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The downside of the increased internationalisation of financial markets is that an economic event in one country can now have major consequences for financial markets and institution that are based in other countries. Countries are affected by the economic health of other countries and by their government policies. Problems in one part of the world can spread like an infection to other parts, with perhaps no country immune. This was clearly illustrated by the credit crunch of 2007/8. There are two ways in which this process of globalisation affects individual economies. The first is through trade and secondly through financial markets.
The differences between countries are large, particularly for per capita incomes. Accurate measurement of economic activity is important as a basis for sound decision making. Government and other businesses affected by economic information would be unwise to make decision in the absence of sound information about the state of economy. Clearly, decisions will be different according to whether the economy is in a boom period or in a recession, or whether it is growing or declining in size.
Economies are made up of a multitude of economic agencies, performing varied roles within the economy in terms of both the production of goods and services and their consumption. Macroeconomics looks at an economy as a whole and how the parts of the economy interact in order to generate wealth. The study of macroeconomics investigates the workings of the wider economy, including the measurement & determination of national income, output & expenditure and the consequences for employment & prices. The field is also concerned with developments in the international economy with implications for the flow of exports and imports between countries and international flows of capital.
We now outline issues that are generally of concern to policy-makers. However the attention given to them will inevitably affected by the economic circumstances of the time for e.g. whether economy is booming or in recession.
Economic Growth (GDP): Economic growth is the term economists use to describe the rate of increase in an economy's potential real output (the volume of output) in the economy over time. Governments try to achieve high rates of economic growth over the longer term: in other words, growth that is sustained over the years and is not just a temporary phenomenon. Governments also try to achieve stable growth, avoiding both recession and excessive short-term growth that cannot be sustained. In practice, this can often prove difficult to achieve. Economies suffer from inherent instability, as a result economic growth and other macroeconomic indicators tend to fluctuate.
Impact of Strong Economy across firms: The impact of stronger economy can quickly spread across all business. Once consumers begin to increase their spending, firm's experience a stronger demand for their products and may begin to hire more employees to accommodate that increase in demand. As more jobs are created, the general income level of consumer rises allowing them to spend more money. In addition, investors who invested in business tend to earn a higher return on their investment and they may spend much or all of that returns on products and services. Thus the extra income causes a favourable ripple effect throughout the economy.
Impact of Weak Economy across firms: Whereas strong economic growth enhances firm's revenue, slow economic growth results in low demand for products and services resulting reduction in firm's revenue. This may result in firm's closing production plants and reduction in employees. This will result in employees having less income, so they reduce their demand for various products. The firms that produce those products experience a decline in sales because of the reduced demand. Nevertheless, most businesses are adversely affected by economic conditions because the demand for products in almost all industries decline.
Thus from the macroeconomics data provided for three countries indicate that Chile is having a better economic growth rate of (0.9% for 2010/11 with overall rate of 5.7% in 2011) then the other two countries. Columbia is showing a steady economic growth rate ( a decline of 0.2% for 2010/11 but overall growth rate of 4.4% for 2011) from the data provided whereas Venezuela economy is in recession with a negative growth rate though it seems that it is improving its conditions from recessions but still the overall economy is -2.5% for 2011. So from the overall data we can say that Chile is having a stronger economic growth whereas Venezuela is facing weak economic conditions.
Inflation: Inflation is the increase in the general level of prices of products and services over a specified period of time. The inflation rate can be estimated by measuring the percentage change in the Consumer Price Index (CPI), which indicates the prices on a wide variety of consumer products such as grocery, housing gasoline, medical services and electricity.
Inflation can affect a firm's operating expenses from producing products by increasing the cost of supplies and materials. Wages can also be affected by inflation. A higher level of inflation will cause a larger increase in a firm's operating expenses. If they pass on higher cost to consumer by raising prices, consumer may reduce their demand for the products and revenue will decline. If the firm do not pass on the higher cost, their revenue may not be affect but since their expenses are higher their profits will decline.
The data for three countries in respect to inflation shows that Chile has a negative inflation for 2009 indicating the fall of CPI in respect to previous year this can be due to the global crisis effect on its inflation rate, but it has been back to 1.7% in 2010 bringing it nearly to the required inflation rate. Columbia on the other hand has inflation at 2.5% for 2010, in line with the required rate. Whereas Venezuela has the highest inflation rate of 30.6% for 2010 making it hard for companies to survive in these conditions.
Unemployment: It is defined as those of working ages who are without work, but who are available for work at current wage rates. The most cost of unemployment is to the unemployed themselves. The government loses tax revenues, since the unemployed pay no income tax and national insurance. This can increase the government deficit as tax revenues are directly connected to the budget.
A high unemployment rate threatens the job security of employees at any level. Particularly, if layoffs happen within one's own organization, it becomes a challenge to reassure the remaining employees and make them feel secure about their positions. This situation of insecurity has an adverse impact on the overall productivity of the company because the employee is usually unable to work with a single-minded focus, enthusiasm and confidence as before. People buy products and services and if they do not have a job they will buy less products and services. That is why increasing unemployment often results in many businesses reducing inventories because they expect to sell less.
The overall data for unemployment indicates that Chile and Venezuela has similar rate, whereas Columbia is facing with the higher unemployment rate of 12.7%. This can effects revenue generated in Columbian economy and the government will have to take major steps to maintain the unemployment rate. Firms will have effect on their profits but will get more exposure toward cheap labour force.
Balance of Payments Current Account: The balance of payment account is a systematic summarised statement of a country's international trade in goods and services and capital transactions with all other countries combined over a specific period of time. All businesses are affected by international trade either directly by involving in importing and exporting, or indirectly by the impact of balance of payments has on domestic economic activity.
The data for balance of payment for Chile is 3.2% which indicates that it has marginal more exports as compared to imports, whereas Columbia has more imports in comparison to its exports due to which it has a negative current account. Venezuela on the other hand is a exporting country with a current account surplus of 20.1 %.
Interest Rate: Interest rates determine the cost of borrowing money. It can affect a firm's performance by having an impact on its expenses or on its revenue. Firm's closely monitor interest rates because it determines the amount of expenses a business will incur if it borrows money. Changes in market interest rate can influence a firm's interest expense because the loan rates that commercial banks and other creditors charge on loans to firms are based on market interest rates.
Some products that are sold by firms are commonly purchased by credit. When interest rates are high it discourages consumer from buying particular products (such as new cars or homes) that they normally purchase with credit as the loan payments would be too high. The firms that offer these products experience a decline in demand and therefore a decline in revenue when interest rates are high and vice versa. Therefore firms tend to experience lower profits under these conditions.
In relation to this Chile has an interest rate of 2.88% which is most suited for firms & consumer to borrow money for expansion or buying cars and homes for consumers. Columbia has an interest rate of 3.46% which is slightly higher in respect to Chile but would still be suitable for firms and consumer to borrow. Venezuela on the other hand has an interest rate of 14.51% which is too high for firms and consumers to borrow and this could affect most businesses by decline in their product demands.
Government Budget Deficit: Budget deficit is the situation when the amount of government spending exceeds the amount of taxes and other revenues received by government. The emergence of a rising budget deficit has been due to a weaker economy and the effects of increases in government spending on priority areas such as health, education, transport and defence.
The budget influences the overall level of spending in the economy. This in turn will affect the demand for the products of individual firms. When spending in the economy as a whole is rising rapidly, each individual firm is likely to experience an increase in demand for its products and vice versa. Some firms will suffer more than others, in particularly those firms producing consumer durables (for e.g. cars, furniture etc.) because consumer can delay the purchase or simply not buy at all.
As budget plays an important role in consumer spending, the above three countries data shows that it has a small deficit. Considering the macroeconomic data, it seems that firms have a moderate risk for investments in these three countries. This still favours Chile as it has the lowest budget deficit of 2.1% out of the three countries.
If we consider the overall macroeconomic indicators data for the three countries it seems that Chile has the strongest economy of all the three countries. Companies would be much more favourable to have better business growth and revenues. As all the macroeconomics indicators are interrelated to each other in designing the overall growth of economy. In reality, low inflation rate and an upward economic growth is never possible. Nevertheless, low inflation rate means slow economic growth. Whenever, money is in excess, there is bidding by the consumers due to which the costs of goods escalate and vice versa.
Section B - Q2: 'Cultural sensitivity is a crucial factor in a company's international business success.' Critically evaluate this statement.
Answer: The number of companies operating internationally is growing constantly. It is important for international business to understand their customer's personal values and accepted norms of behaviour in order to market to them properly. International business is different from national business because countries and societies are different. Cultural differences across and within nations can affect the way business is practiced. When going international, the challenges which the company must handle are new and unfamiliar. Obstacles that firms have never faced before are becoming crucial in everyday work. Culture is one of these obstacles and can affect the entire co-operation.
Culture can influence the business in different ways such as social structure, religion, language, education, economic philosophy and political philosophy. The company must be able to handle these difficulties in a way that is satisfying also for the other part. Mistakes can be difficult to correct and disrespect for the foreign culture can destroy the entire operation for e.g. Nike faced a similar situation in Arab countries when Muslims objected to a stylized "Air" logo on its shoes, which resembled "Allah" in Arabic script. Overlooking cultural differences can result in embarrassing mistakes. When Nike learned that this stylized "Air" logo resembled "Allah" in script Nike apologized for the mistake and pulled the shoes from distribution. (Armstrong Kotler, Principles of Marketing, Tenth edition, The Global Market Place, pp 603).
Hofstede, Namenwirth and Weber describe 'culture as a system of values and norms that are shared among a group of people and that when taken together constitute a design for living'. Values provide the context within which a society's norms are established and justified. Values are not just abstract concepts; they are invested with considerable emotional significance. Norms are the social rules that govern people's actions toward one another. Norm can be subdivided further into two major categories: Folkways and mores. Folkways are the routine conventions of everyday life for e.g. appropriate dress code in a particular situation, good social manners etc. Mores are norms that are seen as central to the functioning of a society and its social life for e.g. indictments against theft, incest etc.
The values and norms of a culture do not emerge fully formed. They are the evolutionary product of a number of factors, including the prevailing political and economical philosophies, the social structure of society and the dominant religion, language and education as per fig below.
Fig 1: The Determinants of Culture (Hill, W. L. C. 2009)
Culture at the global level of the external environment relates to the interaction of at least one national culture with another. The national culture determines the values that influence corporate behaviour. Business conduct is also influenced by industry standards of behaviour, which are more specific than national cultures and in regional or global industries may extend across national cultures. Geert Hofstede studied how culture relates in workplace. He isolated five different layers of business culture dimensions:
Individualism: Individualism is the degree to which individuals are integrated into groups. It is high when ties among individuals belonging to a social group are loose. Highly individualistic cultures find people responding to opportunities on a personal level. In such cultures goods and services helping to mark consumer's difference compared to others should be well received. When individualism is low, social relationships are characterised by strong ties. They take longer to establish but are more enduring. In such cultures an international marketer may want to understate market-dominating positions. Company personnel focus on team and organisational achievements, but are less inclined to corporate across organisational borders.
Power distance: Power distance relates to how members of a culture view distribution of power. A high power distance ranking indicates there is considerable difference between people's status and movement upward is rather difficult. In lower power distance societies upward mobility is much easier to achieve and thus goods and services promising to support upward mobility are well received.
Uncertainty avoidance: Uncertainty avoidance is the extent to which members of a culture feel comfortable or uncomfortable in unstructured situations. Cultures dominated by uncertainty avoidance tend to be highly regulated, having complex rules and regulations in terms of proper behaviour (such as safety and security regulations) and try to avoid risk taking and vice versa.
Competitiveness ("masculinity"): The competitiveness of a national culture is the extent to which individuals perceive social relations as a kind of competition (for all kinds of resources and rewards) as opposed to focusing to mutual benefits. Less competitive cultures tend to focus on solidarity. They are concerned with the social security of their members, attracting working conditions and fairness. More competitive societies tend to emphasise personal achievement, challenging tasks, performance and purposefulness.
Time perspective ("long-term orientation"): Time perspective is defined as the way members of a culture tend to approach decision making in consumer as well as business activities. They may have a dynamic future-oriented mentality including persistence, hard work, thrift and shame. High time perspective ranking indicates the country prescribes to the values of long-term commitments and respect for tradition. A low time perspective ranking indicates the country does not reinforce the concept of long-term, traditional orientation. In this culture, change can occur more rapidly as long-term traditions and commitments do not become impediments to change.
The cultural diversity of employees potentially offers a strategic advantage to business firms. Globalization, and increasingly multi-cultural environments, is one of the main factors affecting companies today. In the 1970s we got used to the idea of ''thinking globally and acting locally'', but without wanting to negate the value of this concept today. It is becoming more and more difficult to differentiate between the global and the local, when teams represent a wide range of cultures, and when multinational markets coincide in the same geographic environment. This multiculturalism, if managed effectively, enables the company to grow by assimilating concepts and ways of working that are culturally different but complementary at the same time.
A recent article by Jonathan Soble in financial times demonstrates the role culture plays in Japanese companies like Toyota, Komatsu (a construction company) and Itochu (a trading house) seeking local leaders in international operations. Move to localise management follows a series of problems at International operations that some have blamed on a shortage of managers with deep localities. A number of Japanese manufacturers were planning to promote more foreign executives to top positions at their overseas operations, opening the way for potentially significant cultural changes as the focus of their business shifts abroad.
The problems have included strikes at Japanese car parts makers in China and the recall by Toyota beginning late last year of millions of vehicles, the majority in the US. Over the past months eight Honda and Toyota suppliers in China have been hit by strikes, which in many cases have forced the shutdown of larger assembly plants that rely on their output. Komatsu which makes heavy equipment for building and mining industries have been facing argumentive labour issues in past due to which it is planning to recruit Chinese managers as the top executive of all its 16 subsidiaries in China by 2012.
Itochu which trades food clothing and industrial raw materials through a network of about 140 offices associated round the world is looking to recruit more local managers for its international operations. The company said that it is moving forward with a global human resources strategy in order to understand local requirements and operations. The company is also scrapping separate performance review systems for Japanese and overseas managers in place of a unified standard review system.
Japanese companies are hardly alone in sending native managers to run overseas operations. But the relative homogeneity of their domestic recruiting pool, combined with a reluctance to hire mid-career executives from other companies has left Japanese companies with a less diverse list of global managers than many of their US or European rivals.
Toyota has shifted more responsibilities to its non-Japanese managers in US and Europe, promoting a group of local executives to run factories and other operations. Once the changes take effect, a third of its 48 foreign subsidiaries will be run by local executives. Didier Leroy (a Frenchman) is to become the first non-Japanese to head Toyota's sales and manufacturing business in Europe.
Cross culture involves the study of values, attitudes, language and customs of another society. Factors to consider in international business are differences in languages, values, laws, politics, technology, education and religion. A major debate in international business concerns the extent to which business plans can be standardised across cultures. Standardisation yields great economies of scale, but the approach is difficult to implement successfully. Although all consumers have similar emotions such as love, hate, greed and envy, expressions and symbolism can be dramatically different as one moves from culture to culture. Therefore in most cases business plans should be tailored to match consumer preferences of the targeted culture for company's international business success.
By Jonathan Soble in Tokyo
Published: June 29 2010 08:14 | Last updated: June 29 2010 23:16