the World Wide Web.

Beijing has demanded that its own standard for wireless security be incorporated into any chips sold in China by June 1, 2004.

The problem for Intel and other chip manufacturers is that compliance with this rule could require them to give proprietary technology to one of 24 Chinese government sanctioned companies. This situation illustrates a concern in the Silicon Valley that China is actually motivated by a desire to boost its own chip industry, which is still in its infancy. China denies that allegation and maintains that its purpose is solely to ensure the security of any Wi-Fi technology used in China.

U.S. technology executives have asked the U.S. government to step in and negotiate a compromise. Underlying all of this is a fear that Chinese companies will use take this Wi-Fi technology and build the internal expertise required to eventually become major competitors on a global scale. The issue of how much technology to share with Chinese companies has been debated for years. The example of the cell phone industry further raises concerns. In the late 1990s, nearly all cell phone handset sold in China were made elsewhere. China closed that market to new foreign entry and today, after sharing technology with Chinese "partners," American companies are finding themselves with new rivals. Technology companies do not want to give away trade secrets, but to ignore China's demands raises the risk that a fast-growing market may be closed to them.

Analysis

China's policies in this instance seem to be mainly political in nature. The closed trade attitude that pervaded China until recently still motivates much of how China does business internationally. Many technology-driven businesses have suffered over the years from China's weak protection of intellectual property. Both Microsoft Corporation and Cisco Systems, Inc., have cried foul over software counterfeiting and copying of hardware, respectively. China has limited some of its more blatantly anti-competitive activities since it joined the WTO two years ago. However, Chinese legislation designed to protect intellectual property remains vaguely worded and difficult to enforce. This move to force chipmakers from outside China to share Wi-Fi technology is suspiciously timed. It is hard to deny the political flavor of this rule coming out just as China is beginning to try to boost its domestic chip industry.

To help things along, the Chinese levied a 17% value-added tax on all chip imports, while domestic chipmakers pay only about a 3% tax. To counteract this action, U.S. tech companies lobbied Washington to file a WTO complaint. China has countered by saying that U.S. companies are over-reacting.

China claims that an improved standard will help to promote greater public confidence in Wi-Fi technology. However, it appears that there is a more politically motivated reason, which is the Chinese fear depending on suppliers from outside the country for crucial encryption technology. The Information Technology Industry Council, National Association of Manufacturers, and SIA are currently all contending that China is violating WTO rules, with U.S. trade experts agreeing. China's mandated technology transfer may be illegal under WTO rules since member states are not allowed to treat foreign companies differently from domestic ones.

U.S. chipmakers are hesitant to involve the WTO, not wishing to alienate China. They are working behind the scenes to convince China to either kill their standard, or to allow the international standard to be used.

Regional Economic Integration and International Business

North America's Second Decade by Robert A. Pastor in Foreign Affairs, Volume 83, Issue 1, Jan/Feb 2004.

Description

The North American Free Trade Agreement (NAFTA) was put in place on January 1, 1994. This was accompanied by fears of job losses in the U.S. And revolutionary rhetoric in the south of Mexico. In a single decade, Canada, Mexico and the U.S. have managed to build a market larger than the 15-nation European Union. Trade and investment levels have almost tripled, and the three countries have enjoyed very high degree of social and economic integration. The term "North America" is finally more than just a geographical designation. NAFTA was really only the first draft of an economic constitution for North America. It was lean, intended only to take down the many barriers to trade and investment. No one planned for its success or for the crises that have confronted it. While it pushed for continental integration, it did not actually provide guidance as to how this was to be achieved. While the EU has created too many institutions, North America created virtually none. Two crises, the Mexican peso devaluation of 1995 and the terrorist attacks of September 11, 2001, have nearly destroyed the integration experiment, as a result. During the first 10 years of NAFTA, the U.S. has enjoyed the largest growth in jobs in its history. Canadian investment in the U.S. grew even faster than U.S. investment in Canada. Environmental standards in Mexico have improved quickly. U.S. trade with its neighbors has increased at a rate nearly twice that of its trade with the rest of the world. U.S. exports to Mexico grew four times over, and exports to Canada doubled. Travel and immigration among the three nations also increased. NAFTA has also failed to deal with some of the challenges of integration, which may prevent the group from making further progress.

Analysis

There are several areas where NAFTA has not lived up to its potential. Many industries have viewed NAFTA as a means of survival, rather than envisioning the agreement as a vehicle for growth. NAFTA simply did not plan well, if at all, for its own success. For example, poor infrastructure cannot deal with increased traffic, creating delays that raise the transactional costs of regional trade more than they were ever lowered by doing away with tariffs. NAFTA does not address the issue of immigration, and the press is quick to point out that the number of undocumented workers in the U.S. has jumped from 3 million to 9 million. NAFTA does not deal with energy issues, and as a result, the U.S. And Canada experienced an incredibly large blackout in August of 2003. NAFTA makes no attempt to handle macroeconomic policy, creating no vehicle for handling market failures such as the Mexican peso crisis. Lastly, NAFTA does not address security issues, and the aftermath of September 11 may yet derail North American integration as borders are strengthened and movement across them is impeded.

NAFTA can only succeed if the three governments involved stop looking at it as separate sets of bilateral agreements. Instead, they should be working in a three-way partnership, realizing that what is good for one is better for all. The experience of European integration should hold a few good lessons for North Americans. Issues such as currency crises, environmental disasters, terrorism, crumbling infrastructures or economic development gaps between member states must all be directly addressed. Excessive bureaucracies must be avoided, and infrastructure and postsecondary education must be priorities, since they have a clear multiplier effect on the rest of the economy. NAFTA must address the issue of the economic disparity between Mexico and its northern neighbors. As the EU discovered, free trade, foreign investment and generous aid (conditioned on good policies) can make a difference.

Impact of Exchange Rates on International Business

Corporate America Sending More Legal Work to Bombay by Ellen Rosen, in the New York Times, 14 Mar. 2004

Description

American firms are increasingly turning to offshore sources for employees, spurred primarily by the large cost savings that are involved, due to favorable exchange rates in many cases. While computer programmers, radiologists and tax preparers have all experienced this phenomena, lawyers have not until recently been subjected to such a situation.

But today, Indian-trained lawyers in Bombay are willing and able to do legal work for American firms for substantially lower fees. Despite the fact that lawyers are bound by convoluted ethical rules and are licensed by individual states, corporate America is beginning to experiment with hiring foreign lawyers for discrete projects.

Offshoring," as the practice is called, has allowed some companies to reduce certain of their legal costs by as much as 50%. Quality is not suffering, as the companies who utilize offshore lawyers appear to be receiving work that is just as good as what they can obtain in the United States. According to Dennis Archer, the president of the American Bar Association, "The need to cut costs reaches across many departments, so it should be no surprise that it goes to the legal department as well."

Many lawyers are, of course, very uncomfortable with even minor uses of offshore outsourcing.

Most large companies have gained a sense of security about using temporary lawyers on projects. However, sending legal work overseas is certainly a much bigger change. The major impact appears to be in the area of routine work, much of which is done in the U.S. By paralegals or newly hired and inexperienced attorneys. Many law firms find that the younger associates aren't interested in this work, due to its less challenging nature.

Analysis

While the disparity between fees charged in the U.S. And overseas directly lowers costs for the firms utilizing this practice, there may be further downstream cost savings in the future. If foreign lawyers charge a fraction of what an American attorney bills for the very same services, it may affect rates for junior associates and paralegals, where the work is routine, large scale and sensitive to technology.

The trend to have overseas lawyers write basic contracts that are then reviewed by U.S. lawyers will undoubtedly escalate. As more U.S. firms do business internationally, they will also develop trusting relationships with attorneys who become affiliated with them through acquisition. This was the case with The Andrew Corporation, a telecommunications company based in Orland, Illinois. They now use an outside patent firm in New Zealand to help with filings in the U.S. At current exchange rates, the attorneys retained in New Zealand charge about 30% less than American lawyers would for the same work.

Obviously, the savings are greater in other countries, depending upon the exact exchange rate between the currencies.

Since this trend to outsource legal work is just beginning, the types of work tends toward basic legal research and routine legal matters. Some firms are pioneering another way to take advantage of the disparity in prices generated by exchange rates between countries. Some are quietly setting up businesses directly, enabling them to take advantage not only of cost savings but also of time differences.

While American legal work done overseas must be reviewed, this presents no real problems. Even if an offshore lawyer is not authorized by a U.S. state to practice law in the U.S., the review by American lawyers "sanitizes" the process. Over time, more large American firms will undoubtedly experiment with sending routine work overseas because of client demands, as well as the cost savings to be realized from outsourcing this type of work to take advantage of favorable exchange rates.

Corporate Strategy in International Business

Macquarie Makes Its Move On Asia by Donald Greenlees and Jan McCallum, in the Far Eastern Economic Review, Vol. 167, Issue 12, March 25, 2004

Description

Macquarie Bank, Australia's sixth-largest finance house, recently opened a branch in downtown Seoul, Korea. The bank has a reputation for bravado in its home market and has attracted a lot of uncomplimentary comments along the way. It is now bringing what it calls its "zeal for the deal" to Asia. On March 2, it announced the first foreign-equity investment in a Japanese toll road. On March 9, Macquarie plunged back into the Asian institutional-broking market by moving ahead with the acquisition of ING Group's equity businesses in 10 nations, a deal that many feel will serve as a springboard for Macquarie in Asia and spur regional growth. Drawing on global expertise in infrastructure investment and management, Macquarie plans to take advantage of the boom in Asian infrastructure.

Macquarie's says that its foray into Asia is driven by entrepreneurial spirit as opposed to a grand vision for regional investment. Macquarie's strategy is to work close to the ground, rather than from a top-down perspective. People who are close to the real work and the people involved are better able to determine what will succeed with individual businesses. This has sometimes led to the bank's global investments appearing to happen without significant rhyme or reason. Macquarie typically enters a market very cautiously, first establishing an alliance with a seasoned institution, and then carefully considering the ramifications of opening its own doors. It makes serious efforts to build contacts and trust with the various governments of the countries it wishes to do business in. Macquarie makes its first priority investor returns, not always what politicians worrying about road-toll fees and other infrastructure charges want to hear.