Cultural Challenges Of Doing Business Overseas

The Cultural Challenges of Doing Business Overseas

Doing business overseas has its rewards, as well as its challenges. This paper will analyze the economic environment and the foreign investment climate for the Czech Republic, in order to help Steve Kafka, an American of Czech origin, to expand his business in his country of origin. Steve is a franchisor for Chicago Style Pizza and wants to open a new franchise in Prague, the capital of the Czech Republic. The paper will present the cultural differences between US and Czech culture that Steve must be aware of, the comparative advantages that exist in the Czech Republic, as well as the macroeconomic and investment factors, trade barriers for his country of origin. Based on this analysis, Steve will be able to successfully conduct his new business, knowing how to mitigate the risks that may be involved because of the cultural differences, as well as how to asses the cost structure and the demand for his product.

Differences and Incompatibilities between US and Czech Cultures

The cultural differences between Czech Republic and United States stem from their unique historical evolution across centuries, from their specific traditions, structure of population, geographical position, surrounding peoples and cultures, and traditional cultural and economic ties with other countries.

The Czech Republic was part of the Austro-Hungarian Empire for several centuries. Their civil law system was based on Austro-Hungarian codes. During 1945-1990, the Czech Republic had a communist regime, as part of the Socialist Republic of Czechoslovakia. Nowadays, the Czech Republic developed a free market economy, being one of the most prosperous countries of the ex-Communist bloc. Their legal code was changed to eliminate the Marxist-Leninist concepts and to accommodate the requirements of the Organization on Security and Cooperation in Europe (OSCE). While building-up and maturing their own business legislation, the business practice in the Czech Republic has remnant German and Russian influences. Their commercial and civil codes have many gray areas, giving way to different interpretations. For example, the current bankruptcy procedure, jeopardized by slow and uneven courts, tends to drag the proceedings for years. The Czech Parliament called for a change in the bankruptcy legislation that would enable out-of-court settlements, to provide fast and effective solutions to the troubled companies in a similar way the US Chapter Eleven does. Still, the number of companies with unsolved bankruptcy cases is baking-up for years. One of the biggest challenges while doing business in the Czech Republic is the bureaucracy. Moreover, the decision making process takes longer than for US counterparts as the business people in the Czech Republic prefer a methodical approach on analyzing proposals to in-depth details.

Business relationships in the Czech Republic are more productive when trust is built by taking time to know the counterpart personally. In addition, business people maintain a formal appearance during the meetings, paying attention to attire, gesture and expression. Keeping the hands in pockets or seating with the legs crossed ankle upon knee is considered inappropriate in such circumstances.

One of the most important incompatibly between the US and Czech culture is the corruption. Although the Czech Republic made tremendous advances on building a new economic system and on restructuring the legislation, corruption is still a problem that cripples the country's progress. Out of 145 countries evaluated by Transparency International, the Czech Republic is ranking 51.

Steve Kafka has a successful business activity in US. However, launching a new business venture in the Czech Republic is going to be a challenging task due to the differences of culture and practice. While defining the business plan for setting-up a pizza restaurant in Prague, Steve needs to choose such a strategy that will protect his business from the negative aspects of the local, social, and cultural environment. He will have to pay special attention to the way he conducts business activities, keeping in mind that he needs to schedule meetings with officials well in advance, that he will face slow decision making situations and he will have to overcome bureaucracy. While focusing on business, Steve could benefit from developing close relationships with the people he will be working with. In order to assure continuous progress on his business plan he will only choose such methods and avenues that are legally sound and clear, avoiding the gray areas and loopholes of the commercial and civil codes. He will pay special attention to the business and tax legislation, choosing such a specific business strategy that will ensure a high economic efficiency. Steve has to remember that corruption is widespread at various levels of activity and he has to protect his business against those who may target his activities and investments for their own illegal profit.

Comparative Advantages in the Czech Republic

Even though it has various cultural and social differences, the Czech Republic offers an attractive environment for foreign investments. There are several comparative advantages in the Czech Republic that Steve can benefit of. These advantages, compared with US, stem from reduced investments due to smaller prices for buying or renting a building for the new pizza restaurant in Prague, which reduces investments from the availability of low-cost, well-qualified labor force lower cost of primary ingredients for making pizza such as cheese, meat, flour, which yield an overall reduced production cost. At the same time, the primary ingredients are of European Union (EU) standards, while the original recipes of the Chicago Style Pizza would attract customers, who would benefit of high-quality service. At the same time, Steve will benefit of a business friendly environment that welcomes foreign investors.

The business legislation in the Czech Republic is more mature now than at the beginning of 90's, with special emphasis on creating an open investment climate, offering five-year tax break for new investments, reduced value added tax (VAT) for food products and reduced taxes for repatriation of profits from US investments.

Czech Business Environment

Hofstede's four primary dimensions

Hofstede's four primary dimensions of culture represent a powerful tool in recognizing and understanding cultural differences and should be used for evaluating the business environment in the Czech Republic.

The first dimension is power distance which "is the extent to which less powerful members of institutions and organizations