3. Cultural and Legal Environment – Fundamentals of International Business

CHAPTER 3

Cultural and Legal Environment

LEARNING OBJECTIVES

After reading this chapter, you should be able to:

  • Identify the different dimensions of culture and its implications for international business
  • Examine cultural factors influencing countries’ business practices
  • Understand the interrelationship between national, regional, and international legal frameworks in the international business environment
  • Assess the dynamics of ethics in international business

 

CHOCOLATE FRIES AND PIKACHU HELP McDONALDS

Global fast food giant McDonald’s faced a crisis in Japan when customers were served stale chicken, and there were reports of plastic bits inside a sundae. This led to a sharp decline in sales and the closure of hundreds of outlets across the country. McDonald’s imminent departure from Japan was saved by the addition of local flavours like the pork-and-ginger ‘Yakki Burger’ and chocolate-covered fries to the menu. The menu was localized by capitalizing on local specialties, such as McShakes with Hokkaido melon or Ehime kiwi.

Existing outlets were given a facelift and McDonald’s entered into an agreement featuring Pokemon characters to attract its young clientele. Parents, especially mothers, were consulted in town halls across the country and measures were introduced so that parents could trace the source of their children’s meals. McDonald’s updated its website to track its food back to the farms and put QR codes on food packaging for customers to examine its ingredient information.

The strategy was remarkable not only for leading a turnaround in profits, but because this turnaround strategy was led by a foreign female CEO. Japanese culture finds very few women at top managerial positions, and it is a key issue in Japan’s shrinking workforce. The success of a foreign CEO was a positive signal to Japanese society about women at top organizational levels becoming harbingers of success in the face of adversity. Sarah Casanova took over in Japan with minimal knowledge of the complicated Japanese language, and used translators to overcome her limited language skills. She also broke the cultural ice with parents by introducing herself as a mother of two children and a grandmother of five, who could empathize with the concerns about the quality of food. This gradually led McDonald’s to regain lost confidence and its position in the market.

The McDonald’s story in Japan clearly illustrates the importance of adaptation to local cultural factors in establishing a global mindset and managing global business enterprises.

References: How Chocolate Fries and Pikachu Helped Turn Around McDonald’s Japan, https://www.bloomberg.com; McDonald’s lovin’ it in Japan as consumers forget scandals, https://asia.nikkei.com; last accessed on 1 September 2018.

INTRODUCTION

The word culture is derived from the Latin word cultus, meaning cult or worship. The term culture may be explained as the knowledge acquired through education and experience that leads to social behaviour. Culture is shared among members of a group, organization or society and as a result, it becomes the basis of individual and group behaviour. It is passed from one generation to another and goes through constant change as people adapt to new environments.

 

Culture is learned, shared behaviour, acquired through education or experience, and passed on from one generation to another. Culture is the basis of both individual and group behaviour.

This process of learning and adjusting to culture is called acculturation and it leads to a learned, shared, interrelated set of symbols which provide specific meaning to the members of a society.

Based on this, we can say that there are five important characteristics of culture:

  1. Culture is learned behaviour: The individual learns through the experience of the group.
  2. Culture is shared: The group is the basis of cultural change and is more important than the individual.
  3. Culture is compelling and determines the behaviour of individuals even though they may not be aware of this.
  4. Culture is interrelated: Each facet of culture is related to another and cannot be understood in isolation. Culture should therefore be studied as a complete entity.
  5. Culture provides orientation to group behaviour and is the basis of individual reaction to a given cultural stimulus. Therefore, understanding culture can help to determine how individuals might react in different situations.
ELEMENTS OF CULTURE

Culture is a complex, multi-dimensional subject and in order to understand its basic nature, we need to examine some of its critical elements.

Language

Language is the key to culture as it is the primary means of transmission of ideas and information, which helps in social interaction and creates a system of shared values and norms. Language is more than the vocabulary and grammar that make up written and spoken expression. It also includes gestures, perceptions and sensibilities. Communication is not only about speaking in the same language but also about being on the same wavelength and having an idea of the perception and sensibilities of the person with whom communication is being done.

 

Language is the key to culture as it is the primary means of transmission of ideas and information.

Spoken languages can act both as a common thread and as a barrier between nations and regions. Africa, for instance, has over a hundred languages for communication but French, is the lingua franca or ‘link language’ of several former French colonies, acting as an effective communication device for managers of international business. Likewise, in India, the principal official language is Hindi and English is the secondary official language with several regional languages being used in different parts of the country. The opening up of the economy since 1991 has seen a large number of TNCs from various countries whose executives use English as their main language of communication.

Communication difficulties for international business managers arise when:

  • The manager does not speak or understand the local language.
  • The manager has to rely on the services of a translator who may not be equally fluent in both languages and either misses a point or mistranslates it.

Knowing the local language is a good idea for international managers and helps them to communicate better with the local workforce because:

  • Direct knowledge of a language helps in a clear and explicit understanding of the situation. The manager does not have to rely on someone else to interpret or explain things.
  • Language provides direct access to local people, who are often more at ease and comfortable in communicating with someone who speaks their language.
  • An understanding of the local language allows the usage of implied meanings, nuances and other information that is not stated outright.
  • Knowledge of the local language is also important because direct translation may be inadequate or misleading.

The use of technical manuals, catalogues, and advertising material may need the services of a translator. Translation can be difficult if certain technical terms do not exist in a particular language. For example, the Portuguese language has several fishing and marine terms but is limited in its vocabulary for newer industries. This has led to the increasing use of English words mixed with original Portuguese.

The same language can often mean completely different things to different cultures. Consider the use of business jargon. In the Indian context, cutting costs can mean anything from cutting down on coffee and biscuits at staffmeetings to looking for cheaper sources of raw materials, but in a European or American TNC, it usually means that they are firing some staff.

Another instance of different meanings being attributed to the same word is when the Indian country manager of a British TNC was overheard saying that he had fi red a subordinate implying that he had scolded a junior; however, his British counterpart thought that he had sacked the employee.

Non-verbal Communication

Non-verbal communication or the unspoken language is as important as the spoken word. Unfortunately, the differences in customs among cultures often cause misinterpretations in such communication.

Bird’s-eye View

Communication is a key element of culture and refers to verbal and non-verbal transmission of ideas and information.

Gestures are a common form of cross-cultural communication but vary in different parts of the world. Emotional gestures such as hugging, kissing on the cheek, and gesturing with your hands, are commonly accepted practices in Hispanic and Latino cultures. If you live in the US, saying yes would mean shaking your head forward, but if you are Greek, Turkish or Bulgarian you would move you head sideways to indicate the same meaning. That can lead to a lot of confusion!

Religion

Religion refers to common beliefs and rituals related to issues that are considered sacred. Religion has the capacity to influence lifestyles, beliefs, values and attitudes and can have a significant bearing on the behaviour of people with each other and with society. There are approximately 15,000 distinct religions and religious movements in the world today. They range from simple folk religions to highly refined systems of beliefs with set rituals, organized worship, sacred texts, and a hierarchy of religious leaders.The leading religions of the world include Christianity, Hinduism, Islam, Buddhism and Confucianism and each one has its own particular beliefs and customs.

 

Religion refers to common beliefs and rituals related to issues that are considered sacred.

It is possible to broadly classify religions of the East such as Hinduism, Buddhism, Jainism, and Sikhism (India); Confucianism and Taoism (China); and Shintoism (Japan) as being significantly different from religions which follow the Judeo–Christian tradition of the West.

The Judeo–Christian tradition believes that the world began with God’s creation and will come to an end according to His will and desire. Each human being therefore is significant as time and has only one lifetime to follow God’s word and achieve everlasting life.

Asian religions such as Hinduism, Jainism and Buddhism on the other hand, are based on the basic philosophy of Nirvana and Karma. According to them, the world is an illusion in which nothing is permanent. They believe that time is cyclical, and all living things, including humans, are in a constant process of birth, death and reincarnation. The basic goal of all living beings is to escape from this cycle to reach the state of eternal bliss called Nirvana, which depends on their own deeds or karma. There is a belief that evil committed in one lifetime is punished in the next and is the motivation for living creatures to do good deeds (karma) and attain a higher spiritual status in their next birth. The Asian sub-continent has been the birth place of seven religions—four of them originated in India (Hinduism, Buddhism, Jainism, and Sikhism), two in China (Confucianism and Taoism), and one in Japan (Shintoism).

The impact of this difference can be clearly seen in the approach to business in different countries. According to Protestant belief men had to work hard to glorify God. There was a great deal of importance given to saving and the reinvestment of capital leading to the growth and development of capitalism in the US.

Hinduism

Hinduism is practiced by more than 80 per cent of India’s population and also in parts of Nepal, Bangladesh and Bali. Its defining feature is that it does not have a single founder nor a sacred scripture, and its followers worship several different Gods through different sets of rituals. Most Hindus believe that the aim of their life is the achievement of eternal bliss (nirvana) through yoga ( purification of mind and body), devout worship of the gods, good works and following the laws and customs ( dharmas) of one’s caste.

An important aspect of Hinduism is the caste system which was the basis of social division in India since ancient times. The highest caste, the Brahmins or priesthood, was followed by the warriors or Kshatriyas and then the merchant class or the Vaishyas, and finally the lowest cast or the untouchables were the Shudras. Accordingly, an individual’s position in society and the work he was permitted to do was determined by his caste. Although the government of India has outlawed discrimination based on the caste system, it occupies an important place in India’s social strata even today with both economic and political implications.

Buddhism

Buddhism originated in India as a reform movement against Hinduism. Buddhism is based on the teachings of an eight-fold path in which an individual goes through different cycles of rebirth to attain nirvana. Although Buddhism rejected the caste system and welcomed everyone into the fold, with the passage of time, two distinct schools appeared in Buddhism—the Hinayana school which emphasized a more austere way of life to be followed by the Monks and the Mahayana school which was more liberal and could be easily followed by the common man.

Jainism

Jainism was founded by Mahavira, a contemporary of Buddha. It is based on the belief of a self-regulated universe in which every soul has the potential to achieve divine consciousness (siddha) through its own efforts. Any soul that has conquered its own inner enemies and achieved the state of Supreme Being is called Jina. It believes that the soul has innate qualities of infinite knowledge, perception, power, and bliss. The path to salvation can be attained by following the path of Right Faith (right vision), Right Knowledge and Right Conduct. In the modern context, Jainism is a religious minority in India with followers in North America, Western Europe, the Far East and Australia.

Confucianism

Confucianism was founded by Chinese philosopher Confucius in the fifth century bc and is based on the philosophy that all reality depends on a mandate from heaven, the family and loyalty towards it basic philosophy of Confucianism. The Asian nations of China, Korea and Japan are followers of the faith and, hence, have strong family-based social organizations. Two basic principles of Confucianism are the principle of unselfish love for others, jen and li, which prescribes a gentle decorum in all actions and translates into the Chinese emphasis on politeness and deference to elders.

Taoism

Taoism is a philosophy propounded by Lao Tzu, a contemporary of Confucius. It is based on the philosophy that all human beings have both male and female energies—yin and yang—that govern the universe. It is focused on meditation and rituals which help individuals free themselves from distractions and become empty, to benefit from the actions of cosmic forces.

Shintoism

Shintoism, is Japan’s indigenous religion, which believes that the founding of the Japanese empire was a cosmic act and, therefore, gives a divine status to the emperor. There are no elaborate rituals of worship but a small Shinto shrine adorns many Japanese homes.

Islam

Islam is the second largest religion in the world. The teachings of Islam are based on the Koran, a collection of Allah’s (God’s) revelations to Muhammad, who is viewed by Muslims as the messenger of God.

For the Muslim, religious ritual is a part of everyday life. It has a code of conduct in the form of formal prescriptive rules for all aspects of life including social relations, social behaviour, rules for the consumption of food and drink and the role and acceptance of women in society.

Islam allows free enterprise and the earning of legitimate profits through trade and commerce, although it forbids the payment or receipt of interest, which is considered usury. Similarly, the Islamic legal system, which traditionally consisted of only religious courts, now has several state courts as well, which are based on both religious law and Western commercial law. Islamic culture is, thus, receptive to international business as long as it follows and respects the accepted tenets of their religion.

Religion exerts a significant influence on international business. Banks in Islamic countries do not charge interest from depositors since bank interest is prohibited under Islamic law. Instead they charge borrowers’ fees and commissions to maintain profitability.

Religion also affects work culture and social customs. We find that in most parts of the world, the working week is from Monday to Friday with Saturday and Sunday being holidays but in Islamic countries of the Middle East such as Qatar and Saudi Arabia, Friday and Saturday are the weekly holidays and the working week begins on Sunday.

Bird’s-eye View

Religion plays a key role in international business through its impact on work culture and social customs. The major religions followed across the globe today include Hinduism, Islam, Buddhism and Christianity.

Values and Attitudes

Values are basic convictions regarding right and wrong, good and bad, important and unimportant. An attitude is a persistent tendency to feel and behave in a particular way towards something or someone.

 

Values are basic convictions regarding right and wrong, good and bad, important and unimportant. An attitude is a persistent tendency to feel and behave in a particular way towards something or someone.

Values exert tremendous influence on the cultural environment of business organizations. For instance, most global organizations project themselves as equal opportunity employers implying an attitude of no racial or gender discrimination.

Attitudes and beliefs differ all over the world and have a strong influence on all aspects of human behaviour and therefore on business. It is therefore useful for international business managers to understand certain key attitudes, since they have to deal with people from different cultures.

In the context of international business, attitudes towards time, towards achievement and work, and towards change are of importance.

Concepts of time vary widely between cultures. While in some countries, ‘time is money’; in other countries this attitude is considered vulgar and even offensive. In countries of Europe and North America, punctuality is respected and to arrive late for an appointment is considered disrespectful. Waiting past a fixed time for an appointment is considered rude and may lead to the assumption that this person is not giving a meeting the importance it deserves. In Latin America or the Middle East, there is a more casual attitude towards time. It is said that an appointment for noon with a British executive will find them there five minutes before the appointed hour, but their Indian counterpart will probably arrive 15 minutes late, and the Brazilian executive anytime between noon and 2 o’clock!

Is it often difficult to decide whether to follow the home country or host country custom. In Spain, a general rule is to never be punctual for you will be considered early. Arabian executives in the Middle East, usually will not arrive at the appointed hour even if they have a meeting with an American executive who is known to be punctual.

Customs and Manners

Customs are common established practices of behaviour. Manners refer to behaviour that is considered appropriate in a particular social setting. Customs dictate how things are to be done; manners are used in carrying them out.

 

Customs are common established practices of behaviour. Manners refer to behaviour that is considered appropriate in a particular social setting.

Customs and manners thus dictate social behaviour. For example, in countries which subscribe to Western culture, food is eaten on the table using individual plates with knives and forks. In Islamic countries, however, food is served on a common platter and eaten by all members of the family sitting on the ground using their palms. Similarly, most Indians use their palms to eat while the Chinese eat with chopsticks.

Another example of difference in custom are Arabian countries where it is considered bad manners to shake hands with a person of higher authority unless they make the first move while, in the US, people offer to shake hands regardless of a person’s social status or rank.

Hugging, kissing on the cheek, gesticulating with one’s hands, and using proper respectful titles to address adults and the elderly are fairly common practices in Hispanic and Latino cultures.

Aesthetics

Aesthetics refers to the artistic tastes of a culture. The increasing cultural interconnectedness between different parts of the world has resulted in an appreciation of Indian classical music in the West and the emergence of the hugely popular fusion music. This has created opportunities for international business through the medium of television as well as social media.

 

Aesthetics refers to the artistic tastes of a culture.

A basic complexity in international business as compared to domestic business arises out of differences which are rooted in culture. The changing cultural environment of international business offers unlimited opportunities for developing competitive advantages for a business manager. This requires an understanding of cross-cultural differences and developing an attitude that combines the global with the local, that is, a GLOCAL attitude to bring about a seamless integration of different cultures and harmony in the enterprise.

Bird’s-eye View

The cultural environment of international business combines elements of communication, religion, values, attitudes, customs, manners and aesthetics in diverse operating situations.

LEGAL ENVIRONMENT

The legal dimension of business has grown in importance with growing trade and investment flows across the globe. The legal environment has historically been determined by national legal systems based on state sovereignty. All commercial transactions across national borders, from the simplest export contracts to complex joint ventures, have to conform to the provisions of national legal systems.

 

The legal environment has historically been determined by national legal systems based on state sovereignty. There are three basic legal systems in the world today—common law, civil law and theocratic law.

Global Legal Systems

There are mainly three kinds of legal systems in the world today.

Common Law

Common law is a legal system based on tradition, precedent, and custom and usage. It is associated with an independent judiciary. In other words, it is a system which is based on legal history, cases decided in the past, and the application of law in specific situations. The system originated and developed in Great Britain and is also found in several former British colonies, such as Australia, New Zealand and even the US.

Civil Law

Civil law is also known as a codified legal system, and is based on a detailed set of laws that make up a code. This codified system includes rules and regulations for carrying out business activities. Most of continental Europe and Latin America use a civil law system that originated as far back as the Roman Empire.

Theocratic Law

Theocratic law refers to any legal system that is based on a religious code or teachings. Countries such as Iran and Saudi Arabia, for instance, rely on Islamic Law as the basis of their legal system. Indonesia also uses limited elements of Islamic Law.

Islamic Law, which came into existence in the tenth century, has remained the same over centuries. It is a moral rather than commercial law and is a code of conduct which governs all aspects of life. In the context of international business, the influence of Islamic Law is felt in the area of banking which forbids the payment of interest or benefit on loans. Banks also structure loans in their books to show a share in the profits of the venture rather than receipt of interest. The underlying principle behind all this is that money should be productively employed to earn a return rather than it being earned in financial markets.

Legal Jurisdiction

Legal jurisdiction refers to the legal authority under which a legal case will be decided. It is often difficult to determine legal jurisdiction for a TNC, since it is subject to the laws of both the home and host countries which may be different and conflicting.

The TNC is governed at a number of jurisdictional levels beginning with the national legal system. At the national level, the laws of both the home and host country remain the most important and relevant for a TNC.

At the regional level, a firm is subject to the laws and regulations of a regional entity, such as the EU, or of a trade framework, such as the Association of Southeast Asian Nations (ASEAN). The greater the level of integration within a regional framework, the more important are the laws enacted at that level.

At the international level, a firm is subject to international law. Since international law relies on customs (established norms) and treaties (an express agreement under international law entered into by different players in international law), it is usually difficult to enforce. For instance, The International Court of Justice in The Hague (Netherlands) is a United Nations (UN) institution that has no jurisdiction in most cases unless the governments involved agree to submit the matter to the court.

In the context of international business contracts, parties to the contract often agree in advance to an arbitration authority, such as the International Court of Arbitration, the Inter-American Commercial Arbitration Commission, or the Canadian–American Commercial Arbitration Commission. They may also choose a body such as the International Centre for Settlement of Investment Disputes, which specializes in disputes related to foreign direct investment (FDI).

Bird’s-eye View

The international legal environment consists of different legal systems which operate at different levels of legal jurisdiction.

ETHICS IN INTERNATIONAL BUSINESS

The term ethics refers to accepted principles of right or wrong which govern the behaviour of an individual, group or an organization. The use of ethical practices in business has been a subject of discussion ever since the origin of business enterprise, and it has assumed huge importance with the growth of international business.

Ethical behaviour not only implies following the rule of law but also acting according to the values, norms and concerns of both the home and host country. Since a TNC’s business environment is characterized by diversity, its ethical challenges also arise out of diverse legal and moral issues and the need to accommodate this diversity in a common corporate structure. In a rapidly globalizing world, ethical decision making is the need of the hour.

CHAPTER SUMMARY
  • Culture is learned, shared behaviour, acquired through education or experience, and passed on from one generation to another.
  • It becomes the basis of individual and group behaviour as it undergoes constant change in the process of being adapted to new environments.
  • The world of international business today consists of people from different countries and cultures coexisting in real and virtual workplaces. To be successful in international businesses, managers must, therefore, understand the cultures of different countries and how to adapt to them.
  • The critical elements of culture encompass language, gestures, religion, values, attitudes, customs, manners, and aesthetics.
  • Thus, these differences in language, customs, religions, etc. constitute the difference in the cultural environments of countries.
  • Legal systems in different countries may be classified as common law, civil law, or theocratic law.
  • Legal jurisdiction is the legal authority under which a legal case can be decided. A TNC works through different levels of legal jurisdiction, including the national, regional and international levels.
  • Jurisdictional issues are more complex in the context of international business than in domestic business. TNCs often face conflicting demands from overlapping jurisdictions.
  • Ethics refers to accepted principles of right or wrong which govern the behaviour of an individual, group or an organization. The use of ethics is similarly applicable to the world of business and especially to TNCs which work in diverse business environments.
KEY TERMS
  • Culture
  • Language
  • Religion
  • Values
  • Attitudes
  • Manners
  • Customs
  • Aesthetics
  • Common law
  • Civil law
  • Theocratic law
  • Ethics
DISCUSSION QUESTIONS
  1. What is meant by culture? Discuss the key elements of culture.
  2. Discuss how different elements of culture can affect an international business.
  3. Distinguish between verbal and non-verbal methods of communication for an international business.
  4. Using examples, explain the role of religion in international business.
  5. What is the basic difference between values and attitudes?
  6. List and explain the different kinds of legal systems in the world today.
  7. What is legal jurisdiction? What is the importance of different kinds of legal jurisdiction for a global firm?
  8. Imagine that you are an Indian engineer who has been offered a job as the CEO of a large American TNC based in Dubai. What are the important cross-cultural issues you are likely to face and how would you resolve them?
EXAMINATION QUESTION
  1. Explain different elements of the cultural environment, which have an impact on international business operations. (7)

    [B.Com 2018]