Understanding cultural differences is a critical aspect of international business. An international manager is not expected to master the cultures of the world; however, understanding the ways culture affects business is necessary. When selecting markets for entry or as a source of supply, an international manager must become familiar with the specific cultural factors, business etiquette and issues involved in conducting business abroad.
Unit Objective [edit]
The goal of this material is to introduce you to cultural issues that may arise in a buyer’s country and the impact they may have on payment and money transmission methods, as well as the level of government control, corruption issues and sources of financing that may or may not be available in the country. By the end of this unit your will be able to:
identify cultural issues that may impact trade finance negotiations.
identify cultural issues that may affect international finance methods.
Unit Outline [edit]
Introduction
Culture Defined
Culture Applied
Culture Defined [edit]
Culture is defined as the integrated system of learned behavior patterns that are distinguishing characteristics of the members of any given society, including everything that a group thinks, says, does and makes – its customs, religion, language, material artifacts and shared systems of attitudes and feelings. Understanding culture involves understanding people, which is, as we all know, an extremely difficult task. Today, because of technology, the internet, the media, travel, and the opening of once-closed societies, culture attitudes have shifted somewhat, becoming more dynamic and less geographically sensitive.
Geert Hofstede, a Danish psychologist, interviewed thousands of IBM employees during his employment and subsequently developed a cultural model which he claims summarizes the different cultures.
Hofstede’s model contains five dimensions, with each dimension given a value between 1 and 120:
individualism versus collectivism – looks at the relationship between individuals and others in their society.
power distance – quantifies how well individuals accept the different levels of power that may be evident among them.
uncertainty avoidance – looks at how well individuals accept uncertainty and risk.
masculinity versus femininity – ranks the extent to which a society embraces masculine values (assertiveness, status, financial rewards) versus feminine values (quality of life). Societies with a stronger masculine culture tend to emphasize the differences in the role of the sexes.
long-term versus short-term orientation – added to help distinguish the difference in thinking between the East and the West.
Models like Hofstede’s provide international managers with a tool to differentiate, compare, and understand cultures and the individuals they will be dealing with abroad. Two important points every international business person must remember:
Understanding culture does not mean judging or ranking cultures or individuals. One’s own culture is not the standard against which others are to be judged. Avoid being ethnocentric.
Applying too many generalizations is dangerous. A manager must understand culture as a framework in which to deal with individual business partners.
There is a saying in international business, “Business is based on relationships.” Developing strong relationships with individuals is often the best way to make business ventures successful.
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Culture Applied [edit]
Culture is most often viewed as the language or religion of a country, but there is obviously more to culture than these two components as Hofstede’s model shows. A successful international business manager must know what cultural matters may affect developing relationships and the impact they have financially on a business venture.
Language [edit]
Financial issues are very much affected by language. Negotiations between a buyer and seller include price, delivery dates, shipping methods, and methods of payment. If either party is not completely fluent in the other party’s language, misunderstandings may arise which could lead to late payment or no payment at all. This situation may also arise between individuals who speak the “same” language as well. Consider the differences in word connotations and spelling between the English spoken in the US, UK, Australia, South Africa, and New Zealand. English isn’t the same English everywhere.
Another language issue that may affect payment, as Hofstede indicates, is the meaning of words. Consider the classic example of the Spanish word “mañana.” Literally translated, it means “tomorrow”; however in business it more appropriately means “not today.” So, if you are asking your customer in Latin America when payment will be ready to wire transfer and the answer is “mañana,” you very likely will not know when payment will actually be made. It could be the next day, but such is not a guarantee since the word has very broad usage.
Another issue has to do with the Asian issue of saving face. Rarely will a business associate say “no” directly since this is considered too bold, direct, and rude. The issue, of course, is how then does an American business person know if payment will be made or if the shipment will be ready on time if the Asian company does not give a direct answer. Knowing and understanding the nuances of a culture will help in interpreting the meaning of statements and therefore knowing when and how business will be conducted.
Religion [edit]
In the US, business and religion are interrelated since there is consideration of both secular and religious holidays in product offerings, sales and distribution. What we rarely experience in the US is a crossover between business law and religion. Such, however, is not the case all over the world.
In countries where Islam is the predominant religion, Sharia law is the body of Islamic law which regulates the public and some private aspects of life. Islamic law prohibits usury, the collection and payment of interest, and prohibits trading in financial risk (which is considered a form of gambling). Islamic law also prohibits investing in businesses that are considered unlawful (businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). These prohibitions may limit international business dealings with companies located in the countries that practice Sharia law. Ideas to overcome these issues could include:
utilizing a bank that does not charge interest on loans
removing statements on invoices that add interest to balances if payments are late
creating independent companies that do not deal in products forbidden by Islamic law
avoiding long-term foreign exchange exposure which will eliminate the need for future or option contracts.
Another example of religion affecting financial transactions can be found in Israel. During the Passover season businesses are not allowed to come in contact with or inventory any products that contain yeast, which means destroying the product or selling it prior to Passover. Unless previous arrangements are made, this situation could increase the cost of products, or lead to spoilage and loss of inventory.
Corruption [edit]
Corruption as defined by Webster’s Collegiate Dictionary (11th edition) is an “inducement to wrong by improper or unlawful means (as bribery).” Political corruption, that is, corruption of a political system or institution where public officials seek illegitimate personal gain through actions such as bribery, is the kind of corruption that directly affects the financial side of business.
The level of corruption that is present in a system will affect how business is conducted between companies as well as the interaction or payment required by government or other officials. Being aware of the potential situation and the possible added costs to business are important for an international manager to prepare for. One tool that can be used is the Corruption Perceptions Index, which measures "the degree to which corruption is perceived to exist among public officials and politicians."
Blue colors indicate little corruption; red colors indicate much corruption. Data source: Corruption Perceptions Index 2006 by Transparency International
The greatest challenges occur when business is conducted between companies located in a country that is blue and one that is red. Understanding that the individuals in the red country may not consider bribery illegal or immoral but simply the way business is done can be a significant challenge for “blue country” companies. Questions that international managers may have to consider include the following:
How much do we budget for “grease payments”?
Can such payments be legally made?
How are such payments accounted for on the financial records?
Will the delay in such payments result in a slowdown of business or payment?
Will a larger payment from a competitive company limit our ability to conduct business?
Government Involvement [edit]
The culture of a country may also determine the level of government involvement that is present in a market. Laws developed based on a society and its religion will ultimately impact the business law structure of the country as well. Issues that international managers may encounter include these:
code law (written law) versus common law (application of precedent) systems
level of development of the business law system: consider the British system which has been around for centuries versus the Chinese system which is being created daily
cultures that prefer to litigate over a dispute versus those that prefer to arbitrate or mediate
systems that require that laws be written before business is conducted (Europe) versus those that wait until issues arise to legislate (US)
inclusive versus exclusive statements: many countries in the Middle East will not allow product to pass through Israel. The
US does not allow exclusionary statements such as this to be made in business documents. All of the above issues may cause delays in the simple ability to conduct or understand how to conduct business, receive payment in a timely manner, or move currencies to make payment for products.
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