In order to do the international business, there are many dimensions that we need to concern to avoid the following risk; commercial, currency, country, and cross-culture. Each dimension has an impact on the business both direct and indirect way. Among these dimensions, the most importance thing is the culture especially for the insurance business like us, because the typical style of insurance is directly deal with people. Each one might have their own personality which is different even inside one country. International business means that you need to deal with people from different countries, different nationalities, and different languages. This is the most challenging things for us, who never have any experiences abroad, to awareness.
Culture relates to a system of shared assumptions, believes, and values that guide people. It appears in term of behaviors, statements, and material items. It can be transmitted from generation to generation which may adapt overtime. There are many people define the definitions of culture, for example Hofstede, the Dutch anthropologist, states culture as the collective mental programming of people.
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There is no right or wrong in culture, different nationalities have difference cultures. Some of them are normally do in this culture, but not in the other culture. For example in Thai, we always greeting by Wai, but the western always greeting by shaking hand. Culture is not about individual behavior. Only one person does, we do not call as culture. Culture is a groups, that people shared values and meaning as in the society, country, nationality. Furthermore culture cannot inherit; people realized from the social environment. We can be perceived the culture by recognize the behavior from our parents or family. We can also learn the rules and behavioral patterns in the society or adapt to a culture by our own experience.
To learn the culture is not easy, there is a research compare culture as an iceberg. Above the surface, the certain characteristic are visible, we easily recognize them. Below the surface is massive base of assumptions, attitudes, and values that influence decision making, conflict, relationships, etc. We have to spend more time to recognize it because these things you need to perceived them by your own feeling. All of these dimensions have an impact on doing international business in every process. Firstly, when you decided to expand your business, you have to know your customer well, what they want and need, in order to serve them the right products and services. You have to communicate your objective to the foreign business partner. In this process is really importance, because if you miscommunication, it will be risk that you can lose your business partner. To start up the international business, the local partner is crucial, because we are not familiar with their culture. We need someone, who familiar to the market, help us to expand our business in that country. Next step is screening and selecting the business partners. Everyone want to do the business with the best partners, if conditions not agree by all, we need to negotiate.
Challenging in doing the international business is to deal with the people from different countries and different cultures. We have to know and prepare ourselves before get into the international market. You have to keep in mind that even in the same country but different location, their culture or traditional might not similar. From the Edward T.Hall, a researcher, classified two classic dimensions of culture which are high- and low-context culture. The context refers to the situation, or environment that connected to an event, a situation, or an individual. A high-context culture stresses on the physical aspects, the closer relationship, and the more high-context communication. This is an indirect way of communication, maintaining of harmony, and careful not to embarrass or offend others. In the other hand the low-context is much stress on spoken words, open, direct, and base on the true feeling. Mostly European and North American are low-context culture, but the Eastern Asia has a high-context culture.
High Context Cultures
Low Context Cultures
Always on Time
Marked to Standard
Source: Hall, E. and M. Hall (1990)
Understanding Cultural Differences
Another famous natural cultural classification is the Hofstede's cultural classification. He explained about the national and regional cultural which has an impact on the behavior in societies. He classified characteristics into five dimensions; Individualism-collectivism, Power distance, Uncertainty avoidance, Masculinity-femininity, and Long-term and short-term orientation. In each type of culture dimension has an affect tour business so it is very importance for us to know and understand the people in each type very well. We can also classify our customers in each country and adapt our business to suit to the culture in that country.
The first group is individualism and collectivism. Individualism is the characteristics of person that tends to focus on his/her own self-interest, in contrast with the collectivism. In collectivism, group is very importance. They normally compromise and conformity in order to maintain group harmony. Asian country mostly have high rate of collectivism, so doing the business with Asians need to consider in this point. For the insurance business, you need to notice that not only one person can desired to sign a contact with us. The insurance packages that cover in group or all family members may be a good choice in Asia, but you cannot use the same strategy in Europe or America. Because in Europe or America has very high individualism rate.
The second group is power distance. Society with a high power distance has a wide gap between powerful and weak. There is relatively different in equalities. For example, in the high-power distance team, the leader has a strong influence over their members, which have a low level of autonomy. The low-power distance means minimal in gap. This kind of cultural, everyone in society seems to equal, not much differences between managers and employees. The United States scores relatively low on power distance.
The third group is uncertainty avoidance. This group is directly affects to our business, insurance business. The high uncertainty avoidance, people are tried to minimize the risk and ensure the security. The insurance business created for transferring and reducing the risk of loss, which directly receive from one entity to the others, by exchanging for payment. Insurance is one form of a risk management. Every company must have to plan for risk, to prevent their company from loss or bankrupt. Also with the person, especially in the countries which has high uncertainty avoidance, the society cannot accept in something that risky. In order to minimize or reduce level of uncertainty, these countries have adopted and implemented strict rules, laws, regulations, and policies. So, these countries should be our target group. When the characteristic of society tend to avoid the risk, they absolutely find something to guarantee that they will not loss or reduce their risk of loss. The more uncertainty avoidance, the more security they want. In the other hand, the low uncertainty avoidance, people in the societies can be accepted to uncertainty. They can make decisions quickly because they like to take a risk; the risky choice always comes up with the huge interests.
The forth group is masculine and feminine culture. The masculine is the characteristics that have more competition, ambition, and accumulation of wealth. The masculinity express as self-confidence, and leadership in the business. The feminine is more concern and care for the poor people, nurturing roles, and interdependence among people. Doing the insurance business is partly dealing with the feminine culture.
The fifth one is long-term and short-term orientation. The long-term orientation is the characteristic that people tends to take a long view of planning and living, which traditional of Asian culture. Moreover they also try to follow the plan for easily to solve the problem, if there is something wrong. When we have a plan, we will know the exactly way that we have to go and the possibility result. If the result is not good as we expected, we have to re-check the plan. The short-term is the opposite side to long-term, they always no plan or have a plan in very short period.
Culture in my opinion it not just only the norms, believes, or behaviors, in addition I think that custom, religion, even the language also effect on the business. In the Islam societies, the religion is really importance. It is the root of laws, regulations, economics and politics. Religion has the most powerful influence on the society. Language is essential of communications. This is a great asset in international business because it facilitates cross-cultural understanding. If we missed in communication, the business goal might not be achieved. There are two types of language, which are the verbal and non-verbal language. The verbal language is the general speaking language. It is difference in each country. The same word in difference in language can represent the difference meaning. In the international business they normally use English as the middle language to avoid misunderstand. The non-verbal language or body-language is the language that represent via the behavior not wording, for example eye contact, movement. I think this is more difficult than verbal language, because it does not have in the lesson. They need to study by themselves from their past experiences.
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In my opinion, to get into the global market is not difficult, if we prepare ourselves well. These memo try to explain to you about how importance of the culture. I think that before expand the business into international market; our company has to study more about culture. It some countries, they believe or behave in the difference way. For example, if you point a finger to somebody, it means that you are very rude and they would not accept you. If we does not notice about this, our business might not be successes in that country.
Hopefully this information might be useful for our company expanding our business into the international market. If you have any question or want some more information, please do not hesitate to tell me
Case 2 : What should be the principal features of improving methodology for picking countries?
The screening and selecting countries is essential step for the firms to expand their business. According to the list of countries that the boss believes hold the greatest potential for international sales, he used the per capita income as an analysis indicators. In my opinion, I thought that it not always true that the high income country will buy the luxury car. I might be the possibility that the high income country will have more potential to support the very high price of luxury car, but it also has some possibility that these countries not interested in this kind of automobiles. Nowadays, there are many countries tend to concern more on the environmental because of the threated of green-house effect. They trend to use the eco automobiles, the save energy and environmental friendly automobiles. It has an impact directly to our company if we selected the wrong target, because we sell our product to the customers who do not want to buy. So the result is that no one will buy our products. Therefore, to successful expand the sell into foreign market company needs to concern on more than one dimension.
However, the purchasing power still has to be concern because our products are the luxury automobiles. To sell luxury automobiles in the country that does not have enough money to support, it might be no one buys them too. The economics of the country is still being an important factor for our company.
They are four main factors that company needs to focus on the international business; economics, culture, legal and political, and commercial. From the boss's list countries, it seems that boss concern on only economic side. I think that per capita income is the interesting indicators for our business as the boss did. But he forgot the crucial factor which is purchasing power parity. He should use the purchasing power parity exchange rates, rather than market exchange rate. The different thing is that purchasing power parity (PPP) provides a more realistic indictor of purchasing power of consumers. PPP states that exchange rate between two country's currencies are balance when their purchasing power is the same in each country. For example, if the value of Baht falls by half when compared to Euro, the GDP measured in Euros also fall half. In fact, it does not mean that Thailand is poorer by a half. The PPP is the very useful in the countries which have a powerful government control over their economics because these countries, the government will hide the information that represent the bad image for their country and demonstrate only the good image or they might be some transaction that not recorded in the government list. We can call as informal economy, the unrecorded economic transaction and left out of government calculation. Moreover using GDP, a representation of income distribution does not accurately because of multiple wage earners. There is another interesting concept, which similar to PPP is the Big Mac Index, developed by Economist. This concept states that exchange rates should adjust to equal the price of basket of goods and services around the world. It comes from the hamburgers at McDonald's, which the price of Big Mac, kind of hamburger, is the same in all around the world. I think that this principle will be more efficiency methodology for our business, in order to measure the economics of the country. It might be more accurately and reasonably measurement.
Investment type is one thing that need to concern. If the company selected countries for sourcing, the company would search for countries that have available materials. The exporting firm should selected countries with low tariff barrier, and steady demand. If the company searches for FDI, the company has to search for countries that have long-term growth and the potential for export. We can classify countries based on the economic development into three types; Advanced economics, Developing economies, Emerging Market economies. The Advanced economies or Developed countries are described the post-industrial countries which has a high per capita income (GDP), high competitive in industries, high- developed commercial infrastructure, and high rating of Human Development Index (HDI). The last criterion is the most recently index, which combines an economic measure, national income, with other measures. This is an index that life expectancy and education. The Developing economics are low-income countries with limited or low levels of well-being, industrialization, and low developing rate. The Emerging market economies are partly of the former developing economies that achieved substantial industrialization, improved in standard of living, modernization, and growing in economic. These countries are improving to become an advance economic. The Emerging markets are interested by investors, because of fast growing economic.
Among the three criteria the Emerging market countries is the most interesting and attractive countries as target markets, according to the growing of middle class, which represent demand for many industrials such as electronics, health care service, and automobiles. There is the report indicated that the largest emerging markets have doubled their share of world imports in the last few years. Moreover, in the emerging market countries, the governments and state enterprises are very big target for sale of infrastructure and related products, machinery, transportation equipment, high-technology products, etc., because of they are trying to improve and level up their countries. The high in return always come up with high risk, so the investments in emerging market is risky due to problems, such as political instability, limited equity opportunities, and currency volatility.
In the culture dimension, some companies are selected country that has culture similar to their home country, such as language, religion, etc., in order to get into the market easily. If they selected these countries they do not have to spend more time to study and get used to this kind of culture. To be successful in business, the firms need to understand their target group. The basic step for starting the business in the countries which is not familiar is starting with the gate way countries or regional hubs which are the entry points to nearby markets.
The political and legal in country are the conditions that investors cannot overlook. The stability of political system effects on company operations and profitability. In some countries, government has an influence on the economics of the country. So, the economics of that country depends on the government. The government can both incentive and protect their country from the foreign investment by law and regulation, tax barrier, etc. Our company has to study political system in the interested country before. The political system can be characterized into four types; Totalitarianism, Socialism, Democracy, and Mixed (strong private sector and strong public sector). All of these systems are directly related to economic, for example the totalitarianism is related with command economics, socialism with mixed economics, and the democracy links to freedom economic. Among of these economic systems the economic freedom is the most interesting, because of freedom and fair in right, our business will not intervene inequalities.
They are many methodologies to analyze countries, but in this case I would like to suggest the PEST analysis. This tool is used for analyze the macro-environment of the external analysis. I think that this tool is the most suitable for our company in order to picking countries for investment because this tool will analyze in four dimensions, which are Political, Economic, Social, and Technology. All these four dimensions are related to the topic that I have already explained above. The political factor is about law and regulations. For the investors, it is importance to study about the law in that country before get into the country, be aware about violate the law. For the automobiles, it also has some restrictions or conditions for export the car into that country, for example in Thailand, the automobiles' tax is 300%. The investors have to concern on this before set the price, if they set the price too high, no one cannot afford it. The economic factors have an impact on purchasing power of customer, which is directly related to the boss's listed. We should emphasize on the economic factors because of the luxury product. The next factor is social. It illustrates the demographic and culture, for example population growth rate, age distribute. These affect customer needs and size of potential market. Technology factors can reduce the entry barriers, minimum efficient production levels, and influence outsourcing decision. The last one is technology. It is importance for manufacturing. If we searching the country for manufacture, we should look at the technology potential, especially for the automobiles industry. This industry is directly related to the advanced in technology, research and development, and the changing in technology.
In summary, I think that GDP can also be used to categories country but it would be better if we concern more on purchasing power priority (PPP). The result will be more accurately than using only GDP as the boss. If we would like to classify countries based on economic, I think that the emerging market economics is the most interesting market for investment, according to the growth in the middle age population which is the most powerful purchasing power, and the developing of the country. Investment in the international market is not easy, the company needs to aware of the risk in many dimension; economic, culture, country, and commercial. In order to select the country, concerning on only the economic side is not enough, we have to use others factor altogether. I think the most suitable methodology for piking countries is PEST analysis because this tool is using for the external and macro environment of countries. It also covers all of the risk factor that I mention above.
Case 3: How relevant are the following factors in contributing to potential country risk: foreign investment laws, controls on operating forms and practices, laws regarding repatriation of income, environment and contracts.
The country risk includes political and legal risk. It indicates the potential of gain or loss of company's operations and profit in a country. The example of country risk is stability; riots, protests, wars, etc. Each country has different political and legal systems that challenges for company strategy and performance. In order to do the international business, for Aoki corporation, the country risk is one of many dimension that company need to consider because it will be the condition and barrier of company to get into and operate the business. If you did something violate the law, you will receive the punishment and cannot avoid it. Some countries are very welcome the foreign investors, they provided an incentive law and regulation for the foreigners to invest and operate in their countries. Some of them launch the law to prevent the profitability for their countries; set a high tariff barrier. The weak in enforcement of laws and regulation also challenged for company, because it easily to violated and weak in punishments. The mostly problems for violating the trade laws is about the intellectual property. The country risk influence can be classify into two types; the systematic country risk, which affects all industries, all firms in a country, and unsystematic country risk, which affects only a subset of firms.
Here is the country risk ranking from Euromoney country risk, March 2010. This racking include overall factor; political risk, economic performance, structural, debt indicators, credit rating, access to bank finance/capital markets.
Country Risk Ranking
Least risky countries, Score out of 100
Source: Euromoney Country risk March 2010
This table illustrates the top 10 of the least-risky countries for investment and also the company's interested countries, which are China, Mexico, and Eastern Europe for manufacturing and Latin American and Europe for selling. You will see that mostly countries in Europe are in the top 10 of less-risky countries for investment. The company's interested countries are rating around middle. So these countries are not bad choice for investment.
They are many relevant factors in contributing to potential risks that Aoki may encounter, which are foreign investment laws, controls on operating forms and practices, law regarding repatriation of income, environmental laws, and contracts laws.
The foreign investment laws are the laws affect the type of firms' entering strategy, their operations and performance. Each country has the difference reasons for restrictions, for example Canada's reason is to ensure net benefit to their own country, United Arab Emirates concern on economic and demographic, China are strictly controls over foreign direct investment and restricts foreign investment in some target industries. These are the examples of foreign investment laws in some countries from GAO summary and analysis of law and information.
Selected Laws and Regulations Addressing Foreign Investment Restrictions
Laws and regulations
Reasons for review or restrictions
2006 Regulations for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, Catalog for the Guidance of Foreign Investment Industries
National economic security, protection of critical industries, purchase of famous trademarks or traditional Chinese brands
2004 Amendment to 1961 Foreign Trade and Payments Act
Ensure essential security interests, prevent disturbance of peaceful international coexistence or foreign relations
Foreign Exchange Management Act, 1999
National security and domestic, cultural, and economic concerns
1991 Amendment to the Foreign Exchange and Foreign Trade Act of 1949
National security, public order, public safety, or the economy
1999 Federal Law on Foreign Investments
Protection of foundations of the constitutional order, national defense and state security, anti-monopoly
United Arab Emirates
Agencies Law of 1981, Companies Law of 1984
Economic and demographic concerns
Exon-Florio Amendment to the Defense Production Act of 1950, as amended
Controls on operating forms and practices by the Government, firms should perform and operate the production, marketing, and distribution activities follow the set of laws and regulations. For example, the federal Mexican government has a Foreign Investment Law dated December27, 1993. This law classified the economic activities limited list into seven categories. It has a difference restriction; such as petroleum, communication via satellite, etc. are reserved for the state. Some activities are required from the national commission on foreign investment, in order than foreign investment may exceed 49%, such as port service, legal service, insurance agencies. If we interested to manufacture in Mexico, we should study whether our business types are in the limited list, or not.
Law regarding income repatriation related to the income and return on investment. This law has limited the amount of net income or dividends that firms can transfer back to their home-country. Some countries not allowed the foreign investor to transfer all of their income back to their home-country, they limited the amount that can transfer. So the investors have to reinvest in their host-country. This is the one method for control the money flow out. The exchange rate plays an important role in this transfer because it limits the ability of another country to transfer money.
Environment laws in some countries are strictly. They issue laws to prevent and protect the natural resource affected, impacted, or endangered by human activities. Moreover this law also required to protect human health and safety. Nowadays many countries are aware of using natural resource, so they are a lot of laws, regulations, and agreement between countries concern on this problem. For example in Mexico, environmental standards enforced due to the fear of foreign investment reduce their resources; the Eastern and Central Europe have an organization worked as partner region to develop more effective environmental protection.
The last factor is contract laws. The contract law is rule or regulation about the relationship of an agreement between two parties. There are five types of contracts; sales of goods or services, distribution of the firm's products through foreign distributors, licensing and franchising, FDI (Foreign Direct Investment), and Joint ventures.
The sale of goods or services is the conditions or restrictions for anyone who sells goods or services need to understand the implications and their responsibilities that they have under it. This law will states what you can sell, quality and quantity that can be reach. If it does not fit to the condition; low quality, the suppliers have to responsible for the problem. The distribution of the firm's products through foreign distributors (export) is the limitation of sending the products from home-country to sell in foreign. The limitation is depends on each county in order to protect their country's benefited. For example China has been control the amount of rare earths element to export because this minerals are vital to the manufacture of high-tech products. If China exports more rare earth, it will be affected to the country as an alternative source for manufacturing high-tech products. Licensing is the term of contract law between two entities, one entity is called Licensor and another is called Licensee. The Licensor from one country will allow the Licensee in another country to use the same manufacturing, branding, intellectual property, knowhow, or any related thing in the business process. The licensee also has authority to operate business by itself. The franchising is also similar to licensing which is the corporation between two parties; one is called Franchisor, another one is called Franchisee. The franchisor is the owner of trade mark and the business process in foreigner and franchisee is the person who received the right in doing business in the country. The franchisee have to operate the business under control of franchisor, which difference from licensing. The example of successful franchising is McDonald. In Europe, they do not adopt a uniform franchise disclosure policy, unlike the USA. The Foreign Direct Investment (FDI) is an international strategy in which the firm invests and establishes abroad in order to acquire the resources or raw materials such as equipment, labor, technology, plant, and land. It also requires a business relationship between a parent company and its foreign subsidiary. The joint venture is a type of agreement that two or more parties joining together for the business purpose. Normally join between the foreign company and the local company which has capabilities and resources. All parties agree to share in the losses and profits together. The joint venture can characterize in to two types; equity joint venture and contractual joint venture. According to the divided in profitabilities, makes them difference; contractual joint venture are divided according to negotiated contract term. But the equity joint ventures are divided in proportion to equity shares invested by the parties. In China, most joint ventures are the equity joint venture.
In conclusion, the country risk is one of the factors that company need to concern. It is importance of company to deal with the country. Before we start to do international business, company has to study more in this risk. It is the challenged for company because in each country has the difference in policies, laws, and regulations. To be successful is not easy, but it also too difficult for us. The country risk factors include foreign investment laws, controls on operating forms and practices, laws regarding repatriation of income, environment and contracts. As I have already explained above, these points can be our weapon to fight in the market if we use it in the right way. In contrast, it can make our company to loose, if we do not know it as well. If Aoki would like to invest for manufacture the products, the laws that we have to pay more attentions are the laws for manufacturing, the environmental laws, and the control and operation in those countries. If the company interested to expand only the sales, they need to study more about the income repatriation, and the contract law; FDI, licensing, export, joint venture, which is the most suitable for company and the condition in each countries.