 Hello and welcome to the session in which we'll discuss influences on international operation or international business. When a company operate internationally, they're going to face a multitude of factors that can significantly affect the success and sustainability of the business in the global market. Therefore, businesses, multinational, they have to understand these factors if they want to navigate the international market, manage risk and seize opportunities. Because if you work in another country, if you sell your product or if you operate over there, there are certain things that you need to be aware of. Therefore, you understand your environment, you understand your customer base, you understand how to deal with suppliers, with customers, with the culture, with the norms. The following are some important factors. There are political factors, legal factors, taxes, the economic system that you are operating in, technological factors, and of course, of course, cultural differences. For each of these factors, I will explain a little bit more in details, but I will focus more at the end toward the cultural differences. We're going to go ahead and start by looking at the political factors. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. Starting with political factors. There are some positive political factors and some negative political factors. If there's a free trade agreements with that country, free trade agreements are one of the most direct ways in which politics can impact international trade. So free trade agreements are negotiated and signed by political leaders and government, and their goal is to reduce or eliminate tariffs, quotas, and other trade restrictions. A good example will be free trade agreement like the EU or the agreement between the US, Mexico, and Canada. It used to be called NAFTA, but the point is, when there's a free trade agreement between countries, it's going to make conducting international business much, much easier. On the other hand, trade wars, they arise from political dispute and they would lead to the trade wars, and which could have a negative impact on international trade. And trade wars usually involve the opposite of free trade agreement, adding tariffs and trade barriers, which would disrupt global supply chains, make goods and services more expensive. A case in point between 2018 and 2020, the US and China, they both imposed tariffs on hundreds of billions of dollars worth of goods. They went into a trade war. Asset expropriation, also known as nationalization. In the US, we have something similar. It's when the government takes over your asset. In the US, we call it eminent domain. Basically, if the government, the state or the local or the federal government, they need to open a highway or some public infrastructure. They might ask you if you want to sell your property. They will offer you a fair market value price. If not, you may sue them. You'll take them to court, but eventually the government can exercise their eminent domain and take over your property. That's in the US. This is not what we're discussing, but it's the same concept where the government takes your property. But nationalization or asset expropriation is basically when the foreign government takes over your asset. Basically, it's a form of theft by the foreign government. This could be because there is a public rage against that country. For example, you have a US company operating in Russia. Well, there's the US, the Russian-Ukrainian war. And all the people say, well, let's take over all the US property in Russia. Well, the Russian government may exercise asset expropriation and take over those assets or fault political reasons or economic control. But that's always a political risk when you operate in a foreign country. There are legal factors. One major one these days is intellectual property laws. Laws protecting intellectual property, including patent, copyright and trademark, provide companies the assurance to sell their product internationally. Knowing that their product won't be copied, stolen without repercussions. So simply put, you're telling the foreign investors or the foreign sellers, you can come here. You can sell your property, you can sell your, you can use your patent copyright property and we will protect you. You have to be aware whether this country is respect those intellectual property laws or not. If not, you want to be very careful operating in those countries. Trade regulations, regulations like health and safety standard, environmental standards and labor standard can affect how goods are produced and traded. Well, these rules can protect consumers and workers. They can also act as a non tariff barrier, complicate and international trade. So you don't want to work in a country or operate in a country. Well, they don't have a safety standard for their employees or health standard. Why? Because it's a bad publicity. So you want to be aware of the legal factors in that countries. Legal remedies, international legal bodies, such as the World Trade Organization, provide mechanism for resolving dispute. What happened if you have a dispute in that country? Are they going to go to the WTO or do you go to the local court? And if you go to the local court, you know, does the local business have more influence on the court than you do? Then it's unfair. These legal mechanism can influence trade by providing a venue for countries to address unfair trade practices. So you look at the legal system. Is it a fair legal system or not as fair? Also legal cost and navigating the legal system. Do they have a lot of red tape or less red tape? Taxes is another factor. In some countries, they have the value added tax as a type of consumption tax that's placed on product. Whenever value is added at a stage of production and at its final sale. Many European countries, they have this value added tax. And for importers, what's going to happen if you buy stuff and you try to sell it in Europe, that's going to increase your cost. It's going to make your product less competitive for exporters. What happened in some countries, they give you a refund if you export the goods after you export the goods. They would refund your value added tax, which will make your product more competitive. So you want to understand what country are you operating into? Do they have a value added tax and if so, how it's going to affect your product? Corporate taxes in different countries have different corporate tax rate. And that's going to influence whether you're going to operate in this country or not. For example, Ireland, they have a tax rate of 12.5. It's a safe haven for corporation from taxes. It attracts locations for many international companies like Google and Apple to set up their European headquarters. And I do have a YouTube about why Apple don't pay any taxes explaining specifically how it happens. Double taxation treaties. Do they have a double taxation with the US or not to avoid businesses being taxed twice? Many countries has established double taxation treaties with each other. So if I pay my taxes in Europe, well, guess what? I don't have to pay my taxes again in the US because I'm going to get a tax credit for that. For example, a double taxation treaty between the UK and India means that a British company operating in India can avoid paying taxes by both the UK and the Indian government on the same profit. Because it's going to be more costly. So you pay taxes either in UK or India or if you pay in the UK, they give you a credit in India. If you pay in India, the UK will give you a credit. So you want to pay the taxes only once on the profit. Assuming they have they have a treaty. If they don't have a treaty, then you have to pay taxes in both places, which is not good. You also want to understand what type of economic system you are operating in. There are many economic system. The two extremes are free market economy, which is capitalism and communism. And a free market economy, businesses and individuals are free to exchange goods and services across borders with minimal government intervention, just free trade economy. Trade policies and currency exchanges are typically driven by supply and demand. So the prices are set by supply and demand. The currency is set by supply and demand. The US is a good example. We trade with other countries around the world, sourcing product where they are most efficiently produced. So if you are a free, if you operate in free capitalist system and you deal with other free capitalist system, as if it's the same system, because you're going to be looking for product in supplies, where it's the most cost efficient. So it's an efficient way to do business. The other extreme of free market economy is the command economy or communism. The government controls everything, all major aspect of economic production and distribution, including international trade. In these countries, you have trade restriction on the flow of goods and services as well as the money. And then in and out of the country, often leading to less international trade. You don't want to operate in these countries because you don't know what's going to happen next because the government can tell you what to do. An extreme example is North Korea as a command economy has limited international trade to maintain its economic independence and control. That's fine, but no one wants to operate. Those are the two extremes. There are other economic systems such as a mixed economy combines both element of the free market and the command economies. The government controlled certain sectors of the economy and allows market forces to dictate other factors. So the level of the government intervention depends on the sectors. If the sector is important for the government, they might control it. If it's not as important, they may not control it. China is an example of this type of mixed economy where the government controls certain aspects of the economy and it allows market mechanism to influence international trade in many other sectors. And this is making China one of the largest international partners with the US as well as around the world with many countries. Transition economies, these economies are transitioning from a command to free market economy based market. What are we talking about here? We're talking about the former Soviet Union countries, the Eastern European countries. Initially, they faced economic stability, but over time they developed stronger trade relationship with the EU and the US as well. So here international trade can fluctuate dramatically because they are still in that transitional factor. Technological factors could influence your operation. Technological advancement vary from country to country. So you have to know whether they have a reliable internet or not. Think about if you're operating in a country where there is no reliable internet. And believe me, there are certain countries where there is no reliable internet. I come from Lebanon and they still don't have a reliable internet. So the level of communication in a country can significantly impact how business operate internationally. Do they have an e-commerce infrastructure? What does that mean? The ability for the population to engage in online transaction greatly influence the ability of business to sell online. Do they have access to the internet? Reliable internet, fast internet, digital payment system. Now they have access to the internet. Can you make payments? Can they pay online? Do they have a digital payment system? Can they receive payment? Can they pay? The adoption of digital payment system varies greatly across countries. For example, in Lebanon, there is no PayPal. There's many digital payment systems that are not available. Data storage and security. Basically, if you operate over there, are they going to provide you security like a cyber security infrastructure? Advanced data storage system like cloud services can help businesses store, manage and analyze large data more efficiently and most importantly in a secure manner. Manufacturing technology as well. High-tech manufacturing equipment can increase production efficiency and product quality, providing businesses with a competitive advantage. On the other hand, businesses operating in countries with less advanced manufacturing technology might face higher production costs and lower product quality. So when you look at all of those factors, as well as many others, but the theme here is are they advanced technologically? Because you might be operating in a developed country. It means it's well developed. They have all these infrastructure or developing that's on the way. Cultural differences play a major role and you have to be aware of that when it comes to international trade. Now, I'm going to expand a little bit on cultural differences. And I'm going to tell you, you may want to look at a half set cultural dimension. This is very interesting. If you are interested in this cultural differences between countries, it provides a valuable insight that can help businesses navigate cultural differences, international trade. So you have to understand these different cultural dimensions so you can develop more effective communication strategies, build stronger relationship, don't get into trouble, create product and services that that's better aligned with the value of the different cultures. And I'm going to go over some of these dimensions. Again, this is very, very interesting topic. I enjoy teaching it. I have a separate recording for this in my international accounting course, if you're interested. But I'm going to go over some of them just to kind of illustrate the cultural differences. One of the dimension is called the Power Distance Index, PDI. This index measures the extent to which less powerful members of the organization, lower level people and institutions accept and expect that power is distributed unequally. So the people who are at the bottom accept that the people at the top make all the decision. In cultures like this, which is called high power distance, like India and China, there's an acceptance of a hierarchy in which everybody has a place that needs and no further justification. So if you are conducting international business in these countries, you have to understand people at the lower level, they cannot make decision. So understanding the power distance can help in understanding the business hierarchy and decision making process. Other dimensions other than power distance index could be individualism versus collectivism. This dimension explained the degree of which individuals are integrated into a group. In individualistic societies like the US, individuals are expected to look after themselves and their direct family only. So here the promotion in a company is based on individual performance and employees are encouraged to voice their opinion and stand out from the crowd. It's individualistic society. In Japan, on the other hand, in a more collective society, you are part of a group and the group are looking for each other. So employees tend to work in teams. So you're you're not doing well. The team is doing well and decision are made by consensus, not individuals, you know, airing their opinion. Loyalty to the company is highly valued in the US. No, you are individual. You don't care if the company doesn't treat you well, you leave. It's uncommon for employees to spend their entire career in a single in a single company in Japan, not in the US. This also could influence how you do business relationship and marketing strategies in international trade. Other dimension of the cultural differences that you need to be aware of something called uncertainty avoidance index. This dimension expressed the degree to which people feel uncomfortable with uncertainty and ambiguity. Do you like uncertainty and ambiguity or you don't like it? You want to avoid it. Cultural with a high uncertainty avoidance tend to have a low tolerance for uncertainty and ambiguity, leading to the creation of extensive everything. What you do now, if you have low avoidance of this, you want laws, rules, lagerations and controls to reduce that uncertainty. On the other hand, cultural with low uncertainty avoidance tend to be more acceptance of uncertainty and ambiguity and are more tolerant of different point of views and behavior. Let's go back to Japan that are high on uncertainty avoidance index. Once I put a number in these, it means there's a score. This half-stat measures, they give you a score for each country, for each culture. For example, the Japanese culture is high on this uncertainty avoidance index. This can be observed in their society and business practice. Japanese society value structure, establishing rules and regulations for everything. Businesses are heavily structured and employees tend to avoid risks. For instance, in business meetings, every detail is planned and outlined to avoid any ambiguity or uncertainty. There's a common Japanese phrase that says, the nail that sticks out gets hammered down, which reflects the society's general aversion to uncertainty and non-conformity. You don't want to stick out in Japan. And this is what happened to the Nissan CEO, I've been mentioning him in many of my lectures, Carlos Gussin. I believe that's how you spell it. He was the CEO of Nissan and he basically stuck out and that was not good. The nail that sticks out gets hammered down. On the other hand, if you look at a country with low uncertainty avoidance index, like the Denmark, they scored low and their score is 23. The Danish people are generally more comfortable with uncertainty and ambiguity. In a business environment, this can translate to a flatter organizational structure, fewer formal rules, greater willingness to take risks and more tolerance for innovative and unconventional ideas. So you need to know what type of culture am I dealing with, high uncertainty or low uncertainty. Other factors that could affect the cultural differences is long-term orientation versus short-term orientation. For example, the U.S. is low on long-term orientation, score 26. American businesses focus on achieving quick results and value traditions and current societal hierarchy. For instance, American business will prioritize quarterly earnings report. They meet an immediate market expectation of a long-term strategic planning. Why? Because managers, they're looking after themselves. They're emphasizing individual performance promotion. So they want the short-term effect, they want the short-term results. China, on the other hand, scores 87 on this on this cultural dimension. They highly value perseverance, thriftness and adopting to changing circumstances. Chinese businesses reflect this by planning for the long-term and being willing to take short-term sacrifices for long-term benefit. This could manifest in significant upfront investment and infrastructure or relationship with the expectation that these investments will pay over time. The U.S. is totally different, the way they approach project. Short-term, what's my interest? What's my interest? How can I improve myself? And the point is, if I can improve my interest, everyone's interest will be improved as well. That's versus a culture, will they value long-term orientations? Like, well, let's all benefit. So it's a different way of looking at things. Again, those are cultural differences. In order to understand businesses, and in order to operate, not understand businesses, in order to operate internationally, a business will need to understand what type of environment they are operating in and what influence those environments. Again, political, legal, taxes, economic system, technological factors, and cultural differences is a big one. What should you do now? Go to Farhad Lectures and look at additional MCQs that's going to help you understand this topic better and help you prepare for the exam. Good luck, study hard, and of course, stay safe.