3.9^FORCES AFFECTING TRADE IN GLOBAL MARKETS^93^101^,,^3360^3525%
FORCES AFFECTING TRADE IN GLOBAL MARKETS
Section Outline
Forces Affecting Trade in Global Markets
  • Sociocultural Forces

  • Economic and Financial Forces

  • Legal and Regulatory Forces

  • Physical and Environmental Forces

Succeeding in any business takes work and effort, due to the many challenges that exist in all markets. Understandably, the hurdles are higher and more complex in global markets than in domestic ones. Global businesses must deal with differences in sociocultural forces, economic and financial forces, legal and regulatory forces, and physical and environmental forces. These forces affect any business, big or small, when entering foreign markets. Managers of even the smallest business must be aware of these forces when making strategic decisions.

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Sociocultural Forces

The term culture refers to the set of values, beliefs, rules, and institutions held to by a specific group of people.53 Primary components of a culture can include social structures, religion, manners and customs, values and attitudes, language, and personal communication. If you hope to get involved in global trade, it is critical to be aware of the cultural differences among nations. Geert Hofstede, a researcher on cross-cultural communications, suggests there are five main dimensions of cultures that critically affect communication among nations.54 Awareness of these five dimensions has become the standard for businesspeople operating overseas, as they pertain to such areas such as gender roles and individualism. See Figure 3.6 for more on Hofstede's five dimensions of culture.

 
  1. Power distance is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society's level of inequality is endorsed by the followers as much as by the leaders. Power and inequality are extremely fundamental facts of any society, and anybody with some international experience will be aware that all societies are unequal, but some are more unequal than others.

  2. Individualism versus collectivism is the degree to which individuals are integrated into groups. On the individualist side we find societies in which the ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family. On the collectivist side, we find societies in which people from birth onward are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts, and grandparents) which continue protecting them in exchange for unquestioning loyalty.

  3. Masculinity versus femininity refers to the distribution of roles between the genders, which is another fundamental issue for any society to which a range of solutions are found…. Studies have revealed that (a) women's values differ less among societies than men's values; (b) men's values from one country to another contain a dimension from very assertive and competitive and different from women's values on the one side, to modest and caring and similar to women's values on the other. The assertive pole has been called “masculine” and the modest, caring pole “feminine.” The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are somewhat assertive and competitive, but not as much as the men, so that these countries show a gap between men's values and women's values.

  4. Uncertainty avoidance deals with a society's tolerance for uncertainty and ambiguity. It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute truth. People in uncertainty avoiding countries are also more emotional, and motivated by inner nervous energy. The opposite type, uncertainty accepting cultures, are more tolerant of different opinions, and they try to have as few rules as possible. On the philosophical and religious level they are relativist and allow many currents to flow side by side. People within these cultures are more matter-of-fact and thoughtful and not expected by their environment to express emotions.

  5. Long-term orientation versus short-term orientation: values associated with long-term orientation are thrift and determination values associated with short-term orientation are respect for tradition, fulfilling social obligations, and protecting one's “face.”

figure 3.6
Hofstede's Five Dimensions of Culture
Source: Five dimensions of culture from Geert Hofstede and Gert Jan Hofstede, Cultures and Organization: Software of the Mind, Revised and Expanded 2nd Edition. New York: McGraw-Hill USA, 2005. Copyright © 2005 Geert Hofstede. Used with permission.

culture The set of values, beliefs, rules, and institutions held to by a specific group of people.

Different nations have very different ways of conducting business, and unfortunately American businesspeople are notoriously bad at adapting to those ways. In fact, American businesspeople have consistently been accused of ethnocentricity which is an attitude that one's own culture is superior to all others. In contrast, foreign businesspeople are very good at adapting to U.S. culture. Think of how effectively German and Japanese carmakers have adapted to Americans' wants and needs in the auto industry. Japanese manufacturer Toyota attributed 70–80 percent of its sales revenues to the American market!55

ethnocentricity Attitude that one's own culture is superior to all others.

You should be aware of the differences in business practices around the world to compete successfully in the global market.
Religion

Religion is an important part of any society's culture and can have a significant impact on business operations. Consider the violent clashes between religious communities in India, Pakistan, Northern Ireland, and the Middle East—clashes that have wounded these areas' economies. Unfortunately, companies at times do not consider the religious implications of business decisions. Both McDonald's and Coca-Cola offended Muslims in Saudi Arabia by putting the Saudi Arabian flag on their packaging. The flag's design contains a passage from the Koran (Islam's sacred scripture), and Muslims feel their holy writ should never be wadded up and thrown away.56 In another example, an American manager in Islamic Pakistan toured a new plant under his control. While the plant was in full operation, he went to his office to make some preliminary forecasts of production. As he was working, suddenly all the machinery in the plant stopped. He rushed out, suspecting a power failure, only to find his production workers on their prayer rugs. Upon learning that Muslims are required to pray five times a day, the manager returned to his office and proceeded to lower his production estimates (it should be noted here that the manager should have done research before doing business in the country, making him more aware of how to do business in that culture).

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Religion may very well be the most important of sociocultural forces.

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Human Resource Management

Sociocultural differences can also affect important business decisions involving human resource management. In Latin American countries, workers believe that managers are placed in positions of authority to make decisions and be responsible for the well-being of the workers under their control. Consider what happened to one American manager in Peru who was unaware of this important cultural characteristic and believed workers should participate in managerial functions. This manager was convinced he could motivate his workers to higher levels of productivity by instituting a more democratic decision-making style than the style already in place. Soon workers began quitting their jobs in droves. When asked why, the Peruvian workers said the new production manager and supervisors did not know their jobs and were asking the workers what to do. All stated they wanted to find new jobs, since obviously this company was doomed because of incompetent managers.

Learning about sociocultural perspectives related to time factors, change, competition, natural resources, achievement, and even work itself can be of great assistance in global markets. Today, before managers and their families are sent on a global assignment, firms often give them training on how to adapt to different cultures. If the company does not provide training, it is up to the individuals to learn about the culture so they may better prepare to respect and deal with the culture when operating within it.

Communication

Sociocultural differences affect not only management behaviors but also global marketing strategies. Marketing, or the process of selling goods to consumers, will be discussed in greater detail in Chapter 8. Global marketing is the term used to describe selling the same product in essentially the same way everywhere in the world. Some companies have developed brand names—such as Intel, Nike, IBM, Sony, Ford, Dell, and Toyota—with widespread global appeal and recognition. However, even these successful global marketers often face difficulties. For example, translating an advertising theme into a different language can be disastrous if extreme care is not exercised regarding nuances and connotations of words. To get an idea of the problems companies have faced with translations, see Figure 3.7.

 
  • PepsiCo attempted a Chinese translation of “Come Alive, You're in the Pepsi Generation” that read to Chinese customers as “Pepsi Brings Your Ancestors Back from the Dead.”

  • Coors Brewing Company put its slogan “Turn It Loose” into Spanish and found it translated as “Suffer from Diarrhea.”

  • Perdue Chicken used the slogan “It Takes a Strong Man to Make a Chicken Tender,” which was interpreted in Spanish as “It Takes an Aroused Man to Make a Chicken Affectionate.”

  • KFC's patented slogan “finger-lickin' good” was understood in Japanese as “Bite Your Fingers Off.”

  • On the other side of the translation glitch, Electrolux, a Scandinavian vacuum manufacturer, tried to sell its products in the U.S. market with the slogan “Nothing Sucks Like an Electrolux.”

figure 3.7
Oops, Did We Say That?Translation problems can cause disasters for companies doing business in other cultures. Careful attention must be paid to the nuances and connotations of words.

global marketing The term used to describe selling the same product in essentially the same way everywhere in the world.

A sound philosophy to adopt in global markets is this: Never assume that what works in one country will work in another. Take for example Kids “R” Us, the clothing subsidiary of Toys “R” Us. Several years ago, the company missed its profit projections in Puerto Rico by banking heavily on back-to-school sales. Toys “R” Us planners failed to understand that Puerto Rican kids wear uniforms to school. They wrongly assumed that Puerto Rico's being a territory of the United States made the Puerto Rican market almost identical to the U.S. market. Thousands of similar stories could be told. The truth is that many U.S. companies often fail to think globally. For many years U.S. auto producers didn't adapt automobiles to drive on the left side of the road, as is done in many countries, and they printed owner's manuals only in English. Also, the United States is one of only five nations in the world that still refuses to conform to the metric system.

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Since global marketing works only in limited cases, it is critical that U.S. exporters thoroughly research their objectives before attempting to penetrate global markets. “Think global, act local” is a valuable motto to follow.

Why are cultural aspects of global business so important for a businessperson to be concerned with?

Economic and Financial Forces

Economic differences can also muddy the water in global markets. Surely it is hard for us to imagine buying chewing gum by the stick instead of by the package. Yet this buying behavior is commonplace in economically depressed nations like Haiti because customers there have only enough money to buy small quantities. You might suspect that with over 1 billion people, India would be a dream market for companies like Coca-Cola and PepsiCo.57 However, Indians annually consume an average of only three soft drinks per person, compared to the 50-plus gallons per person Americans consume each year.58 While it is true some of this uneven consumption may be due to cultural differences, it is also clearly related to the low per capita income level of Indian consumers. Thus, what might seem like the global opportunity of a lifetime maynot be a viable opportunity at all due to economic conditions.

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Global financial markets unfortunately do not have a common worldwide currency. Mexicans shop with pesos, South Koreans with won, Japanese with yen, and Americans with dollars. Globally, the U.S. dollar is considered the world's dominant and most stable form of currency. This doesn't mean, however, that the dollar always retains the same market value. In fact, in recent years, the euro has been more valuable than the dollar. Since 2002, the euro has been the official currency of the European Union (EU). It replaced currencies such as the German deutschmark, the French franc, and the Italian lira.

The euro officially became the common currency of many EU member nations on January 1, 2002. Do you think the euro could replace the American dollar for leadership among the world's currencies?

In an international transaction today, one dollar may be exchanged for eight pesos; tomorrow, however, you may get only seven pesos for the same dollar. The exchange rate is the value of one nation's currency relative to the currencies of other countries. Changes in a nation's exchange rates can have important implications in global markets.59 Such changes occur because people trade in currencies just as people trade in stocks. If the value of the dollar is high, the products of foreign producers are cheaper because it takes fewer dollars to buy them, but the cost of U.S.-produced goods become more expensive to foreign purchasers because of the dollar's high value. Conversely, a low value of the dollar means that a dollar is traded for less foreign currency.60 Therefore, foreign goods become more expensive because it takes more dollars to buy them, but American goods become cheaper to foreign buyers because it takes less foreign currency to buy American goods. Obviously, all this is of huge concern to businesspeople. To earn the highest amount of profit, their hope is that the trading currency (such as the dollar) will remain high and stable.

exchange rate The value of one nation's currency relative to the currencies of other countries.

Changes in currency values cause many problems globally. Consider a multinational corporation like Nestlé, which has over 500 factories and employs over 220,000 workers around the world. Labor costs can vary considerably as currency values shift.61 Or consider a medium-size company like the H. B. Fuller Company headquartered in St. Paul, Minnesota. Fuller has direct operations in 36 countries in North America, Latin America, Europe, and Asia, making paints, adhesives, and coatings. Company president Al Stroucken believed that the most dramatic problem Fuller faced was dealing with currency fluctuations. The company learned to use currency fluctuations to its advantage by buying raw materials from sources whose currencies were lower in value.62

Currency valuation problems can be especially harsh on developing economies. Often, the only possibility of trade in many developing nations is through one of the oldest forms of trade: bartering, which is the exchange of merchandise for other merchandise or service for service with no money involved.63 Countertrading is a complex form of bartering in which several countries may be involved, each trading goods for goods or services for services. It has been estimated that countertrading accounts for over 20 percent of all global exchanges, especially deals involving developing countries.64 For example, let's say that a developing country such as Jamaica wants to buy vehicles from Ford Motor Company in exchange for Jamaican bauxite. Ford, however, does not have a need for Jamaican bauxite but does have a need for computer monitors. In a countertrade agreement, Ford may trade vehicles to Jamaica, which then trades bauxite to another country, say India, which then exchanges computer monitors with Ford. This countertrade is thus beneficial to all three parties. With many countries still in the developing stage, there is no question that countertrading will continue in global markets through much of the 21st century. Trading products for products helps businesses avoid some of the financial problems and currency constraints that exist in global markets.

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bartering The exchange of merchandise for merchandise or service for service with no money involved.

countertrading A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services with the others.

Ethical Challenge (PRODUCT) RED

The world has become united because of business interests, but what about world health issues? Bono, the lead singer of U2, has a vision to get AIDS medication to Africa through world awareness of the problem. As a result, Bono and chair of DATA, Bobby Shiver, have teamed up and created a line of (PRODUCT) RED products where a portion of the profits from the sale of these products will go to support AIDS medication in stricken areas. They are working with companies such as The Gap and Motorola to develop (PRODUCT) RED products and donate a portion of the profits to the Global Fund.

In addition to (RED), Bono has spoken with world leaders trying to utilize the power developed countries have to help poorer countries. Business and world health issues seem to be interconnected. It is true we are one world, and in business as in so many other ways we depend on each other. When the world is experiencing a health crisis such as AIDS, the economies of all nations suffer.

Understanding economic conditions, currency fluctuations, and countertrade opportunities is vital to a company's success in the global market. In financing export operations in the United States, banks have traditionally been the best source of the capital needed for global investment. However, when U.S. banks are not willing to provide export financing, exporters often turn to foreign banks and other sources for financing, which is especially true for small and medium-size businesses. These companies must be creative in scouring the globe for financing.

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Legal and Regulatory Forces

In any economy, both the conduct and direction of business are firmly tied to the legal and regulatory environment. In the United States, for example, federal, state, and local laws and other government regulations heavily impact business practices. In global markets, no central system of law exists, so several groups of laws and regulations may apply. This makes the task of conducting global business extremely difficult as businesspeople find myriad laws and regulations in global markets that are often inconsistent. Important legal questions related to antitrust rules, labor relations, patents, copyrights, trade practices, taxes, product liability, child labor, prison labor, and other issues are written and interpreted differently country by country.65

American businesspeople are required to follow U.S. laws and regulations in conducting business globally. U.S. legislation, such as the Foreign Corrupt Practices Act of 1977, often creates competitive disadvantages for American businesspeople when competing with foreign competitors.66 This law specifically prohibits “questionable” or “dubious” payments to foreign officials to secure business contracts. The problem is that this law runs contrary to beliefs and practices in many countries, where corporate or government bribery is not only acceptable but also perhaps the only way to secure a lucrative contract.67

For a partial list of countries where bribery or other unethical business practices are most common see Figure 3.8. Fortunately for U.S. companies, the Organization for Economic Cooperation and Development (OECD) is leading a global effort to fight corruption and bribery in foreign markets.

  1. Haiti

  2. Bangladesh

  3. Nigeria

  4. Myanmar

  5. Chad

  6. Paraguay

  7. Azerbaijan

  8. Turkmenistan

  9. Tajikistan

  10. Indonesia

figure 3.8
Countries Rated Highest on Corrupt Business Practices
Source: Transparency-International.
Physical and Environmental Forces

Certain physical and environmental forces can also have an important impact on a company's ability to conduct business in global markets. In fact, technological constraints may make it difficult or perhaps impossible to build a large global market. For example, some developing countries have such primitive transportation and storage systems that international distribution is ineffective, if not impossible, and this is especially true with regard to food, which is often spoiled by the time it reaches the market in certain countries. Compound this challenge with unclean water and the lack of effective sewer systems, and you can sense the intensity of the problem.

American exporters must also be aware that certain technological differences affect the nature of exportable products. For example, houses in most developing countries do not have electrical systems that match those of U.S. homes, in kind or capacity. An American appliance manufacturer obviously would have to take this into consideration, and this adds cost to the development of the product. Also, computer and Internet usage in many developing countries is minimal or nonexistent. You can see how this would make for a tough business environment in general and would make e-commerce difficult, if not impossible.

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SELF-CHECK QUESTIONS
  1. What are some forces that must be considered in global business? Give an example of a business consideration for each.

  2. If you had to choose, which force affecting trade do you think would be the most important to consider for an Internet-based business? What about a business that manufactures paper products?

  3. What is countertrade? Give an example not already provided in this chapter.

Kazahkstan extracts over 63 million tons of oil each year. The oil field in the Caspian Sea is expected to be completed in 2008, raising the potential extraction to 3 million barrels of oil per day by 2015.