Category Archives: Dick Locke

Cultural Intelligence II: Why We Need Cultural Intelligence

A young American man devoted a lot of attention to a Japanese woman visiting his community, including extreme courtesy — taking her arm to cross the street, and so on. The young woman later told her friends excitedly that she now had an American boyfriend. In fact the American, who was from the deep south of the United States where many families pride themselves on effusive courtesy, was not interested in the Japanese girl as a prospective girlfriend. He had merely tried to be polite, in a manner that came naturally to him in his own in-group. Unfortunately, the same manner of behavior practice by a member of the Japanese woman’s in-group would definitely have been evidence of a romantic interest.

from Cultural Intelligence by David C. Thomas and Kerr Inkson

Without cultural intelligence, we are just as likely as the man in the above scenario to take actions that will be interpreted completely opposite to our intent by the other parties. So what is cultural intelligence? Succinctly, it’s an individual’s ability to engage successfully in any environment or social setting with other individuals of varied cultural backgrounds. But what does this mean? It means that we have to recognize our cultural failures and overcome them.

What kind of cultural failures? The kind pointed out by Thomas and Inkson, namely:

  • our obliviousness to the key features and biases of our culture,
  • our uneasiness when interacting with those who are culturally different,
  • our inability to explain the behaviour of others who are culturally different,
  • our failure to recognize knowledge that can be transferred from one culture to another,
  • our lack of awareness when our culture is influencing our behavior, and
  • our inability to adjust when living and working in another culture.

Once we recognize these failings, we understand the need to become more culturally intelligent, to increase our CQ or cultural quotient. We can start by switching off cultural cruise control and becoming more mindful of our cultural interactions. Namely, we can:

  • become aware of our own assumptions and ideas,
  • tune into the assumptions and ideas of others by noticing what is apparent about their actions,
  • use all of our senses to perceive a situation,
  • view a scenario from multiple perspectives,
  • become aware of the context of the interaction,
  • create mental maps of the personalities and backgrounds of others to assist us,
  • seek out fresh information to correct and confirm the mental maps, and
  • develop empathy for the other person.

Once we do this, we are well on our way to becoming culturally intelligent, a state of being that we will discuss further in the next post. In the interim, I would encourage you to refer to Thomas and Inkson’s introductory text on Cultural Intelligence or their follow up on Living and Working Globally. While the first book in particular does not contain much in the way of specifics for dealing with a particular culture, it’s a great start for those of you who want to get the right mindset necessary to become culturally intelligent.

This series is edited by Dick Locke, SI’s resident expert on International Trade, author of “Global Supply Management — A Guide to International Procurement” (which was the definitive guide for almost a decade), and President of the Global Procurement Group and Global Supply Training which regularly gives seminars on International Trade and working with International Cultures.

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Cultural Intelligence I: An Introduction to Culture

This series is edited by Dick Locke, SI’s resident expert on International Trade, author of “Global Supply Management — A Guide to International Procurement” (which was the definitive guide for almost a decade), and President of the Global Procurement Group (and Global Supply Training) which regularly gives seminars on International Trade and working with International Cultures.

As per Wikipedia, culture is a term that has various meanings. For example, Alfred Kroeber and Clyde Kluckhohn compiled a list of 164 definitions of “culture” in “Culture: A Critical Review of Concepts and Definitions” on Questia.com.

For our purposes, we’ll define culture as the set of shared attitudes, values, goals, practices, qualities, and beliefs regarding daily interaction, manners, arts, and worthwhile pursuits for a characterizeable group of people.

Culture is important because, as noted by social scientist Geert Hofstede, it conditions individuals’ responses to their environment. Deeply embedded inside each of us, culture affects our mannerisms, our manner of speaking, our dress, and just about every other aspect of our personality. Since it deeply affects who we are, it affects the way we do business, and an understanding of different cultures is thus deeply important when conducting international trade.

Therefore, this series will continue what Dick and I started last year in Overcoming Cultural Distances in International Trade by not only defining what Cultural Intelligence is, but discussing some of the basics of cultural intelligence with respect to each of the seven countries we covered last year: China, Germany, India, Japan, (South) Korea, Mexico, and Thailand.

But first, we’ll discuss some characteristics of culture, as put forward by David C. Thomas and Kerr Inkson in their book Cultural Intelligence, People Skills for Global Business. Culture is:

  • Sharedand people within a group have it in common, so even if each individual in the group has a distinct personality, each member of the group shares a common understanding
  • Learned and Enduringas it is absorbed over long periods of time and deeply ingrained
  • A Powerful Influence on Behavioras we have a natural tendency to revert to our cultural roots and it will unconsciously influence our decisions
  • Systematic and Organizedand every value is contextually related to every other
  • Largely Invisibleas the values and beliefs that define the culture are much deeper than the expressions of those values and beliefs.

Furthermore, its effects and behavior and decisions are many and varied. For example, it:

  • Influences our Perceptionas it determines what we focus on in any given situation, and what we don’t; for example, some people will hang on your every word and ignore everything else about you while others won’t listen to a word you say while instead focussing on all of your non-verbal behaviors
  • Defines our Categorizationand helps us place people into groups such as race, culture, country, ethnic background, and social status
  • Creates our Stereotypesthat tell us what we should expect, right or wrong, from a person of a certain cultural background
  • Specifies our Attributionsand determines our rationale for why people do what we do.

That last point is key, for if we assume that a response means yes when it actually means no, or vice versa, in our international pursuits, we’re just setting ourselves up for failure.

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Undervalued Currencies, Part II

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

In our last post we discussed the undervaluation of the yuan, introduced the Purchasing Power Parity (PPP) rate as a measure of the relative valuation of a currency, and reviewed the background behind the PPP rate. In this post, we’ll cover the determination of PPP rates, the calculations necessary to determine value against the US dollar, and list some countries with large differences between the PPP rate and the actual rate.

The Determination of PPP rates

You can look them up in a very wordy and meandering World Bank publication. However, the World Bank does not update values very frequently. The most recent data is from 2005. The CIA in the United States publishes an annual World Factbook. It has data that enables an easy calculation of current PPP rates.

The Factbook shows GDP at both PPP and “official” exchange rates. In the case of China in 2009, GDP at PPP rates was 8.789 trillion U.S. dollars. (Note to non-U.S. readers: A trillion in the U.S. is 1,000,000,000,000.) GDP at official rates was 4.814 trillion dollars. Because both GDPs are conversions of the same amount of yuan, if you know the official rate simple algebra will give you the PPP rate.

How can you find the “official” rate? In most cases, it’s the actual rate. If you use the “Historical Exchange Rates” facility at oanda.com, it will give you an average exchange rate over a period of time. The average rate in 2009 was 6.841 yuan per dollar.

That means the PPP rate was 3.74 yuan per dollar. (I left the algebra to you.)

Calculation of Over- and Under- Valuation

There’s a big difference between 6.84 and 3.74. How big? First you need to re-express exchange rates into dollars per yuan. That means simply inverting each value, or dividing it into 1. If there are 6.84 yuan per dollar, each yuan is worth 14.62 U.S. cents. At 3.74 yuan per dollar, each yuan is worth 26.69 cents. The difference between the two values is 11.93 cents. Take that difference (11.93) and divide it by the PPP value and you get .452, or 45.2 percent of the PPP value. That means the yuan is undervalued against its PPP value by 45.2%.

Other Countries

If you do similar calculations on other countries, you get results that will dispel any notion that floating currencies settle near the PPP rate. You will also see that China isn’t different than many of its competitors.

With this method, some countries’ currencies are undervalued against the U.S. dollar. In turn, the U.S. dollar is undervalued against some countries’ currencies

Countries Undervalued against U.S. dollar Countries against which the U.S. dollar is overvalued
Country Amount
India 69%
Taiwan 50%
Thailand 45%
China 45%
Malaysia 40%
S. Korea 40%
Singapore 30%
Mexico 29%
Brazil 26%
Country Amount
Germany 14%
Italy 20%
France 23%
Japan 26%
Ireland 29%

Summary

  • PPP rates are calculated based on consumer purchases, not industrial products.
  • China is one of several countries that have both currency controls and an exchange rate that is significantly different than the PPP rate. However, removing controls and floating a currency does not guarantee it will reach PPP rates.
  • Individual buyers (and sourcerers) should not concern themselves with official PPP rates because these consumer-oriented rates may be very different than the rates for the particular product a buyer is handling.

Thanks, Dick! (Global Supply Training)

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Undervalued Currencies, Part I

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

The value of the Chinese currency, the renminbi is getting a lot of attention. The renminbi is commonly called the yuan, and I’ll use that term here. Economists, lobbyists, legislators and others are all saying the yuan is undervalued. I agree with them.

But undervalued compared to what? Often the answer is “compared to what it should be”. That’s really vague and circular. There is one common point of comparison, though. That’s the “Purchasing Power Parity” (PPP) exchange rate. It’s not perfect reference point though. In this two-part post I’ll be covering:

  • Background of the PPP rate
  • How to determine the PPP rate for different countries
  • How to calculate over- and under- valuation
  • Countries with big differences between the PPP rate and the actual rate

Background PPP rates

The concept of the PPP rate came largely from the World Bank. They were trying to give a realistic picture of the relative standard of living between different countries by looking at per capita Gross Domestic Product (GDP). Each country measures GDP in its own currency, and that figure has to be converted to a common currency to compare countries. The common currency the World Bank uses is the U.S. dollar. They found that converting GDPs at the real exchange rate gave an unrealistically low view of the standard of living in developing and poor countries. For example, in 2009 the annual per capita GDP in China using real exchange rates was only about $3,300 per person. But a person can live much better in China on that level of income than they would in the U.S., so the World Bank developed a PPP exchange rate that shows the per capita income to be $6,600, using a PPP rate to convert from yuan to dollars.

So how is a PPP rate determined? It’s based on a market basket of consumer-oriented goods and services. It’s the exchange rate at which that basket would cost the same in both countries. What exactly is in that market basket? I haven’t been able to find that information. I do know that it’s heavy on food, clothing, housing and education costs. It may not have much relevance to industrial purchasers.

Here are two quick examples of one-item market baskets. I live in Mexico most of the time. I can see a first-run movie in a modern theater that’s equivalent to the best in the U.S. for 45 pesos. In the U.S., it would cost $10. The PPP rate for movies in Mexico is therefore 4.5 pesos per dollar (45/10). That’s the exchange rate at which costs would be identical. However, if I were to buy a laptop computer in Mexico, an $800 laptop in the U.S. would probably cost 13,000 pesos. That implies a PPP rate for computers of 16.25. (The real exchange rate is about 12.5 pesos per dollar)

More well-known, the Economist magazine periodically publishes a one-item “Big Mac” Index of PPPs by comparing the prices of Big Macs around the world. You can see some recent results by following the link.

In the next post, we’ll cover the determination of PPP rates, the calculations necessary to determine value against the US dollar, and list some countries with large differences between the PPP rate and the actual rate.

Thanks, Dick!

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Oh-Oh!

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

Indranil Mukherjee / AFP-Getty Images from MSNBC Photoblog

Best reader comment: “Sh@#$% ! My Porsche was in that container, I suppose I’m not going to get it by Friday

Full story on MSNBC.

Fortunately for the environment and the supply chain, this doesn’t happen often.

Thanks, Dick!