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Growth-Oriented Entrepreneurship Global Survey and Assessment Environmental Analysis

INTERNATIONAL CENTER FOR GROWTH-ORIENTED ENTREPRENEURSHIP 2016 Edition Dr. Alan S. Gutterman

Growth-Oriented Entrepreneurship: Global Survey and Assessment 2016 Edition published in 2016 by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org) and copyrighted © 2016 by Alan S. Gutterman (www.alangutterman.com). All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BYNC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-ncsa/4.0/legalcode. About the Center The International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org) engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the intent to achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business. In furtherance of its mission the Center is involved in the preparation and distribution of Libraries of Resources for GrowthOriented Entrepreneurs covering Entrepreneurship, Leadership, Management, Organizational Design, Organizational Culture, Strategic Planning, Governance, Compliance, Finance, Human Resources, Product Development and Commercialization, Technology Management, Globalization, and Managing Growth and Change. About the Author Dr. Alan S. Gutterman is the Founder and Executive Director of the International Center for Growth-Oriented Entrepreneurship and the Founder and Executive Director of the Business Counselor Institute (www.businesscounselorinstitute.org), which distributes Dr. Gutterman’s widely-recognized portfolio of timely and practical legal and business information for attorneys, other professionals and executives in the form of books, online content, webinars, videos, podcasts, newsletters and training programs. Dr. Gutterman has over three decades of experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company. He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge. For more information about Dr. Gutterman, his publications, the International Center for Growth-Oriented Entrepreneurship or the Business Counselor Institute, please visit www.alangutterman.com and/or contact him directly at [email protected].

Growth-Oriented Entrepreneurship: Global Survey and Assessment Contents

PART I

CROSS-CULTURAL STUDIES

PART II

GROWTH-ORIENTED ENTREPRENEURSHIP

PART III

ENVIRONMENTAL ANALYSIS

PART IV

INNOVATION CLUSTERS

PART V

ENTREPRENEURSHIP IN DEVELOPING COUNTRIES

PART VI

UNITED STATES

PART VII

UNITED KINGDOM

PART VIII

LATIN EUROPE

Preface Chapter 1

Israel

Chapter 2

France

PART IX

GERMANIC EUROPE

Preface Chapter 1

Germany

Chapter 2

Switzerland

PART X

NORDIC EUROPE

PART XI

EASTERN EUROPE

PART XII

CONFUCIAN ASIA

Preface Chapter 1

Korea

Chapter 2

Japan

Chapter 3

China

Chapter 4

Vietnam

PART XIII

SOUTHERN ASIA

PART XIV

LATIN AMERICA

Preface Chapter 1

Brazil

Chapter 2

Mexico

PART XV

AFRICA

PART XVI

MIDDLE EAST (ARAB)

This is a Part or chapter from the Survey and you can get copies of other Parts and chapters by contacting the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org) at [email protected]. The Center also prepares and distributes Libraries of Resources for Growth-Oriented Entrepreneurs covering Leadership, Management, Organizational Design, Organizational Culture, Strategic Planning, Governance, Compliance, Finance, Human Resources, Product Development and Commercialization, Technology Management, Globalization, and Managing Growth and Change.

Growth-Oriented Entrepreneurship: Global Survey and Assessment (2016) Part III – Environmental Analysis

PART III ENVIRONMENTAL ANALYSIS §1:1

Introduction

Globalization requires that companies forge business relationships with parties from different countries, cultures and legal systems. All of these relationships present unique challenges and companies must be prepared respect the differences and the values of the other party as they negotiate and eventually begin to conduct a cross-border relationship. In order for this process to be successful, a careful analysis, popularly referred to as “country analysis”, should always be made of the country or countries in which the business activities will take place. Country analysis is a holistic approach to understanding how a country, particularly its government, has acted in the past and may act in the future. The focus on government action--discussed more fully as the “role of the state” in this chapter--follows from the fact that it is chiefly responsible for establishing and maintaining the framework, including the institutions and rules of behavior, through which the country develops its own economic, political, and social structure and relates to the actions of other countries around the world. A great deal has been written on the subject of country analysis, and companies should already be doing some sort of global scanning as part of their overall assessment of competitive factors in their specific industries and business sectors. This chapter attempts to lay out a path to be followed for completing a comprehensive country analysis. Companies should begin with an evaluation of environmental factors, including all relevant economic, political, legal and cultural factors. The next step is to examine the institutional framework of the target country, a process that focuses first on identifying the national goals and objectives of the country and the various policies the government is pursuing to achieve those targets. The analyst must then evaluate the performance of the country vis-à-vis its national goals and objectives using objective and easily verifiable measures. Other elements of a country's institutional framework that should be considered include the financial system, human capital, legal and regulatory systems, ownership and governance practices, business-government relations and the media. The last, and most difficult, step in any country analysis is constructing scenarios that might represent the evolution and development of the country over the period of concern to the company (e.g., the term of a proposed joint venture). Using these scenarios, the company can make an educated guess as to how its interests might be impacted by future events; determine whether the risks and uncertainties are too high to justify a decision to invest; and, in the event the investment is approved, attempt to build some protections into the documentation for the arrangement. Persons and organizations perform country analysis for a number of different reasons. Country analysis is typically discussed in the context of advising foreign investors on whether to launch or expand business activities in a particular country. In addition, however, country analysis is a valuable tool for managers of enterprises already engaged

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in business activities in the country since those managers will presumably want to create internal business plans and set internal performance goals and objectives and will need to make forecasts about the local environment and the actions of local institutions. Country analysis usually focuses on factors that are important for a particular industry sector and this is a useful and practical way to reduce the data and information requirements. 1 At the same time, however, the analyst must factor in information regarding global developments relevant to the sector such as emerging technologies created and launched in other countries that will ultimately penetrate the country market under analysis. §1:2

Information collection

Obviously, statistics on economic growth, social conditions, import/export activity and other trade-related data for each prospective foreign market are necessary in order to make a full evaluation and ultimately decide whether or not an investment in the county is warranted. Most companies, particularly smaller ones lacking substantial internal resources to conduct comprehensive evaluations of foreign markets, rely on outside organizations to assist in collection and review of the initial background information. A great deal can be learned through the local and U.S. chambers of commerce in the foreign country, the U.S. diplomatic or consular representation in the foreign country, the foreign country's diplomatic or consular representation in the U.S., local and foreign banks, U.S. and foreign professional services providers (i.e., lawyers and accountants), and local and foreign associations of trade and industry. When the company reaches the point that it is seriously considering a particular foreign market, senior managers should arrange to visit the area to meet with prospective business partners and government officials and perhaps attend trade fairs and exhibitions where they can observe developments that may be taking place in the marketplace. The U.S. government, as part of its efforts to support export activities, makes available a wide array of information regarding specific regions and countries around the world. The International Trade Administration (“ITA”), which operates under the umbrella of the U.S. Department of Commerce (“DOC”), maintains a “Regions and Countries” page on its web site that includes links to other ITA web sites with information on Africa and the Near East, Asia and the Pacific, Europe and the Western Hemisphere. The ITA Trade Information Center also includes country and regional market information. Other good sources available through the DOC include the Market Access and Compliance web site, the STAT-USA web site and the Country Commercial Guides that are prepared annually by the US Commercial Service and which include information on the business, economic and political climate and separate chapters on trade regulations, investment climate, statistics and market research. Researchers should also visit the International Trade section of the US Business Advisor for resources and information that can be used for country research. The Background Notes prepared by the U.S. Department of State include basic information on the countries of the world, including material on geography, government, economy, foreign affairs and history. Other good sources of informational for environmental analysis are discussed below including the CIA World Factbook, 1

When country analysis is industry-specific, attention should be paid to certain factors not emphasized in the outline of this chapter such as the presence and activities of industry associations.

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which includes information on geography; people and society; government; economy; energy; Index Mundi, which includes information on geography; demographics; government; economy; energy; telecommunications; transportation; military; transnational issues; and environment and health; the BTI Transformational Index; and Wikipedia, which includes information on a variety of topics such as, in the case of the U.S. for example, etymology; history; geography; demographics; government; economy; education; health; culture; sports and infrastructure.

International and regional organizations often publish extensive statistical information on countries around the world. The Country Data available through the World Bank is a valuable and reliable source of information on the structure of the economy, prices and government finance, trade, balance of payments, external debt, resource flows, poverty and key economic indicators. The website of the Organisation for Economic Cooperation and Development includes statistics on main economic indicators of its member countries and specific measures relating to labor force, agriculture, national accounts, purchasing power parities, capitol stocks and cross-border trade in goods and services. The website of the World Trade Organization has trade information and statistics organized by region and selected economies. Both the Statistical Division and the Department of Economic and Social Affairs of the United Nations maintain websites that include extensive collections of statistical information on economic, social, demographic, environmental and trade indicators for a number of countries. At the regional level, the Statistical Office of European Communities distributes official statistics regarding economic activities in the Member States of the European Union, including information on national accounts, monetary and financial indicators, external trade, prices, industrial production and unemployment. Substantial collections of materials useful for country research can also be found on websites maintained by various libraries, notably the Library of Congress Country Studies, the International Documents Collection Page maintained online by Northwestern University, the International Statistical Sites available through the Harvard University Center for International Development and the Latin American Network Information Center hosted by the University of Texas. Finally, organizations established to facilitate international trade, such as the International Trade Centre and the Federation of International Trade Associations, maintain online databases that include links to other sites with information on trade-related topics and economic policies. Universities are also offering resources that can be valuable in conducting a country analysis for purposes of making foreign investment decisions. For example, the Mergers and Acquisitions Research Centre at Cass Business School in the United Kingdom compiles an “M&A Attractiveness Index” that ranks 147 countries worldwide in order to evaluate the capacity of each of those countries to attract and sustain mergers and acquisitions activity. The Index relies on 23 country development indicators that are aggregated into the following five groups of factors:

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    


Regulatory and political factors: Rule of law; completion formalities; registering property; paying taxes; trading across borders; enforcing contracts; political stability; sovereign debt rating; and control of corruption Economic and financial factors: GDP size; GDP growth – CAGR; inflation; stock market capitalization as percentage of GDP; and private credit provided as percentage of GDP Technological factors: High-technology exports; innovation; and Internet users per 100 people Socioeconomic factors: Population size and population aged 15 – 64 (percentage of total) Infrastructure and assets factors: Registered companies (>US$1m total assets); container port traffic (TEU); railway lines (km); and paved roads as percentage of total roads

The report announcing the Index also includes an assessment of market challenges and strengths and an analysis of inbound and outbound investment flows for each country (e.g., the most popular sectors for investment activities). §1:3

Organizational practices for monitoring the environment

While this chapter focuses primarily on various environmental factors to take into account when deciding whether to make an initial investment in a foreign market, environmental monitoring should be a continuous and regular practice for every company interested in establishing and maintaining a global presence. For example, even if a decision is made to enter a particular foreign market, management should be sure it regularly makes an independent assessment of economic, political, legal, social and cultural conditions in the country. Based on this analysis, it may be necessary to reduce the company's presence in the country or even exit the market altogether. On the other hand, improved economic and political conditions, coupled with success in the initial investment, may be persuasive in the choice to expand operations. In the same vein, while the company may decide not to enter a foreign country at a particular point in time, the decision may be revisited at a later date if the local conditions change or the company acquires additional resources to expand global operations into new areas. In any case, several steps should be taken to implement organizational practices for monitoring the environment in promising foreign markets. First, information programs should be conducted inside the organization to educate other managers and key employees about each relevant environment and the effect it might have on the firm. While the importance of environmental analysis is well known and understood in large organizations, it is a foreign concept for many smaller businesses. Second, a plan should be developed to collect relevant information on environmental factors on a continuous basis. The idea at this point is not to create an overly complex or sophisticated system. Instead, the emphasis is on demonstrating to others how important information can be and how it can be applied in solving day-to-day problems. In order to create the system, all relevant sources of information should be identified, including trade publications, government reports, financial information and business reports published by competitors

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and online publications. Information generated by the company through its regular activities should not be overlooked, nor should data and feedback from customers and suppliers. Finally, a formal procedure should be established to ensure that the collected information is carefully analyzed on a regular basis to identify and forecast major forthcoming environmental changes that will create new opportunities for, or significant threats to, the firm.

Whenever possible, the ongoing process of monitoring and continuously evaluating foreign countries and regions should extend beyond reviewing updates of the statistical information described in this chapter to include input available through the extensive volume of commentaries and analysis available from academics and consultants specializing in international trade and related issues. Analytic materials can be found online at websites hosed by universities, think tanks, NGOs and industry groups looking to advocate a particular position or direct attention toward a specific public policy problem. Among the sources that may be used are the CATO Center for Trade Policy Studies, and Foreign Policy in Focus and Global Trade Negotiations (Harvard University Center for International Development). These sites provide critical analysis of trade issues, current trade news and lengthy studies of developing economic, political and legal issues that may impact the environment for cross-border commerce in the future. Companies may also subscribe to fee-based services that provide similar information. §1:4

Environmental analysis

One of the most important steps in deciding whether to conduct business in a foreign market is undertaking a detailed analysis of the unique set of challenges arising out of the particular external business environment in that market. Environmental factors are the external forces (i.e., those that flow primarily from outside the firm) that create pressures, demands and opportunities for the business. Environmental analysis is particularly important in the "going global" decision process in light of the fact that the relevant factors will differ significantly from those that the manager is used to dealing with in the company's local market. While there is no single, or best, way to categorize the multiple factors that might impact the operations of a firm, a useful classification separates and focuses on economic, political, legal, cultural and demographic factors. Each of these major categories can, in turn, be further broken down into distinct categories to facilitate a more robust and systematic analysis that includes such things as natural resources, technology, institutions, religion, and population growth and migratory habits. 2 When assessing 2

General environmental factors (i.e., economic forces; technology forces; political and environmental forces; and demographic, cultural and social forces) should also be taken into account by firms and their managers during the course of their strategic planning process. For further discussion, see “Strategic Planning: A Library of Resources for Growth-Oriented Entrepreneurs” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org). In addition, a firm looking to launch operations in a new foreign market should conduct an extensive environmental analysis of that market before a final decision to proceed is made and the results of that analysis should be incorporated into the firm’s international business plan and the specific export plan for that market. For further discussion, see the chapter on “Developing an International Business Plan” in

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elements of managerial style and/or specific management practices it is essential to do so with due regard for the external environment in which the activity is occurring. In some cases, environmental differences will have little impact on how managers act; however, environmental factors such as culture definitely play a role in the way that firms are managed and the effectiveness of specific managerial styles and practices.

There is substantial evidence to support the proposition that, as Child and Warner put it, “the cultural perspective has for some time provided the dominant paradigm in comparative studies of management and organization”.3 Numerous scholars have made their professional reputations by conducting extensive studies of business organizations around the world that concluded that “culture” was the key factor in explaining differences between countries and culture is a comfortable reference point for managers experiencing frustrations about how their directives are being received by colleagues— managers and subordinates—from other countries with different values and beliefs. However, while culture is certainly an important part of the environmental factors listed below, notice should be taken of the “institutional perspective” that Child and Warner explained as follows: “A contrasting perspective emphasizes that management and business have different institutional foundations in different societies. Key institutions are the state, the legal system, the financial system and the family. Taken together, such institutions constitute the distinctive social organization of a country and its economy. The forms these institutions take and their economic role are seen to shape different ‘national business systems’ or varieties of capitalism (citations omitted). In turn the norms and rules of such systems impact importantly on corporate and managerial behaviour.”4 Child and Warner acknowledged that there is far less understanding of the impact of the institutional elements of these “systems” on organizations but also pointed out that the institutional perspective does appear to offer opportunities for greater understanding of what factors influence managerial behaviors.5 Proponents of the institutional perspective argue that social structures and processes become so embedded within societies as time goes by that it becomes difficult, if not impossible, to distinguish them from societal culture and that eventually one can no longer identify either culture or institutions as the primary cause for why things are the way they are within business organizations. 6

“Globalization: A Library of Resources for Growth-Oriented Entrepreneurs” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org). 3 J. Child and M. Warner, “Culture and Management in China”, in M. Warner (Ed), Culture and Management in Asia (London: Routledge Curzon, 2003) (also citing D. Hickson and D. Pugh, Management Worldwide: The Impact of Social Culture on Organizations Around the Globe (London: Penguin, 1995)). 4 Id. Examples of works relating to “national business systems” cited by Child and Warner included R. Whitley, Business Systems in East Asia (London: Sage, 1992); and R. Whitley, European Business Systems: Firms and Markets in their National Contexts (London: Sage, 1992). 5 For further discussion of the basic principles of “institutional theory”, see P. Tolbert and L. Zucker, “The Institutionalization of Institutional Theory”, in S. Clegg, C. Hardy and W. Nord (Eds), Handbook of Organization Studies (London: Sage, 1996), 175-190. 6 Child and Warner argue that the cultural values of respect for hierarchy and family social collective observed in Chinese society are based both on Confucianism and legal codes promulgated and enforced by the state with the result being the hierarchical and collective orientation seen in both Chinese culture and

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Institutional theorists also point out that culture and institutions influence one another— institutional elements, such as laws and regulations, are not likely to be effective or longlasting if they fly in the face of cultural norms and values; however, new institutional elements will, at least in the short-term, modify the culture to the extent that they trigger changes in the attitudes and behaviors of members of society subject to such laws and regulations.7 Notwithstanding the foregoing, however, it is understood, as Child noted, that “culture and institutions tend to influence different aspects of management and organization.”8 With regard to culture, Child explained that its primary impact is on individual attitudes and behavior, including inter-personal behavior, and that culture was likely to be particularly important with respect to the motivational consequences of managerial practices and styles, norms of communication, the willingness to take individual responsibility, the conduct of meetings, and modes of conflict resolution. Institutions, on the other hand, are relevant to matters shaped or constrained by formal norms and rules including systems of corporate ownership, accountability and governance, conditions of employment and collective bargaining, and the reliance on formal contracts for intra- and inter-organizational transactions.9

In the sections that follow a long menu of relevant external factors is discussed sequentially and each one is treated in an isolated fashion. Of course, life is not that simple and one complicating factor is the potential interdependence of the various external factors. For example, societal culture is obviously an important external factor and while it has been argued that differences among societies with respect to their scores on various dimensions of societal culture are likely to survive for extended periods of time even as other factors impacting societies as a whole evolve and change others have suggested that cultural values will inevitably be impacted by new technologies. The debate on this topic remains heated and Hofstede for one argues that the introduction of new technologies will impact all of the societies with the result being that scores of societies with respect to the cultural dimensions may change but the relative position or ranking of the societies will remain the same except in rare instances. 10 As for the assertion that evolving technology will ultimately reduce cultural variation among societies, Hofstede is dismissive and argues that since the way in which societies cope institutions (e.g., legal rules are oriented toward social obligations to higher authority rather than recognizing and protection individual rights). 7 Child and Warner offer several examples of what they refer to as “same culture, different system”, including West and East Germany and Mainland China and Hong Kong, and argue that “the impact of institutional differences is sufficient for Hong Kong managers to regard managing operations in the Mainland as problematic” (citing J. Child, L. Chung, H. Davies and S. Ng, Managing Business in China (Hong Kong: Hong Kong General Chamber of Commerce, 2000)). 8 J. Child, “Culture, Contingency and Capitalism in the Cross-National Study of Organizations”, in L. Cummings and B. Staw (Eds), Research in Organizational Behavior, Volume 3 (Greenwich, CT: JAI Press, 1981), 303-356. 9 Id. 10 Hofstede’s view is that cultural change that is significant enough to invalidate his country dimension index rankings will take a significant period of time, such as 50 to 100 years, or the occurrence of a dramatic outside event of epic proportions. See Hofstede, “Dimensionalizing cultures: The Hofstede model in context”, in W. Lonner, D. Dinnel, S. Hayes and D. Sattler (Eds.), Online Readings in Psychology and Culture, Unit 2: Conceptual, Methodological and Ethical Issues in Psychology and Culture (Bellingham, WA: Center for Cross Cultural Research, 2006).

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with technological changes will likely be driven by their pre-existing cultural values it may well be that technological advances may sharpen rather than reduce cultural variations among societies.11 As discussed above, a wide array of resources are available for conducting environmental analysis. Index Mundi (http://www.indexmundi.com/) is a comprehensive website that includes lengthy and detailed country reports that cover a wide range of issues relevant to the environmental analysis discussed below. Each country report is organized into key topics including geography, demographics, government, economy, telecommunications, transportation, military, transnational issues, environment and health. In addition, the site contains detailed country statistics (i.e., commodities data and trade statistics), charts and maps complied from multiple sources. The website also facilitates review, analysis and comparison of over 1200 indicators published by the World Bank groups into topics such as economic policy and debt, education, environment, financial sector, health, infrastructure, labor and social protection, poverty, private sector/trade and public sector. The Library of Congress publishes an extensive set of country studies in its Country Studies Series that include a description and analysis of the historical setting for countries around the world and the social, economic, political and national systems and institutions of those countries. The Library of Congress maintains a website where online versions of studies previously published can be accessed and cautions that because the original intent of the series was to focus primarily on lesser-known areas of the world or regions in which U.S. military forces might be deployed, the series is not all-inclusive and covers 101 countries and regions. Some of the studies have not been updated in several years and thus it will be necessary to refer to other research materials described herein; however, the studies are particular useful in providing readers with a reasonable amount of information regarding historical background and development and also includes sections covering geography; societal characteristics; economy, including useful discussions of specific sectors; transportation and telecommunications; government and politics; and national security. The Central Intelligence Agency (CIA) World Factbook provides information on the history, people and society, government, economy, geography, communications and transportation, military and transnational issues for 267 world entities. Each Country Profile is organized and presented in a consistent fashion to facilitate comparison and, in fact, country comparison for various topics are included as part of the Factbook database (i.e., geography, people and society, economy, communications and transportation and military). The Country Profiles are available online and are updated on a regular basis to reflect new developments and changes in statistical information. As a result, the CIA World Factbook often forms the basis for presentations of information in the other sources described in this chapter. A brief history of the evolution of the Factbook can be reviewed to understand when, how and why changes in presentation were made. In addition to the resources described above, comprehensive country analysis may require review of a variety of other sources. While compilation of a definitive list is not possible, 11

Id.

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excellent information and analysis is available in the data profiles compiled by the World Bank and the International Monetary Fund, reports published by the US Departments of Commerce and State (i.e., US State Department Background Notes and Fact Sheets) and reports available through The Economist and other global news organizations. Additional data can be accessed through the central bank equivalent in the particular country and the ministries overseeing finance and commerce in the particular country. Countries also have their own national chamber of commerce and there is typically an American chamber of commerce for each country that can provide information on specific investment opportunities. Specialized databases are available for certain of the topics mentioned below such as the BTI Transformational Index for “transformation analysis” and analysts can also easily access specialized, and regularly updated, databases on domestic laws and regulations that are available through public sources in specific countries, law libraries, and commercial information providers. §1:5

--Economic factors

Economic factors include natural resources (e.g., land and mineral resources, fuels and other energy sources and natural tourist attractions); the availability of skilled human resources, which is actually covered separately as part of the analysis of the institutional framework of countries discussed below; the availability of private and public domestic capital and the strength of local financial institutions, also covered separately below as an institutional framework factor; technology, including the level of technical skill and knowledge among local workers and consumers and the sources of domestic technological development; infrastructure (e.g., transportation, utilities and energy and postal and telecommunications); geography (e.g., arable land, deepwater harbors, mineral resources, environmental/climatic conditions and population density); property rights, including the framework of domestic laws and regulations with respect to the definition, recognition and enforcement of such rights, a topic discussed in more detail below as one of the legal factors in a country's external environment; and the size of the local market for the company's products. Measuring the past and predicting the future performance of these factors is important for in-country managers and prospective foreign investors. When conducting a country analysis it is useful to review the situation and prospects in the three main sectors: agriculture, manufacturing and services. The characteristics associated with the different areas falling under the general umbrella of “economic factors” will vary and change as countries develop and, of course, there will be individual exceptions that may arise due to unique factors (e.g., natural resources will remain a dominant economic factor for oil-producing countries regardless of the overall stage of economic development). In general, however, development tends to decrease the importance of natural resources to an economy, expand the pool of skilled human resources, increase the amount of income available for domestic consumption and investment, strengthen the country's physical infrastructure and internal flow of information and bolster the country's technology levels. §1:6

----Natural resources

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While geography and environmental issues are included here as economic factors, they are often discussed separately in the various research resources referred to above. The natural resources of a country include land and mineral resources, fuels and other energy sources, and natural tourist attractions. The scope of natural resources obviously varies significantly from country to country and, in and of itself, is not an indicator of the anticipated level of economic development. However, managers must consider the importance of natural resources to the local economy and the quantity and quality of available natural resources.

The contribution of natural resources to the economy tends to be one of the common indicators of development. Developing countries tend to have a heavier degree of reliance on natural resources, and managers should monitor the percentage of gross domestic product ("GDP") that comes from agriculture over the term of the local market initiative. If one or more natural resources are central to the local economy, managers should monitor progress and developments in that sector even if the company is not directly involved in that sector. Obviously, if a natural resource is a dominant economic resource, the government will devote significant time and attention to that sector, and the performance of that sector will influence overall economic conditions in the country. Managers should also consider new opportunities in ancillary industries that may be promoted through local government assistance programs. The availability of a particular natural resource obviously depends on the natural endowments of the country, the size of the country, and the steps taken to develop and maintain adequate reserves. While quantitative factors are certainly important, there will often be significant variations in the quality and utility of the resource. For example, while a country may have a relatively large landmass, its productivity may be impaired by climatic and topographic conditions. In any event, resource availability is not only important as an input to local manufacturing activities in a new market, but may also be the basis for a strategy dedicated to securing a captive outlet for a resource to be used throughout a company's global operations. Foreign countries may also be looking for as for environmental conditions, which include the level of pollution and the existence of environmental hazards (e.g., flooding), they must be continuously monitored for their potential impact on the location and operation of a company's business. §1:7

----Human resources

In addition to natural resources, consideration should be given to the availability of skilled human resources in the foreign country. As a general matter, there is a scarcity of skilled labor in developing countries where there is little formal education and technical training. Educated workers often leave the country due to a lack of suitable career opportunities, thereby further inhibiting economic development. In some cases, countries will actually import workers from other countries to fill gaps in particular skills. The size and quality of the workforce in a foreign country is obviously an important concern for managers. Without sufficient training and experience, it may be difficult for local workers to make efficient use of technology being introduced to the marketplace. In

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addition, a scarcity of local managers means the foreign company will need to divert some of its own managerial resources to the new market. While this has become a common practice, it does increase the risk of misunderstandings between managers and workers based on the manager's lack of familiarity with local culture and practices.

Before making a commitment to a new foreign market, companies may need to budget for ongoing education and training programs for prospective workers. Many governments will be supportive of such programs and will consider them favorably in deciding whether to approve the foreign investment or joint venture. However, once the training has been completed, the workers will hold a scarce skill that will substantially enhance their value in the market. As such, efforts must be made to retain the trainees and maintain high morale and motivation. Even though there may be some difficulties caused by a relative scarcity of skilled workers, many countries offer real opportunities for foreign firms to gain access to a large pool of low-cost labor. Such a resource increases the viability of undertaking laborintensive activities and can provide foreign firms with leverage against unions in their home markets. Another problem, however, is that many countries have adopted stringent rules protecting local workers employed by foreign firms, often adopting laws that provide more protection to such workers than to those working for domestic firms. §1:8

----Capital

While some governments are willing and able to arrange financing to attract new foreign investment, it is more likely that private and public domestic capital will be relatively scarce in developing countries. Accordingly, foreign firms must be prepared to provide the necessary cash to fund the activities in the new market until they are self-sustained. The strength of local financial institutions is also an important factor to consider. In many developing, or recently developed, countries, the national banking system remains under the control of the state government, as either a regulator or the owner. This can politicize policy decisions regarding lending practices and allocation of funds to specific borrowers and market sectors. In addition, it often means that citizens will place their savings into non-monetary assets, such as livestock, rather than into the financial system. The weakness of financial institutions can also lead to high capital flight, which means that local firms and citizens will send their money out of the country to obtain a higher (and less risky) return on their financial assets. Another potential problem area is the risk of high levels of inflation that exists in many developing countries. Planning is extremely difficult in the midst of hyperinflation. Pricing decisions are complicated by the need to factor in the cost of replacing the goods that are to be sold. Credit management on both receivables and payables will be critical to the success of the business, while soaring interest costs can easily break the budget. Finally, consideration must be given to the availability of foreign exchange. The level of foreign exchange determines the external purchasing power of the country and its ability

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to acquire needed goods and services that are not produced domestically. Developing countries are often confronted with shortages of foreign exchange in light of the fact that their import requirements significantly exceed their ability to export domestic goods to buyers willing to pay with the desired foreign currency. Managers of foreign firms may find themselves subject to restrictions on outflows of foreign exchange generated from the operation of the business in the local market. If so, raw materials and services may need to be procured from local sources, which may dramatically alter the type and quality of production technologies that must be used in the new market. For all of the financial-related problems associated with entering a new market, there are also opportunities that must be considered. For example, a foreign company may actually be able to provide financial services to the new market that are not available through existing institutions. At a minimum, well-financed foreign firms are able to move quickly to seize market opportunities since they are not subject to the transaction costs normally associated with dealing with local financial institutions. §1:9

----Infrastructure

While the Internet promoted the notion of virtual commerce, it is still generally true that business must be conducted within the confines of a physical infrastructure. The list of facilities and institutions that must be considered is quite lengthy and includes such things as transportation, utilities and energy, and postal and telecommunications. Many developing countries lag far behind in the development of their infrastructure, and there are even significant variations in quality and cost among advanced industrial nations. Physical infrastructure deficiencies can drastically increase the costs of production for foreign firms in a new market. Managers need to consider whether to make an investment in the creation and maintenance of their own infrastructure, such as building access roads and maintaining generators. In addition, the lack of sound local transportation may mean that the company cannot easily access needed raw materials and move finished goods to the target markets. Telecommunications problems may increase transaction costs in the market due to the complications created in the procurement and sales functions. If, on the other hand, the foreign company is engaged in an infrastructure-related business, it may find substantial opportunities in developing countries. Even if that is not the case, a foreign company willing to invest in its own infrastructure may be able to create a new and substantial barrier to entry and generate revenues by making the facilities available to government agencies. Infrastructure issues also include the availability and quality of market-related information. Managers always need reliable information on supply and demand factors in domestic and foreign markets, as well as information on prices, technology, financing and government regulations. In advanced countries, this information is generally readily available through trade journals, newspapers, television and radio, government seminars, and online announcements and reports. In developing countries, however, the pool of information may be limited by the size of the market and the lack of personnel and cash to assemble and distribute the information. These problems are not limited to developing

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countries and may also exist in rural areas of countries such as Brazil that have already made significant strides in industrializing the domestic economy. The role of the media in developing countries has always been important; however, understanding how information is disseminated has become even more urgent with the Internet and continuously expanding access to news and opinions that is now becoming available to people in even the poorest areas of the world through affordable handheld devices. As recent events have shown, the Internet is now a powerful political tool in countries around the world. Management in the face of inadequate information may lead to market inefficiencies and higher transaction costs. In addition, any decision is itself far more risky given that the manager must act on the basis of limited data. In order for a foreign firm to prosper in this type of environment, informal and personal communication networks must be set up and maintained. While the cost of attaining information may increase, the value of the data uncovered will be correspondingly higher given the advantages over competitors that are unwilling, or unable, to make the same effort. §1:10 ----Technology

While natural resources, capital and labor were traditionally the most important economic factors for countries and companies, it is now clear that technology plays an essential role in the success of a national economy or a corporate business plan. Goods and services may be technology-based, which means that their success will depend on the value of the goods and services to purchasers and their ability to understand and use the items in their daily activities. Even in those cases where a business is not developing and distributing technology-based goods and services, the company is likely to be reliant on technology to increase the efficiency of its own internal manufacturing, marketing and operations functions. Other areas of analysis include the level of technical skill and knowledge among local workers and consumers, the sources of domestic technological development and the degree to which the country is reliant on technology imports. Government technologyrelated policies must also be considered. For example, governments often place restrictions on technology transfer arrangements and may limit imports of technologybased products and services that might displace local workers. Another area of interest is government efforts to support needed investments in the development of the country as an “information society.” Country analysis relating to development of the country as an “information society” should include collection and analysis of data relating to Internet access and usage, such as the percentage of households with a personal computer, the number of persons that use the Internet, Internet availability in the schools and the percentage of the population engaged in online communications with governmental authorities and in using the Internet for commercial activities such as banking or the purchase of goods As a country develops, it is common to see a fairly modern and technology-advanced sector emerge next to the traditional labor-intensive and low-technology sectors;

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however, progress is often slow and lacking in continuity and depends on a variety of factors including governmental policies relating to technology-related issues such as education, training and inbound technology transfers. In any event, managers of a foreign company looking to enter a new market must determine how the company's existing technology will fit into the local market and, if necessary, commit to taking the steps needed to ensure that appropriate adjustments are made to the technology. If possible, the company might even implement marketing and education programs in order to adjust the local environment to accept the imported technology. §1:11 ----Geography The goals and policies of a country may well be constrained and driven by physical characteristics that cannot be changed, or changed only at substantial expense. Among the obvious features that might be expected to drive a country's economy are arable land, deep water harbors, mineral resources, climatic conditions and population density. These factors may have a substantial impact on the way in which commerce is conducted in a particular country. For example, if major population centers are located far away from major ports, transportation methods and costs become an important factor in determining the amount of investment necessary to penetrate the market. Similar issues occur when it is necessary to move goods over a mountain range that is expensive or difficult to ship across or into a remote territory that is serviced by only one railroad able to charge monopolist prices. Climatic conditions also have an obvious impact on consumer requirements as well as the timing of certain types of purchasing activity over the course of the year. §1:12 ----Property rights

Particularly when an investment is to be made in a developing country, U.S. managers will be extremely interested in the framework of laws and regulations that country has created with respect to the definition, recognition and enforcement of property rights. In many cases, particularly in the case of natural resources, developing countries have failed to define property rights and establish the institutional structures that would normally be used to monitor and enforce such rights. For example, countries such as Mexico and Nigeria have in the past become quite dependent on income from oil and other natural resources. While this has resulted in significant revenues for the governments in those countries, and sometimes created opportunities for large infrastructure projects, many economists believe the failure to implement a property rights system for the use and enjoyment of these natural resources has caused a variety of serious problems, including inefficiency in the management of the resources, including overexploitation; looting of oil revenues by elite groups in a position to exploit such opportunities; damage to the environment, including high levels of pollution; corrosion of financial and capital infrastructures as well as economic strangulation and negative growth; and widening income inequality and rising levels of poverty, leading to social and political instability in the midst of bountiful income-producing resources.

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The often spectacular economic failure of these countries, and the accompanying losses to industrialized countries that had extended credit based on the natural resources, has led to a concerted push to recognize and enforce private property rights in the developing world. If successful, private markets for trading the property (e.g., land and oil rights) would be created without the need for government intervention, and exploitation of any natural resource subject to a property rights regime would be done more efficiently since the owner of the rights would have the appropriate incentives. Governments often supplement private property regimes with selective legislation to cure possible defects. For example, in this case, if the owner of the oil rights is granted some form of monopoly, as is sometimes the case with property rights in natural resources, the government may impose price controls in order to protect consumers unable to switch to alternative providers. If the price established by the government makes it unprofitable for the rights owner to exploit the property, subsidies may be provided to balance the various interests of the property owner and the public. The government may also regulate the production process by establishing laws penalizing activities that create pollution or that otherwise harm the environment. Properly administered, these laws will compel property rights owners to adopt their own safeguards against pollution in order to maximize the level of permitted profits. §1:13 ----Market size While macroeconomic conditions are important in evaluating the long-term strength and direction of a particular foreign market, the bigger immediate concern for a U.S. company interested in exporting into a foreign country is making a realistic estimate of the size of the local market for its products. Market size has traditionally been measured by the total output of all producers or gross national product ("GNP"). Unfortunately, GNP may not fully reflect money available for purchases, since it underestimates the market size of the few higher income agriculture-intensive nations for consumer goods. A better indication may be per-capita income, or GNP divided by the number of people within the market, and income elasticity of demand. A change in the income of buyers will mean a change in the quantity of products bought. Individuals in countries with higher per-capita income spend a greater share of their income on non-necessities than do those in low per-capita income nations. Thus, consumers in these countries have more money for purchasing goods. As a result, the product or service of an American business may have a better chance of being bought where there is available cash. §1:14 --Political factors The political environment in a country is a particularly important factor for in-country managers and prospective foreign investors and is often a complex and controversial issue in developing countries. Among the factors to consider are stability, ideology, institutions and geopolitical relationships. Predictably, less developed countries tend to suffer from higher levels of instability in their political processes, less developed public and private institutions and excessive dependencies on a limited number of international linkages. The first two factors can significantly increase the so-called political risk to

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foreign investors, while the later issues may limit the supply and distribution channels available to foreign investors once they establish a base in the country. Examination of geopolitical relationships typically involves consideration of military and transnational issues, which are part of the overall political environment. As in the U.S., the current political environment in a country is heavily influenced by the type of government that is in place. For example, a democratic government will generally espouse freedom of expression and association, the rule of law, fundamental human rights and opportunities to participate in government. Other governmental types, such as authoritarian and military governments, typically have different agendas.

The political environment obviously has a large potential impact on public and private business organizations. For example, governments may establish industrial policies, including the scope of permitted foreign investment in the local economy, national development goals and priorities for the educational system in the country with respect to skills and training. In addition, the government, through its involvement in the policing and judicial aspects of the society, will determine the scope and strength of property rights and the degree of trust that organizations and individuals can have in enforcement of contract rights. Finally, the executive and legislative branches of the government will influence business conditions through the laws and regulations they promulgate. In fact, a number of country analysis methods combine political and legal factors; however, this publication treats law and regulation separately below. Changes in a country's political environment that reflect movement toward a freer and market-oriented society can be tracked through the transformation analysis discussed below. §1:15 ----Stability Political stability refers to the degree of predictability in government policies and the continuity of the main political actors in the country. In general, an unstable political environment is evidenced by authoritarian governments acting without regard to any democratic institutions and by frequent changes in the government. In contrast, a stable government is one in which the policies of the leaders are well defined and the system of elections and legislative actions is accepted and transparent. While instability is typically associated with developing countries, there are situations where the political situation in poorer countries has been relatively stable over the years. The risks associated with political instability are often cited as one of the primary reasons companies decide not to enter a new foreign market. Higher risk raises the required rate of return for companies and makes it difficult, even impossible, to create a long-term plan for market entry. An unstable political environment complicates the process of dealing with government officials, particularly since there is no guarantee that promises made by one officer or bureaucrat will be honored in the future. Moreover, sudden and substantial changes in the political system can lead to significant economic disruption in the country and abroad. For example, new governments may seek to nationalize specific industries, impose restrictions on repatriation of capital, confiscate property and void all prior contracts entered into by their predecessors.

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If a company is considering entering a foreign market with a history of relative instability, careful analysis should be made of the probability of changes over the planning period and the probable impact of those changes on the company itself. It may well be that the company's products and services are so unique or essential to the foreign market that a change in control will have little impact on the business model. Also, while the people in power may change, overriding policies and ideologies may remain substantially the same. §1:16 ----Ideology National ideology has been defined as the set of beliefs and assumptions about values that a country holds to justify and legitimize the actions and purpose of its institutions. The ideology of a country is shaped by a wide range of factors, including social attitudes and the historical foundation of its development and maturation. It has been argued that the economic success of a country can be predicted by analyzing the relationship between the country's prevailing ideology and the actual practices of its institutions. Each country, through its government, has its own ideological view of the role of the state and its relation to the marketplace and property rights. This national ideology will, in turn, influence the type of political system that exists in the country (i.e., capitalism, socialism, etc.) and the form and purpose of other institutions. While there is a good deal of ongoing debate regarding the proper role of the state in fostering economic growth and development, many countries continue to opt for heavy involvement of the state in the economy. These policies often reflect a distrust of market forces and serve as a tool to manage the role of outsiders in the domestic economy. Nationalism also plays a large part in the development of the political system and the business environment. Managers must identify the underlying ideological beliefs in any new target market and analyze how these beliefs will impact the role of the state in economic affairs and the hurdles confronting the company as it conducts its business activities. For example, if the state is concerned about foreign participation in the local economy, it is likely the government will impose restrictions on foreign investment, enact special regulations that increase the cost of doing business in the country for foreign companies, and establish procedures that afford local businesses preferred access to domestic markets and sources of credit and other resources. The ideological context for a country is often quite difficult to define and analyze. In general, ideology speaks to the core values of the country and common understandings as to how a society should be organized and the "rights" and "duties" of the members of the society. The decision made regarding ideology impacts the powers that reside in the key institutions and the way in which those institutions are expected to exercise those powers. For example, if the controlling ideology emphasizes equality, then one can expect to see government policies that emphasize freedom of opportunity and access. While this may seem laudable, firms from developed countries are often quite chagrined to see that some governments pursue equality by failing to recognize broad intellectual property rights out of fear that they may deprive society of access to ideas they believe should be open to use

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by all regardless of who made the original investment.

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§1:17 ----Institutions A country's ideology is defined by the activities of various institutions, including political parties, government agencies, courts, labor unions, agricultural cooperatives, universities and industry associations. In addition, politicians must be mindful of specific constituencies which, while not formally organized, tend to act in concert with respect to decisions relating to common areas of interest. Examples of influential constituencies might include the members of a particular ethnic group, aristocratic classes or groups of landowners. Accordingly, when evaluating the political situation in a new market, managers must identify the relevant institutions and political constituencies and the role each may play in the successful development of a company's business model. Obviously, government will always be one of the most, if not the most, important institutions in the country, and foreign parties need to carefully analyze the form or structure of government, the mechanisms designed to guide a transition of power from one leader to the next, the key power blocs and the extent of popular support for the current regime. However, it is also just as important to identify other methods for influencing policy, such as lobbyists, interest groups and family connections. Other institutions beyond the government will have a profound impact on the business environment in a particular country. First of all, foreign investors need to evaluate the core business-related sectors in the local economy, including banking and finance, transportation, real estate and construction. For example, management practices within the financial sectors can be an important indicator of the expected volatility of the domestic market. The investor should also look for any mechanisms that might impact competition, including cartels, informal understandings or interlocking directorates managed through banks. Other groups or activities that might rise to the level of an institution include farmer and agricultural workers and organized labor. Finally, religious institutions play a key role in many countries, particularly where there is a Catholic or Muslim majority. One of the characteristics of political instability is the weakness and unpredictability of key institutions. Generally, this is evidenced by technical weaknesses and inefficiencies within government bureaucracies, particularly a lack of independent authority to make decisions impacting business firms and markets. In many cases, government workers are underpaid and lack the necessary education and experience to make decisions required under applicable regulations. In addition, bureaucrats are often subject to conflicting political demands that tend to influence their independence. This is not uniformly true, however, as the economic development of countries such as Japan has been greatly assisted by the existence of a trained and respected bureaucracy that has functioned quite independently of day-to-day political events. In any event, managers must be mindful of the potential impact of weak institutions in a new target market. Probable inefficiencies and costly government decisions must be built


into the business model from the beginning, and government and institutional relations should be made a distinct function standing alongside, and collaborating with, marketing and production functions. While formation of relationships with specific bureaucrats in an unstable environment may be difficult, companies should always identify the key institutions and their leaders, and make an effort to understand their respective interests and goals. Such knowledge can be useful in negotiations and in anticipating events. §1:18 ----Geopolitical relationships

Government policies are also impacted by geopolitical relationships. For decades, the various alliances created in the context of the Cold War impacted global opportunities for companies looking for overseas markets. Colonial ties continued to influence countries even after the colonies achieved independence due to shared language, business practices and ongoing economic relationships. Regional economic unions, now common among industrialized and developing countries, are an increasingly important form of relationship that can impact barriers to entry. Of course, religious and cultural links are an important force toward collectivism in regions such as the Middle East. Finally, rivalries between neighboring countries may cause unforeseen and dramatic disruptions in the business and economic conditions confronting foreign investors. Managers must understand the key geopolitical relationships to which the target country is a party. In some cases, doing business in one country may provide a company with access to that country's geopolitical partners in ways that would not have been available had the company attempted to set up business directly in the partner countries. For example, a joint venture with a local partner may allow a company to market its goods under the umbrella of preferential trading arrangements negotiated by the host country. On the other hand, a cooling of relations between the company's own government and the government of the host country may drastically impair the investment and may even lead to seizure of assets and termination of business privileges. §1:19 --Legal factors Legal factors include the legal system of the country, which is influenced by the historical traditions that provide the foundation for creation and interpretation of laws and regulations within the country; the development of the “rule of law” in the particular country; the recognition, scope and enforcement of property rights; the efficiency and transparency of the country's judicial and administrative systems; and the level and impact of corruption. Also relevant to legal factors, yet covered as part of the institutional framework discussed below, are the details of the country's legal, regulatory and contracting systems. The “rule of law” has been consistently recognized as a fundamental human right and has been defined by the Secretary-General of the United Nations as: “a principle of governance in which all persons, institutions and entities, public and private, including the State itself, are accountable to laws that are publicly promulgated, equally enforced and independently adjudicated, and which are consistent with international human rights

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norms and standards. It requires, as well, measures to ensure adherence to the principles of supremacy of law, equality before the law, accountability to the law, fairness in the application of the law, separation of powers, participation in decision-making, legal certainty, avoidance of arbitrariness and procedural and legal transparency.”12 The United Nations also provides insight as to the elements of a national rule of law framework, which should include “a Constitution or its equivalent, as the highest law of the land; a clear and consistent legal framework, and implementation thereof; strong institutions of justice, governance, security and human rights that are well structured, financed, trained and equipped; transitional justice processes and mechanisms; and a public and civil society that contributes to strengthening the rule of law and holding public officials and institutions accountable.”13 The framework of laws and regulations that a country has created with respect to the definition, recognition, and enforcement of property rights is particularly important to prospective foreign investors. In many cases, particularly in the case of natural resources, developing countries have failed to define property rights and establishing the institutional structures that would normally be used to monitor and enforce such rights. For example, countries such as Mexico and Nigeria have in the past become quite dependent on income from oil and other natural resources. While this has resulted in significant revenues for the government in those countries, and sometimes created opportunities for large infrastructure projects, many economists believe that the failure to implement a property rights system for the use and enjoyment of these natural resources has caused a variety of serious problems, including inefficiency in the management of the resources, including overexploitation; looting of oil revenues by elite groups in a position to exploit such opportunities; damage to the environment, including high levels of pollution; corrosion of financial and capital infrastructures as well as economic strangulation and negative growth; and widening income inequality and rising levels of poverty, leading to social and political instability in the midst of bountiful incomeproducing resources. The often spectacular economic failure of these countries, and the accompanying losses to industrialized countries that had extended credit based on the natural resources, has led to a concerted push to recognize and enforce private property rights in the developing world. If successful, private markets for trading the property (e.g., land and oil rights) would be created without the need for government intervention and exploitation of any natural resource subject to a property rights regime would be done more efficiently since the owner of the rights would have the appropriate incentives. Governments often supplement private property regimes with selective legislation to cure possible defects. For example, in this case, if the owner of the oil rights is granted some form of monopoly, as is sometimes the case with property rights in natural resources, the government may impose price controls in order to protect consumers unable to switch to alternative providers. If the price established by the government makes it unprofitable for 12

Report of the Secretary-General, The Rule of Law and Transitional Justice in Conflict and Post-Conflict Societies (2004), available at http://www.unrol.org/doc.aspx?n=2004%20report.pdf. 13 United Nations Rule of Law, “What is the Rule of Law?,” available at http://www.unrol.org/article.aspx?article_id=3.

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the rights owner to exploit the property, subsidies may be provided to balance the various interests of the property owner and the public. The government may also regulate the production process by establishing laws penalizing activities that create pollution or that otherwise harm the environment. Properly administered, these laws will compel property rights owners to adopt their own safeguards against pollution in order to maximize the level of permitted profits. Another area of controversy for developing countries has been recognition and enforcement of intellectual property rights, a subject that has long been sensitive given the need for developing countries to gain access to technology originally created in industrialized nations.14 The judicial system is an essential element of the “rule of law” and over time a consensus has begun to arise with respect to the key principles and rules for “good governance” of a national judicial system. For example, Solum has argued that “equity and the rule of law” requires that arbitrary decisions by government officials must not serve as the basis for legal verdicts; government officials must not perceive themselves as being above the law; the law must be known to the public through clear methods of promulgation; legal rules must be stated in general terms and not aimed at particular individuals or groups; similar cases must be treated in an equivalent manner; procedures for determining must be fair and orderly; and actions required and forbidden by the “rule of law” must be easy for citizens to identify.15 Court et al. identified five key values associated with the rule of law: equal protection under the law and access to justice, due process and procedural fairness, judicial autonomy, incorporation of international human rights norms and availability of informal non-judicial mechanisms for settling disputes.16 The scope and content of administrative regulation in a country can substantially impact business activities by creating an “administrative burden” that exceeds the normal and routine costs of administering any business. This so-called “administrative burden” includes the time and financial expense associated with complying with government information requirements, including completion of necessary reports and the effort required to compile the information necessary to fully comply with the reporting requirements. In general, the administrative burden created by any government can be divided into two components. The first component includes laws and regulations that apply to all businesses, regardless of their size or area of business activity, and include taxation, financial statement preparation, environmental laws and regulations pertaining to imports and exports. The second component applies only to those businesses with employees and includes obligations with respect to payroll taxes, social security and workplace conditions. Calibrating the administrative burdens of doing business in a 14

The dilemma for policymakers in developing countries has been succinctly summarized as follows: “Policymakers in Africa appear to be caught in the middle between two competing positions. On the one hand, they are facing pressure to fast-forward technological development and protect foreign investors and foreign investment by strengthening IP protection and enforcement in the continent and, on the other hand, they are met with pressure to promote sustainable development, preserve the public interest, and safeguard basic human rights.” U. Ofodile, “Africa's Intellectual Property Conundrum: Any Way Forward?,” ABA International Law Section: International Law News (2012), 18. 15 L. Solum, “Equity and the Rule of Law,” in Ian Shapiro (ed.) The Rule of Law 1994), 120-148. 16 J. Court, G. Hyden and K. Mease, World Governance Survey Discussion Paper 9, “The Judiciary and Governance” in Developing Countries, 16 (May 2003), 11-12.

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foreign country is obviously important when establishing a branch office or subsidiary; however, it can also impact other business relationships to the extent that it impedes the ability of local partners to perform their obligations in a timely fashion. Administrative burdens associated with launching new businesses (e.g., the time and resources necessary to obtain permits and licenses required for a new company to commence operations) have also been cited as determinative factors in the creation and growth of an entrepreneurial environment in developing countries.

Corruption includes the extent to which it is perceived as being necessary to provide bribes and other favors to government officials in order to secure a business advantage or even just overcome a basic hurdle to conducting business (e.g., a permit or license). Corruption also includes as an assessment of the prevalence of insider dealing and conflicts of interest that might impact a company's efforts in bidding on contracts. The potential hazards of corruption are, unfortunately, still a significant factor in many countries. It remains common for local officials, many of whom are unpaid and overworked, to expect some sort of payment in order to grease the wheels for approvals or services required by companies. Influence-based payments at higher levels are also an issue; however, these transactions are now often subject to local laws prohibiting bribes. While these regulations were adopted at the behest of industrialized countries, there are still significant enforcement problems in some nations. In any event, managers must be prepared to deal with corruption issues to ensure that it does not muddy governmentbusiness relations. Progress regarding reducing the adverse impact of corruption is measured as part of the transformation analysis discussed below. §1:20 --Cultural factors Culture can be defined as the set of shared values, attitudes, and behaviors that characterize and guide a group of people and distinguish members of that group from those of another. Cultural factors are quite diverse and broad and might include social structure and dynamics, time orientation, notions regarding human nature, religion, gender roles and language. Of all the environmental factors to be considered by managers looking to enter a new foreign market, cultural factors are often most difficult to evaluate. The impact of some of the factors described below will vary significantly from country to country, and changes may occur at different speeds as countries develop economically and socially. As a general rule, managers looking to set up business in a developing country will be confronted with a relatively rigid social structure and strong religious influences, as well as stratified roles for men and women and a diverse pool of language and communication methods. However, while these characteristics may apply for larger groups, specific individuals may have their own views and habits that should not be overlooked in day-to-day interactions. There are several different ways to define and analyze cultural differences. One method is referred to as the "conceptual approach" and is based on classifications derived from sociological or anthropological definitions of culture. Suggested categories for studying cultural aspects of a group include sense of self and space, communication and language, dress and appearance, time and time awareness, relationships, values and norms, beliefs

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and attitudes, mental processes and learning, work habits and practices, and food and feeding habits. Another method is referred to as the "systems approach" and relies on observation and analysis of different systems of organization and expression in a society. For example, the analysis may cover kinship, educational, economic, religious, associational, health, recreational, status, legal, artistic expression, and linguistic systems. Finally, the "theoretical" approach looks at how a society addresses certain general, and universally shared, problems that need to be solved by any group, such as relation to authority, sense of self, and ways of dealing with conflicts. Scholars adopting this approach believe cultural variations can be identified with respect to the degree of integration of individuals within groups, differences in the social roles of women versus men, ways of dealing with inequality, the degree of tolerance for the unknown, and tradeoffs between long-term and short-term gratification of needs. §1:21 ----Social structure and dynamics An analysis of social structure and dynamics concerns itself with the nature of relationships and interactions within a society. There are several dimensions to this analysis, including attitudes towards others, the structure of relationships, and the dominant style of decision-making in the society. It is now common to define attitudes towards others on a continuum ranging from individualism on the one end to collectivism on the other end. As the name implies, an individualistic group or society, such as the U.S., will place high value on independence and self-reliance. In contrast, a collective group, which is commonly found in many Asian countries and throughout Africa, will discourage independent behavior in favor of the responsibilities of each member to a specific group, including family, ethnic group, business organization or country. In countries where collectivism is the dominant feature, group norms, such as those based on kinship, are more important than the national community and may become the basis for defining the rights of individuals and groups, inheritance and succession. The structure of relationships can range from hierarchical to egalitarian. A hierarchical, or vertical, structure concentrates authority at the top in a single person or a relatively small group of people, while an egalitarian structure attempts to distribute authority horizontally throughout the group or organization. Finally, decision-making styles also address the procedure for setting direction for the group or organization. At one extreme is the autocratic style in which decisions will be made unilaterally without formal consultation with others. At the other extreme, a group or organization may use a participatory style that includes a number of parties as part of the deliberative process. A good deal of research has been conducted on the social structure and dynamics in various foreign countries. In general, many developing countries tend to be most receptive to group structures that emphasize hierarchical, authoritarian and paternalistic relationships. In addition, these countries generally favor collectivism over individualism and place a high value on loyalty to the group. This information can be essential to managers attempting to design the appropriate organizational structure and decisionmaking processes in a new foreign market. An understanding of prevailing norms relating to social structure is also important in predicting how local managers and workers will respond to various directives and incentives. Another important element to evaluate is the

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manner in which social groups may be defined and segmented. In many cases, workers have much stronger ties to family, ethnic, racial, religious and tribal groups than they do to their companies and their co-workers. In fact, family ties are often the basis for the formation of larger "business groups," which are often significant business organizations in many countries. In addition, important information often passes more quickly through kinship networks than through formal business organizations.

Social structure can have an importance impact on the prevailing management culture in a particular region of country. For example, the traditional managerial style in Africa has been characterized as "paternalistic-authoritarian." Following the dominant cultural beliefs, great emphasis is placed on age and respect for the wisdom that accrues from the aging process. As a result, younger workers are generally expected to submit to the will of their elders, which tends to lead to an authoritarian management structure. In the public domain, national and local governmental bodies, generally dominated by older politicians, are seen as knowing what is best for the people and assume a paternalistic role that allows the government to act freely and without challenge in matters relating to the economy. Unfortunately, this situation is not conducive for management development and the emergence of new leadership and often means entrepreneurial talents are suppressed in favor of bureaucratic risk-aversive administration based on absolute obedience. In fact, age is often the primary factor for advancement in many African countries, and it is uncommon to find younger people in senior management positions. Also, following the dominant authoritarian-paternalistic management style, top management tends to exercise substantial control over appointments that might normally be made by a human resource administration structure. It is common to categorize the social structure of a country by reference to a measure of "power distance," defined as the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally. For example, Africa has a high power distance index, with power generally allocated on the basis of age and social status. Subordinates are highly dependent on their superiors, and communications within organizational hierarchies tend to be almost exclusively downward. Organizations have rigid hierarchies, and decisions are generally made only by senior managers. §1:22 ----Time orientation Differences in time and space orientation between members of different cultures can have significant, if unexpected, effects on business relationships. For example, it is accepted that managers in the U.S. are extremely time-conscious and view time as a limited resource that must be managed with care. In contrast, managers in other parts of the world consider time to be an abundant resource and tend to place less emphasis on punctuality and strict deadlines in business contracts. Different attitudes toward time can greatly complicate agreements regarding scheduling and can be especially problematic for managers who are obligated to deliver goods produced in one foreign market to other parts of the company's organization for consumption and/or distribution. Another interesting byproduct of the differences in time orientation is the impact on the planning

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process so familiar to U.S. managers. In Africa, for example, most people see the future as large, unpredictable and out of their hands; and, as a result, African managers tend to dwell on administering the present as opposed to planning for a future and attempting to establish long-term organizational objectives. §1:23 ----Human nature

Societies tend to have different views of the basic nature of human beings, as well as the changeability of their nature. These beliefs often flow from religious values and can have significant importance to managers. For example, if the dominant belief in a society is that humans are basically good and can be trusted, it is likely management can use looser controls and relatively low levels of supervision in the business context. If, on the other hand, humans are seen as largely untrustworthy, the organization will usually be based on autocratic procedures and tight supervision and control mechanisms. Views about human nature can also influence the use of training in the business organization. If it is believed that human nature can be changed, management is more likely to implement educational and personal development programs and treat employee mistakes as an opportunity for improvement rather than discipline. §1:24 ----Religion In most developing countries, and some industrialized nations, religion is a predominant factor that influences all aspects of political, social and economic life. Religion can be an important determinant of social values regarding social structures and human nature. Moreover, there is often little real separation between church and state in developing countries, and religious institutions can be important players in the political environment. The impact of religious values and practices can be felt throughout the workplace and in the local markets. For example, managers must be mindful of potential tension and conflicts between employees from different religious groups and will also need to be prepared to structure work schedules around local religious holidays and practices. In addition, business practices generally accepted in the manager's home country need to be scrutinized against local notions of "corruption" and unethical behavior. Managers may need to make significant changes in their business-related entertainment methods. Religion should also be taken into account in gauging consumer preferences, and establishing promotional campaigns, in local markets. For example, certain types of products, such as alcohol, are essentially forbidden in Islamic countries. In other cases, companies may be able to take advantage of demand for products based on specific religious practices (e.g., specially prepared foods). §1:25 ----Familial networks and personal relationships Consideration should be given to the impact familial networks and personal relationships might have on business activities in the foreign country. For example, in Africa, as well as in other parts of the world, extended familial networks are quite important and

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generally include a large number of individuals. Individuals are expected to show allegiance to their families, and persons often become dependent on their families for employment and other support. The extended family system also impacts organization of business enterprises in many countries, as evidenced by a preference in large businesses for creating subsidiaries for each male child in the family. Personal relationships are also very important in Africa. A great deal of emphasis is placed on building personal connections, trust and friendships, and such relationships are generally a condition to successful business arrangements in Africa. All of this explains why recruitment and hiring policies in Africa are still driven by family affiliation and friendships as opposed to any objective assessment of the skills and qualifications of applicants. Studies have found that local firms tend to favor recruits that are either related or otherwise affiliated with current employees or who are part of the same tribe, village or region. While this pattern is certainly consistent with the preference of business owners to surround themselves with people they believe can be trusted, firms inevitably hire people who lack the qualifications necessary to fill positions and thus impair the performance of the company. §1:26 ----Gender roles The role of women in society as a whole, and in the workplace and marketplace specifically, has become a subject of great interest. In developing countries, women are generally denied access to education and other productive resources and are prevented by law, religion and custom from owning valuable properties and assets or obtaining credit or employment that would free them from their traditional duties of maintaining the household. In Africa, for example, societies are largely male-dominated and "macho" behavior by managers in Nigeria and elsewhere is generally accepted and understood. Researchers have also noted a high level of discrimination against women in African business; women are considered inferior to men and widespread discrimination exists with respect to recruitment and promotion in the business sector.

Surely, but slowly, the role of women in the marketplace is changing throughout the world. Female participation in the workplace is increasing; however, women are still lacking opportunities to pursue managerial positions in many countries. While young girls are now being allowed into schools, the traditional role of the woman as the primary provider of childcare and housekeeping is still prevalent. Managers looking to tap into this potential labor force must be mindful of the gender-based division of responsibilities that applies in the country and the disruption in the workplace that might be caused by increasing the number of women and/or providing them with managerial roles. §1:27 ----Education Education refers to the formal systems established by a country to provide schooling for its citizens and provide them with the basic social skills necessary to be productive members of society. Countries almost universally establish elementary and secondary schools; however, significant differences can still be found with respect to ensuring that all citizens are able to take advantage of these opportunities. As countries develop, some minimum period of education is a compulsory requirement. Unfortunately, the resources

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available at each school are not always uniform. In addition, access to higher education, and the opportunities that may follow from degrees in disciplines of interest to foreign investors and local entrepreneurs, is still often very limited in many parts of the world. All in all, however, literacy rates have increased steadily around the world over the last decades and the skills of foreign students in mathematics and science often equal or exceed those of their counterparts in the U.S. Formal education is also an important factor in transforming the way that citizens of the country define and view the foundations of their values and the role of the state. For example, it has been noted that reform of the education system is an essential strategy to nurture the ideas of liberty, democracy, and constitutionalism in nation states that are emerging from recent periods of socialist and communist domination.

Prospective U.S. investors will certainly be interested in evaluating the level of education in a foreign market to determine whether it is adequate to support interest in the products they are looking to manufacture and/or distribute locally. For example, countries with a highly skilled workforce in a particular area of technology or science, such as software engineering, will be good candidates for outsourcing of complex product development activities. The education system can also be an indicator of the actual and potential managerial and entrepreneurial skills in the foreign market. For example, local schools can take steps to disseminate information and knowledge about business ownership and management, including general skills in key functional areas such as marketing, finance, product development, manufacturing, law and accounting. Schools may also offer more specific training in areas such as business plan preparation and presentation. In addition to coursework, colleges and universities may, often at the behest of the government, participate in outreach programs that provide information and support to entrepreneurs and build alliances with industry partners. While high levels of formal education are generally thought to be positive indicators of development and economic potential, it is still important to analyze the impact formal education has on social hierarchies within the country. For example, distinctions are often made between knowledge and wisdom in Africa. Knowledge is considered to be the skills and ideas learned through formal or organized programs, such as those conducted by schools, churches or social clubs. In contrast, wisdom cannot be obtained in the same way as knowledge and comes instead from natural and inborn factors, as well as from the experiences that naturally come with age. Therefore, a person who is highly educated may have a good deal of knowledge; however, he or she has not necessarily acquired the wisdom that is so valued and revered in African society. §1:28 ----Language Perhaps the most obvious area of cultural difference among countries is the use of language. Language is the cultural medium of communications and includes not only the spoken and written word, but also the style of expression, the use of context and the accompanying nonverbal signaling (i.e., "body language"). Language can be a particular challenge in many countries. For example, a country such as India has over a dozen major languages and thousands of different dialects. Africa has hundreds of different

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tribal languages, at least 50 of which are used by significantly large groups in excess of one million people. Language diversity creates challenges that run across the board for managers entering a new foreign market. In addition to making sure internal communications within the business organization, including from affiliated companies outside the country, are accurate and non-offensive, managers must be sure promotional and advertising strategies are constructed in a way that is sensitive to local understandings. §1:29 --Demographic factors

Demographic factors include population growth, age structure and health factors, and migratory trends. Each of these factors can influence the pool of available labor and the strategies that should be followed in marketing and promotion of goods and services. Studies have uncovered very clear relationships between demographic factors and the overall level of economic development. For example, population growth rates tend to decrease substantially as a country develops, and lesser-developed countries will generally have a younger population and a shorter life expectancy. Migration to urban areas increases along with industrialization, and highly developed countries tend to have a greater proportion of their populations in urban areas. §1:30 ----Population growth It is clear that the rate of population growth in developing countries far exceeds the rate of growth in industrialized countries. A rapidly growing population can create real opportunities for companies in mature markets to tap into a new group of customers. However, it is not clear that demand correlates with population growth since per-capita income tends to grow less quickly than the number of consumers. Accordingly, it is likely the demand for basic consumer goods will be healthier in a high population growth environment than the demand for luxury goods. High population growth may also be a harbinger of social and political unrest if the country lacks the infrastructure and financial resources to house and educate the new citizens. Resultant instability may create additional business risks for foreign investors. §1:31 ----Age structure and life expectancy One of the most striking demographic factors in developing countries is the impact of improved medical care on the age structure of the population. In most cases, the rate of infant mortality has declined, and this trend, coupled with continued high fertility rates and a general preference for continued growth, has caused age structures in those areas to be dominated by young people. Since a large number of females will be entering the childbearing years simultaneously, this trend toward youth is expected to continue for several decades. The flip side of this equation in developing countries is that improvements in health treatment have yet to have significant positive effects on life expectancies. A number of developing countries continue to experience high rates of illness due to poor sanitary

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conditions and nutrition, a shortage of medical facilities, and the failure to disseminate health information.

The combination of these factors has a significant impact on all aspects of conducting business in a new foreign market. From the perspective of the available workforce, it means most of the surplus labor will be young and inexperienced; however, there is the possibility that younger workers will be more flexible, attentive and motivated than their elders will. However, poor health conditions increase the likelihood workers will be ill and may mean turnover rates in the workforce will be quite high. This will lead to higher production costs due to the need to constantly train new workers and fill gaps in the manufacturing process because of the unavailability of sick employees. It is possible that foreign companies can forge a relative competitive advantage by offering health care to their employees, although the cost of such services may be prohibitive given the lack of medical personnel and facilities in many developing countries. The age structure will also have a strong impact on product development and promotional strategies. For example, it can be assumed that particular goods, such as baby products, educational items, cosmetics, athletic equipment and certain fashion items, will enjoy good success in the local market provided they are reasonably priced. However, it is important not to overestimate the amount of disposable income in the hands of younger workers given that many will need to support large extended families. §1:32 ----Migratory trends As countries develop and production shifts from agriculture to manufacturing and services, migration occurs from rural to urban areas and there is significant growth in the country's urban centers. Increased urbanization can cause a number of problems for government planners, since developing countries generally lack the financial, human and institutional resources to build the infrastructure needed to support a metropolitan area. As a result, it is common to find that large cities in developing countries are overwhelmed with poor housing and sanitation, traffic congestion, power shortages and a lack of basic police and health services. These infrastructure problems can increase the cost of doing business for foreign firms looking to locate in urban areas. Urban migration and growth of cities may have some valuable benefits for marketing and promotion of new products and services in that consumers are now centered in a smaller geographic area and access problems may be eased. Of course, this benefit depends on the communication tools available in the city, including newspapers, radio and television. In addition, foreign companies may be able to market products that appeal to urban purchasers and provide solutions to their unique problems. Another migration-related issue is the possibility that well-educated workers may choose to leave the country to seek greener pastures in other economies. This so-called "brain drain" can be a significant problem in countries where entrepreneurial options are scarce and opportunities for advancement in multinational corporations or large family-owned business groups are minimal. Managers of foreign companies should monitor

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immigration trends and policies as part of their analysis of the quality of managerial and scientific talent. §1:33 --Operational and security factors

Some analysts prefer to supplement the inventory of the traditional factors described above with an assessment of certain elements that more directly impact the ability of the company to operate effectively and safely in the foreign market. Some of the factors considered with respect to "operations" and "security" are similar to those referred to elsewhere; however, this part of the analysis provides an opportunity to move from theory to practice by testing whether the company's particular business plans for the foreign market will be successful. For example, one of the operational factors is "attitudes to foreign investment," an issue previously discussed with respect to "legal factors." In the context of operations, however, the analyst is looking to create a profile of the challenges the company, as a foreign investor, would need to overcome to establish a new business. As such, foreign investment regulations would be just one issue; the analysis must also address attitudes of local unions and the positions taken by politicians and other opinion makers in the country with respect to participation by foreign companies in the local economy. With respect to labor conditions and employment laws and regulations, the key issue with this factor is whether a company can recruit a competent team of local workers at competitive prices with an acceptable level of administrative burden under the country's labor laws. While there are many specific factors that could be considered when assessing the operational environment for a company in a specific market, the following items are basic and should always be included: attitudes toward foreign investment, which includes not only the content and enforcement of foreign investment regulations, but also factors such as tax and employment laws and regulations and whether or not local politicians and the community as a whole welcomes and accepts foreign ownership and managers; labor conditions and employment laws, which includes the education and skill level of the local labor force, wages, attitude and strength of local unions and the scope and burden of labor-related laws and regulations; bureaucracy, which includes efficiency and fairness of officials within national and local governments in handling matters that impact a company's ability to conduct business; transparency, which includes an assessment of openness and accountability in the manner in which laws and regulations are administered and enforced in the foreign country; corruption, which has been discussed above; and, finally, infrastructure and environmental conditions, both of which have also been discussed above. The assessment of security factors in a particular country focuses on just how safe it will be to conduct business in the country. Since foreign investors will understandably be concerned about whether it is safe to transfer its employees and other resources to a new foreign market, it will be important to evaluate such things as crime levels, the existence and impact of “organized crime,” the likelihood of extortion and kidnapping, the levels of political violence and ethnic unrest and, of course, the possibility of terrorism. In some cases, consideration must also be given to the possibility that tensions with neighboring

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countries may lead to war or disruptions in diplomatic relations that may impact a company's plans to export goods to, or import materials from, other countries located in the same region. §1:34 --Transformation analysis

The database and commentaries compiled as part of the BTI Transformational Index project is particularly useful with respect to developing countries and facilitates “transformation analysis”, which focuses on a country’s development and transformation processes toward democracy and a market economy.” Compiled with the help of country experts and updated every two years, the Transformation Index (“BTI”) provides a ranking that combines qualitative, in-depth evaluations with quantitative scores for the performance of 128 developing and transition countries. Relying on country assessments based on 17 criteria, the BTI generates two indices of transformation processes and political management: the Status Index, with two analytic dimensions assessing the state of political and economic transformation, locates the 128 countries on the path toward democracy under the rule of law and a market economy anchored in principles of social justice17; and the Management Index assesses the quality of governance, which encompasses the acumen with which decision makers steer political processes 18. The individual questions on the state of political transformation are also used by the BTI in determining whether a country is classified as a “democracy” or “autocracy”, a determination that takes into account six key factors, including the existence of free and fair elections, effective power to govern, political and civil liberties, freedom of expression, separation of powers and recognition of civil rights. Country reports are available online through the BTI website. §1:35 Institutional framework Firms and entrepreneurs must not only cope with their external environment, and the various factors in that environment discussed above, but must also align their activities with the institutional framework for economics and business that has been created within their country. The organization of the discussion of the institutional framework draws heavily on the work of Whitley and others interested in so-called “national business systems”.19 While complicated definitions of a “business system” are available it is 17

The criteria for analyzing the state of political transformation include stateness, political participation, rule of law, stability of democratic institutions and political and social integration. The criteria for analyzing the state of economic transformation include the level of socio-economic development, organization of the market and competition, currency and price stability, private property rights, welfare regime, economic performance and sustainability. 18 The criteria used in compiling the Management Index include the level of difficulty, steering capability, resource efficiency, consensus-building and international cooperation. 19 Whitley has written extensively on “national business systems”; however, the introduction provided herein is based primarily on R. Whitley, “How National Are Business Systems? The Role of Different State Types and Complementary Institutions in Constructing Homogenous Systems of Economic Coordination and Control”, Paper presented to the Workshop on National Business Systems in the New Global Context, Oslo, Norway, May 2003. See also R. Whitley, Divergent Capitalisms: The social structuring and change of business systems (Oxford: Oxford University Press, 1999); and R. Whitley, "How and Why are

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sufficient to acknowledge that “business systems are characterized and differentiated by at least the following constituent features: the different ways of organizing and coordinating transactions, where what is different across different systems is the mix of hierarchical and market organized transactions; different types and levels of specialization (“preference for particular kinds of activities and skills”); the degree of separation between ownership and control, that is to say, the mode of corporate governance; and the organizing principles that influence firm routines and capabilities through their influence on authority relations, organizational structures, relations between the professions, etc.”.20 Diversity of business systems among countries occurs because they are embedded in the institutional context of their countries.

A national business system assumes that the country or nation, referred to herein as the “state”, must be the primary geopolitical unit for studying the operation of firms since it is “the primary unit of political competition and mobilization” and this means that “individual and collective actors usually organize themselves at the national level to compete for state resources and legitimacy”.21 The state establishes the “rules of the game” for competition, market entry and exit, property rights, contract rights and dispute resolution and establishes policies that influence the organization and control of capital and labor markets and individual firms. Certainly firms may be influenced by the actions of local and regional governments, as well as the influence of international institutions (e.g., the European Union in the case of firms operating therein); however, it seems generally true that the national government—the executive, the legislature, the highest court and “federal” agencies—plays the primary role. As with so many other economic issues there has been considerable debate among economists as to whether there is, or should be, a single universal model of economic organization for a given matrix of products, technologies and market structures that is efficient. While some economists believe this to be the case, Whitley is among those who have effectively argued that there cannot be a single universal model of economic organization given the successes of a wide range of diverse business systems with their roots around the world in countries such as Japan, South Korea, Taiwan, Hong Kong, Denmark, Holland, Germany and Finland.22 Whitley suggested that there are at least four ideal, and significantly different, types of states with complementary institutions that he believed could be expected to standardize contrasting varieties of firm governance structures, authority sharing and organizational capabilities across sectors, regions and firm sizes. Whitley explained the aim of research in business systems as an attempt “to provide a framework for comparing and contrasting the different ways of organizing International Firms Different?" in G. Morgan, P. Kristensen and R. Whitley (Eds) The Multinational Firm (Oxford: Oxford University Press, 2001), 27-68. 20 N. Foss, Understanding Business Systems: An Essay on the Economics and Sociology of Economic Organization (Copenhagen Business School: Department of Industrial Economics and Strategy Working Paper 97-6, 1997), 8. 21 P. Peverelli, National Business System Project, http://personal.vu.nl/p.j.peverelli/nbs/page1.html. 22 N. Foss, Understanding Business Systems: An Essay on the Economics and Sociology of Economic Organization (Copenhagen Business School: Department of Industrial Economics and Strategy Working Paper 97-6, 1997), 3-4 (citing R. Whitley, Business Systems in East Asia (London: SAGE, 1992) and R. Whitley, European Business Systems (London: SAGE, 1992)).

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economic activities which have become established in different institutional contexts and to suggest how some key characteristics are interrelated in particular kinds of business systems”.23 In establishing his topography of business systems Whitley noted differences among countries with respect to “the extent of active state involvement in coordinating and steering economic development” 24 as well as with respect to active encouragement of business associations and active encouragement of labor associations and organization of representation. He commented that “the more active and authoritative are states in guiding such development over the medium to long term, the more likely they will construct a nationally distinctive institutional framework for governing economic actors and their interrelationships that should encourage particular kinds of firms and collective capabilities to become established and reproduced.”25

At one end of his continuum, Whitley placed “regulatory states”, which he said were “primarily concerned to establish clear ‘rules of the competitive game’ within which economic actors are free to pursue their objectives as they wish.”26 The active involvement of a regulatory state in economic development is low and such states give little more than limited active encouragement of business and labor associations and organization of representation. The regulatory state’s main activities are “[developing] nationally standardized legal norms specifying property rights, prohibiting certain forms of market behavior and [establishing] controls over financial markets” and “economic decision-making and coordination are decentralized and variable” in regulatory states. Whitley commented that “[e]mployers and unions, as well as skill formation systems, accordingly frequently vary in their organizing principles and how they are integrated into national associations . . . [and] [o]wners' interests are also variously organized and their connections to firms are essentially market-based”.27 The United States is probably the most typical example of a regulatory state. The other three forms of states identified by Whitley were classified as “developmental” and assumed “a more active role in coordinating economic development, often engaging directly in sectoral and firm development by structuring incentives, providing financial and other forms of support and sanctioning failure of specific firms and groups”.28 Whitley commented that developmental states often actually organized markets “to support entry into new industries and encourage specific companies to invest in particular technologies”. The overall impact of these types of policies was to “discourage a strong emphasis on arm’s length market regulation at the expense of industrial development” and to provide preferences for larger firms or strong associations of small- and medium-

R. Whitley, “Dominant Forms of Economic Organization in Market Economies,” Organization Studies, 15 (1994), 153-182, 154. 24 R. Whitley, “How National Are Business Systems? The Role of Different State Types and Complementary Institutions in Constructing Homogenous Systems of Economic Coordination and Control”, Paper presented to the Workshop on National Business Systems in the New Global Context, Oslo, Norway, May 2003, 6. 25 Id.. 26 Id. 27 Id. 28 Id.

23

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sized enterprises who could “credibly cooperate with the state”.29 In addition, developmental states do not leave it to individual firms, unions and other groups to organize as they wish, as is the case with regulatory states, but instead implement initiatives to standardize interest group representation as a means for easing the tasks associated with the state’s role as an overall coordinator. However, there are differences in how developmental states approach standardization of interest group representation and, in fact, the three types of developmental states in Whitley’s model can be distinguished primarily by the degree to which independent associations of interest groups are involved in economic policy development and implementation. He briefly described each of these states as follows30:   

In “dominant developmental states”, such as Korea, industry associations and similar groups generally function as agents of the state rather than as autonomous representations of distinct interests.31 In “business corporatist states”, the government works closely with associations of large companies (e.g., the keidanren in Japan) who control competition and rarely seeks or encourages involvement of labor unions in policy making. In “inclusive corporatist states”, such as Germany, the government not only works closely with associations of large companies to but also actively mobilizes labor unions at the national level to assist with distributional issues and management of incomes policies.

Whitley notes that with respect to both types of “corporatist states”, the goal of the government in encouraging active involvement of industry associations, be they firms or workers, is “to encourage their standardization as state agencies seek predictable and reliable partners for achieving their development goals”.32 Whitley’s main argument was that the four types of states that he identified and described could be distinguished by their different approaches to the regulation and management of capital and labor markets and the manner in which they institutionalized their political cultures and legal systems. As a result, states could and did “encourage contrasting governance structures, patterns of authority sharing and organizational capabilities amongst leading firms in [their] national economies”.33 In addition, each state type represented a different approach with respect to standardization of interest group formation, labor relations and skill formation systems. All in all, Whitley’s four states

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Id. at 7. Id. 31 Some states refuse to support the establishment of independent associations out of fear that they might challenge decisions of the state and/or the state’s direct links with owners and top managers; however, other states do support some degree of autonomy for intermediary associations by delegating some powers to them and/or granting them monopolies in dealing with certain state agencies. 32 R. Whitley, “How National Are Business Systems? The Role of Different State Types and Complementary Institutions in Constructing Homogenous Systems of Economic Coordination and Control”, Paper presented to the Workshop on National Business Systems in the New Global Context, Oslo, Norway, May 2003, 8. 33 Id. 30

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each represented “nationally distinctive institutional regimes governing economic activities”—the so-called “business systems”.

For each of his “state types”, Whitley provided a description of their “key characteristics”, which have been summarized above (i.e., extent of active involvement in economic development; level of active encouragement of business associations and level of active encouragement of labor associations and organization of representation). In addition, he identified how each of the state types with differ with respect to their approach relating to several “complementary institutions”, which included prevalent norms governing subordination; reliability of legal system and formal institutions; strength of minority property rights; strength of arm’s length competition policies; market segmentation and entry constraints; standardization of interest group representation; standardization of labor relations and standardization of skill formation system. For example, while Whitley characterized the reliability of legal system and formal institutions, the strength of minority property rights and the strength of arm’s length competition policies in regulatory states as “considerable”, the description of the situation on those three dimensions for dominant developmental states was “varied”, “limited” and “limited”, respectively. Differences among the three types of developmental states were also noted; for example, with respect to standardization of skill formation system, which was predictably “low” in regulatory states, the developmental states were described as follows: dominant developmental (“varied”); business corporatist (“limited”); and inclusive corporatist (“considerable”). Prevalent norms governing subordination were contractual in regulatory states, paternalistic in dominant developmental and business corporatist states and communitarian in inclusive corporatist states, a reminder of the influence of societal culture on institutions.34 Whitley also described the “associated business system and firm characteristics” for each of the state types. The dimensions that he used included governance structures, inter-firm relations, employment relations and organizational capabilities.35 With respect to governance structures he compared and contrasted the state types with respect to fragmentation of large firm ownership—high in regulatory states and low or limited in the developing states; commitment of largest shareholders—low in regulatory states and considerable to high in the developing states; and strategic autonomy of large firms— considerable (within capital market constraints) in regulatory states, considerable (but limited by business partners and state) in business corporatist states, limited by state in dominant developmental states and some (but limited by business partners and employees) in inclusive corporatist states. Inter-firm relations was measured by the extent of authority sharing with other firms—limited to short-term alliances in the case of regulatory states; limited except for state-coordinated alliances in dominant developmental states; considerable amongst large firms and limited among SMEs in business corporatist states and considerable in inclusive corporatist states. Analysis of employment relations focused on authority sharing with skilled staff—varies between sectors and firm types in regulatory states, generally limited in dominant developmental states, some in larger firms in business corporatist states and considerable in most firms 34 35

Id. at 37. Id. at 38.

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in inclusive corporatist states; and long-term employer/employee commitments—low in regulatory states, some for managerial staff but otherwise limited in dominant developmental states, considerable in large firms but limited elsewhere in business corporatist states and considerable in most firms in inclusive corporatist states. Finally, organizational capabilities consisted of variability across sectors—considerable in regulatory and dominant developmental states and limited in the business and inclusive corporatist states; and prevalent types—coordinating, re-configurational in some firms in regulatory states, coordinating in state firms in dominant developmental states, coordinating and learning in large firms in business corporatist states and coordinating and learning in inclusive corporatist states.

Commentators have noted that Whitley’s model does provide researchers with “a unified set of criteria to compare national business systems and thus more accurately point out that certain technology, management practices, etc., are the product of a particular business system and predict or explain how their implementation in another business system can lead to problems”.36 In other words, the concept of a “national business system” can be useful in understanding how and why the institutional framework of a particular country evolved and in predicting the effectiveness of particular firm business strategies. However, critics have questioned the applicability of Whitley’s model to noncapitalist economies, such as China, even though it seems that the model can and should be used to analyze any national economy. Another concern has been that the underlying assumption of the model is that in order for countries to “develop” they must ultimately transition to the status of “regulatory state” and adopt the institutions associated with that state type such as complete transparency of firm ownership. It may be best, and indeed appropriate, to focus on each of the state types as alternative methods for organizing the national economy and avoid comparisons and argues about which whether one type is better than another, particularly since each type can be associated with countries that have been noticeably success in their economic activities. In fact, one researcher has argued that Whitley’s main contribution has been “[demonstrating] how such universal capitalist institutions as the financial systems, educational systems, traditions for state intervention, and industrial relations differ across nations” and went on to explain that “[this] means that the form and function of institutions do not represent any ‘most’ efficient solutions to coordination problems, but rather institutions are socially constructed and their functionality is relative within each business system”.37 The organization of the discussion of the institutional framework below does not strictly follow the criteria suggested by Whitley; however, it does embrace most of the dimensions that he used. The “role of the state”, which is determined by the political and bureaucratic elites within the country, includes the economic policies selected by the state and the degree to which the state is willing to decentralize economic power to private interests. Governments set national goals and objectives and then support them through foreign policies, fiscal and monetary policies, income distribution and maintenance 36

P. Peverelli, National Business System Project, http://personal.vu.nl/p.j.peverelli/nbs/page1.html. N. Foss, Understanding Business Systems: An Essay on the Economics and Sociology of Economic Organization (Copenhagen Business School: Department of Industrial Economics and Strategy Working Paper 97-6, 1997), 19 (citing P. Karnø, Only in Social Action! (Unpublished manuscript, 1996)). 37

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policies, foreign trade and investment policies, industrial policies, social and cultural policies and political policies. The dominant institutions relating to financial and labor markets, including human capital, are also important elements of national business systems. As to human capital, states obviously play a key role in skill development through support and oversight of educational systems and through development and enforcement of rules pertaining to the relationship between employers and employees (i.e., union activities and collective bargaining). Legal, regulatory and contracting systems represent attempts by the state to formalize and standardize the rights of participants in economic transactions, property rights and the rules of participation in markets. Ownership and governance includes both models for ownership and management of enterprises—including the distance between owners and managers and the responsibilities of both owners and managers—and the level of reliance on, and basis for forming, networks and alliances to manage risks and share resources. Businessgovernment relations describe the relationships between the state and industry associations that form the basis for distinguishing the various state types described above. Finally, the discussion of the media is concerned with the degree to which the media sector in a particular country performs certain key roles—providing accurate news and information to the public, facilitation of public debate and discussion and serving as a means for holding powerful elites accountable—and the extent to which the state is involved in regulation and restriction of content and access of its citizens to independent sources of news and other information. §1:36 --Role of the state The role of the national government, or the “state” as it sometimes referred to in the literature, will vary depending on the stage of economic development, historical factors and, as described in detail above, the specific form of national business system that applies in the particular country. For example, the state has long played a dominant role in business and economic affairs in Africa. During colonial times, public business enterprises were the major forms of business organization. Following independence, the state continued to exercise control in many countries where the ruling elite pursued socialist development policies. In other cases, the state's influence followed from the lack of private investment capital. Even when funds were available for private enterprises, governments often stepped in and a number of countries embarked on nationalization policies on the premise that private businesses would jeopardize their socialist agenda. Other governments adopted laws and regulations that allowed the state to assume majority control of joint ventures and indigenous businesses. As a result, the private sector failed to grow and develop in many African countries. While this situation is changing steadily around the world, many foreign governments continue to view the private sector with a fair amount of skepticism. States define and fulfill their roles in a variety of ways including the identification and announcement of specific national goals and objectives, the establishment of policies focused on taking the actions necessary to achieve the goals and objectives and, finally, monitoring progress on the plans against appropriate performance indicators. There remains much debate about whether or not it is possible to identify and describe

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the “appropriate” role for the central government to play in the development process.38 Proponents of a U.S.-style market economy with limited state intervention, the “regulatory state” in Whitley's model, have often imposed their will when conditions to financial assistance to developing countries have been prepared; however, the evidence is clear that the recipients of such assistance under those circumstances have generally been unable, or unwilling, to create the institutional framework desired by the donors. It seems clear that there are several alternatives that developing countries may follow when defining the “role of the state” and it may be that research in this area is best confined to identifying those alternatives and understanding how the state has become involved in the various elements that compose the institutional framework. §1:37 ----National goals and objectives Like businesses, countries generally have specific national goals or objectives that drive the various policies implemented by the government. A country may have many goals -some more real than others, some more important than others. Among the most common are autonomy, productivity, and equity. Autonomy means freedom from foreign domination and generally will be expressed through a country’s foreign investment regulations. Productivity refers to the skills and processes that can create wealth and increase the overall standard of living in the country. The need to enhance productivity often drives incentives for foreign investment, which sometimes puts the government at odds with concerns over foreign domination of the economy. Finally, the notion of equity includes questions surrounding distribution income and opportunity. Equity concerns can lead to substantial political uncertainty in a country, as well as to laws and regulations (e.g., required profit-sharing with employees) that impact the anticipated return of a particular business relationship. Many countries, particularly those focusing intensely on rapid development, have included specific goals and objectives and performance indicators in their official government planning documents and/or speeches or presentations made by high government officials. In some cases, countries have actually published multi-year economic plans that include explicit goals and targets. This was quite the common practice in Asia and India during the 1960s and 1970s. However, such plans must be viewed with caution since they often bear little relation to the actual political and economic processes at work in the country. While each set of national goals is obviously unique, it is generally useful to focus on the following categories: 

Economic growth, usually measured by reference to the compound growth rate of GNP, is generally a key long-term goal and should be tied to strategies for the encouragement of domestic and foreign investment.

For further discussion, see “Cross-Cultural Studies: A Library of Resources for Growth-Oriented Entrepreneurs” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org). 38

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

  


Governments adopt policies to raising national incomes and the standard of living, thereby increasing the level of consumption of domestic goods and services. Note that raising consumption can often create conflicts with the need to invest disposable income to achieve long-term economic growth. In most cases, governments also seek equitable distribution of economic opportunities and resources, which may require expansion of educational and other training programs and the use of income redistribution strategies. In addition to equitable distribution of existing opportunities, governments look to create new employment opportunities for their citizens, both as a method of furthering economic growth and as a basic social right. Governments are obligated to preserve national sovereignty by establishing national security strategies and developing control over access to essential natural resources.

An implicit additional goal for any ruling regime is the preservation of its own authority, a reality that often dominates some or all of the goals listed above. In addition to the national goals, governments often set sector-specific goals and supporting strategies. For example, it is common to find plans that deal directly with the development of agricultural, industry, education, housing, and health. The importance of each of these specific goals can be gauged by reference to the amount of resources that the government is willing to devote to the sector and the amount of time the government has invested in a sector or problem. If a goal has been a long-standing objective of the state, it tends to be more difficult to displace and become part of the overriding ideology of the country and its citizens. §1:38 ----National policies When looking at an investment opportunity in a foreign country, businesspersons must not only consider the country's goals and objectives but also the policies the government has selected to achieve its chosen targets. The process of policy selection involves a balancing of many public and private interests. The actual choices are subject to various constraints, including the resources available within the country, the structure of the government and other institutions, and political realities. Among the important policies that should be identified are foreign, which are typically broken out into three distinction policy orientations--territorial or political expansion, the “status quo,” or low profile/inward looking; fiscal and monetary (i.e., government spending and tax policies, money supply, interest rates and currency convertibility); income distribution and maintenance (e.g., wage and price controls, unemployment insurance and social security); foreign trade and investment (e.g., tariffs, incentives for local exports and regulation of foreign participation in the local economy); industrial; social and cultural; and political. Each of these policies should also be evaluated for consistency. Countries tend to lean toward one of three distinct foreign policy orientations: territorial or political expansion, the "status quo," or low profile/inward looking. The foreign policy focus in a particular country may be relatively unimportant for short-term relationships; however, it is important to understand that a country looking to expand will need to

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devote substantial resources to defense-related activities while a lower profile strategy will probably free resources for private investment and enhancement of local markets.

Fiscal policies relate to government spending and tax policies, while monetary policies influence the money supply, the price of money (i.e., interest rates), and convertibility of local currency into foreign currency. Issues of concern for a particular business relationship might well include the decisions of the government regarding procurement and funding of programs in a particular geographic or industrial area, the rate of taxation and foreign exchange policies. Also, if the government has been running substantial deficits, this might have an adverse impact on the entire market. Income distribution and maintenance policies concern themselves with regulation of the level and distribution of income within the country. For example, countries attempting to reduce the level of inflation adopt some form of wage and price controls. Income maintenance programs, such as unemployment insurance and social security, are used to preserve certain minimum standards of livelihood to eligible citizens. Foreign trade and investment policies regulate the flows of trade and capital in and out of a country. Trade policy includes tariffs, as well as other non-tariff barriers to imports, and incentives for exporters who can distribute the country's products in foreign markets in exchange for valuable foreign currencies. Investment policies are particularly important to joint ventures since they regulate the terms of foreign participation in the local economy. Analysis of foreign trade policies has become more complex with the growth in the number of bilateral and multilateral agreements between and among various economies. Industrial policy was a very popular topic during the 1980s as developed and developing countries sought to identify strategies that would promote and enhance the competitiveness of their domestic industries. At the macroeconomic level, industry policy might take the form of modifications to the tax system to promote savings and investment. But, in many cases, industrial policy tended to be a package of policies that effectively favored a given industry over other opportunities. While these policies sometimes brought short-term success, they often tended to protect businesses that lacked an effective management structure due to the fact that they did not have to present themselves to the judgments of independent capital markets. An analysis should always be done of the various social policies of the country, which include several of the other economic-based policies like income maintenance schemes and labor policies. The social and cultural beliefs and practices of a party are a function of history, education and fundamental understanding about how a society ought to be ordered and regulated. These beliefs can profoundly impact the way a party thinks and the way in which its various managers will act in relation to the other party. In many ways, the decision to enter into a new foreign market is an adventure in cultural anthropology. The foreign party needs to carefully consider all the traits and activities that make up the way of life in the target country. The analysis requires identification and understanding of the controlling institutions and customs that regulate the way people

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think and the goals that they seek in their day-to-day lives. These cultural values will, in turn, influence the structure and operation of business enterprises. For example, consider the argument that management practices in a Japanese corporation, including the emphasis on group values and subordination of the desires of the individual, are a byproduct of the social organization in that country. Another illustration is how clan- and family-type relationships in a small developing country can often overwhelm the nominal authority of the government, thereby reducing the degree to which foreign parties can rely on guarantees of the state with respect to the operation of a joint venture. Serious consideration also needs to be given to the impact of educational and population policies, and the government's attitude toward organized religious practices. For example, the role of organized religion in a society can definitely impact the labor practices of the local party and the timing of business activities in the market.

In addition to cultural and social factors, the foreign party must also conduct a careful evaluation of the political environment in the target country. Political factors can extend beyond the structure of government and the rule of law to include informal methods of power and influence. Political evaluation has often been neglected, or contemptuously ignored, by managers in developed countries. The results can be disastrous, leading to misunderstandings between the parties and direct clashes between the foreign investor and regulators and other institutions within the target country. Relevant considerations include an estimate of the political stability and the likely direction of political development in the target country, an appraisal of the quality of the public service, the possibilities of long-term economic growth, and the attitude of the government and people toward foreigners in general and toward the nation of the prospective investor in particular. National pride and sensitivities must also be taken into account. Finally, the foreign party must remember that, particularly in smaller developing countries, its investment will often have far-reaching and unexpected effects on policy developments in the host country and on overall political relations between the countries involved. Apart from evaluating performance, the analyst should also attempt to identify inconsistencies between the country's strategies and policies and the context within which they are formulated and executed. For example, a strategy based on a particular rate of growth may be doomed to failure if the country lacks the requisite resources or local firms are unable to meet the levels of productivity necessary for success. Or, strategies may be impossible to execute if they are not supported by key institutional groups, such as farmers or labor unions. This is a difficult area for foreign investors to evaluate since it requires an uncritical understanding of the ideology that drives local actors. Another possible problem might be that a given strategy is unrealistic in the international context, as might be the case when a country is seeking to achieve growth through exports of goods that are unlikely to be accepted in other countries. If there are inconsistencies between strategies and institutions, it is likely a new strategic direction will be required. Institutions often have historical roots that make them very difficult to change, and any changes that are made will come quite slowly. In contrast, policies can be changed quickly, provided consensus can be achieved within the government. However, even if policy changes are rapid, caution should be exercised in gauging the speed and efficacy of the changes and the associated political and economic costs.

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§1:39 ----Performance indicators While the analogy is sometimes stretched, the national action plan of a country is akin to a business plan of a company and, as such, there must be a way to evaluate how well the country has performed in relation to the goals and objectives stated in the plan. Ideally, the performance measures would be adequate to determine whether or not particular policies and actions have been effective; however, in reality, economic and social development is often hard to measure and the reasons for any specific event or trend (e.g., rapid economic growth, unequal distribution of income, high unemployment among a particular ethnic group) are too complex to be captured by a particular indicator or finite set of factors. Nonetheless, an important part of country analysis is identifying, measuring and analyzing certain economic, social, political and historical indicators of performance. Economic performance indicators are the most widely used tools for evaluating the progress of development. Countries can set objective goals and standards, and these can be easily compared to other similarly situated economies. The most popular indicators include the compound growth rate in real GNP; growth rates in specific sectors; annual inflation rates; savings and investment rates, generally expressed as a percentage of the country's GNP; balance of payments; and employment rates. If the country's economic performance has been satisfactory, an attempt should be made to identify the reasons for success and determine if these represent specific strategic advantages that can be exploited in the future. If, on the other hand, the country's performance has been disappointing, the analyst must search for a diagnosis of the causes. For example, a country may have been guilty of mismanaging its fiscal policy by following spending and taxing policies that had an adverse effect on incentives to work and invest. In other cases, excessive growth in the supply of money may have led to inflation and a high-cost, uncompetitive economy. Also, costly income maintenance and social security programs often create a situation where the government's role in the economy is larger than necessary. Social performance indicators focus on qualitative factors, such as health, education and housing. Key factors to observe include literacy levels, infant and child mortality rates, life expectancies, years of education and completion rates, income distribution, rate of incidence of specific diseases and average number of inhabitants in each household. In many cases, daily food consumption is an important factor, particularly in situations where malnutrition has been a significant health problem. Political performance is often in the eyes of the beholder, and ruling parties tend to measure this factor by their ability to maintain control over the government and other political institutions. There are, however, several independent measures of stability that can be important for foreign investors. These include the degree of stability based on the number of, and reasons for, changes in ruling regimes or important ministries; the number of significant events of civil disobedience; restrictions on basic freedoms; and the transparency and certainty of the rule of law.

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Statistics and objective measures of economic development and performance should be read in the context of the country's overall historical development. While the economic, social and political performance measures can provide a valuable snapshot of current and projected status, one must look backward to identify problems that may have influenced the selection, and success, of the country's goals and strategies. For example, a country such as Mexico in the early 1980s, faced with rampant inflation and huge balance-ofpayments and budgetary problems, had little choice but to adopt short-term strategies that emphasized repair of credit markets, import restrictions and limited state spending. As a result, many long-term growth initiatives had to be deferred until preexisting problems, some of which were created by factors outside of the country's control, could be solved or contained. Another historical factor to consider is the road that a country may have taken to independence. For many countries, colonial rule was the order of the day until the early 1960s. In many cases, these countries were treated as economic serfs of their colonial rulers with most, if not all, economic activities determined by the needs of the dominant country. When independence came, these countries generally struggled to find their place in the global economic order, often losing their preexisting ties to their former rulers. There are some exceptions to this rule, however, as countries such as Japan and Korea were able to quickly capitalize on industrial skills learned during occupation by foreign parties. §1:40 --Financial system The strength of local financial institutions is obviously an important institutional factor to consider since they are not only a source of capital for local businesses but also can provide support for prospective foreign investors looking for financial accommodations to reduce their own outlay of funds. In many developing, or recently developed, countries, the national banking system remains under the control of the state government, either as a regulator or the owner. While there may be some initial advantages to this situation if the state is able to efficiently allocate available financial resources to appropriate development opportunities, in the long run there is a risk that state control over the financial system can politicize policy decisions regarding lending practices and allocation of funds to specific borrowers and market sectors. In addition, it sometimes means that citizens will place their savings into nonmonetary assets, such as livestock, rather than into the financial system if they are concerned about the safety provided by the local banks. The weakness of financial institutions can also lead to high capital flight, which means that local firms and citizens will send their money out of the country in an attempt to obtain a higher (and less risky) return on their financial assets. Another potential problem area is the risk of high levels of inflation that exists in many developing countries. Planning is extremely difficult in the midst of hyperinflation. Pricing decisions are complicated by the need to factor in the cost of replacing the goods that are to be sold. Credit management on both receivables and payables will be critical to the success of the business, while soaring interest costs can easily break the budget. The

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fiscal and monetary policies established by the state must be carefully monitored since policymakers will often embark on relatively risky paths in an effort to realize quick improvements in income and wealth in order to preserve their positions of power.

Finally, consideration must be given to the availability of foreign exchange. The level of foreign exchange determines the external purchasing power of the country and its ability to acquire needed goods and services that are not produced domestically. Developing countries are often confronted with shortages of foreign exchange in light of the fact that their import requirements significantly exceed their ability to export domestic goods to buyers willing to pay with the desired foreign currency. Foreign exchange issues are particularly important to prospective foreign investors since managers of foreign firms may find themselves subject to restrictions on outflows of foreign exchange generated from the operation of the business in the local market. If so, raw materials and services may need to be procured from local sources, which may dramatically alter the type and quality of production technologies that must be used in the new market. §1:41 --Human capital In addition to natural resources and financial capital, prospective businesspersons, both local and foreign, must consider the availability of skilled human resources in the country. As a general matter, there has traditionally been a scarcity of skilled labor in developing countries due to the lack of formal education and technical training. As a result, educated workers often left their countries due to a lack of suitable career opportunities, thereby further inhibiting economic development. In some cases, countries actually were forced to import workers from other countries to fill gaps in particular skills. Circumstances are, however, changing as developing countries begin to make greater strides with respect to education, health care and development of formal laws and regulations pertaining to the employment relationship. Education refers to the formal systems established by a country to provide schooling for its citizens and provide them with the basic social skills necessary to be productive members of society. Countries almost universally establish elementary and secondary schools; however, significant differences can still be found with respect to ensuring that all citizens are able to take advantage of these opportunities. As countries develop, some minimum period of education is a compulsory requirement. Unfortunately, the resources available at each school are not always uniform. In addition, access to higher education, and the opportunities that may follow from degrees in disciplines of interest to foreign investors and local entrepreneurs, is still often very limited in many parts of the world. All in all, however, literacy rates have increased steadily around the world over the last decades and the skills of foreign students in mathematics and science often equal or exceed those of their counterparts in the US. Formal education is also an important factor in transforming the way that citizens of the country define and view the foundations of their values and the role of the state. For example, it has been noted that reform of the education system is an essential strategy to nurture the ideas of liberty, democracy, and constitutionalism in nation states that are emerging from recent periods of socialist and communist domination.

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Prospective foreign investors will certainly be interested in evaluating the level of education in a foreign market to determine whether it is adequate to support interest in the products that they are looking to manufacture and/or distribute locally. For example, countries with a highly-skilled workforce in a particular area of technology or science, such as software engineering, will be good candidates for outsourcing of complex product development activities. The education system can also be an indicator of the actual and potential managerial and entrepreneurial skills in the foreign market. For example, local schools can take steps to disseminate information and knowledge about business ownership and management, including general skills in key functional areas such as marketing, finance, product development, manufacturing, law and accounting. Schools may also offer more specific training in areas such as business plan preparation and presentation. In addition to coursework, colleges and universities may, often at the behest of the government, participate in outreach programs that provide information and support to entrepreneurs and build alliances with industry partners. While high levels of formal education are generally thought to be positive indicators of development and economic potential, it is still important to analyze the impact that formal education has on social hierarchies within the country. For example, distinctions are often made between knowledge and wisdom in Africa. Knowledge is considered to be the skills and ideas that are learned through formal or organized programs, such as those conducted by schools, churches, or social clubs. In contrast, wisdom cannot be obtained in the same way as knowledge and comes instead from natural and inborn factors, as well as from the experiences that naturally come with age. Therefore, a person who is highly educated may have a good deal of knowledge; however, he or she has not necessarily acquired the wisdom that is so valued and revered in African society. Health is an important measure of human capital and depends in large part on the resources committed to medical care. One of the most striking demographic factors in developing countries is the impact of improved medical care on the age structure of the population. In most cases, the rate of infant mortality has declined and this trend, coupled with continued high fertility rates and a general preference for continued growth, has caused age structures in those areas to be dominated by young people. Since a large number of females will be entering the childbearing years simultaneously, it is expected this trend toward youth will continue for several decades. The flip side of this equation in developing countries is that improvements in health treatment have yet to have significant positive effects on life expectancies. A number of developing countries continue to experience high rates of illness due to poor sanitary conditions and nutrition, a shortage of medical facilities, and the failure to disseminate health information. The combination of these factors has a significant impact on all aspects of conducting business in a new foreign market. From the perspective of the available workforce, it means that most of the surplus labor will be young and inexperienced; however, there is the possibility that younger workers will be more flexible, attentive and motivated than their elders will. However, poor health conditions increase the likelihood that workers will be ill and may mean that the turnover rates in the workforce will be quite high. This

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will lead to higher production costs due to the need to constantly train new workers and fill gaps in the manufacturing process because of the unavailability of sick employees. It is possible that foreign companies can forge a relative competitive advantage by offering health care to its employees although the cost of such services may be prohibitive given the lack of medical personnel and facilities in many developing countries.

Finally, as mentioned above, developing countries have been slowly but steadily adopting labor codes and regulations that touch upon a wide range of issues relating to the relationship between employers and employees and conditions in the workplace. Among other things, labor codes in foreign countries will establish norms for such things as collective bargaining agreements, minimum wage and pay equality, working time and vacations, leaves of absence, union representation, pensions, insurance and redundancies. More countries are, to some extent, deregulating the workplace by codifying minimum standards in many areas and leaving other issues to negotiating between employers and employees. While laws banning discrimination have long been in place in the U.S., many countries are just beginning to develop and actively enforce rules and regulations that prohibit unfair and discriminatory treatment of employees based on race, nationality, sex age and sexual orientation. §1:42 --Legal, regulatory and contracting systems In general, legal systems can initially be categorized by reference to the historical traditions that provide the foundation for creation and interpretation of laws and regulations within the country. For example, the legal system in almost every country that has been colonized by Britain at some point in the past, including the US, predominantly follows the common law which originally developed from judicial decisions based on custom and precedent. The other important legal tradition is civil or civilian law developed out of the Roman law of Justinian's Corpus Juris Civilis. Civil law is the foundation of the legal systems of a majority of countries of the world, especially in continental Europe, most of the former colonies of continental European countries, Japan and Latin America. The primary source of law in common law systems is case law and statutes, when applicable, are generally interpreted quite narrowly. In contrast, civil law countries look to the provisions of codes and statutes as the basis for decisions on factual situations that come before the judiciary. Courts in civil law countries look to these codes to find general principles for adjudicating disputes and rarely rely on, or refer to, precedents that may have been created by prior decisions in similar cases. Some states, such as Quebec and South Africa, have mixed systems based on influences from common and civil law colonists. In addition, religious law may influence the legal system in some instances. It is generally necessary to conduct an evaluation of a wide range of areas of law and regulation39 and during this process consideration should be given to the overall impact 39

A comprehensive, yet not necessary complete, list of the legal and regulatory areas that should be evaluated include dispute resolution; establishment legislation (i.e., the rules pertaining to formation, organization and governance of business entities such as corporations); labor and employment laws; competition laws and policies; foreign investment laws; insolvency laws; administrative regulations; and

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that the legal and regulatory framework, including the institutions charged with administration (i.e., the courts and administrative agencies), has on business activities within the country. Clearly, entrepreneurial activity may be adversely impacted by laws and regulations that create excessive compliance burdens for firms. Another factor to consider is the degree to which laws and regulation are clear and understandable. Laws and regulations that are difficult to comprehend, and which are subject to varying and confusing interpretations, cause companies to incur substantial additional costs to meet their obligations. For example, the tax laws of many countries are complex and constantly changing and can only be understood by trained legal and accounting experts. Moreover, taxes are imposed by several different governmental authorities, meaning that firms must establish systems for collecting the information required by each jurisdiction and complying with reporting procedures that are far from uniform. Regulation may also act as a restraint on growth if entrepreneurs believe that adding new employees or otherwise expanding the activities of the business will trigger additional administrative requirements that will reduce the anticipated return associated with growth. Regulatory reforms in developing countries have been undertaken in tandem with privatization of formerly state-owned enterprises.40 §1:43 --Ownership and governance Whitley’s model of national business systems suggests that there are distinguishable differences among states with respect to patterns of ownership and governance structures and the prevalent ways in which owners, managers and employees deal with each other, ownership coordination and inter-firm connections and the scope of activities undertaken by business enterprises. With respect to ownership and governance structures, Peverelli explained that: “On one extreme of this dimension we find national business systems in which the CEO of a firm is usually also its owner, or one of its owners. On the other side the owners do participate in the day to day management of firms, which the delegate to the appointed managers, who act as their agents. Again, other national business systems occupy in between positions on this scale.”41 Countries also vary with respect to their reliance on networks and alliances as a means of managing and reducing commercial and political risks and competing effectively under the rules established by the state. Finally, the level of protection afforded individual property rights by the state influences the size and scope of activities of business enterprises—stronger protection enables specialization while weaker protection leads to companies that “protect their interests by engaging in a number of different types of business, often combining manufacturing and trading, sometimes even including financial services like banking”.42

intellectual property laws. For further discussion, see “Globalization: A Library of Resources for GrowthOriented Entrepreneurs” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org). 40 For further discussion of issues raised by post-privatization regulatory reforms in developing countries, see M. Minogue and L. Carino (Eds.), Regulatory Governance in Developing Countries (Cheltenham, UK: Edward Elgar, 2006). 41 P. Peverelli, National Business System Project, http://personal.vu.nl/p.j.peverelli/nbs/page1.html. 42 Id..

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Country analysis with respect to the topics included under the umbrella of “ownership and governance” requires an understanding of several different areas. First of all, the analyst should collect and analyze data regarding the forms of business enterprise that are active in the market or industry sector that is of greatest interest. This calls for looking at the presence and role of stateowned enterprises (“SOEs”); large privately-held firms, perhaps spin-offs from former SOEs; small- and medium-sized businesses; and local subsidiaries of foreign multinationals. Second, consideration must be given to the relationship between the owners of the enterprise and those responsible for day-to-day management of the enterprise. In many cases, the majority owner also acts as the principal manager of the business, with little or no attention paid to minority owners. At the other extreme is the governance model for “public companies” in the US, which generally have widely dispersed ownership and are managed by professional managers, typically with nominal ownership stakes, overseen by a board of directors elected by the owners but generally selected in advance by the managers. A full understanding of governance practices in a country also requires attention to leadership and management styles and systems, which are covered separately below. Finally, there is a strategic aspect to ownership and governance that must be considered—the degree to which economic actors rely upon formal or informal networks and alliances to acquire control over assets and other resources needed to compete effectively. The emergence of many formerly poor countries in East Asia was led by large business groups with inter-locking ownership that allowed members to pool their resources. As noted in the discussion of national business systems, formation of these groups was often supported and facilitated by the state so long as the groups agreed to follow the economic policies and priorities established by the national government. On the other hand, countries with stricter laws regarding monopolies and acquisition of dominant market positions, such as the US, make the formation of extensive longterm networks and alliances more difficult and drive firms toward specialization.43

§1:44 --Business-government relations The political environment, as well as the specific goals and policies of the government, have already been mentioned as important factors in evaluating a prospective foreign market. The role of the national government, or the "state" as it is sometimes referred to in the literature, will vary depending on the stage of economic development and historical factors. For example, the state has long played a dominant role in business and economic affairs in Africa. During colonial times, public business enterprises were the major forms of business organization. Following independence, the state continued to exercise control in many countries where the ruling elite pursued socialist development policies. In other cases, the state's influence followed from the lack of private investment capital. Even when funds were available for private enterprises, governments often stepped in, and a number of countries embarked on nationalization policies on the premise that private businesses would jeopardize their socialist agenda. Other governments adopted laws and regulations that allowed the state to assume majority control of joint ventures and indigenous businesses. As a result, the private sector failed to grow and develop in many African countries, for example. While this situation is changing steadily around the world, many foreign governments continue to view the private sector with a fair amount of skepticism.

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An excellent resource for tracking developments in corporate governance in a wide range of countries is the online Global Center for Corporate Governance created, sponsored and maintained by Deloitte, which can be accessed at http://www.corpgov.deloitte.com/site/global/.

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Companies must focus on business-government relations in the target country and attempt to determine the role of both the state and the business sector in the unique local political, social and cultural contexts. The study of business-government relations is particularly important in developing countries where it is likely the government will continue to play a large role in all aspects of the economy through its roles as rule maker, strategist and participant (i.e., state ownership of key enterprises and tools of commerce). Even in more industrialized countries where the private markets are more mature, new foreign companies will face special challenges in overcoming inbound investment regulations and fulfilling local requirements with respect to their goods and services that will likely differ from those that apply in their home markets. There are two main goals at this point in the evaluation process--confirming that entry into the foreign market will be permitted on terms reasonably acceptable to the company and establishing the framework for a government relations strategy that can be implemented once the company has actually entered the foreign market. If the company uncovers significant potential difficulties in dealing with government officials, it may decide to abort the investment or change the entry strategy (e.g., seek a local joint venture partner with skills and resources to obtain regulatory approvals). While much emphasis is placed on dealing with the national government, effective government relations appreciates that "government" is actually a set of institutions and individuals at national, regional and local levels. Any given activity may involve several institutions and individual officials. For example, when seeking approval for investment in a new manufacturing facility, a company may need to solicit the favor of national cabinet ministers. However, even though the investment may be approved at that high level, the company must still deal with lower-level customs officials to be sure it is able to import the required parts and materials for the manufacturing activity to proceed. While the high-level endorsement of the investment may create some leverage with customs department bureaucrats, that cannot be assumed. Further complexity comes from the need to deal with a wide range of other political actors, including bureaucrats and civil servants, state-owned enterprises, officials from local political parties and labor unions, and leaders of local interest groups. Each of these entities and individuals has its own interests, resources and actual authority. §1:45 ----National level officials and regulatory bodies

In developing countries, as well as in many smaller industrialized nations, national level officials and regulatory bodies will generally be the most important political actors with respect to the company's business plans and activities. The trick is identifying which ministries and other governmental units may have influence in any required approvals for the company's investment. For example, while a foreign investment may be reviewed by a central board or department, it may elicit comments from other ministries that might have jurisdiction over some aspect of the company's proposed activities. This might be the case when the company's activities involve valuable raw materials or technology that the country is looking to import for use by its local firms. Identifying all of the relevant players allows the company to anticipate potential problems and seek out allies that can ease the approval process.

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§1:46 ----Bureaucrats and civil servants National policy makers are generally subject to the whims and changes of political sentiment, and one election can easily eliminate all or most of the key relationships the company may have formed in earlier days. Accordingly, it is important to nurture the good favor of the bureaucrats and civil servants actually responsible for executing laws and policies on a daily basis. While it is true that patronage still exists in some countries, which means there may be heavy turnover at all levels of government following an election, most countries understand the importance of developing and maintaining a trained and experienced staff of civil servants that acts independently and consistently in relation to foreign investors. The company must identify the regional and local officials most likely to be involved in issuing building permits and approving other governmental services, as well as in interpreting operating regulations. §1:47 ----State-owned enterprises State-owned enterprises remain significant economic and political actors in many developing countries, as well as in some industrialized nations. While a state-owned enterprise is nominally independent of any single government ministry or bureau, it is nonetheless managed by the government to pursue specific national economic and political objectives. Such an enterprise will often become a significant purchaser of the company's products, supplier of the company's raw materials, a competitor or a strategic partner. Since state-owned enterprises will often have monopolistic or dominant positions in the local market, management should make every effort to develop relationships with key managers and understand how the enterprise interacts with the mainstream political and bureaucratic system. §1:48 ----Political party officials and labor leaders Regardless of the size or state of development of a particular country, political party officials will generally exercise significant amounts of power. Obviously, elected officials usually have the most direct impact on governmental policies; however, unelected party leaders can influence the selection of nominees and act as strong lobbyists for the company's interests. If possible, the company should seek friends in each large political party in a particular country, particularly if it is likely that a change in power will occur during the terms of the company's business plans. However, a bipartisan strategy of this type may be problematic in situations where transitions generally occur outside the election process. Labor unions, through the collective bargaining process, can have a significant impact of working conditions, wages, hours and other issues that are important in determining the internal environment of the organization. Labor unions in developing countries are often part of a broad network of groups that can exert significant political leverage at national and regional levels. In addition to collective bargaining negotiations, representatives from labor unions may become more involved in internal matters through service on company

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committees, including those responsible for hiring and promotion decisions. Labor leaders are also important political actors in many countries and will generally be positioned to exercise significant political influence. Labor unions may represent large blocks of voters and can also create economic chaos in the event the government is unwilling to maintain an ongoing dialogue relating to working conditions. While a strike may not directly impact the local operations of the company, it can often cripple the domestic economy through unrest and adverse impact on demand. §1:49 ----Local interest groups Political parties and labor unions are generally not the only organized interest groups on the local landscape. In many cases, special interest groups may be significant players with respect to various industries and business issues. For example, a company's activities catch the attention of social activists, including associations dedicated to environmental protection, consumer rights and advancement of women and/or ethnic groups. At a minimum, activists may increase the level of scrutiny of the manner in which firms conduct their businesses. Increasingly, social activism has led to the adoption of laws and regulations that clearly impact the manner in which firms must operate. Developing countries are beginning to realize the importance of protecting their vast natural resources and have created property rights to create real incentives for conservation and reduction of pollution. In addition, consumer protection laws are being adopted to protect the health and safety of users and encourage companies to use high quality manufacturing and quality assurance practices. Finally, more and more developing countries are casting aside traditional male-oriented values in favor of new guidelines to increase employment opportunities for women. §1:50 ----Government support for innovative activities

Governments often play an important role in the development of the economy by providing subsidies as an incentive for innovative activities. Subsidies may be provided for specified technologies or types of firms (e.g., start-up businesses or small established companies) or to encourage cooperation between various institutions. With respect to each of these categories of subsidies, governments may select between "generic" and "specific" incentives. Generic subsidies allow the beneficiaries to select the technology and type of activity on their own. An example of a generic subsidy would be the tax exemptions and deductions allowed in many countries for research and development expenditures. A generic subsidy is useful in encouraging firms to engage in precompetitive experimentation and basic research. In contrast, a specific subsidy provides support only for technologies or activities that are selected by the government. Generic subsidies for small firms are designed to encourage competition and diversity in the marketplace while specific subsidies, often given to firms engaged in defense-related activities, may be more appropriate for projects that require particular resources and minimum economies of scale. Finally, subsidies for certain collaborative activities, such as research-and-development joint ventures, may increase commitment and discourage participants from engaging in opportunistic behavior at the expense of their partners.

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Governments can also attempt to intervene to enhance opportunities for new firms to obtain the capital required to launch and grow their businesses. For example, countries have taken steps to encourage the development of venture capital markets and have also provided small amounts of financing directly in the form of grants, loans and subsidies to private firms. In addition, countries have introduced programs that provide for the government to guarantee the obligations of small- and medium-sized businesses to a commercial lender. It is anticipated that the guarantee will overcome the risks identified by the lender in providing capital to new entities without a history of operations and on incomplete information. Evidence indicates, however, that such schemes are generally only beneficial to those businesses that already have access to the lending community and that firms that would not otherwise qualify for credit are not likely to benefit from the possibility of a public guarantee. §1:51 ----Negotiation strategies Once the company has made a preliminary evaluation of business-government relations in a particular foreign country, attention should turn to developing the appropriate strategies for negotiating with the various political actors to reduce the risks of market entry and attract any benefits or incentives that might be offered by governmental bodies. Obviously, the company's ability to exercise influence over a governmental actor is determined, in large part, by resources that the company can bring to bear in order to satisfy the needs of the actor. For example, a company may be able to provide equity capital for development of new facilities and job opportunities. Technology is also an important bargaining tool in countries that are looking to catch up in the global economy through modernized manufacturing processes or value-added technology-based products. Job creation and employee training can be a valuable tool for the local government, as can foreign investments in the development of infrastructure projects (e.g., roads, telecommunications facilities, electrical plants, etc.). Finally, a foreign company may be able to facilitate export of local products into new markets. Companies may need to follow one of several different strategic approaches when dealing with governmental actors in a new foreign market. Possible approaches include the following: 

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Companies may seek to alter or adjust governmental policies by requesting a shortterm exemption or waiver. For example, if the company believes that complying with a country's domestic content requirements will have a material adverse impact on the quality of the manufactured goods, it may seek an extension of the deadline for compliance. Companies may decide to avoid governmental controls altogether by changing their operating procedures and/or business activities. For example, if one of the company's products is made subject to domestic price controls in the foreign market, the company may shift production to goods that are not regulated. Similarly, restrictions on direct foreign investment might be circumvented through the use of management contracts. A company that is anxious to enter a promising foreign market, or that lacks the

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resources to effectively bargain for an adjustment or exemption, may simply alter its business plan to meet the relevant government requirements. For example, a company may agree to rigorous foreign exchange restrictions in order to gain access to local markets. Another example is when a company elects to dilute its control by entering into a joint venture with a local partner in order to obtain the benefits of government incentives available only to companies that have significant local ownership. Strategic alliances may also be used in governmental relations. For example, protection from government interference might be obtained through a business relationship with a powerful local company. This might take the form of a joint venture or a contractual arrangement that makes the local company a significant customer or supplier. Another strategy is to recruit influential local leaders to sit on the board of directors or to provide consulting services.

§1:52 --Media The media is not always included as one of the primary institutional elements for consideration in country analysis; however, the linkages between the freedom and power of the media and economic and political development are quite strong. 44 Moreover, the media, including the tools of the relatively recently developed “social media”, is essential in disseminating information within the country that can be used to make political and economic decisions. Locksley has observed that the media influences development in the following ways45:     

Plurality and transparency: the contributions that a plural media environment makes to good governance, transparency, and the functioning of markets (economic and political), which can be seen as the media’s political economy role. Behavioral: the media’s contribution to inspiring beneficial changes in the behaviors of individuals, groups and organizations. Infrastructure and platform: compelling content is essential for and the main driver of investment in new convergent broadband infrastructure and platforms, which hold the potential for transformational development. Economic: the media provide many jobs, especially in smaller-sized enterprises. Trade: trade in media, mainly audio-visual products, is substantial but asymmetric, certain trade barriers restrain investments and limit opportunities for developing country exports, and so the media’s contribution to development.

Another World Bank publication authored by Kalathil included the following quote from James Wolfensohn, a former World Bank president: “A free press is not a luxury. A free press is at the absolute core of equitable development, because if you cannot enfranchise poor people, if they do not have a right to expression, if there is no searchlight on When used herein, the term “media” refers to any source of information and communication such as newspapers, magazines, radio, television and the Internet. For an early discussion of the relationship between the media and economic development, see W. Schramm, Mass Media and National Development: The Role of Information in the Developing Countries (Stanford, CA: Stanford University Press, 1964). 45 G. Locksley, The Media and Development: What’s the Story? (Washington, DC: World Bank Working Paper No. 158, 2009), 5. 44

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corruption and inequitable practices, you cannot build up the public consensus needed to bring about change.”46 Kalathil went on to explain: “In any given country, the media sector ideally performs a number of roles. It provides accurate news and information to the public. It facilitates public debate and discussion on a wide range of issues, and sometimes sets the agenda for such debate. It holds powerful state and non-state interests accountable, serving as a watchdog for the public interest. In essence, an independent media sector is a key factor in good governance.”47 Even the poorest countries have some form of media, but the key is whether or not the conditions are in place for the media to promote the development of democracy and equality. The World Bank has suggested that these conditions include: “independence”, which means autonomy and the absence of control by particular interest groups such as the ruling political elite; “high quality reporting”, which means the ability of the media to provide diverse views on economic, social and political issues; and, finally, a “broad reach in society”, which occurs when the media is able to bring news through various forms of communication (e.g., newspapers, radio, television and/or the Internet) to the entire population in their various languages. These conditions can be used as a starting point by the analyst in assessing the quality and influence of the media in a particular country. Analysis should not be confined to traditional media companies established and owned locally but should be expanded to take into account the influence of information and communication from sources outside of the country, which may be able to gain access to citizens through television, radio and/or the Internet, and the influence of reporting and opinion making made possible by social media. Particular factors to consider would include the degree of control over content and distribution exercised by the state (i.e., censorship and/or denial of access to foreign information sources) and regulatory policies with respect to the telecommunications sector. 48 Clearly this is a complicated and rapidly evolving area, particularly since millions of people around the world have gained instant access to media-generated content through their handheld devices, a development that has disrupted the business models of the largest media companies in the world and transformed marketing activities and the way that election campaigns are conducted. §1:53 --Innovation clusters and entrepreneurial ecosystems Many believe that the first serious reference to geographic concentrations of interconnected companies—“clusters”—appeared in the work of Cambridge economist Alfred Marshall, who described “industrial districts” that arose from an observed tendency of specialized companies to cluster together to form geographic concentrations of expertise and economic activity.49 Marshall viewed these tendencies positively and, in 46

S. Kalathil, Developing Independent Media as an Institution of Accountable Governance: A How-To Guide (Washington, DC: The World Bank, 2011), 3. 47 Id.. 48 The Center for International Media Assistance [http://cima.ned.org] has a wide array of publications and other tools that can be used to understand and evaluate the “state of media” and media freedom in countries around the world. 49 L. Lazzeretti, S. Sedita and A. Caloffi, “Founders and Disseminators of Cluster Research”, Journal of Economic Geography, 14(1) (2014), 21.

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fact, wrote in 1890 about how “…great are the advantages which people following the same skilled trade get from near neighboring to one another…”.50 Other economists built on Marshall’s initial theory by suggesting and adding other “necessary elements” for the creation and maintenance of “innovation clusters” including the importance of a “selfinterested economic agents”, or “entrepreneurs”, willing to take on and attempt to overcome the risks associated with unproven technologies to seek substantial profits. According to Schumpeter, these entrepreneurs drove the process of transferring and transforming emergent technologies into new products, services and product models and creating new methods for organizing economic activities to establish new industries and markets.51 Romer suggested that technological progress is driven by researchers searching for new ideas for innovations which can eventually provide them with monopoly profits.52

A century after Marshall’s work Porter undertook an extension examination and analysis of business clusters and uncovered evidence of a strong positive relationship between the proximity of specialized companies and extraordinary competitive success. 53 Dearlove provided the following description of how Porter painted the boundaries of clusters: “Professor Porter suggests that clusters encompass an array of linked industries and other entities important to competition, including suppliers of specialized inputs and providers of specialized infrastructure. Clusters also extend downstream to channels and customers and laterally to manufacturers of complementary products, and to companies in industries with common skills, technologies, or inputs. Clusters often include governmental and other institutions, such as universities, standard-setting agencies, and think tanks, as well as providers of specialized training, education, information, research, and technical support.”54 Porter famously observed that the importance of clustering contrasts dramatically with the idea that the emerging global economy is breaking down barriers and making location less important as a condition for becoming a “global player” and referred to what he called the “paradox of location”: “Paradoxically, the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, and motivation that distant rivals cannot match.”55 In recent years it has become increasingly popular to refer to innovation clusters as “entrepreneurial ecosystems”, a concept that Mason and Brown discussed in 2013 as part of the broader question of what types of policy initiatives should be taken to promote the

D. Dearlove, “The Cluster Effect: Can Europe Clone Silicon Valley?”, Strategy+Business, July 1, 2001 (citing A. Marshall, Principles of Economics (1890)). 51 For extensive discussion of Schumpeter’s theories relating to “entrepreneurship”, see J. Schumpeter, Theory of Economic Development (1949). 52 See D. Romer, Endogenous Growth, in Advanced Macroeconomics (4th Ed.) (2011), 101. 53 Porter explained his research and theories in a number of articles including M. Porter, “Clusters and the New Economics of Competition”, Harvard Business Review, 76(6) (1998), 77; and M. Porter, “Location, Competition, and Economic Development: Local Clusters in a Global Economy”, Economic Development Quarterly, 14(1) (2000), 16. 54 D. Dearlove, “The Cluster Effect: Can Europe Clone Silicon Valley?”, Strategy+Business, July 1, 2001. 55 Id. (citing M. Porter, “Location, Competition, and Economic Development: Local Clusters in a Global Economy”, Economic Development Quarterly, 14(1) (2000), 16). 50

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creation and maturation of high growth firms (“HGFs”).56 Mason and Brown cited the works of several researchers that supported the premise that HGFs have a significant impact on economic development. For example, the OECD and Brown et al. have reported that HGFs drive productivity growth, create new employment, increase innovation and promote business internationalization57, and Henrekson and Johansson, after conducting a meta-analysis of prior empirical studies, concluded that “a few rapidly growing firms generate a disproportionately large share of all net new jobs compared with non-high growth firms. This is a clear-cut result… [T]his is particularly pronounced in recessions when Gazelles continue to grow”.58 Others have suggested that HGFs have important spill-over effects that are beneficial to the growth of other firms in the same locality and industrial cluster.59 Mason and Brown noted that recognition of the disproportionate value of HGFs to economic development has led policymakers to consider adopting support programs for high growth entrepreneurship that are more “systems-based” and which rely mainly on “relational” forms of support including building connections and networks among entrepreneurs, prioritizing development of “blockbuster entrepreneurs” with significant economic potential and institutional alignment of priorities. A number of researchers have referred to the overall framework for providing this type of support as an “entrepreneurial ecosystem”60, which Mason and Brown defined, based on their own synthesis of definitions throughout the relevant literature, as: “a set of interconnected entrepreneurial actors (both potential and existing), entrepreneurial organisations (e.g. firms, venture capitalists, business angels, banks), institutions (universities, public sector agencies, financial bodies) and entrepreneurial processes (e.g. the business birth rate, numbers of high growth firms, levels of ‘blockbuster entrepreneurship’, number of serial C. Mason and R. Brown, “Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship” November 7, 2013, International Workshop on Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship Organized by OECD LEED Programme and Dutch Ministry of Economic Affairs Workshop; Background Paper (Final Version: January 2014). 57 Organisation for Economic Co-operation and Development, An international benchmarking analysis of public programmes for high-growth firms (OECD LEED programme, Paris, 2013); and R. Brown, C. Mason and S. Mawson, Increasing the Vital 6%: Designing Effective Public Policy to Support High Growth Firms (National Endowment for Science Technology & Arts (NESTA), London, 2014). 58 M. Henrekson and D. Johansson, “Gazelles as job creators: a survey and interpretation of the evidence”, Small Business Economics, 35 (2010), 227, 240. 59 G. Mason, K. Bishop and C. Robinson Business Growth and Innovation; The Wider Impact of Rapidly Growing Firms in UK City-Regions (London: NESTA, 2009). [http://www.niesr.ac.uk/pdf/ 190509_94959.pdf]; J. Du, Y. Gong and Y. Temouri, High Growth Firms and Productivity: Evidence from the UK (London, NESTA, 2013). http://www.nesta.org.uk/publications/working_papers/assets/features/high_growth_ firms_and_productivity]; M. Feldman, J. Francis and J. Bercovitz, “Creating a Cluster While Building a Firm: Entrepreneurs and the Formation of Industrial Clusters”, Regional Studies, 39 (2005), 129-141; and R. Brown, “The determinants of high growth entrepreneurship in the Scottish food and drink cluster”, in G. Alsos, S. Carter, E. Ljunggren, & F. Welter (Eds.), The handbook of research on entrepreneurship in agriculture and rural development (Cheltenham: Edward Elgar, 2011). 60 A. Zacharakis, D. Shepard and J. Coombs, “The development of venture-capital-backed internet companies: An ecosystem perspective”, Journal of Business Venturing, 18 (2003), 217; G. Napier and C. Hansen, Ecosystems for Young Scaleable Firms (FORA Group, 2011); and B. Feld, Startup Communities: building an entrepreneurial ecosystem in your city (Hoboken, NJ: Wiley, 2012). 56

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entrepreneurs, degree of sell-out mentality within firms and levels of entrepreneurial ambition) which formally and informally coalesce to connect, mediate and govern the performance within the local entrepreneurial environment.”61 While Mason and Brown added that entrepreneurial ecosystems were geographically bounded, they noted that cities did not have to be a particular size to qualify and pointed to Austin, Texas and Boulder, Colorado in the US and Cambridge in England as examples of smaller cities that had been successful at developing what they referred to as “thriving entrepreneurial ecosystems”. Mason and Brown also explained that a system could emerge around one industry or evolve and expand to cover several industries.62

For researchers like Isenberg, an entrepreneurial ecosystem is a “strategy for economic development” that depends on several key factors or domains: a conducive culture, enabling policies and leadership, availability of appropriate finance, quality human capital, venture friendly markets for products, and a range of institutional supports.63 For their part, Mason and Brown argued that the distinguishing features of entrepreneurial ecosystems include “a core of large established businesses, including some that have been entrepreneur-led (entrepreneurial blockbusters); entrepreneurial recycling–-whereby successful cashed out entrepreneurs reinvest their time, money and expertise in supporting new entrepreneurial activity; and an information-rich environment in which this information is both accessible and shared”.64 Mason and Brown also believed that in order for entrepreneurial ecosystems to thrive there must be a group of “dealmakers” who are involved in a fiduciary capacity in several entrepreneurial ventures, ready availability of start-up and growth capital, and a supportive community of large firms, universities and service providers.65 Others have suggested that an effective entrepreneurial ecosystem needs accessible domestic markets, including access to small and large companies and governments as customers; human capital, including managerial and technical talent and experience in launching and building knowledge-intensive firms; funding and finance; support systems, including mentors/advisors, professional services, incubators/accelerators and a network of entrepreneurial peers; regulatory framework and infrastructure; education and training; major universities as catalysts; and cultural support.66

C. Mason and R. Brown, “Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship” November 7, 2013, International Workshop on Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship Organized by OECD LEED Programme and Dutch Ministry of Economic Affairs Workshop; Background Paper (Final Version: January 2014), 5. 62 Id. at 5-6. 63 D. Isenberg, The entrepreneurship ecosystem strategy as a new paradigm for economy policy: principles for cultivating entrepreneurship (Babson Park, MA: Babson Entrepreneurship Ecosystem Project, Babson College, 2011), 4. 64 C. Mason and R. Brown, “Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship” November 7, 2013, International Workshop on Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship Organized by OECD LEED Programme and Dutch Ministry of Economic Affairs Workshop; Background Paper (Final Version: January 2014), 1. 65 Id. 66 Entrepreneurial Ecosystems around the Globe and Company Growth Dynamics: Report Summary for the Annual Meeting of the New Champions 2013 (World Economic Forum, September 2013). 61

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On a practical level, entrepreneurial ecosystems should be able to provide entrepreneurs with the resources and tools they need to launch their emerging companies, including networks that can be used to tap into the human resources necessary to build a founding team and recruit knowledge workers who can create and develop new products and services; professional investors (e.g., venture capitalists) and/or corporate partners with the capital necessary to support the product development activities of the founders and the expansion of the company to the point required for effective promotion and distribution of the product or service; professional and business advisors, including attorneys, accountants, bankers, insurance brokers and consultants; regulatory framework that facilitates creation of business entities and establishment of governance systems and allows entrepreneurs to create and protect an intellectual property rights portfolio; and strategic partners that can collaborate with the new firm as suppliers, customers, manufacturers, distributors and research and development partners.67

As for the specific steps that should be taken to launch and stimulate entrepreneurial ecosystems, Mason and Brown argued that policymakers would need to focus on several dimensions including direct support of entrepreneurial actors through accelerators and incubators; development of entrepreneurial organizations and resource providers such as business angels, venture capital, banks, service providers, universities; creation of connectors within the ecosystem through public-private partnerships and alliances and peer-to-peer learning; and development and nurturing of an entrepreneurial environment or culture within the ecosystem through entrepreneurship education, role models, peer-topeer networking and entrepreneurial recycling.68 Mason and Brown noted while there was a role for governments to play in developing entrepreneurial ecosystems, they should limit their involvement to facilitation and leave the details to the private sector, experienced local entrepreneurs and/or leading local companies. Key to success would be the ability to create a local culture that was favorable to startup activity and which promoted and accepted entrepreneurial risk-taking. Experienced entrepreneurs could do their part by training, coaching and mentoring their prospective peers and local companies could contribute by allowing and encouraging spinoff of promising ideas into new firms. In many cases it will be necessary to provide training to both local entrepreneurs and investors on the financing process until such time as the ecosystem has a community of experienced angel and venture capital investors.69 §1:54 Management styles and practices

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For further discussion of the specific issues and challenges associated with launching an emerging company, as well as a description of the characteristics of such a firm, see “Entrepreneurship: A Library of Resources for Growth-Oriented Entrepreneurs” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org). 68 C. Mason and R. Brown, “Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship” November 7, 2013, International Workshop on Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship Organized by OECD LEED Programme and Dutch Ministry of Economic Affairs Workshop; Summary Report. 69 For further discussion of innovation clusters and entrepreneurial ecosystems, see “Growth-Oriented Entrepreneurship: Global Survey and Assessment” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org).

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When entering into business relationships with parties from foreign countries or setting up a new subsidiary in a foreign country that will be staffed with local managers and employees, it is important to understand the norms and expectations in that country with respect to management styles and practices. Management has been widely studied and practiced for literally thousands of years and a number of definitions of “management” have focused on the specific tasks and activities that all managers, regardless of whether they are overseeing a business, a family or a social group, engage in, such as planning, organizing, directing, staffing, coordinating and controlling. While it has been argued that certain management practices and styles have universal appeal and effectiveness, the reality seems to be that there are real and significant differences between countries with respect to their business and innovation systems and their preferences regarding leadership and management styles. Berry et al. argued that these differences, which they referred to as “cross-national distance”, were likely based on a wide range of factors and suggested and defined the following set of “dimensions of cross-national distance”70:         

Economic: Differences in economic development and macroeconomic characteristics Financial: Differences in financial sector development Political: Differences in political stability, democracy and trade bloc membership Administrative: Differences in colonial ties, language, religion and legal system Cultural: Differences in attitudes toward authority, trust, individuality and importance of work and family Demographic: Differences in demographic characteristics Knowledge: Differences in patents and scientific production Connectedness: Differences in tourism and Internet use Geographic: Great circle distance between geographic center of countries

It is reasonable to assume that each of the factors listed above will influence the styles and practices used by managers and the expectations of subordinates regarding the actions and behaviors of their managers; however, a number of management scholars have concluded that societal culture had the biggest impact on the management styles selected by organizations operating within a society. Research and proscriptions regarding culture and management began to emerge and proliferate as businesses around the world were exposed to globalization and their interactions with people and firms in other countries increased. It may be a bit extreme to assume that societal culture is the most important environmental factor affecting management functions, particularly given the evidence that has been collected about the influence of economic, political and legal institutions on formation, operation, growth and survival of businesses. Moreover, the choices that managers can reasonably make regarding strategies related to the various managerial functions are constrained by available technological know-how and physical infrastructure and by socio-cultural variables such as religion, education and language. H. Berry, M. Guillen and N. Zhou, “An institutional approach to cross-national distance”, Journal of International Business Studies, 41 (December 2010), 1460-1480. Berry et al. also provided a bibliography of theoretical sources for each dimension in the institutional literature and examples of empirical studies on each dimension in the international business literature.

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Nonetheless, societal culture, which itself is influenced by the factors mentioned above and evolves as societies and the people within them adapt to changes in their external and internal environments, must be acknowledged as a fundamental consideration for managerial attitudes and behaviors. A useful framework for identifying and understanding management practices and styles in a particular country focuses on the following fundamental issues and challenges that organizations and their managers must address as they are launched and evolve71: 

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Entrepreneurship is concerned with the processes that entrepreneurs in different countries go through in order to create, or give birth to, a new business and the subsequent steps that must be taken in order for the business to survive and have a discernable economic and social impact on the society. Among the subjects that should be considered are the factors influencing entrepreneurial activities; motivational traits of prospective entrepreneurs; the impact of societal culture on entrepreneurship; and the institutional environment for entrepreneurship. Leadership has been consistently identified as playing a critical role in the success or failure of organizations and researchers have consistently found a strong correlation between the quality and effectiveness of the leadership team and their styles and behaviors and organizational performance and job satisfaction among subordinates. Among the subjects that should be considered are the roles and activities expected from an effective leader; personality traits and attributes which can be learned and perfected by persons that aspire to leadership positions; and styles of leadership, which encompass the strategies used by leaders to engage with their followers and which have been shown to be “culturally contingent” (i.e., styles and practices used in one country may not be effective in another country with a different societal culture). Management is concerned with the roles and activities expected from an effective manager (i.e., planning, organizing, staffing, leading, controlling, decision making and motivating.); specific skills which can be learned and perfected by persons that aspire to management positions; and styles of management. Societal culture influences preferences regarding management styles and practices and it is possible to identify the parameters of national business cultures that are impacted by major social institutions; history, including colonial occupation; religion; the availability of capital; the availability of natural resources; human capital; technology; demographic factors; and communications with other societies. Organizational design is concerned with the structured processes that emerge within organizations to guide how the members interact with one another to pursue their mutually agreed goals and objectives. The key elements of well-known models of the organizational design process include strategy, structure, business processes and lateral linkages, compensation and reward systems, culture and human resource management. Basic models of organizational structure include function-based structures, product-based structures, geographic-based structures, market-based

For further discussion of identifying and analyzing management styles and practices using the framework described in the text, see the chapter on “Management Styles and Practices” in “Globalization: A Library of Resources for Growth-Oriented Entrepreneurs” prepared and distributed by the International Center for Growth-Oriented Entrepreneurship (www.growthentrepreneurship.org).

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structures, matrix structures and network structures. While each of these structures are widely used around the world, each society does have its own unique administrative philosophy that will likely influence how a firm is organized in a particular country and various typologies of organizational structures have been suggested for use in making comparisons across national or culture borders. Organizational culture plays in the day-to-day operations of an organization and it is important to understand values, norms and cultural forms (i.e., stories, ceremonies, language, symbols and rituals). Various determinants of organizational culture have been identified including the personal and professional characteristics of organizational members, organizational ethics, property rights, organizational structure, control systems and power structures. A full understanding of organizational culture extends to socialization processes; subcultures; managing and reinforcing cultural characteristics; and evaluating and transforming organizational culture. Organizational culture of an opposite party is relevant to any proposed crossborder transaction and must also be considered when establishing a foreign subsidiary staffed by local personnel. Strategic planning is a process of carefully and thoughtfully aligning the strengths of a company’s business to the opportunities that are available to the company in its chosen business environment. The fundamental elements of the planning process, and desired outputs of that process, include a mission statement, a strategy statement, strategic goals and objectives, and tactical and operational plans. Strategic planning is impacted by both internal and external forces. Researchers have found indications that the relationship between strategic planning and firm performance may be mitigated to some degree by contextual factors relating to the firm including, among other things, societal culture. Research has been carried out on the relationship of strategic planning to all of the most widely recognized dimensions of societal culture and a number of researchers have argued that societal culture does have an impact on organizational processes relating to planning and decision making and on perceptions of strategic strengths and weaknesses Governance, or more specifically “corporate governance”, has been described as involving a set of relationships between a company’s management, its board, its shareholders and other stakeholders that provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. While domestic laws and regulations, as well as customary ways of dealing, are the foundation of governance standards and practices in a particular country, it is important to understand the work that has been done on cross-national research relating to corporate governance and the characteristics of competing corporate governance systems (e.g., Anglo-American, Germanic, Latin and Japanese systems). Financing is an essential element for establishing a new business, launching a new product or service, or expanding an existing business through internal growth or acquisition. It is likely that entrepreneurs and managers will, regardless of the size of their businesses, need to venture into the world of finance several times over the life cycle of the enterprise. In that world they will encounter a wide range of participants, including banks, venture capitalists, investment bankers, government agencies, and business advisors, each of which will provide unique resources and experience. In

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addition, they will be exposed to the legal requirements and institutions of their own domestic “financial systems”, which are the processes that have emerged for channeling funds from agents with surpluses of capital to agents with capital deficits, as well as the requirements and institutions of financial systems in other countries where they might be seeking capital and/or otherwise conducting business. It is possible and necessary to analyze and compare national financial systems by reference to various factors including investment and savings, growth and financial structure, risk sharing, information provision, corporate governance and political and legal factors. The human resources (“HR”) function is at the forefront of a company’s efforts with respect to two of the key elements of organizational design—people and organizational structure. While HR practices differ around the world, it would seem to be universally true that in order for companies to successfully achieve their strategic goals and objectives they must strive to attract, motivate, and retain those employees who are best qualified to carry out the necessary activities of the company and make sure that they are placed into the right spots in the most effective organizational structure. Human resource management (“HRM”) concerns and activities are generally universal around the globe: recruitment and hiring, leadership and management, motivation and performance evaluation, compensation philosophies and policies, training and development, disciplinary actions and terminations, and the use and content of different forms of employment agreements. However, while there is evidence to support an argument that certain “global” HRM practices are emerging, it is more likely that country-specific approaches to HRM, also referred to as “contextual” approaches, are the most effective and will allow firms to become and remain more competitive. Product development and commercialization includes not only the creation and launch of new products but also modification or updates to existing products and initiatives to introduce changes to the overall development program including quality improvements, reduction of time to market, enhanced collaboration with suppliers, plant modernization and technology updates. While it is possible, albeit perhaps simplistic, to identify certain sequential steps and activities for developing and commercializing a new product, notice must be taken of how various factors that are part of any company’s external environment influence innovation including technology, demand, regulatory and legal constraints, patents and other intellectual property rights, suppliers, market conditions, the industry in which the company is operating and societal culture. Technology management concerns itself with the creation or acquisition of technology, particularly the process of transforming basic knowledge, or science, into products that have practical and commercial utility in the marketplace or in internal business activities. Technology management also includes the steps that need to be taken to protect the technology of the firm, including the development and maintenance of an intellectual property rights portfolio, and the formulation and implementation of strategies for commercial exploitation of the company’s technological assets. Specific issues for each firm include assigning management responsibilities for technology activities; technology forecasting; technology scanning, evaluation and selection; methods for acquisition of new technologies,

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including internal development and outsourcing; strategies for exploitation of technology rights; methods for protecting the advantages of technologies; and knowledge management. Cross-border comparisons relating to technology management include the scope and enforcement of intellectual property rights, national innovation systems and strategies, and barriers and challenges to diffusion and adoption of new technologies. Globalization has become a strategic imperative for firms looking to reduce manufacturing and other operational costs, secure additional access to necessary supplies and technologies, improve customer service and relations, and gain access to new markets for their goods and services. Companies may also look at global operations as a way to manage risks and learn about new ways to improve operations in all locations throughout the company and to attract talented managers, engineers, and scientists who can make a contribution to the entire organization. Countries vary in terms of their level of “globalization”, a term that is generally used when discussing the degree to which countries are integrated into the larger global economy. Firms also differ with respect to their degree of “internationalization”, which is accessed by looking at the actions taken by the firm with respect to exploring foreign markets for sales, capital, human resources, technology and other business activities. Firm-specific analysis includes not only the degree of internationalization but also specific topics such as designing and managing global organizations, evaluating foreign markets, developing an international business plan, export planning and foreign investment activities.

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