1. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 1 BA 804: Lecture 2 Country Factors

2. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 2 Learning Outcomes  Develop a formal structure within which to understand country differences  Relate country differences to practical issues in managing in multiple national environments  Relate country differences to ethical management

3. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 3 Lecture Outline  Institutional transition  Political Systems  Economic and legal systems  Geography and education  Culture: The Hofstede scores  The spread of democracy and market systems  Two views of the future  Conclusions?

4. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 4 The Impact of Privatization* * Boubakri and Cosset, Journal of Finance, 1998 Earle, Employment Research, 2006

5. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 5 Another Impact of Privatization

6. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 6 Political Systems “The System of Government in a Nation” Democratic Totalitarian Individualism Collectivism Representation of the People Control of the People Values the individual over the group Values the group over the individual

7. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 7 Political Systems More freedom Less freedom Less order More order Individualism Libertarianism Collectivism Consensus Democracy Delegation of power Totalitarianism Concentration of power Philosophy of John Locke Philosophy of Thomas Hobbes Anarchy ‘State of nature’

8. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 8 Collectivism and Individualism  Collectivism – importance of equity  Big government – welfare state, social capital  Socialism Communists; Social Democrats  Individualism – importance of incentives  Small government – the ‘night watchman’ state  Private property  Guarantee individual freedom and expression  People free pursue economic self-interest

9. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 9 Democracy and Totalitarianism  Democracy  Representation (PR systems) vs. stability (PL systems)  Government by people exercised directly or through elected representatives.  Totalitarianism  Control exercised over all spheres of human life  Opposing views are prohibited  Ideology-based – e.g., communism, theocracy  Personality-based – e.g., dictatorship  Organization-based – e.g., military junta

10. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 10 Democracy  Representative Democracy  Freedoms expression, opinion, organization media regular elections with universal suffrage limited terms for elected representatives fair and independent judiciary bureaucracy, police force and armed services controlled by elected representatives relatively free access to state information

11. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 11 Economic Systems MarketMixedCommand State-Directed HKUSUK GermanyPR China Greater importance for individualism Greater importance for collectivism

12. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 12 Political vs. Economic Systems Markets Polity FREE RESTRICTIVE FREERESTRICTIVE The US The UK Ghana N.Korea India Hong Kong PR China Germany Czech Rep

13. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 13 Legal Systems Laws  Rules that regulate behavior (Laws)  Processes through which laws are enforced & grievances Enforcement are redressed (Enforcement)  An MNC needs to observe  Home country laws  Host country laws  International laws and treaties

14. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 14 Three main legal systems  Common law – tradition, precedent, custom  English Common Law  Anglo-Saxon systems  Civil law – detailed codes  Descends from Roman Law  Most systems in mainland Europe  Theocratic law – religious teachings  Islamic legal systems  Mainly in the Middle East

15. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 15 Issues important to international business  Property rights including intellectual property  Patent policies: Length, breadth, height  Enforcement issues  Product Safety and Product Liability A bundle of legal rights over the use to which a resource is put and over the use made of any income from that resource

16. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 16 Violation of Property Rights  Property rights can be violated through  public action, e.g., government legislation  private action, e.g., theft, piracy  corruption

17. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 17 Regional piracy rates for software Private action

18. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 18

19. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 19

20. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 20 Finland * * Source: Transparency International CORRUPTION

21. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 21 Saudi Arabia Palestine South Africa India Singapore Finland U.A.E. Source: Transparency International CORRUPTION – EXTENT vs. ARBITRARINESS

22. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 22 Secondary analysis of corruption data Countries with a high Globalization Index (levels of cross-national economic, social and technological integration, are also the least corrupt. (A.T.Kearney/Foreign Policy, 2000) Corruption reduces the benefits of globalization while raising its risk elements (Wei, 2000). The benefits of globalization accrue to those countries that are least tolerant of corruption. Neither study supported the position that increases in corruption may be due to increased globalization.

23. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 23 Other Determinants of Development: Geography and Education “Throughout history, coastal states, with their long engagements in international trade, have been more supportive of market institutions than landlocked states, which have tended to organize themselves as hierarchical (and often military) societies. Mountainous states, as a result of physical isolation, have often neglected market- based trade. Temperate climes have generally supported higher densities of population and thus a more extensive division of labor than tropical regions.” - Jeffrey Sachs-

24. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 24 Geography and Education

25. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 25 Success Story – Singapore  Population: 2.8 million  Literacy rate: 91.1%  GDP ($B): 83  Per Capita GDP: $26,294  Strategic location: Malacca Straits  World’s second busiest port: cargo tonnage  Average GDP growth over 25 years: 8%

26. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 26 Culture  “A system of values and norms that are shared among a group of people and that when taken together constitute a design for living.” Hofstede, Namenwirth and Weber

27. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 27 Determinants of culture  Social structure  Religion  Language  Education  Economic philosophy  Political philosophy

28. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 28 Caste and Class Social mobility

29. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 29 Power Distance Index MexicoIndia Japan AustraliaGermany More Hierarchical Less Hierarchical Prefer more participative mgmtPrefer less participative mgmt

30. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 30 Uncertainty Avoidance Index Risk Takers Risk Avoiders Prefer work rules spelled out Prefer implicit work rules

31. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 31 Individualism Index IndividualistCollectivist Prefer individual responsibilityPrefer collective responsibility

32. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 32 Masculinity Index MasculineFeminine Value achievement, Abhor failure Value affiliation, Interpersonal relationships

33. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 33 Hofstede - Caution!  Assumes one-to-one relationship between culture and the nation-state.  The research may have been culturally bound.  Survey respondents were from a single industry (computer) and a single company (IBM).

34. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 34 Cultural Change  Culture is not a constant; it evolves over time.  Japan, today, as it moves toward greater individualism in the workplace.  USA since the 1960s -values regarding the role of women changed.

35. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 35 Institutional transition – political and economic  Worldwide, there has been a spread of democracy and market systems  Totalitarian regimes and state controlled economies failed to deliver economic progress  New information technologies (internet) restricted a state’s ability to control information.  Emergence of prosperous middle class demanding democratic / economic reforms.

36. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 36 The end of country factors? “we may be witnessing…the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” - Francis Fukuyama -

37. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 37 Country factors develop over hundreds of years and do not easily change There is no “universal” civilization based on widespread acceptance of Western liberal democratic ideals.

38. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 38 Takeaways – 1  Political, economic and legal institutions vary dramatically across countries  These differences are rooted in history  Over the last two decades, political and economic institutions have been changing rapidly  dramatic effects on the levels of prosperity in different countries  affected their attractiveness as places for doing business

39. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 39 Takeaways – 2  Country cultural differences make their integration into the modern global economy more or less smooth  Fukuyama vs. Huntington  Asian Tigers vs. the Middle East  Political risk; Economic risk; Legal risk

40. © Ram Mudambi, Temple Univ. and Univ. of Reading, 2007 40 Takeaways – 3  Country cultural differences influence effective management practices HR organization Incentive design