IBT CHAPTER 3 & 4

CHAPTER 3
Economic Development
• Differences among nations affects how attractive it is for doing business.
• Trends that foster greater economic development:
o Democratic forms of government.
o Market-based economic reforms.
o Legal systems that better enforce property rights.

Gross National Income (GNI)

• Measures the total annual income received by residents of a nation.
• GNI does not consider differences in the cost of living.
o Purchasing power parity (PPP) is an adjustment in gross domestic product per capita to
reflect differences in cost of living.
• The World Bank classifies countries' economic development according to GNI. 
Purchasing Power Parity (PPP)
• An adjustment in gross domestic product per capita to reflect differences in the cost of living
o It allows a more direct comparison of living standards in different countries.

Political Economy and Economic Progress

 Innovation and Entrepreneurship are the Engines of Growth
• Innovation.
 Includes new products, new processes, new organizations, new management
practices, and new strategies.
 Also seen as the product of entrepreneurial activity
• Entrepreneurs.
 First to commercialize innovative products and processes.
 Provides much of the dynamism in an economy.
 Innovation and Entrepneurship require a Market Economy
• Economic freedom associated with a market economy creates greater incentives for
innovation and entrepreneurship than either a planned or mixed economy.
• In a market economy, any individual who has an innovative idea is free to try to make
money out of that idea by starting a business.
 Innovation and Entrepreneurship require strong Property Rights
 Economic Progress Begets Democracy
 Geography, Education, Demographics and Economic Development
• Economist Jeffrey Sachs argues that countries with favorable geography are:
 More likely to engage in trade.
 More open to market-based systems.
States in Transition
 The Spread of Democracy
• Three main reasons:
1. Many totalitarian regimes failed to deliver economic progress to the vast bulk of their
populations.
2. New information and communication technologies including satellite television,
desktop publishing, and the Internet and associated social media, have reduces a
state’s ability to control uncensored information.
3. In many countries, economic advances have led to the emergence of increasingly
prosperous middle and working classes that have pushed democratic reforms.
 The New World Order and Global Terrorism
 The Spread of Market-Based Systems
• A shift from centrally planned economies to market-based economies.
 More than 30 countries in the former Soviet Union and eastern European
communist bloc have changed economic system.
 Change also occurring in Asian and African states.

The Nature of Economic Transformation

The shift toward a market-based system involves:
1. Deregulation
• Removing legal restrictions to the free play of markets, the establishment of private
enterprises, and the way private enterprises operate.
• Involved removing price controls, thereby allowing prices to be set by the interplay
between demand and supply; abolishing laws regulating the establishment and
operation of private enterprises; and relaxing or removing restrictions on direct
investment by foreign enterprises and international trade.
2. Privatization
• Transfers ownership of state property into the hands of private individuals.
o By the sale of state assets through an auction
3. Legal System
• A well-functioning market economy requires laws protecting private property rights and
providing mechanisms for contract of enforcement.
Focus on Managerial Implications
Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally
• Countries are more likely to have higher sustained rates of economic growth when they
have:
o Democratic regimes.
o Market based economic policies.
o Strong property rights protection.
• These markets are more attractive to international businesses.
• Benefits
- Function of the size of the market, the present wealth (purchasing power) of customers
in that market, and the likely future wealth of consumers.
• Costs
- A number of political, economic, and legal factors determine the costs of doing business
in a country.
o Political factors: A company may be pushed to pay off politically powerful
entities in a country before the government allows it to do business there.
(bribes)
o Economic factors: Sophistication of a country’s economy. It may be more costly
to do business in relatively primitive or underdeveloped economies because of
lack of infrastructure and supporting business.
o Legal Factors: It can be more costly to do business in a country where local laws
and regulations set strict standards with regard to product safety, safety in
workplace, environmental pollution.

CHAPTER 4 – DIFFERENCES IN CULTURE

Workplace Culture Around The World
ISRAEL
• The workweek in Israel runs from Sunday – Thursday so that citizens are free to observe
Shabbat, the Jewish Holy Day, from sundown on Friday to Saturday evening.
FRANCE
 • French workers are protected by a Right to Disconnect Law, which stipulates that most French
professionals are not responsible for responding to emails that come in after office hours. The
measure was adopted to protect employees from being overworked.
JAPAN
• In Japan, napping in the office is not only common, but can be seen as a sign of employee
diligence. The word for the practice is "inemuri," or "sleeping on duty," and is most prevalent
among senior employees, according to The New York Times.
NIGERIA
• The gesture “THUMBS UP” has a completely different connotation in Nigeria than it does in the
US, and it’s considered very offensive.

UNITED ARAB EMIRATES

• Courtesy and good manners have a revered place in business practice in the United Arab
Emirates. But when doing business in the UAE or in any Muslim country, prayer times should
always be respected.

Cultural Differences
Understanding and adapting to the local cultural is important in international companies.
• Cross-cultural literacy refers to understanding how cultural differences across and within
countries can affect the way business is practiced.
 Cultural differences create a common bond among people.
 Culture can and does evolve.

What Is Culture?
Culture
• A system of values and norms shared among a group of people and that when taken together
constitute a design for living.
Values
• Ideas about what a group believes to be good, right, and desirable.
Norms
• Social rules and guidelines that prescribe appropriate behavior in particular situations.

Society
• A group of people sharing a common set of values and norms.
Determinants of Culture

A. Social Structure
Social Structure
• Refers to the basic social organization of a society.
• Two dimensions help explain differences among cultures:
1. The degree to which the basic unit of social organization is the individual, as
opposed to the group.
2. The degree to which a society is stratified into classes or castes.

Individuals and Groups

 The Individual:
• In many Western societies, the individual is the basic building block of social
organization.
o Emphasis on individual achievement.
 The Group:
• A group is an association of two or more individuals who have a shared
sense of identity and interact in structured ways based on common
expectations.

Social Stratification
• Social strata are hierarchical social categories often based on family background,
occupation, and income.
• Individuals born into a particular stratum, which affects life chances.

 Four basic principles:

1. Trait of society.
2. Carries over into next generation.
3. Generally universal but variable.
4. Involves not just inequality but also beliefs.

 Social Mobility – movement of individuals or groups from one position in a society’s

stratification system to another
 • Two kinds:
o Caste System – A closed system of social stratification in which social position is
determined by the family into which a person is born, and change in change in that
position is usually not possible during an individual’s lifetime.
o Class System – An system of social stratification in which social status is
determined by the family into which a person is born and by subsequent
socioeconomic achievements; mobility between classes is possible.
 A form of open stratification in which the position a person
has by birth can be change through his or her own
achievements or luck.

B. Religious and Ethical Systems

Religion
• A system of shared beliefs and rituals concerned with the realm of the sacred.
Ethical System
• A set of moral principles, or values, that are used to guide and shape behavior.
 Most ethical systems are the product of religions.
 Five dominant religions today:
1. Christianity – the most widely practiced religion in the world.
Vast majority of Christians live in Europe and the Americas.
o Catholic, Orthodox, Protestant
o Christianity grew out of Judaism
o Monotheistic religion
2. Islam – the second largest of the world’s major religions.
o Prophet Muhammad began spreading the word
o Islam has roots in both Judaism and Christianity
o Monotheistic religion
o Islamic Fundamentalism – associated with militants,
terrorists, and violent upheavals.
3. Hinduism – Indian subcontinent
o Founded by Siddhartha Gautama
o Hindus believe in reincarnation, or rebirth into a
different body, after death. Hindus also believe in
karma.
4. Buddhism
o Central and Southeast Asia, China, Korea, and Japan.
o Believes that suffering originates in people’s desires for
pleasure.
o The Noble Eightfold Path – emphasizes right seeing,
thinking, speech, action, living, effort, mindfulness, and
meditation.
o Does not support the caste system.
5. Confucianism - The system of ethics, education, and
statesmanship taught by Confucius and his disciples, stressing
loyalty, honesty, reciprocal obligation, and harmony in thought
and conduct.
o Founded by Kung-Fut-tzu
 o Teaches the importance of attaining personal salvation
through right action.

C. Language
Spoken Language
• Language structures the way we see the world.
• Countries with more than one language often have more than one culture.
• Mandarin (Chinese) is mother tongue of the largest number of people.
• The most widely-spoken language in the world is English.

Unspoken Language
• Nonverbal communication refers to the use of nonverbal cues to communicate
meaning.
o Often culturally bound.
o Personal space is the comfortable distance between a speaker and the
listener.
 Varies among cultures which makes it important to know in
business.

D. Education
Formal Education
• Medium through which individuals learn languages and other skills.
• Socializes the young into the values and norms of a society.
o The “hidden curriculum” in schools teaches respect for others, obedience to
authority, honesty, neatness, timeliness.
• Provides a national competitive advantage.
o Creates a pool of skilled and knowledgeable workers.
o Represents a good index of what products might sell in a country.

E. Culture and Business

Geert Hofstede:
 Power distance – focused on how a society deals with the fact that people are unequal in
physical and intellectual capabilities.
 Degree to which societies accept the idea that inequalities in the power and
well-being of their citizens are due to differences in individuals' physical and
intellectual capabilities and heritage
 Individualism vs. Collectivism – focused on the relationship between the individual and his
or her fellows.
 Uncertainty Avoidance – measured the extent to which different cultures socialized their
members into accepting ambiguous situations and tolerating uncertainty.
 A national culture attribute that describes the extent to which a society feels
threatened by uncertain and ambiguous situations and tries to avoid them
 Masculinity vs. Femininity dimension looked at the relationship between gender and work
roles.
 Masculine cultures: Gender roles were differentiated, and traditional “masculine
values,” such as achievement and effective exercise of power, determined
cultural ideals.
 - A national culture attribute that describes the extent to which the culture favors
traditional masculine work roles of achievement, power, and control. Societal values
are characterized by assertiveness and materialism.
 Feminine cultures: A national culture attribute that indicates little
differentiation between male and female roles; a high rating indicates that
women are treated as the equals of men in all aspects of the society.

Global Leadership and Organizational Behavior Effectiveness (GLOBE) instrument:

• A leader’s effectiveness is contextual.
o Embedded in the societal and organizational norms, values, and beliefs of the
people being led.
• Established nine cultural dimensions.
o Power distance, uncertainty avoidance, humane orientation, institutional
collectivism, in-group collectivism, assertiveness, gender egalitarianism, future
orientation, and performance orientation.

World Values Survey (WVS):

• Explores people’s values and norms, how they change over time, and what impact they
have in society and business.
• Dimensions:
o Support for democracy; tolerance of foreigners and ethnic minorities; support
for gender equality; the role of religion and changing levels of religiosity; the
impact of globalization; attitudes toward the environment, work, family, politics,
national identity, culture, diversity, and insecurity; and subjective well-being.

F. Cultural Change
• Culture is not a constant; it evolves over time.
• Economic advancement and globalization are factors of societal change.
• Cultures of societies may also change as they become richer because economic
progress affects a number of other factors, which in turn influence cultures:
o Increased urbanization and improvements in the quality and availability of
education.

Focus on Managerial Implications

Cultural Literacy and Competitive Advantage
• Cross-Cultural Literacy:
o Companies must be informed about the culture of another nation when conducting
international business.
o Ethnocentrism is the belief in the superiority of one’s own ethnic group or culture.
o Values and norms influence costs of doing business and the costs of doing business
influence ability to establish competitive advantage.

Connection between culture and competitive advantage important for two reasons.
• Suggests which countries are likely to produce the most viable competitors.
• Has important business implications for the choice of countries in which to locate production
facilities and do business.