InternationalManagement

Culture, Strategy, and Behavior

Fred Luthans | Jonathan P. Doh

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International ManagementCulture, Strategy, and Behavior

Tenth Edition

Jonathan P. DohVillanova University

Fred LuthansUniversity of Nebraska–Lincoln

INTERNATIONAL MANAGEMENT: CULTURE, STRATEGY, AND BEHAVIOR, TENTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2015, 2012, and 2009. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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Library of Congress Cataloging-in-Publication Data

Names: Luthans, Fred, author. | Doh, Jonathan P., author.Title: International management : culture, strategy, and behavior / Fred Luthans, University of Nebraska-Lincoln, Jonathan P. Doh, Villanova University.Description: Tenth Edition. | Dubuque: McGraw-Hill Education, [2018] | Revised edition of the authors’ International management, [2015]Identifiers: LCCN 2016055609| ISBN 9781259705076 (alk. paper) | ISBN 1259705072 (alk. paper)Subjects: LCSH: International business enterprises—Management. | International business enterprises—Management—Case studies.Classification: LCC HD62.4 .H63 2018 | DDC 658/.049—dc23 LC record available at https://lccn.loc.gov/2016055609

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

iii

Dedicated in Memory of Rafael Lucea,A Passionate Advocate for Global Business Education and Experience.

v

Preface

C hanges in the global business environment continue unabated and at an accelerated pace. Many surprising and difficult-to-predict developments have rocked global peace and economic security. Terrorism, mass migration, the United Kingdom’s exit from the European Union, and the rise of anti-immigration political movements in Europe, the United States, and elsewhere have called into question assumptions about the direction of the global political economy. In addition, rapid advances in social media have not only accelerated globalization but also provided a means for those who seek political and economic changes to organize and influence their leaders for more responsible gover-nance, or, in some cases, advance a more narrow ideological agenda (see opening articles in Chapters 1 and 2). In addition, concerns about climate change and other environmen-tal issues have prompted companies, in conjunction with governments and nongovern-mental organizations, to consider alternate approaches to business and governance (see Chapter 3 opening article). Some of these developments have challenged longstanding beliefs about the power and benefits of globalization and economic integration, but they also underscore the interconnected nature of global economies. Although many countries and regions around the world are closely linked, important differences in institutional and cultural environ-ments persist, and some of these differences have become even more pronounced in recent years. The challenges for international management reflect this dynamism and the increasing unpredictability of global economic and political events. Continued growth of the emerging markets is reshaping the global balance of economic power, even though differences exist between and among regions and countries. Although many emerging markets continued to experience growth during a period when developed countries’ economies stagnated or declined, others, like Russia and Brazil, have faced major set-backs. Further, some developed economies, such as Greece, Italy, Spain, and Portugal, continue to face formidable challenges that stem from the European debt crisis that began in 2009. Low or negative interest rates reflect a “new normal” of slower-than-average growth among many global economies. The global political and security environment remains unpredictable and volatile, with ongoing conflicts in the Middle East and Africa and continuing tensions in Iran, North Korea, Iraq, and Afghanistan and elsewhere. Another crisis stemming from con-flict in Syria and elsewhere has resulted in mass migration—and broad dislocations—across North Africa and Southern, even Northern, Europe (see Chapters 1 and 2 for further discussion). On the economic front, the global trade and integration agenda seems stalled, largely due to domestic political pressures in Europe and North America. Although the Trans-Pacific Partnership (TPP), a proposed free-trade agreement including 12 coun-tries in the Americas and Asia, was concluded, its ratification in the United States is uncertain. Similarly, the fate of the Transatlantic Trade and Investment Partnership, which was still under negotiation at the time of this writing, is also unclear.   As noted above, the advent of social networking has transformed the way citizens interact; how businesses market, promote, and distribute their products globally; and how civil society expresses its concerns that governments provide greater freedoms and accountability. Concurrently, companies, individuals, and even students can now engage in broad “mass” collaboration through digital, online technology for the development of new and innovative systems, products, and ideas. Both social networking and mass col-laboration bring new power and influence to individuals across borders and transform

vi Preface

the nature of their relationships with global organizations. Although globalization and technology continue to link nations, businesses, and individuals, these linkages also high-light the importance of understanding different cultures, national systems, and corporate management practices around the world. The world is now interconnected geographically, but also electronically and psychologically; as such, nearly all businesses have been touched in some way by globalization. Yet, as cultural, political, and economic differ-ences persist, astute international managers must be in a position to adapt and adjust to the vagaries of different contexts and environments. In this new tenth edition of International Management, we have retained the strong and effective foundations gained from research and practice over the past decades while incorporating the important latest research and contemporary insights that have changed the context and environment for international management. Several trends have emerged that pose both challenges and opportunities for international managers. First, more nationalistically oriented governments and/or political movements have emerged in many regions of the world, challenging previous assumptions about the benefits and inevitability of globalization and integration. Second, while emerging markets continue to rise in importance, some—such as China and India—have fared much better economically than others—such as Brazil and Russia. Third, aging popu-lations and concerns about migration have challenged many developed country govern-ments as they wrestle with these dual pressures. Fourth, social media and other forms of electronic connectivity continue to facilitate international business of all sorts; how-ever, these connection go only so far, with many barriers and limitations imposed by governments.  Although we have extensive new, evidence-based material in this edition, we continue to strive to make the book even more user-friendly and applicable to prac-tice. We continue to take a balanced approach in the tenth edition of International Management: Culture, Strategy, and Behavior. Whereas other texts stress culture, strategy, or behavior, our emphasis on all three critical dimensions—and the interac-tions among them—has been a primary reason why the previous editions have been the market-leading international management text. Specifically, this edition has the following chapter distribution: environment (three chapters), culture (four chapters), strategy (four chapters), and organizational behavior/human resource management (three chapters). Because the context of international management changes rapidly, all the chapters have been updated and improved. New real-world examples and research results are integrated throughout the book, accentuating the experiential relevance of the straightforward content. As always, we emphasize a balance of research and application. For the new tenth edition we have incorporated important new content in the areas of the emergence and role of social media as a means of transacting business and mobi-lizing social movements, the global pressures around migration, the role of the “sharing” economy as represented by companies such as Uber, and other important global themes. We have incorporated the latest research and practical insights on pressure for MNCs to adopt more sustainable practices, and the strategies many companies are using to dif-ferentiate their products through such “green” management practices. We have updated discussion of a range of contemporary topics, including continued exploration of the role of the comprehensive GLOBE study on cross-cultural leadership. A continuing and relevant end-of-chapter feature in this edition is the “Internet Exercise.” The purpose of each exercise is to encourage students to use the Internet to find information from the websites of prominent MNCs to answer relevant ques-tions about the chapter topic. An end-of-book feature is a series of Skill-Building and Experiential Exercises for aspiring international managers. These in-class exercises represent the various parts of the text (culture, strategy, and behavior) and provide hands-on experience.

Preface vii

We have extended from the ninth edition of International Management the chap-ter-opening discussions called “The World of International Management” (WIM), based on very recent, relevant news stories to grab readers’ interest and attention. Many of these opening articles are new to this edition and all have been updated. These timely opening discussions transition the reader into the chapter topic. At the end of each chapter, there is a pedagogical feature that revisits the chapter’s subject matter: “The World of International Management—Revisited.” Here we pose several discussion questions based on the topic of the opening feature in light of the student’s entire reading of the chapter. Answering these questions requires readers to reconsider and to draw from the chapter material. Suggested answers to these “WIM—Revisited” discussion questions appear in the completely updated Instructor’s Manual, where we also provide some multiple-choice and true-false questions that draw directly from the chapters’ World of International Management topic matter for instructors who want to include this material in their tests. The use and application of cases are further enhanced in this edition. All cases have been updated and several new ones have been added. The short within-chapter country case illustrations—“In the International Spotlight”—can be read and dis-cussed in class. These have all been revised and three have been added—Cuba, Greece, and Nigeria. In addition, we have added an additional exercise, “You Be the Interna-tional Management Consultant,” that presents a challenge or dilemma facing a com-pany in the subject country of the “Spotlight.” Students are invited to respond to a question related to this challenge. The revised or newly added “Integrative Cases” positioned at the end of each main part of the text were created exclusively for this edition and provide opportunities for reading and analysis outside of class. Review questions provided for each case are intended to facilitate lively and productive writ-ten analysis or in-class discussion. Our “Brief Integrative Cases” typically explore a specific situation or challenge facing an individual or team. Our longer and more detailed “In-Depth Integrative Cases” provide a broader discussion of the challenges facing a company. These two formats allow maximum flexibility so that instructors can use the cases in a tailored and customized fashion. Accompanying many of the in-depth cases are short exercises that can be used in class to reinforce both the sub-stantive topic and students’ skills in negotiation, presentation, and analysis. The cases have been extensively updated and several are new to this edition. Cases concerning the controversies over drug pricing, TOMS shoes, Russell Athletics/Fruit of the Loom, Euro Disneyland and Disney Asia, Google in China, IKEA, HSBC, Nike, Walmart, Tata, Danone, Chiquita, Coca-Cola, and others are unique to this book and specific to this edition. Of course, instructors also have access to Create (www.mcgraw-hill-create.com), McGraw-Hill’s extensive content database, which includes thousands of cases from major sources such as Harvard Business School, Ivey, Darden, and NACRA case databases. Along with the new or updated “International Management in Action” boxed appli-cation examples within each chapter and other pedagogical features at the end of each chapter (i.e., “Key Terms,” “Review and Discussion Questions,” “The World of Interna-tional Management—Revisited,” and “Internet Exercise”), the end-of-part brief and in-depth cases and the end-of-book skill-building exercises and simulations in the Connect resources complete the package. International Management is generally recognized to be the first “mainstream” text of its kind. Strategy casebooks and specialized books in organizational behavior, human resources, and, of course, international business, finance, marketing, and eco-nomics preceded it, but there were no international management texts before this one, and it remains the market leader. We have had sustainability because of the effort and care put into the revisions. We hope you agree that this tenth edition continues the tradition and remains the “world-class” text for the study of interna-tional management.

viii Preface

McGraw-Hill Connect®: connect.mheducation.com

Continually evolving, McGraw-Hill Connect® has been redesigned to provide the only true adaptive learning experience delivered within a simple and easy-to-navigate environ-ment, placing students at the very center.

∙ Performance Analytics—Now available for both instructors and students, easy-to-decipher data illuminate course performance. Students always know how they’re doing in class, while instructors can view student and section performance at a glance.

∙ Personalized Learning—Squeezing the most out of study time, the adaptive engine within Connect creates a highly personalized learning path for each student by identifying areas of weakness and providing learning resources to assist in the moment of need.

This seamless integration of reading, practice, and assessment ensures that the focus is on the most important content for that individual.

Instructor Library The Connect Management Instructor Library is your repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. To help instructors teach international management, this text is accompanied by a revised and expanded Instructor’s Resource Manual, Test Bank, and PowerPoint slides, all of which are in  the  Connect  Library.

Acknowledgments

We would like to acknowledge those who have helped to make this book a reality. We will never forget the legacy of international management education in general and for this text in particular provided by our departed colleague Richard M. Hodgetts. Special thanks also go to our growing number of colleagues throughout the world who have given us many ideas and inspired us to think internationally. Closer to home, Jonathan Doh would like to thank the Villanova School of Business and its leadership, especially Provost Pat Maggitti, Interim Dean Daniel Wright, Dean Joyce Russell, Interim Vice Dean Wen Mao, and Herb Rammrath, who generously endowed the Chair in International Business Jonathan now holds. Also, for this new tenth edition we would like to thank Ben Littell, who did comprehensive research, graphical design, and writing to update chapter material and cases. Specifically, Ben researched and drafted chapter opening World of International Management features, developed a number of original graphics, and provided extensive research assistance for other revisions to the book. Allison Meade researched and drafted the Chapter 4 World of International Management feature on “Culture Clashes in Cross-Border Mergers and Acquisitions.” Fred Luthans would like to give special recognition to two international management scholars: Henry H. Albers, former Chair of the Manage-ment Department at the University of Nebraska and former Dean at the University of Petroleum and Minerals, Saudi Arabia, to whom previous editions of this book were dedicated; and Sang M. Lee, former Chair of the Management Department at Nebraska, founding and current president of the Pan Pacific Business Association, and close col-league on many ventures around the world over the past 30 years.  In addition, we would like to acknowledge the help that we received from the many reviewers from around the globe, whose feedback guided us in preparing the tenth edition of the text. These include

Joseph S. Anderson,  Northern Arizona UniversityChi Anyansi-Archibong,  North Carolina A&T State UniversityKoren Borges,  University of North Florida

Lauryn De George,  University of Central FloridaJae Jung, University of Missouri at Kansas CityManjula S. Salimath,  University of North Texas

Preface ix

Thomas M. Abbott, Post UniversityYohannan T. Abraham, Southwest Missouri State UniversityJanet S. Adams, Kennesaw State UniversityIrfan Ahmed, Sam Houston State UniversityChi Anyansi-Archibong, North Carolina A&T State UniversityKibok Baik, James Madison UniversityR. B. Barton, Murray State UniversityLawrence A. Beer, Arizona State UniversityKoren Borges, University of North FloridaTope A. Bello, East Carolina UniversityMauritz Blonder, Hofstra UniversityGunther S. Boroschek, University of Massachusetts–BostonCharles M. Byles, Virginia Commonwealth UniversityConstance Campbell, Georgia Southern UniversityScott Kenneth Campbell, Georgia College & State UniversityM. Suzanne Clinton, University of Central OklahomaHelen Deresky, SUNY PlattsburghDr. Dharma deSilva, Center for International Business Advancement (CIBA)David Elloy, Gonzaga UniversityVal Finnigan, Leeds Metropolitan UniversityDavid M. Flynn, Hofstra UniversityJan Flynn, Georgia College and State UniversityJoseph Richard Goldman, University of MinnesotaJames Gran, Buena Vista UniversityRobert T. Green, University of Texas at AustinAnnette Gunter, University of Central OklahomaJerry Haar, Florida International University–MiamiJean M. Hanebury, Salisbury State UniversityRichard C. Hoffman, Salisbury State UniversityJohan Hough, University of South AfricaJulie Huang, Rio Hondo CollegeMohd Nazari Ismail, University of MalayaSteve Jenner, California State University–Dominguez HillsJames P. Johnson, Rollins CollegeMarjorie Jones, Nova Southeastern UniversityJae C. Jung, University of Missouri–Kansas City

Ann Langlois, Palm Beach Atlantic UniversityRobert Kuhne, Hofstra UniversityChristine Lentz, Rider UniversityBen Lever III, College of CharlestonRobert C. Maddox, University of TennesseeCurtis Matherne III, East Tennessee State UniversityDouglas M. McCabe, Georgetown UniversityJeanne M. McNett, Assumption CollegeLauryn Migenes, University of Central FloridaAlan N. Miller, University of Nevada, Las VegasRay Montagno, Ball State UniversityRebecca J. Morris, University of Nebraska–OmahaErnst W. Neuland, University of PretoriaWilliam Newburry, Rutgers Business SchoolYongsun Paik, Loyola Marymount UniversityValerie S. Perotti, Rochester Institute of TechnologyRichard B. Peterson, University of WashingtonSuzanne J. Peterson, University of Nebraska–LincolnJoseph A. Petrick, Wright State UniversityJuan F. Ramirez, Nova Southeastern UniversityRichard David Ramsey, Southeastern Louisiana UniversityOwen Sevier, University of Central OklahomaMansour Sharif-Zadeh, California State Polytechnic University–PomonaEmeric Solymossy, Western Illinois University.Jane H. Standford, Texas A&M University–KingsvilleDale V. Steinmann, San Francisco State UniversityRandall Stross, San Jose State UniversityGeorge Sutija, Florida International UniversityDeanna Teel, Houston Community CollegeDavid Turnipseed, University of South Alabama–MobileKatheryn H. Ward, Chicago State UniversityLi Weixing, University of Nebraska–LincolnAimee Wheaton, Regis CollegeMarion M. White, James Madison UniversityTimothy Wilkinson, University of AkronGeorge Yacus, Old Dominion UniversityCorinne Young, University of TampaZhe Zhang, University of Central Florida–OrlandoAnatoly Zhuplev, Loyola Marymount University

Our thanks, too, to the reviewers of previous editions of the text:

Finally, thanks to the team at McGraw-Hill who worked on this book: Susan Gouijnstook, Managing Director; Anke Weekes, Executive Brand Manager; Laura Hurst Spell, Senior Product Developer; Erin Guendelsberger, Development Editor; Michael Gedatus, Market-ing Manager; and Danielle Clement, Content Project Manager. Last but by no means least, we greatly appreciate the love and support provided by our families.

Fred Luthans and Jonathan P. Doh

New and Enhanced Themes

∙ Thoroughly revised and updated chapters to reflect the most critical issues for international managers.

∙ Greater attention to demographic trends and human mobility, underscoring the importance of aging work forces, migration, culture, and global talent management.

∙ Focus on global sustainability and sustainable management practices and their impact on international management.

∙ New or revised opening World of International Management (WIM) features written by the authors on current international management challenges; these mini-cases were prepared expressly for this edition and are not available elsewhere.

∙ Discussions of the rise of global terrorism, the migrant crisis, the growing role of social media in international transactions, and many other contemporary topics presented in the opening chapter and throughout the book.

∙ New and updated discussions of major issues in global ethics, sustainability, and insights from project GLOBE and other cutting-edge research.

∙ Greater emphasis on major emerging regions, economic challenges in major countries such as Brazil and Russia, and specific case illustrations on how companies are managing these challenges.

Thoroughly Revised and Updated Chapter Content

∙ New or revised opening WIM discussions on topics including the global influences of social media using the case of Snap-chat; the role of social networking in political change in the Middle East; sustainability as a  global competitive advantage using examples of Patagonia, Tesla, and Nestlé; and cultural challenges in global mergers and acquisitions. Others address the competitive dynamics between Apple and Xiaomi and Amazon and Alibaba, the emergence of Haier as the largest global appliance company, Netflix’s challenges in China and Russia, and many others. These features were written expressly for this edition and are not available elsewhere.

∙ Updated and strengthened emphasis on ethics, social responsibility, and sustainability.

∙ Extensive coverage of Project GLOBE, its relationship to other cultural frameworks, and its application to international man-agement practice (Chapters 4, 13).

∙ Revised or new “In the International Spotlight” inserts that profile the key economic and political issues relevant to managers in specific countries.

∙ Greater coverage of the challenges and opportunities for inter-national strategy targeted to the developing “base of the pyramid” economies (Chapter 8 and Tata cases).

x

Luthans Doh

The tenth

edition of International

Management: Culture,

Strategy, and Behavior

is still setting the

standard. Authors

Jonathan Doh and

Fred Luthans have

taken care to retain

the effective

foundation gained

from research and

practice over the past

decades. At the same

time, they have fully

incorporated important

new and emerging

developments that

have changed what

international managers

are currently facing

and likely to face in

the coming years.

xi

Thoroughly Updated and/or New Cases, Inserts, and Exercises

∙ Completely new “In the International Spotlight” country profiles at the end of every chapter including the addition of profiles on Cuba, Greece, and Nigeria.

∙ “You Be the International Management Consultant” exercises pre-senting an actual company’s challenge in that country and inviting students to recommend a course of action.  

∙ New “International Management in Action” features, including discussions on timely topics such as the rise of Bitcoin, the Volkswagen emissions scandal, and the political risks facing Uber, to name a few.

∙ Thoroughly updated cases (not available elsewhere): TOMS shoes, Russell Athletics/Fruit of the Loom, Euro Disneyland and Disney Asia, Google in China, IKEA, HSBC, Nike, Walmart, Tata, Danone, Chiquita, Coca-Cola, and others are unique to this book and specific to this edition.

∙ Brand new end-of-part cases developed exclusively for this edition (not available elsewhere): TOMS Puts Its Right Foot Forward;  The Ethics of Global Drug Pricing.

∙ Brand new “World of International Management” chapter opening discussions, including topics such as Netflix’s expansion to emerg-ing markets, the merger of ABInBev and SABMiller, the battle brewing between Apple’s iPhone and Chinese cell phone startups, the impact of Russian sanctions on international businesses, and the growth of Chinese brand Haier, to name a few.

∙ New and revised graphics throughout.∙ Timely updates throughout, based on the latest research, including

an extended discussion of the GLOBE project, the continued impact of global terrorism on international business, and the push towards a sustainable future, to name a few.

Totally Revised Instructor and Student Support

The following instructor and student support materials can be found in Connect® at connect.mheducation.com for the Tenth Edition.

∙ The Instructor’s Manual offers a summary of Learning Objectives and a teaching outline with lecture notes and teaching tips, as well as suggested answers to questions found throughout and at the conclusion of each chapter. Suggested answers are also pro-vided for all the cases found in the book.

∙ The test bank is offered in both Word and EZ Test formats and offers over 1,000 test items consisting of true/false, multiple choice, and essay. Answers are provided for all test bank questions.

Continues to set the standard. . .

∙ PowerPoint Presentations consisting of 30 slides per chapter give instructors talking points, feature exhibits from the text, and are summarized with a review and discussion slide.

∙ LearnSmart®: The Tenth Edition of International Management is avail-able with LearnSmart, the most widely used adaptive learning resource, which is proven to improve grades. To improve your understanding of this subject and improve your grades, go to McGraw-Hill Connect® at connect.mheducation.com and find out more about LearnSmart. By helping students focus on the most important information they need to learn, LearnSmart personalizes the learning experience so they can study as efficiently as possible.

∙ SmartBook®: An extension of LearnSmart, SmartBook is an adaptive eBook that helps students focus their study time more effectively. As students read, SmartBook assesses comprehension and dynamically highlights where they need to study more.

∙ Create: Instructors can now tailor their teaching resources to match the way they teach! With McGraw-Hill Create, create.mheducation.com, instructors can easily rearrange chapters, combine material from other content sources, and quickly upload and integrate their own content, like course syllabi or teaching notes. Find the right content in Create by searching through thou-sands of leading McGraw-Hill textbooks. Arrange the material to fit your teaching style. Order a Create book and receive a complimentary print review copy in 3–5 business days or a complimentary electronic review copy (echo) via e-mail within one hour. Go to create.mheducation.com today and register.

McGraw-Hill Campus™

McGraw-Hill Campus is a new one-stop teaching and learning experience available to users of any learning management system. This institutional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Education materials, including the award-winning McGraw-Hill Connect platform, from directly within the institution’s web-site. With McGraw-Hill Campus, faculty receive instant access to teaching materials (e.g., eTextbooks, test banks, PowerPoint slides, learning objectives, etc.), allowing them to browse, search, and use any instructor ancillary content in our vast library at no additional cost to instructor or students. In addition, students enjoy SSO access to a variety of free content and subscription-based products (e.g., McGraw-Hill Con-nect). With McGraw-Hill Campus enabled, faculty and students will never need to create another account to access McGraw-Hill products and services. Learn more at www.mhcampus.com.

Assurance of Learning Ready

Many educational institutions today focus on the notion of assurance of learning, an important element of some accreditation standards. International Management is designed specifically to support instructors’ assurance of learning initiatives with a simple yet powerful solution. Each test bank question for International Management  maps to a specific chapter learning objective listed in the text. Instructors can use our test bank software, EZ Test and EZ Test Online, to easily query for learning objectives that directly relate to the learning outcomes for their course. Instructors can then use the reporting features of EZ Test to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy.

xii Continues to Set the Standard. . .

AACSB Tagging

McGraw-Hill Education is a proud corporate member of AACSB International. Under-standing the importance and value of AACSB accreditation, International Management recognizes the curriculum guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in the text and the test bank to the six general knowledge and skill guidelines in the AACSB standards. The statements con-tained in International Management are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While the International Management teaching package makes no claim of any specific AACSB qualification or evaluation, we have within International Management labeled selected questions accord-ing to the six general knowledge and skills areas.

Continues to Set the Standard. . . xiii

About the AuthorsJONATHAN P. DOH is the Herbert G. Rammrath Chair in International Business, found-ing Director of the Center for Global Leadership, and Professor of Management at the Villanova School of Business, ranked in 2016 as the #1 undergraduate program in the United States by Bloomberg Businessweek.   He is also an occasional executive educator for the Wharton School of Business. Jonathan teaches, does research, and serves as an executive instructor and consultant in the areas of international strategy and corporate responsibility.   Previously, he was on the faculty of American and Georgetown Universi-ties and a trade official with the U.S. government. Jonathan is author or co-author of more than 70 refereed articles published in leading international business and management journals, more than 30 chapters in scholarly edited volumes, and more than 90 conference papers. Recent articles have appeared in journals such as Academy of Management Review, California Management Review, Journal of International Business Studies, Journal of Management, Journal of Management Studies, Journal of World Business, Organization Science, Sloan Management Review, and Strategic Management Journal. He is co-editor and contributing author of Globalization and NGOs (Praeger, 2003) and Handbook on Responsible Leadership and Governance in Global Business (Elgar, 2005) and co-author of the previous edition of International Management: Culture, Strategy, and Behavior (9th ed., McGraw-Hill/Irwin, 2015), the best-selling international management text. His current research focus is on strategy for and in emerging markets, global corporate responsibility, and offshore outsourcing of services. His most recent scholarly books are Multinationals and Development (with Alan Rugman, Yale University Press, 2008), NGOs and Corpora-tions: Conflict and Collaboration (with Michael Yaziji, Cambridge University Press, 2009) and Aligning for Advantage: Competitive Strategy for the Social and Political Arenas (with Tom Lawton and Tazeeb Rajwani, Oxford University Press, 2014). He has been an associate, consulting, or senior editor for numerous journals, and is currently the editor-in-chief of Journal of World Business. Jonathan has also developed more than a dozen original cases and simulations published in books, journals, and case databases and used at many leading global universities. He has been a consultant or executive instructor for ABB, Anglo American, Bodycote, Bosch, China Minsheng Bank, Hana Financial, HSBC, Ingersoll Rand, Medtronic, Shanghai Municipal Government, Siam Cement, the World Economic Forum, among others. He is an external adviser to the Global Energy Resource Group of Deloitte Touche. Jonathan is part of the Executive Committee of the Academy of Management Organizations and Natural Environment Division,  a role that culminated in service as chair of the division in 2016. He was ranked among the top 15 most prolific international business scholars in the world for the period 2001–2009 (Lahiri and Kumar, 2012) and in 2015 was elected a fellow of the Academy of International Business. He is a frequent keynote speaker to academic and professional groups in Europe, Asia, and Latin America. He holds a PhD in strategic and international management from George Washington University.

FRED LUTHANS is University and the George Holmes Distinguished Professor of Man-agement, Emeritus  at the University of Nebraska–Lincoln. He is also  a Senior Research Scientist  for HUMANeX  Ventures  Inc.  He received his BA, MBA, and PhD from the University of Iowa, where he received the Distinguished Alumni Award in 2002. While serving as an officer in the U.S. Army from 1965–1967, he taught leadership at the U.S. Military Academy at West Point. He has been a visiting scholar at a number of colleges and universities and has lectured in  numerous  European and Pacific Rim countries. He

© Villanova University, John Shetron

Courtesy of University of Nebraska-Lincoln College of Business Administration

xiv

About the Authors xv

has taught international management as a visiting faculty member at the universities of Bangkok, Hawaii, Henley in England, Norwegian Management School, Monash in Australia, Macau, Chemnitz in Germany, and Tirana in Albania. A past president of the Academy of Management, in 1997 he received the Academy’s Distinguished Educator Award. In 2000 he became an inaugural member of the Academy’s Hall of Fame for being one of the “Top Five” all-time published authors in the prestigious Academy journals.  For many years he was co-editor-in-chief of the  Journal of World Busi-ness  and  editor of  Organizational  Dynamics  and is currently  co-editor of  Journal of Leadership and Organizational Studies. The author of numerous books, his seminal Orga-nizational Behavior  is now in its 13th edition and the  2007 groundbreaking book  Psy-chological Capital  (Oxford University Press) with Carolyn Youssef and Bruce Avolio  came out in a new version in 2015.  He is one of very few management scholars who is a Fellow of the Academy of Management, the Decision Sciences Institute, and the Pan Pacific Business Association. He received the Global Leadership Award from the Pan Pacific Association and  has been a member of its Executive Committee since it was founded  over  30 years ago.  This committee helps to organize the annual meeting held in Pacific Rim countries. He has been involved with some of the first empirical studies on motivation and behavioral management techniques and the analysis of mana-gerial activities in Russia; these articles  were  published in the  Academy of Management Journal,  Journal of International Business Studies,  Journal of World Business,  and European Management Journal. Since the very beginning of the transition to market economies after the fall of communism in Eastern Europe, he has been actively involved in management education programs sponsored by the U.S. Agency for International Development in Albania and Macedonia, and in U.S. Information Agency programs involving the Central Asian countries of Kazakhstan, Kyrgyzstan, and Tajikistan. Profes-sor Luthans’s recent international research involves his construct of positive psychologi-cal capital (PsyCap).  For example, he and colleagues have published their research demonstrating the impact of Chinese workers’ PsyCap on their performance in the Inter-national Journal of Human Resource Management  and  Management and Organization Review. He is applying his positive approach to positive organizational behavior (POB), PsyCap, and authentic leadership to effective global management and has   been the keynote at programs in China (numerous times), Malaysia, South Korea, Indonesia, Phil-ippines, Singapore, Taiwan, Japan, Vietnam, Costa Rica, Mexico, Chile, Fiji, Germany, France, England, Spain, Norway, Finland, Denmark, Netherlands, Italy, Russia, Macedonia, Albania, Morocco,  South Africa,  New Zealand, and Australia.

Environmental Foundation

1 Globalization and International Linkages 2

2 The Political, Legal, and Technological Environment 44

3 Ethics, Social Responsibility, and Sustainability 74

Brief Integrative Case 1.1: Advertising or Free Speech? The Case of Nike and Human Rights 99Brief Integrative Case 1.2: TOMS Puts Its Right Foot Forward 102In-Depth Integrative Case 1.1: Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic 107In-Depth Integrative Case 1.2: The Ethics of Global Drug Pricing 113

The Role of Culture

4 The Meanings and Dimensions of Culture 122

5 Managing Across Cultures 156

6 Organizational Cultures and Diversity 182

7 Cross-Cultural Communication and Negotiation 208

Brief Integrative Case 2.1: Coca-Cola in India 248Brief Integrative Case 2.2: Danone’s Wrangle with Wahaha 255In-Depth Integrative Case 2.1a: Euro Disneyland 262In-Depth Integrative Case 2.1b: Disney in Asia 273In-Depth Integrative Case 2.2: Walmart’s Global Strategies 279

International Strategic Management

8 Strategy Formulation and Implementation 290

9 Entry Strategies and Organizational Structures 328

10 Managing Political Risk, Government Relations, and Alliances 360

11 Management Decision and Control 388

Brief Integrative Case 3.1: Google in China: Protecting Property and Rights 415In-Depth Integrative Case 3.1: Tata “Nano”: The People’s Car 421

Part Two

Part Three

Brief ContentsPart One

xvi

Brief Contents xvii

Organizational Behavior and Human Resource Management

12 Motivation Across Cultures 432

13 Leadership Across Cultures 468

14 Human Resource Selection and Development Across Cultures 508

Brief Integrative Case 4.1: IKEA’s Global Renovations 555In-Depth Integrative Case 4.1: HSBC in China 563In-Depth Integrative Case 4.2: Chiquita’s Global Turnaround 575

Skill-Building and Experiential Exercises 583

Glossary 599Indexes 605

Part Four

Environmental Foundation

1 Globalization and International Linkages 2The World of International Management: An Interconnected World 2

Introduction 5

Globalization and Internationalization 7

Globalization, Antiglobalization, and Global Pressures for Change 7

Global and Regional Integration 10

Changing Global Demographics 14

The Shifting Balance of Economic Power in the Global Economy 15

Global Economic Systems 22

Market Economy 22

Command Economy 23

Mixed Economy 23

Economic Performance and Issues of Major Regions 23

Established Economies 24

Emerging and Developing Economies 26

Developing Economies on the Verge 30

The World of International Management—Revisited 35

Summary of Key Points 37

Key Terms 37

Review and Discussion Questions 37

Answers to the In-Chapter Quiz 38

Internet Exercise: Global Competition in Fast Food 38

Endnotes 38

In the International Spotlight: India 42

2 The Political, Legal, and Technological Environment 44The World of International Management: Social Media and Political Change 44

Political Environment 46

Ideologies 47

Political Systems 50

Legal and Regulatory Environment 52

Basic Principles of International Law 53

Examples of Legal and Regulatory Issues 54

Table of ContentsPart One

xviii

Table of Contents xix

Privatization 57

Regulation of Trade and Investment 60

Technological Environment and Global Shifts in Production 60

Trends in Technology, Communication, and Innovation 60

Biotechnology 62

E-Business 63

Telecommunications 64

Technological Advancements, Outsourcing, and Offshoring 65

The World of International Management—Revisited 67

Summary of Key Points 68

Key Terms 68

Review and Discussion Questions 69

Internet Exercise: Hitachi Goes Worldwide 69

Endnotes 69

In the International Spotlight: Greece 73

3 Ethics, Social Responsibility, and Sustainability 74The World of International Management: Sustaining Sustainable Companies 74

Ethics and Social Responsibility 77

Ethics and Social Responsibility in International Management 77

Ethics Theories and Philosophy 77

Human Rights 79

Labor, Employment, and Business Practices 80

Environmental Protection and Development 81

Globalization and Ethical Obligations of MNCs 83

Reconciling Ethical Differences across Cultures 85

Corporate Social Responsibility and Sustainability 85

Corporate Governance 89

Corruption 90

International Assistance 92

The World of International Management—Revisited 93

Summary of Key points 94

Key Terms 94

Review and Discussion Questions 94

Endnotes 94

In the International Spotlight: Cuba 98

Brief Integrative Case 1.1: Advertising or Free Speech? The Case of Nike and Human Rights 99

Endnotes 101

Brief Integrative Case 1.2: TOMS Puts Its Right Foot Forward 102

Endnotes 105

xx Table of Contents

In-Depth Integrative Case 1.1: Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic 107

Endnotes 111

In-Depth Integrative Case 1.2: The Ethics of Global Drug Pricing 113

Endnotes 120

The Role of Culture

4 The Meanings and Dimensions of Culture 122The World of International Management: Culture Clashes in Cross-Border Mergers and Acquisitions 122

The Nature of Culture 124

Cultural Diversity 125

Values in Culture 128

Values in Transition 128

Cultural Dimensions 129

Hofstede 129

Trompenaars 139

Integrating Culture and Management: The GLOBE Project 145

Culture and Management 146

GLOBE’s Cultural Dimensions 146

GLOBE Country Analysis 147

The World of International Management—Revisited 148

Summary of Key Points 150

Key Terms 150

Review and Discussion Questions 151

Internet Exercise: Renault-Nissan in South Africa 151

Endnotes 151

In the International Spotlight: South Africa 154

5 Managing Across Cultures 156The World of International Management: Taking a Bite Out of Apple: Corporate Culture and an Unlikely Chinese Start-Up 156

The Strategy for Managing across Cultures 158

Strategic Predispositions 159

Meeting the Challenge 160

Cross-Cultural Differences and Similarities 162

Parochialism and Simplification 162

Similarities across Cultures 164

Many Differences across Cultures 165

Cultural Differences in Selected Countries and Regions 168

Using the GLOBE Project to Compare Managerial Differences 169

Managing Culture in Selected Countries and Regions 170

Part Two

Table of Contents xxi

The World of International Management—Revisited 175

Summary of Key Points 176

Key Terms 176

Review and Discussion Questions 176

Internet Exercise: Haier’s Approach 176

Endnotes 177

In the International Spotlight: Poland 180

6 Organizational Cultures and Diversity 182The World of International Management: Managing Culture and Diversity in Global Teams 182

The Nature of Organizational Culture 184

Definition and Characteristics 185

Interaction between National and Organizational Cultures 186

Organizational Cultures in MNCs 190

Family Culture 192

Eiffel Tower Culture 192

Guided Missile Culture 193

Incubator Culture 194

Managing Multiculturalism and Diversity 196

Phases of Multicultural Development 196

Types of Multiculturalism 198

Potential Problems Associated with Diversity 199

Advantages of Diversity 200

Building Multicultural Team Effectiveness 201

The World of International Management—Revisited 203

Summary of Key Points 203

Key Terms 204

Review and Discussion Questions 204

Internet Exercise: Lenovo’s International Focus 205

Endnotes 205

In the International Spotlight: Nigeria 207

7 Cross-Cultural Communication and Negotiation 208

The World of International Management: Netflix’s Negotiations: China and Russia 208

The Overall Communication Process 210

Verbal Communication Styles 210

Interpretation of Communications 213

Communication Flows 214

Downward Communication 214

Upward Communication 215

xxii Table of Contents

Communication Barriers 216

Language Barriers 216

Perceptual Barriers 219

The Impact of Culture 221

Nonverbal Communication 223

Achieving Communication Effectiveness 226

Improve Feedback Systems 226

Provide Language Training 226

Provide Cultural Training 227

Increase Flexibility and Cooperation 229

Managing Cross-Cultural Negotiations 229

Types of Negotiation 229

The Negotiation Process 230

Cultural Differences Affecting Negotiations 231

Negotiation Tactics 234

Negotiating for Mutual Benefit 235

Bargaining Behaviors 237

The World of International Management—Revisited 240

Summary of Key Points 241

Key Terms 241

Review and Discussion Questions 241

Internet Exercise: Working Effectively at Toyota 242

Endnotes 242

In the International Spotlight: China 246

Brief Integrative Case 2.1: Coca-Cola in India 248

Endnotes 253

Brief Integrative Case 2.2: Danone’s Wrangle with Wahaha 255

Endnotes 260

In-Depth Integrative Case 2.1a: Euro Disneyland 262

Endnotes 272

In-Depth Integrative Case 2.1b: Disney in Asia 273

Endnotes 277

In-Depth Integrative Case 2.2: Walmart’s Global Strategies 279

Endnotes 286

International Strategic Management

8 Strategy Formulation and Implementation 290The World of International Management: GSK’s Prescription for Global Growth 290

Strategic Management 293

The Growing Need for Strategic Management 294

Benefits of Strategic Planning 295

Part Three

Table of Contents xxiii

Approaches to Formulating and Implementing Strategy 295

Global and Regional Strategies 299

The Basic Steps in Formulating Strategy 302

Environmental Scanning 302

Internal Resource Analysis 304

Goal Setting for Strategy Formulation 304

Strategy Implementation 306

Location Considerations for Implementation 306

Combining Country and Firm-Specific Factors in International Strategy 308

The Role of the Functional Areas in Implementation 310

Specialized Strategies 311

Strategies for Emerging Markets 311

Entrepreneurial Strategy and New Ventures 317

The World of International Management—Revisited 319

Summary of Key Points 320

Key Terms 320

Review and Discussion Questions 320

Internet Exercise: Infosys’s Global Strategy 321

Endnotes 321

In the International Spotlight: Saudi Arabia 327

9 Entry Strategies and Organizational Structures 328The World of International Management: Building a Global Brand: Haier’s Alignment of Strategy and Structure 328

Entry Strategies and Ownership Structures 329

Export/Import 330

Wholly Owned Subsidiary 330

Mergers/Acquisitions 331

Alliances and Joint Ventures 332

Alliances, Joint Ventures, and M&A: The Case of the Automotive Industry 333

Licensing 335

Franchising 336

The Organization Challenge 337

Basic Organizational Structures 338

Initial Division Structure 338

International Division Structure 339

Global Structural Arrangements 340

Transnational Network Structures 344

xxiv Table of Contents

Nontraditional Organizational Arrangements 346

Organizational Arrangements from Mergers, Acquisitions, Joint Ventures, and Alliances 346

The Emergence of the Network Organizational Forms 348

Organizing for Product Integration 349

Organizational Characteristics of MNCs 350

Formalization 350

Specialization 351

Centralization 352

Putting Organizational Characteristics in Perspective 352

The World of International Management—Revisited 354

Summary of Key points 354

Key Terms 355

Review and Discussion Questions 355

Internet Exercise: Organizing for Effectiveness 355

Endnotes 355

In the International Spotlight: Mexico 359

10 Managing Political Risk, Government Relations, and Alliances 360The World of International Management: Russian Roulette: Risks and Political Uncertainty 360

The Nature and Analysis of Political Risk 362

Macro and Micro Analysis of Political Risk 364

Terrorism and Its Overseas Expansion 367

Analyzing the Expropriation Risk 368

Managing Political Risk and Government Relations 368

Developing a Comprehensive Framework or Quantitative Analysis 368

Techniques for Responding to Political Risk 373

Relative Bargaining Power Analysis 373

Managing Alliances 377

The Alliance Challenge 377

The Role of Host Governments in Alliances 378

Examples of Challenges and Opportunities in Alliance Management 379

The World of International Management—Revisited 381

Summary of Key points 381

Key Terms 382

Review and Discussion Questions 382

Internet Exercise: Nokia in China 382

Endnotes 382

In the International Spotlight: Brazil 386

Table of Contents xxv

11 Management Decision and Control 388The World of International Management: Global Online Retail: Amazon v. Alibaba 388

Decision-Making Process and Challenges 390

Factors Affecting Decision-Making Authority 391

Cultural Differences and Comparative Examples of Decision Making 393

Total Quality Management Decisions 394

Decisions for Attacking the Competition 396

Decision and Control Linkages 397

The Controlling Process 398

Types of Control 399

Approaches to Control 401

Performance Evaluation as a Mechanism of Control 403

Financial Performance 403

Quality Performance 404

Personnel Performance 407

The World of International Management—Revisited 409

Summary of Key Points 410

Key Terms 410

Review and Discussion Questions 410

Internet Exercise: Looking at the Best 411

Endnotes 411

In the International Spotlight: Japan 414

Brief Integrative Case 3.1: Google in China: Protecting Property and Rights 415

Endnotes 419

In-Depth Integrative Case 3.1: Tata “Nano”: The People’s Car 421

Endnotes 429

Organizational Behavior and Human Resource Management

12 Motivation Across Cultures 432The World of International Management: Motivating Employees in a Multicultural Context: Insights from Emerging Markets 432

The Nature of Motivation 434

The Universalist Assumption 435

The Assumption of Content and Process 436

The Hierarchy-of-Needs Theory 436

The Maslow Theory 436

International Findings on Maslow’s Theory 437

Part Four

xxvi Table of Contents

The Two-Factor Theory of Motivation 442

The Herzberg Theory 442

International Findings on Herzberg’s Theory 443

Achievement Motivation Theory 446

The Background of Achievement Motivation Theory 446

International Findings on Achievement Motivation Theory 447

Select Process Theories 449

Equity Theory 449

Goal-Setting Theory 450

Expectancy Theory 451

Motivation Applied: Job Design, Work Centrality, and Rewards 451

Job Design 451

Sociotechnical Job Designs 453

Work Centrality 454

Reward Systems 458

Incentives and Culture 458

The World of International Management—Revisited 459

Summary of Key Points 460

Key Terms 461

Review and Discussion Questions 461

Internet Exercise: Motivating Potential Employees 462

Endnotes 462

In the International Spotlight: Indonesia 467

13 Leadership Across Cultures 468The World of International Management: Global Leadership Development: An Emerging Need 468

Foundation for Leadership 470

The Manager-Leader Paradigm 470

Philosophical Background: Theories X, Y, and Z 472

Leadership Behaviors and Styles 474

The Managerial Grid Performance: A Japanese Perspective 476

Leadership in the International Context 479

Attitudes of European Managers toward Leadership Practices 479

Japanese Leadership Approaches 481

Differences between Japanese and U.S. Leadership Styles 482

Leadership in China 483

Leadership in the Middle East 485

Table of Contents xxvii

Leadership Approaches in India 485

Leadership Approaches in Latin America 486

Recent Findings and Insights about Leadership 487

Transformational, Transactional, and Charismatic Leadership 487

Qualities for Successful Leaders 489

Culture Clusters and Leader Effectiveness 489

Leader Behavior, Leader Effectiveness, and Leading Teams 491

Cross-Cultural Leadership: Insights from the GLOBE Study 493

Positive Organizational Scholarship and Leadership 495

Authentic Leadership 496

Ethical, Responsible, and Servant Leadership 497

Entrepreneurial Leadership and Mindset 500

The World of International Management—Revisited 500

Summary of Key Points 501

Key Terms 502

Review and Discussion Questions 502

Internet Exercise: Taking a Closer Look 502

Endnotes 503

In the International Spotlight: Germany 507

14 Human Resource Selection and Development Across Cultures 508The World of International Management: The Challenge of Talent Retention in India 508

The Importance of International Human Resources 511

Getting the Employee Perspective 511

Employees as Critical Resources 511

Investing in International Assignments 512

Economic Pressures 512

Sources of Human Resources 513

Home-Country Nationals 513

Host-Country Nationals 514

Third-Country Nationals 514

Subcontracting and Outsourcing 516

Selection Criteria for International Assignments 518

General Criteria 518

Adaptability to Cultural Change 518

Physical and Emotional Health 519

Age, Experience, and Education 520

Language Training 520

xxviii Table of Contents

Motivation for a Foreign Assignment 520

Spouses and Dependents or Work-Family Issues 521

Leadership Ability 522

Other Considerations 523

Economic Pressures and Trends in Expat Assignments 523

International Human Resource Selection Procedures 524

Testing and Interviewing Procedures 524

The Adjustment Process 525

Compensation 526

Common Elements of Compensation Packages 527

Tailoring the Package 530

Individual and Host-Country Viewpoints 531

Candidate Motivations 531

Host-Country Desires 531

Repatriation of Expatriates 533

Reasons for Returning 533

Readjustment Problems 533

Transition Strategies 534

Training in International Management 535

The Impact of Overall Management Philosophy on Training 537

The Impact of Different Learning Styles on Training and Development 538

Reasons for Training 539

Types of Training Programs 541

Standardized vs. Tailor-Made 541

Cultural Assimilators 544

Positive Organizational Behavior 545

Future Trends 546

The World of International Management—Revisited 546

Summary of Key Points 548

Key Terms 549

Review and Discussion Questions 549

Internet Exercise: Coke Goes Worldwide 549

Endnotes 550

In the International Spotlight: Russia 554

Brief Integrative Case 4.1: IKEA’s Global Renovations 555

Endnotes 562

In-Depth Integrative Case 4.1: HSBC in China 563

Endnotes 574

In-Depth Integrative Case 4.2: Chiquita’s Global Turnaround 575

Endnotes 582

Skill-Building and Experiential Exercises 583

Personal Skill-Building Exercises 5841. The Culture Quiz 584

2. “When in Bogotá . . .” 589

3. The International Cola Alliances 592

4. Whom to Hire? 596

In-Class Simulations (Available in  Connect, connect.mheducation.com) 1. “Frankenfoods” or Rice Bowl for the World: The U.S.-EU

Dispute over Trade in Genetically Modified Organisms

2. Cross-Cultural Conflicts in the Corning-Vitro Joint Venture

Glossary 599

Name and Organization Index 605

Subject Index 621

Table of Contents xxix

PART ONEENVIRONMENTAL FOUNDATION

2

OB

JEC

TIV

ES

OF

TH

E C

HA

PTE

RChapter 1

GLOBALIZATION AND INTERNATIONAL LINKAGES

The World of International Management

An Interconnected World

O nly 23 years old, Evan Spiegel faced a major business decision: whether or not to accept a US$3 billion offer from Facebook’s Mark Zuckerberg for his social media start-up Snapchat. Taking the deal would make Spiegel one of the youngest self-made billionaires in history. Just two years prior, Spiegel was a typical college junior at Stanford University, living in a fraternity house and working towards graduation. As a product-design student with a knack for computers, Spiegel was keenly aware that popular social media applications, such as Twitter and Facebook, record a digital “paper trail” of their users. Content uploaded to these social media sites, such as text, comments, and photos, are kept indefinitely on servers. For young college graduates try-ing to enter the workforce, this log of past activity has the potential to be particularly harmful; employers are often able to see this information by simply searching for a job appli-cant’s name online. Spiegel, however, had a clever solution: create a social networking application that would allow users to create and share content that “self-destructs” immediately after viewing. For a school project, Spiegel and co-founder Bobby Murphy programmed and developed the application, and the social media application Snapchat was born.1

Around the same time, Facebook executives were actively looking to expand their product line. Having just survived a rocky IPO and finally emerging as a profitable enterprise, Facebook began purchasing several social media applications, including Instagram and WhatsApp in 2012 and 2014, respec-tively, for several billion dollars each. By mid-2013, Facebook’s Mark Zuckerberg had taken notice of the rapidly expanding Snapchat; to Zuckerberg, the appeal of Snapchat seemed to align with that of the typical Facebook user. In an attempt to grab market share from the Snapchat user base, Facebook first introduced a copycat application, called Poke. Though heavily promoted, Poke quickly flopped. Snapchat, meanwhile, continued to grow exponentially. By the beginning of 2014, Snapchat had over 30 million active users and 400 million “snaps” were being received daily.2

Sensing defeat, Zuckerberg approached Spiegel with a lucrative offer: US$3 billion for the application. At that time,

Globalization is one of the most profound forces in our con-temporary economic environment, although support for free trade and open borders is not universal. The practical impact of globalization can be felt on all aspects of society, and effec-tive management of organizations in an increasingly complex global environment is crucial for success. In nearly every coun-try, increasing numbers of large, medium, and even small cor-porations are engaging in international activities, and a growing percentage of company revenue is derived from over-seas markets. Yet, continued economic and political uncertain-ties in many world regions, the rise of more nationalistic political movements, and continued concerns about the impact of immigration have caused some to question the current sys-tem for regulating and overseeing international trade, invest-ments, migration, and financial flows. Nonetheless, international management—the process of applying manage-ment concepts and techniques in a multinational environment—continues to retain importance. Although globalization and international linkages have been part of history for centuries (see the International Man-agement in Action box “Tracing the Roots of Modern Globaliza-tion” later in the chapter), the principal focus of this opening chapter is to examine the process of globalization in the con-temporary world. The rapid integration of countries, advances in information technology, and the explosion in electronic com-munication have created a new, more integrated world and true global competition. Yet, the complexities of doing busi-ness in distinct markets persist. Since the environment of inter-national management is all-encompassing, this chapter is mostly concerned with the economic dimensions, while the fol-lowing two chapters are focused on the political, legal, and technological dimensions and ethical and social dimensions, respectively. The specific objectives of this chapter are

1. ASSESS the implications of globalization for countries, in-dustries, firms, and communities.

2. REVIEW the major trends in global and regional integration.

3. EXAMINE the changing balance of global economic power and trade and investment flows among countries.

4. ANALYZE the major economic systems and recent devel-opments among countries that reflect those systems.

3

Instagram∙ Over 300 million people create content on Insta-

gram every month.∙ Over 70 percent of Instagram users are from out-

side the United States.∙ 70 million new photos are uploaded and shared

every day.4

Snapchat∙ Snapchat reached 100 million active members in

less than four years.5

∙ 60 percent of 13–34 year olds in the United States are on Snapchat.

∙ More than 5 billion videos are viewed on Snapchat every day.

∙ Over 60 percent of Snapchat users create and share original content everyday.6

Certainly, social networks are a part of many people’s lives. Yet, has the virtual world of social media networks made a permanent impact in the world of international business?

Social Media Has Changed Global Business StrategyGeneral Electric (GE), a company with a long-standing legacy in multiple industries, and one of the most recognizable brands on the planet, has strategically leveraged social media to improve its long-term image. By interacting daily with customers across a variety of social net-works, the 100-year-old company aims to trans-form the way that its brand is perceived while simultaneously building a new generation of consumers. A section of GE’s website, called the “Social Hub,” serves as a central spot for this social media activity, compiling its pictures and videos posted to Facebook, Twitter, and Google+ into one location online.

Since 2015, GE has strategically leveraged social media as an advertising tool. Geo-filters, which are graphic advertisements that Snapchat users can add to their “snaps” depending on their geographic location, have been utilized by GE on multiple occasions. Advertising through these filters provides GE with an opportunity to

Snapchat had not made a single dollar in revenue. In a contro-versial and unexpected move, 23-year-old Spiegel gave Zuckerberg a firm answer: “No.” If Spiegel turned down a US$3 billion offer for a single application, just how valuable is social media to the global community?

Social Media Has Changed How We ConnectThough the market value of social media applications, such as Snapchat, are yet to be determined, one thing is certain: We currently live in a world interconnected by social media. Through online networking, the way we connect with others has drastically changed. The volume of content being created and shared is staggering, with virtually anyone on the globe only a few clicks away. In fact, the average number of links separating any two random people on Facebook is now only 4.74.3 Statistics from some of the most used social networking applications underscore how social media has connected peo-ple across the globe:

Facebook

Facebook

900 million users, or about 90% of the daily users, access Facebook through theirmobile devices. Globally, the average user has 338 “friends”:

China India USA

Po

pu

lati

on

in M

illio

ns

0

200

400

600

800

1000

1200

1400

1600

If Facebook were a country, it would be the largest.

84%of users are locatedoutside of the USA &Canada

16%Canada& USA

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh, based on information from Facebook.com & Smith, Aaron, “6 New Facts About Facebook,” Pew Research Center, February 3, 2014. http://www.pewresearch.org.

4 Part 1 Environmental Foundation

increase brand awareness with a younger, more tech-savvy generation while simultaneously linking their brand to specific events and locations. GE’s first Snapchat geo-filter, which was released for the summer solstice, was shared by nearly 5 million users.7 

Through its “Ecomagination” program, GE utilizes social media to crowdsource sustainable solutions to current envi-ronmental issues. A central component of the program is the Open Innovation Challenges, in which teams work together to solve a specific problem specified by GE. Intel-lectual property rights are shared by GE and the partici-pants, and winners receive funding to co-develop their ideas with GE scientists.

Social Media Has Changed How We Do Business GloballyIn his book Socialnomics: How Social Media Transforms the Way We Live and Do Business, Erik Qualman writes, “Social media platforms like Facebook, YouTube, and Twitter are fun-damentally changing the way businesses and consumers behave, connecting hundreds of millions of people to each other via instant communication.” In essence, social media is reshaping how “consumers and companies communicate and interact with each other.”8

Social media has changed how consumers search for products and services. Qualman gives the example of a woman who wants to take a vacation to South America, but she is not sure which country she wants to visit. In the past, she would have typed in “South American vacation” to Google, which would have brought her to travel websites such as TripAdvisor. After hours of research, she would have picked a destination. Then, after more research, she would pick a place to stay. With social media, this woman’s vaca-tion planning becomes streamlined. When she types “South American vacation” into a social network, she finds that five of her friends have taken a trip to South America in the last year. She notices that two of her friends highly recom-mended their vacations to Chile with GoAhead Tours. She clicks on a link to GoAhead Tours and books her vacation. In a social network, online word of mouth among friends car-ries great weight for consumers. With the data available from their friends about products and services, consumers know what they want without traditional marketing cam-paigns.9

This trend means that marketers must be responsive to social networks. For example, an organization that gives travel tours has a group on Facebook. A marketer at that organiza-tion could create a Facebook application that allows its group members to select “places I’d like to visit.” Let’s say that 25 percent of group members who use the application choose Victoria Falls as a place they would like to visit. The organiza-tion could develop a tour to Victoria Falls, and then could send a message to all of its Facebook group members to notify them about this new tour. In this way, a social network

serves as an inexpensive, effective means of marketing directly to a business’s target audience.

Social Media Has Impacted International DiplomacyThe United Nations (U.N.) has increasingly embraced social media as a tool to increase diplomacy and understanding worldwide. The U.N. maintains official accounts on Facebook, Twitter, YouTube, Flickr, Google+, Tumblr, Instagram, and LinkedIn, and, as of 2016, boasts over 2 million followers on its primary Facebook page. As part of its “2015: Time for Global Action” campaign, the U.N. utilized various social media platforms to spread its action plan and its new sustainable development goals worldwide. The hashtag “#action15” was used to link activities across various networks, while Twitter and Facebook served as primary platforms for disseminating information to its global audience (refer to Chapter 3, Table 3-3, for a further discussion of the U.N.’s 2015 sustainable development goals).10

In another pioneering move, the U.S. government sent an unconventional delegation to Moscow that included the cre-ator of Twitter, the chief executive of eBay, and the actor Ashton Kutcher. One of the delegation’s goals was “to per-suade Russia’s thriving online social networks to take up social causes like fighting corruption or human trafficking,” according to Jared Cohen, who served on former-Secretary of State Hillary Clinton’s policy planning staff. In Russia, the average adult spends 10.4 hours a month on social network-ing sites, based on comScore market research. This act of diplomacy by Washington underscores how important social networks have become in our world today, a world in which Twitter has helped mobilize people to fight for freedom from corruption. Social media networks have accelerated technological integration among the nations of the world. People across the globe are now linked more closely than ever before. This social phenomenon has implications for businesses as corporations can now leverage networks such as Facebook to achieve greater success. Understanding the global impact of social media is key to understanding our global society today. Social networks have rapidly diffused from the United States and Europe to every region of the world, underscor-ing the inexorable nature of globalization. As individuals who share interests and preferences link up, they are afforded opportunities to connect in ways that were unimag-inable just a decade ago. Facebook, Twitter, LinkedIn, and others are all providing communication platforms for individ-uals and groups in disparate—and even isolated—locations around the world. Such networks also offer myriad business opportunities for companies large and small to identify and target discrete groups of consumers or other business part-ners. These networks are revolutionizing the nature of management—including international management—by allowing producers and consumers to interact directly

Chapter 1 Globalization and International Linkages 5

GE, have gained real advantages by leveraging online net-works. In this chapter, we examine the globalization phe-nomenon, the growing integration among countries and regions, the changing balance of global economic power, and examples of different economic systems. As you read this chapter, keep in mind that although there are periodic setbacks, globalization continues to move at a rapid pace and that all nations, including the United States, as well as individual companies and their managers, are going to have to keep a close watch on the current environment if they hope to be competitive in the years ahead.

without the usual intermediaries. Networks and the individu-als who make them up are bringing populations of the world closer together and further accelerating the already rapid pace of globalization and integration. As evidenced by Evan Speigel’s rejection of a US$3 bil-lion offer for his social networking application Snapchat, social media is, in many ways, invaluable to the global com-munity. The pace of interconnectivity across the globe con-tinues to increase with the new communication tools that social networking provides. Social media has altered the way that we interact with each other, and businesses, like

■ IntroductionManagement is the process of completing activities with and through other people. International management is the process of applying management concepts and techniques in a multinational environment and adapting management practices to dif-ferent economic, political, and cultural contexts. Many managers practice some level of international management in today’s increasingly diverse organizations. Interna-tional management is distinct from other forms of management in that knowledge and insights about global issues and specific cultures are a requisite for success. Today more firms than ever are earning some of their revenue from international operations, even nascent organizations, as illustrated in The World of International Management chapter opening.

Many of these companies are multinational corporations (MNCs). An MNC is a firm that has operations in more than one country, international sales, and a mix of nationalities among managers and owners. In recent years such well-known American MNCs as Apple, Chevron, Johnson & Johnson, Coca-Cola, Ford Motor Company, ExxonMobil, Caterpillar, Walmart, Microsoft, and Google have all earned more annual revenue in the international arena than they have in the United States.  Table 1–1 lists

managementProcess of completing activities efficiently and effectively with and through other people.

international managementProcess of applying management concepts and techniques in a multinational environment and adapting management practices to different economic, political, and cultural environments.

MNCA firm having operations in more than one country, international sales, and a nationality mix of managers and owners.

Table 1–1The World’s Top Nonfinancial MNCs, Ranked by Foreign Assets, 2015(in millions of dollars)

Company Home Foreign Total Foreign Total Rank Name Economy Assets Assets Sales Sales

1 Royal Dutch/Shell Plc United Kingdom $288,283 $340,157 $169,737 $264,960  2 Toyota Motor Corporation Japan   273,280   422,176 165,195 236,797 3 General Electric United States 257,742 492,692 64,146 117,385 4 Total SA France 236,719 244,856 123,995 159,162 5 British Petroleum Company Plc United Kingdom 216,698   261,832 145,640 222,894 6 Exxon Mobil Corporation United States 193,493 336,758 167,304 259,488 7 Chevron Corporation United States 191,933 266,103 48,183 129,648 8 Volkswagen Group Germany 181,826 416,596 189,817 236,702 9 Vodafone Group Plc United Kingdom   166,967   192,310 52,150 61,466 10 Apple Computer Inc. United States 143,652 290,479 151,983 233,715

Source: UNCTAD, World Investment Report 2016 (June 21, 2016), Annex Table 24, http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx.

6 Part 1 Environmental Foundation

the world’s top nonfinancial companies ranked by foreign assets through 2015. General Electric, headquartered in the United States, for example, now has more than 50% of its assets located outside of its home market.

In addition, companies from developing economies, such as India, Brazil, and China, are providing formidable competition to their North American, European, and Japanese counterparts. Names like Cemex, Embraer, Haier, Lenovo, LG Electronics, Wipro, Telefonica, Santander, Reliance, Samsung, Grupo Televisa, Airtel, Tata, and Infosys are becoming well-known global brands. Globalization and the rise of emerg-ing markets’ MNCs have brought prosperity to many previously underdeveloped parts of the world, notably the emerging markets of Asia. Since 2009, sales of automobiles in China have exceeded those in the United States. Boosted by tax breaks, vehicle sales in China reached a record 24.6 million units in 2015, according to the China Association of Automobile Manufacturers, far ahead of the 17.5 million cars and light trucks sold in the U.S.11  Moreover, a number of emerging market auto compa-nies are becoming global players through their exporting, foreign investment, and international acquisitions, including the purchase of Volvo by Chinese automaker Geely and Tata’s acquisition of Jaguar-Land Rover (see the In-Depth Integrative Case at the end of Part Three).

In a striking move, Cisco Systems, one of the world’s largest producers of network equipment, such as routers, announced it would establish a “Globalization Center East” in Bangalore, India. This center includes all the corporate and operational functions of U.S. headquarters, which have been mirrored in India. Under this plan, which includes an investment of over $1.1 billion, one-fifth of Cisco’s senior management will move to Bangalore.12,13

In March 2014, Procter and Gamble celebrated the grand opening of their Singapore Innovation Center (SgIC), which will function as the primary research and development center for P&G’s hair, skin, and home care products. According to P&G, the SgIC will contain more than 250 research laboratories and 500 researchers, focus-ing on more than 18 different fields of study. The Asian market, with nearly two billion customers and 25 different brands, is particularly important for P&G’s future growth plans.14 Similarly, Unilever has opened R&D centers in Bangalore, India, and Shanghai, China. The Shanghai Center is one of Unilever’s largest R&D buildings, covering some 30,000 square meters and housing more than 450 professionals from 22 nationali-ties.15  Citing the massive growth in the health care market in Asia, General Electric moved its X-ray business headquarters to China in 2011, and vice chairman John Rice relocated to Hong Kong.16,17

Accenture, another American archetype, had about 336,000 employees globally in 2015, with about 237,000 of those employees located outside of the United States. Orig-inally focused on IT services within the United States, Accenture has quickly transformed into one of the largest consulting firms worldwide. The company’s operations in India now employ nearly 150,000 people, twice as many as in the United States.18 With offices in 200 cities across 55 countries, Accenture has focused on providing services for both developed and growing markets.19  In 2015, Accenture drew 47 percent of its revenue from outsourcing.20

These trends reflect the reality that firms are finding they must develop interna-tional management expertise, especially expertise relevant to the increasingly important developing and emerging markets of the world. Managers from today’s MNCs must learn to work effectively with those from many different countries. Moreover, more and more small and medium-sized businesses will find that they are being affected by internation-alization. Many of these companies will be doing business abroad, and those that do not will find themselves doing business with MNCs operating locally. And increasingly, the MNCs are coming from the developing world as previously domestic-oriented companies from countries like China and India expand abroad through acquisitions or other means. Table 1–2 lists the world’s top nonfinancial companies from developing countries ranked by foreign assets in 2014.

Chapter 1 Globalization and International Linkages 7

■ Globalization and InternationalizationInternational business is not a new phenomenon; however, the volume of international trade has increased dramatically over the last decade. Today, every nation and an increas-ing number of companies buy and sell goods in the international marketplace. A number of developments around the world have helped fuel this activity.

Globalization, Antiglobalization, and Global Pressures for ChangeGlobalization can be defined as the process of social, political, economic, cultural, and technological integration among countries around the world. Globalization is distinct from internationalization in that internationalization is the process of a business crossing national and cultural borders, while globalization is the vision of creating one world unit, a single market entity. Evidence of globalization can be seen in increased levels of trade, capital flows, and migration. Globalization has been facilitated by technological advances in transnational communications, transport, and travel. Thomas Friedman, in his book The World Is Flat, identified 10 “flatteners” that have hastened the globalization trend, including the fall of the Berlin Wall, offshoring, and outsourcing, which have combined to dramatically intensify the effects of increasing global linkages.21 Hence, in recent years, globalization has accelerated, creating both opportunities and challenges to global business and international management.

On the positive side, global trade and investment continue to grow, bringing wealth, jobs, and technology to many regions around the world. While some emerging countries have not benefited from globalization and integration, the emergence of MNCs from developing countries reflects the increasing inclusion of all regions of the world in the benefits of globalization. Yet, as the pace of global integration quickens, so have the cries against globalization and the emergence of new concerns over mounting global pressures.22 These pressures can be seen in protests at the meetings of the World Trade

globalizationThe process of social, political, economic, cultural, and technological integration among countries around the world.

offshoringThe process by which companies undertake some activities at offshore locations instead of in their countries of origin.

outsourcingThe subcontracting or contracting out of activities to endogenous organizations that had previously been performed by the firm.

Table 1–2The World’s Top Nonfinancial TNCs from Developing and Transitioning Economies, Ranked by Foreign Assets, 2014(in millions of dollars)

Company Home Foreign Total Foreign Total Rank Name Economy Assets Assets Sales Sales

1 Hutchison Hong Kong/China $91,055 $113,909 $ 27,043 $ 35,098 Whampoa Limited 2 Hon Hai Precision Taiwan 73,010 77,803 138,023 139,018 Industries 3 China National Offshore China 71,090   182,282 26,084   99,557 Oil Group 4 Samsung Electronics South Korea 56,164   211,205 176,534 196,263 Co., Ltd. 5 Vale SA Brazil   55,448   116,598 31,667 37,608 6 Petronas – Petroliam Malaysia   45,572 153,770   76,726 100,602 Nasional Bhd 7 China Ocean Shipping China   44,805 57,875 18,075 27,483 (Group) Company 8 America Movil SAB De CV Mexico 41,627 86,795 41,547 63,793 9 Lukoil OAO Russian Federation   32,907 111,800 119,932   144,167 10 Tata Motors Ltd. India 30,214 38,235 37,201 43,044

Source: UNCTAD, World Investment Report 2016 (June 21, 2016), Annex Table 25, http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx.

International Management in Action

Tracing the Roots of Modern Globalization

Globalization is often presented as a new phenomenon associated with the post–World War II period. In fact, globalization is not new. Rather, its roots extend back to ancient times. Globalization emerged from long-stand-ing patterns of transcontinental trade that developed over many centuries. The act of barter is the forerunner of modern international trade. During different periods of time, nearly every civilization contributed to the expansion of trade.

Middle Eastern Intercontinental TradeIn ancient Egypt, the King’s Highway or Royal Road stretched across the Sinai into Jordan and Syria and into the Euphrates Valley. These early merchants practiced their trade following one of the earliest codes of com-mercial integrity: Do not move the scales, do not change the weights, and do not diminish parts of the bushel. Land bridges later extended to the Phoenicians, the first middlemen of global trade. Over 2,000 years ago, trad-ers in silk and other rare valued goods moved east out of the Nile basin to Baghdad and Kashmir and linked the ancient empires of China, India, Persia, and Rome. At its height, the Silk Road extended over 4,000 miles, providing a transcontinental conduit for the dissemina-tion of art, religion, technology, ideas, and culture. Com-mercial caravans crossing land routes in Arabian areas were forced to pay tribute—a forerunner of custom duties—to those who controlled such territories. In his youth, the Prophet Muhammad traveled with traders, and prior to his religious enlightenment the founder of Islam himself was a trader. Accordingly, the Qur’an instructs followers to respect private property, business agreements, and trade.

Trans-Saharan Cross-Continental TradeEarly tribes inhabiting the triad cities of Mauritania, in ancient West Africa below the Sahara, embraced cara-van trade with the Berbers of North Africa. Gold from the sub-Saharan area was exchanged for something even more prized—salt, a precious substance needed for retaining body moisture, preserving meat, and fla-voring food. Single caravans, stretching five miles and including nearly 2,500 camels, earned their reputation as ships of the desert as they ferried gold powder, slaves, ivory, animal hides, and ostrich feathers to the northeast and returned with salt, wool, gunpowder, porcelain pottery, silk, dates, millet, wheat, and barley from the East.

China as an Ancient Global Trading InitiatorIn 1421, a fleet of over 3,750 vessels set sail from China to cultivate trade around the world for the emperor. The voyage reflected the emperor’s desire to collect tribute in exchange for trading privileges with China and Chi-na’s protection. The Chinese, like modern-day multina-tionals, sought to extend their economic reach while recognizing principles of economic equity and fair trade. In the course of their global trading, the Chinese

introduced uniform container measurements to enable merchants to transact business using common weight and dimension measurement systems. Like the early Egyptians and later the Romans, they used coinage as an intermediary form of value exchange or specie, thus eliminating complicated barter transactions.

European Trade ImperativeThe concept of the alphabet came to the Greeks via trade with the Phoenicians. During the time of Alexan-der the Great, transcontinental trade was extended into Afghanistan and India. With the rise of the Roman Empire, global trade routes stretched from the Middle East through central Europe, Gaul, and across the Eng-lish Channel. In 1215 King John of England signed the Magna Carta, which stressed the importance of cross-border trade. By the time of Marco Polo’s writing of The Description of the World, at the end of the 13th century, the Silk Road from China to the city-states of Italy was a well-traveled commercial highway. His tales, chroni-cled journeys with his merchant uncles, gave Europeans a taste for the exotic, further stimulating the consumer appetite that propelled trade and globalization. Around 1340, Francisco Balducci Pegolotti, a Florentine mer-cantile agent, authored Practica Della Mercatura (Prac-tice of Marketing), the first widely distributed reference on international business and a precursor to today’s textbooks. The search for trading routes contributed to the Age of Discovery and encouraged Christopher Columbus to sail west in 1492.

Globalization in U.S. HistoryThe Declaration of Independence, which set out griev-ances against the English crown upon which a new nation was founded, cites the desire to “establish Com-merce” as a chief rationale for establishing an indepen-dent state. The king of England was admonished “for cutting off our trade with all parts of the world” in one of the earliest antiprotectionist free-trade statements from the New World. Globalization, begun as trade between and across territorial borders in ancient times, was historically and is even today the key driver of world economic develop-ment. The first paths in the creation of civilization were made in the footsteps of trade. In fact, the word mean-ing “footsteps” in the old Anglo-Saxon language is trada, from which the modern English word trade is derived. Contemporary globalization is a new branch of a very old tree whose roots were planted in antiquity.

Source: Thomas Cahill, Sailing the Wine Dark Sea: Why Greeks Matter (New York: Doubleday, 2003), pp. 10, 56–57; Charles W. L. Hill, Interna-tional Business, 4th ed. (New York: McGraw-Hill Irwin, 2003), p. 100; Nefertiti website, http://nefertiti.iweland.com/trade/internal_trade.htm, 2003 (ancient Egypt: domestic trade); Gavin Menzies, 1421: The Year China Discovered America (New York: William Morrow/HarperCollins, 2003), pp. 26–27; Milton Viorst, The Great Documents of Western Civi-lization (New York: Barnes & Noble Books, 1994), p. 115 (Magna Carta) and p. 168 (Declaration of Independence).

Chapter 1 Globalization and International Linkages 9

Organization (WTO), International Monetary Fund (IMF), and other global bodies and in the growing calls by developing countries to make the global trading system more responsive to their economic and social needs. These groups are especially concerned about rising inequities between incomes, and nongovernmental organizations (NGOs) have become more active in expressing concerns about the potential shortcomings of economic globalization.23 In addition, candidates in various election campaigns around the world often find themselves pressured to criticize globalization, including migration of people, for contributing to lost jobs and general economic insecurity even though these problems are obviously the result of a range of factors of which globalization is just one. 

Who benefits from globalization? Proponents believe that everyone benefits from globalization, as evidenced in lower prices, greater availability of goods, better jobs, and access to technology. Theoretically, individuals in established markets will strive for bet-ter education and training to be prepared for future positions, while citizens in emerging markets and underdeveloped countries will reap the benefits of large amounts of capital flowing into those countries, which will stimulate growth and development. Critics dis-agree, noting that the high number of jobs moving abroad as a result of the offshoring of business services jobs to lower-wage countries does not inherently create greater opportunities at home and that the main winners of globalization are the company exec-utives. Proponents claim that job losses are a natural consequence of economic and technological change and that offshoring actually improves the competitiveness of Amer-ican companies and increases the size of the overall economic pie.24 Critics point out that growing trade deficits and slow wage growth are damaging economies and that globalization may be moving too fast for some emerging markets, which could result in economic collapse. Moreover, critics argue that when production moves to countries to take advantage of lower labor costs or less regulated environments, it creates a “race to the bottom” in which companies and countries place downward pressure on wages and working conditions.25

India is one country at the center of the globalization debate. As noted above, India has been the beneficiary of significant foreign investment, especially in services such as software and information technology (IT). Limited clean water, power, paved roadways, and modern bridges, however, are making it increasingly difficult for companies to expand. There have even been instances of substantial losses for companies using India as an offshore base, such as occurred when several automakers, including Ford, Hyundai, Renault-Nissan, and Daimler, experienced the destruction of inventory and a week-long production stoppage due to flooding in southern India.26 India’s public debt has declined to about 65 percent of GDP over the last ten years, increasing macroeconomic stability and lowering its vulnerability to external risks. Expanding by over 7 percent in 2015, India has eclipsed China as the fastest-growing large economy.27 It is possible that India will follow in China’s footsteps and continue rapid growth in incomes and wealth; how-ever, it is also possible that the challenges India faces are greater than the country’s capacity to respond to them. See In the International Spotlight at the end of this chapter for additional insights on India.

This example illustrates just one of the ways in which globalization has raised particular concerns over environmental and social impacts. According to antiglobaliza-tion activists, if corporations are free to locate anywhere in the world, the world’s poor-est countries will relax or eliminate environmental standards and social services in order to attract first-world investment and the jobs and wealth that come with it. Proponents of globalization contend that even within the developing world, it is protectionist policies, not trade and investment liberalization, that result in environmental and social damage. They believe globalization will force higher-polluting countries such as China and Russia into an integrated global community that takes responsible measures to protect the environment. However, given the significant changes required in many developing nations to support globalization, such as better infrastructure, greater educational opportunities, and other improvements, most supporters concede that there may be some short-term disruptions. Over the long term, globalization supporters believe industrialization will

10

A Closer Look

Outsourcing and Offshoring

The concepts of outsourcing and offshoring are not new, but these practices are growing at an extreme rate. Offshoring refers to the process by which compa-nies undertake some activities at offshore locations instead of in their countries of origin. Outsourcing is the subcontracting or contracting out of activities to external organizations that had previously been per-formed within the firm and is a wholly different phe-nomenon. Often the two combine to create “offshore outsourcing.” Offshoring began with manufacturing operations. Globalization jump-started the extension of offshore outsourcing of services, including call centers, R&D, information services, and even legal work. Amer-ican Express, GE, Sony, and Netflix all use attorneys from Pangea3, a Mumbai-based legal firm, to review documents and draft contracts. These companies ben-efit from the lower costs and higher efficiency that companies like Pangea3 can provide compared to domestic legal firms.28  This is a risky venture as legal practices are not the same across countries, and the

documents may be too sensitive to rely on assembly-line lawyers. It also raises the question as to whether or not there are limitations to offshore outsourcing. Many companies, including Deutsche Bank, spread off-shore outsourcing opportunities across multiple coun-tries such as India and Russia for economic or political reasons. The advantages, concerns, and issues with offshoring span a variety of subjects. Throughout the text we will revisit the idea of offshore outsourcing as it is relevant. Here in Chapter 1 we see how skeptics of globalization wonder if there are benefits to offshore outsourcing, while in Chapter 2 we see how these are related to technology, and, finally, in Chapter 14 we see how offshore practices affect human resource management and the global distribution of work.

Sources: Engardio, Pete; Shameen, Assif, “Let’s Offshore the Lawyers,” BusinessWeek, September 18, 2006, p. 42; Hallett, Tony; McCue, Andy, “Why Deutsche Bank Spreads Its Outsourcing,” BusinessWeek, March 15, 2007.

create wealth that will enable new industries to employ more modern, environmentally friendly technology. We discuss the social and environmental aspects of globalization in more detail in Chapter 3.

These contending perspectives are unlikely to be resolved anytime soon. Instead, a vigorous debate among countries, MNCs, and civil society will likely continue and affect the context in which firms do business internationally. Business firms operating around the world must be sensitive to different perspectives on the costs and benefits of globalization and adapt and adjust their strategies and approaches to these differences.

Global and Regional IntegrationOne important dimension of globalization is the increasing economic integration among countries brought about by the negotiation and implementation of trade and investment agreements. Here we provide a brief overview of some of the major developments in global and regional integration.

Over the past six decades, succeeding rounds of global trade negotiations have resulted in dramatically reduced tariff and nontariff barriers among countries. Table 1–3 shows the history of these negotiation rounds, their primary focus, and the number of countries involved. These efforts reached their crest in 1994 with the conclusion of the Uruguay Round of multilateral trade negotiations under the General Agreement on Tar-iffs and Trade (GATT) and the creation of the World Trade Organization (WTO) to oversee the conduct of trade around the world. The WTO is the global organization of countries that oversees rules and regulations for international trade and investment, including agriculture, intellectual property, services, competition, and subsidies. Recently, however, the momentum of global trade agreements has slowed. In December 1999, trade ministers from around the world met in Seattle to launch a new round of global trade talks. In what later became known as the “Battle in Seattle,” protesters disrupted the meeting, and representatives of developing countries who felt their views were being left out of the discussion succeeded in ending the discussions early and postponing a new round of trade talks. Two years later, in November 2001, the members of the WTO met

World Trade Organization (WTO)The global organization of countries that oversees rules and regulations for international trade and investment.

Chapter 1 Globalization and International Linkages 11

again and successfully launched a new round of negotiations at Doha, Qatar, to be known as the “Development Round,” reflecting the recognition by members that trade agree-ments needed to explicitly consider the needs of and impact on developing coun-tries.29  However, after a lack of consensus among WTO members regarding agricultural subsidies and the issues of competition and government procurement, progress slowed. At the most recent meeting, held in Geneva in July 2008, disagreements between the U.S., China, and India over access to agricultural imports from developing countries resulted in an impasse after nine days of discussions.30 Failure to reach agreement resulted in another setback, and although there have been attempts to restart the negotiations, they have remained stalled, especially in light of rising protectionism in the wake of the global economic crisis.31

Partly as a result of the slow progress in multilateral trade negotiations, the United States and many other countries have pursued bilateral and regional trade agreements. The United States, Canada, and Mexico make up the North American Free Trade Agreement (NAFTA), which in essence has removed all barriers to trade among these countries and created a huge North American market. A number of economic develop-ments have occurred because of this agreement that are designed to promote commerce in the region. Some of the more important developments include (1) the elimination of tariffs as well as import and export quotas; (2) the opening of government procurement markets to companies in the other two nations; (3) an increase in the opportunity to make investments in each other’s country; (4) an increase in the ease of travel between coun-tries; and (5) the removal of restrictions on agricultural products, auto parts, and energy goods. Many of these provisions were implemented gradually. For example, in the case of Mexico, quotas on Mexican products in the textile and apparel sectors were phased out over time, and customs duties on all textile products were eliminated over 10 years. Negotiations between NAFTA members and many Latin American countries, such as Chile, have concluded, and others are ongoing. Moreover, other regional and bilateral trade agreements, including the U.S.–Singapore Free Trade Agreement, concluded in May 2003, and the U.S.–Central American Free Trade Agreement (CAFTA), later renamed CAFTA-DR to reflect the inclusion of the Dominican Republic in the agreement and concluded in May 2004, were negotiated in the same spirit as NAFTA. The U.S. Congress approved the CAFTA-DR in July 2005, and the president signed it into law on

North American Free Trade Agreement (NAFTA)A free-trade agreement between the United States, Canada, and Mexico that has removed most barriers to trade and investment.

Table 1–3 Completed Rounds of the Negotiations under the GATT and WTO

Year Place (name) Subjects Covered Countries

1947 Geneva Tariffs 231949 Annecy Tariffs 131951 Torquay Tariffs   381956 Geneva Tariffs   261960–1961 Geneva Tariffs   26 (Dillon Round)1964–1967 Geneva Tariffs and antidumping   62 (Kennedy Round) measures1973–1979 Geneva Tariffs, nontariff measures, 102 (Tokyo Round) “framework” agreements1986–1994 Geneva Tariffs, nontariff measures, 123 (Uruguay Round) services, intellectual property,

dispute settlement, textiles, agriculture, creation of WTO

Source: Understanding the WTO, 5th ed. (Geneva: World Trade Organization, 2015), https://www.wto.org/english/thewto_e/whatis_e/tif_e/understanding_e.pdf.

12 Part 1 Environmental Foundation

August 2, 2005. The export zone created will be the United States’ second largest free-trade zone in Latin America after Mexico. The United States is implementing the CAFTA-DR on a rolling basis as countries make sufficient progress to complete their commitments under the agreement. The agreement first entered into force between the United States and El Salvador on March 1, 2006; followed by Honduras and Nicaragua on April 1, 2006; Guatemala on July 1, 2006; and the Dominican Republic on March 1, 2007. Implementation by Costa Rica was delayed by concerns over the impact of the opening of Costa Rica’s energy and telecommunications monopoly, and a subsequent election and referendum; however, the agreement finally entered into force for Costa Rica on January 1, 2009.32

Agreements like NAFTA and CAFTA not only reduce barriers to trade but also require additional domestic legal and business reforms in developing nations to pro-tect property rights. Most of these agreements now include supplemental commit-ments on labor and the environment to encourage countries to upgrade their working conditions and environmental protections, although some critics believe the agree-ments do not go far enough in ensuring worker rights and environmental standards. Partly due to the stalled progress with the WTO and FTAA, the United States has pursued bilateral trade agreements with a range of countries, including Australia, Bahrain, Chile, Colombia, Israel, Jordan, Malaysia, Morocco, Oman, Panama, Peru, and Singapore.33

Economic activity in Latin America continues to be volatile. Despite the continu-ing political and economic setbacks these countries periodically experience, economic and export growth continue in Brazil, Chile, and Mexico. In addition, while outside MNCs continually target this geographic area, there also is a great deal of cross-border investment between Latin American countries. Regional trade agreements are helping in this cross-border process, including NAFTA, which ties the Mexican economy more closely to the United States. The CAFTA agreement, signed August 5, 2006, between the United States and Central American countries, presents new opportunities for bolster-ing trade, investment, services, and working conditions in the region. Within South America there are Mercosur, a common market created by Argentina, Brazil, Paraguay, Uruguay, and Venezuela, and the Andean Common Market, a subregional free-trade compact that is designed to promote economic and social integration and cooperation between Bolivia, Colombia, Ecuador, and Peru.

The European Union (EU) has made significant progress over the past decade in becoming a unified market. In 2003 it consisted of 15 nations: Austria, Belgium, Denmark, Finland, France, Germany (see In the International Spotlight at the end of Chapter 13), Great Britain, Greece, the Netherlands, Ireland, Italy, Luxembourg, Portugal, Spain, and Sweden. In May 2004, 10 additional countries joined the EU: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. In January 2007, Romania and Bulgaria acceded to the EU, and in July 2013, Croatia became the 28th and newest member of the EU. Not only have most trade barriers between the members been removed, but a subset of European countries have adopted a unified currency called the euro. As a result, it is now pos-sible for customers to compare prices between most countries and for business firms to lower their costs by conducting business in one uniform currency. With access to the entire pan-European market, large MNCs can now achieve the operational scale and scope necessary to reduce costs and increase efficiencies. Even though long-standing cultural differences remain, and the EU has recently experienced some substantial challenges, the EU is more integrated as a single market than NAFTA, CAFTA, or the allied Asian countries. With many additional countries poised to join the EU, including Albania, Serbia, and Turkey, the resulting pan-European market will be one that no major MNC can afford to ignore (see Figure 1–1). Moreover, the Transatlantic Trade and Investment Partnership (T-TIP) is a proposed trade agreement between the European Union and the United States that could further bolster trade and multilateral economic growth in Europe and North America.34

European UnionA political and economic community consisting of 28 member states.

Chapter 1 Globalization and International Linkages 13

Although Japan has experienced economic problems since the early 1990s, it continues to be one of the primary economic forces in the Pacific Rim (see In the International Spotlight at the end of Chapter 11). Japanese MNCs want to take advan-tage of the huge, underdeveloped Asian markets. At the same time, China continues to be a major economic force, with many predictions that it will surpass the United States as the largest economy in the world, in terms of nominal GDP, by 2026.35  Although all the economies in Asia are now feeling the impact of the eco-nomic uncertainty of the post-9/11 era and the Asian economic crisis of the late 1990s, Hong Kong, Taiwan, South Korea, and Singapore have been doing relatively well, and the Southeast Asia countries of Malaysia, Thailand, Indonesia, and even Vietnam are bouncing back to become major export-driven economies. The Associa-tion of Southeast Asian Nations (ASEAN), made up of Indonesia, Malaysia, the Philippines, Singapore, Brunei, Thailand, and, in recent years, Cambodia, Myanmar, and Vietnam, is advancing trade and economic integration and now poses challenges to China as a region of relatively low-cost production and export. In addition, under the Trans-Pacific Partnership (TPP), Asian-facing countries have concluded nego-tiations for an ambitious, next-generation, Asia-Pacific trade agreement. The TPP group represents roughly two-fifths of the global economy, consisting of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. On October 4, 2015, representatives of the 12 Pacific Rim countries agreed to the 30-chapter deal, with full ratification by each country’s legislative bodies expected to take up to two years to complete.36

Central and Eastern Europe, Russia (see In the International Spotlight at the end of Chapter 14), and the other republics of the former Soviet Union currently are still trying to make stable transitions to market economies. Although the Czech Republic, Slovenia, Poland, and Hungary have accelerated this process through their accession to

Trans-Pacific Partnership (TPP) or Trans-Pacific Partnership Agreement (TPPA)A trade agreement among 12 Pacific Rim countries, including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh.

Germany

France

SpainPortugal

The Netherlands

Belgium

PolandUnited

Kingdom

Italy

Austria

Czech RepublicSlovakia

Ireland

Denmark

Lithuania

Latvia

Estonia

FinlandSweden

HungaryRomania

Bulgaria

Greece

Slovenia

CyprusMalta

Turkey

Croatia Serbia

Albania

Luxembourg

Member States Candidate States

Figure 1–1European Member States and Candidates, 2016

14 Part 1 Environmental Foundation

the EU, others (the Balkan countries, Russia, and the other republics of the former Soviet Union) still have a long way to go. However, all remain a target for MNCs looking for expansion opportunities. For example, after the fall of the Berlin Wall in 1989, Coca-Cola quickly began to sever its relations with most of the state-run bottling companies in the former communist-bloc countries. The soft drink giant began investing heavily to import its own manufacturing, distribution, and marketing techniques. To date, Coca-Cola has pumped billions into Central and Eastern Europe—and this investment is beginning to pay off. Its business in Central and Eastern Europe has been expanding at twice the rate of its other foreign operations.

These are specific, geographic examples of emerging internationalism. Equally important to this new climate of globalization, however, are broader trends that reflect the emergence of developing countries as major players in global economic power and influence.

Changing Global DemographicsThe collective world population is aging. In 2016, for the first time since the end of the second World War, the global working-age population will decline. By 2050, the Wall Street Journal projects that the working age population will contract by nearly 5 percent worldwide. These demographic changes will have significant effects on the global economy.37

Multiple factors are contributing to this increase in the median global population age. Due to improvements in the technology and health care sectors, people are now living longer lives in both developed and developing countries. Global life expectancy, which has increased from 48 years in 1950 to 70 years in 2012, will continue to steadily increase over the next several decades. As more people are living longer, they are spend-ing more time in retirement. People are also having fewer children. In the last 65 years, the global fertility rate has been cut in half—from 5 children per woman in 1950 to 2.5 children per woman in 2015.38

Though these demographic changes are projected to occur globally, the most dra-matic impact will be seen in the developed nations. Western Europe, which has seen stagnant economic and population growth for the last decade, will face some of the sharpest constrictions of the workforce population. In Germany and Italy, the working-age population will shrink by over 20 percent by 2050. Developed Asian nations, with some of the longest life expectancies, will not be able to repopulate quickly enough to replace the retiring, aging population. In Japan, the number of nonworkers will be nearly equal to that of workers by 2050. Both Japan and South Korea will face a loss of over 25 percent of their working class population.39   

Even some developing countries will face large challenges. Due to years of a one-child policy, and rapidly rising incomes, which are almost always accompanied by lower birth rates, China faces an unbalanced population pyramid. It is estimated that China will see a 20 percent decline in its working-class population by 2050, as middle-aged work-ers begin to retire and are replaced by fewer workers. With a lower GDP per capita than Germany, Japan, and other developed nations, Chinese workers will face additional pres-sure to support the nonworking population.40

The increase in the size of the elderly population affects more than just the proportion of workers to nonworkers. The amount of spending on health care–related services will continue to increase rapidly, while the demand for goods such as cars and computers will decline. Whereas younger populations spend income on housing and other capitally financed purchases, elderly populations spend money on health care services.41

Although the full impact of these demographic changes will not be known for several years, strategies such as easing the immigration process for workers from devel-oping to developed nations, incentivizing citizens in developed nations to have more

Chapter 1 Globalization and International Linkages 15

children, and encouraging workers to delay retirement could help to offset the problems associated with an aging global population.42

The Shifting Balance of Economic Power in the Global EconomyEconomic integration and the rapid growth of emerging markets are creating a shifting international economic landscape. Specifically, the developing and emerging countries of the world are now predicted to occupy increasingly dominant roles in the global eco-nomic system. Various economists have studied the potential growth of these rapidly expanding economies.

In 2001 the Goldman Sachs global economics team released its initial report on the economic growth projected to occur in the emerging markets of Brazil, Russia, India, and China—which it collectively coined as the “BRIC” nations. Follow-up reports were released in 2004 and 2011. In these reports, Goldman Sachs predicted that the BRIC economies’ share of world growth could rise from 20 percent in 2003 to more than 40 percent in 2025, and that the BRIC’s total weight in the world economy would rise from approximately 10 percent in 2004 to more than 20 percent in 2025. After the 2009 global recession, Goldman Sachs argued that the BRIC economies were growing at such a fast pace that they may constitute four of the top five most dominant economies by the year 2050, with China surpassing the United States in output by 2027. Additionally, the report estimated that the economies of the four BRIC nations will surpass the collective econ-omies of the G7 nations by 2032.43,44 

In the years since Goldman Sachs’ original reports on the future potential of the BRIC nations, global economic conditions have led to some setbacks for the economies of Brazil, Russia, and China, leading some to reconsider the rate at which the BRIC economies will continue to grow. Low prices for oil and other commodities contributed to the deep 2015 and 2016 recessions in Russia and Brazil, and China’s growth has slowed substantially. Unlike its fellow BRIC partners, however, India continues to post strong figures, and the country has actually surpassed China in annual GDP growth rate in recent years. 

In 2015, after a few years of losses and weak forecasts for Brazil, Russia, and China, Goldman Sachs dissolved its BRIC fund, folding the remaining assets into its larger emerging markets fund.45  Whether or not Goldman Sachs’ long-term predictions hold true is yet to be seen, but Brazil, Russia, China, and India will continue to assume a broader role in the global economy. It is notable that since 2009 the leaders of the BRIC nations have met for an annual summit, and, in 2010, the leaders of the founding members agreed to admit South Africa to the group, making it the BRICS.

As the BRICS’s economies mature and growth slows, some analysts, including Goldman Sachs, are beginning to turn their attention to a new group of emerging markets. In March 2006, PricewaterhouseCoopers (PwC) coined the term E7 to describe seven major emerging economies (Brazil, China, India, Indonesia, Mexico, Russia, and Turkey) that are expected to expand significantly in the coming decades.46 Unlike the G7 econo-mies, which are primarily located in North America and Europe, the E7 economies are located throughout Latin America and Asia (see Figure 1–2 and Figure 1–3). In 2015, PwC predicted that the GDP of the E7, when measured in terms of MER (market exchange rates), would surpass that of the G7 by around 2030. Furthermore, the GDP of the E7 would expand at an annual rate of 3.8 percent through 2050, while the G7 would only expand by 2.1 percent annually. Per PwC’s predictions, by 2050, the GDP of the E7 is predicted to be 50 percent higher than that of the G7.47

The N-11 (N stands for “next”) are another grouping of economies that may constitute the next wave of emerging markets growth. These countries, which include Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and  Vietnam, represent a diverse global set, with relative strengths (and weak-nesses) in terms of their future potential. The MIST countries (Mexico, Indonesia, South

16 Part 1 Environmental Foundation

Korea, and Turkey), a subset of the N-11, are sometimes grouped as a particularly attrac-tive subset of the N-11. Goldman views the MIST countries as the most promising and advanced of the N-11, all of which have young, growing populations and other positive good conditions for economic growth. Other groupings of fast-growing developing coun-tries include the CEVITS (Colombia, Egypt, Vietnam, Indonesia, Turkey, and South Africa) and EAGLES (which stands for emerging and growth-leading economies), which includes the original BRIC and MIST countries plus Egypt and Taiwan.48 Table 1–8 compares the G-7 (advanced countries), BRIC, and N-11 by population, GDP, and GDP per capita in 2000, 2010, and 2020.

Using data from the World Bank, PricewaterhouseCoopers has made estimates about the future growth of emerging versus developed economies, the result of which appear in summary form in Tables 1–4 and 1–5. Table 1–4 shows the world’s largest economies in 2014 and 2050 (projected) using (current) market exchange rates. By this calculation, China would surge past the United States and Japan by 2050, and India would move from tenth to third. Viewing the data on a purchasing power parity (PPP) basis, a method that adjusts GDP to account for different prices in countries, a more dramatic picture is presented. Using this method, both China and India would surpass the United States as the largest world economic power by 2050. In both the Goldman Sachs and

Mexico

BrazilIndonesia

Turkey China

India

Russia

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh.

Figure 1–3E7 (Emerging Seven) Economies

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh.

Canada

UnitedStates

UnitedKingdom

FranceGermany

Italy Japan

Figure 1–2G7 (Group of Seven) Economies

Chapter 1 Globalization and International Linkages 17

Table 1–4The World’s Largest Economies 2014 and 2050 (Projected) Measured by GDP at Market Exchange Rates(in billions of dollars)

2014 2050

GDP Rank GDP Rank

United States 17,416   1 41,384 2China 10,355   2 53,553 1Japan 4,770   3 7,914 6Germany 3,820   4 6,338 10France 2,902   5 5,207 12United Kingdom 2,848   6 5,744 11Brazil 2,244   7 8,534 5Italy 2,129   8 3,617 16Russia 2,057   9 6,610 8India 2,048 10   27,937 3Canada 1,794 11 3,583 17Australia 1,483 12 2,903 19South Korea 1,449 13 4,142 15

Spain 1,400 14 3,099 18

Source: The World in 2050: Will the Shift in Global Economic Power Continue? PricewaterhouseCoopers LLP, 2015.

Table 1–5The World’s Largest Economies 2014 and 2050 (Projected) Measured by GDP at Purchasing Power Parity(in millions of dollars)

2014 2050

GDP Rank GDP Rank

China 17,632 1 61,079 1United States 17,416 2 41,384 3India 7,277 3 42,205 2Japan 4,788 4 7,914 7Germany 3,621 5 6,338   10Russia 3,559 6 7,575 8Brazil 3,073 7 9,164 5France 2,587 8 5,207 13Indonesia 2,554 9 12,210 4United Kingdom 2,435   10 5,744 11Mexico 2,143 11 8,014 6Italy 2,066   12 3,617 18South Korea 1,790   13 4,142 17

Saudi Arabia 1,652   14 5,488 12

Source: The World in 2050: Will the Shift in Global Economic Power Continue? PricewaterhouseCoopers LLP, 2015.

18 Part 1 Environmental Foundation

PricewaterhouseCoopers scenarios, global growth over the next decade, and the next 35 years, is heavily supported by Asia, as seen in Table 1–6. In addition, China and India will remain the most populous countries in the world in 2050, although India will surpass China as the most populous (Table 1–7).

Most African countries have not, to date, fully benefited from globalization. However, increases in the price of commodities, such as oil and gas, agricultural products, and mineral and mining products, between 2000 and 2015 have helped boost incomes and wealth in the African continent. Moreover, rapid population growth in many African countries, similar to growth in India and China in earlier periods, may suggest that African countries could constitute the next wave of dynamic emerging markets.

Although the emerging nations have experienced unprecedented GDP growth since the global recession, it is important to note that the growth rates of the developing world are beginning to show signs of a slowdown. The BRIC economies, once thought to be

Table 1–6Cities Expected to Contribute Most to Global Growth 2015–2030(GDP contribution in billions)

City Country GDP Contribution

New York City United States 874Shanghai China 734Tianjin China 625Beijing China 594Los Angeles United States 522Guangzhou China 510Shenzhen China 508London United Kingdom 476Chongqing China 432

Suzhou China 394

Source: “Global Cities 2013,” Oxford Economics, 2015.

Table 1–7Changing Global Demographics: Developing Countries on the Rise (ranked by size)

1950 2017 2050

  1 China China India  2 Soviet Union India China  3 India United States Nigeria  4 United States Indonesia United States  5 Japan Brazil Indonesia  6 Indonesia Pakistan Pakistan  7 Germany Nigeria Brazil  8 Brazil Bangladesh Bangladesh  9 United Kingdom Russia Congo10 Italy Mexico Ethiopia11 France Japan Mexico12 Bangladesh Ethiopia Egypt

Source: United Nations: Department of Economic and Social Affairs, World Population Prospects: the 2015 Revision. https://esa.un.org/unpd/wpp/

Chapter 1 Globalization and International Linkages 19

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20 Part 1 Environmental Foundation

the backbone of the emerging market growth, have experienced particularly deep setbacks. In 2015, the Brazilian economy dipped into recession, experiencing an economic contrac-tion of roughly 3 percent, double-digit inflation, and a rapidly rising unemployment rate. Russia, which averaged 6.6 percent annual GDP growth between 2002 and 2008, slowed to only 1.5 percent average annual growth between 2011 and 2014.49 And in China, GDP grew just 6.8 percent in 2015—significantly less than its 14.5 percent growth in 2007.50  The slowdown extends beyond the BRIC nations; in 2015, emerging markets outside of China and India contributed only 13 percent to global GDP growth. This represents the lowest proportion of GDP growth contributed by emerging markets since 2009.51  While emerging markets still hold the most potential for growth in the coming years, the rapid rate of expansion that was experienced over the last decade may prove difficult to match.52

In the years since the global recession of 2009, in which merchandise exports fell 23 percent to $12.15 trillion and commercial services exports declined 13 percent to $3.31 trillion, global trade and investment have continued to grow at a healthy rate, outpacing domestic growth in most countries. According to the World Trade Organiza-tion, in 2014 merchandise exports reached a record high $18.5 trillion, and commercial services exports have rebounded to $4.9 trillion.53 Foreign direct investment (FDI)—the term used to indicate the amount invested in property, plant, and equipment in another country—also has been growing at a slow but steady rate in the years since the global recession of 2009. Despite dropping almost 50 percent in 2009 to $896 billion, global FDI rebounded to $1.5 trillion by 2013. By 2017, FDI is estimated to reach $1.7 trillion, surpassing the all-time high set a decade earlier in 2007. Interestingly, according to data from UNCTAD, in 2014 Hong Kong received more FDI than the United States, and China received twice as much as Canada, showing the shifting balance of economic influence among developed and developing countries.54  Table 1–9 shows trade flows among major world regions in both absolute and percentage terms. Tables 1–10 and 1–11 show FDI inflows and outflows by leading developed and emerging economies.

As nations become more affluent, they begin looking for countries with economic growth potential where they can invest. Over the last two decades, for example, Japanese MNCs have invested not only in their Asian neighbors but also in the United States and the EU. European MNCs, meanwhile, have made large financial commitments in Japan and, more recently, in China and India because they see Asia as having continued growth potential. American multinationals have followed a similar approach in regard to both Europe and Asia.

The following quiz illustrates how transnational today’s MNCs have become. This trend is not restricted to firms in North America, Europe, or Asia. An emerging global community is becoming increasingly interdependent economically. Take the quiz and see how well you do by checking the answers given at the end of the chapter. However, although there may be a totally integrated global market in the near future, at present, regionalization, as represented by North America, Europe, Asia, and the less developed countries, is most descriptive of the world economy.

1. Where is the parent company of Braun household appliances (electric shav-ers, coffee makers, etc.) located?a. Italy b. Germany c. the U.S. d. Japan

2. The BIC pen company isa. Japanese b. British c. U.S.-based d. French

3. The company that owns Jaguar is based ina. Germany b. the U.S. c. the U.K. d. India

4. French’s Mustard is produced by a company based ina. the U.K. b. the U.S. c. France d. Taiwan

5. The firm that owns Green Giant vegetables isa. U.S.-based b. Canadian c. British d. Italian

foreign direct investment (FDI)Investment in property, plant, or equipment in another country.

Chapter 1 Globalization and International Linkages 21

Table 1–9World Merchandise Trade by Region and Selected Country, 2015(in US$ billions and percentages)

Exports Imports

Annual Annual Values Percentage Change Values Percentage Change

2015 2005–15 2013 2014 2015 2015 2005–15 2013 2014 2015

World 16,272 6 2   0   −13 16,613   5 2   1 −13North America   2,294 5 2   3 −8 3,132   4 0   3 −5 United States 1,505 6 2   3 −7   2,308   4 0   4 −4 Canada 408 2 1   4 −14 419   4 0   0 −10 Mexico 381 7 2   5 −4 405   7 3   5 −2South and Central America 532 5 −2 −6 −22 609   9 3 −3  −16 Brazil 191 6 0 −7   −15 179 12 7 −5  −25 Argentina 57 5 −5 −10   −17 60 10 10 −12 −8Europe   5,956 4 5   0   −12   5,900   4 2   1 −13 European Union (28) 5,381 4 5   1   −12   5,309   3 1   2 −13 Germany 1,329 4 3   3   −11 1,050   4 2   2 −13 France 506 2 2   0   −13 572   2 1   −1 −15 Netherlands 567 4 2   0   −16 506   4   0   0 −14 United Kingdom 460 3 14   −7 −9 626   3   −5   5 −9 Italy 459 3 3   2   −13 409   2   −2   −1 −14Commonwealth of Independent States (CIS) 489 7 −2 −6  −32 339   8 1 −11 −34 Russian Federation 340 6 −1 −5  −32 194   8 2 −10 −37Africa         South Africa 82 6 −3   −4 −11 86   6 −1 −3 −14 Algeria 38 2 −9 −4 −40 52 11 9   6 −12 Egypt 21 6 −5 −7 −23 61 12 −9 1  −9Middle East             Saudi Arabia 202 4 −3 −9 −41 172 12 8   3 −1 Iran 63 5 −21   8 −29 42   2 −14   4 −17Asia   5,967 8   3   3 −8   5,448   8 2   0 −14 China   2,275   12   8   6 −3 1,682 11 7   0 −14 Japan 625 2 −11 −3 −9 648   4 −6 −2 −20

India 267 12 6 2   −17 392 13 −5 −1 −15

Source: Adapted from WTO Press Release, April, 2015. Modest trade recovery to continue in 2015 and 2016 following three years of weak expansion. https://www.wto.org/english/news_e/pres15_e/pr739_e.htm.

6. The owners of Godiva chocolate area. U.S.-based b. Swiss c. Dutch d. Turkish

7. The company that produces Vaseline isa. French b. Anglo-Dutch c. German d. U.S.-based

8. The company that bought General Electric Appliances is headquartered ina. France b. China c. Japan d. Germany

9. The company that owns Holiday Inn is headquartered ina. Saudi Arabia b. France c. the U.S. d. Britain

10. Tropicana orange juice is owned by a company that is headquartered ina. Mexico b. Canada c. the U.S. d. Japan

22 Part 1 Environmental Foundation

■ Global Economic SystemsThe evolution of global economies has resulted in three main systems: market economies, command economies, and mixed economies. Recognizing opportunities in global expan-sion includes understanding the differences in these systems, as they affect issues such as consumer choice and managerial behavior.

Market EconomyA market economy exists when private enterprise reserves the right to own property and monitor the production and distribution of goods and services while the state simply supports competition and efficient practices. Management is particularly effective here since private ownership provides local evaluation and understanding, opposed to a nation-ally standardized archetype. This model contains the least restriction as the allocation of resources is roughly determined by the law of demand. Individuals within the community disclose wants, needs, and desires to which businesses may appropriately respond. A general balance between supply and demand sustains prices, while an imbalance creates a price fluctuation. In other words, if demand for a good or service exceeds supply, the

Table 1–10Foreign Direct Investment Inflows, by Region(in US$ billions)

2015 2014 2013

Developed economies $962.5 $522.0 $680.3Developing economies 764.7 698.5 662.4 Africa 54.1 58.3 52.2 East and Southeast Asia 447.9 383.2 350.3 South Asia 50.5 41.4 35.6 West Asia 42.4 43.3 45.5 Latin America and the Caribbean 167.6 170.3 176.0Transition economies 35.0 56.4 84.5

Source: UNCTAD, World Investment Report 2016 (June 21, 2016), Annex Table 1, http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx.

Table 1–11Foreign Direct Investment Outflows, by Region(in US$ billions)

2015 2014 2013

Developed economies $1,474.2 $800.7 $825.9Developing economies 377.9 445.6 408.9 Africa 11.3 15.2 15.5 East and Southeast Asia 292.8 365.1 312.0 South Asia 7.8 12.1 2.2 West Asia 31.3 20.4 44.7 Latin America and the Caribbean 33.0 31.4 32.3

Transition economies 31.1 72.2 75.8

Source: UNCTAD, World Investment Report 2016 (June 21, 2016), Annex Table 2, http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx.

Chapter 1 Globalization and International Linkages 23

price will inevitably rise, while an excess supply over consumer demand will result in a price decrease.

Since the interaction of the community and firms guides the system, organizations must be as versatile as the individual consumer. Competition is fervently encouraged to promote innovation, economic growth, high quality, and efficiency. The focus on how to best serve the customer is necessary for optimal growth as it ensures a greater penetration of niche markets.55 The government may prohibit such things as monopolies or restrictive business practices in order to maintain the integrity of the economy. Monopolies are a danger to this system because they tend to stifle economic growth and consumer choice with their power to determine supply. Factors such as efficiency of production and qual-ity and pricing of goods can be chosen arbitrarily by monopolies, leaving consumers without a choice and at the mercy of big business.

Command EconomyA command economy is comparable to a monopoly in the sense that the organization, in this case the government, has explicit control over the price and supply of a good or service. The particular goods and services offered are not necessarily in response to consumers’ stated needs but are determined by the theoretical advancement of society. Businesses in this model are owned by the state to ensure that investments and other business practices are done in the best interest of the nation despite the often contradic-tory outcomes. Management within this model ignores demographic information. Gov-ernment subsidies provide firms with enough security so they cannot go out of business, which simply encourages a lack of efficiency or incentive to monitor costs. Devoid of private ownership, a command economy creates an environment where little motivation exists to improve customer service or introduce innovative ideas.56

History confirms the inefficiency and economic stagnation of this system with the dramatic decline of communism in the 1980s. Communist countries believe that the goals of the so-called people take precedence over individualism. While the communist model once dominated countries such as Ethiopia, Bulgaria, Hungary, Poland, and the former U.S.S.R., among others, it survives only in North Korea, Cuba (see In the International Spotlight at the end of Chapter 3), Laos, Vietnam, and China today, in various degrees or forms. A desire to effectively compete in the global economy has resulted in the attempt to move away from the communist model, especially in China, which will be considered in greater depth later in the chapter.

Mixed EconomyA mixed economy is a combination of a market and a command economy. While some sectors of this system reflect private ownership and the freedom and flexibility of the law of demand, other sectors are subject to government planning. The balance allows competition to thrive while the government can extend assistance to individuals or com-panies. Regulations concerning minimum wage standards, social security, environmental protection, and the advancement of civil rights may raise the standard of living and ensure that those who are elderly, are sick, or have limited skills are taken care of. Own-ership of organizations seen as critical to the nation may be transferred to the state to subsidize costs and allow the firms to flourish.57

Below we discuss general developments in key world regions reflective of these economic systems and the impact of these developments on international management.

■ Economic Performance and Issues of Major RegionsFrom a vantage point of development, performance, and growth, the world’s economies can be evaluated as established economies, emerging economies, and developing econo-mies (some of which may soon become emerging).

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Established EconomiesNorth America As noted earlier, North America constitutes one of the four largest trading blocs in the world. The combined purchasing power of the United States, Canada, and Mexico is more than $19 trillion. Even though there will be more and more integra-tion both globally and regionally as time goes on, effective international management still requires knowledge of individual countries.

The free-market-based economy of this region allows considerable freedom in decision-making processes of private firms. This allows for greater flexibility and low barriers for other countries to establish business. Despite factors such as the Iraq War beginning in 2003, Hurricane Katrina in 2005, high oil prices from  2006 to 2008, the global recession in 2009, and Superstorm Sandy in 2012, the U.S. economy continues to grow. U.S. MNCs have holdings throughout the world, and foreign firms are welcomed as investors in the U.S. market. U.S. firms maintain particularly dominant global posi-tions in technology-intensive industries, including computing (hardware and services), telecommunications, media, and biotechnology. At the same time, foreign MNCs are finding the United States to be a lucrative market for expansion. Many foreign automo-bile producers, such as BMW, Honda, Subaru, Nissan, and Toyota, have established a major manufacturing presence in the United States. Given the near collapse of the “domestic” automotive industries, North American automotive production will come increasingly from these foreign “transplants.”

Canada is the United States’ largest trading partner, a position it has held for many years. The United States also has considerable foreign direct investment in Canada. This helps explain why most of the largest foreign-owned companies in Canada are totally or heavily U.S.-owned. The legal and business environments in Canada are similar to those in the United States, and the similarity helps promote trade between the two countries. Geography, language, and culture also help, as does NAFTA, which will assist Canadian firms in becoming more competitive worldwide. They will have to be able to go head to head with their U.S. and Mexican competitors as trade barriers are removed, which should result in greater efficiency and market prowess on the part of the Canadian firms, which must compete successfully or go out of business. In recent years, Canadian firms have begun investing heavily in the United States while gaining international investment from both the United States and elsewhere. Canadian firms also do business in many other countries, including Mexico, Great Britain, Germany, and Japan, where they find ready markets for Canada’s vast natural resources, including lumber, natural gas, crude petroleum, and agricultural products.

By the early 1990s Mexico had recovered from its economic problems of the previous decade and had become the strongest economy in Latin America. In 1994, Mexico became part of NAFTA, and it appeared to be on the verge of becoming the major economic power in Latin America. Yet, an assassination that year and related economic crisis underscored that Mexico was still a developing country with consider-able economic volatility. Mexico now has free-trade agreements with 46 countries, more than any other nation, including agreements with Panama, the Unifying Free Trade Agreement with Central America, the EU, the European Free Trade Area, and the Trans-Pacific Partnership. More than 90 percent of Mexico’s trade occurs under free trade agreements.58  In 2000 the 71-year hold of the Institutional Revolutionary Party on the presidency of the country came to an end, and many investors believe that the admin-istration of Vicente Fox and his successor, Felipe Calderon, have been especially pro-business. Calderon battled Mexico’s narcotics gangs, which, unfortunately, have been responsible for an ongoing epidemic of violence and casualties, including those of innocent civilians. In 2012, the Institutional Revolutionary Party returned to power with the election of Enrique Peña Nieto as president, who, despite uncertainty from some, has continued to advance pro-business initiatives, such as expanding the Mexican auto industry, opening the oil industry to the private sector, and forcing greater competition in telecommunications.59,60

Chapter 1 Globalization and International Linkages 25

Because of NAFTA, Mexican businesses are finding themselves able to take advan-tage of the U.S. market by producing goods for that market that were previously pur-chased by the U.S. from Asia. Mexican firms are now able to produce products at highly competitive prices thanks to lower-cost labor and proximity to the American market. Location has helped hold down transportation costs and allows for fast delivery. This development has been facilitated by the maquiladora system, under which materials and equipment can be imported on a duty- and tariff-free basis for assembly or manufactur-ing and re-export mostly in Mexican border towns. Mexican firms, taking advantage of a new arrangement that the government has negotiated with the EU, can also now export goods into the European community without having to pay a tariff. The country’s trade with both the EU and Asia is on the rise, which is important to Mexico as it wants to reduce its overreliance on the U.S. market (see In the International Spotlight at the end of Chapter 9).

The EU The ultimate objective of the EU is to eliminate all trade barriers among member countries (like between the states in the United States). This economic com-munity eventually will have common custom duties as well as unified industrial and commercial policies regarding countries outside the union. Another goal that has finally largely become a reality is a single currency and a regional central bank. With the ad-dition of Croatia in 2013, 28 countries now comprise the EU, with 17 having adopted the euro. Another 9 countries, having joined the EU in either 2004, 2007, or 2013, are legally bound to adopt the euro upon meeting the monetary convergence criteria.61

Such developments will allow companies based in EU nations that are able to manufacture high-quality, low-cost goods to ship them anywhere within the EU without paying duties or being subjected to quotas. This helps explain why many North Ameri-can and Pacific Rim firms have established operations in Europe; however, all these outside firms are finding their success tempered by the necessity to address local cultural differences.

The challenge for the future of the EU is to absorb its eastern neighbors, the former communist-bloc countries. This could result in a giant, single European market. In fact, a unified Europe could become the largest economic market in terms of purchasing power in the world. Between 2004 and 2007, Poland, the Czech Republic, Hungary, Bulgaria, and Romania all joined the EU, improving economic growth, inflation, and employment rates throughout. Such a development is not lost on Asian and U.S. firms, which are working to gain a stronger foothold in Eastern European countries as well as the existing EU. In recent years, foreign governments have been very active in helping to stimulate and develop the market economies of Central and Eastern Europe to enhance their economic growth as well as world peace.

For the last decade, the EU has faced major challenges. Several European govern-ments, including Greece (see In the International Spotlight at the end of Chapter 2), Portugal, Spain, and Ireland, have found themselves with dangerously large deficits that resulted from both structural conditions (stagnant population growth, overly generous pension systems, early retirements) and shorter-term economic pressures (the 2009 global recession). These conditions have placed pressure on the euro, the currency adopted by most EU countries, and have forced substantial rescue packages led by Germany and France.  Though the financial situation in Ireland, Portugal, and Spain has significantly improved, the situation in Greece remains challenging.

Having accepted multiple bailout packages from the IMF, the European Commis-sion, and the European Central Bank between 2010 and 2015, Greece has been forced to accept severe austerity measures, including higher taxes, the freezing of government pensions and wages, and cuts to public spending. Though the European community believes that forcing these restrictions on Greece is necessary to assure financial stabil-ity and repayment of bailout funds, many in Greece have argued that these austerity measures have made recovery nearly impossible. In July 2015, with Greece facing a repayment of 1.6 billion euro that it would not be able to meet without additional financial

maquiladoraA factory, the majority of which are located in Mexican border towns, that imports materials and equipment on a duty- and tariff-free basis for assembly or manufacturing and re-export.

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assistance, negotiations between Greek officials and its European creditors deadlocked. In a surprising move, the Greek government pushed the decision of whether or not to accept the latest bailout package and accompanying financial restrictions to its citizens via referendum, which the Greek people voted overwhelming to reject. Banks closed across the country and withdrawals were limited to 60 euros per day. Despite the refer-endum vote, the Greek government ultimately accepted the terms of the bailout deal in exchange for financial assistance, preventing bankruptcy and a potential Greek exit from the EU.62,63,64,65

Maintaining a unified EU in the coming decades may be challenging. In the face of growing skepticism about the advantages of integration with Continental Europe, the United Kingdom, part of the EU but not the Euro-zone, held a referendum in June 2016 regarding whether to “remain” in or “leave” the European Union. In a close but decisive vote, the citizens of the United Kingdom became the first to vote to dissolve their mem-bership in the bloc. This vote, though not legally binding, paves the way for invoking Article 50, which establishes the three-year withdrawal procedure for countries wishing to exit. In the morning following the referendum vote, “remain” supporter Prime Minis-ter David Cameron announced his plans to step aside, leaving the task of coordinating the EU exit, or “Brexit,” up to the next prime minister.

Japan During the 1970s and 1980s, Japan’s economic success had been without prec-edent. The country had a huge positive trade balance, the yen was strong, and the Japanese became recognized as the world leaders in manufacturing and consumer goods.

Analysts ascribe Japan’s early success to a number of factors. Some areas that have received a lot of attention are the Japanese cultural values supporting a strong work ethic and group/team effort, consensus decision making, the motivational effects of guaranteed lifetime employment, and the overall commitment that Japanese workers have to their organizations. However, at least some of these assumptions about the Japanese workforce have turned out to be more myth than reality, and some of the former strengths have become weaknesses in the new economy. For example, consensus decision making turns out to be too time-consuming in the new speed-based economy. Also, there has been a steady decline in Japan’s overseas investments since the 1990s due to a slowing Japanese economy, poor management decisions, and competition from emerging economies, such as China.

Some of the early success of the Japanese economy can be attributed to the Ministry of International Trade and Industry (MITI). This is a governmental agency that identifies and ranks national commercial pursuits and guides the distribu-tion of national resources to meet these goals. In recent years, MITI has given primary attention to the so-called ABCD industries: automation, biotechnology, computers, and data processing.

Another major reason for Japanese success may be the use of keiretsus. This Japanese term stands for the large, vertically integrated corporations whose holdings supply much of the assistance needed in providing goods and services to end users. Being able to draw from the resources of the other parts of the keiretsu, a Japanese MNC often can get things done more quickly and profitably than its international competitors.

Despite setbacks, Japan remains a formidable international competitor and is well poised in all three major economic regions: the Pacific Rim, North America, and Europe.

Emerging and Developing EconomiesIn contrast to the fully developed countries of North America, Europe, and Asia are the developing and emerging countries. While there is no precise definition, developing economies typically face relatively low GDP per capita and a workforce that is either unskilled or semiskilled. In many cases, there also is considerable government interven-tion in economic affairs. Emerging markets can be viewed as developing economies that exhibit sustained economic reform and growth.

Ministry of International Trade and Industry (MITI)A Japanese government agency that identifies and ranks national commercial pursuits and guides the distribution of national resources to meet these goals.

keiretsuIn Japan, an organizational arrangement in which a large, often vertically integrated group of companies cooperate and work closely with each other to provide goods and services to end users; members may be bound together by cross-ownership, long-term business dealings, interlocking directorates, and social ties.

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Central and Eastern Europe In 1991, the Soviet Union ceased to exist. Each of the individual republics that made up the U.S.S.R. in turn declared its independence and now is attempting to shift from a centrally planned to a market-based economy. The Russian Republic has the largest population, territory, and influence, but others, such as Ukraine, also are industrialized and potentially important in the global economy. Of most importance to the study of international management are the Russian economic reforms, the disman-tling of Russian price controls (allowing supply and demand to determine prices), and privatization (converting the old communist-style public enterprises to private ownership).

Russia’s economy continues to emerge as poverty declines and the middle class expands. Direct investment in Russia, along with its membership in the International Mon-etary Fund (IMF), helped to raise GDP and decrease inflation, offsetting the hyperinflation created from the initial attempt at transitioning to a market-based economy in the early 1990s. Abundant oil and high global energy prices greatly boosted Russia’s economy in the early 2000s, though recent decreases in demand have pushed Russia into a recession. In addition, the Group of Seven (G7, including the United States, Germany, France, Eng-land, Canada, Japan, and Italy) formally expanded to include Russia in 1997, becoming the Group of Eight (G8). However, Russia was suspended from the group in 2014 after a series of political differences between the original G7 and Russia, culminating in the annex-ation of Crimea. In addition, multilateral sanctions were imposed. These actions, when combined with falling oil and gas prices, have resulted in a dramatic slowdown in Russia’s economy and a fall in the value of the ruble. As such, the Russian economy likely will have a number of years of economic instability and many recurrent political problems.

International Management in Action

Recognizing Cultural Differences www.usrbc.org; www.careerwatch.com

One objective of multicultural research is to learn more about the customs, cultures, and work habits of people in other countries. After all, a business can hardly expect to capture an overseas market without knowledge of the types of goods and services the people there want to buy. Equally important is the need to know the man-agement styles that will be effective in running a foreign operation. Sometimes this information can change quite rapidly. For example, as Russia continues to move from a central to a market economy, management is con-stantly changing as the country attempts to adjust to increased exposure in the global environment. Russia entered into a strategic partnership with the United States in 2002. However, while U.S. perspectives of “partnerships” are flexible, they are generally seen as inherently having some hierarchical structure. Russia, on the other hand, sees “partnerships” as entailing equality, especially in the decision-making process. This may be a part of the reason Russia formed a strategic partner-ship with China in 2005, since both countries emerged from a communist regime and can understand similar struggles. Regardless, as Russia moves to privatize its organizations, the new partnership may pose a threat to the Americas and the West if efforts to understand each other and work together are abandoned. It is evident that the United States and Russia differ on many horizons. Russian management is still based on authoritarian styles, where the managerial role is to pass orders down the chain of command, and there is

little sense of responsibility, open communication, or voice in the decision-making process. Furthermore, while 64 percent of U.S. employees see retirement as an opportunity for a new chapter in life, only 15 percent of Russian employees feel that way, and another 23 percent see retirement as “the beginning of the end.” Despite such differences, there are points of similarity that a U.S. firm can use as leverage when considering opening a business in Russia. About 46 percent of employees in both the United States and Russia would prefer a work schedule that fluctuates between work and leisure, mirroring a pattern of recurring sabbaticals. Also, Russia currently has a post–Cold War mentality, much like the United States experienced after the Great Depression of the 1930s. Looking back at history and incorporating the evolutionary knowledge can assist in understanding emerging economies. These examples show the importance of studying international management and learning via systematic analysis of culture and history and firsthand information how managers in other countries really do behave toward their employees and their work. Such analysis is critical in a firm’s ensuring a strong foothold in effective international management.

Source: Garry Kasparov, “Putin’s Gangster State,” The Wall Street Jour-nal, March 30, 2007, p. A15; The Economist Intelligence Unit, Country Report: Russia (Kent, U.K.: EIU, 2007), p. 7; “Trust the Locals,” The Economist 382, January 25, 2007, pp. 55–56.

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One pervasive set of challenges in Russia is persistent crime, corruption, and lack of public security. As such, many foreign investors feel that the risk is still too high (see The World of International Management at the beginning of Chapter 10). Russia is such a large market, however, and has so much potential for the future that many MNCs feel they must get involved, especially with a promising rise in GDP. There also has been a movement toward teaching Western-style business courses, as well as MBA programs, in all the Central European countries, creating a greater preparation for trends in globalization.

In Hungary, state-owned hotels have been privatized, and Western firms, attracted by the low cost of highly skilled, professional labor, have been entering into joint ventures with local companies. MNCs also have been making direct investments, as in the case of General Electric’s purchase of Tungsram, the giant Hungarian electric company. Another example is Britain’s Telfos Holdings, which paid $19 million for 51 percent of Ganz, a Hungarian locomotive and rolling stock manufacturer. Still others include Suzuki’s investment of $110 million in a partnership arrangement to produce cars with local manufacturer Autokonzern, Ford Motor’s construction of a new $80 million car component plant, and Italy’s Ilwa’s $25 million purchase of the Salgotarjau Iron Works.

Poland had a head start on the other former communist-bloc countries. General political elections were held in June 1989 and the first noncommunist government was established well before the fall of the Berlin Wall. In 1990, the Communist Polish United Workers Party dissolved and Lech Walesa was elected president. Earlier than its neigh-bors, Poland instituted radical economic reforms (characterized as “shock therapy”). Although the relatively swift transition to a market economy has been very difficult for the Polish people, with very high inflation initially, continuing unemployment, and the decline of public services, Poland’s economy has done relatively well. In fact, Poland’s economy was the only economy in the EU to continue to grow during the global reces-sion of 2008–2009. In 2015, Poland’s GDP grew by around 4 percent. However, politi-cal instability and risk, large external debts, a deteriorating infrastructure, and only modest education levels have led to continuing economic problems (see In the Interna-tional Spotlight at the end of Chapter 5).

Although Russia, the Czech Republic, Hungary, and Poland receive the most media coverage and are among the largest of the former communist countries, others also are struggling to right their economic ships. A small but particularly interesting example is Albania. Ruled ruthlessly by the Stalinist-style dictator Enver Hoxha for over four decades following World War II, Albania was the last, but most devastated, Eastern European country to abandon communism and institute radical economic reforms. At the beginning of the 1990s, Albania started from zero. Industrial output initially fell over 60 percent and inflation reached 40 percent monthly. Today, Albania still struggles but is slowly making progress.

The key for Albania and the other Eastern European countries is to maintain the social order, establish the rule of law, rebuild the collapsed infrastructure, and get fac-tories and other value-added, job-producing firms up and running. Foreign investment must be forthcoming for these countries to join the global economy. A key challenge for Albania and the other “have-not” Eastern European countries will be to make themselves less risky and more attractive for international business.

China After years of steady, strong growth, China’s GDP has been slowing consider-ably. In 2015, GDP expanded at only 7 percent, its slowest in 25 years.66  China faces other formidable challenges, including a massive savings glut in the corporate sector, the globalization of manufacturing networks, vast developmental needs, and the requirement for 15–20 million new jobs annually to avoid joblessness and social unrest (see In the International Spotlight at the end of Chapter 7).

China also remains a major risk for investors. The one country, two systems (com-munism and capitalism) balance is a delicate one to maintain, and foreign businesses are often caught in the middle. Most MNCs find it very difficult to do business in and with

Chapter 1 Globalization and International Linkages 29

China. Concerns about undervaluation of China’s currency, the renminbi (also know as the yuan), and continued policies that favor domestic companies over foreign ones make China a complicated and high-risk venture.67,68 Even so, MNCs know that China, with its 1.4 billion people, will be a major world market and that they must have a presence there.

Trade relations between China and developed countries and regions, such as the United States and the EU, remain tense. Many in the United States and around the globe had long argued that the value of the Chinese currency was kept artificially low, giving China an unfair advantage in selling its exports. That opinion, however, may be changing. A slowing Chinese economy, coupled with over a decade of steady gains relative to the dollar, resulted in both the IMF and the Peterson Institute stating in 2015 that the yuan was no longer undervalued.69  In addition, China’s policy toward foreign investors con-tinues to be fluid and sometimes unpredictable. Both Walmart and Yum Brands found themselves accused of improper business practices and each had to close stores and issue public apologies. Walmart was forced to pay nearly US$10 million in fines over the three-year period from 2012 through 2014 due to poor-quality food, confusing pricing, and mislabeled meat products.70 In response, Walmart invested nearly US$50 million through the end of 2015 to improve food safety and testing within China.71  Similarly, Yum Brands suffered a 29 percent drop in same-store sales in China in April of 2013 after concerns about the safety of some chicken and the spread of Avian flu caused customers to stay away from the outlets.72

Other Emerging Markets of Asia In addition to Japan and China, there are a number of other important economies in the region, including South Korea, Hong Kong, Singapore, and Taiwan. Together, the countries of the ASEAN bloc are also fueling growth and de-velopment in the region.

In South Korea, the major conglomerates, called chaebols, include such interna-tionally known firms as Samsung, Daewoo, Hyundai, and the LG Group. Many key managers in these huge firms have attended universities in the West, where in addition to their academic programs they learned Western culture, customs, and language. Now they are able to use this information to help formulate competitive international strategies for their firms. This will be very helpful for South Korea, which has shifted to privatiz-ing a wide range of industries and withdrawing some of the restrictions on overall foreign ownership. Unlike most developed economies, South Korea was able to avoid falling into economic recession in 2009. In the years since, South Korea has maintained steady progress, with a solid economy with moderate growth, moderate inflation, low unemploy-ment, an export surplus, and fairly equal distribution of income.

Bordering southeast China and now part of the People’s Republic of China (PRC), Hong Kong has been the headquarters for some of the most successful multinational operations in Asia. Although it can rely heavily on southeast China for manufacturing, there is still uncertainty about the future and the role that the Chinese government intends to play in local governance.

Singapore is a major success story. Its solid foundation leaves only the question of how to continue expanding in the face of increasing international competition. To date, however, Singapore has emerged as an urban planner’s ideal model and the leader and financial center of Southeast Asia.

Taiwan has progressed from a labor-intensive economy to one that is dominated by more technologically sophisticated industries, including banking, electricity genera-tion, petroleum refining, and computers. Although its economy has also been hit by the downturn in Asia, it continues to steadily grow.

Besides South Korea, Singapore, and Taiwan, other countries of Southeast Asia are also becoming dynamic platforms for growth and development. Thailand, Malaysia, Indonesia (see In the International Spotlight at the end of Chapter 12), and now Vietnam have developed economically with a relatively large population base and inexpensive labor despite the lack of considerable natural resources. These countries have been known to have social stability, but in the aftermath of the recent economic crisis, there has been

chaebolsVery large, family-held Korean conglomerates that have considerable political and economic power.

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considerable turmoil in this part of the world. This instability first occurred in Indonesia, the fourth most populous country in the world, and more recently in Thailand. In late 2013, Thailand’s Prime Minister Yingluck Shinawatra’s government proposed sweeping pardons for various past offenses committed by former and current politicians. Although the legislature overwhelmingly rejected those proposed pardons, protests and political unrest, led by the People’s Democratic Reform Committee, still unraveled on the streets of Bangkok.73 In December, Prime Minister Yingluck Shinawatra attempted to contain the protests by dissolving the House of Representatives, declaring a state of emergency, and calling for a new election in February 2014.74  The continued protests led to disruptions of the February election, leading the Constitutional Court to nullify the election results.75 In May 2014, a military coup d’etat, led by General Prayut Chan-o-cha, removed Prime Minister Yingluck Shinawatra from power.76  Since then, Thailand has been ruled by the newly formed National Council for Peace and Order under military dictatorship.  Despite the political turmoil that has plagued Thailand and other countries in the region, these export-driven Southeast Asian countries remain attractive to outside investors.

India With a population of about 1.3 billion and growing, India has traditionally had more than its share of political and economic problems. The recent trend of locating software and other higher-value-added services has helped to bolster a large middle- and upper-class market for goods and services and a GDP that is quickly reaching the level of China. India may soon be viewed as a fully developed country if it can withstand the intense growth period.

For a number of reasons, India is attractive to multinationals, especially U.S. and British firms. Many Indian people speak English, are very well educated, and are known for advanced information technology expertise. Also, the Indian government is providing funds for economic development. For example, India is expanding its telecommunication systems and increasing the number of phone lines fivefold, a market that AT&T is vig-orously pursuing. Many frustrations remain in doing business in India (see In the Inter-national Spotlight at the end of this chapter), but there is little question that the country will receive increased attention in the years ahead.

Developing Economies on the VergeAround the world there are many economies that can be considered developing (what might formally have been termed “less developed” or in some cases “least developed”) that are worthy of attention and understanding. Some of these economies are on the verge of emerging as impressive contributors to global growth and development.

South America Over the years, countries in South America have had difficult eco-nomic problems. They have accumulated heavy foreign debt obligations and experienced severe inflation. Although most have tried to implement economic reforms reducing their debt, periodic economic instability and the emergence of populist leaders have had an impact on the attractiveness of countries in this region.

Through the 1990s and 2000s, Brazil had been attracting considerable foreign investment, with foreign companies drawn to opportunities created by Brazil’s privatiza-tion of power, telecommunications, and other infrastructure sectors. (See the International Management in Action box “Brazilian Economic Reform and Recent Challenges.”) Power companies such as AES and General Electric have constructed more than $20 billion worth of electricity plants throughout the country. At the same time, many other well-known companies have set up operations in Brazil, including Yum! Brands, Apple, Gap, McDonald’s, and Walmart. Until recently, Brazil has benefited from one of the most stable governments throughout Latin America, which has helped secure the country’s place today as the undisputed economic leader of South America.

More recently, Brazil has faced alternating periods of economic progress and set-backs. After a period of robust growth and declining poverty rates in the period 2008–2014,

Chapter 1 Globalization and International Linkages 31

Brazil slipped into recession in 2015 and 2016. Frustration of economic stagnation and a widespread public corruption scandal resulted in the impeachment of President Dilma Rousseff in May of 2016.77  Given Brazil’s large and relatively well-educated population, ample natural resources, existing industrial base, and strategic geographic position, longer-term prospects are still potentially positive. With an economic output comparable to that of France, the Brazilian economy outweighs that of any other South American country and has become a worldwide presence (see In the International Spotlight at the end of Chapter 10). 

Chile’s market-based economic growth has fluctuated between 3 and 6 percent since the early 2000s, one of the best and most stable performances in Latin America. Chile attracts a lot of foreign direct investment, mainly dealing with gas, water, electric-ity, and mining. It continues to participate in globalization by engaging in further trade agreements, including those with Mercosur, China, India, the EU, South Korea, and Mexico.

Argentina has one of the strongest economies overall with abundant natural resources, a highly literate population, an export-oriented agricultural sector, and a diver-sified industrial base; however, it has suffered the recurring economic problems of infla-tion, external debt, capital flight, and budget deficits. Although Argentina rebounded from the global recession with over 8 percent GDP growth in 2010 and 2011, economic growth has since slowed significantly. In 2015, inflation soared to over 25 percent. An election in 2015, however, ousted the Peronist government that had ruled the country since 2013. Mauricio Macri was elected with a mandate to reverse the government-driven economic policies of his predecessors, Cristina de Kirchner and her husband, Néstor Kirchner.78

Despite the ups and downs, a major development in South America is the growth of intercountry trade, spurred on by the progress toward free-market policies. For exam-ple, beginning in 1995, 90 percent of trade among Mercosur members (Brazil, Argentina, Paraguay, and Uruguay) was duty-free. At the same time, South American countries are increasingly looking to do business with the United States. In fact, a survey of business-people from Argentina, Brazil, Chile, Colombia, and Venezuela found that the U.S. market, on average, was more important for them than any other. Some of these countries, however, also are looking outside the Americas for growth opportunities. For over two decades, Mercosur has been in discussion with the EU to create free trade between the two blocs, and Chile and Peru have joined the Asia-Pacific Economic Cooperation group and were participants in the TPP negotiations described above. These developments help illustrate the economic dynamism of South America and, especially in light of Asia’s recent economic problems, explain why so many multinationals are interested in doing business with this part of the world.

Middle East and Central Asia Israel, the Arab countries, Iran, Turkey, and the Central Asian countries of the former Soviet Union are a special group of emerging countries. Because of their oil, however, some of these countries are considered to be economically rich. Recently, this region has been in the world news because of the political instability and civil war in Syria, the rise of the Islamic State in Iraq and Syria, and the decade-long wars in Iraq and Afghanistan following the September 11, 2011, terrorist attacks in the United States. Despite the political challenges, these countries continue to try to balance geopolitical/religious forces with economic viability and activity in the interna-tional business arena. Students of international management should have a working knowledge of these countries’ customs, culture, and management practices since most industrial nations rely, at least to some degree, on imported oil and since many people around the world work for international, and specifically Arab, employers.

The Arab and Central Asian countries rely almost exclusively on oil production. The price of oil greatly fluctuates, and the Organization of Petroleum Exporting Coun-tries (OPEC) has trouble holding together its cartel. After years of relatively high prices, oil prices dipped to a 12-year low in 2016, causing financial shockwaves thorughout the

32

International Management in Action

Brazilian Economic Reform and Recent Challenges http://en.wikipedia.org; http://www.wto.org/

Over the past two decades, Brazil’s economic reform and progress have been nothing short of spectacular. Beginning with a comprehensive privatization program in the early and mid-1990s under which dozens of state-owned enterprises were sold to commercial inter-ests, Brazil has transformed itself from a relatively closed and frequently unstable economy to one of the global leading “BRIC” countries and the anchor of South American economic development. Brazil’s reforms, which have included macroeconomic stabiliza-tion, liberalization of import and export restrictions, and improved fiscal and monetary management, reflect a definitive break from past inward-looking policies that characterized much of Latin America in the 1960s and 1970s. A critical milestone was the introduction of the Plano Real (“Real Plan”), instituted in the spring of 1994, which sought to break inflationary expectations by peg-ging the real to the U.S. dollar. Inflation was brought down to single-digit annual figures, but not fast enough to avoid substantial real exchange rate appreciation during the transition phase of the Plano Real. This appreciation meant that Brazilian goods were now more expensive relative to goods from other countries, which contributed to large current account deficits. However, no shortage of foreign currency ensued because of the financial community’s renewed interest in Brazilian markets as inflation rates stabilized and memories of the debt crisis of the 1980s faded. The Real Plan successfully eliminated inflation, after many failed attempts to control it. Almost 25 million people turned into consumers. The maintenance of large current account deficits via capital account sur-pluses became problematic as investors became more risk averse to emerging market exposure as a conse-quence of the Asian financial crisis in 1997 and the Russian bond default in August 1998. After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998. In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S. dollar. This devaluation helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998. Brazil’s debt to GDP ratio of 48 percent for 1999 beat the IMF target and helped reassure investors that Brazil will maintain tight fiscal and monetary policy even with a floating currency. The economy grew 4.4 percent in 2000, but prob-lems in Argentina in 2001, and growing concerns that the presidential candidate considered most likely to win, leftist Luis Inácio Lula da Silva, would default on the debt, triggered a confidence crisis that caused the economy to decelerate. Poverty was down to near 16 percent.

In 2002, Luis Inácio Lula da Silva won the presiden-tial elections, and he was reelected in 2006. During his government, the economy began to grow more rapidly. In 2004 Brazil saw promising growth of 5.7 percent in GDP; following in 2005 with 3.2 percent growth; in 2006, 4.0 percent; in 2007, 6.1 percent; and in 2008, 5.1 percent growth. Although the financial crisis caused some slowdown in Brazil’s economy, it has weathered the period much better than nearly every other econ-omy in the Western Hemisphere. From 2009 to 2011, Brazil was the world’s fastest-growing car market. By 2011, the size of the Brazilian economy had surpassed that of the United Kingdom. The years since the financial crisis have been more challenging for the Brazilian economy. Oil producer OXG entered bankruptcy in late 2013—the largest corporate bankruptcy in South American history. Polit-ical corruption, including the exchange of millions in bribery and money laundering between Brazilian poli-ticians and state-owned oil producer Petrobras, low-ered consumer confidence. Petrobras lost nearly 60 percent of its value between the last quarter of 2014 and early 2015, and the Bovespa, Brazil’s stock index, slid sharply downward. Between 2011 and 2015, the real depreciated nearly 50 percent in relation to the U.S. dollar. By 2015, the economy had slipped into recession, and in 2016, the president was impeached due in part to alleged connections to the Petrobras scandal. Despite the current struggles, there continues to be promise for Brazil’s future. Brazil remains the second-biggest destination for foreign direct investment into developing countries after China, and many Brazilian companies continue to expand in the international arena. Embraer (ERJ), the global leader in small and medium-sized airplanes, is now the world’s third-largest manufacturer of passenger jets after Boeing and Air-bus. Odebrecht, the Brazilian business conglomerate in the fields of engineering, construction, chemicals, and petrochemicals, is responsible for building a number of large infrastructure projects around the world, including roads, bridges, mass transit systems, more than 30 air-ports, and sports stadiums such as Florida International University’s FIU stadium. Brazil remains the world’s larg-est exporter of several agricultural products including beef, chicken, coffee, orange juice, and sugar, and the country’s international trade and investment relation-ships continue to diversify considerably to include man-ufacturing and services.

Source: Garry Kasparov, “Putin’s Gangster State,” The Wall Street Jour-nal, March 30, 2007, p. A15; The Economist Intelligence Unit, Country Report: Russia (Kent, U.K.: EIU, 2007), p. 7; “Trust the Locals,” The Economist 382, January 25, 2007, pp. 55–56.

Chapter 1 Globalization and International Linkages 33

region.79  Saudi Arabia, the largest oil producer in the Arab world, was forced to reduce fuel, water, and power subsidies it provides to its citizens after experiencing a U.S.$98 billion budget deficit in 2015 (see In the International Spotlight at the end of Chapter 8).80 Arab countries have invested billions of dollars in U.S. property and businesses. Many people around the world, including those in the West, work for Arab employers. For example, the bankrupt United Press International was purchased by the Middle East Broadcasting Centre, a London-based MNC owned by the Saudis.

The “Arab Spring,” described in the next chapter, has had a profound impact on the political and economic environment of many countries in this region.

Africa Even though they have considerable natural resources, many African nations remain very poor and undeveloped, and international trade is only beginning to serve as a major source of income. One major problem of doing business in the African continent is the overwhelming diversity of approximately one-billion people, divided into 3,000 tribes, that speak 1,000 languages and dialects. Also, political instability is pervasive, and this instability generates substantial risks for foreign investors.

In recent years, Africa, especially sub-Saharan Africa, has had a number of severe problems. In addition to tragic tribal wars, there has been the spread of terrible diseases such as AIDS, malaria, and Ebola. These problems have resulted in serious economic setbacks. According to the World Bank, the 2014–2015 Ebola outbreak cost the econo-mies of Guinea, Liberia, and Sierra Leone an estimated US$1.6 billion of potential economic growth.81  Although the WTO was able to agree to relax intellectual property rights (IPR) in 2002–2003 to allow for greater and less costly access by African countries to antiviral AIDS medications, similar IPR disputes resulted in a delay of Ebola medicine to the region in 2014.82  While globalization has opened up new markets for developed countries, developing nations in Africa lack the institutions, infrastructure, and economic capacity to take full advantage of globalization. Other big problems include poverty, malnutrition, illiteracy, corruption, social breakdown, vanishing resources, overcrowded cities, drought, and homeless refugees. There is still hope in the future for Africa despite this bleak situation because the potential of African countries remains virtually untapped. Not only are there considerable natural resources, but the diversity itself also can be used to advantage. For example, many African people are familiar with the European cultures and languages of the former colonial powers (e.g., English, French, Dutch, and Portuguese), and this can serve them well in international business as they strive for continued growth. Uncertain times are ahead, but a growing number of MNCs are attempting to make headway in this vast continent. Also, the spirit of these emerging countries has not been broken. There are continuing efforts to stimulate economic growth. Examples of what can be done include Togo, which has sold off many of its state-owned operations and leased a steel-rolling mill to a U.S. investor, and Guinea, which has sold off some of its state-owned enterprises and cut its civil service force by 30 percent. A special case is South Africa, where apartheid, the former white government’s policies of racial segrega-tion and oppression, has been dismantled and the healing process is progressing (see In the International Spotlight at the end of Chapter 4). Long-jailed former black president Nelson Mandela was recognized as a world leader. These significant developments have led to an increasing number of the world’s MNCs returning to South Africa; however, there continue to be both social and economic problems that, despite Mandela’s and his successors’ best efforts, signal uncertain times for the years ahead. One major initiative is the country’s Broad-Based Black Economic Empowerment (B-BBEE) program, designed to reintegrate the disenfranchised majority into business and economic life.

Africa’s economic growth and dynamism have accelerated in recent years. Real GDP rose by an average of 5.3 percent a year from 2000 through 2015, more than twice its pace in the 1980s and 1990s.83  Telecommunications, banking, and retailing are all flourishing, while Nigeria and Angola saw their economies accelerate due in part to higher global fuel prices (see In the International Spotlight at the end of Chapter 6).84  It is important to emphasize, however, that sub-Saharan Africa’s recent growth, which has been dependent

34 Part 1 Environmental Foundation

on foreign direct investment and the high level of global demand for commodities, is par-ticularly sensitive to changes in the global economy. In 2015, sub-Saharan Africa’s growth stalled to a 20-year low in the wake of low oil prices and China’s economic slowdown (see Table 1–12).85 Although global pullback from the region, such as China’s slowdown, may mean less foreign direct investment in the near-term, McKinsey, the global consultancy, has found that the rate of return on foreign investment in Africa is actually higher than for any other region, offering positive prospects for this historically struggling region.86

Table 1–12Overview of the World Economic Outlook; Projections(percentage change, unless otherwise noted)

Year over Year Q4 over Q4

Projections Estimates Projections

2013 2014 2015 2016 2014 2015 2016

World Output 3.3 3.4   3.1 3.6 3.3 3.0 3.6Advanced Economies 1.1 1.8 2.0 2.2 1.8 2.0 2.3 United States 1.5 2.4 2.6 2.8 2.5 2.5 2.8 Euro Area   −0.3 0.9 1.5 1.6 0.9   1.5   1.7 Germany 0.4 1.6 1.5 1.6 1.5   1.6   1.6 France 0.7 0.2 1.2   1.5 0.1   1.5   1.5 Italy −1.7 −0.4 0.8   1.3 −0.4   1.2   1.5 Spain −1.2 1.4   3.1 2.5 2.0 3.2 2.2 Japan 1.6 −0.1 0.6   1.0 −0.8   1.3   1.3  United Kingdom 1.7 3.0 2.5 2.2 3.4   2.2 2.2 Canada 2.0 2.4 1.0   1.7 2.5 0.5 2.0 Other Advanced Economies 2.2 2.8 2.3 2.7 2.6 2.5 2.6Emerging and Developing Economies 5.0 4.6 4.0 4.5 4.7 4.0 4.8 Commonwealth of Independent States 2.2 1.0 −2.7 0.5 −0.6 −3.3 0.3 Russia 1.3 0.6 −3.8 −0.6 0.3 −4.6 0.0 Excluding Russia 4.2 1.9 −0.1 2.8 … … …   Emerging and Developing Asia 7.0 6.8 6.5 6.4 6.8 6.4 6.4 China 7.7 7.3 6.8 6.3 7.1 6.7 6.3 India 6.9 7.3 7.3   7.5 7.6 7.3   7.5 ASEAN−5 5.1 4.6 4.6 4.9 4.8 4.4 5.2 Emerging and Developing Europe 2.9 2.8 3.0 3.0 2.6 3.2 4.2 Latin America and the Caribbean 2.9 1.3 −0.3 0.8 1.1 −1.5 1.7 Brazil 2.7   0.1 −3.0 −1.0 −0.2 −4.4 1.3 Mexico 1.4   2.1 2.3 2.8 2.6 2.3 2.9 Middle East and North Africa (MENA) 2.3 2.7 2.5 3.9 … … … Sub-Saharan Africa 5.2 5.0 3.8 4.3 … … … South Africa 2.2 1.5 1.4 1.3 1.3 0.7 1.7 Memorandum European Union 0.2 1.5 1.9 1.9 1.5 1.8 2.1 World Growth Based on Market Exchange Rates 2.4 2.7 2.5 3.0 2.5 2.4 3.0World Trade Volume (goods and services) 5.9 2.8 3.8 5.5 … … … Imports Advanced Economies 2.0 3.4 4.0 4.2 … … …   Emerging and Developing Economies 5.2 3.6 1.3 4.4 … … …   Exports Advanced Economies 2.9 3.4 3.1 3.4 … … …  

Emerging and Developing Economies 4.4 2.9 3.9 4.8 … … …

Source: IMF World Economic Outlook, October 2015.

Chapter 1 Globalization and International Linkages 35

Table 1–12 shows economic growth rates and projections for major world regions and countries from 2013 to 2016. Of note is the fact that a number of emerging regions and countries are growing faster than developed countries; notably, China, India, and other Asian economies. Table 1–13 ranks the top 10 countries globally on their “com-petitiveness” as reported by the World Economic Forum. For 2015, China–Hong Kong and Singapore were ranked second and third, respectively. Table 1–14 ranks emerging markets according to several key indicators.

The World of International Management—RevisitedIn the World of International Management at the start of the chapter, you read about how social media is changing how we connect, shaping business strategy and operations, and even affecting diplomacy. Social media and social networks are revolutionizing the nature of international management by allowing producers and consumers to interact directly and bringing populations of the world closer together. Having read this chapter, you should now be more cognizant of the impacts of globalization and many international linkages among countries, firms, and societies on international management. Although controversial, globalization appears unstoppable. The creation of free-trade agreements worldwide has helped to trigger economic gains in many developing nations. The con-solidation and expansion of the EU will continue to open up borders and make it easier and more cost-effective for exporters from less developed countries to do business there. In Asia, formerly closed economies such as India and China have opened up, and other emerging Asian countries such as Indonesia, Malaysia, the Philippines, and Thailand are becoming important emerging economies in their own right. Continued efforts to priva-tize, deregulate, and liberalize many industries will increase consumer choice and lower prices as competition increases. The rapid growth of social media networks around the world is but one reflection of the interconnected nature of global economies and indi-viduals. In some ways, social media are transcending traditional barriers and impediments to global integration; however, differences in economic systems and approaches persist, making international management an ongoing challenge.

In light of these developments, answer the following questions: (1) What are some of the pros and cons of globalization and free trade? (2) How might the rise of social media result in closer connections (and fewer conflicts) among nations? (3) Which regions of the world are most likely to benefit from globalization and integration in the years to come, and which may experience dislocations or setbacks?

Table 1–13World’s Most Competitive Nations, 2015

Country Rank

USA 1China–Hong Kong 2Singapore 3Switzerland 4Canada 5Luxembourg 6Norway 7Denmark 8Sweden 9Germany 10

Source: World Competitive Scoreboard, 2015. http://www.imd.org/

36 Part 1 Environmental Foundation

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Chapter 1 Globalization and International Linkages 37

1. Globalization—the process of increased integration among countries—continues at an accelerated pace. More and more companies—including those from developing countries—are going global, creating opportunities and challenges for the global economy and international management. Globalization has become controversial in some quarters due to percep-tions that the distributions of its benefits are uneven and due to questions raised by offshoring. There have emerged sharp critics of globalization among academ-ics, NGOs, and the developing world, yet the pace of globalization and integration continues unabated.

2. Economic integration is most pronounced in the triad of North America, Europe, and the Pacific Rim. The North American Free Trade Agreement (NAFTA) is turning the region into one giant market. In South America, there is an increasing amount of intercoun-try trade, sparked by Mercosur. Additionally, trade agreements such as the Central American Free Trade Agreement (CAFTA) are linking countries of the Western Hemisphere together. In Europe, the expan-sion of the original countries of the European Union (EU) is creating a larger and more diverse union, with dramatic transformation of Central and Eastern European countries such as the Czech Republic, Poland, and Hungary. The Trans-Pacific Partnership (TPP), if implemented, could link together 12 or more major Asian and Asian-facing economies, and the Transatlantic Trade and Investment Partner-ship  (T-TIP), a proposed  trade agreement  between the  European Union  and the  United States, could

further promote trade and multilateral economic growth in Europe and North America. Africa and the Middle East continue to face complex problems but still hold economic promise for the future. Emerging markets in all regions present both opportunities and challenges for international managers.

3. Different growth rates and shifting demographics are dramatically altering the distribution of economic power around the world. Notably, China’s rapid growth will make it the largest economic power in the world by midcentury, if not before. India will be the most populous country in the world, and other emerging markets will also become important play-ers. International trade and investment have been increasing dramatically over the years. Major multi-national corporations (MNCs) have holdings throughout the world, from North America to Europe to the Pacific Rim to Africa. Some of these holdings are a result of direct investment; others are partnership arrangements with local firms. Small firms also are finding that they must seek out inter-national markets to survive in the future. MNCs from emerging markets are growing rapidly and expanding their global reach. The internationaliza-tion of nearly all business has arrived.

4. Different economic systems characterize different countries and regions. These systems, which include market, command, and mixed economies, are repre-sented in different nations and have changed as economic conditions have evolved.

SUMMARY OF KEY POINTS

KEY TERMS

chaebols, 29European Union, 12foreign direct investment (FDI), 20 globalization, 7international management, 5keiretsu, 26management, 5

maquiladora, 25Ministry of International Trade and Industry (MITI), 26MNC, 5North American Free Trade Agreement (NAFTA), 11offshoring, 7

outsourcing, 7Trans-Pacific Partnership, 13World Trade Organization (WTO), 10

REVIEW AND DISCUSSION QUESTIONS

1. How has globalization affected different world regions? What are some of the benefits and costs of globalization for different sectors of society (com-panies, workers, communities)?

2. How has NAFTA affected the economies of North America and how has the EU affected Europe? What

importance do these economic pacts have for interna-tional managers in North America, Europe, and Asia?

3. Why are Russia and Eastern Europe of interest to international managers? Identify and describe some reasons for such interest and also risks associated with doing business in these regions.

38 Part 1 Environmental Foundation

4. Many MNCs have secured a foothold in Asia, and many more are looking to develop business rela-tions there. Why does this region of the world hold such interest for international management? Identify and describe some reasons for such interest.

5. Why would MNCs be interested in South America, India, the Middle East and Central Asia, and Africa, the less developed and emerging countries of the

world? Would MNCs be better off focusing their efforts on more industrialized regions? Explain.

6. MNCs from emerging markets (India, China, Brazil) are beginning to challenge the dominance of devel-oped country MNCs. What are some advantages that firms from emerging markets bring to their global business? How might MNCs from North America, Europe, and Japan respond to these challenges?

1. c. U.S.-based Procter & Gamble acquired the Braun company in 2005.

2. d. BIC SA is a French company. 3. d. Tata Motors, a division of the Indian conglomerate

the Tata Group, purchased Jaguar, Land Rover, and related brands from Ford in 2008.

4. a. United Kingdom–based Reckitt Benckiser acquired French’s parent company, Durkee Famous Foods, in 1986.

5. a. General Mills, of the United States, acquired the Green Giant product line (together with the Pillsbury company) in 2001 from Britain’s Diageo PLC.

6. d. Godiva chocolate is owned by Yildiz Holding, a Turkish conglomerate.

7. b. Vaseline is manufactured by the Anglo-Dutch MNC Unilever PLC.

8. d. Haier Group, the largest appliance manufacturer in the world and headquartered in China, acquired GE Appliances in 2016.

9. d. Holiday Inn is owned by Britain’s InterContinen-tal Hotels Group PLC.

10. c. Tropicana orange juice was purchased by U.S.-based PepsiCo.

ANSWERS TO THE IN-CHAPTER QUIZ

One of the best-known franchise operations in the world is McDonald’s, and in recent years, the company has been working to expand its international presence. But emerging market fast-food companies have succeeded in slowing McDonald’s global expansion by catering to local and regional tastes. Philippines-based Jollibee is one such success story. Jollibee has 780 outlets in the Philippines and more than 90 around the world, includ-ing in the United States. Visit the McDonald’s and Jol-libee websites, and find out what each has planned in

terms of its global expansion. Compare their presence in Asia to each other and to Yum! Brands’ KFC and Pizza Hut presence in Asia. Then, based on this assignment and the chapter material, answer these last three questions: (1) Which of these companies seems best positioned in Southeast Asia? (2) What advantages might a “local” brand like Jollibee have over the global companies? What advan-tages do the global MNCs have? (3) What is your pre-diction in terms of future growth potential?

INTERNET EXERCISE: GLOBAL COMPETITION IN FAST FOOD

1. Brad Stone and Sarah Frier, “Evan Spiegel Reveals Plan to Turn Snapchat into a Real Business,” Bloomberg, May 26, 2015, http://www.bloomberg.com/news/features/2015-05-26/evan-spiegel-reveals-plan-to-turn-snapchat-into-a-real-business.

2. Ibid. 3. Lars Backstrom, “Anatomy of Facebook,”

Facebook.com, November 21, 2011, http://www.facebook.com/notes/facebook-data-team/anatomy- of-facebook/10150388519243859.

4. Evan LePage, “A Long List of Instagram Statistics and Facts (That Prove Its Importance),” Hootsuite, September 17, 2015,  http://blog.hootsuite.com/ instagram-statistics-for-business/.

5. Stone and Frier, “Evan Spiegel Reveals Plan to Turn Snapchat into a Real Business.”

6. 3V Advertising, Snapchat,  https://www.snapchat.com/ads (last visited January 10, 2016).

7. Lara O’Reilly, “If You’re Traveling Home for the Hol-idays, GE Wants You to Use This Snapchat Filter,” Business Insider, November 24, 2015, http://www.businessinsider.com/ge-launches-snapchat-geofilter-targeting-airports-and-train-stations-2015-11.

8. Erik Qualman, Socialnomics: How Social Media Transforms the Way We Live and Do Business (Hoboken, NJ: Wiley, 2009), front flap, pp. 95, 110.

9. Ibid.

ENDNOTES

Chapter 1 Globalization and International Linkages 39

10. The UN on Social Media, United Nations,  http://www.un.org/en/sections/about-website/un-social-media/.

11. Rose Yu, “China Car Sales Growth Slows Further,” The Wall Street Journal Online, January 12, 2015, http://www.wsj.com/articles/china-car-sales-growth-slows-further-1452587244.

12. Rajesh Mahapatra, “Cisco to Set Up Center in India,” Associated Press online, December 6, 2006.

13. Joan Lublin, “India Could Provide Unique Opportu-nities for Expat Managers,” The Wall Street Journal, May 8, 2007, p. B1.

14. “Get a First Look at Our New Innovation Center in Singapore,”  P&G News Blog, April 1, 2014, http://news.pg.com/blog/company-strategy/SGIC.

15. Unilever, “Our R&D Locations,”  https://www. unilever.com/about/innovation/our-r-and-d-locations/ (last visited July 11, 2016).

16. Laurie Burkitt, “GE Bases X-ray Unit in China,” The Wall Street Journal Online, July 26, 2012, http://online.wsj.com/article/SB10001424053111904772304576467873321597208.html.

17. “American Powerhouse Builds Global Profile,” The Wall Street Journal Online, November 4, 2012, http://online.wsj.com/article/SB10001424052970204712904578092182301796600.html.

18. Jochelle Mendonca, “Accenture Shoots Past TCS in Headcount; Says 95,000 People Will Join in 2015,” Economic Times, June 26, 2015, http://articles. economictimes.indiatimes.com/2015-06-26/news/ 63862376_1_tata-consultancy-services-headcount-strong-growth.

19. “Q1 Fiscal 2016,” Accenture, November 30, 2015,  https://newsroom.accenture.com/fact-sheet/.

20. “Accenture Earnings: Strong Dollar Impacts Revenue and New Signings Growth,”  Forbes, December 18, 2015, http://www.forbes.com/sites/greatspeculations/ 2015/12/18/accenture-earnings-strong-dollar-impacts-revenue-and-new-signings-growth/2/#6052f0296ef4.

21. Thomas Friedman, The World Is Flat: A Brief His-tory of the Twenty-first Century (New York: Farrar, Straus and Giroux, 2005).

22. “Anti-forum Protests Turn Violent,” Associated Press, February 2, 2009.

23. Michael Yaziji and Jonathan P. Doh, NGOs and Corporations: Conflict and Collaboration (Cambridge: Cambridge University Press, 2009).

24. For discussions of the benefits of globalization, see Jagdish Bhagwati, In Defense of Globalization (New York: Oxford University Press, 2004), and Edward Graham, Fighting the Wrong Enemy: Antiglobal Activists and Multinational Enterprises (Washington, DC: Institute for International Economics, 2000).

25. For discussion of some of the emerging concerns surrounding globalization, see Peter Singer, One World: The Ethics of Globalization (New Haven: Yale University Press, 2002); George Soros, George Soros on Globalization (New York: Public Affairs Books, 2002); Joseph Stiglitz, Globalization and Its Discontents (New York: Norton, 2002).

26. G. Balachandar, “Vehicle Makers Sans Ford Resume Production at Chennai Factories,” The Hindu, December 7, 2015,  http://www.thehindu.com/business/Industry/tamil-nadu-floods-vehicle-makers-sans-ford-resume-production-at-chennai- factories/article7958524.ece.

27. Tim Worstall, “India Now Fastest Growing Large Economy at 7.4% Third Quarter GDP Growth,” Forbes, November 30, 2015, http://www.forbes.com/sites/timworstall/2015/11/30/india-now-fastest- growing-large-economy-at-7-4-third-quarter-gdp-growth/#2715e4857a0b3e2ca881acba.

28. Offshoring Your Lawyer,”  The Economist, December 16, 2010,  http://www.economist.com/node/17733545.

29. Paul Blustein, “EU Offers to End Farm Subsidies,” Washington Post, May 11, 2004, p. E1.

30. Alan Beattie and Frances Williams, “Doha Trade Talks Collapse,” Financial Times, July 29, 2008.

31. “Developing Nations Call for WTO Deal to Help Poor,” Reuters.com, November 29, 2009.

32. CIA, “Costa Rica,”  The World Factbook (2009), https://www.cia.gov/library/publications/the-world-factbook/geos/cs.html.

33. Office of the U.S. Trade Representative, “Trade Agreements,” https://ustr.gov/trade-agreements.

34. Office of the U.S. Trade Representative, “Transatlantic Trade and Investment Partnership (T-TIP),” https://ustr.gov/ttip.

35. Elena Holodny, “China’s GDP Is Expected to Sur-pass the US’ in 11 Years,”  Business Insider, June 24, 2015,  http://www.businessinsider.com/chinas-gdp-is-expected-to-surpass-the-us-in-11-years-2015-6.

36. Office of the U.S. Trade Representative, “Summary of the Trans-Pacific Partnership Agreement,” https://ustr.gov/about-us/policy-offices/press-office/press-releases/ 2015/october/summary-trans-pacific-partnership.

37. Greg Ip, “Population Implosion: How Demographics Rule the Global Economy,” WSJ 2050 Demographic Destiny,  The Wall Street Journal Online, November 22, 2015,  http://www.wsj.com/articles/how-demo-graphics-rule-the-global-economy-1448203724.

38. Ibid.39. Ibid.40. Ibid.41. Ibid.

40 Part 1 Environmental Foundation

42. Ibid.43. Goldman Sachs, “Global Economics Paper No. 99:

Dreaming with the BRICs: The Path to 2050,” October 1, 2003.

44. Goldman Sachs, “Global Economics Paper No. 208: The BRICs 10 Years On: Halfway Through the Great Transformation,” December 7, 2011.

45. Mark Fahey and Nicholas Wells, “Emerging Mar-kets Funds, by the Numbers,”  CNBC, November 9, 2015, http://www.cnbc.com/2015/11/09/emerging-markets-funds-by-the-numbers.html.

46. John Hawksworth, “The World in 2050: How Big Will the Major Emerging Market Economies Get and How Can the OECD Compete?,” Pricewater-houseCoopers, March 2006.

47. “The World in 2050: Will the Shift in Global Eco-nomic Power Continue?” PricewaterhouseCoopers, February 2015.

48. Eric Martin, “Move Over, BRICs. Here Come the MISTs.” BusinessWeek, August 9, 2012, www.bloomberg.com/news/articles/2012-08-09/move-over-brics-dot-here-come-the-mists.

49. Data Team, “Brazilian Waxing and Waning,” The Economist Online, December 1, 2015, http://www.economist.com/blogs/graphicdetail/2016/04/ economic-backgrounder.

50. IMF, “World Economic Outlook Database,” October 2015,  https://www.imf.org/external/pubs/ft/weo/2015/02/weodata/index.aspx.

51. “World GDP,”  The Economist, June 13, 2015, http://www.economist.com/news/economic-and-financial-indicators/21654018-world-gdp.

52. Kenneth Rapoza, “This Year’s World Growth Slowest Since 2008 Crisis, Forecasts ‘The Economist,’” Forbes Online, August 22, 2013, www.forbes.com/sites/kenrapoza/2013/08/22/ this-years-world-growth-slowest-since-2008-crisis-forecasts-the-economist/#7e77de4138de.

53. WTO, International Trade Statistics (Switzerland, WTO, 2015).

54. UNCTAD, World Investment Report 2015 (Switzerland, United Nations, 2015).

55. R. Glenn Hubbard and Anthony Patrick O’Brien, Essentials of Economics (Upper Saddle River, NJ: Pearson Prentice Hall, 2007).

56. Ibid.57. Ibid.58. CIA, “Mexico,”  The World Factbook (2015), https://

www.cia.gov/library/publications/the-world-factbook/geos/mx.html.

59. Colleen Anne, “Mexico Takes Bids on 25 Offshore Oil Fields Taking One Step Closer to Privatization &

Reviving the Energy Sector,”  LatinOne.com, December 16, 2015,  http://www.latinone.com/ articles/29157/20151216/mexico-takes-bids-25- offshore-oil-fields-taking-one-step.htm.

60. Dave Graham, “Mexico Telecoms Regulator Backs AT&T and Telefonica Spectrum Deal,”  Reuters, December 17, 2015,  http://www.reuters.com/article/us-mexico-at-t-idUSKBN0U106B20151218.

61. CIA, “European Union,”  The World Factbook (2015), https://www.cia.gov/library/publications/ the-world-factbook/geos/ee.html.

62. Ben Knight, “Greece Bailout Deal: Angela Merkel Expects IMF Involvement,”  The Guardian, August 16, 2015,  www.theguardian.com/business/2015/aug/16/greece-bailout-deal-angela-merkel-expects- imf-involvement.

63. Virginia Harrison, “Greek Banks Closed Until Thursday,”  CNN Money, July 14, 2015,  http://money.cnn.com/2015/07/13/news/greece-deal-banks-closed/.

64. Abhinav Ramnarayan, “Greece’s July 20 Repayment to ECB Moves into Focus,”  Reuters, June 30, 2015,  www.reuters.com/article/greece-eurobonds-idUSL8N0ZG1QR20150630.

65. “How Greece’s Referendum Works,” The Econo-mist, July 4, 2015,  www.economist.com/blogs/econ-omist-explains/2015/07/economist-explains-2.

66. Xiaoyi Shao and Sue-Lin Wong, “China State Plan-ner Sees 2015 GDP Growth around 7 Percent, Okays More Big Projects,”  Reuters, January 12, 2016,  http://www.reuters.com/article/us-china- economy-planning-idUSKCN0UQ0BH20160112.

67. John Boudreau and Brandon Bailey, “Doing Busi-ness in China Getting Tougher for U.S. Compa-nies,”  Mercury News, March 27, 2010,  www.mercurynews.com/2010/03/26/doing-business-in-china-getting-tougher-for-u-s-companies/.

68. Edward Wong and Mark Landler, “China Rejects U.S. Complaints on Its Currency,”  New York  Times Online,  February 4, 2010,  www.nytimes.com/2010/ 02/05/world/asia/05diplo.html.

69. Wei Gu, “Is Yuan Undervalued or Overvalued?,” The Wall Street Journal Online,  August 11, 2015, www.wsj.com/articles/yuan-devaluation-enters-debate- on-whether-currency-is-undervalued-1439307298.

70. Laurie Burkitt and Shelly Banjo, “Wal-Mart Cries Foul on China Fines,”  The Wall Street Journal Online, April 13, 2014,  www.wsj.com/news/articles/SB10001424052702304157204579473272856969150?cb=logged0.31542067981929367.

71. Laurie Burkitt, “Wal-Mart to Triple Spending on Food-Safety in China,” The Wall Street Journal Online, June 17, 2014, www.wsj.com/articles/wal-mart-to-triple-spending-on-food-safety-in-china-1402991720.

Chapter 1 Globalization and International Linkages 41

72. Bloomberg News, “Yum’s 29% Sales Collapse in China Goes Beyond Avian Flu,” Bloomberg.com, May 12, 2013,  www.bloomberg.com/news/ articles/2013-05-12/yum-s-29-sales-collapse-in-china-goes-beyond-avian-flu.

73. Thomas Fuller, “Antigovernment protesters try to Shut Down Bangkok,” New York Times, January 12, 2014, http://www.nytimes.com/2014/01/13/world/asia/protests-thailand.html?_r=0.

74. “Thai Prime Minister Dissolves Parliament,”  Al Jazeera, December 9, 2013,  www.aljazeera.com/news/asia-pacific/2013/12/thai-pm-says-she-will- dissolve-parliament-201312913831169537.html.

75. “Thai Court Rules General Election Invalid,” BBC.com, March 21, 2014,  http://www.bbc.com/news/world-asia-26677772.

76. Walden Bello, “Military Coup Follows Judicial Coup in Thailand,”  Inquirer.net, May 24, 2014,  http://opinion.inquirer.net/74896/military-coup-follows-judicial-coup-in-thailand.

77. Simon Romero, Vinod Sreeharsha, and Bryant Rousseau, “Brazil Impeachment: The Process for Removing the President,”  New York Times,  May 12, 2016,  www.nytimes.com/interactive/2016/world/americas/brazil-dilma-rousseff-impeachment.html?_r=0.

78. The Editorial Board, “Argentina’s Transformative Election,”  New York Times, November 26, 2015,  www.nytimes.com/2015/11/27/opinion/argen-tinas-transformative-election.html.

79. Mark Shenk, “$30 Oil Just Got Closer as WTI Slides to 12-Year Low on China,”  Bloomberg Busi-ness Online, January 6, 2016,  www.bloomberg.com/news/articles/2016-01-06/oil-trades-near-34-as-record-cushing-stockpiles-exacerbate-glut.

80. Rick Gladstone, “Saudi Arabia, Squeezed by Low Oil Prices, Cuts Spending to Shrink Deficit,” New York Times Online, December 28, 2015, www.nytimes.com/2015/12/29/world/middleeast/squeezed-by-low-oil-prices-saudi-arabia-cuts- spending-to-shrink-deficit.html?_r=0.

81. The World Bank, “Ebola: Most African Countries Avoid Major Economic Loss but Impact on Guinea, Liberia, Sierra Leone Remains Crippling,” January 20, 2015,  www.worldbank.org/en/news/press-release/2015/01/20/ebola-most-african- countries-avoid-major-economic-loss-but-impact-on-guinea-liberia-sierra-leone-remains-crippling.

82. Karen Pauls, “Could Ebola Vaccine Delay Be Due to an Intellectual Property Spat?,”  CBC News, October 3, 2014,  www.cbc.ca/news/canada/ manitoba/could-ebola-vaccine-delay-be-due-to-an-intellectual-property-spat-1.2786214.

83. The World Bank, “Sub-Saharan Africa: Regional Forecast,”  Global Economic Prospects,  https://www.worldbank.org/content/dam/Worldbank/GEP/GEP2015b/Global-Economic-Prospects-June-2015-Sub-Saharan-Africa-analysis.pdf  (last visited January 9, 2016).

84. Matina Stevis, “IMF Revises Down Sub-Saharan Africa 2015 Growth,”  The Wall Street Journal Online, October 27, 2015,  www.wsj.com/articles/imf-revises-sub-saharan-africa-2015-growth-down-1445936591.

85. Ibid.86. Acha Leke, Susan Lund, Charles Roxburgh, and

Arend van Wamelen, “What’s Driving Africa’s Growth,” McKinsey Quarterly, June 2010, www.mckinsey.com/global-themes/middle-east- and-africa/whats-driving-africas-growth.

87. CIA, “India,”  The World Factbook  (2016),  https://www.cia.gov/library/publications/the-world-factbook/geos/in.html.

88. Ibid.89. World Bank, “India,”  World Development Indica-

tors  (2016),  http://data.worldbank.org/country/india#cp_wdi.

90. Ankit  Panda, “India’s 7.4% GDP Growth Rate Keeps It Ahead of the Emerging Economy Pack,”  The Diplomat, December 2, 2015,  http:// thediplomat.com/2015/12/indias-7-4-gdp-growth-rate-keeps-it-ahead-of-the-emerging-economy-pack/.

91. Ritika  Katyal, “India Census Exposes Extent of Poverty,”  CNN, August 2, 2015,  www.cnn.com/2015/08/02/asia/india-poor-census-secc/.

92. “A Brief History of the Kashmir Conflict,” The Telegraph, September 24, 2001,  www.telegraph.co.uk/news/1399992/A-brief-history-of-the-Kashmir- conflict.html.

93. Donald Kirk, “Modi, India’s New Prime Minister, Dreams of Economic Reform, Reconciliation with Pakistan,”  Forbes, May 26, 2014,  www.forbes.com/sites/donaldkirk/2014/05/26/modi-indias-new-prime-minister-dreams-of-lifting-indias-masses-from-poverty/#5fa99962750c.

94. Ibid.95. Shashank Bengali, “Wal-Mart, Thwarted by India’s

Retail Restrictions, Goes Big: Wholesale,”  Los Angeles Times, July 23, 2015.

96. Geeta Anand and Hari Kumar, “Hoping Jobs for India Will Follow, Modi Clears Investors’ Path,” New York Times, June 21, 2016, p. A1.

97. Bengali, “Wal-Mart, Thwarted by India’s Retail Restrictions, Goes Big: Wholesale.”

In the International Spotlight

42

was Muslim, has served as a focal point for disagreements between the nations. The multiple wars over this area are known collectively as the “Kashmir Conflict.”92 Because India was under British rule, India adopted the “common law” legal system, with certain codes inter-twined based on particular religions. As a democratic republic, India’s political system is also similar to that of the British system. The country has operated with this form of government since its independence in 1947. The executive branch consists of the president, vice president, prime minister, and a cabinet of appointees; the legisla-tive branch is fashioned as a bicameral Parliamentary system; and the judicial branch is modeled off of the English court system. In May 2014, India elected Prime Minister Narendra Modi. Support for Prime Minister Modi was based on promises that he would mend the country’s relationship with its Asian neighbors, including China and, most importantly, Pakistan. He also promised to create a business-friendly environment in the country.93  Specifi-cally, Prime Minister Modi promised to invest heavily in infrastructure, including adding high-speed trains, build-ing more schools, and cleaning the badly polluted water-ways. These investments were designed to dramatically increase India’s manufacturing exports.94 Early in his term, Prime Minister Modi was criticized for failing to deliver on his promises. However, India’s 7.5 percent annual GDP growth rate has positioned it as the fastest-growing major world economy. Time will tell if India will be able to maintain this growth rate and whether or not the Prime Minister’s efforts to open India to foreign business will succeed. Currently, India ranks 130 out of 185 nations in the World Bank’s “Ease of Doing Business” Survey, which is up four spots from the previous year.

You Be the International Business Consultant:Walmart is one of the largest retailers in the world. Despite its size, the company has faced numerous chal-lenges when entering and operating in foreign markets. India has posed an especially difficult situation. Even though the country has opened its economy to the world market over the past 30–40 years, India maintains strict limitations over foreign ownership in its retail sector. For example, foreign companies are prohibited from opening supermarkets and can only own a maximum of 51 percent

India is located in southern Asia, with the Bay of Bengal to the country’s east and the Arabian Sea to its west. Positioned alongside the important trade corridor of the Indian Ocean, India is approximately one-third the size of the United States in area. Its major natural resources con-sist of coal (fourth-largest reserves in the world), iron ore, manganese, mica, bauxite, rare earth elements, titanium ore, chromite, natural gas, diamonds, petroleum, lime-stone, and arable land. The majority of the country’s land use (60 percent) is allocated to agriculture. India is a largely rural country that suffers from a significant lack of infrastructure in both metropolitan and rural areas.87 India boasts a population of 1.295 billion. The country is approximately 80 percent Hindu and 14 percent Muslim. The population is also relatively young: approximately 85 percent of its population is 54 years old or younger. The population growth rate is a steady 1.22 percent. Hindi is the dominant language, but Indians, depending on their ethnicity and geographic location, speak other languages as well, including Bengali, Telugu, Marathi, Tamil, Urdu, Gujarati, Kannada, Malayalam, Oriya, Punjabi, Assamese, and Maithili. These various languages form the basis on how the states within the country are divided. While Hindi is the dominant language, English is the language primarily used among the educated class and in commer-cial and political communication. The vast majority of the population is either directly or indirectly dependent on agriculture.88 India’s GDP in 2014 was US$2.049 trillion.89  GDP growth in India has been higher and more consistent com-pared to many of the other larger emerging markets, with recent annual growth rates holding steady at around 7 percent.90 India faces numerous socioeconomic and security chal-lenges, including a very high rate of poverty and strained relations with neighboring Pakistan. India’s 2014–2015 census indicates that less than 10 percent of the 300 mil-lion households surveyed had a salaried job; only 5 per-cent had earned enough to pay taxes. More than 35 percent of adults are classified as illiterate.91  India’s tense relations with Pakistan date back to the moment each gained independence from the British empire. Split along religious lines, India was intended to remain a largely Hindu state while Pakistan was intended to be a predom-inantly Muslim one. Fighting between the two neighbors started almost immediately. Kashmir, where the leader of the state was Hindu but the majority of the population

India

sales to the kiranas can provide enough revenue to make remaining in India worthwhile.97

Questions 1. In light of this situation, what would your recom-

mendation be to Walmart? 2. Should it stick with the wholesale focus, or

should it pursue another joint venture with an Indian partner?

3. Alternatively, should it maintain a “wait and see” approach in hopes that the Indian government will finally reform its restrictions on foreign investment?

Source: John F. Burns, “India Now Winning U.S. Investment,” New York Times, February 6, 1995, pp. C1, C5; Rahual Jacob, “India Gets Moving,” Fortune, September 5, 1994, pp. 101–102; Jon E. Hilsenrath, “Honda Venture Takes the Bumps in India,” The Wall Street Journal, August 2, 2000, p. A18; Manjeet Kripalani and Pete Engardio, “India: A Shocking Election Upset Means India Must Spend Heavily on Social Needs,” BusinessWeek, May 31, 2004; Steve Hamm, “The Trouble with India,” BusinessWeek, March 19, 2007, pp. 48–58; “The World’s Headache,” The Economist, December 6, 2008, p. 58; Gaurav Choudhury, “How Slow GDP Growth Affects You,” Hindustan Times, December 4, 2012, http://www.hindustantimes.com/.

in local chains. Other retailers, such as Starbucks, have paired up with Indian companies; Starbucks has a 50-50 joint venture with Tata, one of India’s largest conglomer-ates. Walmart also had plans for future joint ventures in India. In 2007, it announced a partnership with Bharti Enterprises, but the relationship fell apart in the face of continued limitations on what the joint venture would be permitted to do. Allegations of corruption also soured the deal. The Indian government has frequently commit-ted to opening the retail sector to foreign investment, only to bow to pressures from local competitors, result-ing in delayed or watered-down proposals.95 Recently, however, the Indian government has once again announced new policies that would appear to open for-eign investment in retail.96 As a way to remain in the market, Walmart has shifted its attention to serving as a wholesale supplier to India’s small mom-and-pop stores, known as kiranas. This is per-mitted because India does not maintain restrictions on foreign investment in wholesale. The kiranas purportedly sell more than 95 percent of the country’s basic food-stuffs, creating a large opportunity for a wholesaler like Walmart. It is unclear, however, as to exactly what retail role Walmart will be able to play long term and whether

Chapter 1 Globalization and International Linkages 43

44

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RChapter 2

THE POLITICAL, LEGAL, AND TECHNOLOGICAL ENVIRONMENT

The World of International Management

Social Media and Political Change

T he struggle for government reform has traditionally been a long, painful process. In the past, uprisings in the Middle East were often violently and horrifically repressed by corrupt dictators. Governments censored and controlled news organizations, hiding the atrocities of war from the view of the global community. For example, the true scale of the 1982 Hama massacre, where at least 10,000 Syrian revolutionaries were killed by government forces, is still unclear. Over the last few years, however, the transparency of war and the resulting pace of change appear to be rapidly increasing. The ongoing conflict in Syria, which arose in the wake of the “Arab Spring” that spread across Egypt, Tunisia, and Libya in the early 2010s, has been particularly impacted by the use of social media. Journalism, communication, and transparency from within Syria have all been redefined by the use of social media by ordinary citizens. Unlike past conflicts, the Syrian civil war and resulting refugee crisis are unraveling in real time to a global audience in photos and videos through YouTube, Facebook, and Twitter.

Social Media as an Organizing ToolWhile previous uprisings lacked widespread communication tools, those engaged in the Syrian conflict are equipped with smartphones and social media. Syrian government loyalists, Syrian revolutionaries, and the terrorist organization Islamic State of Iraq and Syria (ISIS) have all utilized social media to quickly and efficiently organize their supporters. In the early years of the conflict, the pro-revolution Facebook group “The Syrian Revolution 2011” swelled to nearly half a million mem-bers, while the group supporting Syrian President Bashar al-Assad had nearly 3 million. ISIS has released propaganda videos on all forms of social media, and the terror group has maintained multiple Twitter accounts in an attempt to recruit internationally. Evidence suggests that revolutionaries in particular have mobilized successfully through social media. Inspired by videos

The broader political, legal, and technological environment faced by international managers is changing rapidly. Changes in this environment are more common and rapid, presenting challenges for managers seeking to respond and adapt to this environment. Although there are many dimensions of the external environment relevant to international management, economic considerations covered in the last chapter are among the most important, along with cultural issues covered in Part Two. However, the political, legal, regulatory, and tech-nological dimensions also bear on the international manager in highly significant ways. The objective of this chapter is to examine how the political, legal, regulatory, and technological environments have changed in recent years, and how these changes pose challenges and opportunities for international managers. In Chapter 10, we return to some of these themes, especially as they relate to political risk and managing the political environment. In this chapter, we outline some of the major trends in the political, legal, and technological environ-ment that will shape the world in which international managers will compete. The specific objectives of this chapter are

1. INTRODUCE the basic political systems that characterize regions and countries around the world and offer brief examples of each and their implications for international management.

2. PRESENT an overview of the legal and regulatory environ-ment in which MNCs operate worldwide, and highlight differ-ences in approach to legal and regulatory issues in different jurisdictions.

3. REVIEW key technological developments, including the growth of e-commerce, and discuss their impact on MNCs now and in the future.

45

Social Media as a Journalistic ToolIn the early stages of the war, the Syrian government banned international news media from covering the revolution. As a result, social media became the primary source of photos, videos, and news stories from inside the conflict. The Syrian civil war represented one of the first major conflicts in which citizens could instantly record video from the front lines and, using smartphones, transmit that footage to the Internet in real time. News organizations, unable to gather information from any other source, used the uploaded social media to build their reports.9

Syrians from all sides of the conflict created and shared this content on various social networking sites, attempting to build international support for their cause.10 The sheer amount of content uploaded is staggering; over a million videos from within the revolution were uploaded to YouTube, often taken by cellular phone. Another website, OnSyria, was used by pro-testors to upload nearly 200,000 videos. More importantly, smartphones and social networks ensured that any human rights violations from either revolu-tionaries or the government would be broadcast online, likely eroding any international support that the inflicting party had. In August 2013, one of the most defining moments in the early years of the war occurred when hundreds of civilians were killed in a sarin gas chemical attack in Ghouta, allegedly perpetrated by the Syrian government. Almost instantly, wit-nesses and first responders uploaded photos and video of the aftermath to social networking sites including YouTube, Reddit, and Twitter. These images marked a critical turning point in the global public opinion and international involvement in the war. The U.S. government had taken a hands-off approach prior to the attacks; however, once these human rights viola-tions were broadcast across social media, the U.S. had no choice but to take a formal stand against the Syrian government.11

Social Media as a Support-Building ToolUnlike written news releases, pictures and videos have the ability to convey information in emotional ways that transcend language. During the Syrian civil war, social media, used as a visual medium, led the global community to unite behind the plight of the Syrian refugees in an unprecedented way. Throughout early 2015, images and videos of overloaded rafts, filled with desperately fleeing Syrians, dominated social media. The emotion and suffering of the refugees were con-veyed through these images to a worldwide audience in real

uploaded to YouTube showing the Syrian government harshly cracking down on nonviolent protesters, nearly 100,000 Syrians organized via Facebook and staged a protest in Hama in June  2011. The strength in numbers afforded by social media has made the Syrian protests incredibly difficult to dissolve; the mass scale of protests organized through social networking sites far outnumbers the military and government forces sent to suppress them. Tips on how to protect oneself from tear gas and police batons are shared through Facebook groups, and Twitter has served as a communication lifeline when gov-ernment authorities have attempted to disperse the crowds.1,2

Social media has provided such a powerful tool to revolu-tionaries that the Syrian government has attempted to completely disrupt Internet service on several occasions since 2011, most notably during massive protests demanding the removal of President Bashar al-Assad. Widespread outages spread through nearly all of Syria, including Damascus, essentially shutting off all communication with the outside world.3 Cyber attacks have also been perpetrated by supporters of the Syrian government in an attempt to censor photos and videos coming from the protesters; malware programs that steal Facebook and YouTube logins have been dispatched on a massive scale.4 Smartphones have morphed into a symbol of the revolutionary forces, with Syrian government soldiers and ISIS border guards often demanding to inspect cell phones of anyone passing through their posts.5

Those fleeing the conflict have also utilized social media to  plan safe escape from Syria. Refugees who successfully migrated to Europe assist those still making the journey through online activity. A Facebook group dedicated to sharing knowledge and advice with fellow refugees has over 100,000 members. Topics range from necessary supplies and route information to messages of encouragement. Smugglers, often necessary for safe passage, are recommended and discussed, and even weather conditions are relayed to those making the journey by sea.6,7 Refugees in past conflicts often separated from their family and friends with the unfortunate yet realistic possibility that they would never reunite. During the Syrian conflict, refugees have been able to send messages to their loved ones and update them on their safety throughout their journey.8 WhatsApp, the instant messaging application, is popular among refugees not only for familial communication but also for its ability to connect with transportation, smug-glers, and even Greek coast guard officials in the event of an  emergency.

46 Part 1 Environmental Foundation

The role of social media as an organizing tool, a journalistic tool, and a support-building tool, all in the context of political change, underscores the interesting interactions of technological progress and political conflict and change. Social media has enabled revo-lutionaries, governments, journalists, and even terrorists to organize quickly, communi-cate globally, and build support for their cause, resulting in serious ramifications for international management. It is important for international managers to think through these complex political, legal, and technological issues that arise in a world that embraces rapid change so that they are prepared for potential challenges. MNCs must collabora-tively work with new governments as laws, policies, and regulations are introduced and altered. Managing the political and legal environment will continue to be an important challenge for international managers, as will the rapid changes in the technological envi-ronment of global business.

■ Political EnvironmentBoth domestic and international political environments have a major impact on MNCs. As government policies change, MNCs must adjust their strategies and practices to accommodate the new perspectives and actual requirements. Moreover, in a growing number of regions and countries, governments appear to be less stable; therefore, these areas carry more risk than they have in the past. The assessment of political risk and strategies to cope with it will be given specific attention in Chapter 10, but in this chap-ter we focus on general political systems with selected areas used as illustrations relevant to today’s international managers.

The political system or system of government in a country greatly influences how its people manage and conduct business. We discussed in Chapter 1 how the government regulates business practices via economic systems. Here we review the general systems currently in place throughout the world. Political systems vary greatly between nation-states across the world. The issue with understanding how to conduct international man-agement extends beyond general knowledge of the governmental practices to the specifics of the legal and regulatory frameworks in place. Underlying the actions of a government is the ideology informing the beliefs, values, behavior, and culture of the nation and its political system. We discussed ideologies and the philosophies underpin-ning them above. Effective management occurs when these different ideologies and philosophies are recognized and understood.

A political system can be evaluated along two dimensions. The first dimension focuses on the rights of citizens under governments ranging from fully democratic to totalitarian. The other dimension measures whether the focus of the political system is

200,000 times within 24 hours. In the United States, the United Kingdom, and Canada, the hashtag “#RefugeesWelcome” swelled to 1.5 million shares.12 Within four days, 78 percent of the British public had seen the photo of Al-Kurdi, and 92 per-cent had at least heard about it. The photo was directly linked to increased support: Those who had seen the photo were nearly twice as likely to say that the United Kingdom should take in more refugees.13 Support in the form of financial donations also surged. Migrant Offshore Aid Station, an NGO focused on search and rescue efforts, reported a 1,400 per-cent increase in donations in the 24 hours immediately after the pictures went viral. Donations to organizations including Oxfam and Care Canada doubled in one week what had been raised all year.14

time. Though thousands of images, stories, and videos were shared over various social networks during the crisis, the September 2015 photo of a deceased toddler, Aylan Al-Kurdi, who had drowned during his family’s attempted escape on a raft across the Mediterranean, provoked global outcry and underscores the power of social media as a support-building tool. As a direct result of this image, financial and emotional support among the global community grew almost instantly. World leaders, including French President François Hollande, British Prime Minister David Cameron, and Irish Prime Minister Enda Kenny, publically expressed support and shock after seeing the picture of the toddler. Spreading across social networks almost instantly, the hashtag “#kiyiyavuraninsanlik,” meaning “Humanity Washed Ashore,” was shared more than

Chapter 2 The Political, Legal, and Technological Environment 47

on individuals or the broader collective. The first dimension is the ideology of the system, while the second measures the degree of individualism or collectivism. No pure form of government exists in any category, so we can assume that there are many gradations along the two extremes. The observed correlation suggests that democratic societies emphasize individualism, while totalitarian societies lean toward collectivism.15

IdeologiesIndividualism Adopters of individualism adhere to the philosophy that people should be free to pursue economic and political endeavors without constraint. This means that government interest should not solely influence individual behavior. In a business con-text, this is synonymous with capitalism and is connected to a free-market society, as discussed in Chapter 1, which encourages diversity and competition, compounded with private ownership, to stimulate productivity. It has been argued that private property is more successful, progressive, and productive than communal property due to increased incentives for maintenance and focus on care for individually owned property. The idea is that working in a group requires less energy per person to achieve the same goal, but an individual will work as hard as he or she has to in order to survive in a competitive environment. Simply following the status quo will stunt progress, while competing will increase creativity and progress. Modern managers may witness this when dealing with those who adopt an individualist philosophy and then must work in a team situation. Research has shown that team performance is negatively influenced by those who con-sider themselves individualistic; however, competition stimulates motivation and encourages increased efforts to achieve goals.16

The groundwork for this ideology was founded long ago. Philosophers such as David Hume (1711–1776), Adam Smith (1723–1790), and even Aristotle (384–322 BC) contributed to these principles. While philosophers created the foundation for this belief system long ago, it can be witnessed playing out through modern practice. Eastern Europe, the former Soviet Union, areas of Latin America, Great Britain, and Sweden all have moved toward the idea that the betterment of society is related to the level of free-dom individuals have in pursuing economic goals, along with general individual free-doms and self-expression without governmental constraint. The well-known movement in Britain toward privatization was led by Prime Minister Margaret Thatcher during her 11 years in office (1979–1990), when she successfully transferred ownership of many companies from the state to individuals and reduced the government-owned portion of gross national product from 10 to 3.9 percent. She was truly a pioneer in the movement toward a capitalistic society, which has since spread across Europe.

International managers must remain alert as to how political changes may impact their business, as a continuous struggle for a foothold in government power often affects leaders in office. For example, Britain’s economy improved under the leadership of Tony Blair; however, his support of the Iraq War severely weakened his position. Conservative David Cameron, first elected prime minister in 2010, sought to integrate traditional con-servative principles without ignoring social development policies, something the Labour Party has traditionally focused on. More recently, however, increased concerns about immigration and the role of the EU in managing affairs in member states prompted the United Kingdom to vote to leave the EU, a process that has been termed “Brexit.” Gov-ernment policy, in its attempt to control the economic environment, waxes and wanes, something the international manager must be keenly sensitive to.

Europe has added complexity to the political environment with the unification of the EU, which celebrated its 60th “birthday” in 2017. Notwithstanding the increasing integration of the EU, MNCs still need to be responsive to the political environment of individual countries, some due to the persistence of cultural differences, which will be discussed in Chapter 5. Yet, there are also significant interdependencies. For example, the recent economic crises in Greece, Spain, Portugal, and Ireland have prompted Germany and France to mobilize public and private financial support, even though the

individualismThe political philosophy that people should be free to pursue economic and political endeavors without constraint (Chapter 2); the tendency of people to look after themselves and their immediate family only (Chapter 4).

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two largest economies in the euro zone have residual distrust from earlier eras of conflict and disagreement.17 Europe is no longer a group of fragmented countries; it is a giant and expanding interwoven region in which international managers must be aware of what is happening politically, not only in the immediate area of operations but also throughout the continent. The EU consists of countries that adhere to individualistic orientations as well as those that follow collectivist ideals.

Collectivism Collectivism views the needs and goals of society at large as more im-portant than individual desires.18 The reason there is no one rigid form of collectivism is because societal goals and the decision of how to keep people focused on them differ greatly among national cultures. The Greek philosopher Plato (427–347 BC) believed that individual rights should be sacrificed and property should be commonly owned. While on the surface one may assume that this would lead to a classless society, Plato believed that classes should still exist and that the best suited should rule over the people. Many forms of collectivism do not adhere to that idea.

Collectivism emerged in Germany and Italy as “national socialism,” or fascism. Fascism is an authoritarian political ideology (generally tied to a mass movement) that considers individual and other societal interests inferior to the needs of the state and seeks to forge a type of national unity, usually based on ethnic, religious, cultural, or racial attributes. Various scholars attribute different characteristics to fascism, but the following elements are usually seen as its integral parts: nationalism, authoritarianism, militarism, corporatism, collectivism, totalitarianism, anticommunism, and opposition to economic and political liberalism.

We will explore individualism and collectivism again in Chapter 4 in the context of national cultural characteristics.

Socialism Socialism directly refers to a society in which there is government ownership of institutions but profit is not the ultimate goal. In addition to historically communist states such as China, North Korea, and Cuba, socialism has been practiced to varying degrees in recent years in a more moderate form—“democratic socialism”—by Great Britain’s Labour Party, Germany’s Social Democrats, as well as in France, Spain, and Greece.19

Modern socialism draws on the philosophies of Karl Marx (1818–1883), Friedrich Engels (1820–1895), and Vladimir Ilyich Lenin (1870–1924). Marx believed that govern-ments should own businesses because in a capitalistic society only a few would benefit, and it would probably be at the expense of others in the form of not paying wages due to laborers. He advocated a classless society where everything was essentially communal. Socialism is a broad political movement and forms of it are unstable. In modern times, it branched off into two extremes: communism and social democracy.

Communism is an extreme form of socialism that was realized through violent revolution and was committed to the idea of a worldwide communist state. During the 1970s, most of the world’s population lived in communist states. The communist party encompassed the former Soviet Union, China, and nations in Eastern Europe, Southeast Asia, Africa, and Latin America. Cuba, Nicaragua, Cambodia, Laos, and Vietnam headed a notorious list. Today much of the communist collective has disintegrated. China still exhibits communism in the form of limiting individual political freedom. China has begun to move away from communism in the economic and business realms because it has discovered the failure of communism as an economic system due to the tendency of common goals to stunt economic progress and individual creativity.

Some transition countries, such as Russia, are postcommunist but still retain aspects of an authoritarian government. Russia presents one of the most extreme examples of how the political environment affects international management. Poorly managed approaches to the economic and political transition resulted in neglect, corruption, and confusing changes in economic policy.20 Devoid of funds and experiencing regular gas pipeline leaks, toxic drinking water, pitted roads, and electricity shutoffs, Russia did not present attractive investment opportunities as it moved away from communism. Yet more

collectivismThe political philosophy that views the needs or goals of society as a whole as more important than individual desires (Chapter 2); the tendency of people to belong to groups or collectives and to look after each other in exchange for loyalty (Chapter 4).

socialismA moderate form of collectivism in which there is government ownership of institutions, and profit is not the ultimate goal.

Chapter 2 The Political, Legal, and Technological Environment 49

companies are taking the risk of investing in Russia because of increasing ease of entry, the new attempt at dividing and privatizing the Unified Energy System, and the move-ment by the Kremlin to begin government funding for the good of society including education, housing, and health care.21 Actions by the Russian government over the past few years, however, continue to call into question the transparency and reliability of the Russian government. BP, Exxon Mobil, and Ikea have each encountered de facto expro-priation, corruption, and state-directed industrialization (see The World of International Management at the beginning of Chapter 10).

One of the biggest problems in Russia and in other transition economies is cor-ruption, which we will discuss in greater depth in Chapter 3. The 2014 Corruption Perception Index from Transparency International ranked Russia 136th out of 174 coun-tries, falling behind Egypt and Colombia.22 Brazil, China, and India, part of the BRIC emerging markets block, consistently score higher than Russia. In the 2015 Heritage Foundation’s Index of Economic Freedom, Russia’s overall rating in the measurement of economic openness, regulatory efficiency, the rule of law, and competitiveness remained at 52.1 this year, ranking it only 2.1 points away from being a repressive economic busi-ness environment.23 As more MNCs invest in Russia, these unethical practices will face increasing scrutiny if political forces can be contained. To date, some multinationals feel that the risk is too great, especially with corruption continuing to spread throughout the country. Despite the Kremlin’s support of citizens, Russia is in danger of becoming a unified corrupt system. Still most view Russia as they do China: Both are markets that are too large and potentially too lucrative to ignore.

Social democracy refers to a socialist movement that achieved its goals through nonviolent revolution. This system was pervasive in such Western nations as Australia, France, Germany, Great Britain, Norway, Spain, and Sweden, as well as in India and Brazil. While social democracy was a great influence on these nations at one time or another, in practice it was not as viable as anticipated. Businesses that were nationalized were quite inefficient due to the guarantee of funding and the monopolistic structure. Citizens suffered a hike in both taxes and prices, which was contrary to the public inter-est and the good of the people. The 1970s and 1980s witnessed a response to this unfair structure with the success of Britain’s Conservative Party and Germany’s Christian Dem-ocratic Party, both of which adopted free-market ideals. Margaret Thatcher, as mentioned previously, was a great leader in this movement toward privatization. Although many businesses have been privatized, Britain still has a central government that adheres to the ideal of social democracy. With Britain facing severe budget shortfalls, Prime Min-ister David Cameron, first elected in 2010, proposed a comprehensive restructuring of public services that could further alter the country’s longstanding commitment to a broad social support program. Under his administration, austerity measures, including cuts to military and social program spending, were implemented. The Conservatives and David Cameron were reelected in a landslide in 2015, however, the Brexit vote was seen as a repudiation to Cameron and he later resigned.24

It is important to note here the difference between the nationalization of businesses and nationalism. The nationalization of businesses is the transference of ownership of a business from individuals or groups of individuals to the government. This may be done for several reasons: The ideologies of the country encourage the government to extract more money from the firm, the government believes the firm is hiding money, the gov-ernment has a large investment in the company, or the government wants to secure wages and employment status because jobs would otherwise be lost. Nationalism, on the other hand, is an ideal in and of itself whereby an individual is completely loyal to his or her nation. People who are a part of this mindset gather under a common flag for such reasons as language or culture. The confusing thing for the international businessperson is that it can be associated with both individualism and collectivism. Nationalism exists in the United States, where there is a national anthem and all citizens gather under a common flag, even though individualism is practiced in the midst of a myriad of cultures and extensive diversity. Nationalism also exists in China, exemplified in the movement

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against Japan in the mid-1930s and the communist victory in 1949 when communist leader Mao Tse-tung gathered communists and peasants to fight for a common goal. This ultimately led to the People’s Republic of China. In the case of modern China, nationalism presupposes collectivism.

Political SystemsThere are two basic anchors to political systems, each of which represents an “ideal type” that may not exist in pure form.

Democracy Democracy, with its European roots and strong presence in Northern and Western Europe, refers to the system in which the government is controlled by the citi-zens either directly or through elections. Essentially, every citizen should be involved in decision-making processes. The representative government ensures individual freedom since anyone who is eligible may have a voice in the choices made.

A democratic society cannot exist without at least a two-party system. Once elected, the representative is held accountable to the electorate for his or her actions, and this ultimately limits governmental power. Individual freedoms, such as freedom of expression and assembly, are secured. Further protections of citizens include impartial public service, such as a police force and court systems that also serve the government and, in turn, the electorate, though they are not directly affiliated with any political party. Finally, while representatives may be reelected, the number of terms is often limited, and the elected representative may be voted out during the next election if he or she does not sufficiently adhere to the goals of the majority ruling. As mentioned above, a social democracy com-bines a socialist ideology with a democratic political system, a situation that has charac-terized many modern European states as well as some in Latin America and other regions.

Totalitarianism Totalitarianism refers to a political system in which there is only one representative party, which exhibits control over every facet of political and human life. Power is often maintained by suppression of opposition, which can be violent. Media censorship, political repression, and denial of rights and civil liberties are dominant ide-als. If there is opposition to government, the response is imprisonment or even worse tactics, often torture. This may be used as a form of rehabilitation or simply a warning to others who may question the government.

Because only one party within each entity exists, there are many forms of totalitarian government. The most common is communist totalitarianism. Most dictatorships under the communist party disintegrated by 1989, but as noted above, aspects and degrees of this form of government are still found in Cuba, North Korea, Laos, Vietnam, and China. The evolution of modern global business has substantially altered the political systems in Viet-nam, Laos, and China, each of which has moved toward a more market-based and plural-istic environment. However, each still exhibits some oppression of citizens through denial of civil liberties. The political environment in China is very complex because of the gov-ernment’s desire to balance national, immediate needs with the challenge of a free-market economy and globalization. Since joining the WTO in 2001, China has made trade liber-alization a top priority. However, MNCs still face a host of major obstacles when doing business with and in China. For example, government regulations severely hamper multi-national activity and favor domestic companies, which results in questionable treatment such as longer document processing times for foreign firms.25 This makes it increasingly difficult for MNCs to gain the proper legal footing. The biggest problem may well be that the government does not know what it wants from multinational investors, and this is what accounts for the mixed signals and changes in direction that it continually sends. All this obviously increases the importance of knowledgeable international managers.

China may be moving further away from its communist tendencies as it begins supporting a more open, democratic society, at least in the economic sphere. China continues to monitor what it considers antigovernment actions and practices, but there

democracyA political system in which the government is controlled by the citizens either directly or through elections.

totalitarianismA political system in which there is only one representative party, which exhibits control over every facet of political and human life.

Chapter 2 The Political, Legal, and Technological Environment 51

is a discernible shift toward greater tolerance of individual freedoms.26 For now, China continues to challenge the capabilities of current international business theory as it tran-sitions through a unique system favoring high governmental control yet striving to unleash a more dynamic market economy.27

Though the most common, the totalitarian form of government exhibited in China is not the only one. Other forms of totalitarianism exhibit other forms of oppression as well. Parties or governments that govern an entity based on religious principles will ultimately oppress religious and political expression of its citizens. Examples are Iran and Saudi Arabia, where the laws and government are based on Islamic principles. Con-ducting business in the Middle East is, in many ways, similar to operating a business in the Western world. The Arab countries have been a generally positive place to do busi-ness, as many of these nations are seeking modern technology and most have the finan-cial ability to pay for quality services. Worldwide fallout from the war on terrorism; the rise of ISIS; the Afghanistan, Iraq, and Syrian wars; and the ongoing Israel–Arab con-flicts, however, have raised tensions in the Middle East considerably, making the business environment there risky and potentially dangerous.

The 2011 Arab Spring uprisings have affected business dealings in the authoritar-ian and/or totalitarian countries across northern Africa and the Middle East. Reasons for the political unrest varied, but most commonly included factors were oppressive govern-ment rule, economic decline, high unemployment, and human rights violations. Protest-ers successfully overthrew four government regimes and forced reforms in almost a dozen others. The political and economic fallout from the Arab Spring, including the Syrian civil war discussed in the opening section of this chapter, has left the business environ-ment with much continued uncertainty. Production and GDP were negatively affected almost overnight, and fuel prices spiked globally. Supply chain routes were disrupted for months, increasing the shipping and logistical costs of goods passing through the region. In Egypt, a military coup overthrew democratically elected Egyptian President Morsi in 2013, and a military general was elected president in a suspect election in 2014. In Libya, the fall of Gaddafi has resulted in a power vacuum, inviting increased acts of terrorism. Unemployment in Egypt and Tunisia has not recovered since the uprisings, and inflation remains around 10 percent.28 According to a late 2011 study by Grant Thornton, 26 percent of businesses in North America, and 22 percent of businesses globally, reported negative effects from the uprisings.29 A map of the countries that were impacted by the Arab Spring can be seen in Figure 2–1. Though many countries in the region have

Morocco

WesternSahara

Algeria

Tunisia Lebanon

Libya EgyptSaudiArabia

IraqSyria

KuwaitJordan

Oman

Somalia

YemenSudan

Mauritania

Civil war Government overthrown Governmental changes Protests

Figure 2–1 Summary of Arab Spring Uprisings

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh.

somewhat stabilized, the fallout from the revolutions will continue to impact international business.

One final form of totalitarianism, sometimes referred to as “right-wing,” allows for some economic (but not political) freedoms. While it directly opposes socialist and com-munist ideas, this form may gain power and support from the military, often in the form of a military leader imposing a government “for the good of the people.” This results in military officers filling most government positions. Such military regimes ruled in Germany and Italy from the 1930s to the 1940s and persisted in Latin America and Asia until the 1980s, when the latter moved toward democratic forms. Recent examples include Myanmar, where the military ruled as a dictatorship from 1962 to 2011.

■ Legal and Regulatory EnvironmentOne reason why today’s international environment is so confusing and challenging for MNCs is that they face so many different laws and regulations in their global business operations. These factors affect the way businesses are developed and managed within host nations, so special consideration must be paid to the subtle differences in the legal codes from one country to another. Adhering to disparate legal frameworks sometimes prevents large MNCs from capitalizing on manufacturing economies of scale and scope within these regions. In addition, the sheer complexity and magnitude of bureaucracies

A Closer Look

The Economic Impacts of Global Terrorism

A New Challenge for the International Business  CommunityAs discussed in the opening section of this chapter, social media has made global communication easier, which unfortunately includes the orchestration of terror-ist attacks. Global terrorism is a relatively new challenge; no longer are terrorist attacks small, one-person events isolated to a particular region or country. Over the last decade, attacks in Madrid, London, and Paris have involved a high degree of complexity and organization. Organizations like ISIS are recruiting worldwide through social networking sites, working to organize attacks far from their home base in Syria. Living in an intercon-nected world, it would be naïve to believe that the threat of terrorism does not affect the international business community. Evidence shows that the tourism industry appears to be especially impacted by the threat of terrorism, at least in the short term. According to the Paris Conven-tion and Visitors Bureau, the November 2015 terrorist attacks in Paris, which killed 130 civilians, resulted in a sudden, yet temporary, decline in tourism activity. Res-taurants, shops, and related businesses lost revenue, and hotels reported that the number of visitors declined sharply in the weeks following the attacks. Forty per-cent of hotel bookings in Brussels were cancelled the weekend following the Paris attacks, when suspected terrorist apartments were raided in Belgium. In places like France, where seven percent of economic activity and nearly two million jobs are dependent on tourism, even a slight decrease in visitors has a high economic

impact. There is some evidence that terrorism nega-tively impacts other sectors of the economy as well. According to a report issued by financial services firm Markit, manufacturing and service providers grew at a slower rate in November 2015 than expected. Service providers specifically stated that the terrorist attacks in Paris contributed to negative performance and a decrease in consumer confidence. Some estimates suggest that the November attacks could ultimately cost the French economy tens of billions of euros. Despite these setbacks, the long-term economic impact from terrorist attacks does not appear to be sub-stantial. Past terrorist attack locations, such as New York City, quickly rebounded from short-term economic set-backs. Stock market volatility following previous terror attacks has always stabilized fairly quickly, indicating a continued confidence from investors despite living in a world with this new type of uncertainty. The global econ-omy faces a variety of challenges in the 21st century—climate change, political tensions, and demographic shifts, to name a few. Global terrorism, like these other challenges, will likely continue to cause some disruption to the international business community, but it will not stop economic progress.

Sources: Walker, Andrew, “Paris Attacks: Assessing the economic impact,” BBC, December 2, 2015. http://www.bbc.com/news/ business-34965000; “Market Flash France PMI,” Markit Economics, November 23, 2015. https://www.markiteconomics.com/; Newton-Small, Jay, “The Cost of the Paris Attacks,” Time, November 23, 2015. http://time.com/4123827/paris-attacks-tourism/.

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Chapter 2 The Political, Legal, and Technological Environment 53

require special attention. This, in turn, results in slower time to market and greater costs. MNCs must take time to carefully evaluate the legal framework in each market in which they do business before launching products or services in those markets.

There are four foundations on which laws are based around the world. Briefly summarized, these are

1. Islamic law. This is law derived from interpretation of the Qur’an and the teachings of the Prophet Muhammad. It is found in most Islamic countries in the Middle East and Central Asia.

2. Socialist law. This law comes from the Marxist socialist system and contin-ues to influence regulations in former communist countries, especially those from the former Soviet Union, as well as present-day China, Vietnam, North Korea, and Cuba. Since socialist law requires most property to be owned by the state or state-owned enterprises, MNCs have traditionally shied away from these countries.

3. Common law. This comes from English law, and it is the foundation of the legal system in the United States, Canada, England, Australia, New Zealand, and other nations.

4. Civil or code law. This law is derived from Roman law and is found in the non-Islamic and nonsocialist countries such as France, some countries in Latin America, and even Louisiana in the United States.

With these broad notions serving as points of departure, the following sections discuss basic principles and examples of the international legal environment facing MNCs today.

Basic Principles of International LawWhen compared with domestic law, international law is less coherent because its sources embody not only the laws of individual countries concerned with any dispute but also treaties (universal, multilateral, or bilateral) and conventions (such as the Geneva Conven-tion on Human Rights or the Vienna Convention of Diplomatic Security). In addition, international law contains unwritten understandings that arise from repeated interactions among nations. Conforming to all the different rules and regulations can create a major problem for MNCs. Fortunately, much of what they need to know can be subsumed under several broad and related principles that govern the conduct of international law.

Sovereignty and Sovereign Immunity The principle of sovereignty holds that gov-ernments have the right to rule themselves as they see fit. In turn, this implies that one country’s court system cannot be used to rectify injustices or impose penalties in another country unless that country agrees. So while U.S. laws require equality in the workplace for all employees, U.S. citizens who take a job in Japan cannot sue their Japanese em-ployer under the provisions of U.S. law for failure to provide equal opportunity for them.

International Jurisdiction International law provides for three types of jurisdictional principles. The first is the nationality principle, which holds that every country has jurisdiction (authority or power) over its citizens no matter where they are located. There-fore, a U.S. manager who violates the American Foreign Corrupt Practices Act while traveling abroad can be found guilty in the United States. The second is the territoriality principle, which holds that every nation has the right of jurisdiction within its legal territory. Therefore, a German firm that sells a defective product in England can be sued under English law even though the company is headquartered outside England. The third is the protective principle, which holds that every country has jurisdiction over behav-ior that adversely affects its national security, even if that conduct occurred outside the country. Therefore, a French firm that sells secret U.S. government blueprints for a satellite system can be subjected to U.S. laws.

Islamic lawLaw that is derived from interpretation of the Qur’an and the teachings of the Prophet Muhammad and is found in most Islamic countries.

socialist lawLaw that comes from the Marxist socialist system and continues to influence regulations in countries formerly associated with the Soviet Union as well as China.

common lawLaw that derives from English law and is the foundation of legislation in the United States, Canada, and England, among other nations.

civil or code lawLaw that is derived from Roman law and is found in the non-Islamic and nonsocialist countries.

principle of sovereigntyAn international principle of law that holds that governments have the right to rule themselves as they see fit.

nationality principleA jurisdictional principle of international law that holds that every country has jurisdiction over its citizens no matter where they are located.

territoriality principleA jurisdictional principle of international law that holds that every nation has the right of jurisdiction within its legal territory.

protective principleA jurisdictional principle of international law that holds that every country has jurisdiction over behavior that adversely affects its national security, even if the conduct occurred outside that country.

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Doctrine of Comity The doctrine of comity holds that there must be mutual respect for the laws, institutions, and governments of other countries in the matter of jurisdiction over their own citizens. Although this doctrine is not part of international law, it is part of international custom and tradition.

Act of State Doctrine Under the act of state doctrine, all acts of other governments are considered to be valid by U.S. courts, even if such acts are inappropriate in the United States. As a result, for example, foreign governments have the right to set limits on the repatriation of MNC profits and to forbid companies from sending more than this amount out of the host country back to the United States.

Treatment and Rights of Aliens Countries have the legal right to refuse admission of foreign citizens and to impose special restrictions on their conduct, their right of travel, where they can stay, and what business they may conduct. Nations also can deport aliens. For example, the United States has the right to limit the travel of foreign scientists com-ing into the United States to attend a scientific convention and can insist they remain within five miles of their hotel. After the horrific events of 9/11, the U.S. government began greater enforcement of laws related to illegal aliens. As a consequence, closer scrutiny of visitors and temporary workers, including expatriate workers from India and elsewhere who have migrated to the United States for high-tech positions, may result in worker shortages.30

Forum for Hearing and Settling Disputes This is a principle of U.S. justice as it applies to international law. At their discretion, U.S. courts can dismiss cases brought before them by foreigners; however, they are bound to examine issues including where the plaintiffs are located, where the evidence must be gathered, and where the property to be used in restitution is located. One of the best examples of this principle is the Union Carbide pesticide plant disaster in Bhopal, India. Over 2,000 people were killed and thousands left permanently injured when a toxic gas enveloped 40 square kilome-ters around the plant. The New York Court of Appeals sent the case back to India for resolution.

Examples of Legal and Regulatory IssuesThe principles described above help form the international legal and regulatory frame-work within which MNCs must operate. In the following, we examine some examples of specific laws and situations that can have a direct impact on international business.

Financial Services Regulation The global financial crisis of 2008–2010 underscored the integrated nature of financial markets around the world and the reality that regulatory failure in one jurisdiction can have severe and immediate impacts on others.31 The global contagion that enveloped the world was exacerbated, in part, by the availability of global derivatives trading and clearing and the relatively lightly regulated private equity and hedge fund industries. The crisis and its broad economic effects have prompted regulators around the world to consider tightening aspects of financial services regulation, espe-cially those related to the risks associated with the derivatives activities of banks and their involvement in trading for their own account. In the United States, financial reform legislation was approved in July of 2010, although the degree to which that legislation would prevent another crisis remained hotly debated.32 The nearby Closer Look box provides a comparison of proposed and implemented financial reform approaches across the globe.

Foreign Corrupt Practices Act During the special prosecutor’s investigation of the Watergate scandal in the early 1970s, a number of questionable payments made by U.S. corporations to public officials abroad were uncovered. These bribes became the focal

doctrine of comityA jurisdictional principle of international law that holds that there must be mutual respect for the laws, institutions, and governments of other countries in the matter of jurisdiction over their own citizens.

act of state doctrineA jurisdictional principle of international law that holds that all acts of other governments are considered to be valid by U.S. courts, even if such acts are illegal or inappropriate under U.S. law.

Chapter 2 The Political, Legal, and Technological Environment 55

point of investigations by the U.S. Internal Revenue Service, Securities and Exchange Commission (SEC), and Justice Department. This concern over bribes in the international arena eventually culminated in the 1977 passage of the Foreign Corrupt Practices Act (FCPA), which makes it illegal to influence foreign officials through personal payment or political contributions. The objectives of the FCPA were to stop U.S. MNCs from initiating or perpetuating corruption in foreign governments and to upgrade the image of both the United States and its businesses abroad.

Critics of the FCPA feared the loss of sales to foreign competitors, especially in those countries where bribery is an accepted way of doing business. Nevertheless, the U.S. government pushed ahead and attempted to enforce the act. Some of the countries that were named in early bribery cases under the law included Algeria, Kuwait, Saudi Arabia, and Turkey. The U.S. State Department tried to convince the SEC and Justice Department not to reveal countries or foreign officials who were involved in its investi-gations for fear of creating internal political problems for U.S. allies. Although this political sensitivity was justified for the most part, several interesting developments occurred: (1) MNCs found that they could live within the guidelines set down by the FCPA and (2) many foreign governments actually applauded these investigations under the FCPA because it helped them crack down on corruption in their own country.

One analysis reported that since passage of the FCPA, U.S. exports to “bribe prone” countries actually increased.33 Investigations reveal that once bribes were removed as a key competitive tool, more MNCs were willing to do business in that country. This proved to be true even in the Middle East, where many U.S. MNCs always assumed that bribes were required to ensure contracts. Evidence shows that this is no longer true in most cases; and in cases where it is true, those companies that engage in bribery face a strengthened FCPA that now allows the courts to both fine and imprison guilty parties. In addition, stepped-up enforcement appears to be having a real impact. A report from the law firm Jones Day found that FCPA actions are increasingly targeting individual executives, not just corporations; that penalties imposed under the FCPA have skyrocketed; and that violations have spurred a number of collateral civil actions.34

Bureaucratization Very restrictive foreign bureaucracies are one of the biggest prob-lems facing MNCs. This is particularly true when bureaucratic government controls are inefficient and left uncorrected. A good example is Japan, whose political parties feel more beholden to their local interests than to those in the rest of the country. As a result, it is extremely difficult to reorganize the Japanese bureaucracy and streamline the ways things are done because so many politicians are more interested in the well-being of their own districts than in the long-term well-being of the nation as a whole. In turn, parochial actions create problems for MNCs trying to do business there. The administration of Prime Minister Junichiro Koizumi of Japan tried to reduce some of this bureaucracy, although the fact that Japan has had seven different prime ministers from 2006 to 2015 has not helped these efforts. Certainly the long-running recessionary economy of the country is inspiring reforms in the nation’s antiquated banking system, opening up the Japanese market to more competition.35

Japanese businesses are also becoming more aware of the fact that they are depen-dent on the world market for many goods and services and that when bureaucratic red tape drives up the costs of these purchases, local consumers pay the price. These busi-nesses are also beginning to realize that government bureaucracy can create a false sense of security and leave them unprepared to face the harsh competitive realities of the international marketplace.

In many developing and emerging markets, bureaucratic red tape impedes business growth and innovation. The World Bank conducts an annual survey to determine the ease of doing business in a variety of countries around the world. The survey includes indi-vidual items related to starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. A composite ranking, as

Foreign Corrupt Practices Act (FCPA)An act that makes it illegal to influence foreign officials through personal payment or political contributions; became U.S. law in 1977 because of concerns over bribes in the international business arena.

A Closer Look

Comparing Recent Global Financial Reforms

Preventing More Tax-Funded BailoutsThe G20 wants to end the belief among banks that they are “too big to fail” by requiring resolution mechanisms and “living wills” for speedy windups that don’t destabi-lize markets. As a legislative body for a unified country, the United States’ Senate was able to set up an “orderly liquidation” process fairly quickly through Title II of the Dodd-Frank Act. Japan’s Diet passed similar reforms by amending its existing Deposit Insurance Act in 2013. The EU, as a collection of 28 states with no common insolvency laws, faces a much harder task of thrashing out a pan-EU mechanism even though cross-border banks dominate the sector. To ensure that resolution funds can quickly be collected and paid even when banks cross international borders, the European Com-mission established a centralized banking union in 2012. This banking union essentially transfers the leg-islating of banking policies from individual nations to the EU as a whole. Two major initiatives have resulted from this shift: the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The SSM, which became operational in 2014, supervises the financial health of banking institutions across Europe. The SRM, which came into force on January 1, 2016, provides restructuring assistance to failing EU banks. The SRM is funded through contributions made by other banking institutions, thereby protecting taxpayers. Winners/Losers: Banks face an extra levy on top of higher capital and liquidity requirements. Taxpayers should be better shielded. Messy patchwork for global banks, which will come under pressure to “subsidiarize” operations in different countries.

Over-the-Counter DerivativesThe G20 agreed that derivatives should be standard-ized where possible so they can be centrally cleared and traded on an exchange by the end of 2012; three- quarters of the G20 members were able to meet this deadline. Some countries have taken reforms a step further. The U.S. Senate adopted legislation (Dodd-Frank Act) requiring banks to spin off their swaps desk to iso-late risks from depositors, and, in 2014, Canada expanded the ability of banking regulators to set restric-tions over banks that trade standard derivatives. However, some disagreement has risen between the EU and the U.S. within the international derivatives mar-ket. Between 2014 and 2016, regulators in Europe and the United States were unable to agree on whether each other’s clearinghouse rules were equivalent. Without an agreement, European traders would have faced higher capital requirements, likely resulting in less transnational trading. In 2016, the EU and the United States finally reached a deal on the oversight of clearinghouses, pav-ing the way for a more unified global market. Winners/Losers: Cross-border trading within the United States and the EU will continue uninterrupted.

Corporations face costlier hedging as there will be heavier capital charges on uncleared trades, but differ-ences in exemption scope could be exploited.

BonusesThe G20 has introduced principles to curb excessive pay and bonuses, such as requiring a big chunk of a bonus to be deferred over several years with a claw-back mechanism. The United States and the EU are applying these principles and taking their own actions, such as a one-off tax in Britain. Winners/Losers: Harder to justify big bonuses in the future.

Credit Ratings AgenciesThe G20 agreed that ratings agencies should be required to register, report to supervisors, and show how they man-age internal conflicts of interest. In 2014 the EU adopted even stricter laws, increasing the disclosure requirements regarding fees charged by credit rating agencies. Also in 2014, the Securities and Exchange Commission in the United States adopted stricter requirements for credit rat-ing agencies, aimed at preventing conflicts of interest and increasing standards and transparency. Winners/Losers: Ratings agencies will have to justify what they do much more in the future. The “Big Three”—Fitch, S&P, and Moody’s—may face more competition in the EU. The sector faces more efforts to dilute their role in determining bank capital requirements.

Hedge Funds/Private EquityThe United States and the EU are working in parallel to introduce a G20 pledge to require hedge fund manag-ers to register and report a range of data on their posi-tions. U.S. law is in line with G20 but exempts private equity and venture capital. The EU wants to go much further by including private equity and requiring third-country funds and managers to abide by strict require-ments if they want to solicit European investors, a step the United States says is discriminatory. Managers of alternative funds in the EU would also have curbs on remuneration, an element absent from U.S. reform. Winners/Losers: U.S. hedge fund managers may find it harder to do business in the EU. European investors may end up with less choice. Regulators will have better data on funds. EU managers may decamp to Switzer-land, though also for tax reasons.

Banks TradingThe U.S. Senate has adopted the “Volcker Rule,” which would ban risky trading unrelated to customers’ needs at deposit-insured banks. The Volcker Rule’s associated regulations were fully implemented in the United States

56

Chapter 2 The Political, Legal, and Technological Environment 57

shown in Table 2–1, ranks the overall ease of doing business in these countries. Although developed countries generally rank better (higher), there are some developing countries (Georgia, Malaysia) that do well, and some developed economies (Greece) that do poorly.

In Table 2–1 economies are ranked on their ease of doing business, from 1 to 189, with first place being the best. A high ranking on the ease-of-doing-business index means the regulatory environment is conducive to the operation of business. This index averages the country’s percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings are benchmarked to June 2015.

PrivatizationAnother example of the changing international regulatory environment is the current move toward privatization by an increasing number of countries. The German govern-ment, for example, has sped up privatization and deregulation of its telecommunications market. This has opened a host of opportunities for MNCs looking to create joint ventures with local German firms. Additionally, the French government has put some of its busi-nesses on the sale block. Meanwhile, in China the government is slowly moving forward with plans to partially privatize many of its state-owned enterprises. In late 2015, the Chinese government announced reforms allowing private investment in state-owned enterprises. These reforms are likely aimed at increasing the profitability of the

in 2014. Similar regulation in Europe has been slower to take shape. Many key EU states are against the rule as they want to preserve their universal banking model, though, in 2015, the European Commission sent a pro-posal to the European Parliament for consideration. Winners/Losers: Some trading could switch to the EU from the United States inside global banks.

Systemic RiskThe G20 wants mechanisms in place to spot and tackle systemwide risks better, a core lesson from the crisis. The U.S. Senate bill sets up a council of regulators that includes the Federal Reserve, but the U.S. House wants a bigger role for the Fed. The EU has approved a reform that will make the European Central Bank the hub of a pan-EU systemic risk board. Winners/Losers: ECB is a big winner with an enhanced role that many see as a platform for a more pervasive role in the future. Banks will have yet another pair of eyes staring down at them.

Bank Capital RequirementsThe push to beef up bank capital and liquidity require-ments is being led by the global Basel Committee of central bankers and supervisors, which is toughening up its global accord as requested by the G20. It took at the end of 2012. The U.S. bill directs regulators to increase capital requirements on large financial firms as they grow in size or engage in riskier activities. In 2015, the Federal Reserve further increased the capital require-ments for the eight largest banks.

The EU has approved new rules to beef up capital on trading books and allow supervisors to slap extra capital requirements if remuneration is encouraging excessively risky behavior. Additional rules were imple-mented to strengthen corporate governance and increase transparency. Winners/Losers: Bank return on equity is set to be squeezed. Regulators will have many more tools to control the sector. Higher costs are likely to be passed on to consumer investors. There could be timing issues as the EU has been more willing than the United States in the past to adopt Basel rules.

Fixing SecuritizationThe U.S. Senate bill forces securitizers to keep a base-line 5 percent of credit risk on securitized assets. The EU has already approved a law to this effect. Winners/Losers: Banks say privately the 5 percent level is low enough not to make much difference and that the key problem is restoring investor confidence into the tarnished sector.

Sources: Tracy, Ryan; McGrane, Victoria; Baer, Justin, “Fed Lifts Capi-tal Requirements for Banks,” The Wall Street Journal, July 20, 2015; “SEC Adopts Credit Rating Agency Reform Rules,” US Securities and Exchange Commission, August 27, 2014; Brush, Silla; Verlaine, Julia-Ambra, “EU, U.S. Reach Deal on Clearing Rules for Derivatives Mar-ket,” BloombergBusiness, February 10, 2016; Mayeda, Andrew, “Canada to Increase Regulation of Over-the-Counter Derivatives,” BloombergBusiness, February 11, 2014; “Factbox: Comparing EU and U.S. Financial Reform,” Reuters, May 19, 2010. Additional research by authors.

Tab

le 2

-1E

ase-

of-

Do

ing

-Bu

sin

ess

Ran

kin

g a

mo

ng

Sel

ect

Co

un

trie

s (2

01

5)

E

ase

of

Do

ing

Dea

ling

Bu

sin

ess

w

ith

Tr

adin

g

(O

vera

ll)

Sta

rtin

g a

C

on

stru

ctio

n

Get

tin

g

Reg

iste

rin

g

Get

tin

g

Pro

tect

ing

P

ayin

g

acro

ss

En

forc

ing

R

eso

lvin

g

Eco

no

my

Ran

k B

usi

nes

s P

erm

its

Ele

ctri

city

P

rop

erty

C

red

it

Inve

sto

rs

Taxe

s B

ord

ers

Co

ntr

acts

In

solv

ency

Sin

gap

ore

1

1

0

1

6

17

1

9

1

5

41

1

2

7U

nite

d K

ing

do

m

6

17

2

3

15

4

5

19

4

1

5

38

3

3

13

Un

ited

Sta

tes

7

49

3

3

44

3

4

2

35

5

3

34

2

1

5S

we

de

n

8

16

1

9

7

11

7

0

14

3

7

17

2

4

19

Fin

lan

d

10

3

3

27

1

6

20

4

2

66

1

7

32

3

0

1Ta

iwan

1

1

22

6

2

1

8

59

2

5

39

6

5

16

2

1A

ust

ralia

1

3

11

4

3

9

47

5

6

6

42

8

9

4

14

Ge

rman

y 1

5

10

7

13

3

6

2

28

4

9

72

3

5

12

3

Ire

lan

d

17

2

5

43

3

0

39

2

8

8

6

48

9

3

20

Mal

aysi

a 1

8

14

1

5

13

3

8

28

4

3

1

49

4

4

45

Ge

org

ia

24

6

1

1

62

3

7

2

0

40

7

8

13

1

01

Fra

nce

2

7

32

4

0

20

8

5

79

2

9

87

1

1

4

24

Un

ited

Ara

b E

mir

ate

s 3

1

60

2

4

1

0

97

4

9

1

10

1

18

9

1Ja

pan

3

4

81

6

8

14

4

8

79

3

6

12

1

52

5

1

2K

azak

hst

an

41

2

1

92

7

1

19

7

0

25

1

8

12

2

9

47

Ru

ssia

n F

ed

era

tion

5

1

41

1

19

2

9

8

42

6

6

47

1

70

5

5

1G

ree

ce

60

5

4

60

4

7

14

4

79

4

7

66

2

7

13

2

54

Bah

rain

6

5

14

0

9

77

2

5

10

9

11

1

8

85

1

01

8

5S

aud

i A

rab

ia

82

1

30

1

7

24

3

1

79

9

9

3

15

0

86

1

89

Ke

nya

1

08

1

51

1

49

1

27

1

15

2

8

11

5

10

1

13

1

10

2

14

4In

do

ne

sia

10

9

17

3

10

7

46

1

31

7

0

88

1

48

1

05

1

70

7

7B

razi

l 1

16

1

74

1

69

2

2

13

0

97

2

9

17

8

14

5

45

6

2A

rge

ntin

a 1

21

1

57

1

73

8

5

11

6

79

4

9

17

0

14

3

38

9

5C

amb

od

ia

12

7

18

0

18

1

14

5

12

1

15

1

11

9

5

98

1

74

8

2In

dia

1

30

1

55

1

83

7

0

13

8

42

4

9

15

2

12

7

18

4

11

6P

akis

tan

1

38

1

22

6

1

15

7

13

7

13

3

25

1

71

1

69

1

51

9

4E

thio

pia

1

46

1

76

7

3

12

9

14

1

16

7

16

6

11

3

16

6

84

1

14

Gam

bia

, th

e

15

1

16

9

11

7

15

3

12

4

16

2

16

3

17

7

10

4

11

0

11

1Z

imb

abw

e

15

5

18

2

18

4

16

1

11

4

79

8

1

14

5

10

0

16

6

15

2B

oliv

ia

15

7

17

8

15

0

10

1

14

3

12

6

14

4

18

9

12

4

13

6

92

Nig

er

16

0

13

4

17

8

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6

13

3

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1Ir

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16

1

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89

Ban

gla

de

sh

17

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88

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tral

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pu

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1

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1

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77

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49

Ve

ne

zue

la,

RB

1

86

1

86

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65

So

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Th

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ank,

“Ta

ble

1.1

: R

anki

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approximately 115 large state-owned conglomerates. The returns for these businesses, ranging from telecommunications to energy, have been far lower than those from related private enterprises. Despite these small reforms, some still express doubt that the Com-munist Party will allow a true market-based economy to take hold. The state still controls 80,000 small-scale businesses across the country, plans to maintain a high level of con-trol over the nationalized conglomerates, and continues to exert a level of control over the stock market.36,37

Poland, transitioning from a state-planned economy to a free-market economy, underwent extensive privatization of its state-owned enterprises in the early 2000s. The mass privatization of industries, including insurance and coal mining, boosted the Warsaw Stock Exchange into the top ten European markets by value.38 Turkey had issued various privatization tenders in the energy and electricity sectors; Nigeria finalized the privatiza-tion of three of the Power Holding Company of Nigeria successor companies in 2012;

International Management in Action

Bitcoin and other Decentralized Currencies in the Digital Age

Alternative, extra-governmental currencies have sparked the interest of many due to the global nature of online transactions. In the past, these virtual currencies were centrally controlled and often quickly shut down by gov-ernmental regulations. Virtual currencies in the early 2000s, such as “E-gold” and “Liberty Reserve,” were prone to criminal activity and illegal transactions. These virtual currencies acted more as businesses than as peer-to-peer transaction devices, and the currencies provided little flexibility in real, everyday use. In 2008, a paper published online by Satoshi Naka-moto, titled “Bitcoin: A Peer-to-Peer Electronic Cash Sys-tem,” outlined a new concept for digital currency, in which open peer-to-peer transactions replace the need for cen-tralized currency oversight and regulation. Little is known about “Satoshi Nakamoto,” with many now believing that the name is a pseudonym for a group of individuals. In 2009, Nakamoto released the first peer-to-peer Bitcoin software and issued the first round of currency. Unlike its predecessors, Bitcoin is easy to use when purchasing real, tangible goods. In recent years, Bitcoin has quickly grown into the most widely used digital currency. Like traditional paper currency, Bitcoin depends on faith of the users for the system to work. Rather than relying on a central bank, Bitcoin relies on a decentral-ized ledger system to maintain the overall value within the market. On a basic level, every registered user main-tains a copy of the ledger, which displays the individual balance of Bitcoin for every other user. Transactions in Bitcoin are, in essence, just the debiting and crediting of those balances. The open, public sharing of the value of the transactions occurring in Bitcoin is essential, as this allows for the role of the central banking institution to be completely replaced, thereby “decentralizing” the currency. As of February 2016, the market capitalization of Bitcoin was about US$6 billion. More than 1,000 retailers, both online and in brick-and-mortar locations, now accept Bitcoin. Bitcoin and other decentralized digital currencies could provide an alternative method of storing value in

times of currency uncertainty. In 2015, when Greece’s inability to meet its debt repayment schedule led to restrictions on bank withdrawals and growing uncer-tainty for the future of the European Union, Bitcoin saw a surge in activity across Europe. In July, the number of Greeks registering to buy and sell Bitcoin increased ten-fold, and trades increased by 79 percent. Bitcoin mar-kets in Germany, Poland, and China saw large increases in activity from Greek computers. Governments appear to be cautiously open to the use of Bitcoin within their borders. Almost every country allows the use of Bitcoin for private transactions. The United States and EU have issued only modest warnings regarding the use of digital currencies, and few legal regulations exist. In 2015, the United States officially recognized Bitcoin as a commodity. Bitcoin’s growth has not been completely smooth. A series of rapid increases and decreases in the value of a Bitcoin, from US$0.08 in 2010 to over US$1,200 in 2013, has led to many economists, including former U.S. Federal Reserve Chairman Alan Greenspan, to declare the currency a bubble. Though the currency has stabi-lized to a value of between US$200 and US$400 in recent years, rapid price swings are still commonplace. Illegal activity, including drug trafficking and money laundering, does occur through Bitcoin marketplaces, though the open ledger concept behind the currency makes these activities easier to trace. As a digital cur-rency, malware and computer viruses have also led to some limited instances of theft. Bitcoin’s encryption, however, is still regarded as strong. Bitcoin appears to be reaching a tipping point. While some economists insist that Bitcoin will ultimately sink to a value of zero, others predict that the currency will rise to a value of over US$40,000. Perhaps the ultimate suc-cess or failure of Bitcoin as a digital currency lies not in its own design, but in the uncertainties that led to its initial rise in popularity. If consumers continue to cast doubt over government-issued, centralized currencies, Bitcoin could continue to grow in popularity for years to come.

59

60 Part 1 Environmental Foundation

and Pakistan had privatized 167 state-owned enterprises since its inception, yielding US$9 billion in proceeds to the government.39 As described in the International Manage-ment in Action box “Brazilian Economic Reform” in Chapter 1, many developing coun-tries are privatizing their state-owned companies to provide greater competition and access to service.

Regulation of Trade and InvestmentThe regulation of international trade and investment is another area in which individual countries use their legal and regulatory policies to affect the international management environment. The rapid increase in trade and investment has raised concerns among countries that others are not engaging in fair trade, based on the fundamental principles of international trade as specified in the WTO and other trade and investment agreements. Specifically, international trade rules require countries to provide “national treatment,” which means that they will not discriminate against others in their trade relations. Unfor-tunately, many countries engage in government support (subsidies) and other types of practices that distort trade. For example, many developing countries require that foreign MNCs take on local partners in order to do business. Others mandate that MNCs employ a certain percentage of local workers or produce a specific amount in their country. These practices are not limited to developing countries. Japan, the United States, and many European countries use product standards, “buy local” regulations, and other policies to protect domestic industries and restrict trade.

In addition, most trade agreements require that countries extend most-favored-nation status such that trade benefits accorded one country (such as tariff reductions under the WTO) are accorded all other countries that are parties to that agreement. The emergence of regional trade arrangements has called into question this commitment because, by definition, agreements among a few countries (NAFTA, EU) give preference to those specific members over those who are not part of these trading “blocs.” As discussed in Chapter 1, many countries engage in antidumping actions intended to offset the practice of trading partners “dumping” products at below cost or home market price, as well as countervailing duty actions intended to offset foreign government subsidization. In each case, there is evidence that many countries abuse these laws to protect domestic industries, something the WTO has been more vigilant in monitoring in recent years.

■ Technological Environment and Global Shifts in  Production

Technological advancements not only connect the world at incredible speed but also aid in the increased quality of products, information gathering, and R&D. Manufacturing, infor-mation processing, and transportation are just a few examples of where technology improves organizational and personal business. The need for instant communication increases exponentially as global markets expand. MNCs need to keep their businesses connected; this is becoming increasingly easier as technology contributes to “flattening the world.” Thomas Friedman, in his book The World Is Flat, writes that such events as the introduc-tion of the Internet or the World Wide Web, along with mobile technologies, open sourc-ing, and work flow software distribution, not only enable businesses and individuals to access vast amounts of information at their fingertips in real time but are also resulting in the world flattening into a more level playing field.40

Trends in Technology, Communication, and InnovationThe innovation of the microprocessor could be considered the foundation of much of the technological and computing advancements seen today.41 The creation of a digital frame-work allowed high-power computer performance at low cost. This then gave birth to such breakthroughs as the development of enhanced telecommunication systems, which will

Chapter 2 The Political, Legal, and Technological Environment 61

be explored in greater depth later in the chapter. Now, computers, telephones, televisions, and wireless forms of communication have merged to create multimedia products and allow users anywhere in the world to communicate with one another. The Internet allows one to obtain information from literally billions of sources.

Global connections do not necessarily level the playing field, however. Throughout the early 2000s, the challenge of integrating telecom standards became an issue for MNCs in China. Qualcomm Corporation had wanted to sell China narrowband CDMA (code division multiple access) technology; however, Qualcomm was initially unsuccess-ful in convincing the government that it could build enough products locally. Instead, China’s network, the world’s largest mobile network, used primarily the GSM technology that is popular in Europe.42 Following the reorganization of China’s telecommunication industry in 2009, however, CDMA gained a foothold in China. In 2015 alone, China Telecom was expected to sell an estimated 100 million CDMA handsets.43

Furthermore, concepts like the open-source model allow for free and legal sharing of software and code, which may be utilized by underdeveloped countries in an attempt to gain competitive advantage while minimizing costs. India exemplifies this practice as it continues to increase its adoption of the Linux operating system (OS) in place of the global standard Microsoft Windows. The state of Kerala shifted the software of its 2,600 high schools to the Linux system, enabling each user to configure it to his or her needs, with the goal of creating a new generation of adept programmers. Microsoft, through its DreamSpark program, has been providing students access to its latest developer and designer tools at no charge. The program aims to unlock students’ creative potential and set them on the path to academic and career success and, since its inception, has provided nearly 50 million free downloads. Originally launched in the United States and United Kingdom, the DreamSpark program is now available to students in over 165 countries.44 More broadly, a number of for-profit and nonprofit firms have been aggressively working to bring low-cost computers into the hands of the hundreds of millions of children in the developing world who have not benefited from the information and computing revolution.

Next Thing Company, a start-up based in California, has developed an extremely low-cost computer with the goal of providing word processing and Internet access to people in low-income areas. Called C.H.I.P., the computers retail for US$9. The comput-ers are roughly the size of a postcard, allowing for cheap and easy shipment to any part of the world. Despite the low price, C.H.I.P. computers have about as much functional-ity as a smartphone; every unit has Wi-Fi capability, a 4-gigabyte hard drive, and 512 megabytes of RAM. Accessories can be connected through USB ports, and most televi-sions can serve as the computer’s screen, saving additional costs by negating the need for more expensive monitors. Because of the low cost and small size, the computers are suited to be adapted, or “hacked,” to best fit the needs of the user. Next Thing Company plans to actively partner with schools and nonprofits to ensure that the computers ulti-mately meet the needs of the end users in the developing world. The first 30,000 units were shipped in January 2016.45

There also exists a great potential for disruptions as the world relies more and more on digital communication and imaging. The world is connected by a vast network of fiber-optic cables that we do not see because they are buried either underground or under-water. Roughly the width of a garden hose, 200 sets of these cables carry 99 percent of all transoceanic communication, leading to a great deal of system vulnerability.46 In 2015, a series of accidental disruptions to one cable led to weeks of slower Internet and com-munication problems throughout Vietnam. The fact that so many were reliant on a mere 4-inch-thick cable shows the potential risks associated with greater global connectivity.47

We have reviewed general influences of technology here, but what are some of the specific dimensions of technology and what other ways does technology affect interna-tional management? Here, we explore some of the dimensions of the technological envi-ronment currently facing international management, with a closer look at biotechnology, e-business, telecommunications, and the connection between technology, outsourcing, and offshoring.

62 Part 1 Environmental Foundation

In addition to the trends discussed above, other specific ways in which technology will affect international management in the next decade include

1. Rapid advances in biotechnology that are built on the precise manipulation of organisms, which will revolutionize the fields of agriculture, medicine, and industry.

2. The emergence of nanotechnology, in which nanomachines will possess the ability to remake the whole physical universe.

3. Satellites that will play a role in learning. For example, communication firms will place tiny satellites into low orbit, making it possible for millions of peo-ple, even in remote or sparsely populated regions such as Siberia, the Chinese desert, and the African interior, to send and receive voice, data, and digitized images through handheld telephones.

4. Automatic translation telephones, which will allow people to communicate naturally in their own language with anyone in the world who has access to a telephone.

5. Artificial intelligence and embedded learning technology, which will allow think-ing that formerly was felt to be only the domain of humans to occur in machines.

6. Silicon chips containing up to 100 million transistors, allowing computing power that now rests only in the hands of supercomputer users to be available on every desktop.

7. Supercomputers that are capable of 1 trillion calculations per second, which will allow advances such as simulations of the human body for testing new drugs and computers that respond easily to spoken commands.48

The development and subsequent use of these technologies have greatly benefited the most developed countries in which they were first deployed. However, the most positive effects should be seen in developing countries where inefficiencies in labor and production impede growth. Although all these technological innovations will affect international man-agement, specific technologies will have especially pronounced effects in transforming economies and business practices. The following discussion highlights some specific dimensions of the technological environment currently facing international management.

BiotechnologyThe digital age has given rise to such innovations as computers, cellular phones, and wireless technology. Advancements within this realm allow for more efficient commu-nication and productivity to the point where the digital world has extended its effect from information systems to biology. Biotechnology is the integration of science and technol-ogy, but more specifically it is the creation of agricultural or medical products through industrial use and manipulation of living organisms. At first glance, it appears that the fusion of these two disciplines could breed a modern bionic man immune to disease, especially with movements toward technologically advanced prosthetics, cell regeneration through stem cell research, or laboratory-engineered drugs to help prevent or cure diseases such as HIV or cancer.

Pharmaceutical competition is also prevalent on the global scale with China’s raw material reserve and the emergence of biotech companies such as Genentech and Merck, after its acquisition of Swiss biotech company Serono. India is emerging as a major player, with its largest, mostly generic, pharmaceutical company Ranbaxy’s ability to produce effective and affordable drugs (for further discussion on drug affordability inter-nationally and the ethics of drug pricing, see In-Depth Integrative Case 1.2 at the end of Part One).49 While pharmaceutical companies mainly manufacture drugs through a process similar to that of organic chemistry, biotech companies attempt to discover genetic abnormalities or medicinal solutions through exploring organisms at the molecu-lar level or by formulating compounds from inorganic materials that mirror organic

Chapter 2 The Political, Legal, and Technological Environment 63

substances. DNA manipulation in the laboratory extends beyond human research. As mentioned above, another aspect of biotech research is geared toward agriculture. In the United States and Brazil, ethanol production is expected to increase for the foreseeable future, with corn and sugarcane serving as feedstock. Automobile gasoline in Brazil is now mandated to consist of nearly 25 percent ethanol, and blended gasoline was initially encouraged in the United States through tax subsidies.50 However, some have raised concerns regarding increased food prices caused by using sugarcane and corn as a fuel alternatives. For this and many other reasons, global companies like Monsanto are col-laborating with others such as BASF AG to work toward creating genetically modified seeds such as drought-tolerant corn and herbicide-tolerant soybeans.51 (See the supple-mental online simulation related to the U.S.-EU dispute over trade in genetically modified organisms.) Advancements in this industry include nutritionally advanced crops that may help alleviate world hunger.52

Aside from crops, the meat industry can also benefit from this process. The out-break of mad cow disease in Great Britain sparked concern when evidence of the disease spread throughout Western Europe; however, the collaborative work of researchers in the United States and Japan may have engineered a solution to the problem by eliminat-ing the gene that is the predecessor to making the animal susceptible to this ailment.53 Furthermore, animal cloning, which simply makes a copy of preexisting DNA, could boost food production by producing more meat or dairy-producing animals. The first evidence of a successful animal clone was Dolly, born in Scotland in 1996. Complica-tions arose, and Dolly aged at an accelerated rate, indicating that while she provided hope, there still existed many flaws in the process. While the EU has banned the clon-ing of livestock, the United States allows cloned animal products to be incorporated in the food supply.54 Other countries actively cloning animals include Australia, China, Japan, New Zealand, and South Korea. The world is certainly changing, and the trend toward technological integration is far from over. Whether one desires laser surgery to correct eyesight, a vaccine for emerging viruses, or more nutritious food, there is a biotechnology firm competing to be the first to achieve these goals. Hunger and poor health care are worldwide issues, and advancement in global biotechnology is working to raise the standards.

E-BusinessAs the Internet becomes increasingly widespread, it is having a dramatic effect on inter-national commerce. Table 2–2 shows Internet penetration rates for major world regions,

Table 2–2World Internet Usage and Population Statistics

Internet Internet World Population Users Users Penetration Growth Users % Regions (2015 Est.) 2000 2015 (% Population) 2000–2015 of Total

Africa 1,158,355,663 4,514,400 327,145,889 28.2% 7,146.7% 9.8%Asia 4,032,466,882 114,304,000 1,611,048,215 40.0 1,309.4 48.1 Europe 821,555,904 105,096,093 604,147,280 73.5 474.9 18.1 Middle East 236,137,235 3,284,800 123,172,132 52.2 3,649.8 3.7 North America 357,178,284 108,096,800 313,867,363 87.9 190.4 9.4 Latin America/ Caribbean 617,049,712 18,068,919 339,251,363 55.5 1,777.5 10.1Oceania/Australia 37,158,563 7,620,480 27,200,530 73.2 256.9 0.8

WORLD TOTAL 7,259,902,243 360,985,492 3,345,832,772 46.1 826.9 100.0

Source: “Usage and Population Statistice,” Internet World Stats, www.internetworldstats.com/stats.htm. Estimated Internet users are 3,345,832,772 for November 15, 2015.

64 Part 1 Environmental Foundation

illustrating the dramatic increase from 2000 to 2015 and the accompanying growth rates, with Africa exhibiting the highest rate at more than 7,000 percent.

Tens of millions of people around the world have now purchased books from Ama-zon.com, and the company has now expanded its operations around the world (see The World of International Management at the beginning of Chapter 11). So have a host of other electronic retailers (e-tailers), which are discovering that their home-grown retailing expertise can be easily transferred and adapted for the international market.55 Dell Com-puter has been offering B2C (electronic business-to-consumer) goods and services in Europe for a number of years, and the automakers are now beginning to move in this direction. Tesla sells most of its cars directly to customers through the Internet, and Toyota is testing a similar model.56 Other firms are looking to use e-business to improve their current operations. For example, Deutsche Bank has overhauled its entire retail net-work with the goal of winning affluent customers across the continent.57 Yet the most popular form of e-business is for business-to-business (B2B) dealings, such as placing orders and interacting with suppliers worldwide. Business-to-consumer (B2C) transactions will not be as large, but this is an area where many MNCs are trying to improve their operations.

The area of e-business that will most affect global customers is e-retailing and financial services. For example, customers can now use their keyboard to pay by credit card, although security remains a problem. However, the day is fast approaching when electronic cash (e-cash) will become common. This scenario already occurs in a number of forms. A good example is prepaid smart cards, which are being used mostly for tele-phone calls and public transportation. An individual can purchase one of these cards and use it in lieu of cash. This idea is blending with the Internet, allowing individuals to buy and sell merchandise and transfer funds electronically. The result will be global digital cash, which will take advantage of existing worldwide markets that allow buying and selling on a 24-hour basis.

Some companies, such as Capital One 360, the U.S.’s largest direct bank, are completely “disintermediating” banking by eliminating the branches and other “bricks-and-mortar” facilities altogether. Through Capital One 360, all banking transactions occur online, with higher interest rates often offered to those who agree to “paperless” state-ments and communication. To align with its Internet-savvy clientele, Capital One 360 has developed a comprehensive social media “Savers Community,” including Twitter, Facebook, Pinterest, and its YouTube “Challenge Your Savings” video series. And so far, not one of the 275-plus bank failures in the U.S., since the financial crisis began in 2008, has been online banks.58 HSBC and other global banks are learning from Capital One 360’s success and growing their Internet banking globally(see In-Depth Integrative Case 4.1 after Part Four).

TelecommunicationsOne of the most important dimensions of the technological environment facing interna-tional management today is telecommunications. To begin with, global access to afford-able cell phone services is resulting in a form of technological leapfrogging, in which regions of the world are moving from a situation where phones were completely unavail-able to one where cell phones are available everywhere, including rural areas, due to the quick and relatively inexpensive installation of cellular infrastructure. This is especially true in sub-Saharan Africa. According to a 2015 Pew Research study, the number of land-line phone users is nearly zero percent in the countries of Ghana, Kenya, Nigeria, Senegal, South Africa, Tanzania, and Uganda, while cellular phone access in those same countries averages over 80 percent.59 In addition, technology has merged two previously discrete methods of communication: the telephone and the Internet. Internet access through cellular phones has, in many ways, replaced access via computers. By 2016, nearly half of all e-mails were opened on mobile phones. Social networking sites have seen an even larger shift to mobile; over 900 million people were checking Facebook

Chapter 2 The Political, Legal, and Technological Environment 65

daily via their smartphones, and 90 percent of all video views on Twitter were occurring on mobile devices.60 Wireless technology is proving to be a boon for less developed countries, such as in South America, Africa, and Eastern Europe where customers once waited years to get a telephone installed.

One reason for this rapid increase in telecommunications services is many countries believe that without an efficient communications system, their economic growth may stall. Additionally, governments are accepting the belief that the only way to attract foreign investment and know-how in telecommunications is to cede control to private industry. As a result, while most telecommunications operations in the Asia-Pacific region were state-run a few decades ago, a growing number are now in private hands. Singapore Telecommunications, Pakistan Telecom, Thailand’s Telecom Asia, Korea Tele-com, and Globe Telecom in the Philippines all have been privatized, and MNCs have helped in this process by providing investment funds. Today, First Pacific holds a 25 per-cent stake in the Philippine Long Distance Telephone Company, and the Japanese gov-ernment has privatized nearly two-thirds of Nippon Telegraph & Telephone (NTT). At the same time, Australia’s Telestra is moving into the Philippines; Thailand is loosening regulations on foreign investment in telecom; and Korea Telecom has operations in Brunei, Mongolia, and Uzbekistan.

Many governments are reluctant to allow so much private and foreign ownership of such a vital industry; however, they also are aware that foreign investors will go elsewhere if the deal is not satisfactory. The Hong Kong office of Salomon Brothers, a U.S. invest-ment bank, estimates that to meet the expanding demand for telecommunication service in Asia, companies will need to considerably increase the investment, most of which will have to come from overseas. MNCs are unwilling to put up this much money unless they are assured of operating control and a sufficiently high return on their investment.

Developing countries are eager to attract telecommunication firms and offer liberal terms. This liberalization has resulted in rapid increases in wireless penetration, with more than 1.2 billion wireless devices in circulation in China and about a billion in India. Between 2000 and 2012, the total number of mobile subscribers in developing countries grew dramatically—from 250 million to nearly 4.5 billion.61 According to the International Telecommunications Union, nearly 80 percent of people in developing nations have mobile phones.62 Growth was rapid in all regions, but fastest in sub-Saharan Africa. It is estimated that mobile phone penetration in Africa stands at over 60 percent, and, in Nigeria alone, there are nearly 150 million mobile phones. This represents a nearly one-to-one ratio of people to mobile devices.63 In Africa, mobile users are increasingly relying on their devices for commerce and payment. Transactions are conducted via text message, and users aren’t even required to hold a bank account.64 Apple and Samsung, two of the larg-est mobile phone producers globally, have been aggressively penetrating emerging markets with smartphone technology (see The World of International Management at the beginning of Chapter 5). Since 2012, China has held the largest share of smartphone sales world-wide.65 Although the counterfeiting of smartphones remains an issue in many emerging markets, there are signs that some effort is being taken to protect authentic products; in 2015, police in Beijing busted a large-scale counterfeiting operation that included hun-dreds of employees and six production lines. According to the Wall Street Journal, this particular counterfeiter manufactured over 40,000 fake iPhones in 2015 alone.66

Technological Advancements, Outsourcing, and OffshoringAs MNCs use advanced technology to help them communicate, produce, and deliver their goods and services internationally, they face a new challenge: how technology will affect the nature and number of their employees. Some informed observers note that technology already has eliminated much and in the future will eliminate even more of the work being done by middle management and white-collar staff. Mounting cost pressures resulting from increased globalization of competition and profit expectations exerted by investors have placed pressure on MNCs to outsource or offshore production to take advantage of

66 Part 1 Environmental Foundation

lower labor and other costs.67 In the past century, machines replaced millions of manual laborers, but those who worked with their minds were able to thrive and survive. During the past three decades in particular, employees in blue-collar, smokestack industries such as steel and autos have been downsized by technology, and the result has been a perma-nent restructuring of the number of employees needed to run factories efficiently. In the 1990s, a similar trend unfolded in the white-collar service industries (insurance, banks, and even government). Most recently, this trend has affected high-tech companies in the late 1990s and early 2000s, when after the dot-com bubble burst, hundreds of thousands of jobs were lost, and again in 2008–2010, when many jobs were lost in finance and related industries as a result of the financial crisis and global recession. Furthermore, the job recovery in the wake of the financial crisis has been largely dependent on lower-wage jobs. According to the National Employment Law Project, 78 percent of jobs lost during the global recession were in finance, manufacturing, and construction, but only 57 percent of the jobs created from 2009 to 2015 were in those fields.68

Some experts predict that in the future, technology has the potential to displace employees in all industries, from those doing low-skilled jobs to those holding positions traditionally associated with knowledge work. For example, voice recognition is helping to replace telephone operators; the demand for postal workers has been reduced substan-tially by address-reading devices; and cash-dispensing machines can do 10 times more transactions in a day than bank tellers, so tellers can be reduced in number or even eliminated entirely in the future. Also, expert (sometimes called “smart”) systems can eliminate human thinking completely. For example, American Express has an expert system that performs the credit analysis formerly done by college-graduate financial analysts. In the medical field, expert systems can diagnose some illnesses as well as doctors can, and robots capable of performing certain operations are starting to be used.

Emerging information technology also makes work more portable. As a result, MNCs have been able to move certain production activities overseas to capitalize on cheap labor resources. This is especially true for work that can be easily contracted with overseas locations. For example, low-paid workers in India and Asian countries now are being given subcontracted work such as labor-intensive software development and code-writing jobs. A restructuring of the nature of work and of employment is a result of such information technology; Table 2–3 identifies some winners and losers in the workforce in recent years.

The new technological environment has both positives and negatives for MNCs and societies as a whole. On the positive side, the cost of doing business worldwide should decline thanks to the opportunities that technology offers in substituting lower-cost machines for higher-priced labor. Over time, productivity should go up, and prices should go down. On the negative side, many employees will find either their jobs eliminated or their wages and salaries reduced because they have been replaced by machines and their skills are no longer in high demand. This job loss from technology can be especially devastating in developing countries. However, it doesn’t have to be this way. A case in point is South Africa’s showcase for automotive productivity as represented by the Delta Motor Corporation’s Opel Corsa plant in Port Elizabeth. To provide as many jobs as pos-sible, this world-class operation automated only 23 percent, compared to more than 85 percent auto assembly in Europe and North America.69 Even some manufacturing processes in developed countries have traded robots for humans; in 2014, Toyota replaced automated manufacturing machines with manual jobs in an effort to increase quality.70 Some industries can also add jobs. For example, the positive has outweighed the negative in the computer and information technology industry, despite its ups and downs. Specifi-cally, employment in the U.S. computer software industry has increased over the last decade. In less developed countries such as India, a high-tech boom in recent years has created jobs and opportunities for a growing number of people.71 Even though developed countries such as Japan and the United States are most affected by technological displace-ment of workers, both nations still lead the world in creating new jobs and shifting their traditional industrial structure toward a high-tech, knowledge-based economy.

Chapter 2 The Political, Legal, and Technological Environment 67

The precise impact that the advanced technological environment will have on inter-national management over the next decade is difficult to forecast. One thing is certain, however; there is no turning back the technological clock. MNCs and nations alike must evaluate the impact of these changes carefully and realize that their economic perfor-mance is closely tied to keeping up with, or ahead of, rapidly advancing technology.

The World of International Management—RevisitedPolitical, legal, and technological environments can alter the landscape for global com-panies. The chapter opening The World of International Management described how social media can be used a tool for political change—both positive and negative. It has

Table 2–3Winners and Losers in Selected Occupations: Percentage Change Forecasts for 2014–2024

The 10 occupations with the largest projected employment growth 2014–2024

Occupation

Employment in millions

DifferencePercent change2014 2024

Personal care aidesRegistered nursesHome health aidesCombined food preparation and serving workers, including fast foodRetail salespersonsNursing assistantsCustomer service representativesCooks, restaurantGeneral and operations managersConstruction laborers

1768.42751.0

931.5

3159.74624.9 1492.1 2581.81109.72124.1 1159.1

2226.53190.31261.9

3503.24939.1 1754.1 2834.81268.72275.21306.5

458.1 439.3348.4

343.5314.2262.0252.9158.9151.1147.4

25.9%16.038.1

10.96.8

17.69.8

14.37.1

12.7

The 10 occupations with the largest projected employment declines, 2014–2024

Occupation

Employment in millions

DifferencePercent change2014 2024

Bookkeeping, accounting, and auditing clerksCooks, fast foodPostal service mail carriersExecutive secretaries and executive administrative assistantsFarmworkers and laborers, crop, nursery, and greenhouse Sewing machine operatorsTellersPostal service mail sorters, processors, and processing machine operatorsCutting, punching, and press machine setters, operators, and tenders, metal and plasticSwitchboard operators, including answering service

1760.3524.4297.4

776.6

470.2153.9520.5

117.6

192.2112.4

1611.5444.0219.4

732.0

427.3112.2480.5

78.0

152.775.4

−148.7−80.4−78.1

−44.6

−42.9−41.7−40.0

−39.7

−39.5−37.0

−8.4%−15.3−26.2

−5.7

−9.1−27.1

−7.7

−33.7

−20.6−32.9

Source: Bureau of Labor Statistics, “Tables 4 & 6,” Employment Projections. December 15, 2015. http://www.bls.gov/emp/tables.htm.

68 Part 1 Environmental Foundation

allowed political groups to organize, journalists to communicate and report on political developments, and citizens to mobilize and build support for political movements. This situation underscores the increasing uncertainty in the global business environment and the rapidity and extent of political and legal change. It also highlights how technology is contributing to accelerating change and how traditional legal systems have difficulty keeping pace with these changes. International managers need to be aware of how dif-fering political, legal, and technological environments are affecting their business and how globalization, security concerns, and other developments influence these environ-ments. Changes in political, legal, and environmental conditions also open up new busi-ness opportunities but close some old ones.

In light of the information you have learned from reading this chapter, you should have a good understanding of these environments and some of the ways in which they will affect companies doing business abroad. Drawing on this knowledge, answer the following questions: (1) How will changes in the political and legal environment in the Middle East and North Africa, including the potential economic impacts of terrorism, affect U.S. MNCs conducting business there? (2) How might evolving political interests and legal systems affect future investment in the region? (3) How does technology result in greater integration and dependencies among economies, political systems, and financial markets, but also greater fragility?

1. The global political environment can be understood via an appreciation of ideologies and political sys-tems. Ideologies, including individualism and col-lectivism, reflect underlying tendencies in society. Political systems, including democracy and totali-tarianism, incorporate ideologies into political struc-tures. There are fewer and fewer purely collectivist or socialist societies, although totalitarianism still exists in several countries and regions. Many coun-tries are experiencing transitions from more social-ist to democratic systems, reflecting related trends discussed in Chapter 1 toward more market-oriented economic systems.

2. The current legal and regulatory environment is both complex and confusing. There are many differ-ent laws and regulations to which MNCs doing business internationally must conform, and each nation is unique. Also, MNCs must abide by the laws of their own country. For example, U.S. MNCs

must obey the rules set down by the Foreign Cor-rupt Practices Act. Privatization and regulation of trade also affect the legal and regulatory environ-ment in specific countries.

3. The technological environment is changing quickly and is having a major impact on international busi-ness. This will continue in the future with, for example, digitization, higher-speed telecommunica-tion, and advancements in biotechnology as they offer developing countries new opportunities to leapfrog into the 21st century. New markets are being created for high-tech MNCs that are eager to provide telecommunications service. Technological developments also impact both the nature and the structure of employment, shifting the industrial structure toward a more high-tech, knowledge-based economy. MNCs that understand and take advantage of this high-tech environment should prosper, but they also must keep up, or go ahead, to survive.

SUMMARY OF KEY POINTS

KEY TERMS

act of state doctrine, 54civil or code law, 53collectivism, 48common law, 53democracy, 50doctrine of comity, 54

Foreign Corrupt Practices Act (FCPA), 55individualism, 47Islamic law, 53nationality principle, 53principle of sovereignty, 53

protective principle, 53socialism, 48socialist law, 53territoriality principle, 53totalitarianism, 50

Chapter 2 The Political, Legal, and Technological Environment 69

REVIEW AND DISCUSSION QUESTIONS

1. In what ways do different ideologies and political systems influence the environment in which MNCs operate? Would these challenges be less for those operating in the EU than for those in Russia or China? Why or why not?

2. How do the following legal principles impact MNC operations: the principle of sovereignty, the national-ity principle, the territoriality principle, the protective principle, and principle of comity?

3. How will advances in technology and telecommuni-cations affect developing countries? Give some specific examples.

4. Why are developing countries interested in privatiz-ing their state-owned industries? What opportunities does privatization have for MNCs?

Hitachi products are well known in the United States, as well as in Europe and Asia. However, in an effort to maintain its international momentum, the Japanese MNC is continuing to push forward into new markets, especially emerging markets, while also developing new products. Visit the MNC at its website www.hitachi.com and examine some of the latest developments that are taking place. Begin by reviewing the firm’s current activities in Asia, specifically Hong Kong and Singapore. Then look at how it is doing business in

North America. Finally, read about its European opera-tions. Then answer these three questions: (1) What kinds of products and systems does the firm offer? What are its primary areas of emphasis? (2) In what types of environments does it operate? Is Hitachi pri-marily interested in developed markets, or is it also pushing into newly emerging markets? (3) Based on what it has been doing over the last two to three years, what do you think Hitachi’s future strategy will be in competing in the environment of international business?

INTERNET EXERCISE: HITACHI GOES WORLDWIDE

1. “Syrian Protests Grow Despite Attacks, Internet Cut,” USA Today, June 3, 2011, http://usatoday30.usatoday.com/news/world/2011-06-03-syria-unrest_n.htm.

2. Nicholas Blanford, “On Facebook and Twitter, Spreading Revolution in Syria,” The Christian Sience Monitor, April 8, 2011, www.csmonitor.com/World/Middle-East/2011/0408/On-Facebook-and-Twitter-spreading-revolution-in-Syria.

3. Rosemary D’Amour, “Syria Utilites ‘Kill Switch’ as Internet Freedom Debate Heats Up,” Broadband-Breakfast, June 17, 2011, http://broadbandbreakfast.com/2011/06/syria-utilizes-kill-switch-as-internet-freedom-debate-heats-up/.

4. Eva Galperin, “Fake YouTube Site Targets Syrian Activists with Malware,” Electronic Frontier Foundation, March 12, 2012, www.eff.org/ deeplinks/2012/03/fake-youtube-site-targets-syrian-activists-malware.

5. Matthew Brunwasser, “A 21st Century Migrant’s Essentials: Food, Shelter, Smartphone,” New York Times, August 25, 2015, http://mobile.nytimes.com/2015/08/26/world/europe/a-21st-century- migrants-checklist-water-shelter-smartphone.html?_r=3&referer=http://jilltxt.net/?p=4332.

6. Andrew Byme and Erika Solomon, “Refugees Seek  Help from Social Media,” Financial Times, September 11, 2015, www.ft.com/intl/cms/s/ 0/09625b90-56fc-11e5-a28b-50226830d644.html#axzz3xjqWWaD1.

7. Brunwasser, “A 21st Century Migrant’s Essentials: Food, Shelter, Smartphone.”

8. Ibid. 9. Zeina Karam, “Syria’s Civil War Plays Out on

Social Media,” Huffington Post, October 19, 2013, www.huffingtonpost.com/huff-wires/20131019/ ml–syria-youtube-war/?utm_hp_ref=world&ir=world.

10. Ibid.11. Jennifer Moire, “5 Ways Social Media Spread Word

of Syrian Chemical Attack,” Adweek Social Times, August 27, 2013, www.adweek.com/socialtimes/5-ways-social-media-spread-word-of-syrian-chemical-attack/135905.

12. Mukul Devichand, “Alan Kurdi’s Aunt: My Dead Nephew’s Picture Saved Thousands of Lives,” BBC News, January 2, 2016, www.bbc.com/news/blogs-trending-35116022.

13. “BBC Newsnight Refugee Poll,” ComRes, September 2015, www.comres.co.uk/polls/bbc- newsnight-refugee-poll/.

ENDNOTES

70 Part 1 Environmental Foundation

14. Rachelle Younglai and Jacqueline Nelson, “Until Now, Syria a Hard Sell for Donations,” UNHCR, September 6, 2015, www.unhcr.org/cgi-bin/texis/vtx/refdaily?pass=52fc6fbd5&id=55ed341e5.

15. Michael Gundlach, “Understanding the Relationship Between Individualism-Collectivism and Team Per-formance Through an Integration of Social Identity Theory and the Social Relations Model,” Human Relations 59, no. 12 (2006), pp. 1603–1632.

16. Donald Ball, Michael Geringer, Michael Minor, and Jeanne McNett, International Business: The Challenge of Global Competition (New York: McGraw-Hill, 2009).

17. Alessandra Galloni, Charles Forelle, and Stephen Fidler, “France, Germany Weigh Rescue Plan for Greece,” The Wall Street Journal Online, February 11, 2010.

18. Henry W. Spiegel and Ann Hubbard, The Growth of Economic Thought (Durham, NC: Duke University Press, 1991).

19. Ball et al., International Business: The Challenge of Global Competition.

20. Daniel J. McCarthy, Sheila M. Puffer, and Alexander I. Naumov, “Russia’s Retreat to Statiza-tion and the Implications for Business,” Journal of World Business 35, no. 3 (2000), p. 258.

21. Jason Bush, “Russia’s New Deal,” BusinessWeek Online, March 29, 2007, www.bloomberg.com/news/articles/2007-03-29/russias-new-dealbusinessweek-business-news-stock-market-and-financial-advice.

22. Transparency International, Corruption Perceptions Index 2014.

23. Heritage Foundation, Index of Economic Freedom 2015.

24. Kim Hjelmgaard, “Cameron Gets a Go-Ahead for His British Austerity Programs,” USA Today, May 8, 2015, www.usatoday.com/story/news/world/2015/ 05/08/british-election-analysis-conservatives- cameron/26968731/.

25. Keith Bradsher, “As China Stirs Economy, Some See Protectionism,” New York Times, June 24, 2009, p. B1.

26. “When Opium Can Be Benign,” The Economist, February 1, 2007, pp. 25–27.

27. John Child and David K. Tse, “China’s Transition and Its Implications for International Business,” Journal of International Business Studies, First Quarter 2001, pp. 5–21.

28. Andre Tartar and Salma El Wardany, “The Grim Eco-nomic Legacy of the Arab Spring Poster Children,” Bloomberg Businessweek, October 27, 2015, www.bloomberg.com/news/articles/2015-10-28/the-grim- economic-legacy-of-the-arab-spring-poster-children.

29. “Business Counts the Cost of the Arab Spring,” Grant Thornton, June 21, 2011.

30. Paul Nadler, “Making a Mystery out of How to Comply with Patriot Act,” American Banker, May 19, 2004, p. 5.

31. “International: Financial Crisis Goes Global,” New York Times, September 19, 2008.

32. David M. Herszenhorn, “Financial Overhaul Wins Final Approval in House,” New York Times, June 30, 2010, p. A1.

33. John Graham, “Foreign Corrupt Practices Act: A Manager’s Guide,” California Management Review, Summer 1987, p. 9.

34. R. Christopher Cook and Stephanie Connor, “The Foreign Corruption Practices Act: 2010 and Beyond,” Jonesday.com, January 2010.

35. Katsunori Nagayasu, “How Japan Restored Its Financial System,” The Wall Street Journal Online, August 6, 2009.

36. Scott Cendrowski, “Why China’s SOE Reform Would Always Disappoint,” Fortune, September 15, 2015, http://fortune.com/2015/09/15/why-chinas-soe-reform-would-always-disappoint/.

37. Gabriel Wildau, “China Cautiously Embraces Priva-tisation of State-Owned Enterprises,” The Financial Times, September 25, 2015, www.ft.com/intl/cms/s/0/69253d76-633c-11e5-97e9-7f0bf5e7177b.html#axzz3y5XO5C6p.

38. Marcin Sobczyk, “Warsaw Rows Back from Large-Scale Asset Sales,” The Wall Street Journal Online, July 4, 2014, www.wsj.com/articles/polish-govern-ment-rows-back-from-large-scale-asset-sales-1404469210.

39. Privatization Alert, Fdi.net, May 2010.40. Thomas Friedman, The World Is Flat (Updated and

Expanded): A Brief History of the Twenty-first Century (New York: Farrar, Straus and Giroux, 2006).

41. Charles W. L. Hill, International Business (New York: McGraw-Hill/Irwin, 2011).

42. Rebecca Buckman, “China Keeps Telecom Firms Waiting on 3G,” The Wall Street Journal, May 13, 2004, p. B4.

43. “China Telecom Announces 2015 Plan in 4G Business,” CRI English, December 24, 2014, http://english.cri.cn/12394/2014/12/24/1261s858097.htm.

44. Lee Stott, “What Does DreamSpark Offer for UK Education?” Microsoft.com, April 2, 2014, https://www.microsoft.com/en-gb/developers/articles/ week01apr14/what-does-dreamspark-offer-for- uk-education/.

Chapter 2 The Political, Legal, and Technological Environment 71

45. Andrew Rosenblum, “For Oakland Startup, a $9 Computer About More Than Getting Rich,” Mer-cury News, February 9, 2016, www.mercurynews.com/news/ci_29491760/west-oakland-startup-9- computer-about-more-than?source=infinite-up.

46. Greg Miller, “Undersea Internet Cables Are Surprisingly Vulnerable,” Wired.com, October 29, 2015, www.wired.com/2015/10/undersea-cable-maps/.

47. “Vietnam Suffers Second Internet Cable Cut in Less Than 4 Months,” Tuoi Tre News, April 23, 2015, http://tuoitrenews.vn/society/27677/vietnam-suffers-second-internet-cable-cut-in-less-than-4-months.

48. “Supercomputers: The Race Is On,” BusinessWeek, June 7, 2004, p. 76.

49. Nicholas Zamiska and Eric Bellman, “Ranbaxy Unveils Its Ambition to Be a Generics Power-house,” The Wall Street Journal, January 10, 2007, p. A11.

50. Congressional Budget Office,“Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals,” July 14, 2010, https://www.cbo.gov/publication/21444?index=11477.

51. Christopher Leonard, “Monsanto, BASF Join Forces,” BusinessWeek Online, March 21, 2007, www.businessweek.com.

52. Doris De Guzman, “Monsanto Sows More Seeds,” ICIS Chemical Business Americas 270, no. 2 (2007), p. 26.

53. “World’s First BSE-Immune Cow,” Asia Pacific Biotech News 8, no. 12 (2004), p. 682.

54. Gretchen Vogel, “E.U. Parliament Votes to Ban Cloning of Farm Animals,” Science Magazine, Sep-tember 8, 2015, www.sciencemag.org/news/2015/09/eu-parliament-votes-ban-cloning-farm-animals.

55. David Mildenberg, “SDN Sees Growth in High Speed Links,” The Business Journal, May 14, 2004, p. 1.

56. James Ayre, “Toyota Following Tesla’s Lead, Trying Out Direct Online Sales,” Clean Technica, August 29, 2015, http://cleantechnica.com/2015/08/29/toyota-following-teslas-lead-trying-direct-online-sales/.

57. “Deutsche Bank Govvie Honcho: Business as Usual Now,” Bondweek, June 22, 2003, p. 1.

58. FDIC, “Failed Bank List,” https://www.fdic.gov/bank/individual/failed/banklist.html (last visited February 11, 2016).

59. “Cell Phones in Africa: Communication Lifeline,” Pew Research Center, April 15, 2015, www.pew-global.org/2015/04/15/cell-phones-in-africa-commu-nication-lifeline/.

60. Govind Bansal, “Trends in Multimedia Consump-tion on Mobile,” Business World, January 21, 2016, http://businessworld.in/article/Trends-In-Multimedia-Consumption-On-Mobile/21-01-2016-90515/.

61. David Yanofsky and Christopher Mims, “Since 2000, the Number of Mobile Phones in the Developing World Has Increased 1700%,” Quartz, October 2, 2012, http://qz.com/9101/mobile-phones-developing-world/.

62. Chandra Steele, “How the Mobile Phone Is Evolv-ing in Developing Countries,” PC Mag, May 11, 2012, www.pcmag.com/slideshow/story/297822/how-the-mobile-phone-is-evolving-in-developing-countries.

63. Morgan Winsor, “Nigeria’s Telephone Penetration Expands in First Half of 2015 Amid Mobile Phone Boom,” International Business Times, September 29, 2015, www.ibtimes.com/nigerias-telephone- penetration-expands-first-half-2015-amid-mobile-phone-boom-2118947.

64. Heidi Vogt, “Making Change: Mobile Pay in Africa,” The Wall Street Journal Online, January 2, 2015, www.wsj.com/articles/making-change-mobile-pay-in-africa-1420156199.

65. mobiThinking,“Global Mobile Statistics 2014 Part A: Mobile Subscribers; Handset Market Share; Mobile Operators,” mobiForge, May 16, 2014, https://mobiforge.com/research-analysis/global-mobile-statistics-2014-part-a-mobile-subscribers-handset-market-share-mobile-operators.

66. Yang Jie, “Chinese Firm Made Fake iPhones Worth $19.4 Million, Police Say,” The Wall Street Journal Online, July 27, 2015, http://blogs.wsj.com/ chinarealtime/2015/07/27/chinese-firm-made-fake-iphones-worth-19-4-million-police-say/.

67. Jonathan P. Doh, Kraiwinee Bunyaratavej, and Eugene E. Hahn, “Separable but Not Equal: The Location Determinants of Discrete Offshoring Activities,” Journal of International Business Studies 40, no. 6 (2009), pp. 926–943.

68. Cole Strangler, “Unemployment Report: Six Years after the Great Recession, Are the Good Jobs Ever Coming Back?” International Business Times, March 6, 2015, www.ibtimes.com/unemployment-report-six-years-after-great-recession-are-good-jobs-ever-coming-back-1838178.

69. Jan Syfert, “Up There with the Best,” Productivity SA, November–December 1998, p. 49.

70. Craig Trudell, “Humans Replacing Robots Herald Toyota’s Vision of Future,” BloombergBusiness, April 7, 2014, www.bloomberg.com/news/arti-cles/2014-04-06/humans-replacing-robots-herald- toyota-s-vision-of-future.

72 Part 1 Environmental Foundation

71. Ashok Bhattacharjee, “India’s Outsourcing Tigers Seek Cover, Markets, in Europe’s East,” The Wall Street Journal, December 18, 2003, p. A16.

72. CIA, “Greece,” The World Factbook (2016), https://www.cia.gov/library/publications/the-world-factbook/geos/gr.html.

73. Ibid.74. World Bank, “Greece,” World Development Indica-

tors (2016), http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries/GR?display=graph.

75. CIA, “Greece.”76. Liz Alderman, James Kanter, Jim Yardley, and Jack

Ewing, “Greece’s Debt Crisis Explained,” New York Times, November 9, 2015, www.nytimes.com/inter-active/2015/business/international/greece-debt-crisis-euro.html?_r=0.

77. Ibid.

73

The country has started to show some limited signs of progress and has recently agreed to further economic reforms in return for liquidity from its lenders. Greece is not out of the woods, however. The bailout money has largely gone to the country’s lenders and has not yet been able to support the restructuring of the economy.76

You Be the International Management ConsultantIn 2015, Greece received its third bailout in five years. Relations between Greece and its creditors remain strained and contentious. On several occasions, Greece has threat-ened to default on its loans and has even contemplated exiting the European Union. The 2015 bailout allowed creditors to demand harsh austerity programs and require deep economic and structural reforms. These measures included raising the retirement age, cutting pensions, lib-eralizing the energy market, opening up protected profes-sions, enlarging a property tax that Greeks already despise, and moving ahead with a program to sell state-owned enterprises and other assets.77

Questions 1. If you are a consultant for a business looking to

expand in Europe, is Greece even an option? 2. Do the facts that its population is comprised largely

of government workers, that the citizens were largely in favor of defaulting on its national debt, and that the country nearly left the European Union constitute a deal breaker?

3. If the government does, in fact, implement the agreed-upon austerity measures, would that be a sign that the country is on the right track?

4. What other concerns would you have about entering the Greek market?

Greece is located in southern Europe, positioned geograph-ically between the Aegean and Mediterranean Seas, Albania, and Turkey. The country’s land mass is slightly smaller than that of Alabama. Major natural resources include lignite, petroleum, iron ore, bauxite, lead, zinc, nickel, magnesite, marble, salt, and hydro-power potential.72 Greece has a population of 10.78 million people, with Athens, the capital, home to 3 million people. Population growth has stabilized at zero in recent years. Greece is a fairly homogeneous country, with close to 95 percent of the population with Greek ethnicity. Nearly all in the country practice the Greek Orthodox religion. With a median age of 44 years, Greece has an older population than most countries in the world. Approximately 34 per-cent of the population is 55 years or older. In recent years, the country has struggled economically, leading to the third highest unemployment rate in the world.73 Greece’s GDP is estimated at US$238 billion. After years of negative growth, and declines of 9.1 percent in 2011 and 7.3 percent in 2012, the country’s GDP finally grew in 2014 by 0.7 percent. GDP per capita in Greece is estimated at $26,000. Greece has a capitalist economy, but the public sector accounts for approximately 40 per-cent of GDP.74 Greece was significantly impacted by the financial cri-sis of 2008. Greece’s poor financial management of the country’s budget and its failure to report massive deficits in a timely fashion to its borrowers amplified the impact of the crisis, causing the economy to spiral downward. As a consequence, Greece was no longer able to borrow in global markets. Ultimately, Greece was required to take a US$316 billion bailout from the European Union. In return for the bailout, the Greek government was required to implement dramatic spending cuts and tax increases to reduce its budget deficits. In total, aid from the European Union has amounted to approximately 3 percent of the country’s GDP.75

Greece In the International Spotlight

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RChapter 3

ETHICS, SOCIAL RESPONSIBILITY, AND SUSTAINABILITY

The World of International Management

Sustaining Sustainable Companies

W ith a more environmentally aware public, becoming a “sustainable” business has become an important part of the business model for many MNCs. Three of these companies—Patagonia, Nestlé, and Tesla—have in different ways transformed their corporate strategy to emphasize “doing good” socially and environmentally while “doing well” economically.

Sustainability in the Supply Chain—PatagoniaFounded by Yvon Chouinard in 1972, Patagonia is a private, outdoor-clothing company. Patagonia’s transition to a sustainability-focused company started in 1988 after several employees in one of their Boston retail stores suddenly fell ill. After a thorough investigation, it was discovered that formaldehyde, emitted from Patagonia’s cotton-based mer-chandise, was cycling into the air. In response, Patagonia committed in 1994 to use only formaldehyde-free, 100 per-cent organic cotton in the manufacture of its clothing; within just 18 months, they achieved that goal.1 Since then, Pata-gonia has examined and modified its entire supply chain from both a corporate social responsibility and environmen-tal viewpoint. Its revised mission statement reflects that ideal: “Build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis.”2

Internally, recycled products constitute a large percentage of the material used in Patagonia’s products. Recycled polyes-ter and nylon, made of postconsumer soda bottles and waste fabric, are used in the production of fleece and linings.3 This reuse cuts down on oil usage and CO2 emissions. All of Patagonia’s wool products are now chlorine-free, preventing the contamination of wastewater in the developing countries where the products are manufactured. Furthermore, Patagonia’s finished products are fully recyclable, and the company has encouraged its customers to properly dispose of their prod-ucts. Any Patagonia product can be dropped off at a retail store for guaranteed recycling.4

Recent concerns about ethics, social responsibility, and sus-tainability transcend national borders. In this era of globaliza-tion, MNCs must be concerned with how they carry out their business and their social role in foreign countries. This chapter examines business ethics and social responsibility in the inter-national arena, and it looks at some of the critical social issues that will be confronting MNCs in the years ahead. The discus-sion includes ethical decision making in various countries, reg-ulation of foreign investment, the growing trends toward environmental sustainability, and current responses to social responsibility by today’s multinationals. The specific objectives of this chapter are

1. EXAMINE ethics in international management and some of the major ethical issues and problems confronting MNCs.

2. DISCUSS some of the pressures on and actions being taken by selected industrialized countries and companies to be more socially and environmentally responsive to world problems.

3. EXPLAIN some of the initiatives to bring greater account-ability to corporate conduct and limit the impact of corrup-tion around the world.

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Nestlé sets environmental objectives, resulting in trackable and measurable progress. From 2005 to 2015, Nestlé cut overall energy consumption by a quarter and greenhouse gas emissions by 40 percent. The use of industrial refriger-ants has been cut by 92 percent, and Nestlé’s chest freezers now consume 50 percent less energy. In 2015, Nestlé was able to achieve zero waste in 15 percent of its global facto-ries. By 2017, Nestlé plans to eliminate 100,000 tons of packaging material.11

Environmental efforts extend down Nestlé’s supply chain, from raw material sourcing to final distribution. Environmen-tal standards are set for all farmers conducting business with Nestlé, and Nestlé supports those farmers through training and informational support. Whenever possible, local farmers are utilized to decrease the environmental impacts from ship-ping raw materials long distances. During the manufacturing process, the Nestlé Environmental Management System tracks energy performance and improves efficiency and qual-ity. Areas for improvement are identified, leading to new manufacturing processes that lead to less waste. Final distri-bution, though handled by third parties, is subject to Nestlé’s environmental performance standards. Mileage and fuel con-sumption are tracked, distribution networks are altered to decrease congestion and noise, and greenhouse gas emis-sions are monitored.12

Continual environmental-friendly innovation is a priority for Nestlé. Nestlé developed an eco-design tool, called the Eco-dEX, to assist with sustainability in its research and develop-ment efforts. Since 2013, over 5,000 products have been tested and assessed using this tool. All new products now undergo an environmental assessment.13  As with Patagonia, customers seem eager to purchase products that are sustain-able, giving Nestlé a competitive advantage over the competi-tion. Nestlé reached number 18 on Fortune magazine’s 2014 “Best Global Green Brands” list.14

Sustainability as a Competitive Advantage—Tesla MotorsTesla Motors, an independent Silicon Valley–based auto manufacturer, focuses on creating and mass-producing reliable electric automobiles. Using technology descended from 19th-century physicist Nikola Tesla, Tesla Motors has developed the longest-range electric car battery on the market. Visionary billionaire Elon Musk, who is also behind SpaceX, cofounded the company in 2003.15

Social sustainability, with an emphasis on employee welfare, has also become a key tenet of Patagonia’s strat-egy. Beginning in 1990, Patagonia instituted a policy of vis-iting every factory that manufactured its goods to evaluate and score working conditions.5 Patagonia refuses to do busi-ness with any factory that does not allow full access or breaks local labor laws. Additionally, third-party audits of factories were established to provide nonbiased assess-ments of the factories. Every factory along its supply chain is listed on its website. In 1999, Patagonia became one of the founding members of the Fair Labor Association.6 Since 1985, Patagonia has donated one percent of its sales to environmental nonprofits.7 In 2002, Chouinard expanded on his vision for corporate sustainability by cofounding “One Percent for the Planet,” an international nonprofit dedicated to philanthropy for environmental organizations. The pro-gram encourages companies to follow Patagonia’s lead and donate one percent of sales to worthwhile, environmentally focused causes. As of 2015, over 1,200 companies across 48 countries have joined the organization. Over 3,300 dif-ferent nonprofits have received funding from the over US$100 million donated by the member companies.8

The decision to invest in sustainable products has not been without repercussions. Chlorine-free wool has been more costly to manufacture, cutting down on profits. Follow-ing the shift to 10 percent organic cotton, Patagonia’s prof-its dropped.9 Furthermore, the high priority that Patagonia puts on only using factories that follow its strict standards means higher labor costs than the competition. However, Patagonia has gained a competitive advantage by doing good. The company has developed a loyal customer base that is willing to pay a premium for the sustainability that Patagonia provides.

Sustainability in Operations and Products—NestléFounded over 150 years ago, Nestlé S.A., a Swiss MNC, is best known for its chocolate and other snack products. With sales of over US$1.1 billion in 2015, the company employs over 339,000 people across 447 factories. Nestlé maintains operations in 197 countries and boasts over 2,000 brands. For Nestlé, sustainability means improving its environmental impact along the entire value chain.10

Nestlé’s sustainable efforts are centered on six core cat-egories: resource efficiency, packaging, products, climate change, natural capital, and information. In each category,

76 Part 1 Environmental Foundation

Unlike previously developed electric cars, which were clunky and unattractive, Tesla aimed to design automobiles that were attractive and high-quality. Tesla’s first vehicle, the Roadster, was designed to be a high-performance sports car. Released in 2008, the Roadster can accelerate from zero to 60 in less than four seconds, reaching top speeds of over 125 miles per hour.16 The Model S, released in 2012, was designed to be a luxury sedan for the masses. Starting at US$57,400, the Model S was introduced for less than half of the cost of the Roadster. The car won multiple awards upon its release, including Motor Trend’s “Car of the Year” award for 2013, and sold over 100,000 units within its first four years.17  In late 2015, Tesla introduced a full-size SUV, named the Model X, as the latest addition to its fleet and in early 2016, the company started taking pre-orders for its forthcoming US$35,000 Model 3. More than a quarter of a mil-lion people pre-ordered the car within the first 72 hours, shat-tering expectations.18

Inspiring sustainability across the entire automobile industry is a secondary goal for the company. To achieve that goal, Tesla has collaborated with several other researchers and car manufacturers to produce greener automobiles. Panasonic joined Tesla’s US$5 billion “Gigafactory” battery production project in 2014, and from 2009 to 2015, Tesla partnered with Mercedes to provide powertrain components for its electric models.19,20,21  In its partnerships with Smart and Toyota, Tesla produced batteries and chargers.22,23 

As an innovator, Tesla has faced some major obstacles. Tesla’s first automobile, the Roadster, faced two high-profile recalls, one of which dealt with the potential loss of control of the car.24,25  In a highly publicized February 2013 article, a New York Times reporter took the Model S on an infamous test drive along the East Coast. Not only did the car fall short of the estimated 200-mile range per charge, but the battery actually ran completely out of power and the car ended up having to be towed.26  Musk estimated that the negative New York Times review resulted in several hundred vehicle can-cellations and cost Tesla US$100 million in valuation.27  Financially, Tesla has invested hundreds of millions of dollars into its operations. Since its founding in 2003, Tesla has only earned a quarterly profit once; Tesla posted a US$300 million loss in 2014.28

Tesla, despite its setbacks, still maintains a competitive advantage from its dedicated investor and customer bases. Customers seem willing to deal with minor issues and recalls for the sake of the overall sustainability goal of the company. By targeting high-income customers with the Roadster, Tesla was able to spend the funds necessary to develop and fine-tune its technology. Investors have also been willing to bet on the idea of Tesla Motors. The IPO on June 29, 2010, raised US$226 million for the company, and in the years since, Tesla’s share price has increased nearly tenfold.29,30

Our opening discussion of Patagonia, Nestlé, and Tesla demonstrates how corporations are shifting their focus from traditional market-responsive strategies to broader approaches that incorporate both business and social or environmental goals. Patagonia has radically transformed its business to focus on what it expects to be increasing demand for “green” products as well as those that contribute to improved working conditions in developing countries. Focusing on six core categories for creating and tracking sustainable goals allowed Nestlé to achieve measurable progress in emissions reductions. Tesla Motors’s Model S is focused on developing and deploying a reason-ably priced all-electric car to the masses. By combining their commitment to social and environmental sustainability, aligned with their business and commercial objec-tives, these three companies appear to be setting an example for a new approach to integrating social and business goals among global corporations, tapping into consum-ers’ desire for products and services that are consistent with their values. This “triple bottom line” approach, which simultaneously considers social, environmental, and economic sustainability (“people, planet, profits”) could make a real and lasting impact on the world’s human and environmental conditions by harnessing business and managerial skills and techniques.

More broadly, recent scandals have called attention to the perceived lack of ethical values and corporate governance standards in business. In addition, assisting impover-ished countries by helping them gain a new level of independence is both responsible and potentially profitable. Indeed, corporate social responsibility is becoming more than just good moral behavior. It can assist in avoiding future economic and environmental setbacks and may be the key to keeping companies afloat.

Chapter 3 Ethics, Social Responsibility, and Sustainability 77

■ Ethics and Social ResponsibilityThe ethical behavior of business and the broader social responsibilities of corporations have become major issues in the United States and all countries around the world. Eth-ical scandals and questionable business practices have received considerable media atten-tion, aroused the public’s concern about ethics in international business, and brought attention to the social impact of business operations.

Ethics and Social Responsibility in International ManagementUnbiased ethical decision-making processes are imperative to modern international business practices. It is difficult to determine a universal ethical standard when the views and norms in one country can vary substantially from those in others. Ethics, the study of morality and standards of conduct, is often the victim of subjectivity as it yields to the will of cultural relativism, or the belief that the ethical standard of a country is based on the culture that created it and that moral concepts lack universal application.31

The adage “When in Rome, do as the Romans do” is derived from the idea of cultural relativism and suggests that businesses and their managers should behave in accordance with the ethical standards of the country they are active in, regardless of MNC headquarters location. It is necessary, to some extent, to rely on local teams to execute under local rule; however, this can be taken to extremes. While a business whose only objective is to make a profit may opt to take advantage of these differ-ences in norms and standards in order to legally gain leverage over the competition, it may find that negative consumer opinion about unethical business practices, not to mention potential legal action, could affect the bottom line. Dilemmas that arise from conflicts between ethical standards of a country and business ethics, or the moral code guiding business behavior, are most evident in employment and business practices; recognition of human rights, including women in the workplace; and corruption. The newer area of corporate social responsibility (CSR) is closely related to ethics. However, we discuss CSR issues separately. Ethics is the study of or the learning process involved in understanding morality, while CSR involves taking action. Fur-thermore, the area of ethics has a lawful component and implies right and wrong in a legal sense, while CSR is based more on voluntary actions. Business ethics and CSR therefore may be viewed as two complementary dimensions of a company’s overall social profile and position.

Ethics Theories and PhilosophyThere are a range of ethical theories and approaches around the world, many emanat-ing from religious and cultural traditions. We focus on the cultural factors in Part Two of the book. Here we review three tenets from Western philosophy and briefly describe Eastern philosophy, which can be used to evaluate and inform international manage-ment decisions. The International Management in Action feature explores how these perspectives might be used to inform the ethics of a specific international business decision.

Kantian philosophical traditions argue that individuals (and organizations) have responsibilities based on a core set of moral principles that go beyond those of narrow self-interest. In fact, a Kantian moral analysis rejects consequences (either conceivable or likely) as morally irrelevant when evaluating the choice of an agent: “The moral worth of an action does not lie in the effect expected from it, nor in any principle of action which requires to borrow its motive from this expected effect.”32  Rather, a Kantian approach asks us to consider our choices as implying a general rule, or maxim, that must

ethicsThe study of morality and standards of conduct.

corporate social responsibility (CSR)The actions of a firm to benefit society beyond the requirements of the law and the direct interests of the firm.

78 Part 1 Environmental Foundation

be evaluated for its consistency as a universal law. For Kant, what is distinctive about rational behavior is not that it is self-interested or even purpose driven, though all actions do include some purpose as part of their explanation. Instead, rational beings, in addition to having purposes and being able to reason practically in their pursuit, are also capable of evaluating their choices through the lens of a universal law, what Kant calls the moral law, or the “categorical imperative.”33 From this perspective, we ought always to act under a maxim that we can will consistently as a universal law for all rational beings similarly situated.

Aristotelian virtue ethics focus on core, individual behaviors and actions and how they express and form individual character. They also consider social and institutional arrangements and practices in terms of their contribution to the formation of good character in individuals. A good, or virtuous, individual does what is right for the right reasons and derives satisfaction from such actions because his or her character is rightly formed. For Aristotle, moral success and failure largely come down to a matter of right desire, or appetite: “In matters of action, the principles of initiating motives are the ends at which our actions are aimed. But as soon as people become corrupted by pleasure or pain, the goal no longer appears as a motivating principle: he no longer sees that he should choose and act in every case for the sake of and because of this end. For vice tends to destroy the principle or initiating motive of action.”34 It is important to have an understanding of what is truly good and practical wisdom to enable one to form an effective plan of action toward realizing what is good; however, absent a fixed and habitual desire for the good, there is little incentive for good actions. There is also an important social component to virtue theory insofar as one’s formation is a social process. The exemplars and practices one finds in one’s cultural context guide one’s moral development. Virtue theory relies heavily on existing practices to provide an account of what is good and what character traits contribute to pursuing and realizing the good in concrete ways.

Utilitarianism—a form of consequentialism—favors the greatest good for the great-est number of people under a given set of constraints.35 A given act is morally correct if it maximizes utility, that is, if the ratio of benefit to harm (calculated by taking every-one affected by the act into consideration) is greater than the ratio resulting from an alternative act. This theory was given its most famous modern expression in the works of Jeremy Bentham (1988) and John Stuart Mill (1957), two English utilitarians writing in the 18th and 19th centuries, both of whom emphasized the greatest happiness prin-ciple as their moral standard.36,37 Utilitarianism is an attractive perspective for business decision making, especially in Western countries, because its logic is similar to an eco-nomic calculation of utility or cost-benefit, something many Western managers are accus-tomed to doing.

Eastern philosophy—which broadly can include various philosophies of Asia, including Indian philosophy, Chinese philosophy, Iranian philosophy, Japanese philoso-phy, and Korean philosophy—tends to view the individual as part of, rather than separate from, nature. Many Western philosophers generally assume as a given that the individual is something distinct from the entire universe, and many Western philosophers attempt to describe and categorize the universe from a detached, objective viewpoint. Eastern perspectives, on the other hand, typically hold that people are an intrinsic and insepa-rable part of the universe and that attempts to discuss the universe from an objective viewpoint, as though the individual speaking were something separate and detached from the whole, are inherently absurd.

In international management, executives may rely upon one or more of these perspectives when confronted with decisions that involve ethics or morality. While they may not invoke the specific philosophical tradition by name, they likely are drawing from these fundamental moral and ethical beliefs when advancing a specific agenda or decision. The International Management in Action box regarding an offshoring decision shows how a given action could be informed by each of these perspectives.

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■ Human RightsHuman rights issues present challenges for MNCs as there is currently no universally adopted standard of what constitutes acceptable behavior. It is difficult to list all rights inherent to humanity because there is considerable subjectivity involved, and cultural dif-ferences exist among societies. Some basic rights include life, freedom from slavery or torture, freedom of opinion and expression, and a general ambiance of nondiscriminatory practices.38  One violation of human rights that resonated with MNCs and made them question whether to move operations into China was the violent June 1989 crackdown on student protesters in Beijing’s Tiananmen Square. Despite this horrific event, most MNCs continued their involvement in China, although friction still exists between countries with high and low human rights standards. Even South Africa is beginning to experience the healing process of transitioning to higher human rights standards after the 1994 disman-tling of apartheid, the former white government’s policy of racial segregation. Unfortu-nately, human rights violations are still rampant worldwide. For several decades, for example, Russia has experienced widespread human trafficking, but this practice has accelerated in recent years.39 Here, we take a closer look at women in the workplace.

Women’s rights and gender equity can be considered a subset of human rights. While the number of women in the workforce has increased substantially worldwide, most are still experiencing the effects of a “glass ceiling,” meaning that it is difficult, if

International Management in Action

The Ethics of an Offshoring Decision

The financial services industry has been especially active in offshoring. Western investment banks including Citi-group, Deutsche Bank, Goldman Sachs, Credit Suisse, and UBS have established back-office functions in India. JP Morgan was the first to offshore staff to the country in 2001 and has more than 8,000 staff in Mumbai, nearly 5 percent of its 170,000 employees worldwide. In Octo-ber 2007, Credit Suisse announced the expansion of its center of excellence in Pune, India, with 300 new jobs, bringing staff numbers to 1,000 by December. Deutsche Bank has 3,500 staff in Bangalore and Mumbai. UBS began outsourcing work to third-party information tech-nology vendors in 2003 and has 1,220 employees in Hyderabad and Mumbai. Goldman Sachs started offshor-ing to India three years ago and has about 2,500 employees there. On October 17, 2007, JP Morgan announced plans to build a back-office workforce of 5,000 in the Philippines over the next two years. Its tra-ditional offshoring center of Mumbai in India has become overcrowded by investment banks that have set up similar operations. The bank will develop credit card and treasury services in the Philippines. A source close to the bank said the move was to diversify its back-office loca-tions and because JP Morgan has strong links with a human resources network in the country. Mark Kobayashi-Hillary, an outsourcing specialist, said: “Because India’s finance center is almost wholly based in Mumbai, the resources are finite and there is a supply and demand problem. It’s no surprise people are looking elsewhere. But banks are not just after keeping costs down; these moves are also strategic.” He said he was surprised that banks had not opened more offices in the Philippines,

considering its strong links with the U.S., cheap rent, and wealth of resources. “In Manila there is a high density of people who have worked in the financial sector with the skills that investment banks look for. We should see more banks setting up shop there soon.” Ethical philosophy and reasoning could be used to inform offshoring decisions such as these. A Kantian approach to offshoring would require us to consider a set of principles in accord with which offshoring choices were made such that decisions were measured against these core tenets, such as a corporate code of conduct. A virtue theory perspective would suggest that the deci-sion should consider the impact on communities and a goal of humans flourishing more generally; such an analysis could include economic as well as social impacts. A utilitarian perspective would urge that ben-efits and costs be measured; e.g., who is losing jobs, who is gaining, and do the gains (measured in either jobs, income, utility, or quality of life) outweigh the losses. An Eastern philosophical approach would sug-gest a broader, more integrative and longer-term view, considering impacts not just on humans but also on the broader natural environment in which they operate. Taken together, an understanding of these ethical perspectives could help managers to decide how to make their own ethical decisions in the international business environment.

Source: Jonathan Doh and Bret Wilmot, “The Ethics of Offshoring,” Working Paper, Villanova University, 2010; David Smith, “Offshoring: Political Myths and Economic Reality,” World Economy, March 2006, pp. 249–256.

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not impossible, to reach the upper management positions. Japan is a good example because both harassment and a glass ceiling have existed in the workplace. Sexual harass-ment also remains a major social issue in Japan. Many women college graduates in Japan are still offered only secretarial or low-level jobs. Japanese management still believes that women will quit and get married within a few years of employment, leading to a two-track recruiting process: one for men and one for women.40,41 Japan ranked 101st in the “gender gap index” study by the World Economic Forum, an international nonprofit organization that measured the economic opportunities and political empowerment of women by nation in 2015. Iceland ranked no. 1, and the U.S. was no. 28. Japanese women make up only 8 percent of senior executives and managers, a tiny share compared with 21 percent in the U.S., 38 percent in China, and 26 percent in France, according to Grant Thornton’s 2015 Women in Business report. Two-thirds of Japanese businesses still have no female members on their senior leadership teams.42

Equal employment opportunities may be more troubled in Japan than other coun-tries, but the glass ceiling is pervasive throughout the world. Today, women earn less than men for the same job in the United States, although progress has been made in this regard. France, Germany, and Great Britain have seen an increase in the number of women not only in the workforce but also in management positions. Unfortunately, women in management tend to represent only the lower level and do not seem to have the resources to move up in the company. This is partially due to social factors and perceived levels of opportunity or lack thereof. The United States, France, Germany, and Great Britain all have equal opportunity initiatives, whether they are guaranteed by law or are represented by growing social groups. Despite the existence of equal opportunity in French and German law, the National Organization for Women in the United States, and British legislation, there is no guarantee that initiatives will be implemented. It is a difficult journey as women attempt to make their mark in the workplace, but soon it may be possible for them to break through the glass ceiling.

Labor, Employment, and Business PracticesLabor policies vary widely among countries around the world. Issues of freedom to work, freedom to organize and engage in collective action, and policies regarding notification and compensation for layoffs are treated differently in different countries. Political, eco-nomic, and cultural differences make it difficult to agree on a universal foundation of employment practices. It does not make much sense to standardize compensation pack-ages within an MNC that spans both developed and underdeveloped nations. Elements such as working conditions, expected consecutive work hours, and labor regulations also create challenges in deciding which employment practice is the most appropriate. For example, the low cost of labor entices businesses to look to China; however, workers in China are not well paid, and to meet the demand for output, they often are forced to work 12-hour days, seven days a week. In some cases, children are used for this work. Child labor initially invokes negative associations and is considered an unethical employ-ment practice. The reality is that of the 168  million children age 5–17 working globally in 2016, most are engaged in work to help support their families.43  In certain countries it is necessary for children to work due to low wages. UNICEF and the World Bank recognize that in some instances, family survival depends on all members working, and that intervention is necessary only when the child’s developmental welfare is compro-mised. There has been some progress in the reduction of child labor. It continues to decline, especially among girls, but only modestly, with the International Labour Orga-nization reporting a 25 percent reduction between 2000 and 2015.44 There has also been considerable progress in the ratification of ILO standards concerning child labor. Conven-tion 182 (on the worst forms of child labor) has been ratified by 180 countries, with only India and a few Pacific island nations yet to endorse. Convention 138 (on minimum age), however, has found less acceptance and remains yet to be ratified by nearly two dozen countries, including the United States, India, and Australia. Roughly one-quarter of the children in the world live in countries that have not ratified Convention 138.45

Chapter 3 Ethics, Social Responsibility, and Sustainability 81

In early 2010, the issue of relatively low wages paid by Chinese subcontractors made the headlines after a number of suicides by workers at factories run by Foxconn, one of the largest contractors for electronics firms such as Apple, and a strike by work-ers at a Honda plant. A year later, in May 2011, an explosion at a Foxconn iPad factory killed two employees. In a survey of Foxconn employees, over 43 percent of workers stated that they have seen or been part of a workplace accident.46  As a result of these controversies, Foxconn, which employs more than 800,000 workers in China making products for companies such as Dell, Hewlett-Packard, and Apple, agreed to raise its base wage by more than 30 percent. Earlier, Honda had raised wages at some of its factories by 24 percent.47  Additional pressure from Apple in 2012 further improved employee safety and reduced working hours at Foxconn. By July 2013, weekly work hours were limited to just 49 per employee; this reduced overtime hours from 80 per month to just 36. Apple also partnered with the Fair Labor Association to independently audit the safety of the Foxconn plants.48 Some analysts believe these higher wages, com-bined with the longstanding shortage and high turnover of factory workers in China, will eventually result in the lowest wage manufacturing moving to other countries, such as Vietnam, while higher value-added production will remain in China.

Ensuring that all contractors along the global supply chain are compliant with company standards is an ongoing issue and one that is not without challenges. This issue came to a head once again when a Bangladesh factory that produced products for Walmart caught fire in November 2012, killing 112 workers. Walmart immediately responded by severing all ties with suppliers who use subcontractors without Walmart’s knowledge and began requiring all overseas factories to pass audits before they could be used to produce Walmart products.49  Yet, a subsequent collapse of a garment factory in Bangladesh in April of 2013 that killed more than 1,000 and a fire not two weeks later, also in Bangladesh, killing eight, underscored the challenges companies face in trying to develop and implement policies for production that is largely outsourced. After a number of NGOs pressed companies to take responsibility for the conditions that allowed for these tragedies, several global apparel firms, including Swedish-based retailer H&M; Inditex, owner of the Zara chain; the Dutch retailer C&A; and British companies Primark and Tesco, agreed to a plan to help pay for fire safety and building improvements in Bangladesh. The Bangladesh government announced that it would improve its labor laws, raise wages, and ease restrictions on forming trade unions.50 Walmart and Gap chose not to sign on to the European-led agreement out of concerns that they could be subject to litigation. Instead, they initiated a separate agreement with U.S. retail trade groups and a bipartisan think tank. These challenges, and the reforms they bring, should contribute to improved workers’ conditions and help prevent similar tragedies.

Environmental Protection and DevelopmentConservation of natural resources is another area of ethics and social responsibility in which countries around the world differ widely in their values and approach. Many poor, developing countries are more concerned with improving the basic quality of life for their citizens than worrying about endangered species or the quality of air or water. There are several hypotheses regarding the relationship between economic development, as measured by per capita income, and the quality of the natural environment. The most widely accepted thesis is represented in the Environmental Kuznets Curve (EKC), which hypothesizes that the relationship between per capita income and the use of natural resources and/or the emission of wastes has an inverted U-shape. (See Figure 3–1.) According to this specification, at relatively low levels of income, the use of natural resources and/or the emission of wastes increase with income. Beyond some turning point, the use of the natural resources and/or the emission of wastes decline with income. Reasons for this inverted U-shaped relationship are hypothesized to include income-driven changes in (1) the composition of production and/or consumption, (2) the prefer-ence for environmental quality, (3) institutions that are needed to internalize externalities, and/or (4) increasing returns to scale associated with pollution abatement. The term

82 Part 1 Environmental Foundation

“EKC” is based on its similarity to the time-series pattern of income inequality described by Simon Kuznets in 1955. A 1992 World Bank Development Report made the notion of an EKC popular by suggesting that environmental degradation can be slowed by policies that protect the environment and promote economic development. Subsequent statistical analysis, however, showed that while the relationship might hold in a few cases, it could not be generalized across a wide range of resources and pollutants.51

Despite difficulty in achieving international consensus on environmental reform, recent progress holds promise. For two weeks in December 2015, representatives from over 185 countries converged in the suburbs of Paris at the 21st annual United Nations Climate Change Conference. Throughout the conference, representatives debated and drafted a wide-ranging greenhouse gas agreement that aims to drastically reduce global emissions beginning in 2020. On December 12, 2015, the text of the “Paris Agreement” was adopted by all 196 parties at the convention. A summary of some of the agreement’s 27 articles is included in Table 3-1.

Figure 3–1The Environmental Kuznets Curve

Po

lluti

on

Income per capita

Table 3–1Highlights of the Paris Agreement on Climate Policy

Article 2•   Outlines the objectives of the agreement, which includes limiting the increase in the average temperature globally to under 

2 degrees Celsius and aiming for just a 1.5 degrees Celsius increase. Also states goals of developing lower greenhouse gas emissions technology and structuring financing to nations so that adaption to the impacts of climate change and lower greenhouse gas emissions technology is implemented.

Article 4•   Affirms that the global peaking of greenhouse gas emissions should be reached as soon as possible to ensure that goals 

can be reached. The long-term goal is to achieve net zero global emissions by 2070. Each individual country is tasked with determining its own contributions, with developed countries tasked with taking the lead. Smaller, less developed nations are to be assisted by developed nations.

Article 7•  Requires countries to submit reports indicating their strategies for adapting to the effects of climate change.Article 8•  Provides a method for smaller, more vulnerable countries to mitigate potential financial losses due to climate change.Article 9•   Requires more developed countries to provide financing to developing countries to meet emissions goals and adapt to the 

effects of climate change.Article 13•  Requires all countries to be transparent with their progress towards emissions reduction goals.Article 14•  Requires that every five years, countries are to update, evaluate, and set new targets based on their progress.

Source: Summarized from the Paris Agreement,  https://unfccc.int/.

Chapter 3 Ethics, Social Responsibility, and Sustainability 83

For the Paris Agreement to officially take effect, ratification of the deal must now take place by at least 55 countries representing at least 55 percent of global emissions. As the two largest emitters of greenhouse gas, China and the United States are critical in reaching the 55 percent emission threshold. The signing of the agreement officially commenced on April 22, 2016, in New York City. If fully ratified, the Paris Agreement will be the largest international agreement on environmental reform since the Kyoto Protocol of 1997.

Despite improvements in environmental protection and ethical business practices, many companies continue to violate laws and/or jeopardize safety and environmental concerns in their operations. This is particularly true in emerging and developing coun-tries, where environmental laws may be reasonably strong but are not as vigorously enforced as in higher income countries. As one example, in April 2016, China’s govern-ment announced it would investigate a report that nearly 500 students became sick with various ailments, including cancer, at a school built near a recently closed chemical plant in Changzhou.52    As citizens become more demanding that governments and businesses take action to address environmental pollution, and the media report on these controver-sies, officials are likely to feel pressure to respond.    

■ Globalization and Ethical Obligations of MNCsAll this prompts the question, how much responsibility do MNCs have in changing these practices? Should they adopt the regulations in the country of origin or yield to those in the country of operation? One remedy could be to instill a business code of ethics that extends to all countries, or to create contracts for situations that may arise. The nearby International Management in Action box regarding Volkswagen underscores how, despite a strong code of conduct, VW found itself the subject of numerous ethical problems, which resulted in lawsuits and severely tarnished its reputation.

“Doing the right thing” is not always as simple as it appears. Some years back, Levi Strauss experienced this issue with its suppliers from Bangladesh. Children under the age of 14 were working at two locations, which did not violate the law in Bangladesh but did go against the policy of Levi Strauss. Ultimately, Levi Strauss decided to con-tinue paying the wages of the children and secured a position for them once they reached the age of 14, after their return from schooling.53 While the level of involvement is hard to standardize, having a basic set of business ethics and appropriately applying it to the culture in which one is managing is a step in the right direction. Managers need to be cautious not to blur the lines of culture in these situations. The Prince of Wales was once quoted as saying, “Business can only succeed in a sustainable environment. Illiter-ate, poorly trained, poorly housed, resentful communities, deprived of a sense of belong-ing or of roots, provide a poor workforce and an uncertain market.”54  Businesses face much difficulty in attempting to balance organizational and cultural roots with the advancement of globalization.

One recent phenomenon in response to globalization has been not just to off-shore low-cost labor-intensive practices, as described in Chapter 1, but to transfer a large percentage of current employees of all types to foreign locations. The inexpen-sive labor available through offshore outsourcing in India has aided many institutions, but also has put a strain on some industries, particularly home-based technology ser-vices. More than a third of the global IT workforce is now located in India. It is estimated that IBM now bases more than 30 percent of its employees in India and Accenture, a company specializing in management consulting, technology services, and outsourcing, now has more than double the number of employees in India than it has in the United States. With labor costs in India at less than half of those in the United States, companies like Accenture gain a competitive advantage by offering similar low-cost services, but with consulting expertise that is not yet matched by Indian cohorts.55

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The transfer of the labor force overseas creates an interesting dynamic in the scope of ethics and corporate responsibility. While most international managers concern them-selves with understanding the social culture in which the corporation is enveloped and how that can mesh with the corporate culture, this recent wave involves the extension of an established corporate culture into a new social environment. The difference here is that the individuals being moved offshore are part of a corporate citizenship, meaning that they will identify with the corporation and not necessarily the outside environment; the opposite occurs when the firm moves to another country and seeks to employ local citizens. Accenture proves that it is possible to succeed with such an effort, but as more and more companies follow suit, other questions and concerns may arise. How will the two cultures work together? Will employees adhere to the work schedule of the home or the host country? Will the host country be open or reluctant to an influx of new citizens?

International Management in Action

Volkswagen’s Challenges with Ethical Business Practices

In the fiercely competitive global automotive industry, the Volkswagen Group (VW) has pursued an ongoing global strategy that emphasizes both centralization and regional adaptation and leverages the range of capa-bilities from its various brands and their production. VW operates manufacturing facilities in nearly 30 countries, including two joint ventures in China, and sells its cars in over 150 countries. After two decades of sales lead-ership in Europe, VW reached a significant milestone in its 78-year history when, for the first half of 2015, it surpassed Toyota to become the top automobile pro-ducer by sales worldwide. However, celebrations would be short-lived. In late 2015, VW found itself in a major ethical crisis after numerous independent investigations confirmed that VW’s engine software was intentionally bugged to alter a car’s performance when the vehicle was under-going emissions testing. The VW-manufactured diesel engines were programmed to function in such a way that good gas mileage could be achieved during road tests (when emissions were not being tested) and acceptable nitrogen oxide readings were emitted dur-ing lab tests (when gas mileage was not being tested). In reality, however, the amount of nitrogen oxide emit-ted during regular road driving was nearly 40 times greater than what was emitted during testing, far exceeding permissible emissions levels regulated in the United States and Europe. In September 2015, the U.S. Environmental Protection Agency (EPA) formally issued a Notice of Violation to VW. The software modification was installed on nearly 11 million vehicles across the globe, affecting all VW diesel engines manufactured between 2009 and 2015. It has been speculated that over 30 management-level employees participated in or had knowledge of the intentional attempt to cheat on these emissions tests. Within hours of the issuance of the EPA Notice of Vio-lation, the scandal was receiving worldwide news cover-age. Perhaps learning from the experience of other companies entangled in ethical scandals over the last

several years, VW was quick to assume full responsibility. A number of key figureheads, including global CEO Mar-tin Winterkorn and American President Michael Horn, resigned. Maintaining transparency, including open testi-mony before the U.S. Congress, was a key element of VW’s approach to rebuilding public trust. “We’ve totally screwed up,” stated former American VW President Horn. The financial fallout from the scandal has been dev-astating to VW. After starting the year as the top global automaker, VW slumped in the final few months of 2015, and annual sales declined for the first time in 13 years. The company’s stock price dropped by a third over the last several months of 2015. In the third quarter of 2015, VW posted its first quarterly loss in 15 years. VW has set aside over $7 billion to cover costs incurred due to the recall and repair of the vehicles. However, as of mid 2016, Volkswagen still did not have an economical approach to lowering emissions in the affected cars.   In November 2015, the company offered vouchers worth $1,000 to all U.S. affected customers, and in April 2016, Volkswagen gave U.S. customers the option to return their vehicle for a full refund. No compensation package, however, has been extended to those custom-ers outside of the U.S. Fines and associated lawsuits are likely to cost VW even more in the coming years. The EPA has the ability to fine VW $37,500 per car sold in the United States—or about $18 billion. Over 500 law-suits have already been filed in the United States against VW, with additional pressure due to a pending $46 bil-lion suit filed by the U.S. Department of Justice.   In its 15-page code of conduct, published in the years prior to the emissions scandal, VW emphasizes its com-mitment to its strong reputation. The trust that the public placed in the VW brand aided in its growth from a small German automaker to a global giant. Now, that reputation appears to be in jeopardy. Will VW be able to recover?

Sources: Volkswagen website, www.vw.com/; Russell Hotten, “Volkswa-gen: The Scandal Explained,”  BBC, December 10, 2015, www.bbc.com/news/business-34324772.

Chapter 3 Ethics, Social Responsibility, and Sustainability 85

The latter may not be a current concern due to the infrequency of offshoring, but MNCs may face a time when they have to consider more than just survival of the company. One must also bear in mind the effects these choices will have on both cultures.

Reconciling Ethical Differences across CulturesAs noted in the introduction to this section, ethical dilemmas arise from conflicts between ethical standards of a country and business ethics, or the moral code guiding business behavior. Most MNCs seek to adhere to a code of ethical conduct while doing business around the world, yet must make some adjustments to respond to local norms and values. Navigating this natural tension can be challenging. One approach advocated by two prominent business ethicists suggests that there exist implied social contracts that gener-ally govern behavior around the world, some of which are universal or near universal. These “hyper” norms include fundamental principles like respect for human life or abstention from cheating, lying, and violence. Local community norms are respected within the context of such hyper norms when they deviate from one society to another.

This approach, called “Integrative Social Contracts Theory” (ISCT), attempts to navigate a moral position that does not force decision makers to engage exclusively in relativism versus absolutism. It allows substantial latitude for nations and economic com-munities to develop their unique concepts of fairness but draws the line at flagrant neglect of core human values. It is designed to provide international managers with a framework when confronted with a substantial gap between the apparent moral and ethical values in the country in which the MNC is headquartered and the many countries in which it does business. Although ISCT has been criticized for its inability to provide precise guidance for managers under specific conditions, it nonetheless offers one approach to helping reconcile a fundamental contradiction in international business ethics.56

Corporate Social Responsibility and SustainabilityIn addition to expectations that they adhere to specific ethical codes and principles, corporations are under increasing pressure to contribute to the societies and communities in which they operate and to adopt more socially responsible business practices through-out their entire range of operations. Corporate social responsibility (CSR) can be defined as the actions of a firm to benefit society beyond the requirements of the law and the direct interests of the firm.57 It is difficult to provide a list of obligations since the social, economic, and environmental expectations of each company will be based on the desires of the stakeholders. Pressure for greater attention to CSR has emanated from a range of stakeholders, including civil society (the broad societal interests in a given region or country) and from nongovernmental organizations (NGOs). These groups have urged MNCs to be more responsive to the range of social needs in developing countries, includ-ing concerns about working conditions in factories or service centers and the environ-mental impacts of their activities.58  The increased CSR efforts by businesses appear to be effective in increasing public opinion; more than 50 percent of global respondents to a recent Edelman survey expressed trust in business and government in 2016, reaching a record high (see Figure 3–2).59

Many MNCs such as Intel, HSBC, Lenovo, TOMS, and others take their CSR commitment seriously (see Brief Integrative Case 1.2 at the end of Part One). These firms have integrated their response to CSR pressures into their core business strategies and operating principles around the world (see the section “Response to Social and Organizational Obligations”.

Civil Society, NGOs, MNCs, and Ethical Balance The emergence of organized civil society and NGOs has dramatically altered the business environment globally and the role of MNCs within it. Although social movements have been part of the political and economic landscape for centuries, the emergence of NGO activism in the United States

nongovernmental organizations (NGOs)Private, not-for-profit organizations that seek to serve society’s interests by focusing on social, political, and economic issues such as poverty, social justice, education, health, and the environment.

86 Part 1 Environmental Foundation

during the modern era can be traced to mid-1984, when a range of NGOs, including church and community groups, human rights organizations, and other antiapartheid activ-ists, built strong networks and pressed U.S. cities and states to divest their public pension funds of companies doing business in South Africa. This effort, combined with domes-tic unrest, international governmental pressures, and capital flight, posed a direct, sus-tained, and ultimately successful challenge to the white minority rule, resulting in the collapse of apartheid.

Since then, NGOs generally have grown in number, power, and influence. Large global NGOs such as Save the Children, Oxfam, CARE, Amnesty International, World Wildlife Fund, and Conservation International are active in all parts of the world. Their force has been felt in a range of major public policy debates, and NGO activism has been responsible for major changes in corporate behavior and governance. Some observ-ers now regard NGOs as a counterweight to business and global capitalism. NGO criti-cisms have been especially sharp in relation to the activities of MNCs, such as Nike, Levi’s, Chiquita, and others whose sourcing practices in developing countries have been alleged to exploit low-wage workers, take advantage of lax environmental and workplace standards, and otherwise contribute to social and economic problems. Three recent exam-ples illustrate the complex and increasingly important impact of NGOs on MNCs.

In November 2015, on the opening day of the United Nations climate summit in Paris, Morgan Stanley and Wells Fargo announced that they would no longer provide financing to coal-mining companies in both the developed and developing world. Morgan Stanley also stated that it, as a financier, has a responsibility to guide the global com-munity towards a low-carbon economy. This announcement came after several months of aggressive pressure and lobbying by environmental protection groups, including the Rainforest Action Network (RAN). An online petition initiated by RAN drew thousands of signatures.60 After heavy lobbying from NGOs, in August 2003, the U.S. pharmaceu-tical industry dropped its opposition to relaxation of intellectual property provisions under the WTO to make generic, low-cost antiviral drugs available to developing coun-tries facing epidemics or other health emergencies.61 In November 2009, after nearly two years of student campaigning in coordination with the apparel workers, a Honduran workers’ union concluded an agreement with Russell Athletics, the apparel manufacturer owned by Fruit of the Loom, that puts all of the workers back to work, provides com-pensation for lost wages, recognizes the union and agrees to collective bargaining, and provides access for the union to all other Russell apparel plants in Honduras for union organizing drives in which the company will remain neutral. According to a November 18,

Figure 3–2Public Trust Reaches Record Highs in 2016

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from 2016  Edelman Trust Barometer, www.edelman.com/insights/intellectual-property/2016-edelman-trust-barometer/.

50%

47%

46%

38%

55%

53%

49%

43%

35%

40%

45%

50%

55%

60%

2012 2013 2014 2015 2016

NGOs MediaBusinesses Government

Chapter 3 Ethics, Social Responsibility, and Sustainability 87

2009, press release of United Students Against Sweatshops, this has been an “unprece-dented victory for labor rights.”62

Many NGOs recognize that MNCs can have positive impacts on the countries in which they do business, often adhering to higher standards of social and environmental responsibility than local firms. In fact, MNCs may be in a position to transfer “best practices” in social or environmental actions from their home to host countries’ markets. In some instances, MNCs and NGOs collaborate on social and environmental projects and in so doing contribute both to the well-being of communities and to the reputation of the MNC. The emergence of NGOs that seek to promote ethical and socially respon-sible business practices is beginning to generate substantial changes in corporate management, strategy, and governance.

Response to Social and Organizational Obligations MNCs are increasingly en-gaged in a range of responses to growing pressures to contribute positively to the social and environmental progress of the communities in which they do business. One response is the agreements and codes of conduct in which MNCs commit to maintain certain standards in their domestic and global operations. These agreements, which include the U.N. Global Compact (see Table 3–2), the Global Reporting Initiative, the social accountability “SA8000” standards, and the ISO 14000 environmental qual-ity standards, provide some assurances that when MNCs do business around the world, they will maintain a minimum level of social and environmental standards in the workplaces and communities in which they operate.63,64 These codes help offset the real or perceived concern that companies move jobs to avoid higher labor or environ-mental standards in their home markets. They may also contribute to the raising of standards in the developing world by “exporting” higher standards to local firms in those countries.

Another interesting trend among businesses and NGOs is the movement toward increasing the availability of “fairly traded” products. Beginning with coffee and moving to chocolate, fruits, and other agricultural products, fair trade is an organized social movement and market-based approach that aims to help producers in developing coun-tries obtain better trading conditions and promote sustainability. See the A Closer Look box for a discussion of fair trade systems and products.

fair tradeAn organized social movement and market-based approach that aims to help producers in developing countries obtain better trading conditions and promote sustainability.

Table 3–2Principles of the Global Compact

Human Rights

Principle 1: Support and respect the protection of international human rights within their sphere of influence.Principle 2: Make sure their own corporations are not complicit in human rights abuses.Labor

Principle 3: Freedom of association and the effective recognition of the right to collective bargaining.Principle 4: The elimination of all forms of forced and compulsory labor.Principle 5: The effective abolition of child labor.Principle 6: The elimination of discrimination with respect to employment and occupation.Environment

Principle 7: Support a precautionary approach to environmental challenges.Principle 8: Undertake initiatives to promote greater environmental responsibility.Principle 9: Encourage the development and diffusion of environmentally friendly technologies.Anticorruption

Principle 10: Business should work against all forms of corruption, including extortion and bribery.

Source: From The Ten Principles of the UN Global Compact, by The United Nations, © 2016 United Nations. Reprinted with the permission of the United Nations.

88

Sustainability In the boardroom, the term sustainability may first be associated with financial investments or the hope of steadily increasing profits, but for a growing number of companies, this term means the same to them as it does to an environmental conser-vationist. Partially this is due to corporations recognizing that dwindling resources will eventually halt productivity, but the World Economic Forum in Davos, Switzerland, has also played a part in bringing awareness to this timely subject. In a report published in 2012, the World Economic Forum discussed the challenges created by the speed of busi-ness growth. With half as many people living in poverty as just 30 years ago, the con-sumer class is growing rapidly in emerging markets. The report focused on how sustainable consumption of energy and resources can be used to ease the problems brought about from this need for rapid business scaling.65

While the United States has the Environmental Protection Agency to provide infor-mation about and enforce environmental laws,66  the United Nations also has a division dedicated to the education, promotion, facilitation, and advocacy of sustainable practices and environmentally sound concerns called the United Nations Environment Programme (UNEP).67 The degree to which global awareness and concern are rising extends beyond laws and regulations, as corporations are now taking strides to be leaders in this “green” movement.

Walmart, one of the most well-known and pervasive global retailers, has begun to recognize the numerous benefits of the adage, “Think globally, act locally.” Walmart has set three broad corporate goals in regards to sustainability: to use 100 percent renewable energy, to achieve zero-waste, and to sell products that are sustainable for the environ-ment and people.68  Working with environmentalists, it discovered that many changes in production and supply chain practices could reduce waste and pollution and therefore reduce costs. By cutting back on packaging, Walmart saves an estimated $2.4 million a

sustainabilityDevelopment that meets humanity’s needs without harming future generations.

A Closer Look

Fair Trade in the U.S.: Fair trade USA http://www.fairtradeusa.org/

Fair Trade helps farming families across Latin America, Africa, and Asia to improve the quality of life in their communities. Fair Trade certification empowers farm-ers and farm workers to lift themselves out of poverty by investing in their farms and communities, protect-ing the environment, and developing the business skills necessary to compete in the global marketplace. Fair Trade is much more than a fair price. Fair Trade principles include

• Fair price: Democratically organized farmer groups receive a guaranteed minimum floor price and an additional premium for certified organic products. Farmer organizations are also eligible for preharvest credit.

• Fair labor conditions: Workers on Fair Trade farms enjoy freedom of association, safe working condi-tions, and living wages. Forced child labor is strictly prohibited.

• Direct trade: With Fair Trade, importers purchase from Fair Trade producer groups as directly as possible, eliminating unnecessary middlemen and empowering farmers to develop the business capacity necessary to compete in the global marketplace.

• Democratic and transparent organizations: Fair Trade farmers and farm workers decide democrati-cally how to invest Fair Trade revenues.

• Community development: Fair Trade farmers and farm workers invest Fair Trade premiums in social and business development projects like scholar-ship programs, quality improvement training, and organic certification.

• Environmental sustainability: Harmful agrochemi-cals and GMOs are strictly prohibited in favor of environmentally sustainable farming methods that protect farmers’ health and preserve valuable eco-systems for future generations.

Fair Trade USA, a nonprofit organization, is the only inde-pendent, third-party certifier of Fair Trade products in the U.S. and one of 20 members of Fairtrade Labeling Orga-nizations International (FLO). Fair Trade USA’s rigorous audit system, which tracks products from farm to finished product, verifies industry compliance with Fair Trade cri-teria. Fair Trade USA  allows U.S. companies to display the Fair Trade Certified label on products that meet strict Fair Trade standards. Fair Trade certification is currently available in the U.S. for coffee, tea and herbs, cocoa and chocolate, fresh fruit, sugar, rice, and vanilla.

Chapter 3 Ethics, Social Responsibility, and Sustainability 89

year, 3,800 trees, and 1 million barrels of oil. Over 80,000 suppliers compete to put their products on Walmart shelves, which means that this company has a strong influence on how manufacturers do business.69,70 To encourage sustainability from these suppliers, Walmart created a “Sustainability Hub” website to share standards and encourage inno-vation.71  And Walmart’s efforts are truly global. In line with the three corporate goals, the company is buying solar and wind power in Mexico, sourcing local food in China and India, and analyzing the life-cycle impact of consumer products in Brazil. Alleviat-ing hunger has become a goal of Walmart’s charitable efforts, and so with CARE it is backing education, job-training, and entrepreneurial programs for women in Peru, Ban-gladesh, and India. Walmart is attempting to change global standards as it offers higher prices to coffee growers in Brazil and increases pressures on the factory owners in China to reduce energy and fuel costs.72 Although Walmart has faced some setbacks in its global CSR efforts, it continues to respond to pressures for social responsibility and sustain-ability (see In-Depth Integrated Case 2.2 at the end of Part Two).

GE has pursued an aggressive initiative to integrate environmental sustainability with its business goals through the “ecomagination” program. Management styles again are changing as agendas are refocused on not only seeing the present but also looking to the future of human needs and the environment. Ecomagination is a GE strategic initiative to use innovation to improve energy efficiency across the globe. By meeting the demand for “green” products and services, GE is generating value for shareholders as well as promoting environmental sustainability. At a GE Hitachi Nuclear Energy power plant in North Carolina, a new wastewater system “has reduced water usage by 25 mil-lion gallons annually, avoiding nearly 80 tons per year of CO2 emissions and realizing annual savings of $160,000 in water and energy costs.” GE’s ecomagination ZeeWeed® membrane bioreactor (MBR) technology transforms up to 65,000 gallons per day of wastewater into treated water that can be used in the facility’s cooling towers. GE Jen-bacher engines capture gas from various fuel sources, even garbage, to create power. Jenbacher engines are at the core of a Mexican landfill gas-to-energy project, which President Felipe Calderón called “a model renewable energy project” for Latin America. This project’s power supports “Monterrey’s light-rail system during the day and city street lights at night.”

In addition, GE’s Flight Management System (FMS) for Boeing 737 planes has enabled airlines to lower fuel costs and reduce emissions. According to a GE Ecomagi-nation Annual Report, “The FMS enables pilots to determine, while maintaining a highly efficient cruise altitude, the exact point where the throttle can be reduced to flight idle while allowing the aircraft to arrive precisely at the required runway approach point without the need for throttle increases.”73 SAS Scandinavian Airlines estimates that FMS will save the airline $10 million annually. According to CEO Jeffrey R. Immelt and vice president of Ecomagination Steven M. Fludder, “Ecomagination is playing a role in boosting economic recovery, supporting the jobs of the future, improving the environ-mental impact of our customers’ (and our own) operations, furthering energy indepen-dence, and fostering innovation and growth in profitable environmental solutions.”74

Corporate GovernanceThe recent global, ethical, and governance scandals have placed corporations under intense scrutiny regarding their oversight and accountability. Adelphia, Arthur Andersen, Enron, Olympus, HSBC, Tyco, and Barclays are just a few of the dozens of companies that have been found to engage in inappropriate and often illegal activities related to governance. In addition, a number of financial services firms, including Credit Suisse, Deutsche Bank, Lehman Brothers, Citigroup, and many others, have been found to have engaged in inap-propriate trading or other activities. Corporate governance is increasingly high on the agenda for directors, investors, and governments alike in the wake of financial collapses and corporate scandals in recent years. The collapses and scandals have not been limited to a single country, or even a single continent, but have been a global phenomenon.

90 Part 1 Environmental Foundation

Corporate governance can be defined as the system by which business corpora-tions are directed and controlled.75 The corporate governance structure specifies the dis-tribution of rights and responsibilities among different participants in the corporation—such as the board, managers, shareholders, and other stakeholders—and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance.

Governance rules and regulations differ among countries and regions around the world. For example, the UK and U.S. systems have been termed “outsider” systems because of dispersed ownership of corporate equity among a large number of outside investors. Historically, although institutional investor ownership was predominant, institutions generally did not hold large shares in any given company; hence, they had limited direct control.76  In contrast, in an insider system, such as that in many conti-nental European countries, ownership tends to be much more concentrated, with shares often being owned by holding companies, families, or banks. In addition, differences in legal systems, as described in Chapter 2, also affect shareholders’ and other stake-holders’ rights and, in turn, the responsiveness and accountability of corporate manag-ers to these constituencies. Notwithstanding recent scandals, in general, North American and European systems are considered comparatively responsive to sharehold-ers and other stakeholders. In regions with less well-developed legal and institutional protections and poor property rights, such as some countries in Asia, Latin America, and Africa, forms of “crony capitalism” may emerge in which weak corporate gover-nance and government interference can lead to poor performance, risky financing pat-terns, and macroeconomic crises.

Corporate governance will undoubtedly remain high on the agenda of governments, investors, NGOs, and corporations in the coming years, as pressure for accountability and responsiveness continues to increase.

CorruptionAs noted in Chapter 2, government corruption is a pervasive element in the international business environment. Recently publicized scandals in Brazil, China, Costa Rica, Egypt, Pakistan, Russia, South Africa, and elsewhere underscore the extent of corruption glob-ally, especially in the developing world. However, a number of initiatives have been taken by governments and companies to begin to stem the tide of corruption.77,78

The Foreign Corrupt Practices Act (FCPA) makes it illegal for U.S. companies and their managers to attempt to influence foreign officials through personal payments or political contributions. Prior to passage of the FCPA, some American multinationals had engaged in this practice, but realizing that their stockholders were unlikely to approve of these tactics, the firms typically disguised the payments as entertainment expenses, consulting fees, and so on. Not only does the FCPA prohibit these activities, but the U.S. Internal Revenue Service also continually audits the books of MNCs. Those firms that take deductions for such illegal activities are subject to high financial penal-ties, and individuals who are involved can even end up going to prison. Strict enforce-ment of the FCPA has been applauded by many people, but some critics wonder if such a strong stance has hurt the competitive ability of American MNCs. On the positive side, many U.S. multinationals have now increased the amount of business in countries where they used to pay bribes. Additionally, many institutional investors in the United States have made it clear that they will not buy stock in companies that engage in unethical practices and will sell their holdings in such firms. Given that these institu-tions have hundreds of billions of dollars invested, senior-level management must be responsive to their needs.

Looking at the effect of the FCPA on U.S. multinationals, it appears that the law has had far more of a positive effect than a negative one. Given the growth of American MNCs in recent years, it seems fair to conclude that bribes are not a basic part of business

corporate governanceThe system by which business corporations are directed and controlled.

Chapter 3 Ethics, Social Responsibility, and Sustainability 91

in many countries, for when multinationals stopped this activity, they were still able to sell in that particular market. On the other hand, this does not mean that bribery and corruption are a thing of the past.

Indeed bribery continues to be a problem for MNCs around the world. In fact, recent scandals at ALSTOM, BAE, Daimler, Halliburton, Siemens, Walmart, and many other multinationals underscore the reality that executives continue to partici-pate in bribery and corruption. Although Siemens paid a record fine, U.S. authorities are still concerned about enforcement of corruption laws in other countries.79 Figure 3–3 gives the latest corruption index of countries around the world. Notice that the United States ranks 16th in this independent analysis. These rankings fluctuate somewhat from year to year. Factors that appear to contribute to these fluctuations include changes in government or political party in power, economic crises, and crackdowns in individual countries.

In complying with the provisions of the FCPA, U.S. firms must be aware of changes in the law that make FCPA violators subject to Federal Sentencing Guide-lines. The origin of this law and the guidelines that followed can be traced to two Lockheed Corporation executives who were found guilty of paying a $1 million bribe to a member of the Egyptian parliament in order to secure the sale of aircraft to the Egyptian military. One of the executives was sentenced to probation and fined $20,000 and the other, who initially fled prosecution, was fined $125,000 and sentenced to 18 months in prison.80

Another development that promises to give teeth to “antibribing” legislation is the recent formal agreement by a host of industrialized nations to outlaw the practice of bribing foreign government officials. The treaty, which initially included 29 nations that belong to the Organization for Economic Cooperation and Development (OECD), marked a victory for the United States, which outlawed foreign bribery two decades previously but had not been able to persuade other countries to follow its lead. As a result, American firms had long complained that they lost billions of dollars in contracts each year to rivals that bribed their way to success.81

This treaty does not outlaw most payments to political party leaders. In fact, the treaty provisions are much narrower than U.S. negotiators wanted, and there undoubtedly will be ongoing pressure from the American government to expand the scope and cover-age of the agreement. For the moment, however, it is a step in the direction of a more ethical and level playing field in global business. Additionally, in summing up the impact and value of the treaty, one observer noted: “For their part, business executives say the treaty . . . reflects growing support for antibribery initiatives among corporations in Europe and Japan that have openly opposed the idea. Some of Europe’s leading industrial corporations, including a few that have been embroiled in recent allegations of bribery, have spoken out in favor of tougher measures and on the increasingly corrosive effect of corruption.”82

In addition to the 34 members of the OECD, a number of developing countries, including Argentina, Brazil, Bulgaria, and South Africa, have signed on to the OECD agreement. Latin American countries have established the Organization of American States (OAS) Inter-American Convention Against Corruption, which entered into force in March 1997, and more than 25 Western Hemisphere countries are signatories to the convention, including Argentina, Brazil, Chile, Mexico, and the United States. As a way to prevent the shifting of corrupt practices to suppliers and intermediaries, the Transpar-ent Agents Against Contracting Entities (TRACE) standard was developed after a review of the practices of 34 companies. It applies to business intermediaries, including sales agents, consultants, suppliers, distributors, resellers, subcontractors, franchisees, and joint-venture partners, so that final producers, distributors, and customers can be confident that no party within a supply chain has participated in corruption.

Both governments and companies have made important steps in their efforts to stem the spread of corruption, but much more needs to be done in order to reduce the impact of corruption on companies and the broader societies in which they operate.83

Figure 3–3Transparency International Corruption Perceptions Index Ratings, Selected Countries, 2016

Source: Original graphic by Ben Littell under supervision of Jonathan Doh based on data from Transparency International Corruption Perceptions Index Ratings 2016.

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92 Part 1 Environmental Foundation

International AssistanceIn addition to government- and corporate-sponsored ethics and social responsibility prac-tices, governments and corporations are increasingly collaborating to provide assistance to communities around the world through global partnerships. This assistance is particu-larly important for those parts of the world that have not fully benefited from globaliza-tion and economic integration. Using a cost-benefit analysis of where investments would have the greatest impact, a recent study identified the top priorities around the world for development assistance. The results of this analysis are presented in Table 3–3. Fighting malnutrition, controlling malaria, and immunizing children are shown to be the best investments. Governments, international institutions, and corporations are involved in several ongoing efforts to address some of these problems.

At a United Nations summit in September 2015, world leaders placed development at the heart of the global agenda by adopting the Sustainable Development Goals (see Table 3–4). The seventeen Sustainable Development Goals constitute an ambitious agenda to significantly improve the human condition by 2030. The goals set clear targets for reducing poverty, hunger, disease, and inequalities, while protecting the environment and climate. For each goal, targets and indicators have been defined and are used to track the progress in meeting the goals.84

A more specific initiative is the Global Fund to Fight AIDS, Tuberculosis and Malaria, which was established in 2001. Through the end of 2015, the Global Fund had committed over US$33 billion in grants to over 151 countries.85

Through these and other efforts, MNCs, governments, and international organiza-tions are providing a range of resources to communities around the world to assist them as they respond to the challenges of globalization and development. International manag-ers will increasingly be called upon to support and contribute to these initiatives.

Table 3–3Copenhagen Consensus Investment Priorities

Ranking Investment

1 Bundled micronutrient interventions to fight hunger and improve education 2 Expanding the subsidy for malaria combination treatment 3 Expanded childhood immunization coverage 4 Deworming of schoolchildren, to improve educational and health outcomes 5 Expanding tuberculosis treatment 6 R&D to increase yield enhancements, to decrease hunger, fight biodiversity

destruction, and lessen the effects of climate change 7 Investing in effective early warning systems to protect populations against natural

disaster 8 Strengthening surgical capacity 9 Hepatitis B immunization 10 Using low-cost drugs in the case of acute heart attacks in poorer nations (these

are already available in developed countries) 11 Salt reduction campaign to reduce chronic disease 12 Geo-engineering R&D into the feasibility of solar radiation management 13 Conditional cash transfers for school attendance 14 Accelerated HIV vaccine R&D 15 Extended field trial of information campaigns on the benefits from schooling 16 Borehole and public hand pump intervention

Source: Copenhagen Consensus 2012.

Chapter 3 Ethics, Social Responsibility, and Sustainability 93

The World of International Management—RevisitedThe World of International Management feature that opened this chapter outlines how three companies have sought to incorporate social responsibility and sustainability into their busi-ness strategy and operations. In each case, the companies have responded to changes in the external environment and sought to capitalize on increasing interest in and support of sustain-ability in business. This interest has spread around the globe such that both developed and developing countries and their companies are increasingly committed to a sustainable future.

In this chapter we focused on ethics and social responsibility in global business activities, including the role of governments, MNCs, and NGOs in advancing greater ethical and socially responsible behavior. MNCs’ new focus on environmental sustain-ability and “doing well by doing good” is an important dimension of this broad trend.

Global ethical and governance scandals have rocked the financial markets and implicated dozens of individual companies. New corporate ethics guidelines passed in the United States have forced many MNCs to take a look at their own internal ethical practices and make changes accordingly. Lawmakers in Europe and Asia have also made adjustments in rules over corporate financial disclosure. The continuing trend toward globalization and free trade appears to be encouraging development of a set of global ethical, social responsibility, and anticorruption standards. This may actually help firms cut compliance costs as they realize that economies have common global frameworks.

Having read the chapter, answer the following questions: (1) Do governments and companies in developed countries have an ethical responsibility to contribute to economic growth and social development in developing countries? (2) Are governments, companies, or NGOs best equipped to provide this assistance? How might collaboration among these sectors provide a comprehensive approach? (3) Do corporations have a responsibility to use their “best” ethics and social responsibility practices when they do business in other countries, even if those countries’ practices are different? (4) How can companies leverage their ethical reputation and social and environmental responsibility to improve business performance?

Table 3–4The U.N. Sustainable Development Goals

Goal 1: Poverty—End poverty in all its forms everywhere.Goal 2: Food—End hunger, achieve food security and improved nutrition, and promote sustainable agriculture.Goal 3: Health—Ensure healthy lives and promote well-being for all at all ages.Goal 4: Education—Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all.Goal 5: Women—Achieve gender equality and empower all women and girls.Goal 6: Water—Ensure availability and sustainable management of water and sanitation for all.Goal 7: Energy—Ensure access to affordable, reliable, sustainable, and modern energy for all.Goal 8: Economy—Promote sustained, inclusive, and sustainable economic growth; full and productive employment; and decent

work for all.Goal 9: Infrastructure—Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation.Goal 10:  Inequality—Reduce inequality within and among countries.Goal 11:  Habitation—Make cities and human settlements inclusive, safe, resilient, and sustainable.Goal 12:  Consumption—Ensure sustainable consumption and production patterns.Goal 13:  Climate—Take urgent action to combat climate change and its impacts.Goal 14:  Marine ecosystems—Conserve and sustainably use the oceans, seas, and marine resources for sustainable development.Goal 15:  Ecosystems—Protect, restore, and promote sustainable use of terrestrial ecosystems; sustainably manage forests; com-

bat desertification; halt and reverse land degradation; and halt biodiversity loss.Goal 16:  Institutions—Promote peaceful and inclusive societies for sustainable development; provide access to justice for all;

and build effective, accountable, and inclusive institutions at all levels.Goal 17:  Sustainability—Strengthen the means of implementation and revitalize the global partnership for sustainable development

Source: www.un.org/sustainabledevelopment/sustainable-development-goals/.

94 Part 1 Environmental Foundation

1. Ethics is the study of morality and standards of conduct. It is important in the study of international management because ethical behavior often varies from one country to another. Ethics manifests itself in the ways societies and companies address issues such as employment conditions, human rights, and corruption. A danger in international management is the ethical relativism trap—“When in Rome, do as the Romans do.”

2. During the years ahead, multinationals likely will become more concerned about being socially responsible. NGOs are forcing the issue. Countries are passing laws to regulate ethical practices and

governance rules for MNCs. MNCs are being more proactive (often because they realize it makes good business sense) in making social contributions in the regions in which they operate and in developing codes of conduct to govern ethics and social responsibility. One area in which companies have been especially active is in pursuing strategies that blend environmental sustainability and business objectives.

3. MNCs—in conjunction with governments and NGOs—are also contributing to international devel-opment assistance and working to ensure that cor-porate governance practices are sound and effective.

SUMMARY OF KEY POINTS

KEY TERMS

corporate governance, 90corporate social responsibility (CSR), 77

ethics, 77fair trade, 87

nongovernmental organizations (NGOs), 85sustainability, 88

REVIEW AND DISCUSSION QUESTIONS

1. How might different ethical philosophies influence how managers make decisions when it comes to offshoring of jobs?

2. What lessons can U.S. multinationals learn from the bribery and corruption scandals in recent years, such as those affecting contractors doing business in Iraq (Halliburton), as well as large MNCs such as Siemens, HP, and others? Discuss two.

3. In recent years, rules have tightened such that those who work for the U.S. government in trade negotia-tions are now restricted from working for lobbyists

for foreign firms. Is this a good idea? Why or why not?

4. What are some strategies for overcoming the impact of counterfeiting? Which strategies work best for discretionary (for instance, movies) versus nondis-cretionary (pharmaceutical) goods?

5. Why are MNCs getting involved in corporate social responsibility and sustainable business practice? Are they displaying a sense of social responsibility, or is this merely a matter of good business, or both? Defend your answer.

1. “Becoming a Responsible Company,” Patagonia.com, www.patagonia.com/responsible-company.html.

2. “Patagonia Mission Statement: Our Reason for Being,” Patagonia.com. www.patagonia.com/ company-info.html.

3. “Becoming a Responsible Company.” 4. Ibid.

5. “Corporate Responsibility: Promoting Fair Labor Practices and Safe Working Conditions throughout Patagonia’s Supply Chain,” Patagonia.com, www.patagonia.com/corporate-responsibility.html.

6. Ibid. 7. “Becoming a Responsible Company.” 8. “About us,” 1% for the Planet, http://onepercentfor-

theplanet.org/about/.

ENDNOTES

Chapter 3 Ethics, Social Responsibility, and Sustainability 95

26. John M. Broder, “Stalled Out on Tesla’s Electric Highway,” The New York Times, February 8, 2013, www.nytimes.com/2013/02/10/automobiles/stalled-on-the-ev-highway.html.

27. Paul Chesser, “Tesla CEO Elon Musk Fights Per-ceptions as Stock Drops,” NLPC.org, February 26, 2013, http://nlpc.org/stories/2013/02/25/tesla-ceo-elon-musk-fights-perceptions-stock-drops.

28. John Lippert, “Will Tesla Ever Make Money?”  Bloomberg Markets, March 4, 2015,  www.bloomberg.com/news/articles/2015-03-04/ as-tesla-gears-up-for-suv-investors-ask-where-the-profits-are.

29. Ibid.30. Kristen Scholer and Lee Spears, “Tesla Posts

Second-Biggest Rally for 2010 U.S. IPO,” Bloomberg Businessweek, June 29, 2010.

31. Thomas Donaldson, The Ethics of International Busi-ness (New York: Oxford University Press, 1989).

32. I. Kant, Fundamental Principles of the Metaphysics of Morals, trans. Thomas K. Abbott (New York: Macmillan, 1949 [1785]), p. 18.

33. Ibid.34. Aristotle, Nicomachean Ethics, trans. Martin Ost-

wald New York: Macmillan, 1962, p. 153.35. W. Frankena, Ethics, 2nd ed. (Engelwood Cliffs,

NJ: Prentice Hall, 1973).36. J. Bentham, The Principles of Morals and Legisla-

tion (Amherst, NY: Prometheus Books, 1988 [1789]),

37. J. S. Mill, Utilitarianism (Indianapolis: Bobbs-Merrill, 1957 [1861]).

38. R. J. Vincent, Human Rights and International Relations (New York: Cambridge University Press, 1986).

39. Vladimir Kovalev, “EU Presses Russia on Human Trafficking,”BusinessWeek, February 23, 2007, www.bloomberg.com/news/articles/2007-02-23/ eu-presses-russia-on-human-traffickingbusinessweek-business-news-stock-market-and-financial-advice.

40. Andrew Pollack, “In Japan, It’s See No Evil; Have No Harassment,” The New York Times, May 7, 1996, p. C5.

41. Howard W. French, “Diploma at Hand, Japanese Women Find Glass Ceiling Reinforced with Iron,” The New York Times, January 1, 2001, p. A4.

42. Grant Thornton, “Women in Business: The Path to Leadership,”  Grant Thornton International Business Report 2015,  www.grantthornton.global/globalassets/1.-member-firms/global/insights/ibr-charts/ibr2015_wib_report_final.pdf.

9. “Supply Chain: The Footprint Chronicles: 20 Years of Organic Cotton,” Patagonia.com, www.patagonia.com/20-years-of-organic-cotton.html.

10. “About Us,”  Nestlé,  www.nestle.com/aboutus  (last visited January 30, 2016).

11. “Environmental Sustainability,”  Nestlé,  www.nestle.com/csv/environmental-sustainability  (last visited January 30, 2016).

12. Ibid.13. Ibid.14. Brian Dumaine, “Is Apple ‘Greener’ Than Star-

bucks?”  Fortune, June 24, 2014,  http://fortune.com/2014/06/24/50-best-global-green-brands-2014/.

15. “About Tesla,” Tesla Motors, www.teslamotors.com/about.

16. “Features and Specs,” Tesla Motors, http://maben.homeip.net/static/auto../tesla/Tesla%20roadster%20specifications%201.pdf.

17. “Model S: Features and Specs,” Tesla Motors, www.teslamotors.com/models/features#/ performance.

18. Joe Romm, “Tesla’s Model 3 Is Already Shattering Expectations,”  Climate Progress, April 6, 2016,  http://thinkprogress.org/climate/2016/04/ 06/3766982/next-apple-tesla-model-3-presales/.

19. “Panasonic, Tesla Agree to Partnership for US Car Battery Plant,”  Nikkei Asian Review, July 29, 2014,  http://asia.nikkei.com/Business/Deals/Pana-sonic-Tesla-agree-to-partnership-for-US-car-battery-plant.

20. “Mercedes Electric Car by Tesla Test Drive–Video Tesla Mercedes A Class,” The Daily Green, Sep-tember 3, 2010.

21. Steve Hanley, “Mercedes Is Saying Goodbye to Tesla,”  GAS2, August 21, 2015,  http://gas2.org/2015/08/21/mercedes-is-saying-goodbye-to-tesla/.

22. Chuck Squatriglia, “Tesla Motors Joins Daimler on a Smart EV | Autopia,” Wired.com, January 13, 2009, www.wired.com/autopia/2009/01/tesla- motors-jo/.

23. Tori Tellem, “2012 Toyota RAV4-EV: Take Two,” The New York Times, November 17, 2011.

24. Tesla Motors, “Tesla Initiates Voluntary Recall after Single Customer Incident,” press release,  October 1, 2010, www.teslamotors.com/about/press/releases/tesla-initiates-voluntary-recall-after-single-customer-incident.

25. Suzanne Ashe, “Tesla Motors Recalls Electric Roadster,” CNET, May 28, 2009, http://reviews.cnet.com/8301-13746_7-10251758-48.html.

96 Part 1 Environmental Foundation

57. Abagail McWilliams and Donald Siegel, “Corporate Social Responsibility: A Theory of the Firm Per-spective,” Academy of Management Review 26, no. 1 (2001), pp. 117–127.

58. “Non-governmental Organizations and Business: Living with the Enemy,” The Economist, August 9, 2002, pp. 49–50.

59. “2016 Edelman Trust Barometer: Annual Global Study,”  Edelman  (2016),  www.edelman.com/insights/intellectual-property/2016-edelman-trust-barometer/.

60. Blair FitzGibbon,  “Morgan Stanley and Wells Fargo Cut Coal Financing, Join Growing Movement by Banks in U.S. and Europe,” RAN press release,  November 30, 2015,  www.ran.org/morgan_stanley_and_wells_fargo_cut_coal_financing.

61. “WTO to Allow Access to Cheap Drug Treatments,” Los Angeles Times, August 31, 2003, p. A4.

62. “USAS Press Release on Jerzees de Honduras Victory,” USAS, November 18, 2009, http://usas.org/2009/11/18/usas-press-release-on-jerzees-de- honduras-victory/.

63. Jonathan P. Doh and Terrence R. Guay, “Globalization and Corporate Social Responsibility: How Nongovernmental Organizations Influence Labor and Environmental Codes of Conduct,” Management International Review 44, no. 3 (2004), pp. 7–30.

64. Petra Christmann and Glen Taylor, “Globalization and the Environment: Strategies for International Voluntary Environmental Initiatives,” Academy of Management Executive 16, no. 30 (2002), pp. 121–135.

65. More with Less: Scaling Sustainable Consumption and Resource Efficiency (Geneva: World Economic Forum, 2012).

66. For more information, visit www.epa.gov.67. For more information regarding the role of the

UNEP, visit www.unep.org.68. “Sustainability,” Walmart,  http://corporate.walmart.

com/global-responsibility/sustainability/.69. Marc Gunther, “The Green Machine,” Fortune,

August 7, 2006, pp. 42–57.70. Marc Gunther, “Wal-Mart: Still the Green Giant,”

May 19, 2010, www.marcgunther.com/2010/05/19/walmart-still-the-green-giant/.

71. “SustainabilityHUB,” Walmart,  www. walmartsustainabilityhub.com/.

72. Gunther, “The Green Machine.”73. GE Ecomagination, 2008 Ecomagination Annual

Report, p. 29, www.ge.com/about-us/ecomagination. 

43. “Child Labour,” International Labour Organiza-tion  (2015),  http://www.ilo.org/global/topics/child-labour/lang–en/index.htm.

44. Ibid.45. “C138—Minimum Age Convention, 1973 (No.

138): Countries That Have Not Ratified This Con-vention,”  International Labour Organization (2015), www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB: 11310:0::NO:11310:P11310_INSTRUMENT_ID:312283:NO.

46. Mikey Campbell, “Foxconn Promises to Fix a Mul-titude of Violations Found by FLA Audit,” Apple Insider, March 29, 2012,  http://appleinsider.com/articles/12/03/29/foxconn_promises_to_fix_ violations_found_by_fla_audit.html.

47. David Barboza, “After Spate of Suicides, Technol-ogy Firm in China Raises Workers’ Salaries,” The New York Times, June 3, 2010, p. B3.

48. Campbell, “Foxconn Promises to Fix a Multitude of Violations Found by FLA Audit.”

49. Shelly Banjo, “Wal-Mart Toughens Supplier Poli-cies,” The Wall Street Journal, January 21, 2013. http://online.wsj.com/article/SB10001424127887323301104578256183164905720.html.

50. Steven Greenhouse and Jim Yardley, “Global Retail-ers Join Safety Plan for Bangladesh,” The New York Times, May 14, 2013, p. A1.

51. David Stern, “The Rise and Fall of the Environ-mental Kuznets Curve,” World Development 32, no. 8 (2004), pp. 1419–1439.

52. Gerry Shih, “School in China Near Closed Plants Has 500 Sick Kids,”  U.S. News and World Report, April 18, 2016,  www.usnews.com/news/articles/ 2016-04-18/changzhou-china-school-has-500-sick-kids-due-to-toxins-report-says.

53. Ron Duska and Nicholas M. Rongione, Ethics and Corporate Responsibility: Theory, Cases and Dilemmas (New York: Thomas Custom Publishing, 2003).

54. Paul M. Minus, The Ethics of Business in a Global Economy (Boston: Kluwer Academic Publishers, 1993).

55. Shilpa Phadnis and Sujit John, “Top Global IT Firms Have More Staff in India Than Home Nations,”  The Times of India, November 6, 2013,  http://timesofindia.indiatimes.com/tech/jobs/Top-global-IT-firms-have-more-staff-in-India-than-home-nations/articleshow/25280494.cms.

56. Thomas Donaldson and Thomas W. Dunfee, Ties That Bind: A Social Contracts Approach to Busi-ness Ethics (Cambridge, MA: Harvard Business Press, 1999).

Chapter 3 Ethics, Social Responsibility, and Sustainability 97

82. Edmund L. Andrews, “29 Nations Agree to Outlaw Bribing Foreign Officials,” The New York Times, November 21, 1997, p. C2.

83. “Special Report: The Short Arm of the Law— Bribery and Business,” The  Economist, March 2, 2002, p. 85.

84. “Sustainable Development Goals,” United Nations,  www.un.org/sustainabledevelopment/sus-tainable-development-goals/.

85. “Financials,”  The Global Fund,  www.theglobalfund.org/en/financials/  (last visited February 14, 2016).

86. CIA, “Cuba,”  The World Factbook  (2016),  https://www.cia.gov/library/publications/the-world-factbook/geos/cu.html.

87. Ibid.88. Ibid.89. Ibid.90. Heritage Foundation, “Cuba,” Index of Economic

Freedom  (2016), http://www.heritage.org/index/country/cuba.

91. Miguel  Heft, “Why Airbnb Thinks Cuba Can Become a Case Study,”  Forbes, September 6, 2015, www.forbes.com/sites/miguelhelft/2015/09/06/inside-airbnbs-cuba/#42de19b7c3ec.

74. Ibid., p. 3.75. Organization for Economic Cooperation and Devel-

opment, Corporate Governance: A Survey of OECD Countries (Paris: OECD, 2003).

76. Stijn Claessens and Joseph P. H. Fan, “Corporate Governance in Asia: A Survey,” International Review of Finance 3, no. 2 (2002), pp. 71–103.

77. Bob Davis, “The Economy: U.S. Nears Pact on Corruption Treaty,” The Wall Street Journal, August 13, 2003, p. A2.

78. See also Jonathan P. Doh, Peter Rodriguez, Klaus Uhlenbruck, Jamie Collins, and Lorraine Eden, “Coping with Corruption in Foreign Markets,” Academy of Management Executive 17, no. 3 (2003), pp. 114–127.

79. Ken Stier, “Too Big to Be Nailed,” Fortune, April 19, 2001, http://archive.fortune.com/2010/04/19/news/companies/hewlett_packard_bribery.fortune/index.htm.

80. Tipton F. McCubbins, “Somebody Kicked the Sleeping Dog—New Bite in the Foreign Corrupt Practices Act,” Business Horizons, January–February 2001, p. 27.

81. Greg Steinmetz, “U.S. Firms Are among Least Likely to Pay Bribes Abroad, Survey Finds,” The Wall Street Journal, August 25, 1997, p. 5.

98

restrictions have been eased. In 2016, Presidents Obama and Castro held a series of in-person meetings over sev-eral days on the island. Telecom giants Verizon and Sprint have been able to establish roaming agreements with the state-owned telecommunications company in Cuba for U.S. citizens, and U.S. citizens can now use debit cards in Cuba.90

You Be the International Management ConsultantAs the tension in the relations between the United States and Cuba have begun to thaw, trade and business oppor-tunities may open up, making Cuba a potentially attractive investment for U.S. companies. One company that has already taken advantage of this new market is “Airbnb,” the private house and room rental website, which opened in the Cuban marketplace in April 2015. As the Cuban government begins allowing more and more private enter-prise in the country, room rentals are quickly becoming one of the most successful ways for Cubans to earn for-eign currency. Airbnb’s hope is that, as relations continue to normalize, it can provide reliable rentals in this previ-ously unvisited country. As it will take time for a full restoration of Cuban-U.S relations, Airbnb does not see the island nation as a major source of profit any time in the near future. But with over 200,000 American visitors expected in 2017, and with that number projected to grow by 30 percent in the coming years, Airbnb believes that its early investment in Cuba will pay off.91

QuestionsAlthough Cuba is allowing more private enterprise into the country, it is still very much under communist rule, and the government still has a deplorable record when dealing with human rights.

1. Would you advise a company to become an early investor in Cuba?

2. Do you think Airbnb’s investment in Cuba will eventually see success and become a reliable profit stream?

3. Do you think Cuba will ultimately become an attractive long-term tourist destination for Americans?

Cuba is an island nation located between the Atlantic Ocean and the Caribbean Sea. The country is positioned just 150 kilometers from Key West, Florida. Cuba is slightly smaller in area than Pennsylvania. The country has few natural resources, but it does possess some depos-its of cobalt, nickel, iron ore, chromium, copper, salt, tim-ber, silica, petroleum, and arable land.86 Cuba’s population is estimated at 11 million people. Havana, the capital, is home to over 2 million Cubans. The country’s population is currently decreasing, at 0.15 percent per year, and the country boasts a higher-than-average median age of 40.4 years old. More than 70 per-cent of the population is older than 25.87 Cuba’s GDP stands at US$77.15 billion, although this number is disputed due to Cuba’s economic isolation from many other countries. For 50 years, foreign exchange of currency has been highly limited. Additionally, the coun-try has two currencies in circulation, one for local Cubans and one for tourists and traders. After a significant reces-sion and steady economic decline from 2006 until 2009, Cuba’s GDP growth stabilized at about 1 percent annually. In 2015, GDP grew at about 1.3 percent. The country’s GDP per capita is estimated at around US$10,000, but some believe this number is highly inflated.88 Cuba is a communist state. The president is indirectly elected by the legislative body, the National Assembly, for a five-year term. There are no term limits and, since 1976, there have only been two presidents: Fidel Castro, who stepped aside in 2008, and his brother Raul Castro. The economy remains sluggish due to the effects of the long-time communist regime and poor economic policies and management. Cuba’s public sector, which controls nearly all public services and private busi-nesses in the country, employs well over 75 percent of the employed population.89  The country suffers from corruption that occurs within its state-owned businesses, its military, and the political elite class. In the past, Cuba has been able to gain the majority of its foreign investment from countries like Venezuela, but due to dramatic drops in oil prices, Cuba may now be looking towards the United States and other Western investors. In 2014, President Barack Obama and President Raul Castro announced that the two countries would seek to normalize their relationship. As a consequence, each country reopened its embassy in the other and travel

CubaIn the International Spotlight

99

became the first among its peers to release a complete listing of all of the overseas factories that it contracts for labor. That same year, Nike released the pay scales of the factory workers and addressed actions it was taking to further improve conditions. Even so, the stigma of past practices—whether perceived or real—remained embla-zoned on its image and brand name. Nike found itself constantly defending its activities, striving to shake this reputation and perception. In 2002, Marc Kasky sued Nike, alleging that the com-pany knowingly made false and misleading statements in its denial of direct participation in abusive labor condi-tions abroad. Through corporate news releases, full-page ads in major newspapers, and letters to editors, Nike defended its conduct and sought to show that allegations of misconduct were unwarranted. The action by the plain-tiff, a local citizen, was predicated on a California state law prohibiting unlawful business practices. He alleged that Nike’s public statements were motivated by market-ing and public relations and were simply false. According to the allegation, Nike’s statements misled the public and thus violated the California statute. Nike countered by claiming its statements fell under and within the protec-tion of the First Amendment, which protects free speech. The state court concluded that a firm’s public statements about its operations have the effect of persuading consum-ers to buy its products and therefore are, in effect, adver-tising. Therefore, the suit could be adjudicated on the basis of whether Nike’s pronouncements were false and misleading. The court stated that promoting a company’s reputation was equivalent to sales solicitation, a practice clearly within the purview of state law. The majority of justices summarized their decision by declaring, “because messages in question were directed by a commercial speaker to a commercial audience, and because they made representations of fact about the speaker’s own business operations for the purpose of promoting sales of its prod-ucts, we conclude that these messages are commercial speech for purposes of applying state laws barring false and misleading commercial messages” (Kasky v. Nike Inc., 2002). The conclusion reached by the court was that statements by a business enterprise to promote its reputa-tion must, like advertising, be factual representations and that companies have a clear duty to speak truthfully about such issues.2

Nike Inc., the global leader in the production and market-ing of sports and athletic merchandise including shoes, clothing, and equipment, has enjoyed unparalleled world-wide growth for many years. Consumers around the world recognize Nike’s brand name and logo. As a supplier to and sponsor of professional sports figures and organiza-tions, and as a large advertiser to the general public, Nike is widely known. Nike was a pioneer in offshore manu-facturing, establishing company-owned assembly plants and engaging third-party contractors in developing coun-tries. In 1996, Life magazine published a landmark article about the labor conditions of Nike’s overseas subcontrac-tors, entitled “On the Playgrounds of America, Every Kid’s Goal Is to Score: In Pakistan, Where Children Stitch Soccer Balls for Six Cents an Hour, Their Goal Is to Sur-vive.” Accompanying the article was a photo of a 12-year-old Pakistani boy stitching a Nike-embossed soccer ball. The photo caption noted that the job took a whole day, and the child was paid US$0.60 for his effort. Up until this time, the general public was neither aware of the wide use of foreign labor nor familiar with the working arrange-ments and treatment of laborers in developing countries. Almost instantly, Nike became a poster child for the ques-tionable unethical use of offshore workers in poorer regions of the world. This label continued to plague the corporation as many global human interest and labor rights organizations have monitored and often condemned Nike for its labor practices around the world. In the years following, Nike executives were frequent targets at public events, especially at universities where students pressed administrators and athletic directors to ban products that had been made under “sweatshop” con-ditions. Indeed, at the University of Oregon, a major gift from Phil Knight, Nike’s CEO, was held up in part because of student criticism and activism against Nike on campus.1 Nike took immediate action to repair its damaged brand. In 2001, the company established a Corporate Responsibility and Sustainability Committee to ensure that labor practices were ethical across its supply chain. By 2003, the company employed 86 compliance officers (up from just three in 1996) to monitor its plant operations and working conditions and ensure compliance with its published corporate code of conduct. In 2005, Nike

Brief Integrative Case 1.1

Advertising or Free Speech? The Case of Nike and Human Rights

100 Part 1 Environmental Foundation

amount of water needed for dyeing processes. Nike has pledged to eliminate all hazardous chemicals from its supply chain by 2020. As part of its domestic CSR profile, Nike is primarily concerned with keeping youth active, presumably for health, safety, educational, and psychological/esteem rea-sons. Nike has worked with Head Start (2005) and Special Olympics Oregon (2007), as well as created its own com-munity program, NikeGO, to advocate physical activity among youth. Partnering with then First Lady Michelle Obama, Nike worked to implement the “Let’s Move” campaign (2013) into schools across the U.S. Nike also sponsors Project Play (2014), which aims to reshape the direction of youth sports by encouraging children to stay involved and feel included. Furthermore, Nike is commit-ted to domestic efforts such as Hurricane Katrina relief and education, the latter through grants made by the Nike School Innovation Fund in support of the Primary Years Literacy Initiative.7    Despite Nike’s impressive CSR profile, if the Califor-nia State Supreme Court decision is sustained and sets a global precedent, Nike’s promotion or “advertisement” of its global CSR initiatives could still be subjected to legal challenge. This could create a minefield for multinational firms. It would effectively elevate statements on human rights treatment by companies to the level of corporate marketing and advertising. Under these conditions, it might be difficult for MNCs to defend themselves against allegations of human rights abuses. In fact, action such as the issuance and dissemination of a written company code of conduct could fall into the category of advertising dec-larations. Although Kasky v. Nike was never fully resolved in court, the issues that it raised remain to be addressed by global companies. Also to be seen is what effect a court decision would have on Nike’s financial success. Despite the publicity of the case, at both the state and Supreme Court levels, and the lingering criticism about its labor practices overseas, Nike has maintained strong and growing sales and profits. The company has expanded its operations into different types of clothing and sports equipment and has continued to choose successful athletes to advertise its gear. Nike has shown no signs of slowing down, suggesting that its name and logo have not been substantially tarnished in the global market.

Questions for Review

1. What ethical issues faced by MNCs in their treatment of foreign workers could bring allegations of miscon-duct in their operations?

2. Would the use of third-party independent contractors insulate MNCs from being attacked? Would that practice offer MNCs a good defensive shield against charges of abuse of “their employees”?

In January 2003, the U.S. Supreme Court agreed to hear Nike’s appeal of the decision in Kasky v. Nike Inc. from the California Supreme Court. In particular, the U.S. Supreme Court agreed to rule on whether Nike’s previous statements about the working conditions at its subcon-tracted, overseas plants were in fact “commercial speech” and, separately, whether a private individual (such as Kasky) has the right to sue on those grounds. Numerous amici briefs were filed on both sides. Supporters of Kasky included California, as well as 17 other states; Ralph Nader’s Public Citizen Organization; California’s AFL/CIO; and California’s attorney general. Nike’s friends of the court included the American Civil Liberties Union, the Business Roundtable, the U.S. Chamber of Com-merce, other MNCs including Exxon/Mobil and Micro-soft, and the Bush administration (particularly on the grounds that it does not support private individuals acting as public censors).3 Despite the novelty of this First Amendment debate and the potentially wide-reaching effects for big business (particularly MNCs), the U.S. Supreme Court dismissed the case (6 to 3) in June 2003 as “improvidently granted” due to procedural issues surrounding the case. In their dissenting opinion, Justices Stephen G. Breyer and Sandra Day O’Connor suggested that Nike would likely win the appeal at the U.S. Supreme Court level. In both the con-curring and dissenting opinions, Nike’s statements were described as a mix of “commercial” and “noncommer-cial” speech.4 This suggested to Nike, as well as other MNCs, that if the Court were to have ruled on the sub-stantive issue, Nike would have prevailed. Although this case has set no nationwide precedent for corporate advertising about business practices or corporate social responsibility (CSR) in general, given the sensitivity of the issue, Nike has allowed its actions to speak louder than words in recent years. As part of its international CSR profile, Nike has assisted relief efforts (donating $1 million to tsunami relief in 2004) and advocated fair wages and employment practices in its outsourced operations. Nike claims that it has not abandoned production in certain countries in favor of lower-wage labor in others and that its factory wages abroad are actually in accordance with local regulations, once one accounts for purchasing power and cost-of-living differences.5 The Nike Foundation, a nonprofit organization supported by Nike, is also an active sup-porter of the Millennium Development Goals, particu-larly those directed at improving the lives of adolescent girls in developing countries (specifically Bangladesh, Brazil, China, Ethiopia, and Zambia) through better health, education, and economic opportunities.6  Envi-ronmental impact is also a key component of Nike’s CSR profile. The company has focused on preserving water in the areas where its products are manufactured, incorporating new technology that minimizes the

Brief Integrative Case 1.1 Advertising or Free Speech? The Case of Nike and Human Rights 101

nothing, (b) construct a corporate code of ethics, or (c) align itself with some of the universal covenants or compacts prepared by international agencies?

5. What does Nike’s continued financial success, in spite of the lawsuit, suggest about consumers’ reac-tions to negative publicity? Have American media and NGOs exaggerated the impact of a firm’s labor practices and corporate social responsibility on its sales? How should managers of an MNC respond to such negative publicity?

Source: This case was prepared by Lawrence Beer, W. P. Carey School of Business, Arizona State University as the basis for class discussion. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility.

3. Do you think that statements by companies that describe good social and moral conduct in the treat-ment of their workers are part of the image those companies create and therefore are part of their advertising message? Do consumers judge companies and base their buying decision on their perceptions of corporate behavior and values? Is the historic “made in” question (e.g., “Made in the USA”) now being replaced by a “made by” inquiry (e.g., “Made by Company X” or “Made for Company X by Com-pany Y”)?

4. Given the principles noted in the case, how can com-panies comment on their positive actions to promote human rights so that consumers will think well of them? Would you propose that a company (a) do

1. “Nike CEO Retracts University Donation over Human Rights,”  SocialFunds.com, May 3, 2000,  www.socialfunds.com/news/print.cgi?sfArticleId=237.

2. Marc Kasky v. Nike Inc., No. 994446, 02 C.D.O.S. 3790 (Cal., San Francisco Superior Ct. 2002), http://law.justia.com/cases/california/supreme-court/4th/27/939.html  (accessed November, 15, 2016).

3. Linda Greenhouse, “Free Speech for Companies on Justices’ Agenda,”  New York Times,  April 20, 2003, p. A17.

4. Linda Greenhouse, “Nike Free Speech Case Is Unexpectedly Returned to California,”  New  York Times,  June 27, 2003, p. A16.

5. “Nike and child labour – how it went from laggard to leader,”  www.mallenbaker.net/csr/CSRfiles/nike.html  (accessed November 16, 2016).

6. Nike Inc., “Nike Foundation Secures Footing in Helping to Reach Millennium Development Goals,” press release,  www.nikebiz.com  (accessed September 15, 2005).

7. Nike Inc., “Nike Announces $200,000 Grant to Hillsboro Schools,” press release,  www.nikebiz.com  (accessed March 6, 2007).

ENDNOTES

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Argentina for the first time.9  Later that year, Mycoskie moved to Los Angeles, where he co-founded his third start-up, cable network Reality Central. For this new ven-ture, Mycoskie joined forces with Larry Namer, a founder of E! Entertainment Television.10  The network debuted in 2003, with a planned format of airing both new, original programming as well as reruns of past successful realty shows. The venture was able to raise large amounts of funding from backers and proved successful until 2005, when competitor channel Fox Reality began to dominate ratings.11 A short time later, Mycoskie (holding true to his entrepreneurial spirit) partnered with the founders of Traf-ficschool.com to create his fourth business, Drivers Ed Direct, which functioned as an online-based drivers educa-tion service.12 To increase brand awareness, Mycoskie cre-ated a viral marketing company, the Closer Marketing Group, to better promote his driver education business.13

The TOMS ExperimentOn the heels of these successes, Mycoskie took his pivotal trip to Argentina in 2006. As his adventure was nearing its conclusion, Mycoskie happened to stumble upon an aid worker conducting a volunteer shoe drive. She was working to provide impoverished children with new shoes, explaining to  Mycoskie that, even in more-developed countries like Argentina, children in poverty often lacked shoes.14  Without shoes, simple daily tasks can be quite difficult and children are also especially vulnerable to dis-ease and illness when lacking proper footwear. According to the volunteer, inconsistent donations limited the suc-cess of events like shoe drives. Over the next few days, Mycoskie’s eyes were opened to the realities of poverty across Argentina. He traveled with the volunteer to several local villages, observing pov-erty among children first hand. The experience left an strong impression on Mycoskie, stimulating him to con-sider getting involved in addressing poverty.15  Mycoskie strategized how to address the problem. Although he con-sidered forming a charity to fund shoe donations for the children, the uncertainty posed by often inconsistent and uneven donations led Mycoskie to consider more busi-ness-oriented solutions. Having a constant flow of shoes available for donation was deemed as a critical element to the success of the effort. Mycoskie therefore settled on creating a for-profit business in which the sale of each pair of shoes would fund the donation of a pair of shoes for impoverished children. Mycoskie, reflecting on his

Nearing 30 years old and tired from working long hours on his fourth start-up, serial entrepreneur Blake Mycoskie took a much-needed extended vacation to Argentina in 2006.1 While there, Mycoskie fully immersed himself in the local culture, learning to dance the tango, enjoying fine Argentine wine, and engaging in sports such as polo.2 Mycoskie also took note of the diverse Argentine fashion culture. One trend in particular that caught Mycoskie’s eye was the soft canvas footwear called the “alpargata,” worn by nearly all Argentines.3 During his stay, Mycoskie purchased and began wearing his own alpargatas. He quickly realized how functional and comfortable the shoes were, leading him to wonder: Would consumers in the United States also be interested in such a product?

Blake Mycoskie: Serial Entrepreneur Blake Mycoskie, born in Arlington, Texas, is the founder and “Chief Shoe Giver” for TOMS Shoes. A world trav-eler and former realty show contestant, Mycoskie has spent his entire career involved in start-ups.4  Much of Mycoskie’s business knowledge was self-taught through reading biographies of successful businesspeople. Though originally enrolled at Southern Methodist University (SMU), Mycoskie dropped out after just two years when he lost his tennis scholarship due to an injury.5 This newly found freedom gave Mycoskie the chance to put his entre-preneurial spirit into action. His first start-up business, EZ Laundry, was a small laundry service located at SMU. The university, with no campus dry cleaning service, provided steady demand.6 By 1999, EZ Laundry had expanded to three more universi-ties, and Mycoskie sold the company to his partner.7 Fol-lowing this experience, Mycoskie moved to Nashville and founded his next venture, Mycoskie Media. As an outdoor billboard company, Mycoskie Media focused on market-ing country music. The company turned a steady profit, and Mycoskie sold it in just nine months.8 With two successful businesses behind him, Mycoskie and his sister, Paige, applied to be on the reality show Survivor in 2001. Although they did not make the cut for Survivor, they were ultimately cast in the travel-based real-ity series, The Amazing Race. Through this experience, Mycoskie was able to venture to Africa, Asia, and South America. Ultimately finishing the race as second runner-ups, the brother/sister team missed out on the million U.S. dollar prize by just a few minutes. However, and perhaps more importantly, the adventure exposed Mycoskie to

Brief Integrative Case 1.2

TOMS Puts Its Right Foot Forward

Brief Integrative Case 1.2 TOMS Puts Its Right Foot Forward 103

February 2006

May 2006

October 2006

April 2007

August 2011

December 2011

June 2013

March 2014

February 2015

June 2016

The company reaches 10,000 shoes sold, and the first“shoe drop” occurs in Argentina.

The first “A Day Without Shoes” social media campaignis launched, increasing donations and brand awareness.

TOMS launches its eyewear brand, maintaining thesame “One for One” concept.

TOMS reaches the milestone of over 2 million shoesdonated.

TOMS reaches the milestone of over 10 million shoesdonated.

TOMS reaches the milestone of over 60 million shoesdonated.

TOMS Bag Collection is launched, focusing on donationsto aid mothers in childbirth.

TOMS Roasting Company begins business, expandingTOMS’s product line into consumable products.

Sales begin. Following a string of positive press, shoesales skyrocket.

Blake Mycoskie founds TOMS & begins developmentof his first shoe line.

Figure 1 A Brief Timeline of TOMS

Argentine adventure, based the shoe design on the “alpar-gata” shoes, which he believed held potential for success in the U.S. market. “Shoes for a Better Tomorrow,” which Mycoskie originally named the company, was based on shoe sales today leading to donated shoes tomorrow. The name was eventually shortened to “Tomorrow’s Shoes,” which again was shortened to TOMS (see Figure 1).16

Products That Solve ProblemsTOMS is built around the concept of expanding community outreach efforts through reliable business practices. As often discussed, TOMS was founded with the “One for One” company philosophy: every pair of shoes purchased would fund the donation of a pair of shoes to a child in need. First focusing on developing and selling the simple Argentine alpargata shoe, the company has since diversified its product line greatly. Current shoe selection includes winter boots, wet-weather shoes, sports shoes, and even locally produced shoes. Through this program, local locations manufacture their own traditional shoe, spurring job creation in develop-ing areas. Each type of shoe that is donated is tailored to the specific geographic region to which it is sent.17 In 2011, the company expanded to incorporate eye-glasses. With every pair of sunglasses purchased, TOMS

funds the donation of a pair of prescription glasses to a person in need.18 Furthermore, the purchase of sunglasses funds more intensive eye-related procedures, including sight-saving surgery and medical treatments. Educational programs regarding proper eye care have also been spon-sored through TOMS’s donations. Through this venture, TOMS partners with 14 different organizations in 13 dif-ferent countries to help diverse communities.19 TOMS continues to expand its product line and the scope of its social outreach programs. TOMS formed its first consumable product offering, a coffee business called TOMS Roasting Company, in 2014. With each bag of cof-fee purchased, TOMS provides 140 liters of water to a com-munity in need. This equates to a week’s supply of fresh, safe water to an individual person.20  To date, TOMS has provided over 250,000 weeks of safe water to locations around the globe.21  In 2015, TOMS expanded into the handbag industry, with the charitable link of ensuring safe childbirth for expecting mothers in developing locations. A leading cause of childbirth complications for both the mother and the infant is infections; with a portion of the profits from the sale of its bags, TOMS is financially sup-porting partners in its network by delivering materials and training that is needed, decreasing the chance of an infec-tion for delivering mothers by up to 80 percent.22 

104 Part 1 Environmental Foundation

Social Responsibility, Sustainability, and Business StrategyEarly on, one of the most common criticisms of TOMS’s philanthropic programs was that it was not creating new jobs within local populations.29 Using this feedback con-structively, Mycoskie expanded the “One for One” phi-losophy and focused his company’s next efforts on creating job opportunities for those in the developing nations where donations were being directed. In 2013, TOMS committed to producing one-third of its shoes within the regions where they are actually distributed. This effort has proven successful; over 700 jobs have been created in the regions where shoes are donated. Furthermore, employment opportunities have been kept at an equal ratio for male and female workers, promoting gender equality in developing locations.30 Today, TOMS maintains factories in all six countries in which it donates shoes: Argentina, China, Ethiopia, Haiti, India, and Kenya. Another example of TOMS’s recent push towards social responsibility can be seen through TOMS Roasting Company. The coffee-produc-ing subsidiary now engages in sourcing practices that pro-vide farmers with a fair wage and ensure that clean water is accessible to people in the regions in which it sources its coffee beans. Interestingly, TOMS’s internally conducted studies indicate that its overseas production initiatives are not negatively affecting domestic shoe manufacturers.31 Helping like-minded start-ups has evolved into another priority for TOMS. Specifically, TOMS seeks to assist new socially oriented enterprises in developing locations. Major end-goals of these efforts are the creation of additional jobs in poverty-stricken areas and the reinvestment of revenue into the improvement of the lives of locals.32 To help facil-itate these efforts, TOMS has created a platform called TOMS Marketplace to highlight specific social enterprises and to assist them in their efforts to improve communities.  Another program that Mycoskie started is funded directly by sales of his award winning book,  Start Some-thing That Matters.33 Mycoskie donates 100 percent of the profits from the book to the Start Something That Matters Foundation, which has helped create over 20 socially responsible start-ups including Charlize Theron’s African Outreach Project, Charity: Water, Movember, and Ben Affleck’s Eastern Congo Initiative.34 Charity: Water is a nonprofit organization focused on solving the water shortage problems common to areas all over the world. Charity: Water takes donations from indi-viduals that are then reinvested into organizations experi-enced in building sustainable, community-owned water projects.35 Charity: Water now maintains operations in 24 different countries, funding almost 20,000 projects and providing over 6 million people with safe water.36 Movember, another nonprofit organization, is commit-ted to the happiness and health of men. The organization has raised over US$650 million and funded over 1,000 projects. Efforts are primarly focused on combating testicular and prostate cancers, the first and second most

As TOMS carries on its “One for One” philosophy, it continues to expand its product line. It is effectively gen-erating more revenue and at the same time helping more people in need. TOMS is also spreading its philosophy and gaining more partners to help it with the same cause.

The Unconventional LeaderMycoskie takes a somewhat unconventional approach to managing the everyday operations at TOMS. While many entrepreneurs spend long days at the office, Mycoskie takes his duties on the road with him, acting as a traveling brand representative. This allows him to personally con-vey the TOMS philosophy to potential customers. Back at the office, a carefully selected management team han-dles the day-to-day operations.23  Even when he is in the office, Mycoskie takes an unorthodox approach to manag-ing his staff. Informal meetings are often held out on his sailboat. Mycoskie’s personal life is equally unconventional. Prior to his recent marriage and the birth of his child, Mycoskie resided in his sailboat, docked in Marina del Ray, California. He would arise around 8:30 a.m., con-sume a Cliff Bar for breakfast, and spend several hours writing before finally heading into the office. Mycoskie is also a long-time user of a personal diary, allowing him to track his thoughts as they occur.24 In fact, his journaling has filled over 50 books, containing his thoughts on all aspects of his life. He usually revisits these notes months later. In a world where instant communication is often demanded by employers, Mycoskie is notorious for leav-ing his e-mail inbox untouched for several days at a time. He also has been known to frequently bypass e-mail com-pletely, utilizing handwritten letters instead. On many days, however, Mycoskie is up early to head to the airport and function as the company’s traveling spokesper-son.25 Mycoskie spends much of his time speaking at dif-ferent events and universities to promote personal social responsibility, the TOMS ideology, and other messages that he believes create positive impact in the world. For two or three months in the year, Mycoskie also takes time off to go travel as it continues to inspire him through seeing the world and meeting new people.26 In the years since visiting Argentina and building the TOMS brand, Mycoskie has largely focused on the cor-porate responsibility and charitable side of the business. Several times a year, Mycoskie leads teams of volunteers and employees on “shoe drops.” “Shoe drop” is the term that is used to describe when a TOMS team, composed of roughly 10 to 15 staff and volunteers, heads out into the field to hand out shoes to those in need.27  This oppor-tunity is considered an honor; an employee must earn the ability to participate by staying with the company for sev-eral years. TOMS now donates shoes in over 40 countries, preventing more diseases and providing the means for many children to live better lives.28

Brief Integrative Case 1.2 TOMS Puts Its Right Foot Forward 105

40  million women in four countries during childbirth, decreasing the likelihood of infection or death.42  Socially responsible companies have gained traction in the global society as people work to raise awareness and promote a higher standard of life; TOMS, leveraging this trend, is now valued at US$625 million.43 Building on the one-for-one model pioneered by TOMS, other companies have pursued similar approaches, such as Blanket Amer-ica, which gives a blanket for every blanket purchased, and Smile Squared, which donates a toothbrush for every one bought. It appears as if some consumers find the direct connection between buying and giving to be appeal-ing, and companies such as TOMS—and the charities they support—are thriving as a result.44,45 

Questions for Review

1. How might combining commercial objectives and social goals improve the impact of corporate social responsibility efforts? How might the two conflict?

2. What aspects of the “One for One” philosophy appeal to consumers? How might it appeal to con-sumers who may not otherwise be motivated to support corporate social responsibility?

3. Could a company like TOMS have come about absent the role of Blake Mycoskie? What is the role of the individual in entrepreneurial ventures such as TOMS?

Source: This case was prepared by Otto Eberle of Villanova Univer-sity under the supervision of Professor Jonathan Doh as the basis for class discussion. Additional research assistance was provided by Ben Littell. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility.

common cancers in males, as well as poor mental health and physical inactivity. An interesting symbol of this organization is their pride in having moustaches.37

Global Impact and InfluenceThrough TOMS’s ideology of “One for One,” the original organization and its offshoots have had a significant impact on the lives of those in need. TOMS partners with several different organizations in its Giving Partners program. These partners, numbering more than 100, provide exper-tise and input, working closely with TOMS in its shoes, sight, water, safe birth, and bullying-prevention efforts. The statistics highlight how effective many of the com-pany’s efforts have been. An estimated 2 million children have been protected from hookworm with the TOMS shoes provided, and, following shoe distribution, there has been a 42 percent increase in maternal health-care pro-gram participation and a 1,000-student increase in enroll-ment.38 The awareness program One Day Without Shoes has reached millions, showing the difficulties that people without shoes experience while also donating a pair of shoes for every social media photo shared that shows someone without shoes.39  The statistics from TOMS’s other product initiatives are just as encouraging. TOMS’s sunglasses purchases have funded hospitals and doctors with the help of 14 different partners. An estimated 325,000 people with cur-able eye ailments have had their sight restored as a result of TOMS’s efforts, and another 175,000 have received needed eye surgeries.40  Funds raised through TOMS Roasting Co. have supported partners like Water for Peo-ple and Aguayuda with the development and maintenance of safe water systems in local communities.41  From bag sales, TOMS and three of its partners have helped

1. Blake  Mycoskie, “How I Did It: The TOMS Story,” Entrepreneur, September 20, 2011, https://www.entrepreneur.com/article/220350.

2. Ibid. 3. Ibid. 4. Kelsey Hubbard, “Sole Man Blake Mycoskie,”

The Wall Street Journal, January 7, 2012,  www.wsj.com/articles/SB10001424052970204632204577131031031671906.

5. Jessica Shambora, “How TOMS Shoes Founder Blake Mycoskie Got Started,”  CNN, March 16, 2010, http://archive.fortune.com/2010/03/16/smallbusiness/toms_shoes_blake_mycoskie.fortune/index.htm.

6. Karen  Bates, “‘Soul Mates’: Shoe Entrepreneur Finds Love in Giving,”  NPR, March 7, 2014, www.npr.org/2010/11/23/131550142/-soul-mates-shoe-entrepreneur-finds-love-in-giving.

7. Shambora, “How TOMS Shoes Founder Blake Mycoskie Got Started.”

8. Imran Amed and Vikram Alexei Kansara, “Founder Stories: Blake Mycoskie of Toms on Social Entre-preneurship and Finding His ‘Business Soulmate,’” Business of Fashion, July 29, 2013, https://www.businessoffashion.com/articles/founder-stories/founder-stories-blake-mycoskie-of-toms-on- social-entrepreneurship-and-finding-his-business-soulmate.

9. Gillian Telling, “Saving Soles,”  Hemispheres, April 1, 2009,  http://old.hemimag.us/2009/04/01/blake-mycoskie-saves-the-world-step-by-step/.

10. J. J. Colao, “The Trials of Entrepreneurship: TOMS Founder Blake Mycoskie on Starting Up Again . . . and Again,”  Forbes, March 3, 2014,  www. forbes.com/sites/jjcolao/2014/03/03/the-trials-of-

ENDNOTES

106 Part 1 Environmental Foundation

29. Cheryl Davenport,  “The Broken ‘Buy-One, Give-One’ Model: 3 Ways to Save Toms Shoes,” factsco-exist.com, April 10, 2012,  www.fastcoexist.com/1679628/the-broken-buy-one-give-one-model-three-ways-to-save-toms-shoes.

30. Kevin  Short, “Toms CEO Blake Mycoskie Offers Surprising Answer to His Critics,” Huffington Post, November 14, 2013,  www.huffingtonpost.com/2013/11/14/toms-ceo-critics_n_4274637.html.

31. “TOMS: One for One,”  TOMS,  www.toms.com/#expanding-local-production.

32. “Beyond One for One: Social Enterprise,” TOMS,  www.toms.com/beyond-one-for-one.

33. “Hardcover Business Books,”  New York Times, October 2011,  www.nytimes.com/books/best-sellers/ 2011/10/09/hardcover-business-books/.

34. Sandi L.  Gordon, “Change the World—Start Some-thing That Matters,”  Ezine, January 3, 2013, http://ezinearticles.com/?Change-the-World—Start-Something-That-Matters&id=7447820.

35. Gregory  Ferenstein, “Trickle-Forward Economics: Scott Harrison’s Water-Based Experiment in Viral Philanthropy,”  Fast Company, October 24, 2011,  https://www.fastcompany.com/1790136/trickle-forward-economics-scott-harrisons-water-based-experiment-viral-philanthropy.

36. Charity: Water home page,  www.charitywater.org/.37. Movember Foundation home page,  https://us.

movember.com/?home.38. “What We Give: Giving Shoes,” TOMS,  www.

toms.com/what-we-give-shoes.39. Julee  Wilson, “TOMS Shoes Annual ‘One Day With-

out Shoes,’ Plus Barefoot Celebs,”  Huffington Post, April 10, 2012,  www.huffingtonpost.com/2012/04/10/toms-one-day-without-shoes_n_1414470.html.

40. “What We Give: Giving Sight,” TOMS, http://www.toms.com/what-we-give-sight

41. “What We Give: Giving Water,”  TOMS,  www.toms.com/what-we-give-water.

42. “What We Give: Safe Births,”  TOMS,  www.toms.com/what-we-give-safe-births.

43. Marcela Isaza and Leanne Italie,  “Blake Mycoskie on 10 Years of Toms,”  Business of Fashion, May 6, 2016,  https://www.businessoffashion.com/articles/news-analysis/blake-mycoskie-on-10-years-of-toms.

44. Adam L.  Penenberg, “Blanket America’s Charitable Capitalism Is Going Viral,”  Fast Company, November 12, 2009,  https://www.fastcompany.com/1449664/blanket-americas-charitable-capitalism-going-viral.

45. Michelle Juergen, “Smile Squared Donates Tooth-brushes to Children in Need,” Entrepreneur, November 7, 2012, https://www.entrepreneur.com/article/224444.

entrepreneurship-toms-founder-blake-mycoskie-on-starting-up-again-and-again/#76895a42669d.

11. “Get to the Top with Mycoskie’s 5 tips,”  CNN World Business, September 26, 2008,  www.cnn.com/2008/BUSINESS/09/26/mycoskie.tips/index.html?iref=nextin.

12. Colao, “The Trials of Entrepreneurship.”13. “Blake Mycoskie, Contributor Profile,”  Huffington

Post, 2014,  www.huffingtonpost.com/author/blake-mycoskie.

14. Blake  Mycoskie, “Blake Mycoskie Conceived the Idea for TOMS Shoes While Sitting on a Farm, Pondering Life, in Argentina,” Business Insider, September 21, 2011,  www. businessinsider.com/blake-mycoskie-argentina- toms-shoes-2011-09.

15. Ibid.16. Mycoskie, “How I Did It.”17. “Improving Lives,”  http://www.toms.com/improving-

lives.18. Booth  Moore, “Toms Founder Blake Mycoskie Is

Known for Pairing Fashion and Causes,” Los Angeles Times, June 11, 2011,  http://articles.latimes.com/2011/jun/11/image/la-ig-toms-20110611.

19. “What We Give: Giving Sight,”  TOMS,  www.toms.com/what-we-give-sight.

20. Stephanie  Strom, “Turning Coffee into Water to Expand Business Model,”  New York Times, March 11, 2014,  www.nytimes.com/2014/03/12/business/turning-coffee-into-water-to-expand-a-one-for-one-business-model.html.

21. Jefferson  Graham, “SXSW | Toms Expands to Coffee,”  USA Today, March 12, 2014,  www. usatoday.com/story/tech/2014/03/12/sxsw–toms-expands-to-coffee/6284525/.

22. “Every Newborn: An Action Plan to End Prevent-able Deaths,”  World Health Organization, June 2014,  www.who.int/maternal_child_adolescent/ topics/newborn/enap_consultation/en/.

23. Tamara  Schweitzer, “The Way I Work: Blake Mycoskie of Toms Shoes,”  Inc.com, June 1, 2010, www.inc.com/magazine/20100601/the-way-i-work-blake-mycoskie-of-toms-shoes.html.

24. Ibid.25. Ibid.26. Ibid.27. Ibid.28. Michael  Murray, “Person of the Week: TOMS

Shoes Founder Blake Mycoskie,”  ABC News, April 8, 2011,  abcnews.go.com/International/ PersonOfWeek/person-week-toms-shoes-founder-blake-mycoskie/story?id=13331473.

107

conditions, such as long hours, unhealthy conditions, and/or an oppressive environment. Some observers see these work environments as essentially acceptable if the labor-ers freely contract to work in such conditions. For others, to call a workplace a sweatshop implies that the working conditions are illegitimate and immoral. The U.S. Govern-ment Accountability Office (the name since July 7, 2004) would hone this definition for U.S. workplaces to include those environments where an employer violates more than one federal or state labor, industrial homework, occupa-tional safety and health, workers’ compensation, or indus-try registration laws. The AFL-CIO Union of Needletrades, Industrial and Textile Employees would expand on that to include workplaces with systematic violations of global fundamental workers’ rights. The Interfaith Center on Corporate Responsibility (ICCR) defines sweatshops much more broadly than either of these; even where a factory is clean, well organized, and harassment free, the ICCR considers it a sweatshop if its workers are not paid a sustainable living wage. The purpose of reviewing these varied definitions is to acknowledge that, by definition, sweatshops are oppressive, unethical, and patently unfair to workers.12

History of SweatshopsSweatshop labor systems were most often associated with garment and cigar manufacturing of the period 1880–1920. Sweated labor can also be seen in laundry work, green grocers, and most recently in the “day laborers,” often legal or illegal immigrants, who landscape suburban lawns.13 Now, sweatshops are often found in the clothing industry because it is easy to separate higher- and lower-skilled jobs and contract out the lower-skilled ones. Cloth-ing companies can do their own designing, marketing, and cutting and contract out sewing and finishing work. New contractors can start up easily; all they need are a few sewing machines in a rented apartment or factory loft located in a neighborhood where workers can be recruited.14 Sweatshops make the most fashion-oriented clothing—women’s and girls’—because production has to be flexible, change quickly, and be done in small batches. In less style-sensitive sectors—men’s and boys’ wear, hosiery, and knit products—there is less change and lon-ger production runs, and clothing can be made competi-tively in large factories using advanced technology.15

IntroductionIn November 2009, after nearly two years of student cam-paigning in coordination with the apparel workers, the Hon-duran workers’ union concluded an agreement with Russell Athletic, a major supplier of clothing and sportswear to col-lege campuses around the country. The agreement included a commitment by Russell to put all of the workers back to work, to provide compensation for lost wages, to recognize the union and agree to collective bargaining, and to allow access for the union to all other Russell apparel plants in Honduras for union organizing drives in which the company will remain neutral. According to a November 18, 2009, press release of United Students Against Sweatshops (USAS), this has been an “unprecedented victory for labor rights.”1 Outsourcing of production facilities and labor to devel-oping countries has been one of the important business strategies of large U.S. corporations. While in the United States, a typical corporation is subject to various regula-tions and laws such as minimum wage law, labor laws, safety and sanitation requirements, and trade union organiz-ing provisions, in some developing countries these laws are soft and rudimentary, allowing a large corporation to derive significant cost benefits from outsourcing. Moreover, many developing countries like Bangladesh, China, Honduras, India, Pakistan, and Vietnam encourage the outsourcing of work from the developed world to factories within their borders as a source of employment for their citizens, who otherwise would suffer from lack of jobs in their country. However, in spite of the obvious positive fact of creating new jobs in the hosting country, large multinational corpo-rations very often have been criticized for violating the rights of the workers, creating unbearable working condi-tions, and increasing workloads while cutting compensa-tion. They have been attacked for creating a so-called sweatshop environment for their employees. A few of the recent targets of the criticism have been Walmart,2 Disney,3 JCPenney, Target, Sears,4 ToysRUs,5 Nike,6 Reebok,7 adidas,8 Gap,9 IBM, Dell, HP,10 Apple, and Microsoft,11 etc. This case addresses advocacy by students and other stakeholders toward one of these companies and docu-ments the evolution and outcome of the dispute.

What Is a Sweatshop?By common agreement, a sweatshop is a workplace that provides low or subsistence wages under harsh working

In-Depth Integrative Case 1.1

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sweatshops were difficult to locate and could easily close and move to avoid union organizers and government inspec-tors. In the 1960s, sweatshops began to reappear in large numbers among the growing labor force of immigrants, and by the 1980s sweatshops were again “business as usual.” In the 1990s, atrocious conditions at a sweatshop once again shocked the public.20 A 1994 U.S. Department of Labor spot check of garment operations in California found that 93 per-cent had health and safety violations, 73 percent of the gar-ment makers had improper payroll records, 68 percent did not pay appropriate overtime wages, and 51 percent paid less than the minimum wage.21

Sweatshop DilemmaThe fight against sweatshops is never a simple matter; there are mixed motives and unexpected outcomes. For example, unions object to sweatshops because they are genuinely concerned about the welfare of sweated labor, but they also want to protect their own members’ jobs from low-wage competition even if this means ending the jobs of the working poor in other countries.22 Also, sweat-shops can be evaluated from moral and economic perspec-tives. Morally, it is easy to declare sweatshops unacceptable because they exploit and endanger workers. But from an economic perspective, many now argue that, without sweatshops, developing countries might not be able to compete with industrialized countries and achieve export growth. Working in a sweatshop may be the only alternative to subsistence farming, casual labor, prostitu-tion, and unemployment. At least most sweatshops in other countries, it is argued, pay their workers above the poverty level and provide jobs for women who are other-wise shut out of manufacturing. And American consumers have greater purchasing power and a higher standard of living because of the availability of inexpensive imports.23

NGOs’ Anti-Sweatshop InitiativesInternational nongovernmental organizations (NGOs) have attempted to step into the sweatshop conflict to suggest voluntary standards to which possible signatory countries or organizations could commit. For instance, the Interna-tional Labour Office has promulgated its Tripartite Decla-ration of Principles Concerning Multinational Enterprises and Social Policy, which offers guidelines for employment, training, conditions of work and life, and industrial rela-tions. The “Tripartite” nature refers to the critical coopera-tion necessary from governments, employers’ and workers’ organizations, and the multinational enterprises involved.24 On December 10, 1948, the General Assembly of the United Nations adopted its Universal Declaration of Human Rights, calling on all member countries to pub-licize the text of the Declaration and to cause it to be disseminated, displayed, and read. The Declaration rec-ognizes that all humans have an inherent dignity and specific equal and inalienable rights. These rights are

Since their earliest days, sweatshops have relied on immi-grant labor, usually women, who were desperate for work under any pay and conditions. Sweatshops in New York City, for example, opened in Chinatown, the mostly Jewish Lower East Side, and Hispanic neighborhoods in the bor-oughs. Sweatshops in Seattle are near neighborhoods of Asian immigrants. The evolution of sweatshops in London and Paris—two early and major centers of the garment industry—followed the pattern in New York City. First, gar-ment manufacturing was localized in a few districts: the Sentier of Paris and the Hackney, Haringey, Islington, Tower Hamlets, and Westminster boroughs of London. Second, the sweatshops employed mostly immigrants, at first men but then primarily women, who had few job alternatives.16 In developing countries, clothing sweatshops tend to be widely dispersed geographically rather than concentrated in a few districts of major cities, and they often operate alongside sweatshops, some of which are very large, that produce toys, shoes (primarily athletic shoes), carpets, and athletic equipment (particularly baseballs and soccer balls), among other goods. Sweatshops of all types tend to have child labor, forced unpaid overtime, and widespread viola-tions of workers’ freedom of association (i.e., the right to unionize). The underlying cause of sweatshops in develop-ing nations—whether in China, Southeast Asia, the Carib-bean, or India and Bangladesh—is intense cost-cutting done by contractors who compete among themselves for orders from larger contractors, major manufacturers, and retailers.17 Sweatshops became visible through the public exposure given to them by reformers in the late 19th and early 20th centuries in both England and the United States. In 1889–1890, an investigation by the House of Lords Select Committee on the Sweating System brought atten-tion in Britain. In the United States, the first public inves-tigations came as a result of efforts to curb tobacco homework, which led to the outlawing of the production of cigars in living quarters in New York State in 1884.18 The spread of sweatshops was reversed in the United States in the years following a horrific fire in 1911 that destroyed the Triangle Shirtwaist Company, a women’s blouse manufacturer near Washington Square in New York City. The company employed 500 workers in notoriously poor conditions. One hundred forty-six workers perished in the fire; many jumped out windows to their deaths because the building’s emergency exits were locked. The Triangle fire made the public acutely aware of conditions in the clothing industry and led to pressure for closer regulation. The number of sweatshops gradually declined as unions organized and negotiated improved wages and conditions and as government regulations were stiffened (particularly under the 1938 Fair Labor Standards Act, which imposed a minimum wage and required overtime pay for work of more than 40 hours per week).19 Unionization and government regulation never completely eliminated clothing sweatshops, and many continued on the edges of the industry; small

In-Depth Integrative Case 1.1 Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic 109

company. USAS pressure tactics persuaded one of the nation’s leading sportswear companies, Russell Athletic, to agree to rehire 1,200 workers in Honduras who lost their jobs when Russell closed their factory soon after the workers had unionized.29 Russell Corporation, founded by Benjamin Russell in 1902, is a manufacturer of athletic shoes, apparel, and sports equipment. Russell products are marketed under many brands, including Russell Athletic, Spalding, Brooks, Jerzees, Dudley Sports, and others. This company with more than 100 years of history has been a leading supplier of team uniforms at the high school, college, and professional level. Russell Athletic™ active wear and col-lege-licensed products are broadly distributed and mar-keted through department stores, sports specialty stores, retail chains, and college bookstores.30 After an acquisi-tion in August 2006, Russell’s brands joined Fruit of the Loom in the Berkshire-Hathaway family of products. Russell/Fruit of the Loom is the largest private em-ployer in Honduras. Unlike other major apparel brands, Russell/Fruit of the Loom owns all eight of its factories in Honduras rather than subcontracting to outside manu-facturers.31 The incident related to Russell Athletic’s busi-ness in Honduras that led to a major scandal in 2009 was the company’s decision to fire 145 workers in 2007 for supporting a union. This ignited the anti-sweatshop cam-paign against the company. Russell later admitted its wrongdoing and was forced to reverse its decision. How-ever, the company continued violating worker rights in 2008 by constantly harassing the union activists and mak-ing threats to close the Jerzees de Honduras factory. It finally closed the factory on January 30, 2009, after months of battling with a factory union.32

NGOs’ Anti-Sweatshop PressureThe Worker Rights Consortium (WRC) has conducted a thorough investigation of Russell’s activities, and ultimately released a 36-page report on November 7, 2008, document-ing the facts of worker rights violations by Russell in its factory Jerzees de Honduras, including the instances of death threats received by the union leaders.33 The union’s vice president, Norma Mejia, publicly confessed at a Berk-shire-Hathaway shareholders’ meeting in May 2009 that she had received death threats for helping lead the union.34 The Worker Rights Consortium continued monitoring the flow of the Russell Athletic scandal and issued new reports and updates on this matter throughout 2009, including its recommendation for Russell’s management on how to mediate the situation and resolve the conflict. As stated in its mission statement, the Worker Rights Consortium is an independent labor rights monitoring organization, whose purpose is to combat sweatshops and protect the rights of workers who sew apparel and make other products sold in the United States. The WRC con-ducts independent, in-depth investigations, issues public

based on the foundation of freedom, justice, and peace. The UN stated that the rights should be guaranteed with-out distinction of any kind, such as race, color, sex, lan-guage, religion, political or other opinion, national or social origin, property, birth, or other status. Further-more, no distinction shall be made on the basis of the political, jurisdictional, or international status of the country or territory to which a person belongs. The foun-dational rights also include the right to life, liberty, and security of person and protection from slavery or servi-tude, torture, or cruel, inhuman, or degrading treatment or punishment.25 Articles 23, 24, and 25 discuss issues with immediate implications for sweatshops. By extrapo-lation, they provide recognition of the fundamental human right to nondiscrimination, personal autonomy or liberty, equal pay, reasonable working hours and the abil-ity to attain an appropriate standard of living, and other humane working conditions. All these rights were rein-forced by the United Nations in its 1966 International Covenant on Economic, Social, and Cultural Rights.26 These are but two examples of standards promulgated by the international labor community, though the enforce-ment of these and other norms is spotty. In the apparel industry in particular, the process of internal and external monitoring has matured such that it has become the norm at least to self-monitor, if not to allow external third-party monitors to assess compliance of a supplier factory with the code of conduct of a multinational corporation or with that of NGOs. Though a number of factors affected this evolution, one such factor involved pressure by American universities on their apparel suppliers, which resulted in two multistakeholder efforts—the Fair Labor Association, primarily comprising and funded by the multinational retailers, and the Worker Rights Con-sortium, originally perceived as university driven. Through a cooperative effort of these two organizations, large retailers such as Nike and Adidas not only have allowed external monitoring, but Nike has now published a complete list of each of its suppliers.27

The Case of Russell AthleticWhile some argue that sweatshop scandals cause little or no impact on the corporate giants because people care more for the ability to buy cheap and affordable products rather than for working conditions of those who make these products,28 the recent scandal around the Russell Athletic brand has proved that it may no longer be as easy for a corporation to avoid the social responsibility for its outsourcing activities as it has been for a long time. November 2009 became a tipping point in the many years of struggle between the student anti-sweatshop movement and the corporate world. An unprecedented victory was won by the United Students Against Sweatshops (USAS) coalition against Russell Athletic, a corporate giant owned by Fruit of the Loom, a Berkshire-Hathaway portfolio

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products. The students even sent activists to knock on Warren Buffett’s door in Omaha because his company, Berkshire-Hathaway, owns Fruit of the Loom, Russell’s parent company.39 United Students Against Sweatshops involved students from more than 100 campuses where it did not have chap-ters in the anti-Russell campaign. It also contacted students at Western Kentucky University in Bowling Green, where Fruit of the Loom has its headquarters.40 The USAS activ-ists even reached Congress, trying to gain more support and inflict more political and public pressure on Russell Athletic. On May 13, 2009, 65 congressmen signed the letter addressed to Russell CEO John Holland expressing their grave concern over the labor violations. In addition, the Fair Labor Association (FLA), a non-profit organization dedicated to ending sweatshop condi-tions in factories worldwide, issued a statement on June 25, 2009, putting Russell Athletic on probation for noncompli-ance with FLA standards.41 The Fair Labor Association, one of the powerful authorities that oversees the labor prac-tices in the industry, represents a powerful coalition of industry and nonprofit sectors. The FLA brings together colleges and universities, civil society organizations, and socially responsible companies in a unique multistake-holder initiative to end sweatshop labor and improve work-ing conditions in factories worldwide. The FLA holds its participants, those involved in the manufacturing and mar-keting processes, accountable to the FLA Workplace Code of Conduct.42 The 19-member Board of Directors, the FLA’s policy-making body, comprises equal representation from each of its three constituent groups: companies, col-leges and universities, and civil society organizations.43

Victory for USAS and WRCAs mentioned at the start of this case, on November 2009, after nearly two years of student campaigning in coordina-tion with the apparel workers, the Honduran workers’ union concluded an agreement with Russell that put all of the workers back to work, provided compensation for lost wages, recognized the union and agreed to collective bar-gaining, and provided access for the union to all other Russell apparel plants in Honduras for union-organizing drives in which the company will remain neutral. Accord-ing to the November 18, 2009, press release of USAS, this has been an “unprecedented victory for labor rights.”44  Rod Palmquist, USAS International Campaign Coordinator and University of Washington alumnus, noted that there were no precedents for a factory apparently being shut down to dislodge a union and “later reopened after a worker-activist campaign.”45 This was not an overnight victory for the student move-ment and the coalition of NGOs such as USAS, WCR, and FLA. It took over 10 years of building a movement that persuaded scores of universities to adopt detailed

reports on factories producing for major U.S. brands, and aids workers at these factories in their efforts to end labor abuses and defend their workplace rights. The WRC is supported by over 175 college and university affiliates and is primarily focused on the labor practices of factories that make apparel and other goods bearing university logos.35 Worker Rights Consortium assessed that Russell’s decision to close the plant represented one of the most serious challenges yet faced to the enforcement of univer-sity codes of conduct. If allowed to stand, the closure would not only unlawfully deprive workers of their liveli-hoods, it would also send an unmistakable message to workers in Honduras and elsewhere in Central America that there is no practical point in standing up for their rights under domestic or international law and university codes of conduct and that any effort to do so will result in the loss of one’s job. This would have a substantial chilling effect on the exercise of worker rights throughout the region.36 The results of the WRC investigation of Russell Ath-letic unfair labor practices in Honduras spurred the nation-wide student campaign led by United Students Against Sweatshops (USAS), who persuaded the administrations of Boston College, Columbia, Harvard, NYU, Stanford, Michigan, North Carolina, and 89 other colleges and uni-versities to sever or suspend their licensing agreements with Russell. The agreements—some yielding more than $1 million in sales—allowed Russell to put university logos on T-shirts, sweatshirts, and fleeces.37 As written in its mission statement, USAS is a grass-roots organization run entirely by youth and students. USAS strives to develop youth leadership and run strategic student-labor solidarity campaigns with the goal of build-ing sustainable power for working people. It defines “sweatshop” broadly and considers all struggles against the daily abuses of the global economic system to be a struggle against sweatshops. The core of its vision is a world in which society and human relationships are organized coop-eratively, not competitively. USAS struggles toward a world in which all people live in freedom from oppression, in which people are valued as whole human beings rather than exploited in a quest for productivity and profits.38 The role of USAS in advocating for the rights of the Honduran workers in the Russell Athletic scandal is hard to overestimate. One can only envy the enthusiasm and effort contributed by students fighting the problem that did not seem to have any direct relationship to their own lives. They did not just passively sit on campus, but went out to the public with creative tactical actions such as picketing the NBA finals in Orlando and Los Angeles to protest the league’s licensing agreement with Russell, dis-tributing fliers inside Sports Authority sporting goods stores, and sending Twitter messages to customers of Dick’s Sporting Goods urging them to boycott Russell

In-Depth Integrative Case 1.1 Student Advocacy and “Sweatshop” Labor: The Case of Russell Athletic 111

Questions for Review

1. Assume that you are an executive of a large U.S. multinational corporation planning to open new manufacturing plants in China and India to save on labor costs. What factors should you consider when making your decision? Is labor outsourcing to developing countries a legitimate business strategy that can be handled without risk of running into a sweatshop scandal?

2. Do you think that sweatshops can be completely eliminated throughout the world in the near future? Provide an argument as to why you think this can or cannot be achieved.

3. Would you agree that in order to eliminate sweat-shop conflicts, large corporations such as Russell Athletic should retain the same high labor standards and regulations that they have in the home country (for example, in the U.S.) when they conduct busi-ness in developing countries? How hard or easy can this be to implement?

4. Do you think that the public and NGOs like USAS should care about labor practices in other countries? Isn’t this a responsibility of the government of each particular country to regulate the labor practices within the borders of its country? Who do you think provides a better mechanism of regulating and improving the labor practices: NGOs or country governments?

5. Would you agree that Russell Athletic made the right decision by conceding to USAS and union demands? Isn’t a less expensive way to handle this sort of situation simply to ignore the scandal? Please state your pros and cons regarding Russell’s decision to compromise with the workers’ union and NGOs as opposed to ignoring this scandal.

Source: This case was prepared by Professor Jonathan Doh and Tety-ana Azarova of Villanova University as the basis for class discussion. Additional research assistance was provided by Ben Littell. It is not intended to illustrate either effective or ineffective managerial capabil-ity or administrative responsibility.

codes of conduct for the factories used by licensees like Russell.46 It is another important lesson for the corporate world in the era of globalization, which can no longer expect to conduct business activities in isolation from the rest of the world. The global corporations such as Russell Athletic, Nike, Gap, Walmart, and others will have to assess the impact of their business decisions on all the variety of stakeholders and take higher social responsibil-ity for what they do in any part of the world. More recently, a fire at a Bangalore textile factory in late 2012, and two horrific accidents at garment factories in Bangladesh in 2013, have placed renewed pressure on U.S. and European clothing brands to take greater respon-sibility for the working conditions of the factories from which they source products. On April 24, 2013, more than 1,000 workers were killed when an eight-story building collapsed while thousands of people were work-ing inside. Less then two weeks later, eight people were killed in a fire at a factory in Dhaka that was producing clothes for Western retailers. After a number of investor, religious, labor, and human rights groups voiced con-cerns about the lack of oversight and accountability by the major companies, several of the world’s largest apparel firms agreed to a plan to help pay for fire safety and building improvements. Companies agreeing to the plan included the Swedish-based retailer H&M; Inditex, owner of the Zara chain; the Dutch retailer C&A; and British companies Primark and Tesco. At the same time, the Bangladesh government announced that it would improve its labor laws and raise wages, and ease restric-tions on forming trade unions. U.S. retailers Walmart and Gap did not commit to the agreement, expressing con-cerns about legal liability in U.S. courts. Instead, with the help of a U.S.-based think tank, they announced they would pursue a separate accord to improve factory condi-tions in Bangladesh.47 Despite these promises by various companies and gov-ernmental organizations, and a commitment of over a quarter of a billion dollars, much work remains to be done. According to December 2015 report by NYU Stern Center for Business and Human Rights, only eight out of over 3,000 factories in Bangladesh had cleared violations in the years since the garment fires and building collapse.48

1. USAS Press Release on “Jerzees de Honduras Victory,” USAS, November 18, 2009, usas.org/2009/11/18/usas-press-release-on-jerzees-de- honduras-victory/.

2. David Barboza, “In Chinese Factories, Lost Fingers and Low Pay,” New York Times, January 5, 2008, www.nytimes.com/2008/01/05/business/worldbusiness/05sweatshop.html.

3. Ibid. 4. “Tearing Down a Sweatshop,” Duke University News,

June 15, 2001, https://today.duke.edu/2001/06/peterle615.html.

5. Dexter Roberts and Aaron Bernstein, “Inside a Chinese Sweatshop: A Life of Fines and Beating,” BusinessWeek, October 2, 2000, www.bloomberg.

ENDNOTES

112 Part 1 Environmental Foundation

27. Ibid.28. Laura Fitch, “Do Sweatshop Scandals Really

Damage Brands?”  Brandchannel, November 20, 2009, www.brandchannel.com/home/post/2009/ 11/20/Do-Sweatshop-Scandals-Really-Damage-Brands.aspx#continue.

29. Steven Greenhouse, “Labor Fight Ends in Win for Students,”  New York Times,  November 17, 2009,  www.nytimes.com/2009/11/18/business/18labor.html.

30. Russell Athletic home page,  www.fotlinc.com/pages/russell-athletic-classic-athletic-apparel-and-uniforms.html#.WCNTKPorKUk.

31. “USAS Press Release on Jerzees de Honduras Victory.”32. “Russell Corporation’s Rights Violations in Hondu-

ras,” Worker Rights Consortium, News and Projects, http://workersrights.org/RussellRightsViolations.asp.

33. Ibid.34. Greenhouse, “Labor Fight Ends in Win for Students.”35. “Mission,”  Worker Rights Consortium,  http://

workersrights.org/about/.36. “Russell Corporation’s Rights Violations in Honduras.”37. Greenhouse, “Labor Fight Ends in Win for Students.”38. USAS, “Mission and Vision,”  http://usas.org/about/

mission-vision-organizing/.39. Greenhouse, “Labor Fight Ends in Win for Students.”40. Ibid.41. FLA Board Resolution on Special Review for

Russell Corporation, adopted June 25, 2009,  Fair Labor Association,  www.fairlabor.org/sites/default/files/documents/reports/board_resolution_06.28.09.pdf.

42. “FLA Workplace Code of Conduct,” Fair Labor Association,  www.fairlabor.org/our-work/labor- standards.

43. “Board of Directors,”  Fair Labor Association,  www.fairlabor.org/about-us/board-directors.

44. USAS Press Release on “Jerzees de Honduras Victory.”

45. Ibid.46. Greenhouse, “Labor Fight Ends in Win for Students.”47. Steven Greenhouse and Jim Yardley, “Global Retailers

Join Safety Plan for Bangladesh.” New York Times, May 14, 2013, p. A1.

48. Gillian B. White, “Are Factories in Bangladesh Any Safer Now?,” The Atlantic Magazine, December 17, 2015, www.theatlantic.com/business/archive/2015/12/ bangladesh-factory-workers/421005/.

com/news/articles/2000-10-01/inside-a-chinese-sweatshop-a-life-of-fines-and-beating.

6. Tim Connor, “Still Waiting for Nike to Do It,” Global  Exchange,  May 2001,  www.globalexchange.org/campaigns/sweatshops/nike/stillwaiting.html.

7. Ann Harrison and Jason Scorse, “Multinationals and Anti-Sweatshop Activism,”American Economic Review  100, no. 1  (March 2010),  https://www.aeaweb.org/articles?id=10.1257/aer.100.1.247.

8. Ibid. 9. Ibid.10. “Working in a Chinese Sweatshop for HP, Micro-

soft, Dell and IBM,”  France 24,  December 2, 2009, observers.france24.com/en/20090212-working-hp-microsoft-china-serving-prison-sentence- sweatshop-dell-ibm-china.

11. Jonathan Adams and Kathleen E. McLaughlin, “Special Report: Silicon Sweatshops,” Globalpost, November 17, 2009,  sacom.hk/special-report- silicon-sweatshops/.

12. Laura P. Hartman,  Encyclopedia of Business Ethics and Society,  vol. 4, ed. Robert W. Kolb (Thousand Oaks, CA: Sage Publications, 2008), pp. 2034–2041.

13. Richard A. Greenwald,  Dictionary of American History, 3rd ed., vol. 8, ed. Stanley I. Kutler (New York: Charles Scribner’s Sons, 2003), pp. 34–35.

14. Gary Chaison,  Encyclopedia of Clothing and  Fash-ion,  vol. 3, ed. Valerie Steele (Detroit: Charles Scribner’s Sons, 2005), pp. 247–250.

15. Ibid.16. Ibid.17. Ibid.18. Greenwald,  Dictionary of American  History,

pp. 34–35.19. Chaison,  Encyclopedia of Clothing and  Fashion, 

pp. 247–250.20. Ibid.21. Hartman,  Encyclopedia of Business  Ethics and

Society,  pp. 2034–2041.22. Chaison,  Encyclopedia of  Clothing and Fashion, 

pp. 247–250.23. Ibid.24. Hartman,  Encyclopedia of  Business Ethics and

Society,  pp. 2034–2041.25. Ibid.26. Ibid.

113

spending. In 2014, drug prices grew by 12.2 percent from the previous year, and prices for some medications, including effective treatments for hepatitis-C, cancer, and multiple sclerosis, grew by as much as $50,000.4 Patients need reliable drugs that can be used to treat their conditions; however, the costs to patients vary widely based on the health-care system of the countries in which they live, whether they are subject to public or private insurance (or no insurance at all), and various other fac-tors. In the United States, insurance options vary widely, with some patients paying out of pocket, others opting for coverage under their employer-paid or commercial insur-ance, and some utilizing a form of government-paid insur-ance, like Medicare. The type of provider and type of plan ultimately determine the cost that the patient must pay out of pocket for any prescription medications. Some plans require co-pays, premiums, or deductibles to cover the costs of prescriptions and some pay a certain percentage of prescription costs, leaving the balance to the patient. In many countries featuring single-payer models, health plans determine which drugs are available and how they are to be allocated to patients. In a similar vein, insurance plans in the United States maintain a “booklet” or listing of what prescription medications are covered under a given plan. This booklet can change from year-to-year, meaning that one year a given insurance company will cover costs for a certain medication and, due to factors like huge price increases, the medication may not be cov-ered the following year. In the United States, prescribing doctors are an impor-tant stakeholder in this issue. Until recently, their respon-sibility and incentives were not always well established. In the past, it was common practice for pharmaceutical companies to offer doctors fees for research and clinical assessments. Because these fees created at least the appearance of a conflict of interest, legislation and regu-lation began to require greater disclosure and reporting. Now, all compensation, including nonmonetary items such as food and entertainment, that pharmaceutical com-panies provide to doctors in exchange for research and promotional activities must be reported.5 Putting that role aside, doctors are generally expected to treat patients with whatever means result in the highest efficacy levels. Higher prescription drug prices inevitably interact with that responsibility. Recent trends seem to indicate that these tensions will only grow; the number of Americans using prescription medication has increased nearly 10 percent since 1999, to 60 percent of Americans,

In September 2015, Turing Pharmaceuticals, headed by former hedge fund manager Martin Shrkeli, increased the price of a 62-year-old drug used for treating life-threaten-ing parasitic infections in HIV and cancer patients by over 5,000 percent—from US$13.50 to US$750 per tablet.1 Also in 2015, Valeant Pharmaceuticals raised the price of a standard-use diabetes pill from US$896 to US$10,020, pills used for Wilson’s Disease from US$1,395 and US$888 to US$21,267 and US$26,139 respectively, and a heart rate medication from $4,489 to $36,811.2 In the same year, Rodelis Therapeutics increased the price of a drug used to treat multidrug-resistant tuberculosis from around US$500 to US$10,800 per 30 pills.3 These highlight just a few examples of numerous recent extreme price increases that have fueled the debate regarding the cost of prescrip-tion medication in the United States, prompting compari-sons to drug prices in other industrialized countries. Moreover, a related debate has simmered regarding access to life-saving medicine in developing countries, the rela-tively low investments by major global pharma companies in developing new medicines for diseases such as tubercu-losis and malaria, and the prices major pharmaceutical companies charge for HIV/AIDS medications.

Pharmaceuticals and Pricing—A Complicated CalculationThe issue of drug pricing is incredibly complex and, as more prescription medications are becoming available to the growing global population, that complexity is increas-ing. Debates regarding prescription medication pricing involve such hot-button issues as the appropriate levels of corporate profits, the responsibility of the corporations who own the medication (profit for shareholders versus providing a need for suffering patients), and insurance coverage, to name a few. The ethical debate over drug pricing is not confined to just the United States, but extends to developed and developing companies alike. The pricing of pharmaceuticals is influenced by a myriad of stakeholders who represent a wide range of competing interests. These include the patients taking the drugs, the doctors prescribing the drugs, the insurance companies paying for the drugs, the pharmaceutical man-ufacturers that either produce or acquire the rights and supply the drug, and the governmental forces that often act as a bulk purchaser and regulator, policing the entire process. Tensions among these diverse stakeholders are aggravated by continued growth in prescription-drug

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In the most egregious cases of price increases, compa-nies like Valeant and Turing buy the rights to specialty medications that have been on the market for years and for which there are few direct substitutes. These companies then raise the prices of the drugs exponentially. Decades-old specialty medications often do not have generic alter-natives due to traditionally low sales volumes. Therefore, patients who require these medications and have been using them as standard care are left without any real cost-effective alternative when prices skyrocket. Pharmaceutical companies also argue that they provide subsidies—sometimes significant ones—for patients who are not able to pay the full cost. These programs include providing medication free of charge to patients in both developed and developing countries, as well as offering a type of financial aid to help other patients obtain the medication at a discount. Pharma companies’ programs to provide access to medicines for patients in developing countries are discussed below. When taken together, the many considerations associ-ated with drug costs and pricing conspire to create a con-fusing web of social, economic, and political challenges, some of which are detailed below.

Drug Pricing in the United States and around the WorldAlthough the United States is facing rapidly increasing prescription medication prices, this is not the case in much of the world. In the United States, a mostly market-based system provides economic and other incentives for companies that develop new drugs or improve existing ones. The drug companies in market-based systems, ben-efiting from patent-protected exclusivity, ultimately recoup their large research and development investments with higher market-based prices for their breakthrough products. In other parts of the world, where public health care and prescription drug purchasing systems are com-monplace, different factors prevail. The Wall Street Journal conducted a study comparing prescription drug prices in the market-based United States, using the data available through Medicare Part B, to the prices found in three countries with public health care sys-tems: Norway, England, and Canada’s Ontario province. This investigation used both public and nonpublic data.12 Table 1 summarizes the results of that study. Among the findings was that, in the case of the top 40 selling drugs, prices in the United States were 93 percent higher than in Norway. Similarly, England and Ontario also showed sig-nificantly cheaper prices than those found in the U.S. Research seems to conclude that, in general, branded pre-scription drugs are more expensive in the market-based U.S. system than in other developed countries.13 The patent protection and exclusivity prevalent in the market-based U.S. system are not the only reason for steep

and the number of patients who take five or more medica-tions has doubled to 15 percent.6  As drug prices continue to soar, doctors are placed in the difficult situation of pre-scribing their patients medication that may not be afford-able or performing alternative methods with lower efficacy. In defending relatively high prices of drugs, pharma-ceutical companies routinely cite the high failure rate of new drugs during the FDA approval process and the steep costs of research and development. Indeed, some esti-mates put the price of developing a new drug at nearly $3 billion when including the cost of failures and drugs that never reach the marketplace.7 Opponents of this argu-ment cite the fact that, in cases where a new drug is suc-cessful, it enjoys approximately two decades of protection from any competition under strict patent laws. Addition-ally, some companies, especially in the “orphan” drug industry, which will be discussed later, receive grants for research and development. Finally, in extreme cases of companies like Valeant and Turing, critics point to the fact that those companies do not appear to invest much if any financial resources into developing new drugs. Vale-ant, for example, invests less than 3 percent of revenue into research and development activities.8 The Wall Street Journal conducted an exhaustive investigation into the pricing of drugs at Pfizer, which involved interviewing management regarding pricing for its new breast cancer medication Ibrance. The results revealed that Pfizer’s multistep pricing process is not based on a single algorithm but is derived—and adjusted—based on a range of external inputs and inter-nal benchmarks. According to the report, research and development costs had minimal influence on the ulti-mate price per dose set by the company. Rather, factors including demand in the marketplace, competition, the opinions of medical professionals, and potential pressure from insurers heavily influenced the resulting pricing strategy.9  Pfizer explained that it seeks to reduce this complex analysis into a three-point approach: patients receive maximum access to the drug; payers, such as insurers, will accept the price; and Pfizer receives strong financial returns. In this case, Pfizer spent three years of market research to determine pricing for what was a revolutionary medication to treat advanced breast cancer. The final step of the process was a meeting of Pfizer economists to determine the financial impact to the com-pany, the health insurers, and the patients. Finally, the commercial team decided to set the price at $9,850 per month. This price was approved by Pfizer and, just as the medication was set to go to market, a competitor raised the price of its comparable medication by 9.9 per-cent, putting the monthly cost of that medication at US$687 more than Pfizer’s, on the basis of “reflecting an evolving health-care and competitive environment.”10  According to The Wall Street Journal, Pfizer was left thinking, “was $9,850 too low?”11

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determine the cost-effectiveness of new drugs. Pharma-ceutical companies submit a price for reimbursement, which must be below the maximum price set by the agency, and the pharmaceutical companies must file detailed documents outlining the additional benefits and value that the new drug provides that existing drugs do not. QALY, or quality-adjusted life year, is a metric that is often used to measure the value of the drug.19 Interest-ingly, Medicare in the U.S. is prohibited from incorporat-ing such an approach. Many drug companies ultimately discount their drugs to ensure that they are accepted by NMA for inclusion in the health-care system, though companies are able to resubmit rejected drugs if they can improve the value proposition.20 England’s health-care cost agency, the National Insti-tute for Health and Care Excellence (NICE), is one of Europe’s strictest regulators. Providing a high value is critical to any specific drug’s acceptance by NICE; the agency evaluates the cost versus effectiveness of drugs, ultimately determining whether the medication provides enough benefit to warrant coverage. If NICE determines that the value offered by the new drug is too low com-pared to the price, drug makers have the opportunity to try for acceptance again with a revised price point.21  The level of spending by the National Health Service (NHS) on individual drugs is also capped, and the pharmaceuti-cal industry must reimburse the NHS for any additional spending over that cap. Nearly every drug covered by both Medicare Part B and the English health-care system was more expensive in the U.S.22 Though the Canadian health-care system does not include a centralized government agency responsible for all drug payments and negotiations, the country has been able to maintain lower drug costs due to government reg-ulation.23 First, maximum drug prices, based on the effec-tiveness and overall value of the pharmaceutical product as well as the cost of the drug in the U.S. and Europe, are set by Canada’s Patented Medicine Prices Review Board. After the price ceiling is set on a particular drug, the phar-maceutical company producing the product is prohibited from increasing the price above the comparable U.S. or

drug prices; structural differences in the health-care sys-tem, the lobbying and political power of pharmaceutical companies, and the fear of rationing all contribute to the increased prices in the market.14 Conversely, the state-run health systems in other developed countries, like Norway, exert strong negotiating leverage with drug companies. In these countries, nearly all drug purchasing is completed by government agencies, shifting the power from pure market demand to a single government purchaser. In these systems, it is common for government health-care agen-cies to set firm caps on pricing, require strong evidence that breakthrough drugs truly provide higher value than existing medications, and refuse to pay for higher-priced drugs that offer only minimal improvements over cheaper alternatives.15  By contrast, the U.S. marketplace is more disjointed. Individuals, employers, large and small insur-ance companies, and even state and federal government agencies foot the bill for medications, resulting in decreased bargaining power. Furthermore, Medicare, which pays for more medications than any other company or agency in the country, is legally prevented from nego-tiating pricing.16 Drug manufacturers and developers are quick to note the huge financial disincentives posed by European public health-care systems. Lower returns coupled with strong governmental control arguably result in decreased research investment and less patient access to life-saving drugs. Without the large profits achieved through the U.S. pric-ing model, new drug development would sharply decline.17 Per Pharmaceutical Research and Manufacturers of Amer-ica (PhRMA) executive vice president Lori Reilly, “The U.S. has a competitive biopharmaceutical marketplace that works to control costs while encouraging the develop-ment of new treatments and cures.”18 Below is a brief summary of drug pricing approaches in key European countries.

Norway, Canada, and the United KingdomNorway created the Norwegian Medicines Agency (NMA) to determine the appropriateness of specific drugs for treatment. The agency evaluates patient information to

Table 1 Drug Price ComparisonDrug Dose Size Medicare (U.S.) Norway England Ontario Drug Used for

Lucentis 0.5 mg US $1,936 US $ 894 US $1,159 US $1,254 Macular degenerationEylea 2 mg 1,930 919 1,274 1,129 Macular degenerationRituxan/MabThera 500 mg 3,679 1,527 1,364 1,820 Rheumatoid arthritisNeulasta 6 mg 3,620 1,018 1,072 n/a White blood cell deficiencyAyastin 100 mg 685 399 379 398 CancerProlia 60 mg 893 260 286 285 OsteoporosisAlimta 100 mg 604 313 250 342 Lung cancerVelcade 3.5 mg 1,610 1,332 1,191 n/a CancerHerceptin 100 mg 858 483 424 493 Breast cancerEligard 7.5 mg 217 137 n/a 247 Prostate cancer

Source: Jeanne Whalen, “Why the U.S. Pays More Than Other Countries for Drugs,” The Wall Street Journal, December 1, 2015.

116 Part 1 Environmental Foundation

significant consumer pressure on the drug manufacturer. When a low reference price is set, consumers become more willing to switch the specific drug that they are tak-ing to avoid any additional, uncovered cost. Drug compa-nies, with the desire to keep consumers, respond by lowering their price to as close to the reference price as possible.31 Germany, Italy, and Spain vary slightly in how reference prices are actually set. In Germany and Spain, averages are used to calculate the proper reference price, while in Italy, the lowest price in each drug category effectively acts as the reference price. Price controls, whether through government agencies or insurers, are often blamed for slowing drug research and development. While this may be rooted in some truth, the reference price strategy can still result in financial incentive for innovation. When a new, breakthrough drug is developed, reference pricing allows for that drug to be placed into a category by itself, eliminating the price competition seen in categories of drugs established with multiple competitors. The new drug is still able to reap the financial benefits of being a first-to-market innovator, likely for many years.32 Additionally, the reference pricing strategy can encourage innovations within long-estab-lished drug categories. When an existing drug within a crowed, competitive drug category is improved and its cost to manufacture is reduced, the drug manufacturer can likewise lower its price point in an attempt to steal market share. This results in savings to the end consumer. As stated already, it is difficult to argue against a system that has prices a fraction of those in the U.S., but it is worth mentioning that this system is still difficult to implement in cases where there are no comparable drugs. Further-more, companies could shave margins on drugs that have comparable alternatives but attempt to make up those mar-gins in areas where they provide novel medications. Finally, as seen with Pfizer’s pricing example, pharmaceutical com-panies routinely look to competitors for guidance on pric-ing. Implementing a reference-pricing system could incentivize companies to set higher prices knowing that the government will be imposing a bottom price or average price and encourage a type of price-fixing.

Specialty and “Orphan” DrugsSpecialty drugs—which are generally understood to be drugs that are structurally complex and often require spe-cial handling or delivery mechanisms—are typically priced much higher than traditional drugs. While some of these drugs have been groundbreaking in the treatment of cancer, rheumatoid arthritis, multiple sclerosis, and other chronic conditions, the cost of treating a patient with spe-cialty drugs can exceed tens of thousands of dollars a year. Over the past decade, the industry has seen signifi-cant increases to the pricing of specialty drugs. Figure 1 shows the growth in these costs.

European price. Additionally, the annual rate of price increase is capped at Canada’s rate of inflation.24 Because Canada has a nationalized system with heavy subsidies for low- and fixed-income citizens, the Canadian government also must determine whether or not any specific drug will be available to seniors and those on government assistance. The Canadian Agency for Drugs and Technologies in Health ultimately makes this decision. These regulations appear to effectively reduce costs, especially when com-pared to the U.S. For example, of 30 pharmaceutical drugs covered by both Ontario’s Ministry of Health and Long-Term Care and the U.S.’s Medicare Part B, only 7 percent of the drugs were more expensive in Canada.25 Obviously, the significant difference in health-care sys-tems and prescription medication practices makes it extremely difficult to debate whether the U.S. approach or the Norway-England-Canada approach is better. Of more practical relevance, it would be extremely difficult for the U.S. to adopt the approach used in these three countries. Indeed, the U.S. has (so far) rejected a univer-sal, government-paid health-care system.26 The arguments for and against that type of system are well-documented and will not be addressed here, but it is worth mentioning that there are valid reasons for opposing it. One is that adopting a universal system could result in the govern-ment being unwilling to pay for certain medications, something that is quite controversial in the U.S., where freedom and choice are highly valued.27 This reality com-plicates the process for encouraging development of spe-cialty and orphan drugs that by definition treat a very small portion of the population. In these cases, there is usually a lack of effective alternatives or generic medica-tions and it is only with strong economic incentives that pharmaceutical companies are willing to take the risk of development new products. As such, a public health-care system does not provide a solution to high drug prices in cases where there are little to no alternative treatments.28

Germany, Spain, and ItalyAnother approach to drug pricing, which has features of both a private, market-based system, like that of the United States, and a public system, like that of Norway, can be found in Germany, Spain, and Italy. A New York Times analysis described how these countries approach the pricing challenge. In Germany, Spain, and Italy, pharmaceutical drugs are categorized into groupings with other similar drugs.29 Insur-ers, whether public or private, then set a single specific price that they will pay for any drug that is grouped within a specific category. This price is referred to as the “reference price.” If any individual drug within a category is priced higher than the set reference price for that cat-egory, the consumer must pay the excess cost if he or she wants the more expensive drug.30 This approach results in

In-Depth Integrative Case 1.2 The Ethics of Global Drug Pricing 117

Depending on the effectiveness, demand, and disease being treated, some specialty drugs cost upwards of three-quarters of a million U.S. dollars annually. In fact, within the last few years, a third of all spending on pre-scription drugs in the U.S. has been dedicated to spe-cialty drugs. This has resulted in a surge in the development of new specialty drugs; since 2010, the U.S. Food and Drug Administration (FDA) has been approv-ing more specialty drugs than traditional drugs. For example, in 2014, specialty drugs accounted for 54 per-cent of all FDA approvals.33 Another classification of drugs—called “orphan drugs”—are pharmaceutical products aimed at rare dis-eases or disorders. In the market-based U.S. system, orphan drugs can be financially lucrative for drug devel-opers, especially since the passage of the Orphan Drug Act of 1983. Since the passage of the law, over 400 new orphan drugs have received FDA approval, resulting in treatments for nearly 400 rare diseases. In the U.S., orphan drugs often cost 20 times that of drugs used to treat tra-ditional disease. Additionally, the market for orphan drugs continues to grow. More than 30 million U.S. citizens, representing almost 10 percent of the entire population, are estimated to be inflicted with a rare disease. While demand for traditional prescription drugs is only expected to increase 4 percent annually in Japan, the U.S., and Europe through 2020, total sales for orphan drugs will increase by 11 percent year-over-year. By 2020, nearly a fifth of all nongeneric drugs sold globally will be orphan drugs.34 As discussed previously, the U.S. spending on pre-scription medication is substantially higher than in most other countries. One argument justifying these high prices is that the high prices for medications in the U.S. and some other developed countries make it possible for the same companies to offer medications needed in develop-ing countries at a significant discount.

Access to Medicine and Pricing in Developing CountriesPrescription drugs are the primary method of medical treatment in most developing countries and largely domi-nate total health-care spending in these economies. As a result, drug affordability in emerging countries is critical to ensuring medical treatment for those who are in need. Despite aid from the international community, developing countries still lack access to life-saving medications. Less than 20 percent of all drug importing, and only 6 percent of all drug exporting, occurs in emerging nations. Further-more, a full third of people in these countries are without consistent access to prescription drugs.35 One grouping of major global initiatives that are help-ing to make medication more available to the developing countries is the Neglected Tropical Disease (NTD) pro-grams. NTDs are defined as common, easily transmitted diseases that are most often found in the approximately 150 developing nations located in tropical regions. The economic impact of these diseases is estimated to be in the US$ billions annually, directly and indirectly affecting more than a fifth of the world’s population. Often, factors such as unsanitary water and livestock contribute to the spread of NTDs.36  Specific programs, such as the one established by the Centers for Disease Control and Pre-vention (CDC), aim to combat NTDs directly. This includes attempting to completely eliminate diseases through Mass Drug Administration (MDA) programs, as well as working together with pharmaceutical companies and local NGOs. With a lack of formal doctors and nurses in many of these areas, localized community leaders and volunteers, such as teachers, function as drug administra-tors. These volunteers have the training required to effec-tively and properly provide drugs to the community members. Pharmaceutical companies provide support through large drug donations.37,38 The U.S. Agency for

Source: Anna Gorman, “California Voters Will Have Their Say on Drug Prices,”  Kaiser Health News. January 29, 2015,  http://khn.org/news/california-voters-will-have-their-say-on-drug-prices/.

$0

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118 Part 1 Environmental Foundation

and, over time, blindness. MDP approves more than 140 million treatments for onchocerciasis annually.43  Another company, Novartis, developed a highly effective malaria treatment called Coartem that was made available in a lemon-flavored disbursable format, making it easier for children to take. It has become one of the largest access-to-medicine programs in the health-care industry, mea-sured by the number of patients reached annually.44 Since 2001, working with a range of international organizations such as the World Health Organization and the Gates Foundation, Novartis has provided more than 600 million treatments for adults and children, to more than 60 malaria-endemic countries, contributing to a dramatic reduction of the malaria burden in Africa.45 It is estimated that 3.3 million lives have been saved as a result.46  Inter-estingly, Novartis chose to sell the drug on a cost-recovery (not-for-profit) basis rather than give away the drug, per-haps because it believes this approach will make the pro-gram more sustainable over the long term. Novartis was the first recipient of an NTD priority review voucher described above.

The Future of Drug Pricing around the WorldThe question of how to price pharmaceutical drugs is dif-ficult and ethically complex. As an industry directly related to the health and welfare of humankind, political and ideological decisions regarding health-care provision and delivery can be deeply personal for many. In addition, income disparities both within countries and across the developing world are on the rise, and these differences pose difficult questions about fairness, equity, and moral obligations. It seems clear that drug pricing will remain a conten-tious and debated issue. From the perspective of global-ization, it is interesting to consider whether or not price differentials for drugs will persist, or, as is the case in many other areas, prices will converge due to growing wealth in developing and emerging markets, regulatory coordination across jurisdictions, increasing market pres-sures, or some combination of these factors.

Questions for Review

1. What is the proper balance for pharmaceutical com-panies between delivering the fiduciary obligation of earning a profit for owners and providing life-saving or life-extending drugs to customers? How much profit is too much profit and who determines the amount? How does that balance get achieved?

2. Should the United States consider other methods for controlling drug pricing, such as those used in some European countries? Are there other ways the United States might use market forces or incentives from government programs to control drug prices? Given that one of the most prevalent and persuasive

International Development (USAID) is a key partner with organizations like the CDC and the World Health Orga-nization (WHO). In addition, USAID, CDC, and WHO also collaborate with other organizations, including foun-dations such as the Bill and Melinda Gates Foundation, as well as individual pharmaceutical companies that donate medications that can combat these diseases. In the United States, concern about NTDs and the lack of incentives for pharmaceutical companies to develop drugs for those diseases caught the attention of three aca-demics from Duke University. In their 2006 paper, researchers David Ridley, Henry Grabowski, and Jeffery Moe proposed a voucher system based on the Orphan Drug program to reward companies for investing in the development of drugs targeted at treating NTDs.39  Under this system, the incentive provided to pharmaceutical companies developing NTD treatments would be the expedited FDA review of a subsequent drug of the com-pany’s choice, potentially generating millions of dollars of added revenue due to the fact that the chosen drug would gain market access earlier than would otherwise be the case. The researchers also suggested providing some flexibility in redeeming this reward, including allowing the benefit to be sold to another company. In the U.S., the voucher system idea quickly transformed from concept into law; U.S. Senator Sam Brownback adapted and included the program in the Food and Drug Administra-tion Amendments Act (FDAAA) of 2007.40  In addition to the above initiatives, pharmaceutical companies are increasingly evaluated and assessed based on their ability and willingness to make drugs available to poor countries. The Access to Medicine Foundation, an independent nongovernmental organization, publishes the “Access to Medicine Index,” which ranks pharmaceutical companies by their access-related policies and practices. The index is based on an analysis of 95 indicators, in relation to 106 countries and 47 diseases.41 Each company is ranked separately according to its commitment to its performance in seven categories: (1) General Access to Medicine Management; (2) Public Policy and Marketing Influence; (3) Research and Development; (4) Pricing, Manufacturing, and Distribution; (5) Patents and Licens-ing; (6) Capability Advancement; and (7) Donations and Philanthropy. Figure 2 shows the overall ranking for the top 20 pharmaceutical companies globally. In addition, individual companies have taken it upon themselves to provide free or low-cost access to their own production and distribution channels or with partners. For example, the pharmaceutical giant Merck developed a drug—Mectizan—to fight onchocerciasis, also known as river blindness, in 1987 and established the Mectizan Donation Program (MDP) to oversee the initia-tive.42 Onchocerciasis is found primarily in Latin America and Africa. It is transmitted through the bites of black flies and can cause disfiguring dermatitis, eye lesions,

In-Depth Integrative Case 1.2 The Ethics of Global Drug Pricing 119

arguments for relatively high drug prices is the high cost associated with research and development and regulatory compliance, is there a way to combat those costs?

3. What are your views on the role of patents in pre-scription medication? What is the proper balance of patent protection for costly research and develop-ment versus lack of competition?

4. What should be done on the issue of orphan drugs to combat high costs without viable alternatives? Should there be cost restrictions? Should there be patent restrictions?

5. What should be done in cases like Turing and Vale-ant Pharmaceuticals, where decades-old medications that do not have competitors are purchased and

prices are raised exponentially? If you think restric-tions should be imposed, what is the justification for treating that case differently than the case where a drug, with patent protection, comes to market and is priced for hundreds or thousands of dollars?

6. How can the United States and other developed countries stimulate greater research and develop-ment of treatments for NTDs and offer those drugs at prices that are affordable?

Source: This case was prepared by Matthew Vassil of Villanova Uni-versity under the supervision of Professor Jonathan Doh as the basis for class discussion. Additional research assistance was provided by Ben Littell. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility.

1 1 GlaxoSmithKline plc=

4 7 Novartis AG▲

5 5 Gilead Sciences Inc.=

6 8 Merck KGaA▲

11 15 Eisai Co. Ltd.▲

14 17 Boehringer Ingelheirn GmbH▲

15 16 AstraZeneca plc▲

18 20 Astellas Pharma Inc.▲

2 6 Novo Nordisk A/S▲

3 2 Johnson & Johnson▼

7 4 Merck & Co. Inc.▼

8 3 Sanofi▼

10 9 Bayer AG▼

12 10 Roche Holding AG▼

13 12 Bristol-Myers Squibb Co.▼

16 11 Pfizer Inc.▼

17 14 Eli Lilly & Co.▼

20 18 Takeda Pharmaceutical Co. Ltd.▼

19 19 Daiichi Sankyo Co. Ltd.=

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General Access to Medicine Management

PositionAccess to MedicineIndex 2012

PositionAccess to MedicineIndex 2014

Public Policy & Market Influence

Research & Development

Pricing, Manufacturing & Distribution

Patents & Licensing

Capability Advancement in Product Development & Distribution

Product Donations & Philanthropic Activities

A score of zero means lowest and five signifies highest indicator scoreamong the company set.

Figure 2 The Access to Medicine Index 2014—Overall Ranking

120 Part 1 Environmental Foundation

1. Andrew  Pollock, “Drug Goes from $13.50 a Tablet to $750, Overnight,”  New York Times, September 21, 2015, p. B1.

2. Andrew  Pollock and Sabrina Tavernise, “Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers,”  New York Times, October 5, 2015, p. A1.

3. Carolyn Y. Johnson, “How an Obscure Drug’s 4,000% Price Increase Might Finally Spur Action on Soaring Health-Care Costs,”  Washington Post, September 21, 2015.

4. Joseph Walker, “Patients Struggle with High Drug Prices,” The Wall Street Journal,  December 31, 2015.

5. Andrew Pollock, “Drug Prices Soar, Prompting Calls for Justification,”  New York Times, July 23, 2015.

6. Jessica Firger, “Prescription Drugs on the Rise: Estimates Suggest 60 Percent of Americans Take at Least One Medication,”  Newsweek, November 3, 2015.

7. Joseph A. DiMasi and Henry G. Grabowski, “The Cost of Biopharmaceutical R&D: Is Biotech Differ-ent?,” Managerial and Decision Economics  28,  no. 4–5 (2011), pp. 469–479.

8. Pollock and Tavernise, “Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers.”

9. Jonathan D. Rockoff, “How Pfizer Set the Cost of Its New Drug at $9,850 a Month,”  The Wall Street Journal, December 9, 2015.

10. Ibid.11. Ibid.12. Jeanne Whalen, “Why the U.S. Pays More Than

Other Countries for Drugs,”  The Wall Street Journal, December 1, 2015.

13. Ibid.14. Ibid.15. Ibid.16. Ibid.17. Ibid.18. Ibid.19. Ibid.20. Ibid.21. Ibid.22. Ibid.23. Ibid.24. Ibid.25. Ibid.

26. Ibid.27. Ibid.28. Ibid.29. Andrew Frakt, “To Reduce the Costs of Drugs,

Look to Europe,”  New York Times, October 19, 2015.

30. Ibid.31. Ibid.32. Ibid.33. America’s Health Insurance Plans Center for Policy

and Research, “Issue Brief: Specialty Drugs—Issues and Challenges,” July 2015.

34. EvaluatePharma,  Orphan Drug Report 2014, October 2014,  www.evaluategroup.com/public/Reports/ EvaluatePharma-Orphan-Drug-Report-2014.aspx.

35. “Trade, Foreign Policy, Diplomacy, and Health—Access to Medicines,”  World Health Organization, http://www.who.int/trade/en/.

36. “Neglected Tropical Diseases,” World Health Organi-zation, www.who.int/neglected_diseases/diseases/en/.

37. Neglected Tropical Diseases,” Centers for Disease Control and Prevention, November 22, 2013,  www.cdc.gov/globalhealth/ntd/global_program.html.

38. Neglected Tropical Diseases Program, USAID, https://www.neglecteddiseases.gov/about/what-we-do.

39. Alexander  Gaffney and Michael Mezher, “Regulatory Explainer: Everything You Need to Know About FDA’s Priority Review Vouchers,” July 2, 2015, www.raps.org/Regulatory-Focus/News/2015/ 07/02/21722/Regulatory-Explainer-Everything-You-Need-to-Know-About-FDA%E2%80%99s-Priority-Review-Vouchers/#sthash.1NDz9gW3.dpuf.

40. Food and Drug Administration Amendments Act of 2007, Pub. L. No. 110-85, 121 Stat. 823.

41. Access to Medicine Foundation,  Access to Medicine Index 2014  (November 2014), www.accesstomedicineindex.org/sites/2015.atmindex. org/files/2014_accesstomedicineindex_fullreport_clickablepdf.pdf.

42. “About,”  Mectizan Donation Program,  www. mectizan.org/about  (last visited July 12, 2016).

43. Ibid.44. “The Novartis Malaria Initiative,” Novartis,

www.malaria.novartis.com/images/Brochure-Malaria-Initiative.pdf  (last visited July 12, 2016).

45. Ibid.46. Ibid.

ENDNOTES

PART TWOTHE ROLE OF CULTURE

122

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THE MEANINGS AND DIMENSIONS OF CULTURE

The World of International Management

Culture Clashes in Cross-Border Mergers and Acquisitions

I n one of the largest cross-border deals ever proposed, Belgian-Brazilian beverage giant ABInBev offered US$104.2  billion to acquire British-owned SABMiller. Both companies have multiple investments and brands in every major beer market in the world. The merger brings ABInBev’s brands of Budweiser, Busch, Corona, and Stella Artois together with SABMiller’s brands of Miller, Foster, Grolsch, Peroni, Castle, and Carlton, resulting in the largest beverage company on the globe. The combined company will account for 30 percent of beer sales worldwide and 60 percent of sales in the U.S. market. In late 2015, SABMiller’s shareholders agreed to the terms of the deal.1

Mergers and acquisitions are among the most challenging strategic moves by companies seeking to grow their markets and reap hoped-for efficiencies. Many cross-border mergers and acquisitions have failed or experienced extreme difficulties in the face of cultural differences that manifest in communica-tion, work policies, compensation systems, and other aspects of strategy and operations. These cultural differences can be aggravated by geographic, institutional, and psychological distance. With operations spanning the globe, and leadership teams in both Latin America and Europe, the combined ABInBev and SABMiller company will need to address the interests of its culturally diverse constituencies. Although both SABMiller and ABInBev have recent, extensive experience with cross-border mergers and acquisitions, neither company has been involved in a deal this large. How can this integrated company fully realize the benefits of combining peo-ple, production, and brands from diverse cultures? Will ABInBev be able to achieve its aggressive sales goal of US$100 billion annually by 2020? Looking at some past cross-border mergers, both successful and failed, may provide some insight.

DuPont in DenmarkWhen DuPont, the U.S.-based giant chemicals company, set out to acquire Danisco, a Danish producer of food ingredients, shareholders in Denmark initially voiced skepticism and disapproval. To better understand the concerns of the Danish investment community, DuPont sent executives to Copenhagen.2  Gaining

A major challenge of doing business internationally is to respond and adapt effectively to different cultures. Such adap-tation requires an understanding of cultural diversity, percep-tions, stereotypes, and values. In recent years, a great deal of research has been conducted on cultural dimensions and atti-tudes, and the findings have proved useful in providing inte-grative profiles of international cultures. However, a word of caution must be given when discussing these country profiles. It must be remembered that stereotypes and overgeneraliza-tions should be avoided; there are always individual differ-ences and even subcultures within every country. This chapter examines the meaning of culture as it applies to international management, reviews some of the value differences and similarities of various national groups, studies important dimensions of culture and their impact on behavior, and examines country clusters. The specific objec-tives of this chapter are

1. DEFINE the term culture, and discuss some of the compar-ative ways of differentiating cultures.

2. DESCRIBE the concept of cultural values, and relate some of the international differences, similarities, and changes occurring in terms of both work and managerial values.

3. IDENTIFY the major dimensions of culture relevant to work settings, and discuss their effects on behavior in an international environment.

4. DISCUSS the value of country cluster analysis and relational orientations in developing effective international management practices.

123

that would dictate a unified approach to planning, information exchange, communication, and decision making. Executives believed that a unified company culture—part American, part German—would lead to a better working relationship between employees and result in improved fiscal results for the com-pany. After just a few months, however, continued cultural dif-ficulty led executives to conclude that imposing a single culture on its diverse workforce was a short-sighted strategy. Engineers between the two companies continued to disagree over quality and design, and personality conflicts persisted. Americans found Germans to have an “attitude,” while Ger-mans found Americans to be “chaotic.”8

In response to these failures, Daimler-Chrysler took a more drastic approach to altering its operations. Rather than attempting to impose the Daimler culture on Chrysler employ-ees, individual business groups were permitted to adopt whichever culture worked best for them. Essentially, two cul-tures were allowed to persist at the merged company—those of American Chrysler and of German Daimler. Though this strategy worked well for groups that were located solely in the United States or Germany, business divisions that spanned both countries continued to face challenges. Communication was often misinterpreted, and the approach to staffing was questioned by executives on both sides.9

After a decade of struggle, the merger was ultimately reversed. Daimler sold nearly its entire stake in Chrysler to an American private equity group for a fraction of its original invest-ment, and Chrylser entered bankruptcy proceedings just two years later. Roland Klein, former manager of corporate commu-nications at the merged Daimler-Chrysler, remarked that “Maybe we should have had a cultural specialist to counsel us. But we wanted to achieve the integration without outside help.”10

ABInBev’s Past ExperiencesIn many ways, ABInBev’s own history may provide the best example of a previously successful cross-border merger. In 2008, Belgian-Brazilian-based InBev acquired U.S.-based Anheuser Busch, creating the world’s largest brewing company. InBev first bid $65 per share for Anheuser Bush, which was initially rejected. The final price agreed to was $70 per share. With oper-ations on every continent, the newly combined company had to quickly adapt to diverse national and organizational culture back-grounds. InBev’s organizational culture, heavily influenced by AmBev, was described as “a work atmosphere reminiscent of an athletic locker room . . . a culture that includes ferocious cost

an  understanding of the cultural and business perspectives of those shareholders through face-to-face, in-person meetings, DuPont executives were able to determine that their original offer was seen as offensively low. In response, DuPont adjusted its offer, resulting in a 92 percent approval rate from Danisco’s shareholders. Dupont’s CEO claims, “These face-to-face conver-sations were critical for the actions we took next, and, ultimately, for the successful outcome of the deal.”3

After the deal was complete, DuPont made culture a strong focus of itsintegration efforts by first hosting a “Welcome Week” with presentations to all employees about the new combined firm, adjusted to local communication styles. After this week-long celebration, designed to encourage excitement and positive thinking, the company gauged successes and failures using reg-ular pulse surveys. These surveys “created a heat map of poten-tial geographic locations where there might be confusion or miscommunication.”4  Anticipating and measuring potential places of difficulty allowed managers to address issues as quickly and transparently as possible, easing the integration pro-cess. DuPont’s CEO reflected on the successful acquisition of Danisco, saying, “If we didn’t execute and integrate well, and if we didn’t get synergies quickly, it wouldn’t be a victory.”5

DuPont’s careful, level-headed due diligence, strong com-munication, and appreciation for Danisco’s corporate and national cultures ultimately helped the firm evaluate the poten-tial success of a combined business venture and avoided deal-ending cultural conflicts. Forming the right deal and designing an integration process with the goal of maximizing the value of the deal provided the merging companies with the tools necessary to optimize their combined value and avoid the pit-falls of cultural miscommunications.6

The Daimler-Chrysler DebacleLooking at failed cross-border mergers can lend some valuable insight as well. One classic case is that of Daimler-Chrysler, two companies that came together in a US$36 billion acquisi-tion that faced severe challenges from the start. Although it was hailed as a historic “merger of equals,” enthusiasm dis-solved in the face of cultural and personality clashes.7  From the onset, German executives were uncomfortable with the lack of protocol and loose structure at Chrysler. Conversely, the American managers felt that their German bosses were too formal and lacked any flexibility. In its first attempt to resolve these issues, top leaders at the company quickly worked to establish firm-wide processes

124 Part 2 The Role of Culture

Our opening discussion in “The World of International Management” shows how culture can have a great impact on mergers. For some companies, like DuPont and ABInBev, early recognition of differences led to more successful company integration. National cultural characteristics can strengthen, empower, and enrich management effectiveness and success. MNCs that are aware of the potential positives and negatives of different cultural characteristics will be better equipped to manage under both smooth and trying times and environments.

■ The Nature of CultureThe word culture comes from the Latin cultura, which is related to cult or worship. In its broadest sense, the term refers to the result of human interaction.16  For the purposes of the study of international management, culture is acquired knowledge that people use to interpret experience and generate social behavior.17  This knowledge forms values, creates attitudes, and influences behavior. Most scholars of culture would agree on the following characteristics of culture:

1. Learned. Culture is not inherited or biologically based; it is acquired by learning and experience.

2. Shared. People as members of a group, organization, or society share culture; it is not specific to single individuals.

3. Transgenerational. Culture is cumulative, passed down from one generation to the next.

4. Symbolic. Culture is based on the human capacity to symbolize or use one thing to represent another.

5. Patterned. Culture has structure and is integrated; a change in one part will bring changes in another.

6. Adaptive. Culture is based on the human capacity to change or adapt, as opposed to the more genetically driven adaptive process of animals.18

cultureAcquired knowledge that people use to interpret experience and generate social behavior. This knowledge forms values, creates attitudes, and influences behavior.

Going ForwardCompanies from the same cultural clusters inherently understand one another’s values, expectations of leadership, and communi-cation styles better than people from different cultural clusters would. With diligent planning and education of their workforce, two firms from different organizational and national cultural back-grounds, such as SABMiller and ABInBev, can still find success through mergers or acquisitions. Although companies from differ-ent geographic regions would not have an “inherent understand-ing,” it is possible to replicate it through employee training and strong leadership, as past mergers at DuPont and ABInBev dem-onstrated. Managers and executives at a newly merged company should educate its employees on the cultural differences of the two joining firms, putting the combined company in a position to leverage the merger as an opportunity to create a new corporate culture that emphasizes elements and values common to both companies’ national cultures while preserving, where necessary, attributes of the distinct cultures of each. Despite diversity among its British, Belgian, Brazilian, and American roots, cultural commonalities and understanding may help to propel the SABMiller and ABInBev merger forward. The companies certainly face challenges ahead, but, as demon-strated by past successes, proper management and careful planning can maximize their chances for long-term success. 

cutting and lucrative incentive-based compensation programs.”11

In contrast to this, Anheuser-Busch was known as a family-friendly company founded in St. Louis in the 1800s with strong emphasis on community involvement. Anheuser-Busch “won numerous awards for its philanthropy, diversity, community involvement, and employer of choice. The company was known for luxurious executive offices and lots of perks, with six planes and two helicopters to transport its employees.”12

It was clear to leadership that these two distinct cultures—one very competitive and low cost, the other inclusive with many expensive corporate reward systems—would create conflicts in regards to communication, informal relationships between employees, employee satisfaction, and mentorship.13  In response, ABInBev formulated an integration plan that, among other actions, led to the creation of a new board of directors for the combined company, which included the current directors of the InBev board, the Anheuser-Busch president and CEO, as well as one other current or former director of the Anheuser-Busch board. The management team consisted of executives from both companies’ current leadership teams.14 Ultimately, the ABInBev merger was a financial success, with EBITDA rising from 23 per-cent to 38 percent in the three years following the deal. Despite initial cultural clashes, this merger succeeded due to the recogni-tion and education of these differences and the international management experience of the company’s leaders.15

Chapter 4 The Meanings and Dimensions of Culture 125

Because different cultures exist in the world, an understanding of the impact of culture on behavior is critical to the study of international management.19 If international managers do not know something about the cultures of the countries they deal with, the results can be quite disastrous. For example, a partner in one of New York’s leading private banking firms tells the following story:

I traveled nine thousand miles to meet a client and arrived with my foot in my mouth. Deter-mined to do things right, I’d memorized the names of the key men I was to see in Singapore. No easy job, inasmuch as the names all came in threes. So, of course, I couldn’t resist showing off that I’d done my homework. I began by addressing top man Lo Win Hao with plenty of well-placed Mr. Hao’s—sprinkled the rest of my remarks with a Mr. Chee this and a Mr. Woon that. Great show. Until a note was passed to me from one man I’d met before, in New York. Bad news. “Too friendly too soon, Mr. Long,” it said. Where diffidence is next to godliness, there I was, calling a room of VIPs, in effect, Mr. Ed and Mr. Charlie. I’d remembered every-body’s name—but forgot that in Chinese the surname comes first and the given name last.20

■ Cultural DiversityThere are many ways of examining cultural differences and their impact on international management. Culture can affect technology transfer, managerial attitudes, managerial ideol-ogy, and even business-government relations. Perhaps most important, culture affects how people think and behave. Table 4–1, for example, compares the most important cultural values of the United States, Japan, and Arab countries. A close look at this table shows a great deal of difference among these three cultures. Culture affects a host of business-related activities, even including the common handshake. Here are some contrasting examples:

Culture Type of HandshakeUnited States FirmAsian Gentle (shaking hands is unfamiliar and uncomfortable for some;

the exception is the Korean, who usually has a firm handshake)British SoftFrench Light and quick (not offered to superiors); repeated on arrival and departureGerman Brusque and firm; repeated on arrival and departureLatin American Moderate grasp; repeated frequentlyMiddle Eastern Gentle; repeated frequentlySouth Africa Light/soft; long and involved

Source: Lillian H. Chaney and Jeanette S. Martin, Intercultural Business Communication  (Englewood Cliffs, NJ: Prentice Hall, 1995), p. 115.

Table 4–1Priorities of Cultural Values: United States, Japan, and Arab Countries

United States Japan Arab Countries

1. Freedom 1. Belonging 1. Family security 2. Independence 2. Group harmony 2. Family harmony 3. Self-reliance 3. Collectiveness 3. Parental guidance 4. Equality 4. Age/seniority 4. Age 5. Individualism 5. Group consensus 5. Authority 6. Competition 6. Cooperation 6. Compromise 7. Efficiency 7. Quality 7. Devotion 8. Time 8. Patience 8. Patience 9. Directness 9. Indirectness 9. Indirectness10. Openness 10. Go-between 10. Hospitality

Note: “1” represents the most important cultural value, “10” the least.Source: Adapted from information found in F. Elashmawi and Philip R. Harris, Multicultural Management  (Houston: Gulf Publishing, 1993), p. 63.

126 Part 2 The Role of Culture

In overall terms, the cultural impact on international management is reflected by basic beliefs and behaviors. Here are some specific examples where the culture of a society can directly affect management approaches:

∙ Centralized vs. decentralized decision making. In some societies, top manag-ers make all important organizational decisions. In others, these decisions are diffused throughout the enterprise, and middle- and lower-level managers actively participate in, and make, key decisions.

∙ Safety vs. risk. In some societies, organizational decision makers are risk-averse and have great difficulty with conditions of uncertainty. In others, risk taking is encouraged and decision making under uncertainty is common.

∙ Individual vs. group rewards. In some countries, personnel who do outstand-ing work are given individual rewards in the form of bonuses and commis-sions. In others, cultural norms require group rewards, and individual rewards are frowned on.

∙ Informal vs. formal procedures. In some societies, much is accomplished through informal means. In others, formal procedures are set forth and followed rigidly.

∙ High vs. low organizational loyalty. In some societies, people identify very strongly with their organization or employer. In others, people identify with their occupational group, such as engineer or mechanic.

∙ Cooperation vs. competition. Some societies encourage cooperation between their people. Others encourage competition between their people.

∙ Short-term vs. long-term horizons. Some cultures focus most heavily on short-term horizons, such as short-range goals of profit and efficiency. Others are more interested in long-range goals, such as market share and technological development.

∙ Stability vs. innovation. The culture of some countries encourages stability and resistance to change. The culture of others puts high value on innovation and change.

These cultural differences influence the way that international management should be conducted. 

Another way of depicting cultural diversity is through visually separating its com-ponents. Figure 4–1 provides an example by using concentric circles. The outer ring consists of the explicit artifacts and products of the culture. This level is observable and consists of such things as language, food, buildings, and art. The middle ring contains the norms and values of the society. These can be both formal and informal, and they are designed to help people understand how they should behave. The inner circle contains the implicit, basic assumptions that govern behavior. By understanding these assump-tions, members of a culture are able to organize themselves in a way that helps them increase the effectiveness of their problem-solving processes and interact well with each other. In explaining the nature of the inner circle, Trompenaars and Hampden-Turner have noted that

[t]he best way to test if something is a basic assumption is when the [situation] provokes confusion or irritation. You might, for example, observe that some Japanese bow deeper than others. . . . If you ask why they do it the answer might be that they don’t know but that the other person does it too (norm) or that they want to show respect for authority (value). A typical Dutch question that might follow is: “Why do you respect authority?” The most likely Japanese reaction would be either puzzlement or a smile (which might be hiding their irritation). When you question basic assumptions you are asking questions that have never been asked before. It might lead others to deeper insights, but it also might provoke annoyance. Try in the USA or the Netherlands to raise the question of why people are equal and you will see what we mean.21

Chapter 4 The Meanings and Dimensions of Culture 127

The explicit artifacts andproducts of the society

The norms and valuesthat guide the society

The implicit, basicassumptions

that guide people’sbehavior

Figure 4–1A Model of Culture

Source: Adapted from Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diversity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998).

A supplemental way of understanding cultural differences is to compare culture as a normal distribution, as in Figure 4–2, and then to examine it in terms of stereo-typing, as in Figure 4–3. Chinese culture and American culture, for example, have quite different norms and values. So the normal distribution curves for the two cul-tures have only limited overlap. However, when one looks at the tail-ends of the two curves, it is possible to identify stereotypical views held by members of one culture about the other. The stereotypes are often exaggerated and used by members of one culture in describing the other, thus helping reinforce the differences between the two while reducing the likelihood of achieving cooperation and communication. This is one reason why an understanding of national culture is so important in the study of international management.

French culture U.S. culture

Source: Revised and adapted from various sources, including Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diversity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 25.

Figure 4–2Comparing Cultures as Overlapping Normal Distributions

128 Part 2 The Role of Culture

■ Values in CultureA major dimension in the study of culture is values. Values are basic convictions that people have regarding what is right and wrong, good and bad, and important and unim-portant. These values are learned from the culture in which the individual is reared, and they help direct the person’s behavior. Differences in cultural values often result in varying management practices. 

Values in TransitionDo values change over time? Past research indicates that personal value systems are relatively stable and do not change rapidly.22 However, changes are taking place in man-agerial values as a result of both culture and technology. A good example is provided by examining the effects of the U.S. environment on the cultural values of Japanese managers working for Japanese firms in the United States. Researchers, focusing attention on such key organizational values as lifetime employment, formal authority, group orientation, seniority, and paternalism, found that

1. Lifetime employment is widely accepted in Japanese culture, but the stateside Japanese managers did not believe that unconditional tenure in one organiza-tion was of major importance. They did believe, however, that job security was important.

2. Formal authority, obedience, and conformance to hierarchic position are very important in Japan, but the stateside managers did not perceive obedience and conformity to be very important and rejected the idea that one should not question a superior. However, they did support the concept of formal authority.

3. Group orientation, cooperation, conformity, and compromise are important organizational values in Japan. The stateside managers supported these values but also believed it was important to be an individual, thus maintaining a balance between a group and a personal orientation.

valuesBasic convictions that people have regarding what is right and wrong, good and bad, and important and unimportant.

French culture

How the Americans see the French:

• arrogant• flamboyant• hierarchical• emotional

How the French see the Americans:

U.S. culture

• naive• aggressive• unprincipled• workaholic

Source: Revised and adapted from various sources, including Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diversity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 23.

Figure 4–3 Stereotyping from the Cultural Extremes

Chapter 4 The Meanings and Dimensions of Culture 129

4. In Japan, organizational personnel often are rewarded based on seniority, not merit. Support for this value was directly influenced by the length of time the Japanese managers had been in the United States. The longer they had been there, the lower their support for this value.

5. Paternalism, often measured by a manager’s involvement in both personal and off-the-job problems of subordinates, is very important in Japan. Stateside Japanese managers disagreed, and this resistance was positively associated with the number of years they had been in the United States.23

There is increasing evidence that individualism in Japan is on the rise, indicating that Japanese values are changing—and not just among managers outside the country. The country’s long economic slump has convinced many Japanese that they cannot rely on the large corporations or the government to ensure their future. They have to do it for themselves. As a result, today a growing number of Japanese are starting to embrace what is being called the “era of personal responsibility.” Instead of denouncing indi-vidualism as a threat to society, they are proposing it as a necessary solution to many of the country’s economic ills. A vice chair of the nation’s largest business lobby summed up this thinking at the opening of a recent conference on economic change when he said, “By establishing personal responsibility, we must return dynamism to the economy and revitalize society.”24  This thinking is supported by past research, which reveals that a culture with a strong entrepreneurial orientation is important to global competitiveness, especially in the small business sector of an economy. This current trend may well be helpful to the Japanese economy in helping it meet foreign competition at home.25

Other countries, such as China, have more recently undergone a transition of val-ues. As discussed in Chapter 2, China is moving away from a collectivist culture, and it appears as though even China is not sure what cultural values it will adhere to. Confu-cianism was worshipped for over 2,000 years, but the powerful messages through Con-fucius’s teachings were overshadowed in a world where profit became a priority. Now, Confucianism is slowly gaining popularity once again, emphasizing respect for authority, concern for others, balance, harmony, and overall order. While this may provide sanctu-ary for some, it poses problems within the government because it will have to prove its worthiness to remain in power. As long as China maintains economic momentum, despite its recent slowdown, hope for a unified culture may be on the horizon.26

■ Cultural DimensionsUnderstanding the cultural context of a society, and being able to respond and react appropriately to cultural differences, is becoming increasingly important as the global environment becomes more interconnected. Over the past several decades, researchers have attempted to provide a composite picture of culture by examining its subparts, or dimensions.

HofstedeIn 1980, Dutch researcher Geert Hofstede identified four original, and later two addi-tional, dimensions of culture that help explain how and why people from various cultures behave as they do.27  His initial data were gathered from two questionnaire surveys with over 116,000 respondents from over 70 different countries around the world—making it the largest organizationally based study ever conducted. The individuals in these studies all worked in the local subsidiaries of IBM. As a result, Hofstede’s research has been sometimes criticized because of its focus on just one company; however, samples for cross-national comparison need not be representative, as long as they are functionally equivalent. Because they are so similar in respects other than nationality (their employers, their kind of work, and—for matched occupations—their level of education), employees of multinational companies like IBM form attractive sources of information for comparing

130 Part 2 The Role of Culture

national traits. The only thing that can account for systematic and consistent differences between national groups within such a homogeneous multinational population is nation-ality itself—the national environment in which people were brought up before they joined this employer. Comparing IBM subsidiaries therefore shows national culture differences with unusual clarity.28 Despite being first published nearly 40 years ago, Hofstede’s mas-sive study continues to be a focal point for additional research, including the most recent GLOBE project, discussed at the end of this chapter.

The original four dimensions that Hofstede examined were (1) power distance, (2)  uncertainty avoidance, (3) individualism, and (4) masculinity.29 Further research by Hofstede led to the recent identification of the fifth and sixth cultural dimensions: (5) time orientation, identified in 1988, and (6) indulgence versus restraint, identified in 2010.30

Power Distance Power distance is “the extent to which less powerful members of institutions and organizations accept that power is distributed unequally.”31  Countries in  which people blindly obey the orders of their superiors have high power distance. In many societies, lower-level employees tend to follow orders as a matter of procedure. In societies with high power distance, however, strict obedience is found even at the upper levels; examples include Mexico, South Korea, and India. For example, a senior Indian executive with a PhD from a prestigious U.S. university related the following story:

What is most important for me and my department is not what I do or achieve for the company, but whether the [owner’s] favor is bestowed on me. . . . This I have achieved by saying “yes” to everything [the owner] says or does. . . . To contradict him is to look for another job. . . . I left my freedom of thought in Boston.32

The effect of this dimension can be measured in a number of ways. For exam-ple, organizations in low-power-distance countries generally will be decentralized and have flatter organization structures. These organizations also will have a smaller pro-portion of supervisory personnel, and the lower strata of the workforce often will consist of highly qualified people. By contrast, organizations in high-power-distance countries will tend to be centralized and have tall organization structures. Organiza-tions in high-power-distance countries will have a large proportion of supervisory personnel, and the people at the lower levels of the structure often will have low job qualifications. This latter structure encourages and promotes inequality between people at different levels.33

Uncertainty Avoidance Uncertainty avoidance is “the extent to which people feel threatened by ambiguous situations and have created beliefs and institutions that try to avoid these.”34 Countries populated with people who do not like uncertainty tend to have a high need for security and a strong belief in experts and their knowledge; examples include Germany, Japan, and Spain. Cultures with low uncertainty avoidance have people who are more willing to accept that risks are associated with the unknown and that life must go on in spite of this. Examples include Denmark and Great Britain.

The effect of this dimension can be measured in a number of ways. Countries with high-uncertainty-avoidance cultures have a great deal of structuring of organizational activities, more written rules, less risk taking by managers, lower labor turnover, and less ambitious employees.

Low-uncertainty-avoidance societies have organization settings with less structur-ing of activities, fewer written rules, more risk taking by managers, higher labor turnover, and more ambitious employees. The organization encourages personnel to use their own initiative and assume responsibility for their actions.

Individualism We discussed individualism and collectivism in Chapter 2 in reference to political systems. Individualism is the tendency of people to look after themselves and their immediate family only.35 Hofstede measured this cultural difference on a bipolar continuum with individualism at one end and collectivism at the other. Collectivism is

GLOBE (Global Leadership and Organizational Behavior Effectiveness)A multicountry study and evaluation of cultural attributes and leadership behaviors among more than 17,000 managers from 951 organizations in 62 countries.

power distanceThe extent to which less powerful members of institutions and organizations accept that power is distributed unequally.

uncertainty avoidanceThe extent to which people feel threatened by ambiguous situations and have created beliefs and institutions that try to avoid these.

individualismThe political philosophy that people should be free to pursue economic and political endeavors without constraint (Chapter 2); the tendency of people to look after themselves and their immediate family only (Chapter 4).

collectivismThe political philosophy that views the needs or goals of society as a whole as more important than individual desires (Chapter 2); the tendency of people to belong to groups or collectives and to look after each other in exchange for loyalty (Chapter 4).

Chapter 4 The Meanings and Dimensions of Culture 131

the tendency of people to belong to groups or collectives and to look after each other in exchange for loyalty.36

Like the effects of the other cultural dimensions, the effects of individualism and collectivism can be measured in a number of different ways.37  Hofstede found that wealthy countries have higher individualism scores and poorer countries higher collectivism scores (see Table 4–2  for the 74 countries used in Figure 4–4 and sub-sequent figures). Note that in Figure 4–4, the United States, Canada, Australia, France, and the United Kingdom, among others, have high individualism and high GNP. Con-versely, China, Mexico, and a number of South American countries have low indi-vidualism (high collectivism) and low GNP. Countries with high individualism also tend to have greater support for the Protestant work ethic, greater individual initiative, and promotions based on market value. Countries with low individualism tend to have less support for the Protestant work ethic, less individual initiative, and promotions based on seniority.

Masculinity Masculinity is defined by Hofstede as “a situation in which the dom-inant values in society are success, money, and things.”38  Hofstede measured this

masculinityA cultural characteristic in which the dominant values in society are success, money, and things.

Table 4–2Countries and Regions Used in Hofstede’s Research

Arabic-speaking Ecuador Panamacountries (Egypt, Estonia PeruIraq, Kuwait, Finland PhilippinesLebanon, Libya, France PolandSaudi Arabia, Germany PortugalUnited Arab Great Britain RomaniaEmirates) Greece RussiaArgentina Guatemala SalvadorAustralia Hong Kong SerbiaAustria (China) SingaporeBangladesh Hungary SlovakiaBelgium Flemish India Slovenia(Dutch speaking) Indonesia South AfricaBelgium Walloon Iran Spain(French speaking) Ireland SurinameBrazil Israel SwedenBulgaria Italy Switzerland FrenchCanada Quebec Jamaica Switzerland GermanCanada total Japan TaiwanChile Korea (South) ThailandChina Luxembourg TrinidadColombia Malaysia TurkeyCosta Rica Malta United StatesCroatia Mexico UruguayCzech Republic Morocco VenezuelaDenmark Netherlands VietnamEast Africa New Zealand West Africa(Ethiopia, Kenya, Norway (Ghana, Nigeria,Tanzania, Zambia) Pakistan Sierra Leone)

Source: From G. Hofstede and G. J. Hofstede, Cultures and Organizations: Software of the Mind, 2nd ed. (New York: McGraw-Hill, 2005).

132 Part 2 The Role of Culture

dimension on a continuum ranging from masculinity to femininity. Contrary to some stereotypes and connotations, femininity is the term used by Hofstede to describe “a situation in which the dominant values in society are caring for others and the quality of life.”39

Countries with a high masculinity index, such as the Germanic countries, place great importance on earnings, recognition, advancement, and challenge. Individuals are encouraged to be independent decision makers, and achievement is defined in terms of recognition and wealth. The workplace is often characterized by high job stress, and many managers believe that their employees dislike work and must be kept under some degree of control. The school system is geared toward encouraging high performance. Young men expect to have careers, and those who do not often view themselves as failures. Historically, fewer women hold higher-level jobs, although this is changing. The school system is geared toward encouraging high performance.

femininityA cultural characteristic in which the dominant values in society are caring for others and the quality of life.

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from The World Bank and from G. Hofstede and G. J. Hofstede, Cultures and Organizations: Software of the Mind, 2nd ed. (New York: McGraw-Hill, 2005).

Individualism Score

GD

P p

er C

apit

a in

US

$Germany

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0 10 20 30 40 50 60 70 80 90 1000

Russia ⬥

Peru ⬥

Bangladesh ⬥

Brazil ⬥Mexico ⬥

Colombia ⬥

Singapore⬥

Australia⬥

USA⬥

Canada⬥

Belgium⬥

France⬥

Italy⬥Japan⬥

South Korea⬥

Saudi Arabia⬥

Chile⬥Venezuela⬥ Argentina⬥

India⬥Nepal⬥

Indonesia⬥

China⬥Thailand⬥

Spain⬥

United Kingdom⬥

Figure 4–4 GDP per Capita in 2015 versus Individualism

Chapter 4 The Meanings and Dimensions of Culture 133

Countries with a low masculinity index (Hofstede’s femininity dimension), such as Norway, tend to place great importance on cooperation, a friendly atmosphere, and employ-ment security. Individuals are encouraged to be group decision makers, and achievement is defined in terms of layman contacts and the living environment. The workplace tends to be characterized by low stress, and managers give their employees more credit for being respon-sible and allow them more freedom. Culturally, this group prefers small-scale enterprises, and they place greater importance on conservation of the environment. The school system is designed to teach social adaptation. Some young men and women want careers; others do not. Many women hold higher-level jobs and do not find it necessary to be assertive.

Time Orientation Originally called Confucian Work Dynamism, time orientation is defined by Hofstede as “dealing with society’s search for virtue.” Long-term-oriented societies tend to focus on the future. They have the ability to adapt their traditions when conditions change, have a tendency to save and invest for the future, and focus on achiev-ing long-term results. Short-term-oriented cultures focus more on the past and present than on the future. These societies have a deep respect for tradition, focus on achieving quick results, and do not tend to save for the future.40 Hofstede’s original time orientation research only included 23 countries, leading to some criticism. However, in 2010, the research was expanded to include 93 countries.  Table 4–3  highlights ten differences between long- and short-term-oriented cultures.

Asian cultures primarily exhibit long-term orientation. Countries with a high long-term orientation index include China, Japan, and Indonesia (see Figure 4–5). In these cultures, individuals are persistent, thrifty with their money, and highly adaptable to unexpected circumstances. Relationships tend to be ordered by status, which can affect the way that situations are handled. Additionally, people in long-term-oriented cultures are more likely to believe that there are multiple truths to issues that arise, rather than just one, absolute answer.

Table 4–3Ten Differences between Short- and Long-Term- Oriented Societies

Short-Term Orientation Long-Term Orientation

Most important events in life occurred in  the past or take place now

Most important events in life will occur in  the future

Personal steadiness and stability: a good person is always the same

A good person adapts to the circumstances

There are universal guidelines about what are good and evil

What are good and evil depend on the circumstances

Traditions are sacrosanct Traditions are adaptable to changed circumstances

Family life is guided by imperatives Family life is guided by shared tasksSupposed to be proud of one’s country Trying to learn from other countriesService to others is an important goal Thrift and perseverance are important

goalsSocial spending and consumption Large savings quote, funds available

for investmentStudents attribute success and failure to luck

Students attribute success to effort and failure to lack of effort

Slow or no economic growth of poor countries

Fast economic growth of countries up until a level of prosperity

Source: From G. Hofstede, “Dimensionalizing Cultures: The Hofstede Model in Context,” Online Readings in Psychology and Culture, Unit 2 (2011),  http://scholarworks.gvsu.edu/orpc/vol2/iss1/8/.

134 Part 2 The Role of Culture

Spain, the USA, and the UK were identified as having a low long-term orientation index (Hofstede’s short-term orientation). Individuals in short-term-oriented societies believe in absolutes (good and evil), value stability and leisure time, and spend money more freely. Traditional approaches are respected, and feedback cycles tend to be short. Gift giving and greetings are shared and reciprocated.41

Indulgence versus Restraint Based on research related to relative happiness around the world, Hofstede’s most recent dimension measures the freedom to satisfy one’s nat-ural needs and desires within a society. Indulgent societies encourage instant gratification of natural human needs, while restrained cultures regulate and control behavior based on social norms.42 The research leading to the identification of this sixth dimension included participants from 93 countries.  Table 4–4  highlights ten differences between indulgent and restrained cultures.

Countries that show a high indulgence index tend to be located in the Americas and Western Europe, including the USA, Australia, Mexico, and Chile (see Figure 4–6). Freely able to satisfy their basic human desires, individuals in these societies tend to live in the moment. They participate in more sports and activities, express happiness freely, and view themselves as being in control of their own destiny. Freedom of speech is considered vital, and smaller police forces are commonplace. People in indulgent cultures tend to view friendships as important, have less moral discipline, and exhibit a more extroverted, positive personality.

Countries that show a low indulgence index (Hofstede’s dimension of high restraint) tend to be located in Asia and Eastern Europe, including Egypt, Russia, India, and China. In these societies, individuals participate in fewer activities and sports, express less happiness, and believe that their own destiny is not in their control. Main-taining order is seen as vital, resulting in larger police forces and less crime. People tend to value work ethic over friendships, exhibit introverted personalities, and follow a stricter moral discipline.43

Figure 4–5Countries with Very High Long-Term and Short-Term Orientation Scores

High Short-Term

High Long-Term

Note: Country rankings were completed using Geert Hofstede’s Long-Term Orientation (LTO) scores.  High Short-Term refers to countries with scores less than 35 and  High Long-Term refers to countries with scores greater than 60.

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from Geert Hofstede, “Dimensionalizing Cultures: The Hofstede Model in Context,” Online Readings in Psychology and Culture, Unit 2 (2011), http://scholarworks.gvsu.edu/orpc/vol2/iss1/8/.

Chapter 4 The Meanings and Dimensions of Culture 135

Table 4–4Ten Differences between Indulgent and Restrained Societies

Indulgent Restrained

Higher percentage of people declar-ing themselves very happy

Fewer very happy people

A perception of personal life control A perception of helplessness: what happens to me is not my own doing

Freedom of speech seen as important Freedom of speech is not a primary concern

Higher importance of leisure Lower importance of leisureMore likely to remember positive emotions

Less likely to remember positive emotions

In countries with educated popula-tions, higher birthrates

In countries with educated populations, lower birthrates

More people actively involved in sports

Fewer people actively involved in sports

In countries with enough food, higher percentages of obese people

In countries with enough food, fewer obese people

In wealthy countries, lenient sexual norms

In wealthy countries, stricter sexual norms

Maintaining order in the nation is not given a high priority

Higher number of police officers per 100,000 population

Source: From Geert Hofstede, “Dimensionalizing Cultures: The Hofstede Model in Context,” Online Readings in Psychology and Culture, Unit 2 (2011),  http://scholarworks.gvsu.edu/orpc/vol2/iss1/8/.

High Indulgence

High Restraint

Note: Country rankings were completed using Geert Hofstede’s Indulgence versus Restraint (IVR) scores.  High Indulgence refers to countries with scores greater than 50 and  High Restraint refers to countries with scores less than 25.

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from Geert Hofstede, “Dimensionalizing Cultures: The Hofstede Model in Context,” Online Readings in Psychology and Culture, Unit 2 (2011), http://scholarworks.gvsu.edu/orpc/vol2/iss1/8/.

Figure 4–6Countries with Very High Indulgence and Restraint Scores

136 Part 2 The Role of Culture

Integrating the Dimensions A description of the four original and two additional dimensions of culture is useful in helping to explain the differences between various countries, and Hofstede’s research has extended beyond this focus and shown how countries can be described in terms of pairs of dimensions. In Hofstede’s and later research, pairings and clusters can provide useful summaries for international managers. It is always best to have an in-depth understanding of the multicultural environment, but the general groupings outline common ground that one can use as a starting point. Figure 4–7, which incorporates power distance and individualism, provides an example.

Upon first examination of the cluster distribution, the data may appear confus-ing. However, they are very useful in depicting what countries appear similar in values and to what extent they differ from other country clusters. The same countries are not always clustered together in subsequent dimension comparisons. This indicates

Figure 4–7Power Distance versus Individualism

Ind

ivid

ual

ism

(ID

V)

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ivid

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colle

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GuatemalaEcuador

Banglades

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Thailand

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Singapore

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Philippines

IndiaMoro

cco

Arab ctrs

S. Korea

Taiwan Vietn

amW A

frica

E Africa

Iran

Indonesia

Colombia

Portugal

CroatiaGreece

Slovakia

S. Africa

Israel

Malta

Finland

Ireland France

Austria

Canada total

Canada Quebec

Poland

Hungary

ItalyBelgium NI

Belgium FrSweden

Germany

Denmark

Switzerland Ge

Switzerland Fr

Norway

Netherlands

Great Britain

United States

New Zealand

Australia

Estonia, LuxembourgCzech Rep.

Spain

Russia

RomaniaBulgaria

Slovenia

Serbia

ArgentinaSuriname

Jamaica Brazil

Salvador

Chile

Uruguay

Mexico

PeruTrinidad

Costa Rica

PanamaVenezuela

slanted

regular Europe and Anglo countries

Asia and Muslim countries

quadrant partition lines

Latin America

Legend

italics

Turkey

⬥⬥

⬥⬥⬥

⬥⬥

⬥⬥ ⬥

⬥⬥

⬥⬥

⬥⬥

⬥⬥⬥ ⬥ ⬥ ⬥

⬥ ⬥⬥

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⬥⬥

⬥⬥

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⬥⬥

⬥⬥

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⬥ ⬥

⬥⬥

Source: From G. Hofstede and G. J. Hofstede, Cultures and Organizations: Software of the Mind, 2nd ed. (New York: McGraw-Hill, 2005).

Chapter 4 The Meanings and Dimensions of Culture 137

that while some beliefs overlap between cultures, it is where they diverge that makes groups unique to manage.

In Figure 4–7, the United States, Australia, Canada, Britain, Denmark, and New Zealand are located in the lower-left-hand quadrant. Americans, for example, have very high individualism and relatively low power distance. They prefer to do things for them-selves and are not upset when others have more power than they do. The other countries, while they may not be a part of the same cluster, share similar values. Conversely, many of the underdeveloped or newly industrialized countries, such as Colombia, Hong Kong, Portugal, and Singapore, are characterized by large power distance and low individual-ism. These nations tend to be collectivist in their approach.

Similarly, Figure 4–8  plots the uncertainty-avoidance index against the power- distance index. Once again, there are clusters of countries. Many of the Anglo nations tend to be in the upper-left-hand quadrant, which is characterized by small power distance

Figure 4–8 Power Distance versus Uncertainty Avoidance

Un

cert

ain

ty A

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ce (

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Power Distance (PDI)small large

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family

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machine

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Philippines

India⬥

Morocco⬥

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h⬥

Arab ctrs

S. Korea

Taiwan

Vietnam⬥

W Africa

E Africa

Iran⬥

Indonesia

Pakistan⬥

Colombia⬥

Portugal⬥

Croatia⬥

Greece⬥

Slovakia⬥

S. Africa⬥

Israel⬥

Malta⬥

Finland⬥

Ireland⬥

France⬥

Austria⬥

Canada total ⬥

Canada Quebec⬥

Poland⬥

Hungary⬥

Italy⬥

Belgium NI⬥

Belgium Fr⬥

Sweden⬥

Germany⬥

Denmark⬥

Switzerland Ge⬥

Switzerland Fr⬥

Ecuador⬥

Norway⬥

Netherlands⬥

Great Britain⬥

United States⬥

New Zealand⬥

Australia⬥

Estonia⬥

Luxembourg⬥

Czech Rep.⬥

Spain⬥

Russia⬥

Romania⬥

Bulgaria⬥

Slovenia⬥

Serbia⬥

Argentina⬥

Suriname⬥

Jamaica ⬥

Brazil⬥

Salvador⬥

Chile⬥

Uruguay⬥

Mexico⬥

Peru⬥

Trinidad⬥

Costa Rica ⬥ Panama⬥

Venezuela⬥

slanted

regular Europe and Anglo countries

Asia and Muslim countries

quadrant partition lines

Latin America

Legend

italics

⬥Turke

y

Source: From G. Hofstede and G. J. Hofstede, Cultures and Organizations: Software of the Mind, 2nd ed. (New York: McGraw-Hill, 2005).

138 Part 2 The Role of Culture

and weak uncertainty avoidance, while, in contrast, many Latin, Mediterranean, and Asian nations are characterized by high power distance and strong uncertainty avoidance.

The integration of these cultural factors into two-dimensional plots helps illustrate the complexity of understanding culture’s effect on behavior. A number of dimensions are at work, and sometimes they do not all move in the anticipated direction. For exam-ple, at first glance, a nation with high power distance would appear to be low in indi-vidualism, and vice versa, and Hofstede found exactly that (see Figure 4–7). However, low uncertainty avoidance does not always go hand in hand with high masculinity, even though those who are willing to live with uncertainty will want rewards such as money and power and accord low value to the quality of work life and caring for others (see Figure 4–9). Simply put, empirical evidence on the impact of cultural dimensions may differ from commonly held beliefs or stereotypes. Research-based data are needed to determine the full impact of differing cultures.

Figure 4–9Masculinity versus Uncertainty Avoidance

Un

cert

ain

ty A

void

an

ce (

UA

I)st

ron

g

Masculinity (MAS)feminine masculine

we

ak

5

85

95

75

65

55

45

35

25

15

115

105

5 25 54 65 85

Guatemala ⬥

China

Thailand⬥

Japan ⬥

Hong Kong

Singapore

Malaysia

Philippines

India⬥

Morocco

Banglades

h⬥

Arab ctrs,

S. Korea⬥

Taiwan ⬥

Vietnam

W Africa⬥E

Africa ⬥

Iran⬥

Indonesia⬥

Pakistan

Colombia⬥

Portugal⬥

Croatia⬥

Greece⬥

Slovakia (110) ⬥S. Africa⬥

Israel⬥

Malta⬥

Finland ⬥

Ireland⬥

France⬥

Austria⬥

Canada total⬥

Canada Quebec⬥

Poland⬥

Hungary⬥

Italy⬥

Belgium NI ⬥Belgium Fr

Sweden⬥

Germany⬥

Denmark⬥

Switzerland Ge⬥

Switzerland Fr⬥

Ecuador⬥

Norway⬥

Netherlands⬥

Great Britain⬥

United States⬥

New Zealand⬥

Australia⬥

Estonia⬥

Luxembourg,Czech Rep.⬥

Spain⬥

Russia ⬥

Romania ⬥

Bulgaria⬥

Slovenia⬥

Serbia⬥

Argentina⬥

Suriname ⬥

Jamaica⬥

Brazil⬥

Salvador⬥

Chile⬥

Uruguay⬥

Mexico⬥

Peru ⬥

Trinidad⬥

Costa Rica ⬥

Panama

Venezuela⬥

slanted

regular Europe and Anglo countries

Asia and Muslim countries

quadrant partition lines

Latin America

Legend

italics

⬥Turke

y

Source: From G. Hofstede and G. J. Hofstede, Cultures and Organizations: Software of the Mind, 2nd ed. (New York: McGraw-Hill, 2005).

Chapter 4 The Meanings and Dimensions of Culture 139

The Hofstede cultural dimensions and country clusters are widely recognized and accepted in the study of international management. His work has served as a springboard to numerous recent cultural studies and research projects.

TrompenaarsIn 1994, another Dutch researcher, Fons Trompenaars, expanded on the research of Hofstede and published the results of his own ten-year study on cultural dimensions.44 He administered research questionnaires to over 15,000 managers from 28 countries and received usable responses from at least 500 in each nation; the 23 countries in his research are presented in Table 4–5. Building heavily on value orientations and the rela-tional orientations of well-known sociologist Talcott Parsons,45 Trompenaars derived five relationship orientations that address the ways in which people deal with each other; these can be considered to be cultural dimensions that are analogous to Hofstede’s dimen-sions. Trompenaars also looked at attitudes toward both time and the environment, and the result of his research is a wealth of information helping explain how cultures differ and offering practical ways in which MNCs can do business in various countries. The following discussion examines each of the five relationship orientations as well as attitudes toward time and the environment.46

Universalism vs. Particularism Universalism is the belief that ideas and practices can be applied everywhere without modification. Particularism is the belief that circum-stances dictate how ideas and practices should be applied. In cultures with high univer-salism, the focus is more on formal rules than on relationships, business contracts are adhered to very closely, and people believe that “a deal is a deal.” In cultures with high

universalismThe belief that ideas and practices can be applied everywhere in the world without modification.

particularismThe belief that circumstances dictate how ideas and practices should be applied and that something cannot be done the same everywhere.

Table 4–5Trompenaars’s Country Abbreviations

Abbreviation Country

ARG ArgentinaAUS AustriaBEL BelgiumBRZ BrazilCHI ChinaCIS Former Soviet UnionCZH Former CzechoslovakiaFRA FranceGER Germany (excluding former East Germany)HK Hong KongIDO IndonesiaITA ItalyJPN JapanMEX MexicoNL NetherlandsSIN SingaporeSPA SpainSWE SwedenSWI SwitzerlandTHA ThailandUK United KingdomUSA United StatesVEN Venezuela

140 Part 2 The Role of Culture

particularism, the focus is more on relationships and trust than on formal rules. In a particularist culture, legal contracts often are modified, and as people get to know each other better, they often change the way in which deals are executed. In his early research, Trompenaars found that in countries such as the United States, Australia, Germany, Sweden, and the United Kingdom, there was high universalism, while countries such as Venezuela, the former Soviet Union, Indonesia, and China were high on particularism. Figure 4–10  shows the continuum.

In follow-up research, Trompenaars and Hampden-Turner presented the respon-dents with a dilemma and asked them to make a decision. Here is one of these dilemmas along with the national scores of the respondents:47

You are riding in a car driven by a close friend. He hits a pedestrian. You know he was going at least 35 miles per hour in an area of the city where the maximum allowed speed is 20 miles per hour. There are no witnesses. His lawyer says that if you testify under oath that he was driving 20 miles per hour it may save him from serious consequences. What right has your friend to expect you to protect him?

a. My friend has a definite right as a friend to expect me to testify to the lower figure.b. He has some right as a friend to expect me to testify to the lower figure.c. He has no right as a friend to expect me to testify to the lower figure.

With a high score indicating strong universalism (choice c) and a low score indicat-ing strong particularism (choice a), here is how the different nations scored:

Figure 4–10Trompenaars’s Relationship Orientations on Cultural Dimensions

Individualism vs. Communitarianism

Individualism

Sin

Communitarianism

ThaJpnIdoFraChiGerHK ItaVenBelSwiBrzSpaNL

SweAus

UKArgCISMex

CzhUSA

Achievement vs. Ascription

Achievement Ascription

Aus USA Ger Arg Tha Bel Fra ItaBrz

NLHK

Spa Jpn Czh Sin CIS Chi Ido VenSwiUK

SweMex

Specific vs. Di�use

Specific Di�use

Aus UK USASwi

Fra NL Bel Brz Czh Ido Spa Chi VenHKSin

Swe

CISTha

ArgJpnMex

ItaGer

Neutral vs. Emotional

Neutral Emotional

Jpn UK Sin Aus Ido HK Tha BelGer

SweArgUSA

CzhFra

Spa ItaVen

CIS Brz Chi Swi NL Mex

Universalism

Universalism vs. Particularism

Particularism

USA Aus GerSwi

Swe UK NL Czh Ita Bel Brz Fra JapSin

Arg Mex Tha HK Chi Ido CIS Ven

Source: Adapted from information found in Fons Trompenaars, Riding the Waves of Culture  (New York: Irwin, 1994); Charles Hampden-Turner and Fons Trompenaars, “A World Turned Upside Down: Doing Business in Asia,” in  Managing Across Cultures: Issues and Perspectives, ed. Pat Joynt and Malcolm Warner (London: International Thomson Business Press, 1996), pp. 275–305.

Chapter 4 The Meanings and Dimensions of Culture 141

Universalism (no right)

Canada 96United States 95Germany 90United Kingdom 90Netherlands 88France 68Japan 67Singapore 67Thailand 63Hong Kong 56Particularism (some or definite right)

China 48South Korea 26

As noted earlier, respondents from universalist cultures (e.g., North America and Western Europe) felt that the rules applied regardless of the situation, while respondents from particularist cultures were much more willing to bend the rules and help their friend.

Based on these types of findings, Trompenaars recommends that when individuals from particularist cultures do business in a universalistic culture, they should be prepared for rational, professional arguments and a “let’s get down to business” attitude. Con-versely, when individuals from universalist cultures do business in a particularist environ-ment, they should be prepared for personal meandering or irrelevancies that seem to go nowhere and should not regard personal, get-to-know-you attitudes as mere small talk.

Individualism vs. Communitarianism Individualism and communitarianism are key dimensions in Hofstede’s earlier research. Although Trompenaars derived these two relationships differently than Hofstede does, they still have the same basic meaning, although in his more recent work Trompenaars has used the word communitarianism rather than collectivism. For him, individualism refers to people regarding themselves as individuals, while communitarianism refers to people regarding themselves as part of a group, similar to the political groupings discussed in Chapter 2. As shown in Figure 4–10, the United States, former Czechoslovakia, Argentina, the former Soviet Union (CIS), and Mexico have high individualism.

In his most recent research, Trompenaars posed the following situation. If you were to be promoted, which of the two following issues would you emphasize most: (a) the new group of people with whom you will be working or (b) the greater responsibility of the work you are undertaking and the higher income you will be earning? The following reports the scores associated with the individualism of option b—greater responsibility and more money.48

communitarianismRefers to people regarding themselves as part of a group.

Individualism (emphasis on larger responsibili-ties and more income)

Canada 77Thailand 71United Kingdom 69United States 67Netherlands 64France 61Japan 61China 54Singapore 50Hong Kong 47Communitarianism (emphasis on the new group of people)

Malaysia 38Korea 32

142 Part 2 The Role of Culture

These findings are somewhat different from those presented in Figure 4–10  and show that cultural changes may be occurring more rapidly than many people realize. For example, findings show Thailand very high on individualism (possibly indicating an increasing entrepreneurial spirit/cultural value), whereas the Thais were found to be low on individualism a few years before, as shown in Figure 4–10. At the same time, it is important to remember that there are major differences between people in high- individualism societies and those in high-communitarianism societies. The former stress personal and individual matters; the latter value group-related issues. Negotiations in cultures with high individualism typically are made on the spot by a representative, peo-ple ideally achieve things alone, and they assume a great deal of personal responsibility. In cultures with high communitarianism, decisions typically are referred to committees, people ideally achieve things in groups, and they jointly assume responsibility.

Trompenaars recommends that when people from cultures with high individualism deal with those from communitarianistic cultures, they should have patience for the time taken to consent and to consult, and they should aim to build lasting relationships. When people from cultures with high communitarianism deal with those from individualistic cultures, they should be prepared to make quick decisions and commit their organization to these decisions. Also, communitarianists dealing with individualists should realize that the reason they are dealing with only one negotiator (as opposed to a group) is that this person is respected by his or her organization and has its authority and esteem.

Neutral vs. Emotional A neutral culture is one in which emotions are held in check. As seen in Figure 4–10, both Japan and the United Kingdom are high-neutral cultures. People in these countries try not to show their feelings; they act stoically and maintain their composure. An emotional culture is one in which emotions are openly and natu-rally expressed. People in emotional cultures often smile a great deal, talk loudly when they are excited, and greet each other with a great deal of enthusiasm. Mexico, the Netherlands, and Switzerland are examples of high emotional cultures.

Trompenaars recommends that when individuals from emotional cultures do busi-ness in neutral cultures, they should put as much as they can on paper and submit it to the other side. They should realize that lack of emotion does not mean a lack of inter-est or boredom, but rather that people from neutral cultures do not like to show their hand. Conversely, when those from neutral cultures do business in emotional cultures, they should not be put off stride when the other side creates scenes or grows animated and boisterous, and they should try to respond warmly to the emotional affections of the other group.

Specific vs. Diffuse A specific culture is one in which individuals have a large pub-lic space they readily let others enter and share and a small private space they guard closely and share with only close friends and associates. A diffuse culture is one in which public space and private space are similar in size and individuals guard their public space carefully because entry into public space affords entry into private space as well. As shown in Figure 4–10, Austria, the United Kingdom, the United States, and Switzerland all are specific cultures, while Venezuela, China, and Spain are diffuse cultures. In specific cultures, people often are invited into a person’s open, public space; individuals in these cultures often are open and extroverted; and there is a strong separa-tion of work and private life. In diffuse cultures, people are not quickly invited into a person’s open, public space because once they are in, there is easy entry into the private space as well. Individuals in these cultures often appear to be indirect and introverted, and work and private life often are closely linked.

An example of these specific and diffuse cultural dimensions is provided by the United States and Germany. A U.S. professor, such as Robert Smith, PhD, generally would be called “Doctor Smith” by students when at his U.S. university. When shop-ping, however, he might be referred to by the store clerk as “Bob,” and when golfing, Bob might just be one of the guys, even to a golf partner who happens to be a

neutral cultureA culture in which emotions are held in check.

emotional cultureA culture in which emotions are expressed openly and naturally.

specific cultureA culture in which individuals have a large public space they readily share with others and a small private space they guard closely and share with only close friends and associates.

diffuse cultureA culture in which public space and private space are similar in size and individuals guard their public space carefully because entry into public space affords entry into private space as well.

Chapter 4 The Meanings and Dimensions of Culture 143

graduate student in his department. The reason for these changes in status is that, with the specific U.S. cultural values, people have large public spaces and often conduct themselves differently depending on their public role. In high-diffuse cultures, on the other hand, a person’s public life and private life often are similar. Therefore, in Germany, Herr Professor Doktor Schmidt would be referred to that way at the uni-versity, local market, and bowling alley—and even his wife might address him for-mally in public. A great deal of formality is maintained, often giving the impression that Germans are stuffy or aloof.

Trompenaars recommends that when those from specific cultures do business in diffuse cultures, they should respect a person’s title, age, and background connections, and they should not get impatient when people are being indirect or circuitous. Con-versely, when individuals from diffuse cultures do business in specific cultures, they should try to get to the point and be efficient, learn to structure meetings with the judi-cious use of agendas, and not use their titles or acknowledge achievements or skills that are irrelevant to the issues being discussed.

Achievement vs. Ascription An achievement culture is one in which people are accorded status based on how well they perform their functions. An ascription culture is one in which status is attributed based on who or what a person is. Achievement cultures give high status to high achievers, such as the company’s number-one salesper-son or the medical researcher who has found a cure for a rare form of bone cancer. Ascription cultures accord status based on age, gender, or social connections. For ex-ample, in an ascription culture, a person who has been with the company for 40 years may be listened to carefully because of the respect that others have for the individual’s age and longevity with the firm, and an individual who has friends in high places may be afforded status because of whom she knows. As shown in Figure 4–10, Austria, the United States, Switzerland, and the United Kingdom are achievement cultures, while Venezuela, Indonesia, and China are ascription cultures.

Trompenaars recommends that when individuals from achievement cultures do business in ascription cultures, they should make sure that their group has older, senior, and formal position holders who can impress the other side, and they should respect the status and influence of their counterparts in the other group. Conversely, he recommends that when individuals from ascription cultures do business in achievement cultures, they should make sure that their group has sufficient data, technical advisers, and knowledge-able people to convince the other group that they are proficient, and they should respect the knowledge and information of their counterparts on the other team.

Time Aside from the five relationship orientations, another major cultural difference is the way in which people deal with the concept of time. Trompenaars has identified two different approaches: sequential and synchronous. In cultures where sequential ap-proaches are prevalent, people tend to do only one activity at a time, keep appointments strictly, and show a strong preference for following plans as they are laid out and not deviating from them. In cultures where synchronous approaches are common, people tend to do more than one activity at a time, appointments are approximate and may be changed at a moment’s notice, and schedules generally are subordinate to relationships. People in synchronous-time cultures often will stop what they are doing to meet and greet individuals coming into their office.

A good contrast is provided by the United States, Mexico, and France. In the United States, people tend to be guided by sequential-time orientation and thus set a schedule and stick to it. Mexicans operate under more of a synchronous-time orientation and thus tend to be much more flexible, often building slack into their schedules to allow for interruptions. The French are similar to the Mexicans and, when making plans, often determine the objectives they want to accomplish but leave open the timing and other factors that are beyond their control; this way, they can adjust and modify their approach as they go along. As Trompenaars noted, “For the French and Mexicans, what was

achievement cultureA culture in which people are accorded status based on how well they perform their functions.

ascription cultureA culture in which status is attributed based on who or what a person is.

144 Part 2 The Role of Culture

important was that they get to the end, not the particular path or sequence by which that end was reached.”49

Another interesting time-related contrast is the degree to which cultures are past- or present-oriented as opposed to future-oriented. In countries such as the United States, Italy, and Germany, the future is more important than the past or the present. In countries such as Venezuela, Indonesia, and Spain, the present is most important. In France and Belgium, all three time periods are of approximately equal importance. Because different emphases are given to different time periods, adjusting to these cultural differences can create challenges.

Trompenaars recommends that when doing business with future-oriented cultures, effective international managers should emphasize the opportunities and limitless scope that any agreement can have, agree to specific deadlines for getting things done, and be aware of the core competence or continuity that the other party intends to carry with it into the future. When doing business with past- or present-oriented cultures, he recom-mends that managers emphasize the history and tradition of the culture, find out whether internal relationships will sanction the types of changes that need to be made, and agree to future meetings in principle but fix no deadlines for completions.

The Environment Trompenaars also examined the ways in which people deal with their environment. Specific attention should be given to whether they believe in control-ling outcomes (inner-directed) or letting things take their own course (outer-directed). One of the things he asked managers to do was choose between the following statements:

1. What happens to me is my own doing.2. Sometimes I feel that I do not have enough control over the directions my life

is taking.

Managers who believe in controlling their own environment would opt for the first choice; those who believe that they are controlled by their environment and cannot do much about it would opt for the second.

Here is an example by country of the sample respondents who believe that what happens to them is their own doing:50

United States 89%Switzerland 84%Australia 81%Belgium 76%Indonesia 73%Hong Kong 69%Greece 63%Singapore 58%Japan 56%China 35%

In the United States, managers feel strongly that they are masters of their own fate. This helps account for their dominant attitude (sometimes bordering on aggressiveness) toward the environment and discomfort when things seem to get out of control. Many Asian cultures do not share these views. They believe that things move in waves or natural shifts and one must “go with the flow,” so a flexible attitude, characterized by a willingness to compromise and maintain harmony with nature, is important.

Trompenaars recommends that when dealing with those from cultures that believe in dominating the environment, it is important to play hardball, test the resilience of the opponent, win some objectives, and always lose from time to time. For example, repre-sentatives of the U.S. government have repeatedly urged Japanese automobile companies to purchase more component parts from U.S. suppliers to partially offset the large volume

Chapter 4 The Meanings and Dimensions of Culture 145

of U.S. imports of finished autos from Japan. Instead of enacting trade barriers, the United States was asking for a quid pro quo. When dealing with those from cultures that believe in letting things take their natural course, it is important to be persistent and polite, maintain good relationships with the other party, and try to win together and lose apart.

■ Integrating Culture and Management: The GLOBE Project

Most recently, the GLOBE (Global Leadership and Organizational Behavior Effective-ness) research program reflects an additional approach to measuring cultural differences. Conceived in 1991, the GLOBE project is an ongoing research project, currently consist-ing of three major interrelated phases. GLOBE extends and integrates the previous anal-yses of cultural attributes and variables published by Hofstede and Trompenaars. The three completed GLOBE phases explore the various elements of the dynamic relationship between the culture and organizational behavior.51

At the heart of phases one and two, first published in 2004 and 2007, is the study and evaluation of nine different cultural attributes using middle managers from 951 organizations in 62 countries.52,53 A team of 170 scholars worked together to survey over 17,000 managers in three industries: financial services, food processing, and telecom-munications. When developing the measures and conducting the analysis, they also used archival measures of country economic prosperity and of the physical and psychological well-being of the cultures studied. Countries were selected so that every major geo-graphic location in the world was represented. Additional countries, including those with unique types of political and economic systems, were selected to create a complete and comprehensive database upon which to build the analysis.54 This research has been con-sidered among the most sophisticated in the field to date, and a collaboration of the work of Hofstede and GLOBE researchers could provide an influential outlook on the major factors characterizing global cultures.55

While phases one and two focus on middle management, phase three, first published in 2012, examines the interactions of culture and leadership in upper-level management positions. More than 1,000 CEOs, and more than 5,000 of their direct reports, were sur-veyed by 40 researchers across 24 countries. To provide compatibility across all phases of the GLOBE project, 17 of the 24 countries surveyed in phase three were also included in the initial study performed for phases one and two.56  A further explanation of phase three, which deals primarily with leadership, occurs in Chapter 13. Table 4–6 also provides an overview of the purposes and results of the different phases.

Table 4–6GLOBE Cultural Variable Results

Variable Highest Ranking Medium Ranking Lowest Ranking

Assertiveness Spain, U.S. Egypt, Ireland Sweden, New Zealand

Future orientation Denmark, Canada Slovenia, Egypt Russia, Argentina

Gender differentiation South Korea, Egypt Italy, Brazil Sweden, Denmark

Uncertainty avoidance Austria, Denmark Israel, U.S. Russia, Hungary

Power distance Russia, Spain England, France Denmark, Netherlands

Collectivism/societal Denmark, Singapore Hong Kong, U.S. Greece, Hungary

In-group collectivism Egypt, China England, France Denmark, Netherlands

Performance orientation U.S., Taiwan Sweden, Israel Russia, Argentina

Humane orientation Indonesia, Egypt Hong Kong, Sweden Germany, Spain

Source: From Mansour Javidan, Peter W. Dorfman, Mary Sully de Luque, and Robert J. House, “In the Eye of the Beholder: Cross Cultural Lessons in Leadership from Project GLOBE,” Academy of Management Perspectives  20, no. 1 (2006), p. 76.

146 Part 2 The Role of Culture

The GLOBE study is interesting because its nine constructs were defined, concep-tualized, and operationalized by a multicultural team of over 100 researchers. In addition, the data in each country were collected by investigators who were either natives of the cultures studied or had extensive knowledge and experience in those cultures.

Culture and ManagementGLOBE researchers adhere to the belief that certain attributes that distinguish one culture from others can be used to predict the most suitable, effective, and acceptable organiza-tional and leader practices within that culture. In addition, they contend that societal culture has a direct impact on organizational culture and that leader acceptance stems from tying leader attributes and behaviors to subordinate norms.57

The GLOBE project set out to answer many fundamental questions about cultural variables shaping leadership and organizational processes. The meta-goal of GLOBE was to develop an empirically based theory to describe, understand, and predict the impact of specific cultural variables on leadership and organizational processes and the effective-ness of these processes. Overall, GLOBE hopes to provide a global standard guideline that allows managers to focus on local specialization. Specific objectives include answer-ing these fundamental questions:58

• Are there leader behaviors, attributes, and organizational practices that are universally accepted and effective across cultures?

• Are there leader behaviors, attributes, and organizational practices that are accepted and effective in only some cultures?

• How do attributes of societal and organizational cultures affect the kinds of leader behaviors and organizational practices that are accepted and effective?

• What is the effect of violating cultural norms that are relevant to leadership and organizational practices?

• What is the relative standing of each of the cultures studied on each of the nine core dimensions of culture?

• Can the universal and culture-specific aspects of leader behaviors, attributes, and organizational practices be explained in terms of an underlying theory that accounts for systematic differences across cultures?

GLOBE’s Cultural DimensionsPhase one of the GLOBE project identified the nine cultural dimensions:59

1. Uncertainty avoidance is defined as the extent to which members of an organi-zation or society strive to avoid uncertainty by reliance on social norms, rituals, and bureaucratic practices to alleviate the unpredictability of future events.

2. Power distance is defined as the degree to which members of an organization or society expect and agree that power should be unequally shared.

3. Collectivism I: Societal collectivism refers to the degree to which organiza-tional and societal institutional practices encourage and reward collective dis-tribution of resources and collective action.

4. Collectivism II: In-group collectivism refers to the degree to which individuals express pride, loyalty, and cohesiveness in their organizations or families.

5. Gender egalitarianism is defined as the extent to which an organization or a society minimizes gender role differences and gender discrimination.

6. Assertiveness is defined as the degree to which individuals in organizations or societies are assertive, confrontational, and aggressive in social relationships.

7. Future orientation is defined as the degree to which individuals in organiza-tions or societies engage in future-oriented behaviors such as planning, invest-ing in the future, and delaying gratification.

Chapter 4 The Meanings and Dimensions of Culture 147

8. Performance orientation refers to the extent to which an organization or soci-ety encourages and rewards group members for performance improvement and excellence.

9. Humane orientation is defined as the degree to which individuals in organiza-tions or societies encourage and reward individuals for being fair, altruistic, friendly, generous, caring, and kind to others.

The first six dimensions have their origins in Hofstede’s cultural dimensions (see Figure 4-11). The collectivism I dimension measures societal emphasis on col-lectivism; low scores reflect individualistic emphasis and high scores reflect collec-tivistic emphasis by means of laws, social programs, or institutional practices. The collectivism II scale measures in-group (family or organization) collectivism such as pride in and loyalty to family or organization and family or organizational cohesive-ness. In lieu of Hofstede’s masculinity dimension, the GLOBE researchers developed the two dimensions they labeled gender egalitarianism and assertiveness. The dimen-sion of future orientation is similar to Hofstede’s time orientation dimension. Future orientation also has some origin in past research, as does performance orientation and humane orientation.60 These measures are therefore integrative and combine a number of insights from previous studies.

A unique contribution of the GLOBE project is the identification of both values, which represent how people think things should be, and practices, which represent how things actually are. For example, GLOBE researchers found that China exhibits a high level of power distance in practice (a score of 5.02) despite the fact that the Chinese people desire a lower level of power distance (a score of 3.01) in their culture.  Fig-ure  4-12  shows the differences in values and practices within Brazil. Recently, further analysis has been conducted with regard to corporate social responsibility (CSR), a topic discussed in detail in Chapter 3.61

GLOBE Country AnalysisThe initial results of the GLOBE analysis are presented in Table 4–7. The GLOBE analysis corresponds generally with those of Hofstede and Trompenaars, although with some variations resulting from the variable definitions and methodology. Hofstede cri-tiqued the GLOBE analysis, pointing out key differences between the research methods;

Figure 4–11Comparing the Cultural Dimension Research: Geert Hofstede and the GLOBE Project 

Geert HofstedeDutch researcher

GLOBE Project170 researchers

1980 (updated in 1988 & 2010) 2004 (Phase 1 – cultural dimensions)

Hofstede and the GLOBE Project: Comparing the Research

Scholars

DateCompleted

Identified Dimensions

Sample

Collectivism ICollectivism IIPower DistanceUncertainty AvoidanceGender EgalitarianismAssertivenessFuture OrientationPerformance OrientationHumane Orientation

Managers from 951 companies~17,000 participants> 60 countries

Individualism

Power DistanceUncertainty Avoidance

Masculinity

Time Orientation (1988)

Indulgence (2010)

IBM employees~116,000 participants

> 70 countries

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from G. Hofstede and G. J. Hofstede, Cultures and Organizations: Software of the Mind, 2nd ed. (New York: McGraw-Hill, 2005), and the GLOBE project research.

148 Part 2 The Role of Culture

Figure 4–12Comparing Values and Practices in Brazil

Assertiveness

Institutional Collectivism

In-Group CollectivismPower Distance

Performance Orientation Future Orientation

Gender EgalitarianismHumane Orientation

Uncertainty Avoidance

01

2

3

4

5

6

7

PracticeValues

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from the GLOBE project research.

Hofstede was the sole researcher and writer of his findings, while GLOBE consisted of a team of perspectives; Hofstede focused on one institution and surveyed employees, while GLOBE interviewed managers across many corporations; and so on. The disparity of the terminology between these two, coupled with the complex research, makes it challenging to compare and fully reconcile these two approches.62  Other assessments have pointed out that Hofstede may have provided an introduction into the psychology of culture, but further research is necessary in this changing world. The GLOBE analy-sis is sometimes seen as complicated, but so are cultures and perceptions. An in-depth understanding of all facets of culture is difficult, if not impossible, to attain, but GLOBE provides a current comprehensive overview of general stereotypes that can be further analyzed for greater insight.63,64

We will explore additional implications of the GLOBE findings as they relate to cross-cultural perspectives in Chapter 5  and managerial leadership in Chapter 13.

The World of International Management—RevisitedThis chapter’s opening discussion of the successes and failures of cross-border mergers by DuPont, ABInBev, and Chrysler illustrates the importance of culture and how cultural differences may contribute to global management challenges. Cultural distance can influ-ence both positively and negatively how decisions are made, reported, and resolved. Having read this chapter, you should understand the impact culture has on the actions of MNCs, including general management practices and relations with employees and customers, and on maintaining overall reputation.

Recall the chapter opening discussion about the merger of ABInBev and SABMiller and then draw on your understanding of Hofstede’s and Trompenaars’s cultural dimen-sions to answer the following questions: (1) What dimensions contribute to the differences

Chapter 4 The Meanings and Dimensions of Culture 149

Tab

le 4

–7

Glo

be

Ph

ases

On

e, T

wo,

an

d T

hre

e

Pu

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.

150 Part 2 The Role of Culture

between how Brazilian and United Kingdom workers address management problems, including operational or product flaws? (2) What are some ways that Brazilian culture may affect operational excellence in a positive way? How might it hurt quality? (3) How could managers from Brazil or other similar cultures adopt practices from European cultures when investing in those regions?

1. Culture is acquired knowledge that people use to interpret experience and generate social behavior. Culture also has the characteristics of being learned, shared, transgenerational, symbolic, patterned, and adaptive. There are many dimensions of cultural diversity, including centralized vs. decentralized decision making, safety vs. risk, individual vs. group rewards, informal vs. formal procedures, high vs. low organizational loyalty, cooperation vs. competition, short-term vs. long-term horizons, and stability vs. innovation.

2. Values are basic convictions that people have regarding what is right and wrong, good and bad, and important and unimportant. Research shows that there are both differences and similarities between the work values and managerial values of different cultural groups. Work values often reflect culture and industrialization, and managerial values are highly related to success. Research shows that values tend to change over time and often reflect age and experience.

3. Hofstede has identified and researched four major dimensions of culture: power distance, uncertainty avoidance, individualism, and masculinity. Recently, he has added a fifth dimension, time orientation, and more recently yet, a sixth dimension, indul-gence vs. restraint: Each will affect a country’s political and social system. The integration of these factors into two-dimensional figures can illustrate the complexity of culture’s effect on behavior.

4. In recent years, researchers have attempted to clus-ter countries into similar cultural groupings to study similarities and differences. Through analyzing the relationship between two dimensions, as Hofstede illustrated, two-dimensional maps can be created to show how countries differ and where they overlap.

5. Research by Trompenaars has examined five rela-tionship orientations: universalism vs. particularism, individualism vs. communitarianism, affective vs. neutral, specific vs. diffuse, and achievement vs. ascription. Trompenaars also looked at attitudes toward time and toward the environment. The result is a wealth of information helping to explain how cultures differ as well as practical ways in which MNCs can do business effectively in these environ-ments. In particular, his findings update those of Hofstede while helping support the previous work by Hofstede on clustering countries.

6. Recent research undertaken by the GLOBE project has attempted to extend and integrate cultural attri-butes and variables as they relate to managerial lead-ership and practice. The GLOBE project identified nine cultural dimensions through the study of middle managers from over 900 different countries. These analyses confirm much of the Hofstede and Trompe-naars research, with greater emphasis on differences in managerial leadership styles. Unique to the GLOBE project is the identification of both values, which represent how people think things should be, and practices, which represent how things actually are.

SUMMARY OF KEY POINTS

KEY TERMS

achievement culture, 143ascription culture, 143collectivism, 130communitarianism, 141culture, 124diffuse culture, 142

emotional culture, 142femininity, 132GLOBE, 130individualism, 130masculinity, 131neutral culture, 142

particularism, 139power distance, 130specific culture, 142uncertainty avoidance, 130universalism, 139values, 128

Chapter 4 The Meanings and Dimensions of Culture 151

REVIEW AND DISCUSSION QUESTIONS

1. What is meant by the term culture? In what way can measuring attitudes about the following help differentiate between cultures: centralized or decen-tralized decision making, safety or risk, individual or group rewards, high or low organizational loy-alty, cooperation or competition? Use these atti-tudes to compare the United States, Germany, and Japan. Based on your comparisons, what conclu-sions can you draw regarding the impact of culture on behavior?

2. What is meant by the term value? Are cultural val-ues the same worldwide, or are there marked differ-ences? Are these values changing over time, or are they fairly constant? How does your answer relate to the role of values in a culture?

3. What are the four major dimensions of culture stud-ied by Geert Hofstede? Identify and describe each. What is the cultural profile of the United States? Of Asian countries? Of Latin American countries? Of Latin European countries? Based on your compari-sons of these four profiles, what conclusions can you draw regarding cultural challenges facing

individuals in one group when they interact with individuals in one of the other groups? Why do you think Hofstede added the fifth dimension of time orientation and the sixth dimension related to indul-gence versus restraint?

4. As people engage in more international travel and become more familiar with other countries, will cultural differences decline as a roadblock to inter-national understanding, or will they continue to be a major barrier? Defend your answer.

5. What are the characteristics of each of the following pairs of cultural characteristics derived from Trompe-naars’s research: universalism vs. particularism, neu-tral vs. emotional, specific vs. diffuse, achievement vs. ascription? Compare and contrast each pair.

6. How did project GLOBE build on and extend Hofstede’s analysis? What unique contributions are associated with project GLOBE?

7. In what way is time a cultural factor? In what way is the need to control the environment a cultural factor? Give an example for each.

The Renault-Nissan alliance, established in March 1999, is the first industrial and commercial partnership of its kind involving a French company and a Japanese com-pany. The Alliance invested more than 1 billion rand in upgrading Nissan’s manufacturing plant in Rosslyn, out-side Pretoria, to increase output and produce the Nissan NP200 pickup and the Renault Sandero for the South African market. Visit the Renault-Nissan website at http://www.renault.com to see where factories reside for

each car group. Compare and contrast the similarities and differences in these markets. Then answer these three questions: (1) How do you think cultural differ-ences affect the way the firm operates in South Africa versus France versus Japan? (2) In what way is culture a factor in auto sales? (3) Is it possible for a car com-pany to transcend national culture and produce a global automobile that is accepted by people in every culture? Why or why not?

INTERNET EXERCISE: RENAULT-NISSAN IN SOUTH AFRICA

1. Chad Bray, “Anheuser-Busch InBev Completes Agreement for SABMiller,”  New York Times, November 12, 2015, p. B1.

2. Ellen  Kullman, “DuPont’s CEO on Executing a Complex Cross-Border Acquisition,”  Harvard Busi-ness Review, July–August 2012,  https://hbr.org/2012/07/duponts-ceo-on-executing-a-complex-cross-border-acquisition.

3. Ibid. 4. Ibid. 5. Ibid. 6. Ibid.

7. Bill Vlasic and Bradley A. Stertz,  Taken for a Ride: How Daimler-Benz Drove off with Chrysler  (New York: Wiley, 2000).

8. Dorothee Ostle, “The Culture Clash at DaimlerChrysler Was Worse Than Expected,”  Automotive News Europe, November 22, 1999,  http://europe. autonews.com/article/19991122/ANE/911220842/the-culture-clash-at-daimlerchrysler-was-worse- than-expected.

9. Ibid.10. Ibid.

ENDNOTES

152 Part 2 The Role of Culture

11. Andrew  Inkpen, “InBev and Anheuser-Busch,” Thunderbird School of Global Management (2010), pp. 8–9,  https://cb.hbsp.harvard.edu/cbmp/product/TB0251-PDF-ENG.

12. Ibid.13. Ibid.14. Anheuser-Busch InBev, “Anheuser-Busch InBev

2013 Annual Report,” press release (2013),  http://www.ab-inbev.com/content/dam/universaltemplate/ab-inbev/investors/sabmiller/reports/annual-reports/annual-report-2013.pdf.

15. James Allen, “The Beliefs That Built a Global Brewer,”  Harvard Business Review, April 27, 2012,  https://hbr.org/2012/04/the-beliefs-that- built-a-globa.

16. Pat Joynt and Malcolm Warner, “Introduction: Cross-Cultural Perspectives,” in Managing Across Cultures: Issues and Perspectives, ed. Pat Joynt and Malcolm Warner (London: International Thomson Business Press, 1996), p. 3.

17. For additional insights, see Gerry Darlington, “Culture—A Theoretical Review,” in Managing Across Cultures, ed. Joynt and Warner, pp. 33–55.

18. Fred Luthans, Organizational Behavior, 7th ed. (New York: McGraw-Hill, 1995), pp. 534–535.

19. Gary Bonvillian and William A. Nowlin, “Cultural Awareness: An Essential Element of Doing Business Abroad,” Business Horizons, November–December 1994, pp. 44–54.

20. Roger E. Axtell, ed., Do’s and Taboos around the World, 2nd ed. (New York: Wiley, 1990), p. 3.

21. Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diver-sity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 23.

22. George W. England, “Managers and Their Value Sys-tems: A Five-Country Comparative Study,” Columbia Journal of World Business, Summer 1978, p. 39.

23. A. Reichel and D. M. Flynn, “Values in Transition: An Empirical Study of Japanese Managers in the U.S.,” Management International Review 23, no. 4 (1984), pp. 69–70.

24. Yumiko Ono and Bill Spindle, “Japan’s Long Decline Makes One Thing Rise: Individualism,” The Wall Street Journal, December 29, 2000, pp. A1, A4.

25. Sang M. Lee and Suzanne J. Peterson, “Culture, Entrepreneurial Orientation, and Global Competi-tiveness,” Journal of World Business 35, no. 4 (2000), pp. 411–412.

26. “Confucius Makes a Comeback,” The Economist, May 17, 2007, www.economist.com/world/asia/ displaystory.cfm?story_id=9202957.

27. Geert Hofstede, Culture’s Consequences: Interna-tional Differences in Work-Related Values (Beverly Hills, CA: Sage, 1980).

28. Ibid., pp. 251–252.29. Ibid.30. Geert Hofstede, “National Culture,”  http://geert-

hofstede.com/national-culture.html.31. Geert Hofstede and Michael Bond, “The Need for

Synergy among Cross-Cultural Studies,” Journal of Cross-Cultural Psychology, December 1984, p. 419.

32. A. R. Negandhi and S. B. Prasad, Comparative Management (New York: Appleton-Century-Crofts, 1971), p. 128.

33. For additional insights, see Mark F. Peterson et al., “Role Conflict, Ambiguity, and Overload: A 21-Nation Study,” Academy of Management Journal, June 1995, pp. 429–452.

34. Hofstede, Culture’s Consequences.35. Ibid.36. Ibid.37. Also see Chao C. Chen, Xiao-Ping Chen, and James

R. Meindl, “How Can Cooperation Be Fostered? The Cultural Effects of Individualism-Collectivism,” Academy of Management Review 23, no. 2 (1998), pp. 285–304.

38. Hofstede, Culture’s Consequences, pp. 419–420.39. Ibid., p. 420.40. Ibid. 41. Geert Hofstede, “Dimensionalizing Cultures: The

Hofstede Model in Context,” Online Readings in Psychology and Culture,  Unit 2 (2011), http:// scholarworks.gvsu.edu/orpc/vol2/iss1/8.

42. Hofstede, “National Culture.”43. Hofstede. “Dimensionalizing Cultures.”44. Fons Trompenaars, Riding the Waves of Culture:

Understanding Diversity in Global Business (New York: Irwin, 1994), p. 10.

45. Talcott Parsons, The Social System (New York: Free Press, 1951).

46. Also see Lisa Hoecklin, Managing Cultural Differ-ences (Workingham, England: Addison-Wesley, 1995).

47. Charles M. Hampden-Turner and Fons Trompenaars, “A World Turned Upside Down: Doing Business in Asia,” in Managing Across Cultures, ed. Joynt and Warner, p. 279.

48. Ibid., p. 288.49. Fons Trompenaars and Charles Hampden-Turner,

Riding the Waves of Culture: Understanding Diversity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 23.

Chapter 4 The Meanings and Dimensions of Culture 153

50. Ibid., p. 140.51. Peter Dorfman, Mansour Javidan, Paul Hanges, Ali

Dastmalchian, and Robert House, “GLOBE: A Twenty Year Journey into the Intriguing World of Culture and Leadership,” Journal of World Business 47 (2012), pp. 504–518.

52. Ibid.53. Mansour Javidan and Robert House, “Leadership

and Cultures around the World: Findings from GLOBE: An Introduction to the Special Issue,” Journal of World Business 37, no. 1 (2002), pp. 1–2.

54. Robert House, Paul J. Hanges, Mansour Javidan, Peter W. Dorfman, and Vipin Gupta, Culture, Lead-ership, and Organizations: The GLOBE Study of 62 Societies (London: Sage, 2004).

55. Kwong Leung, “Editor’s Introduction to the Exchange between Hofstede and GLOBE,” Journal of International Business Studies 37 (2006), p. 881.

56. Dorfman et al., “GLOBE: A Twenty Year Journey into the Intriguing World of Culture and Leadership.”

57. House et al., Culture, Leadership, and Organiza-tions: The GLOBE Study.

58. Mansour Javidan and Robert House, “Cultural Acu-men for the Global Manager: Lessons from Project GLOBE,” Organizational Dynamics 29, no. 4 (2001), pp. 289–305.

59. Robert House, Mansour Javidan, Paul Hanges, and Peter Dorfman, “Understanding Cultures and Implicit Leadership Theories across the Globe: An Introduction to Project GLOBE,” Journal of World Business 37, no. 1 (2002), pp. 3–10.

60. Ibid.61. David A. Waldman, Mary Sully de Luque, et al.,

“Cultural and Leadership Predictors of Corporate Social Responsibility Values of Top Management: A

GLOBE Study of 15 Countries,” Journal of Interna-tional Business Studies 37 (2006), pp. 823–837.

62. Geert Hofstede, “What Did GLOBE Really Mea-sure? Researchers’ Minds versus Respondents’ Minds,” Journal of International Business Studies 37 (2006), pp. 882–896.

63. P. Christopher Earley, “Leading Cultural Research in the Future: A Matter of Paradigms and Taste,” Journal of International Business Studies 37 (2006), pp. 922–931.

64. Peter B. Smith, “When Elephants Fight, the Grass Gets Trampled: The GLOBE and Hofstede Projects,” Journal of International Business Studies 37 (2006), pp. 915–921.

65. CIA, “South Aftica,”  The World Factbook (2016), https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html.

66. Ibid.67. Ibid.68. Rene  Vollgraaf, “Moody’s Says South African Debt

Could Surpass 50% of GDP,”  Bloomberg Business, February 4, 2016,  www.bloomberg.com/news/ articles/2016-02-04/moody-s-says-south-africa-debt-could-swell-to-over-50-of-gdp.

69. “Fool’s Gold—Black Economic Empowerment Has Not Worked Well. Nor Will It End Soon,”  The Economist, April 27, 2013,  www.economist. com/news/briefing/21576655-black-economic-empowerment-has-not-worked-well-nor-will-it- end-soon-fools-gold.

70. “As South African Economy Falters, Fast-Food Giant, Famous Brands, Seeks Fresh Pastures in Nigeria,” International Business Times, September 16, 2013,  www.ibtimes.com/south-african-economy- falters-fast-food-giant-famous-brands-seeks-fresh-pastures-1406294.

154

South Africa, as its name suggests, is located on the southern tip of the African continent. The Atlantic Ocean borders the country on the west and the Indian Ocean borders on the east. South Africa’s neighboring countries include Zimbabwe, Swaziland, Botswana, Namibia, and Lesotho. Slightly smaller than twice the size of Texas in area, the country’s natural resources are plentiful and include gold, chromium, antimony, coal, iron ore, manga-nese, nickel, phosphates, tin, rare earth elements, uranium, gem diamonds, platinum, copper, vanadium, salt, and natural gas.65 South Africa’s population is estimated at over 53 mil-lion people and has a modest projected growth rate of 1.33 percent. South Africa has one of the most diverse populations in the world, consisting of approximately 80 percent black African, 8.5 percent white, 9 percent mixed race, and around 2 percent Indian. Several languages are spoken in the country. The country’s main religions include Protestantism, Catholicism, Islam, and numerous indigenous religions. Approximately 90 percent of the population is 54 years old or younger, with a median age of 26.5 years old. Approximately 95 percent of the coun-try is deemed literate.66 South Africa’s GDP was estimated at US$350.1 billion in 2014 and per capita income was estimated at US$13,100.67  After a relatively solid period of strong growth, annual GDP growth has been slowing. In 2014, the economy grew by just 1.4 percent. South Africa ranks 73rd out of 185 nations in “Ease of Doing Business,” which is down four spots from its previous ranking. As the country’s GDP growth slows, the country’s debt con-tinues to grow. Moody’s Investor Services predict that the government debt could exceed 50 percent of the country’s GDP in the very near future.68 Unfortunately, the legacy of apartheid continues to exert profound impacts on the country and its socioeconomic environment. Apartheid was a system of legal racial segre-gation that was enforced for approximately 50  years. In response to the end of apartheid, South Africa installed a program known as Black Economic Empowerment (BEE) that seeks to redress the inequalities from the apartheid system and give those previously disadvantaged groups (essentially all groups besides the white South Africans) economic opportunities. Specifically, the program includes skill, ownership, management, and socioeconomic develop-ment and, in some cases, preferential procurement. Critics

of this program say that it is unfair and a crude form of affirmative action that is hurting the country’s economy. These critics cite examples of “brain drain,” in which qual-ified and talented white businesspeople leave the country to avoid the alleged unequal treatment. Additionally, critics argue that this program has helped to make primarily well-connected black Africans more wealthy while the large majority have not received any benefits.69

You Be the International Management ConsultantDomestic South African companies appear to be search-ing outside of their home market for stability and growth. Famous Brands, one of South Africa’s largest food com-panies, is seeking to grow by more than 200 percent by expanding rapidly into the rest of Africa. Its initial focus is Nigeria, now the largest economy in Africa, with the goal of diversifying and spreading risk from its South and Southern Africa operations. The fast-food chain announced that it would buy a 49 percent stake in Nigeria’s UAC Restaurants Limited, which includes 165 franchised eater-ies. Famous Brands has long operated in surrounding countries, but this recent move indicates a doubling-down on its move into other countries.70

Questions 1. As a consultant looking for opportunities in Africa,

how would you gauge the prospects of moving a business into South Africa?

2. What are your immediate concerns about this move? 3. What are the pros and cons of opportunities in

South Africa? 4. How does the fact that traditional South African

companies are increasing their presence in other African countries factor into your decision?

Source: The Economist Intelligence Unit, Country Report: South Africa (Kent, U.K.: EIU, 2009), pp. 7–10; “Still Everything to Play For,” The Economist, June 5, 2010, pp. 15–16; “The Darkening of White South Africa,” The Economist, May 20, 1995, pp. 18–20; Tom Nevin, “The World Cup Retail Windfall—Myth or Reality?” African Business, March 2010, pp. 58–59; “When the Whistle Blows,” The Economist, June 5, 2010, p. 15; “Buthelezi Slams Affirmative Action,” Mail & Guardian, February 1, 2007; “Tutu Warns of Poverty ‘Powder Keg’,” BBC, November 23, 2004, news.bbc.co.uk.

South AfricaIn the International Spotlight

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RChapter 5

MANAGING ACROSS CULTURES

The World of International Management

Taking a Bite Out of Apple: Corporate Culture and an Unlikely Chinese Start-Up

S ince first introducing the iPhone in 2007, Apple has achieved tremendous success in the smartphone industry. User-friendly innovations, including the first touchscreen dis-play, transformed the smartphone market. Through 2015, Apple has sold over 800 million iPhones, becoming one of the most admired and recognizable brands worldwide.2 Though Apple has faced competition from traditional rivals Samsung and Motorola for several years, new competition from unexpected companies in developing markets is beginning to disrupt the smartphone market. Xiaomi, a Chinese start-up formed in 2010, is perhaps the largest and most successful of these new smart-phone marketplace entrants. Xiaomi released its first phone in 2011; since then, sales have soared. By 2013, Xiaomi had sur-passed Apple in terms of sales within China, the world’s largest smartphone market. And in 2015, Xiaomi became the fourth largest smartphone producer worldwide. Though they are competing for the same customers, Apple and Xiaomi could not be more different. Their approaches to innovation, their supply chains, their product lines, and even their ideas about intellectual property rights are diametrically opposed. How have these two incredibly different companies achieved success, and will Xiaomi’s corporate culture and accompanying strategy ultimately propel the company to rival Apple in the smartphone battle?

Individual versus the CollectiveAt Apple, individual achievement is highly regarded. Innovating for the company, as an individual, is expected and required. In fact, according to an urban legend, Steve Jobs allegedly once fired an employee in the elevator for not having an answer to the question, “So what have you done for Apple lately?” Per-sonal excellence is required by every employee, with an over-all focus on end results and exceeding corporate goals.3 Internal competition, and challenging others, is strongly encouraged. Hierarchy exists, but individuals are encouraged to speak up if it means achieving a better, more innovative

Traditionally, both scholars and practitioners assumed the uni-versality of management. There was a tendency to take the management concepts and techniques that worked at home into other countries and cultures. It is now clear, from both practice and cross-cultural research, that this universality assumption, at least across cultures, does not hold up. Although there is a tendency in a borderless economy to pro-mote a universalist approach, there is enough evidence from many cross-cultural researchers to conclude that the universal-ist assumption that may have held for U.S. organizations and employees is not generally true in other cultures.1

The overriding purpose of this chapter is to examine how MNCs can and should manage across cultures. This chap-ter puts into practice Chapter 4’s discussion on the meaning and dimensions of culture and serves as a foundation and point of departure for Chapters 8 and 9 on strategic manage-ment. The first part of this chapter addresses the traditional tendency to attempt to replicate successful home-country operations overseas without taking into account cultural differ-ences. Next, attention is given to cross-cultural challenges, focusing on how differences can impact multinational manage-ment strategies. Finally, the cultures in specific countries and geographic regions are examined. The specific objectives of this chapter are

1. EXAMINE the strategic dispositions that characterize responses to different cultures.

2. DISCUSS cross-cultural differences and similarities.

3. REVIEW cultural differences in select countries and regions, and note some of the important strategic guidelines for doing business in each.

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production expenses over the life of the product. While Apple and other competitors retire their products nearly every year, Xiaomi will continue to manufacture the same phone for nearly two years.9 This flexibility also lowers inventory carrying costs. Xiaomi owns no warehouses for long-term inventory holding, considering itself more of an Internet-based merchant.10

Product FocusApple is dedicated to maintaining first-mover advantage. As a result, Apple focuses narrowly on a few key products, with lit-tle variation in features and price. The iPhone, for example, is the only phone offered by Apple. When purchasing the latest Apple product, customers know that they are buying the most current technology on the market. By continually being the first to market with new technology, Apple is able to maintain a loyal customer base that is willing to put up with minor defects and flaws in design. This narrow product focus has created a trendy “brand” image for the company. However, by only offering one product line, Apple sacrifices sales to potential customers who are less concerned with the latest technology. Knowing that it cannot compete for the first-mover custom-ers who want the newest technology fastest, Xiaomi focuses on competing on price. Xiaomi aims to provide the best value in the marketplace to its customers by not sacrificing quality to meet consumer pricing demands; the hardware specifications of Xiaomi phones rival those of Apple and Samsung but remain at a fraction of the cost. Unlike Apple, Xiaomi offers a wide array of products at multiple price points. In fact, Xiaomi plans to introduce regionally specific models for every new market it enters. With dozens of different phone products, for example, customers can sacrifice features and the most cur-rent technology for a phone within their budget. Xiaomi is will-ing to quickly try multiple products, releasing slightly updated models nearly every week.11

Intellectual PropertyApple, as a company that differentiates itself through innova-tion, values its intellectual property as an important asset. This culture starts at the top and permeates through the company: Steve Jobs alone was listed as the inventor on over 300 pat-ents.12 Having spent millions in research and development for new technology and improved designs, Apple has accused Samsung and others of essentially stealing patent-protected technology. Apple has sued numerous companies to protect its

product. According to a former employee, “There’s a mentality that it’s okay to shred somebody in the spirit of making the best products.”4

Collectivism and group achievement, on the other hand, permeate Xiaomi’s corporate culture. From initial design to final production, collaboration between employees and the public is more celebrated than individual creativity. Rather than developing innovations in secret, Xiaomi takes an unconven-tional approach to design by using crowd-sourcing as a key element of its strategy.5 End users provide input and feedback continuously to Xiaomi, shaping the direction in which Xiaomi takes it products. This feedback results in continual product evolution; rather than release new phones annually, like Apple, Xiaomi actually releases new, incrementally better smartphone models every week.6

Supply Chain ManagementApple has been able to maximize profits through its com-plex, yet carefully doctored, supply chain. To minimize costs, Apple outsources the majority of its production processes. Nearly a thousand factories produce components for Apple across the globe, with over 600 in Southeast Asia alone.7 As a result of its low manufacturing costs, Apple is able to sell the majority of its products with a 70 percent gross profit margin. Relinquishing its control over the manufacturing process, however, has led to some major negative conse-quences for Apple. In 2012, Apple was unable to meet customer demand for the iPad Mini due to supply chain issues that resulted in lower-than-expected production numbers.8 Furthermore, the lack of control over its suppliers’ actions has exposed Apple to criticism over human rights violations. Highly publicized worker suicides and alleged underage labor have tarnished Apple’s image, even though the abuses occurred at the suppliers’ facilities. Like Apple, Xiaomi works with a variety of suppliers throughout Asia to produce its products. A key advantage for Xiaomi’s approach to its supply chain, however, is its unique ability to adjust production to meet demand. To achieve this, Xiaomi maintains a strict policy with its suppliers that demand alone drives the production quantity. This has allowed for great flexibility in its supply. For example, in 2015, Xiaomi was able to set the world record for most smartphones sold in 24  hours when it sold and shipped 2.1 million units. To keep costs along its supply chain low, Xiaomi sells its products for longer periods of time than its competitors, reducing

158 Part 2 The Role of Culture

intellectual property. In 2010, Apple sued HTC over 20 patent infringements relating to its iPhone’s hardware and software.13

In 2012 alone, Apple and Samsung launched over a dozen lawsuits against each other, primarily over patent infringe-ments. Contested issues range from component technology to software design. According to Apple, protecting its patents allows it to provide “distinctive products that stand apart from the masses.”14 Xiaomi’s approach to intellectual property mirrors its collec-tive approach to design; exclusivity and secrecy are not seen as important to its overall strategy. Little priority is placed on protecting its own intellectual property, and the company often skirts the line of violating other companies’ intellectual prop-erty. For example, Xiaomi’s “MiPad” looks like, operates similar to, and mimics the naming of Apple’s “iPad.” In fact, Xiaomi will find it difficult, if not impossible, to sell its products in many markets without facing lawsuits due to patent violations. Most of the largest cell phone markets have strict intellectual property protections in place. Xiaomi only holds two patents

from the United States, making it nearly impossible to defend itself against lawsuits from Apple and other cell phone produc-ers. It has been estimated that Xiaomi will need to spend as much as US$100 million on lawsuits in the first two years if it were to start selling products in the United States.15,16

Looking Forward—Which Strategy Is Working?Whether or not Xiaomi can ultimately rival Apple in the smart-phone battle is unclear. The first-mover advantage that Apple has leveraged since 2007 has begun to deliver diminishing returns. In the second quarter of 2016, Apple posted its first decrease in revenue since the iPhone was first introduced. However, while Xiaomi has surpassed Apple in sales within China, Xiaomi’s global market share stands at only 5 percent, far behind Apple’s 14 percent.17 Additionally, Xiaomi’s low-cost strategy comes with low profits; in 2014, Xiaomi’s 2 percent profit margin netted only US$56 million. Apple, on the other hand, managed a 29 percent profit margin in the same year.18

The cultural differences of Xiaomi and Apple highlight how, within the same industry, two companies can achieve success despite opposing strategies. This chapter provides insight into uncovering similarities and differences across cultures and using those insights to develop international management approaches that are effective and responsive to local cultures.

■ The Strategy for Managing across CulturesAs MNCs become more transnational, their strategies must address the cultural simi-larities and differences in their varied markets. A good example is provided by Renault, the French auto giant. For years Renault manufactured a narrow product line that it sold primarily in France. Because of this limited geographic market and the fact that its cars continued to have quality-related problems, the company’s performance was at best mediocre. Several years ago, however, Renault made a number of strategic decisions that dramatically changed the way it did business. Among other things, it bought controlling stakes in Nissan Motors of Japan, Samsung Motors of South Korea, and Dacia, the Romanian automaker. The company also built a $1 billion factory in Brazil to produce its successful Mégane sedan and acquired an idle factory near Moscow to manufacture Renaults for the Eastern European market.

Today, Renault is a multinational automaker with operations on four continents. The challenge the company now faces is to keep all these operations profitable. This has not been easy. Nissan’s profits have a history of being unpredictable. In the years since the global recession, Nissan has refocused its strategy by cutting costs and increasing sales in the markets outside of Japan. These changes have resulted in a drastic turnaround; Nissan experienced positive net incomes of 389 billion yen in 2013, 458 billion yen in 2014, and 535 billion yen in 2015.19,20,21 Similarly, Renault has rebounded to net incomes of 1.99 billion euros and 2.82 billion euros in 2014 and 2015, respectively.22 Renault’s quest for greater global market share continues to progress, with world market share up to 3.1 percent in 2014. In the passenger car market, the Renault Group reported market share of 3.3 percent.23 The Renault brand reclaimed the position of third-ranked brand in Western Europe mainly owing to the success of the Mégane family and Twingo. In the light commercial vehicle (LCV) market, the Renault brand has been the number-one brand in Western Europe since 1998.

Chapter 5 Managing Across Cultures 159

Dacia has manufactured what some call a genuine world car, known as the Logan. Now sold in 43 countries, this simple, compact vehicle is sold at an affordable price in European markets and has recently been introduced in India. Renault maintains innova-tive strategies by offering the Logan under either the Dacia, Renault, or Nissan name, depending on the market. Constituting 31 percent of market share in Romania, 5 percent of market share in France, and 2.5 percent of market share across Europe, Dacia sold over 500,000 passenger cars in 2014.24 The decision to integrate its sales organizations with those of Nissan in Europe, thus creating one well-integrated, efficient sales force on the continent, and the decision to start producing Nissan models in its Brazilian plant, so that it can expand its South American offerings by more efficiently using current facili-ties, have led to continual growth year-over-year improvements in sales and efficiency.25

In 2015, Renault introduced the Kwid, its ultra-low-cost hatchback, for the Indian market. Unlike Tata’s Nano and other low-price cars introduced into the Indian market over the last several years, the Kwid is designed to offer features similar to more expen-sive cars, including good gas mileage, generous leg and head room, and attractive design. Initial pricing in 2015 started at only US$5,000.26 On the 15th year of the Renault-Nissan alliance, the Group called attention to a number of milestones achieved over that period:

∙ Growth in sales from 4.8 million units in 1999 to 8.3 million in 2014.∙ The eight brands within the alliance account for 10 percent of all car sales

worldwide.∙ Savings of over 2.8 billion euros in 2013 alone through strategic synergies

that led to cost reductions and cost avoidance, as well as increased revenue.∙ Growth in proportion of total sales that were coming from BRIC nations,

from 1 percent in 1999 to 30 percent in 2014.∙ Development of zero-emission technology, resulting in 134,000 zero-emission

vehicles sold by 2013.∙ Expansion globally, including in Russia through the acquisition of a majority

stake in the country’s largest car maker, AvtoVAZ.∙ The longest-lasting and most productive alliance in the automobile sector.∙ Employment of nearly a half of a million people worldwide.27

The Renault-Nissan Alliance has sought to foster multicultural management at all levels. Each year, more than 30 teams with Renault and Nissan employees from all regions and functions work together to identify synergies and best practices. Thou-sands of people with cross-cultural experience have been in collaboration since the beginning of the Alliance. Renault’s chief Carlos Ghoshen, who also serves as CEO of Nissan Motor Co., is widely credited with both the operational and strategic improvements at both Renault and Nissan. His multicultural and multinational upbring-ing and career have convinced him of the value of cultural diversity and the creativity they generate.

Renault’s recent experiences underscore the need to carefully consider different national cultures and practices when developing international strategies.

Strategic PredispositionsMost MNCs have a cultural strategic predisposition toward doing things in a particular way. Four distinct predispositions have been identified: ethnocentric, polycentric, regio-centric, and geocentric.

A company with an ethnocentric predisposition allows the values and interests of the parent company to guide strategic decisions. Firms with a polycentric predisposition make strategic decisions tailored to suit the cultures of the countries where the MNC operates. A regiocentric predisposition leads a firm to try to blend its own interests with those of its subsidiaries on a regional basis. A company with a geocentric predisposition

ethnocentric predispositionA nationalistic philosophy of management whereby the values and interests of the parent company guide strategic decisions.

polycentric predispositionA philosophy of management whereby strategic decisions are tailored to suit the cultures of the countries where the MNC operates.

regiocentric predispositionA philosophy of management whereby the firm tries to blend its own interests with those of its subsidiaries on a regional basis.

geocentric predispositionA philosophy of management whereby the company tries to integrate a global systems approach to decision making.

160 Part 2 The Role of Culture

tries to integrate a global systems approach to decision making. Table 5–1 provides details of each of these orientations.

If an MNC relies on one of these profiles over an extended time, the approach may become institutionalized and greatly influence strategic planning. By the same token, a predisposition toward any of these profiles can provide problems for a firm if it is out of step with the economic or political environment. For example, a firm with an ethno-centric predisposition may find it difficult to implement a geocentric strategy because it is unaccustomed to using global integration. Commonly, successful MNCs use a mix of these predispositions based on the demands of the current environment described in the chapters in Part One.

Meeting the ChallengeDespite the need for and, in general, the tendency of MNCs to address regional differ-entiation issues, many MNCs remain committed to a globalization imperative, which is a belief that one worldwide approach to doing business is the key to both efficiency and effectiveness. However, despite this predilection to use home strategies, effective MNCs are continuing their efforts to address local needs. A number of factors are mov-ing companies to facilitate the development of unique strategies for different cultures, including

1. The diversity of worldwide industry standards such as those in broadcasting, where television sets must be manufactured on a country-by-country basis.

globalization imperativeA belief that one worldwide approach to doing business is the key to both efficiency and effectiveness.

Table 5–1Orientation of an MNC under Different Profiles

Orientation of the Firm

Ethnocentric Polycentric Regiocentric Geocentric

Mission

Governance

Strategy

Structure

CultureTechnologyMarketing

Finance

Personnel practices

Profitability (viability)

Top-down

Global integration

Hierarchical product divisions

Home countryMass productionProduct development determined primarily by the needs of home country customersRepatriation of profits to home country

People of home country developed for key positions everywhere in  the world

Public acceptance (legitimacy)

Bottom-up (each subsidiary decides on local objectives)National responsiveness

Hierarchical area divi-sions, with autonomous national units

Host countryBatch productionLocal product development based on local needs

Retention of profits in host countryPeople of local nationality developed for key positions in their own country

Both profitability and public acceptance (viability and legitimacy)Mutually negotiated between region and its subsidiariesRegional integration and national responsivenessProduct and regional organization tied through a matrix

RegionalFlexible manufacturingStandardized within region, but not across regions

Redistribution within regionRegional people devel-oped for key positions anywhere in the region

Same as regiocentric

Mutually negotiated at all levels of the corporationGlobal integration and national responsivenessA network of organiza-tions (including some stakeholders and com-petitor organizations)Global Flexible manufacturingGlobal product, with local variations

Redistribution globally

Best people everywhere in the world developed for key positions every-where in the world

Source: From Balaji S. Chakravarthy and Howard V. Perlmutter, “Strategic Planning for a Global Business,” Columbia Journal of World Business, Summer 1985, pp. 5–6.

Chapter 5 Managing Across Cultures 161

2. A continual demand by local customers for differentiated products, as in the case of consumer goods that must meet local tastes.

3. The importance of being an insider, as in the case of customers who prefer to “buy local.”

4. The difficulty of managing global organizations, as in the case of some local subsidiaries that want more decentralization and others that want less.

5. The need to allow subsidiaries to use their own abilities and talents and not be restrained by headquarters, as in the case of local units that know how to customize products for their market and generate high returns on investment with limited production output.

Responding to the cultural needs of local operations and customers, MNCs find that regional strategies can be used effectively in capturing and maintaining worldwide market niches. One example is Haier, which is discussed in the opening World of Inter-national Management section at the beginning of Chapter 9. Another example is appli-ance producer Whirlpool, which has manufacturing facilities spread across the United States. Each plant is specialized and produces a small number of products for the entire North American market; in this way, each can focus on tailoring products for the unique demands of the various markets.

The globalization versus national responsiveness challenge is even more acute when marketing cosmetics and other products that vary greatly in consumer use. For example, marketers sell toothpaste as a cosmetic product in Spain and Greece but as a cavity fighter in the Netherlands and United States. Soap manufacturers market their product as a cosmetic item in Spain but as a functional commodity in Germany. Moreo-ver, the way in which the marketing message is delivered also is important. For example:

∙ Germans want advertising that is factual and rational; they fear being manip-ulated by “the hidden persuader.” The typical German spot features the stan-dard family of two parents, two children, and grandmother.

∙ The French avoid reasoning or logic. Their advertising is predominantly emotional, dramatic, and symbolic. Spots are viewed as cultural events—art for the sake of money—and are reviewed as if they were literature or films.

∙ The British value laughter above all else. The typical broad, self-deprecating British commercial amuses by mocking both the advertiser and consumer.28

In some cases, however, both the product and the marketing message are similar worldwide. This is particularly true for high-end products, where the lifestyles and expec-tations of the market niche are similar regardless of the country. Heineken beer, Hennes-sey brandy, Porsche cars, and the Financial Times all appeal to consumer niches that are fairly homogeneous, regardless of geographic locale. The same is true at the lower end of the market for goods that are impulse purchases, novel products, or fast foods, such as Coca-Cola’s soft drinks, Levi’s jeans, pop music, and ice-cream bars. In most cases, however, it is necessary to modify products as well as the market approach for the regional or local market. One analysis noted that the more marketers understand about the way in which a particular culture tends to view emotion, enjoyment, friendship, humor, rules, status, and other culturally based behaviors, the more control they have over creating marketing messages that will be interpreted in the desired way.

The need to adjust global strategies for regional markets presents three major chal-lenges for most MNCs. First, the MNC must stay abreast of local market conditions and sidestep the temptation to assume that all markets are basically the same. Second, the MNC must know the strengths and weaknesses of its subsidiaries so that it can provide these units with the assistance needed in addressing local demands. Third, the multina-tional must give the subsidiary more autonomy so that it can respond to changes in local demands. The International Management in Action “Ten Key Factors for MNC Success” provides additional insights into the ways that successful MNCs address these challenges.

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■ Cross-Cultural Differences and SimilaritiesAs you saw in Chapter 4, cultures can be similar or quite different across countries. The challenge for MNCs is to recognize and effectively manage the similarities and differ-ences. Generally, the way in which MNCs manage their home businesses often should be different from the way they manage their overseas operations.29 After recognizing the danger for MNCs of drifting toward parochialism and simplification in spite of cultural differences, the discussion in this section shifts to some examples of cultural similarities and differences and how to effectively manage across cultures by a contingency approach.

Parochialism and SimplificationParochialism is the tendency to view the world through one’s own eyes and perspectives. This can be a strong temptation for many international managers, who often come from advanced economies and believe that their state-of-the-art knowledge is more than ade-quate to handle the challenges of doing business in less developed countries. In addition, many of these managers have a parochial point of view fostered by their background.30 A good example is provided by Randall and Coakley, who studied the impact of culture on successful partnerships in the former Soviet Union. Initially after the breakup of the Soviet Union, the republics called themselves the Commonwealth of Independent States (CIS). Randall and Coakley found that while outside MNC managers typically entered into partnerships with CIS enterprises with a view toward making them efficient and profitable, the CIS managers often brought a different set of priorities to the table.

Commenting on their research, Randall and Coakley noted that the way CIS man-agers do business is sharply different from that of their American counterparts. CIS managers are still emerging from socially focused cultural norms embedded in their

parochialismThe tendency to view the world through one’s own eyes and perspectives.

International Management in Action

Ten Key Factors for MNC Success

Why are some international firms successful while oth-ers are not? Some of the main reasons are that success-ful multinational firms take a worldwide view of operations, support their overseas activities, pay close attention to political winds, and use local nationals whenever possible. These are the overall findings of a report that looked into the development of customized executive education programs. Specifically, there are 10 factors or guidelines that successful global firms seem to employ. Successful global competitors

1. See themselves as multinational enterprises and are led by a management team that is comfort-able in the world arena.

2. Develop integrated and innovative strategies that make it difficult and costly for other firms to compete.

3. Aggressively and effectively implement their world-wide strategy and back it with large investments.

4. Understand that innovation no longer is confined to the United States and develop systems for tapping innovation abroad.

5. Operate as if the world were one large market rather than a series of individual, small markets.

6. Have organization structures that are designed to handle their unique problems and challenges and thus provide them the greatest efficiency.

7. Develop a system that keeps them informed about political changes around the world and the implications of these changes on the firm.

8. Have management teams that are international in composition and thus better able to respond to the various demands of their respective markets.

9. Allow their outside directors to play an active role in the operation of the enterprise.

10. Are well managed and tend to follow such impor-tant guidelines as sticking close to the customer, having lean organization structures, and encour-aging autonomy and entrepreneurial activity among the personnel.

Source: James F. Bolt, “Global Competitors: Some Criteria for Success,” Business Horizons, January–February 1988, pp. 34–41; Alan S. Rugman and Richard M. Hodgetts, International Business, 2nd ed. (London: Pearson, 2000), chapter 1; Sheida Hodge, Global Smarts: The Art of Communicating and Deal Making Anywhere in the World (New York: Wiley, 2000).

Chapter 5 Managing Across Cultures 163

history, past training, and work experiences that emphasize strategic values unlike those that exist in an international market-driven environment. For example, while an excess of unproductive workers may lead American managers to lay off some individuals for the good of the company, CIS managers would focus on the good of the working com-munity and allow the company to accept significant profit losses as a consequence. This led the researchers to conclude:

As behavioral change continues to lag behind structural change, it becomes imperative to understand that this inconsistency between what economic demands and cultural norms require manifests problems and complexities far beyond mere structural change. In short, the implications of the different perspectives on technology, labor, and production . . . for potential partnerships between U.S. and CIS companies need to be fully grasped by all par-ties entering into any form of relationship.31

Simplification is the process of exhibiting the same orientation toward different cultural groups. For example, the way in which a U.S. manager interacts with a British manager is the same way in which he or she behaves when doing business with an Asian executive. Moreover, this orientation reflects one’s basic culture. Table 5–2 provides an example, showing several widely agreed-on, basic cultural orientations and the range of variations for each. Asterisks indicate the dominant U.S. orientation. Quite obviously, U.S. cultural values are not the same as those of managers from other cultures; as a result, a U.S. manager’s attempt to simplify things can result in erroneous behavior. Here is an example of a member of the purchasing department of a large European oil company who was negotiating an order with a Korean supplier:

At the first meeting, the Korean partner offered a silver pen to the European manager. The latter, however, politely refused the present for fear of being bribed (even though he knew about the Korean custom of giving presents). Much to our manager’s surprise, the second

simplificationThe process of exhibiting the same orientation toward different cultural groups.

Table 5–2Six Basic Cultural Variations

Orientations Range of Variations

What is the nature of people? Good (changeable/unchangeable) A mixture of good and evil* Evil (changeable/unchangeable)

What is the person’s relationship to nature? Dominant* In harmony with nature Subjugation

What is the person’s relationship to other people? Lineal (hierarchic) Collateral (collectivist) Individualist*

What is the modality of human activity? Doing* Being and becoming Being

What is the temporal focus of human activity? Future* Present Past

What is the conception of space? Private* Mixed Public

Note: *Indicates the dominant U.S. orientation.Source: Adapted from the work of Florence Rockwood Kluckhohn and Fred L. Stodtbeck.

164 Part 2 The Role of Culture

meeting began with the offer of a stereo system. Again the manager refused, his fear of being bribed probably heightened. When he gazed at a piece of Korean china on the third meeting, he finally realized what was going on. His refusal had not been taken to mean “let’s get on with business right away,” but rather “If you want to get into business with me, you had better come up with something bigger.”32

Understanding the culture in which they do business can make international man-agers more effective.33 Unfortunately, when placed in a culture with which they are unfamiliar, most international managers are not culturally knowledgeable, so they often misinterpret what is happening. This is particularly true when the environment is mark-edly different from the one from which they come. Consider, for example, the difference between the cultures in Malaysia and the United States. Malaysia has what could be called a high-context culture, which possesses characteristics such as

1. Relationships between people are relatively long lasting, and individuals feel deep personal involvement with each other.

2. Communication often is implicit, and individuals are taught from an early age to interpret these messages accurately.

3. People in authority are personally responsible for the actions of their subordi-nates, and this places a premium on loyalty to both superiors and subordinates.

4. Agreements tend to be spoken rather than written.5. Insiders and outsiders are easily distinguishable, and outsiders typically do not

gain entrance to the inner group.

These Malaysian cultural characteristics are markedly different from those of low-context cultures such as the United States, which possess the following characteristics:

1. Relationships between individuals are relatively short in duration, and in gen-eral, deep personal involvement with others is not valued greatly.

2. Messages are explicit, and individuals are taught from a very early age to say exactly what they mean.

3. Authority is diffused throughout the bureaucratic system, and personal responsibility is hard to pin down.

4. Agreements tend to be in writing rather than spoken.5. Insiders and outsiders are not readily distinguished, and the latter are encour-

aged to join the inner circle.34

These differences are exacerbated by the fact that Malaysian culture is based on an amalgamation of diverse religions, including Hinduism, Buddhism, and Islam. The belief is pervasive that success and failure are the will of God, which may create issues with American managers attempting to make deals, as Malaysians will focus less on facts and more on intuitive feelings.

At the same time, it is important to realize that while there are cultural differences, there also are similarities. Therefore, in managing across cultures, not everything is totally different. Some approaches that work at home also work well in other cultural settings.

Similarities across CulturesWhen internationalization began to take off in the 1970s, many companies quickly admit-ted that it would not be possible to do business in the same way in every corner of the globe. There was a secret hope, however, that many of the procedures and strategies that worked so well at home could be adopted overseas without modification. This has proved to be a false hope. At the same time, some similarities across cultures have been uncov-ered by researchers. For example, a co-author of this text (Luthans) and his associates studied through direct observation a sample of managers in the largest textile factory in Russia to determine their activities. Like U.S. managers studied earlier, Russian managers

Chapter 5 Managing Across Cultures 165

carried out traditional management, communication, human resources, and networking activities. The study also found that, as in the United States, the relative attention given to the networking activity increased the Russian managers’ opportunities for promotion, and that communication activity was a significant predictor of effective performance in both Russia and the United States.35

Besides the similarities of managerial activities, another study at the same Russian factory tested whether organizational behavior modification (O.B.Mod.) interventions that led to performance improvements in U.S. organizations would do so in Russia.36,37 As with the applications of O.B.Mod. in the United States, Russian supervisors were trained to administer social rewards (attention and recognition) and positive feedback when they observed workers engaging in behaviors that contributed to the production of quality fabric. In addition, Russian supervisors were taught to give corrective feedback for behaviors that reduced product quality. The researchers found that this O.B.Mod. approach, which had worked so well in the United States, produced positive results in the Russian factory. They concluded that the hypothesis that “the class of interventions associated with organizational behavior modification are likely to be useful in meeting the challenges faced by Russian workers and managers [is] given initial support by the results of this study.”38,39

In another cross-cultural study, this time using a large Korean sample, Luthans and colleagues analyzed whether demographic and situational factors identified in the U.S.-based literature had the same antecedent influence on the commitment of Korean employ-ees.40,41 As in the U.S. studies, Korean employees’ position in the hierarchy, tenure in their current position, and age all related to organizational commitment. Other similari-ties with U.S. firms included (1) as organizational size increased, commitment declined; (2) as structure became more employee-focused, commitment increased; and (3) the more positive the perceptions of organizational climate, the greater the employee commitment. The following conclusion was drawn:

This study provides beginning evidence that popular constructs in the U.S. management and organizational behavior literature should not be automatically dismissed as culture bound. Whereas some organizational behavior concepts and techniques do indeed seem to be culture specific . . . a growing body of literature is demonstrating the ability to cross-culturally validate other concepts and techniques, such as behavior management. . . . This study con-tributed to this cross-cultural evidence for the antecedents to organizational commitment. The antecedents for Korean employees’ organizational commitment were found to be similar to their American counterparts.42

Many Differences across CulturesWe have stressed throughout the text how different cultures can be from one another and how important it is for MNCs to understand the points of disparity. Here, we look at some differences from a human resources perspective, a topic that will be covered in depth in Chapter 14. We introduce human resource management (HRM) here as a way to illustrate that the cultural foundations utilized in the selection of employees can further form the culture that international managers will oversee. In other words, understanding the HRM strategies before becoming a manager in the industry can aid in effective per-formance. The focus here is more from a socially cultural perspective; the organizational perspective will be discussed further in Chapter 14.

Despite similarities between cultures in some studies, far more differences than sim-ilarities have been found. MNCs are discovering that they must carefully investigate and understand the culture where they intend to do business and modify their approaches appropriately. Sometimes these cultures are quite different from the United States—as well as from each other! One human resource management example has been offered by Trompenaars, who examined the ways in which personnel in international subsidiaries were appraised by their managers. The head office had established the criteria to be used in these evaluations but left the prioritization of the criteria to the national operating company.

166 Part 2 The Role of Culture

As a result, the outcome of the evaluations could be quite different from country to coun-try because what was regarded as the most important criterion in one subsidiary might be ranked much lower on the evaluation list of another subsidiary. In the case of Shell Oil, for example, Trompenaars found that the firm was using a HAIRL system of appraisal. The five criteria in this acronym stood for (a) helicopter—the capacity to take a broad view from above; (b) analysis—the ability to evaluate situations logically and completely; (c) imagination—the ability to be creative and think outside the box; (d) reality—the ability to use information realistically; and (e) leadership—the ability to effectively galvanize and inspire personnel. When staff in Shell’s operating companies in four countries were asked to prioritize these five criteria from top to bottom, the results were as follows:

Netherlands France Germany Britain

Reality Imagination Leadership HelicopterAnalysis Analysis Analysis ImaginationHelicopter Leadership Reality RealityLeadership Helicopter Imagination AnalysisImagination Reality Helicopter Leadership

Quite obviously, personnel in different operating companies were being evaluated differently. In fact, no two of the operating companies in the four countries had the same criterion at the top of their lists. Moreover, the criterion at the top of the list for operat-ing companies in the Netherlands—reality—was at the bottom of the list for those in France; and the one at the top of the list in French operating companies—imagination—was at the bottom of the list of the Dutch firms. Similarly, the German operating com-panies put leadership at the top of the list and helicopter at the bottom, while the British companies did the opposite! In fact, the whole list for the Germans is in the exact reverse order of the British list.43

Other HRM differences can be found in areas such as wages, compensation, pay equity, and maternity leave. Here are some representative examples.

1. The concept of an hourly wage plays a minor role in Mexico. Labor law requires that employees receive full pay 365 days a year.

2. In Austria and Brazil, employees with one year of service are automatically given 30 days of paid vacation.

3. Some jurisdictions in Canada have legislated pay equity—known in the United States as comparable worth—between male- and female-intensive jobs.

4. In Japan, compensation levels are determined by using the objective factors of age, length of service, and educational background rather than skill, ability, and performance. Performance does not count until after an employee reaches age 45.

5. In the United Kingdom, employees are allowed up to 40 weeks of maternity leave, and employers must provide a government-mandated amount of pay for 18 of those weeks.

6. In 87 percent of large Swedish companies, the head of human resources is on the board of directors.44

These HRM practices certainly are quite different from those in the United States, and U.S. MNCs need to modify their approaches when they go into these countries if they hope to be successful. Compensation plans, in particular, provide an interesting area of contrast across different cultures.

Drawing on the work of Hofstede (see Chapter 4), it is possible to link cultural clusters and compensation strategies. Each cluster requires a different approach to for-mulating an effective compensation strategy:

1. In Pacific Rim countries, incentive plans should be group-based. In high- masculinity cultures (Japan, Hong Kong, Malaysia, the Philippines, Singapore), high salaries should be paid to senior-level managers.

Chapter 5 Managing Across Cultures 167

2. In EU nations such as France, Spain, Italy, and Belgium, compensation strategies should be similar. In the latter two nations, however, significantly higher salaries should be paid to local senior-level managers because of the high masculinity index. In Portugal and Greece, both of which have a low individualism index, profit-sharing plans would be more effective than individual incentive plans, while in Denmark, the Netherlands, and Germany, personal-incentive plans would be highly useful because of the high individualism in these cultures.

3. In Great Britain, Ireland, and the United States, managers value their individ-ualism and are motivated by the opportunity for earnings, recognition, advancement, and challenge. Compensation plans should reflect these needs.45

Figure 5–1 shows how specific HRM areas can be analyzed contingently on a country-by-country basis. Take, for example, the information on Japan. When it is con-trasted with U.S. approaches, a significant number of differences are found. Recruitment and selection in Japanese firms often are designed to help identify those individuals who will do the best job over the long run. In the United States, people often are hired based on what they can do for the firm in the short run because many of them eventually will quit or be downsized. Similarly, the Japanese use a great deal of cross-training, while the Americans tend to favor specialized training. The Japanese use group performance appraisal and reward people as a group; at least traditionally, Americans use manager-subordinate performance appraisal and reward people as individuals. In Japan, unions are regarded as partners; in the United States, management and unions view each other in a much more adversarial way. Only in the area of job design, where the Japanese use a great deal of participative management and autonomous work teams, are the Americans beginning to employ a similar approach. The same types of differences can be seen in the matrix of Figure 5–1 among Japan, Germany, Mexico, and China.

These differences should not be interpreted to mean that one set of HRM practices is superior to another. In fact, recent research from Japan and Europe shows these firms often have a higher incidence of personnel-related problems than do U.S. companies. Figure 5–1 clearly indicates the importance of MNCs using a contingency approach to HRM across cultures. Not only are there different HRM practices in different cultures, but there also are different practices within the same cultures. For instance, one study involving 249 U.S. affiliates of foreign-based MNCs found that in general, affiliate HRM practices closely fol-low local practices when dealing with the rank and file but even more closely approximate parent-company practices when dealing with upper-level management.46 In other words, this study found that a hybrid approach to HRM was being used by these MNCs.

Aside from the different approaches used in different countries, it is becoming clear that common assumptions and conventional wisdom about HRM practices in certain countries no longer are valid. For example, for many years, it has been assumed that Japanese employees do not leave their jobs for work with other firms, that they are loyal to their first employer, and that it would be virtually impossible for MNCs operating in Japan to recruit talent from Japanese firms. Recent evidence, however, reveals that job-hopping among Japanese employees is increasingly common. One report concluded:

While American workers, both the laid-off and the survivors, grapple with cutbacks, one in three Japanese workers willingly walks away from his job within the first 10 years of his career, according to the Japanese Institute of Labor, a private research organization. And many more are thinking about it. More than half of salaried Japanese workers say they would switch jobs or start their own business if a favorable opportunity arose, according to a survey by the Recruit Research Corporation.47

These findings clearly illustrate one important point: Managing across cultures requires careful understanding of the local environment because common assumptions and stereotypes may not be valid. Cultural differences must be addressed, and this is why cross-cultural research will continue to be critical in helping firms learn how to manage across cultures.48,49

168 Part 2 The Role of Culture

• Prepare for long process

• Ensure that your firm is “here to stay”

• Develop trusting relationship with recruit

• Make substantial investment in training

• Use general training and cross-training

• Training is everyone’s responsibility

• Use recognition and praise as motivators

• Avoid pay for performance

• Treat unions as partners

• Allow time for negotiations

• Include participation • Incorporate group

goal setting • Use autonomous

work teams • Use uniform, formal

approaches • Encourage

co-worker input • Empower teams to

make decision

Recruitment and selection

Training

Compensation

Labor relations

Job design

• Obtain skilled labor from government-subsidized appren-ticeship program

• Reorganize and utilize apprenticeship programs

• Be aware of govern-ment regulations on training

• Note high labor costs for manufacturing

• Be prepared for high wages and short workweek

• Expect high pro­ductivity from unionized workers

• Utilize works councils to enhance worker participation

• Use expatriates sparingly

• Recruit Mexican nationals at U.S. col-leges

• Use bilingual trainers

• Consider all aspects of labor cost

• Understand changing Mexican labor law

• Prepare for increas-ing unionization of labor

• Approach participa-tion cautiously

• Recent public policy shifts encourage use of sophisticated selection procedures

• Carefully observe existing training programs

• Utilize team training

• Use technical training as reward

• Recognize egalitarian values

• Use “more work, more pay” with caution

• Tap large pool of labor cities

• Lax labor laws may become more stringent

• Determine employ-ee’s motives before implementing participation

Japan Germany Mexico ChinaSource: From Fred Luthans, Paul A. Marsnik, and Kyle W. Luthans, “A Contingency Matrix Approach to IHRM,” Human Resource Management Journal 36, no. 2 (1997), pp. 183–199.

A Partially Completed Contingency Matrix for International Human Resource Management

Figure 5–1

■ Cultural Differences in Selected Countries and Regions

As noted in Part One and in Chapter 4, MNCs are increasingly active in all parts of the world, including the developing and emerging regions because of their recent growth and future potential. Chapter 4 introduced the concept of country clusters, which is the idea that certain regions of the world have similar cultures. For example, the way that Amer-icans do business in the United States is very similar to the way that the British do

Chapter 5 Managing Across Cultures 169

business in England. Even in this Anglo culture, however, there are pronounced differ-ences, and in other clusters, such as in Asia, these differences become even more pro-nounced. The next sections focus on cultural highlights and differences in selected countries and regions that provide the necessary understanding and perspective for effective management across cultures.

Using the GLOBE Project to Compare Managerial DifferencesExamination of the GLOBE project has resulted in an extensive breakdown of how managers behave and how different cultures can yield managers with similar perspec-tives in some realms, with quite divergent opinions in other sectors. One example, as illustrated in Figure 5–2, shows how the value scores for managers in China compare to those of managers in the United States and Argentina. The web structure, based on factors such as individualism, consciousness of social and professional status, and risky behaviors, can be used to show both similarities and differences between multiple cultures at once, indicating potential areas of cultural misunderstanding when conduct-ing business. As can be seen through the web structure shown, Chinese managers typically score higher than their Argentine and U.S. counterparts in the area of uncer-tainty avoidance. This indicates that Chinese managers prefer structured situations, rules, and careful planning, while their counterparts in the U.S. and Argentina are more open to looser restrictions and more unplanned situations. When managers from the U.S. and Argentina are conducting business in a culture with high uncertainty avoid-ance preferences, like China, it is suggested that they give their employees a clear plan and a structural framework to complete their assigned tasks. Interestingly, all three countries score similarly low in the area of power distance, indicating that managers

Figure 5–2GLOBE Analysis: Comparing Values in China, the U.S., and Argentina

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from the GLOBE project research.

U.S.China Argentina

Assertiveness

Institutional Collectivism

In-Group CollectivismPower Distance

Performance Orientation Future Orientation

Gender EgalitarianismHumane Orientation

Uncertainty Avoidance

01

2

3

4

5

6

7

170 Part 2 The Role of Culture

in these cultures prefer structures with less hierarchy and more equality—even if, in practice, the opposite is true within their country.50

As shown in the figure, Chinese managers tend to value assertiveness significantly more than managers from Argentina, indicating that aggressive or confrontational behavior in a business negotiation, for example, would not be viewed in a negative way by Chinese businesspeople but might well by Argentine businesspeople. A Chinese businessperson may walk away from intense negotiation feeling as though things went well, while an Argentine counterpart across the table might view the same meeting as unproductive and detrimental.51

One interesting development is the increasing frequency of managers and execu-tives from one part of the world assuming leadership roles in another. For example, in 2015, Takeda Pharmaceutical Company named Christophe Weber as its new CEO, becoming the first non-Japanese CEO in the company’s history. He joins the ranks of the few—but increasing—number of foreign heads of Japanese firms, who now include Brian Prince of Aozora Bank, Eva Chen of Trend Micro, and Carlos Ghoshen of Nissan Motor Co. Foreign CEOs still face cultural difficulties, however. At Nippon Sheet Glass, for example, American Craig Naylor resigned suddenly in 2012 after just two years as CEO. Naylor cited “fundamental disagreements with the board on company strategy” as the key reason for his departure.52 Chapters 13 and 14 provide an in-depth discussion of leadership and human resource management across cultures, respectively. Because of the increasing importance of developing and emerging regions and countries in the global economy, knowledge of these contexts is more and more important for global managers. In a study by the China Europe International Business School’s Leadership Behavioral Laboratory and the Center for Creative Leadership, executives identified critical charac-teristics in their careers that contributed to their development as managers in emerging markets settings. These included setting an example for junior employees and learning to thrive in unstable environments.53 In addition, managers emphasized the importance of learning about their business and the emerging markets environment, through formal classes, mentoring, and direct experience.

Managing Culture in Selected Countries and RegionsMore specific insight on cultural practices specific to the BRIC countries, Arab countries, and France are presented below.

Before this discussion, however, it is important to provide a word of caution on overgeneralizing about cultures. Businesspeople from all cultures are individuals with unique personalities and styles; there are always exceptions to the general cultural char-acteristics discussed in the following sections. Stereotyping in cross-cultural dealings is unwarranted. In this chapter, we review general cultural characteristics, but from your own experience, you know the importance of an understanding of the particular individuals or situations you are dealing with.

Managing Culture in China The People’s Republic of China (China, for short) has had a long tradition of isolation. In 1979, Deng Xiaoping opened this country to the world. Although his bloody 1989 put-down of protesters in Tiananmen Square was a definite setback for progress, China is rapidly trying to close the gap between itself and economically advanced nations and to establish itself as a power in the world economy. As noted in Chapter 1, China is actively trading in world markets, is a member of the WTO, and is a major trading partner of the United States. Despite this global presence, many U.S. and European multinationals still find that doing business in China can be a long, grueling process.54,55 Foreign firms still find it difficult to make a profit in China. One primary reason is that Western-based MNCs do not appreciate the important role and impact of Chinese culture.

Experienced executives report that the primary criterion for doing business in China is technical competence. For example, in the case of MNCs selling machinery,

Chapter 5 Managing Across Cultures 171

Chinese businesspeople tend to want to know exactly how the machine works, what its capabilities are, and how repairs and maintenance must be handled. Sellers must be prepared to answer these questions in precise detail. This is why successful multination-als send only seasoned engineers and technical people to China. They know that the questions to be answered will require both knowledge and experience, and young, fresh-out-of-school engineers will not be able to answer them.

A major cultural difference between China and many Western countries is the issue of time. Chinese culture tends to value punctuality, so it is important that those who do business with them arrive on time, as discussed in Chapter 4. During meetings, such as those held when negotiating a contract, Chinese businesspeople may ask many questions and nod their assent at the answers. This nodding usually means that they understand or are being polite; it seldom means that they like what they are hearing and want to enter into a contract. For this reason, when dealing with Chinese businesspeople, one must keep in mind that patience is critically important. Chinese businesspeople will make a decision in their own good time, and it is common for outside businesspeople to make several trips to China before a deal is finally concluded. Moreover, not only are there numerous meetings, but sometimes these are unilaterally cancelled at the last minute and rescheduled. This often tries the patience of outsiders and is inconvenient in terms of rearranging travel plans and other problems.

Another important dimension of Chinese culture is guanxi, which means “good connections.”56 In turn, these connections can result in such things as lower costs for doing business.57 Yet guanxi goes beyond just lower costs. Yi and Ellis surveyed Hong Kong and Chinese managers and found that both groups agreed that guanxi networking offered a number of potential benefits, including increased business, higher sales revenue, more sources of information, greater prospecting opportunities, and the facilitation of future transactions.58 In practice, guanxi resembles nepotism, where individuals in author-ity make decisions on the basis of family ties or social connections rather than objective indices.59 Additionally, outsiders doing business in China must be aware that Chinese people will typically argue that they have the guanxi to get a job done, when in reality they may or may not have the necessary connections.

When conducting business in China, one must realize that the Chinese are a col-lective society in which people pride themselves on being members of a group. Chinese people are very proud of their collective economic accomplishments and want to share these feelings with outsiders. This is in sharp contrast to the situation in the United States and other Western countries, where individualism is highly prized. For this reason, one must never single out a Chinese employee and praise him or her for a particular quality, such as intelligence or kindness, because doing so may embarrass the individual in the presence of his or her peers. It is equally important to avoid using self-centered conver-sation, such as excessive use of the word “I,” because it appears that the speaker is trying to single him- or herself out for special consideration.

In negotiations, reciprocity is important. If Chinese partners give concessions, they expect some in return. Additionally, it is common to find them slowing down negotiations to take advantage of Westerners’ desire to conclude arrangements as quickly as possible. The objective of this tactic is to extract further concessions. Another common strategy used by Chinese businesspeople is to pressure the other party during final arrangements by suggesting that this counterpart has broken the spirit of friendship in which the business relationship originally was established. Again, through this strategy, the Chinese partners are trying to gain additional conces-sions. Because negotiating can involve a loss of face, it is common to find Chinese businesspeople carrying out the whole process through intermediaries. This allows them to convey their ideas without fear of embarrassment.60 During negotiations, it is also important not to show excessive emotion of any kind. Anger or frustration, for example, is viewed as antisocial and unseemly. Negotiations should be viewed with a long-term perspective. Those who will do best are the ones who realize they are investing in a long-term relationship.61

guanxiIn Chinese, it means “good connections.”

172 Part 2 The Role of Culture

While these are the traditional behaviors of Chinese businesspeople, the transition-ing economy (see Chapter 1) has also caused a shift in business culture, which has affected working professionals’ private lives. Performance, which was once based on effort, is now being evaluated from the angle of results as the country continues to maintain its flourishing profits. While traditional Chinese culture focused on family first, financial and material well-being has become a top priority. This performance orientation has increased stress and contributed to growing incidence of burnout, depression, sub-stance abuse, and other ailments. Some U.S. companies have attempted to curb these psychological ailments by offering counseling; however, this service is not as readily accepted by Chinese culture. Instead of bringing attention to the “counseling” aspect, firms instead promote “workplace harmony” and “personal well-being services.”62 This suggests that while some aspects of Chinese culture are changing, international managers must recognize the foundational culture of the country and try to deal with such issues according to local beliefs.

Managing Culture in Russia As pointed out in Chapter 1, the Russian economy has experienced severe problems, and the risks of doing business there cannot be overstated. Recent tensions between the governments of Russia and the G7 nations, resulting from Russian intervention in Crimea and Syria, have made business dealings even more com-plicated. At the same time, however, by following certain guidelines, MNCs can begin to tap the potential opportunities.

When conducting business in Russia, it is important to build personal relationships with partners. Business laws and contracts do not mean as much in Russia as they do in the West. When there are contract disputes, there is little protection for the aggrieved party because of the time and effort needed to legally enforce the agreement. Detailed contracts can be hammered out later on; in the beginning, all that counts is friendship.

Local consultants can be valuable. Because the rules of business have changed so much in recent years, it pays to have a local Russian consultant working with the com-pany. Russian expatriates often are not up to date on what is going on and, quite often, are not trusted by local businesspeople who have stayed in the country. So the consultant should be someone who has been in Russia all the time and understands the local busi-ness climate.

Ethical behavior in Europe and the United States is not always the same as in Russia. For example, it is traditional in Russia to give gifts to those with whom one wants to transact business, an approach that may be regarded as bribery in the United States. In recent years, large companies such as IKEA have faced repercussions in their home markets due to bribery allegations from their business conduct in Russia (see Brief Integrative Case 4.1 at the end of Part 4).

When conducting business in Russia, businesspeople should be careful about com-promising or settling things too quickly, as this is often seen as a sign of weakness. Because of the history of complexity during the Soviet Union days, Russians today tend to be suspicious of anything that is conceded easily. If agreements are not reached after a while, a preferred tactic on their part is to display patience and then wait it out. How-ever, they will abandon this approach if the other side shows great patience because they will realize that their negotiating tactic is useless.63

Conducting business in Russia requires careful consideration of cultural factors, and it often takes a lot longer than initially anticipated. However, the benefits may be worth the wait. And when everything is completed, there is a final cultural tradition that should be observed: Fix and reinforce the final agreements with a nice dinner together and an invitation to the Russians to visit your country and see your facilities.64

Managing Culture in India In recent years, India has begun to attract the attention of large MNCs. Unsaturated consumer markets, coupled with cheap labor and production locations, have helped make India a desirable market for global firms. The government continues to play an important role in this process, although recently many of the

Chapter 5 Managing Across Cultures 173

bureaucratic restrictions have been lifted as India works to attract foreign investment and raise its economic growth rate.65,66 In addition, although most Indian businesspeople speak English, many of their values and beliefs are markedly different from those in the West. Thus, understanding Indian culture is critical to successfully doing business in India.

Shaking hands with male business associates is almost always an acceptable prac-tice. U.S. businesspeople in India are considered equals, however, and the universal method of greeting an equal is to press one’s palms together in front of the chest and say, “namaste,” which means “greetings to you.” Therefore, if a handshake appears to be improper, it always is safe to use “namaste.”

For Western businesspeople in India, shirt, trousers, tie, and suit are proper attire. In the southern part of India, where the climate is very hot, a light suit is preferable. In the north during the winter, a light sweater and jacket are a good choice. Indian busi-nesspeople, on the other hand, often will wear local dress. In many cases, this includes a dhoti, which is a single piece of white cloth (about five yards long and three feet wide) that is passed around the waist up to half its length and then the other half is drawn between the legs and tucked at the waist. Long shirts are worn on the upper part of the body. In some locales, such as Punjab, Sikhs will wear turbans, and well-to-do Hindus sometimes will wear long coats like the rajahs. This coat, known as a sherwani, is the dress recognized by the government for official and ceremonial wear. Foreign business-people are not expected to dress like locals, and in fact, many Indian businesspeople will dress like Europeans. Therefore, it is unnecessary to adopt local dress codes.67

Finally, it is important to remember that Indians are very tolerant of outsiders and understand that many are unfamiliar with local customs and procedures. Therefore, there is no need to make a phony attempt to conform to Indian cultural traditions. Making an effort to be polite and courteous is sufficient.68

Managing Culture in France Many in the United States believe that it is more difficult to get along with the French than with other Europeans. This feeling probably reflects the French culture, which is markedly different from that in the United States. In France, one’s social class is very important, and these classes include the aristocracy, the upper bourgeoisie, the upper-middle bourgeoisie, the middle, the lower middle, and the lower. Social interactions are affected by class stereotypes, and during their lifetime, most French people do not encounter much change in social status. Additionally, the French are very status conscious, and they like to provide signs of their status, such as knowledge of literature and the arts; a well-designed, tastefully decorated house; and a high level of education.

In the workplace, many French people are not motivated by competition or the desire to emulate fellow workers. They often are accused of not having as intense a work ethic as, for example, Americans or Asians. Many French workers frown on overtime, and statistics show that on average, they have the longest vacations in the world (four to five weeks annually). On the other hand, few would disagree that they work extremely hard in their regularly scheduled time and have a reputation for high productivity. Part of this reputation results from the French tradition of craftsmanship. Part of it also is accounted for by a large percentage of the workforce being employed in small, independ-ent businesses, where there is widespread respect for a job well done. In general, French employees do not derive much motivation from professional accomplishment. Rather, they believe that quality of life is what really matters. As a result, they attach a great deal of importance to leisure time, and many are unwilling to sacrifice the enjoyment of life for dedication to work.

Most French organizations tend to be highly centralized and have rigid structures. As a result, it usually takes longer to carry out decisions. Because this arrangement is quite different from the more decentralized, flattened organizations in the United States, both middle- and lower-level U.S. expatriate managers who work in French subsidiaries often find bureaucratic red tape a source of considerable frustration. There also are

174 Part 2 The Role of Culture

marked differences at the upper levels of management. In French companies, top manag-ers have far more authority than their U.S. counterparts, and they are less accountable for their actions. While top-level U.S. executives must continually defend their decisions to the CEO or board of directors, French executives are challenged only if the company has poor performance. As a result, those who have studied French management find that they take a more autocratic approach.69

Managing Culture in Brazil Brazil is considered a Latin American country, but it is important to highlight this nation since some characteristics make it markedly different to manage as compared to other Latin American countries.70 Brazil was originally colo-nized by Portugal, and remained affiliated with its parent country until 1865. Even though today Brazil is extremely multicultural, the country still demonstrates many at-tributes derived from its Portuguese heritage, including its official language. For exam-ple, the Brazilian economy was once completely centrally controlled like many other Latin American countries, yet was motivated by such Portuguese influences as flexibil-ity, tolerance, and commercialism.71 This may be a significant reason behind its success-ful economic emergence.

Brazilian businesspeople tend to have a relaxed work ethic, often respecting those who inherit wealth and have strong familial roots over those seeking entrepreneurial opportunities. They view time in a very relaxed manner, so punctuality is not a strong suit in this country. Overall, the people are very good-natured and tend to avoid confron-tation, yet they seek out risky endeavors.

In Brazil, physical contact is acceptable as a form of communication. Brazilian businesspeople tend to stand very close to others when having a conversation, and will touch the person’s back, arm, or elbow as a greeting or sign of respect. Additionally, face-to-face interaction is preferred as a way to communicate, so avoid simply e-mailing or calling. Do not be surprised if business meetings begin anywhere from 10 to 30  minutes after the scheduled time because Brazilian culture tends to not be governed by the clock.

Appearance can be very important to Brazilian culture, as it will reflect both you and your company. When conducting business, men should wear conservative dark suits, shirts, and ties. Women should dress nicely but avoid too conservative or formal attire. Brazilian managers often wonder, for example, if Americans make so much money, why do they dress like they are poor?

Patience is key when managing business in Brazil. Many processes are longer and more drawn out than in other cultures, including negotiations. Expressing frustration or impatience and attempting to speed up procedures may lose the deal. The slow processes and relaxed atmosphere do not imply that it is acceptable to be ill-prepared. Presentations should be informative and expressive, and consistency is important. It is common for Brazilian businesspeople to bring a lot of people to attend negotiations, mostly to observe and learn. Subsequent meetings may include members of higher management, requiring a rehashing of information.72,73

Managing Culture in Arab Countries The intense media attention given to the Iraq War, terrorist actions, and continuing conflicts in the Middle East have perhaps revealed to everyone that Arab cultures are distinctly different from Anglo cultures.74,75 Europeans and Americans often find it extremely hard to do business in Arab countries, and a number of Arab cultural characteristics can be cited for this difficulty.

One is the Arab view of time. In the United States, it is common to use the cliché, “Time is money.” In Arab countries, a favorite expression is Bukra insha Allah, which means “Tomorrow if God wills,” an expression that explains the fatalistic approach to time common to many Arab cultures. As a result, if Arab businesspeople commit themselves to a date in the future and fail to show up, they may feel no guilt or concern because they believe they have no control over time in the first place.

Chapter 5 Managing Across Cultures 175

When conducting business in an Arab country, it is important to understand that culture generally holds that destiny depends more on the will of a supreme being than on the behavior of individuals. A higher power dictates the outcome of important events, so individual action is of little consequence. Also of importance is that, in the culture of many Arab countries, social status is largely determined by family position and connections, not necessarily by accomplishments. This view helps to explain why some Middle Easterners take great satisfaction in appearing to be helpless. This approach is quite different from that in the United States, where the strong tend to be compensated and rewarded. If a person was ill, such as in this example, the individual would be relieved of his responsibility until he or she had regained full health. In the interim, the rest of the group would go on without the sick person, and he or she might lose power.

In Arab countries, initial meetings typically are used to get to know the other party. Business-related discussions may not occur until the third or fourth meeting. Also, in contrast to the common perception among many Western businesspeople who have never been to an Arab country, it is not necessary to bring the other party a gift. If this is done, however, it should be a modest gift. A good example is a novelty or souvenir item from the visitor’s home country. Also, Arab businesspeople tend to attach a great deal of importance to status and rank. When meeting with them, one should pay deference to the senior person first. It also is important never to criticize or berate anyone publicly. This causes the individual to lose face, and the same is true for the person who makes these comments. Mutual respect is required at all times.76

The World of International Management—RevisitedManagement at many companies and in many countries is becoming more and more multicultural, yet individual corporate cultures persist. Apple and Xiaomi are both exam-ples of highly successful companies with radically different approaches to strategy and management. Apple prides itself on groundbreaking innovation, individual achievement, and excellence. At Xiaomi, the emphasis is on extending innovations and applications and on group achievement and collective responsibility, all geared toward companywide success. The two companies even take a very different approach to their supply chains, with Apple outsourcing the entirety of its production and only manufacturing its new phone models for about a year, while Xiaomi produces its new phone models for a lon-ger period of time and maintains contracts with suppliers who can adjust production based on frequent changes in demand. In terms of products, Apple is a first-mover with a universal product focus, while Xiaomi is a “fast follower” with a variety of phones for its different markets. In some ways, these two companies epitomize the cultures from which they emanate, but both are now global players.

Cross-border investments by Chinese, Indian, and other developing-country firms have prompted investing firms, especially in Europe and North America, to more thought-fully consider cultural issues as they seek to integrate local companies and employees into their global organizations. As we saw in Chapter 4, East Asian, U.S., and Western European cultures differ on many dimensions, which may pose challenges for companies seeking to operate across these geographical/cultural boundaries.

Now that you have read this chapter, you should have a good understanding of the importance and the difficulties of managing across cultures. Using this knowledge as a platform, answer the following questions: (1) Which aspects of Apple’s culture have helped it succeed in its global growth and which may have impeded it? (2) Which aspects of Xiaomi’s culture have helped it succeed in its global growth and which may have impeded it? (3) How would you characterize Apple and Xiaomi in terms of the four basic strategic predispositions? (4) What might Apple learn from Xiaomi and Xiaomi learn from Apple?

176 Part 2 The Role of Culture

1. One major problem facing MNCs is that they some-times attempt to manage across cultures in ways similar to those of their home country. MNC dispo-sitions toward managing across cultures can be characterized as (1) ethnocentric, (2) polycentric, (3) regiocentric, and (4) geocentric. These different approaches shape how companies adapt and adjust to cultural pressures around the world.

2. One major challenge when dealing with cross- cultural problems is that of overcoming parochialism and simplification. Parochialism is the tendency to view the world through one’s own eyes and per-spectives. Simplification is the process of exhibiting the same orientation toward different cultural groups. Another problem is that of doing things the same way in foreign markets as they are done in domestic markets. Research shows that in some cases, this approach can be effective; however,

effective cross-cultural management more com-monly requires approaches different than those used at home. One area where this is particularly evident is human resource management. Recruitment, selec-tion, training, and compensation often are carried out in different ways in different countries, and what works in the United States may have limited value in other countries and geographic regions.

3. Doing business in various parts of the world requires the recognition and understanding of cul-tural differences. Some of these differences revolve around the importance the society assigns to time, status, control of decision making, personal accom-plishment, and work itself. These types of cultural differences help to explain why effective managers in China or Russia often are quite different from those in France, and why a successful style in the United States will not be ideal in Arab countries.

SUMMARY OF KEY POINTS

KEY TERMS

ethnocentric predisposition, 159geocentric predisposition, 159globalization imperative, 160

guanxi, 171parochialism, 162polycentric predisposition, 159

regiocentric predisposition, 159simplification, 163

REVIEW AND DISCUSSION QUESTIONS

1. Define the four basic predispositions MNCs have toward their international operations.

2. If a locally based manufacturing firm with sales of $350 million decided to enter the EU market by set-ting up operations in France, which orientation would be the most effective: ethnocentric, polycentric, regio-centric, or geocentric? Why? Explain your choice.

3. In what way are parochialism and simplification barriers to effective cross-cultural management? In each case, give an example.

4. Many MNCs would like to do business overseas in the same way that they do business domestically. Do research findings show that any approaches that

work well in the United States also work well in other cultures? If so, identify and describe two.

5. In most cases, local managerial approaches must be modified for doing business overseas. What are three specific examples that support this statement? Be complete in your answer.

6. What are some categories of cultural differences that help make one country or region of the world different from another? In each case, describe the value or norm and explain how it would result in different behavior in two or more countries. If you like, use the countries discussed in this chapter as your point of reference.

Haier is a China-based multinational corporation that sells a wide variety of commercial and household appliances in the international marketplace. These range from washers, dryers, and refrigerators to industrial heating and ventila-tion systems. Visit Haier.com and read about some of the latest developments in which the company is engaged: (1)  What type of cultural challenges does Haier face when it attempts to market its products worldwide? Is demand

universal for all these offerings, or is there a “national responsiveness” challenge, as discussed in the chapter, that must be addressed? (2) Investigate the way in which Haier has adapted its products in different countries and regions, especially emerging markets. What are some examples? (3) In managing its far-flung enterprise, what are two cul-tural challenges that the company is likely to face and what will it need to do to respond to these?

INTERNET EXERCISE: HAIER’S APPROACH

Chapter 5 Managing Across Cultures 177

1. Nancy J. Adler, International Dimensions of Orga-nizational Behavior, 5th ed. (Cincinnati, OH: Southwestern, 2007).

2. Evan Niu, “How Many iPhones Has Apple Sold?” The Motley Fool, November 14, 2015, www.fool.com/investing/general/2015/11/14/iphones-sold.aspx.

3. Dylan Love, “At Apple, They Really Are After You,” Business Insider, January 9, 2013, www.busi-nessinsider.com/apple-corporate-culture-2013-1.

4. Adam Lashinsky, “This Is How Apple Keeps the Secrets,” Fortune, January 18, 2012, http://fortune.com/2012/01/18/the-secrets-apple-keeps/.

5. Parmy Olson, “How China’s Xiaomi Does in a Week What Apple Does in a Year: Update Devices,” Forbes, October 22, 2013, www.forbes.com/sites/parmyolson/2013/10/22/how-chinas-xiaomi-does-in-a-week-what-apple-does-in-a-year-update-devices/2/#15201d7b2c16.

6. Ibid. 7. David M. Barreda, “Who Supplies Apple? (It’s Not

Just China),” China File, February 14, 2013, www.chinafile.com/who-supplies-apple-it-s-not-just-china- interactive-map.

8. Peter Cohan, “Apple Can’t Innovate or Manage Supply Chain,” Forbes, October 26, 2012. http://www.forbes.com/sites/petercohan/2012/10/26/apple-cant-innovate-or-manage-supply-chain/.

9. “Xiaomi & the Supply Chain Behind the World’s Highest Valued Startup,” Elementum News, April 16, 2015, http://news.elementum.com/how-supply-chain-is-building-xiaomis-empire.

10. Ibid.11. Devindra Hardawar, “What China’s Xiaomi Can

Teach Apple, Google, and the Western Tech World,” Venture Beat, September 1, 2013, http://venturebeat.com/2013/09/01/what-xiaomi-can-teach-google-apple-and-the-western-tech-world/.

12. Miguel Helft and Shan Carter, “A Chief Executive’s Attention to Detail, Noted in 313 Patents,” The New York Times, August 25, 2011, www.nytimes.com/2011/08/26/technology/apple-patents-show-steve-jobss-attention-to-design.html?_r=2.

13. Nick Bilton, “Bits: What Apple vs. HTC Could Mean,” The New York Times, March 2, 2010, http://bits.blogs.nytimes.com/2010/03/02/what-apple-vs-htc-could-mean/.

14. Leo Kelion, “Apple v Samsung Patent Verdict Reconsidered in Court,” BBC, December 6, 2012, www.bbc.com/news/technology-20615376.

15. Parmy Olson, “Xiaomi May Have a Major Patent Problem,” Forbes, January 29, 2015, www.forbes.com/sites/parmyolson/2015/01/29/xiaomi-patent-problem/#37415e5322ec.

16. Salvador Rodriguez, “Why Xiaomi Is Not Coming to America Anytime Soon: It Only Has 2 US Pat-ents,” International Business Times, March 30, 2015, www.ibtimes.com/why-xiaomi-not-coming-america-anytime-soon-it-only-has-2-us-pat-ents-1863838.

17. “Smartphone Vendor Market Share, 2015 Q2,” IDC, http://www.idc.com/prodserv/smartphone-market-share.jsp.

18. Carrie Mihalcik, “Xiaomi Made Only $56M Last Year, Filing Shows,” CNet, December 16, 2014, www.cnet.com/news/upstart-phone-maker-xiaomi-values-growth-over-profit/.

19. Nissan Motor Corporation, “Nissan Reports Net Income of 389 Billion Yen for FY2013,” news releases, May 12, 2014, www.nissan-global.com/EN/NEWS/2014/_STORY/140512-01-e.html.

20. Nissan Motor Corporation, “Nissan Reports Net Income of $4.2 Billion (¥457.6 billion) for FY2014,” news release, May 13, 2015, http://nissan-news.com/en-US/nissan/usa/releases/nissan-reports-net-income-of-4-2-billion-457-6-billion-for-fy2014.

21. Yuro Kageyama, “Nissan Reports 38 Percent Rise in Profit, Raises Forecasts,” AP, November 2, 2015, http://bigstory.ap.org/article/80dda8efe70041f4b8aa312b14d67996/nissan-reports-38-percent-rise-profit-raises-forecasts.

22. “New models lift Renault profit despite Russia writedown.” Reuters, February 12, 2016. http://www.reuters.com/article/us-renault-results- idUSKCN0VL0KP.

23. “World Motor Vehicle Production,” OICA, February 2016, www.oica.net/category/production-statistics/.

24. “Dacia Exceeded the Threshold of 500,000 Vehicles Sold Worldwide,” Dacia Group, January 19, 2015, www.daciagroup.com/en/press/press-releases/2015/dacia-exceeded-the-threshold-of-500000-vehicles-sold-worldwide.

25. Luca Ciferri, “How Renault’s Low-Cost Dacia Has Become a ‘Cash Cow,’” Automotive News Europe, January 2, 2013, http://europe.autonews.com/arti-cle/20130102/ANE/312259994/how-renaults-low-cost-dacia-has-become-a-cash-cow.

26. Greeshma M, “5 Reasons Why Renault Kwid Will Be a Game Changer,” Economic Times of India, September 26, 2015, www.ibtimes.co.in/5-reasons-why-renault-kwid-will-be-game-changer-648139.

ENDNOTES

178 Part 2 The Role of Culture

27. “Renault-Nissan Alliance Celebrates 15th Anniver-sary as Four Key Business Units Prepare to Con-verge,” Renault Nissan, March 27, 2014, www.media.blog.alliance-renault-nissan.com/news/renault-nissan-alliance-celebrates-15th-anniversary-as-four-key-business-units-prepare-to-converge/.

28. Lisa Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), pp. 98–99.

29. Marcy Beitle, Arjun Sethi, Jessica Milesko, and Alyson Potenza, “The Offshore Culture Clash,” AT  Kearney Executive Agenda XI, no. 2 (2008), pp.  32–39.

30. Matt Ackerman, “State St.: New Markets Key to Growth,” American Banker, May 3, 2004, p. 1.

31. Linda M. Randall and Lori A. Coakley, “Building a Successful Partnership in Russia and Belarus: The Impact of Culture on Strategy,” Business Horizons, March–April 1998, pp. 15–22.

32. Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diver-sity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 202.

33. See, for example, Anisya S. Thomas and Stephen L. Mueller, “A Case for Comparative Entrepreneurship: Assessing the Relevance of Culture,” Journal of International Business Studies, Second Quarter 2000, pp. 287–301.

34. Adapted from Richard Mead, International Manage-ment (Cambridge, MA: Blackwell, 1994), pp. 57–59.

35. Fred Luthans, Dianne H. B. Welsh, and Stuart A. Rosenkrantz, “What Do Russian Managers Really Do? An Observational Study with Comparisons to U.S. Managers,” Journal of International Business Studies, Fourth Quarter 1993, pp. 741–761.

36. Diane H. B. Welsh, Fred Luthans, and Steven M. Sommer, “Organizational Behavior Modification Goes to Russia: Replicating an Experimental Analy-sis Across Cultures and Tasks,” Journal of Organi-zational Behavior Management 13, no. 2 (1993), pp. 15–35.

37. Diane H. B. Welsh, Fred Luthans, and Steven M. Sommer, “Managing Russian Factory Workers: The Impact of U.S.-Based Behavioral and Participative Techniques,” Academy of Management Journal, February 1993, pp. 58–79.

38. Welsh, Luthans, and Sommer, “Organizational Behavior Modification,” p. 31.

39. The summary of positive (17 percent average) per-formance from O.B.Mod. for U.S. samples can be found in Fred Luthans and Alexander Stajkovic,

“Reinforce for Performance,” Academy of Manage-ment Executive 13, no. 2 (1999), pp. 49–57.

40. Steven M. Sommer, Seung-Hyun Bae, and Fred Luthans, “The Structure-Climate Relationship in Korean Organizations,” Asia Pacific Journal of Management 12, no. 2 (1995), pp. 23–36.

41. Also see Steven Sommer, Seung-Hyun Bae, and Fred Luthans, “Organizational Commitment Across Cultures: The Impact of Antecedents on Korean Employees,” Human Relations 49, no. 7 (1996), pp. 977–993.

42. Sommers, Bae, and Luthans, “The Structure- Climate Relationship in Korean Organizations.”

43. Trompenaars and Hampden-Turner, Riding the Waves of Culture, p. 196.

44. Shari Caudron, “Lessons for HR Overseas,” Person-nel Journal, February 1995, p. 92.

45. Richard M. Hodgetts and Fred Luthans, “U.S. Mul-tinationals’ Compensation Strategies for Local Man-agement: Cross-Cultural Implications,” Compensation and Benefits Review, March–April 1993, pp. 42–48.

46. Philip M. Rosenzweig and Nitin Nohria, “Influ-ences on Human Resource Management Practices in Multinational Corporations,” Journal of Interna-tional Business Studies, Second Quarter 1994, pp. 229–251.

47. “Disillusioned Workers Cost Japanese Economy up to $180.18 Billion,” The Wall Street Journal, September 5, 2001, p. B18.

48. Also see Richard W. Wright, “Trends in Interna-tional Business Research: Twenty-Five Years Later,” Journal of International Business Studies, Fourth Quarter 1994, pp. 687–701.

49. Also see Schon Beechler and John Zhuang Yang, “The Transfer of Japanese-Style Management to American Subsidiaries: Contingencies, Constraints, and Competencies,” Journal of International Busi-ness Studies, Third Quarter 1994, pp. 467–491.

50. Mansour Javidan, Peter W. Dorfman, et al., “In the Eye of the Beholder: Cross Cultural Lessons in Leadership from Project GLOBE,” Academy of Management Perspectives 20, no. 1 (2006), pp. 67–90.

51. Ibid.52. Jacob M. Schlesinger, “Another Foreign CEO

Leaves Japan’s Executive Ranks,” The Wall Street Journal Online, April 18, 2012, http://blogs.wsj.com/japanrealtime/2012/04/18/another-foreign-ceo-leaves-japans-executive-ranks/.

53. Jean Lee, “Emerging Need: How Companies in Developing Markets Can Cultivate the Leaders

Chapter 5 Managing Across Cultures 179

They Lack,” The Wall Street Journal Online, May 24, 2010, www.wsj.com/articles/SB10001424052748704878904575030901196923746.

54. John Boudreau and Brandon Bailey, “Doing Business in China Getting Tougher for U.S. Companies,” Mercury News, March 27, 2010.

55. Emily Rauhala, “Q. and A.: Doing Business in China,” The New York Times online, June 16, 2010, www.nytimes.com/2010/06/17/business/global/17iht-chinqa.html.

56. Eric W. K. Tsang, “Can Guanxi Be a Source of Sustained Competitive Advantage for Doing Busi-ness in China?” Academy of Management Executive 12, no. 2 (1998), p. 64.

57. Stephen S. Standifird and R. Scott Marshall, “The Transaction Cost Advantage of Guanxi-Based Busi-ness Practices,” Journal of World Business 35, no. 1 (2000), pp. 21–42.

58. Lee Mei Yi and Paul Ellis, “Insider-Outsider Per-spective of Guanxi,” Business Horizons, January–February 2000, p. 28.

59. Rosalie L. Tung, “Managing in Asia: Cross-Cultural Dimensions,” in Managing Across Cultures: Issues and Perspectives, ed. Pat Joynt and Malcolm War-ner (London: International Thomson Business Press, 1996), p. 239.

60. For more on this topic, see Philip R. Harris and Robert T. Moran, Managing Cultural Differences, 3rd ed. (Houston: Gulf Publishing, 1991), pp. 410–411.

61. Ming-Jer Chen, Inside Chinese Business (Boston: Harvard Business School Press, 2001), p. 153.

62. Michelle Conlin, “Go-Go-Going to Pieces in China,” BusinessWeek, April 23, 2007, p. 88.

63. For additional insights into how to interact and negotiate effectively with the Russians, see Richard D. Lewis, When Cultures Collide (London: Nicholas Brealey, 1999), pp. 314–318.

64. William B. Snavely, Serguel Miassaoedov, and Kevin McNeilly, “Cross-Cultural Peculiarities of the Russian Entrepreneur: Adapting to the New Russians,” Business Horizons, March–April 1998, pp. 13.

65. “The AU: Challenges for India,” Chicago Tribune, May 27, 2004, p. 28.

66. Amy Waldman, “In India, Economic Growth and Democracy Do Mix,” The New York Times, May 26, 2004, p. A13.

67. Adapted from Harris and Moran, Managing Cultural Differences, p. 447.

68. Also see Lewis, When Cultures Collide, pp. 341–346.

69. Jean-Louis Barsoux and Peter Lawrence, “The Making of a French Manager,” Harvard Business Review, July–August 1991, pp. 58–67.

70. T. Lenartowicz and James Patrick Johnson, “A Cross-National Assessment of Values of Latin America Managers: Contrasting Hues or Shades of Gray?” Journal of International Business Studies 34, no. 3 (May 2003), p. 270.

71. Reed E. Nelson and Suresh Gopalan, “Do Organi-zational Cultures Replicate National Cultures? Isomorphism, Rejection and Reciprocal Opposition in the Corporate Values of Three Countries,” Organization Studies 24, no. 7 (September 2003), pp. 1115–1154.

72. Derived from Raul Gouvea, “Brazil: A Strategic Approach,” Thunderbird International Business Review 46, no. 2 (March–April 2004), pp. 183–184.

73. David Hannon, “Brazil Offers the Best of Both Worlds,” Purchasing, October 5, 2006, pp. 51–52, https://www.highbeam.com/doc/1G1-152695481.html.

74. Sean Van Zyl, “Global Political Risks: Post 9/11,” Canadian Underwriter 71, no. 3 (March 2004), p. 16.

75. Marvin Zonis, “Mideast Hopes: Endless Surprises,” Chicago Tribune, January 18, 2004, p. 1.

76. Adapted from Harris and Moran, Managing Cul-tural Differences, p. 503.

77. CIA, “Poland,” The World Factbook (2016), https://www.cia.gov/library/publications/the-world-factbook/geos/pl.html.

78. Ibid.79. “Poland: Selected Indicators,” Organization for Eco-

nomic Co-operation and Development, https://data.oecd.org/poland.htm.

80. CIA, “Poland.” This is Op. cit of Endnote 77.81. “Poland: Selected Indicators.” This is Op. Cit of

Endnote 79.82. CIA, “Poland.” This is Op. cit of Endnote 77.83. Ibid.84. Deyana Ivanova, “Tesco Share Price: Grocer’s

Polish Business at Risk,” Invezz, February 10, 2016, http://invezz.com/news/equities/22323-Tesco-share-price-Grocers-Polish-business-at-risk-.

180

Poland is located in Central Europe and is bordered by Germany, the Czech Republic, Slovakia, Ukraine, Belarus, and Lithuania. The Baltic Sea is located to the northwest. Slightly smaller than New Mexico, the country’s terrain is largely flat with mountain ranges along its southern border. Its climate is relatively cool, with moderately severe winters and mild summer temperatures. Poland’s natural resources include coal, sulfur, copper, natural gas, silver, lead, salt, amber, and arable land.77 Poland’s population, estimated at 38,562,000, has remained steady for the last several years. Poland, with a median age of 40 years old, has an older-than-average population. The country is essentially entirely made up of native Poles. Immigrants do not comprise a significant proportion of the population. Poland has no citizenship by birth; instead, citizenship is awarded by descent, which requires both parents to be citizens of Poland. The coun-try is almost exclusively Roman Catholic.78 Poland’s GDP stands at US$545 billion, or US$24,952 per capita. Unlike most of Europe, Poland has seen years of steady economic gains. In 2015, the economy expanded at 3.5 percent.79 Poland was one of the only countries in the European Union to avoid a recession during 2008–2009: The government of Prime Minister Donald Tusk steered the Polish economy through the economic down-turn by skillfully managing public finances and adopting controversial pension and tax reforms to further shore up public finances. Once a largely agricultural nation, the country’s economy has transitioned to one based primar-ily on industry (41 percent) and services (56 percent).80 The labor force, with 18.29 million people, ranks 34th in the world in size.81 Poland’s main export partners include Germany, the UK, the Czech Republic, France, Italy, the Netherlands, and Russia. Machinery and transportation equipment, intermediate manufactured goods, miscella-neous manufactured goods, foodstuffs, and live animals are all major exports.82 Poland has adopted a republic form of government. It was one of the first ex-communist countries to embrace a

capitalistic economy with privatization and economic lib-eralization. The country’s economic success following the fall of the Soviet Union was largely attributed to the gov-ernment’s success at privatizing most of the small and medium state-owned companies and encouraging foreign direct investment. Poland’s major difficulties lie in its somewhat deficient infrastructure, its rigid labor codes, a burdensome commercial court system, its extensive government red tape, a lack of energy mix, and its burdensome tax system.83

You Be the International Management ConsultantTesco, a multinational grocery and general merchandise retailer, operates over 6,000 stores around the world and 442 stores in Poland. Tesco has a large online presence and handles online orders for customers in its various markets. The company has enjoyed considerable success across the world but has faced some recent difficulty with its Polish investments. The Polish government has recently announced a plan to increase revenues to pay for various initiatives, includ-ing the proposed imposition on large retailers of a 1.9  percent tax on gross revenue. This tax is targeted at “foreign-dominated industries” like supermarkets and banks. Moody’s estimates that this new tax could cost Tesco as much as 3.5 percent of earnings.84

Questions 1. If you were a consultant for Tesco, how would you

advise Tesco to deal with the new tax? 2. Would this new tax be enough for you to advise the

company to end business in Poland? 3. Does the fact that this regulation is specifically

targeted at foreign-dominated industries and businesses create concern for future regulations should you choose to continue operations in Poland?

PolandIn the International Spotlight

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RChapter 6

ORGANIZATIONAL CULTURES AND DIVERSITY

The World of International Management

Managing Culture and Diversity in Global Teams

A ccording to many international consultants and manag-ers, diverse and global teams are one of the most con-sistent sources of competitive advantage for any organization. Deloitte Touche Tohmatsu, the international accounting and consulting firm, has embraced a global mindset when building its teams. According to the company, “strength from cultural diversity is one of Deloitte’s shared values.” With more than 200,000 employees spread across offices in 150 countries, the company has implemented a corporate culture that regards diversity as a key competitive advantage.1

At Deloitte, as with most multinational organizations, global teams are also virtual teams. According to a study by Kirkman, Rosen, Gibson, and Tesluk, virtual teams are “groups of people who work interdependently with shared purpose across space, time, and organization boundaries using technology to commu-nicate and collaborate.”2 These teams are often cross-cultural and cross-functional. Furthermore, Kirkman and colleagues explain that virtual teams allow “organizations to combine the best expertise regardless of geographic location.”3 To manage a global team, international managers must take into consider-ation three factors: culture, communication, and trust.

CultureAt Deloitte, leadership is trained to adapt to the cultural differ-ences that their globally located employees exhibit. Leveraging the experiences of one of their global teams, the company conducted a three-month study into how cultural dynamics impact performance and success. The team included employ-ees from Spain, Germany, Australia, the United States, and Japan. Through this study, Deloitte identified four key findings regarding culture and global leadership:4

1. “Cultural and/or personality diversity is in the eye of the beholder.” Despite prior assumptions that cultural differ-ences would have the largest impact on the team’s final deliverable, the team members in the study were split as to whether culture or personality led to a greater

The previous two chapters focused on national cultures. The overriding objective of this chapter is to examine the interac-tion of national culture (diversity) and organizational cultures and to discuss ways in which MNCs can manage the often inherent conflicts between national and organizational cultures. Many times, the cultural values and resulting behaviors that are common in a particular country are not the same as those in another. To be successful, MNCs must balance and integrate the national cultures of the countries in which they do busi-ness with their own organizational culture. Employee relations, which includes how organizational culture responds to national culture or diversity, deals with internal structures and defines how the company manages. Customer relations, associated with how national culture reacts to organizational cultures, reflects how the local community views the company from a customer service and employee satisfaction perspective. Although the field of international management has long recognized the impact of national cultures, only recently has attention been given to the importance of managing organiza-tional cultures and diversity. This chapter first examines com-mon organizational cultures that exist in MNCs, and then presents and analyzes ways in which multiculturalism and diversity are being addressed by the best, world-class multina-tionals. The specific objectives of this chapter are

1. DEFINE exactly what is meant by organizational culture, and discuss the interaction of national and MNC cultures.

2. IDENTIFY the four most common categories of organiza-tional culture that have been found through research, and discuss the characteristics of each.

3. PROVIDE an overview of the nature and degree of multi-culturalism and diversity in today’s MNCs.

4. DISCUSS common guidelines and principles that are used in building multicultural effectiveness at the team and the or-ganizational levels.

183

better, stronger cross-cultural teams. Through the program, individuals are identified as having one or more of the four types of “chemistries”: Pioneer, Driver, Integrator, or Guardian. By sharing their “chemistry” with the team, team members can adapt their style of delivery to better communicate with each other. Deloitte delivers “Business Chemistry” to external clients as well as to its internal teams. To date, more than 90,000 people in 150 countries have used the program.6

In her article “Tips for Working in Global Teams,” Melanie Doulton provides helpful suggestions for good communication in a global team:

∙ When starting a project with a new team, hold an initial meeting in which all members introduce themselves and describe the job each one is going to do.

∙ Hold regular meetings throughout the project to ensure everyone is “on the same page.” Follow up conference calls with written minutes to reinforce what was discussed and what individual team members are responsible for.

∙ Put details of the project in writing, especially for a new team in which everyone speaks in different accents and uses different idioms and colloquialisms.

∙ Communicate using the most effective technology. For example, decide when e-mail is preferable to a phone call or instant messaging is preferable to a videoconfer-ence. In addition, try to understand everyone’s communi-cation style. For example, for a high-context culture such as India’s, people tend to speak in the passive voice, whereas in North America, people use the active voice.7

Moreover, while acknowledging the challenges of communica-tion in virtual teams, Steven R. Rayner also points out that written communication can have an advantage. He states, “The process of writing—where the sender must carefully examine how to communicate his/her message—provides the sender with the opportunity to create a more refined response than an ‘off-the-cuff’ verbal comment.”8

impact. In many instances, the individual personalities of the team members, irrespective of national origin, were shown to be equally as differentiating.

2. “Cultural diversity can positively contribute to people’s professional and personal enjoyment of the project, as well as a project’s outcome.” The team members in the study universally expressed an enhanced experience from working with others of differing cultures. A few fac-tors seemed to lead to this. Genuine curiosity about their fellow team members, learning how to build new types of relationships, and being challenged to think differently were all found to be enjoyable by the employees.

3. “Cultural diversity can indirectly encourage project mem-bers to rethink their usual working habits and expecta-tions, behave with fewer assumptions about the ‘right’ way to address an issue and promote linguistic clarity.” Unexpectedly, the lack of a common first language between team members actually enhanced communica-tion. Employees spent more time ensuring that the con-tent of their communication was clearly understood by the team, and team members reported that they actually found themselves transforming into better listeners.

4. “The dominance of cultural diversity amongst team mem-bers reduces the bias to interact with people who have common characteristics and create a unique bond.” With each employee bringing a different set of perspectives to the table, the playing field among the team members was more level. The employees expressed a sense of synergy, with many stating that they felt better prepared to overcome challenges by having such a diverse set of skills at their disposal. Ironically, the lack of similarities between the employees in the study actually led to greater personal connections to each other, with team members expressing a familial feeling among the group.5

CommunicationCommunicating without face-to-face interaction can have its drawbacks. Being consciously aware of the way that both you and your teammates communicate can increase the chances of success for your team. To help team members gain a better understanding of each other’s communication styles, Deloitte developed “Business Chemistry,” a program that identifies the pre-ferred business behaviors of team members to help build

Likelihood of Message Getting Interpreted Correctly

Source: Adapted from Steven R. Rayner, “The Virtual Team Challenge,” Rayner & Associates, Inc., 1997.

Fax/Letter

LOW HIGH

E-mail TelephoneVideo

ConferencingFace-to-Face

Interaction

184 Part 2 The Role of Culture

TrustKirkman and colleagues emphasize that “a specific challenge for virtual teams, compared to face-to-face teams, is the dif-ficulty of building trust between team members who rarely, or never, see each other.”9  Rayner notes that “by some estimates, as much as 30 percent of senior management time is spent in ‘chance’ encounters (such as unplanned hallway, parking lot, and lunch room conversations). . . . In a virtual team setting, these opportunities for relationship building and idea sharing are far more limited.”10

How can managers build trust among virtual team mem-bers? From their research, Kirkman and colleagues discovered that “building trust requires rapid responses to electronic com-munications from team members, reliable performance, and consistent follow-through. Accordingly, team leaders should coach virtual team members to avoid long lags in responding, unilateral priority shifts, and failure to follow up on commit-ments.”11 In addition, Doulton recommends that virtual team members “exchange feedback early” and allow an extra day or two for responses due to time zone differences.12

Team building activities also build trust. According to Kirkman and colleagues, as part of the virtual team launch, it is recom-mended that all members meet face-to-face to “set objectives, clarify roles, build personal relationships, develop team norms, and establish group identity.”13  Picking the right team members can help the teams become more cohesive as well. When Kirk-man and colleagues interviewed 75 team leaders and members in virtual teams, people responded that skills in communication, teamwork, thinking outside the box, and taking initiative were more important than technical skills. This finding was surprising, considering most managers select virtual team members based on technical skills. Having people with the right skills is essential to bring together a successful virtual team.14

At Deloitte, training employees to trust and harness the ben-efits of global, diverse teaming starts at the intern level. Through Deloitte’s Global Project Challenge, interns cross-collaborate with other Deloitte employees across the world to solve real business problems. Employees learn strategies to cope with both the logistical challenges, such as time zone differences, and cultural challenges that arise when working in a virtual team.

Advantages of Global Virtual TeamsIn addition to its challenges of overcoming cultural and com-munication barriers, global virtual teams have certain advan-tages over face-to-face teams. First, Kirkman and colleagues concluded that “working virtu-ally can reduce team process losses associated with stereotyp-ing, personality conflicts, power politics, and cliques commonly experienced by face-to-face teams. Virtual team members may be unaffected by potentially divisive demographic differences when there is minimal face-to-face contact.” Managers may even give fairer assessments of team members’ work because managers are compelled to rely on objective data rather than being influenced by their perceptual biases.15

Second, Rayner observes that “having members span many different time zones can literally keep a project moving around the clock. . . . Work doesn’t stop—it merely shifts to a different time zone.”16

Third, according to Rayner, “The ability for an organization to bring people together from remote geography and form a cohesive team that is capable of quickly solving complex prob-lems and making effective decisions is an enormous competi-tive advantage.”17

For an international manager, this competitive advantage makes overcoming challenges of managing global teams worth the effort.

As can be seen from Deloitte’s experiences, there are both benefits and challenges inher-ent in multinational, multicultural teams. These teams, which almost always include a diverse group of members with varying functional, geographic, ethnic, and cultural back-grounds, can be an efficient and effective vehicle for tackling increasingly multidimen-sional business problems. At the same time, this very diversity brings challenges that are often exacerbated when the teams are primarily “virtual.” Research has demonstrated the benefits of diversity and has also offered insight on how best to overcome the inherent challenges of global teams, including those that are “virtual.”

In this chapter we will explore the nature and characteristics of organizational culture as it relates to doing business in today’s global context. In addition, strategies and guidelines for establishing a strong organizational culture in the presence of diversity are presented.

■ The Nature of Organizational CultureThe chapters in Part One provided the background on the external environment, and the chapters so far in Part Two have been concerned with the external culture. Regardless of whether this environment or cultural context affects the MNC, when individuals join an MNC, not only do they bring their national culture, which greatly affects their learned beliefs, attitudes, values, and behaviors, but they also enter into an organizational culture. Employees of MNCs are expected to “fit in.” For example, at PepsiCo, personnel are

Chapter 6 Organizational Cultures and Diversity 185

expected to be cheerful, positive, and enthusiastic and have committed optimism; at Ford, they are expected to show self-confidence, assertiveness, and machismo.18 Regardless of the external environment or their national culture, managers and employees must under-stand and follow their organization’s culture to be successful. In this section, after first defining organizational culture, we analyze the interaction between national and organi-zational cultures. An understanding of this interaction has become recognized as vital to effective international management.

Definition and CharacteristicsOrganizational culture has been defined in several different ways. In its most basic form, organizational culture can be defined as the shared values and beliefs that enable members to understand their roles in and the norms of the organization. A more detailed definition is offered by organizational cultural theorist Edgar Schein, who defines it as a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, and that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to per-ceive, think, and feel in relation to those problems.19

Regardless of how the term is defined, a number of important characteristics are associated with an organization’s culture. These have been summarized as

1. Observed behavioral regularities, as typified by common language, terminol-ogy, and rituals.

2. Norms, as reflected by things such as the amount of work to be done and the degree of cooperation between management and employees.

3. Dominant values that the organization advocates and expects participants to share, such as high product and service quality, low absenteeism, and high efficiency.

4. A philosophy that is set forth in the MNC’s beliefs regarding how employees and customers should be treated.

5. Rules that dictate the dos and don’ts of employee behavior relating to areas such as productivity, customer relations, and intergroup cooperation.

6. Organizational climate, or the overall atmosphere of the enterprise, as reflected by the way that participants interact with each other, conduct themselves with customers, and feel about the way they are treated by higher-level management.20

This list is not intended to be all-inclusive, but it does help illustrate the nature of organizational culture.21  The major problem is that sometimes an MNC’s organizational culture in one country’s facility differs sharply from organizational cultures in other countries. For example, managers who do well in England may be ineffective in Germany, despite the fact that they work for the same MNC. In addition, the cultures of the English and German subsidiaries may differ sharply from those of the home U.S. location. Effec-tively dealing with multiculturalism within the various locations of an MNC is a major challenge for international management.

A good example is provided by the British-Swedish MNC AstraZeneca PLC, the seventh-largest pharmaceutical company in the world. With operations in over 100 coun-tries on six continents, AstraZeneca’s 13-member senior executive team includes leaders from the United Kingdom, France, Australia, the United States, and the Nether-lands.22 Over 23 percent of the company’s employees work in North America, and about 31 percent are employed in Asia.23 To unite such a diverse set of employees under a common corporate culture, AstraZeneca’s Global Steering Group has focused on three universal cultural pillars: “Leadership and Management Capability,” “Transparency in Talent Management and Career Progression,” and “Work/Life Challenges.”24 Further-more, the company introduced a new cross-cultural mentorship program, called Insight Exchange. By pairing senior- and junior-level employees from different cultural and professional backgrounds, AstraZeneca hopes to create a more open culture.

organizational cultureShared values and beliefs that enable members to understand their roles and the norms of the organization.

186 Part 2 The Role of Culture

In some cases companies have deliberately maintained two different business cul-tures because they do not want one culture influencing the other. A good example is provided by the Tata Group, the giant conglomerate based in India, which has made multiple transnational acquisitions in recent years. When its automobile subsidiary, Tata Motors, bought control of Daewoo, a Korean automaker, it used a strategy that is not very common when one company controls another. Rather than impose its own culture on the chain, Tata’s management took a back seat. To emphasize this approach, Tata Group chairman Ratan Tata publicly stated that “Tata Motors will operate Daewoo as a Korean company, in Korea, managed by Koreans.”25  Tata maintained the Daewoo brand name, appointed a Korean as the new CEO, and operated as a Korean business. The union vice president even remarked that “Though Tata is a foreign company, we were able to confirm that it recognizes and respects Korea in many aspects.” In the first four years after the acquisition, revenue doubled, operating profit grew sevenfold, and trust between the employees’ union and management improved.26   

Tata Chemicals took a similar approach when it purchased British soda ash producer Brunner Mond and its Kenyan subsidy Magadi Soda. To maintain the existing company culture at Brunner Mond and Magadi Soda, Tata Chemicals did not change the companies’ names or logos, kept all existing senior executives in place, and made it clear that all major decisions would be made jointly between Brunner Mond, Magadi Soda, and Tata Chemi-cals. To ensure a smooth ownership transition, executives from all three companies jointly created a plan of action for the first 100 days post-acquisition. Since then, Tata Chemicals has leveraged resources from all three companies to build strong relationships with exter-nal suppliers, expand global growth opportunities, and coordinate sales and operations.27 

■ Interaction between National and Organizational CulturesThere is a widely held belief that organizational culture tends to moderate or erase the impact of national culture. The logic of such conventional wisdom is that if a U.S. MNC set up operations in, say, France, it would not be long before the French employees began to “think like Americans.” In fact, evidence is accumulating that just the opposite may be true. Hofstede’s research found that the national cultural values of employees have a significant impact on their organizational performance, and that the cultural values employees bring to the workplace with them are not easily changed by the organization. So, for example, while some French employees would have a higher power distance than Swedes and some a lower power distance, chances are “that if a company hired locals in Paris, they would, on the whole, be less likely to challenge hierarchical power than would the same number of locals hired in Stockholm.”28

Andre Laurent’s research supports Hofstede’s conclusions.29 He found that cultural differences are actually more pronounced among foreign employees working within the same multinational organization than among personnel working for firms in their native lands. Nancy Adler summarized these research findings as follows:

When they work for a multinational corporation, it appears that Germans become more German, Americans become more American, Swedes become more Swedish, and so on. Surprised by these results, Laurent replicated the research in two other multinational cor-porations, each with subsidiaries in the same nine Western European countries and the United States. Similar to the first company, corporate culture did not reduce or eliminate national differences in the second and third corporations. Far from reducing national differ-ences, organization culture maintains and enhances them.30

There often are substantial differences between the organizational cultures of dif-ferent subsidiaries, and, of course, this can cause coordination problems. For example, when Lucent Technologies, Inc., of Murray Hill, New Jersey, merged with Alcatel SA of Paris, France, both parties failed to realize some of the cultural differences between themselves and their new partners. Leadership concerns due to cultural misunderstand-ings arose from the very beginning of the merger. Frenchman Serge Tchuruk was

Chapter 6 Organizational Cultures and Diversity 187

appointed chair of the combined company, while American Patricia Russo was appointed as CEO. In France, the chair is often seen as the company’s leader, while in the United States, the CEO is viewed as the person highest in command. This cultural difference led to confusion as to whether Russo or Tchuruk was actually in charge.31 Additionally, Patricia Russo did not speak French, despite leading a now-French company, resulting in additional confusion.32   

When the combined company faced financial crises, the cultural response differed greatly between the American and French executives, leading to further disagreement. In the United States, jobs are often cut when finances are pressured, whereas in France, companies tend to reach out to the government for assistance. As a result, Alcatel-Lucent was unable to cut costs, but also unable to secure government assistance.33 Local restric-tions, overlooked before the merger, further hindered the combined company’s success and added to the financial strain; in Bonn, Germany, for example, the company was required to keep both Lucent’s and Alcatel’s original offices open, despite employing only a combined 75 employees.34 After just a few years, both top executives were forced to step aside. The merger never did result in profitability for the company; for all seven years that Alcatel-Lucent operated independently before being acquired by Nokia in 2015, the company posted negative cash flows.

In examining and addressing the differences between organizational cultures, Hofstede provided the early database of a set of proprietary cultural-analysis techniques and pro-grams known as DOCSA (Diagnosing Organizational Culture for Strategic Application). This approach identifies the dimensions of organizational culture summarized in Table 6–1.

Table 6–1Dimensions of Corporate Culture

Motivation

Activities Outputs

To be consistent and precise. To strive for accuracy and To be pioneers. To pursue clear aims and objectives. attention to detail. To refine and perfect. Get it right. To innovate and progress. Go for it.

Relationship

Job Person

To put the demands of the job before the needs of To put the needs of the individual before the needs the individual. of the job.

Identity

Corporate Professional

To identify with and uphold the expectations of the To pursue the aims and ideals of each professional practice. employing organizations.

Communication

Open Closed

To stimulate and encourage a full and free exchange To monitor and control the exchange and accessibility of of information and opinion. information and opinion.

Control

Tight Loose

To comply with clear and definite systems and procedures. To work flexibly and adaptively according to the needs of the situation.

Conduct

Conventional Pragmatic

To put the expertise and standards of the employing To put the demands and expectations of customers first. To organization first. To do what we know is right. do what they ask.

Source: Adapted from a study by the Diagnosing Organizational Culture for Strategic Application (DOCSA) group and reported in Lisa Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), p. 146.

188 Part 2 The Role of Culture

It was found that when cultural comparisons were made between different subsidiaries of an MNC, different cultures often existed in each one. Such cultural differences within an MNC could reduce the ability of units to work well together. An example is provided in Figure 6–1, which shows the cultural dimensions of a California-based MNC and its Euro-pean subsidiary as perceived by the Europeans. A close comparison of these perceptions reveals some startling differences.

The Europeans viewed the culture in the U.S. facilities as only slightly activities oriented (see Table 6–1 for a description of these dimensions), but they saw their own European operations as much more heavily activities oriented. The U.S. operation was viewed as moderately people oriented, but their own relationships were viewed as very job oriented. The Americans were seen as having a slight identification with their own organization, while the Europeans had a much stronger identification. The Americans were perceived as being very open in their communications; the Europeans saw them-selves as moderately closed. The Americans were viewed as preferring very loose control, while the Europeans felt they preferred somewhat tight control. The Americans were seen as somewhat conventional in their conduct, while the Europeans saw themselves as somewhat pragmatic. If these perceptions are accurate, then it obviously would be neces-sary for both groups to discuss their cultural differences and carefully coordinate their activities to work well together.

This analysis is relevant to multinational alliances. It shows that even though an alliance may exist, the partners will bring different organizational cultures with them.

Figure 6–1Europeans’ Perception of the Cultural Dimensions of U.S. Operations (A) and European Operations (B) of the Same MNC

Source: Adapted from a study by the Diagnosing Organizational Culture for Strategic Application (DOCSA) group and reported in Lisa Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), pp. 147–148.

30 31 32 33 34 35 36 37 38 39 40 41 42

Activities

Job

Corporate

Open

Tight

Conventional

Outputs

Person

Professional

Closed

Loose

Pragmatic

30 31 32 33 34 35 36 37 38 39 40 41 42

Activities

Job

Corporate

Open

Tight

Conventional

Outputs

Person

Professional

Closed

Loose

Pragmatic

(A)

(B)

Chapter 6 Organizational Cultures and Diversity 189

Lessem and Neubauer, who have portrayed Europe as offering four distinct ways of deal-ing with multiculturalism (based on the United Kingdom, French, German, and Italian characteristics), provide an example in Table 6–2, which briefly describes each of these sets of cultural characteristics. A close examination of the differences highlights how difficult it can be to do business with two or more of these groups because each group perceives things differently from the others. Another example is the way in which nego-tiations occur between groups; here are some contrasts between French and Spanish negotiators:35

French Spanish

Look for a meeting of minds. Look for a meeting of people.Intellectual competence is very important. Social competence is very important.Persuasion through carefully prepared and Persuasion through emotional appeal is skilled rhetoric is employed. employed.Strong emphasis is given to a logical Socialization always precedes negotiations, presentation of one’s position coupled which are characterized by an exchange of with well-reasoned, detailed solutions. grand ideas and general principles.A contract is viewed as a well-reasoned A contract is viewed as a long-lasting transaction. relationship.Trust emerges slowly and is based on the Trust is developed on the basis of frequent evaluation of perceived status and and warm interpersonal contact and intellect. transaction.

Such comparisons also help explain why it can be difficult for an MNC with a strong organizational culture to break into foreign markets where it is not completely familiar with divergent national cultures. The International Management in Action “Doing Things the Walmart Way” provides an illustration. When dealing with these challenges, MNCs must work hard to understand the nature of the country and institutional practices to both moderate and adapt their operations in a way that accommodates the company and cus-tomer base.

Table 6–2European Management Characteristics

Characteristic

Western Northern Eastern Southern Dimension (United Kingdom) (France) (Germany) (Italy)

Corporate Commercial Administrative Industrial FamilialManagement attributes Behavior Experiential Professional Developmental Convivial Attitude Sensation Thought Intuition FeelingInstitutional models Function Salesmanship Control Production Personnel Structure Transaction Hierarchy System NetworkSocietal ideas Economics Free market Dirigiste Social market Communal Philosophy Pragmatic Rational Holistic HumanisticCultural images Art Theatre Architecture Music Dance Culture (Anglo-Saxon) (Gallic) (Germanic) (Latin)

Source: Adapted from Ronald Lessen and Fred Neubauer, European Management Systems (McGraw-Hill, London, 1994), and reported in Lisa Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), p. 149.

190

International Management in Action

Doing Things the Walmart Way; Germans Say, “Nein, vielen Dank”

Across the globe, Walmart employees engage in the “Walmart cheer” to start their day. It is a way to show inclusivity and express their pride in the company, and can be heard in many different languages. Walmart not only operates in more than two dozen countries but is also a leader in diversity in the workplace. In 2015, Walmart was named a noteworthy company for diversity by DiversityInc magazine, and, in 2012, then-CEO Mike Duke was inducted into the CPG/Retail Diversity Hall of Fame. However, despite Walmart’s multinational presence and representation, its internal culture proved to be less than satisfactory to the German market. Walmart has experienced a fair share of negative PR over the years, so it is no surprise that some may have adverse reactions to news of Walmart moving into the neighborhood. Before the unflattering buzz, Walmart sometimes discovers that even the best intentions can fall flat. Walmart entered the German market in 1997 and stressed the idea of friendly service with a smile, where the customers always come first. Even before the employees walked onto the sales room floor, employee dissatisfaction became clear. The pamphlet that outlined the workplace code of ethics was simply translated from English to German, but the message was not expressed the way Walmart had intended. It warned employees of potential supervisor-employee relationships, implying sexual harassment, and encouraged reports of “improper behavior,” which spoke more to legal matters. The Germans interpreted this to mean that there was a ban on any romantic relationships in the workplace and saw the  reporting methods as more of a way to rat out co-workers than benefit the company. As we saw in  Chapter 3, ethical values in one country may not be  the same as in another, and Walmart experienced this firsthand. Another employee relations issue that arose dealt with local practices. Walmart has never been open to unionized employees, so when the German operations began dealing with workers’ councils and adhering to

co-determination rules, a common practice there, Walmart was less than willing to listen to suggestions as to how to improve employee working conditions. As if this was not enough, Walmart soon experienced problems with customer relations as well. Doing things the Walmart way included smiling at customers and assisting them by bagging their grocer-ies at the Supercenter locations. This policy presented problems in the German environment. Male employees who were ordered to smile at customers were often seen as flirtatious to male customers, and Germans do not like strangers handling their groceries. These are just a few reasons that customers did not enjoy their shopping experience. This does not mean that every-thing Walmart attempted was wrong. Products that are popular in Germany were available on the shelves in place of products that would be common in other countries. Enhanced distribution processes guaranteed availability of most requested items, and efficiency was pervasive. Despite some successes and good intentions and numerous attempts to improve the German stores, the Walmart culture proved to be a poor fit for the German market, and Walmart vacated Germany in 2006. Unfor-tunately, Walmart learned the hard way that in the retail or service industry, local customs are often more important than a strong, unyielding organizational cul-ture. The challenge to incorporate everyone into the Walmart family certainly fell short of expectations. If the Walmart culture does not become more flexible, or locally relevant, it may be chastised from numerous global markets, and the company could hear, “no, thank you” in even more languages than German as it continues to expand. (See In-Depth Integrative Case 2.2 at the end of Part Two for more detail on Walmart’s experiences around the world.)

Source: Mark Landler and Michael Barbaro, “Wal-Mart Finds That Its For-mula Doesn’t Fit Every Culture,” New York Times, August 2, 2006, http://www.nytimes.com/2006/08/02/business/worldbusiness/02walmart.html.

■ Organizational Cultures in MNCsOrganizational cultures of MNCs are shaped by a number of factors, including the cul-tural preferences of the leaders and employees. In the international arena, some MNCs have subsidiaries that, except for the company logo and reporting procedures, would not be easily recognizable as belonging to the same multinational.36

Given that many recent international expansions are a result of mergers or acquisi-tion, the integration of these organizational cultures is a critical concern in international

Chapter 6 Organizational Cultures and Diversity 191

management. Numeroff and Abrahams have suggested that there are four steps that are critical in this process:

1. The two groups have to establish the purpose, goal, and focus of their merger.2. Then they have to develop mechanisms to identify the most important organi-

zational structures and management roles.3. They have to determine who has authority over the resources needed for get-

ting things done.4. They have to identify the expectations of all involved parties and facilitate

communication between both departments and individuals in the structure.37

Companies all over the world are finding out firsthand that there is more to an international merger or acquisition than just sharing resources and capturing greater market share. Differences in workplace cultures sometimes temporarily overshadow the overall goal of long-term success of the newly formed entity. With the proper manage-ment framework and execution, successful integration of cultures is not only possible, but also the most preferable paradigm in which to operate. It is the role of the sponsors and managers to keep sight of the necessity to create, maintain, and support the notion of a united front. It is only when this assimilation has occurred that an international merger or acquisition can truly be labeled a success.38

In addition, there are three aspects of organizational functioning that seem to be especially important in determining MNC organizational culture: (1) the general relationship between the employees and their organization; (2) the hierarchical sys-tem of authority that defines the roles of managers and subordinates; and (3) the general views that employees hold about the MNC’s purpose, destiny, goals, and their place in them.39

When examining these dimensions of organizational culture, Trompenaars sug-gested the use of two continua: One distinguishes between equity and hierarchy; the other examines orientation to the person and the task. Along these continua, which are shown in Figure 6–2, he identifies and describes four different types of organizational cultures: family, Eiffel Tower, guided missile, and incubator.40

In practice, of course, organizational cultures do not fit neatly into any of these four, but the groupings can be useful in helping examine the bases of how individuals relate to each other, think, learn, change, are motivated, and resolve conflict. The fol-lowing discussion examines each of these cultural types.

Fulfillment-orientedculture

INCUBATOR

Project-orientedculture

GUIDED MISSILE

EIFFEL TOWER

Role-orientedculture

FAMILY

Power-orientedculture

PersonEmphasis

TaskEmphasis

Equity

Hierarchy

Figure 6–2Organizational Cultures

Source: Adapted from Fons Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Burr Ridge, IL: Irwin, 1994), p. 154.

192 Part 2 The Role of Culture

Family CultureFamily culture is characterized by a strong emphasis on hierarchy and orientation to the person. The result is a family-type environment that is power-oriented and headed by a leader who is regarded as a caring parent and one who knows what is best for the per-sonnel. Trompenaars found that this organizational culture is common in countries such as Turkey, Pakistan, Venezuela, China, Hong Kong, and Singapore.41

In this culture, personnel not only respect the individuals who are in charge but look to them for both guidance and approval as well. In turn, management assumes a paternal relationship with personnel, looks after employees, and tries to ensure that they are treated well and have continued employment. Family culture also is characterized by traditions, customs, and associations that bind together the personnel and make it difficult for outsiders to become members. When it works well, family culture can catalyze and multiply the energies of the personnel and appeal to their deepest feelings and aspirations. When it works poorly, members of the organization end up supporting a leader who is ineffective and drains their energies and loyalties.

This type of culture is foreign to most managers in the United States, who believe in valuing people based on their abilities and achievements, not on their age or position in the hierarchy. As a result, many managers in U.S.-based MNCs fail to understand why senior-level managers in overseas subsidiaries might appoint a relative to a high-level, sensitive position even though that individual might not appear to be the best qualified for the job. They fail to realize that family ties are so strong that the appointed relative would never do anything to embarrass or let down the family member who made the appointment. Here is an example:

A Dutch delegation was shocked and surprised when the Brazilian owner of a large manufacturing company introduced his relatively junior accountant as the key coordina-tor of a $15 million joint venture. The Dutch were puzzled as to why a recently qualified accountant had been given such weighty responsibilities, including the receipt of their own money. The Brazilians pointed out that the young man was the best possible choice among 1,200 employees since he was the nephew of the owner. Who could be more trustworthy than that? Instead of complaining, the Dutch should consider themselves lucky that he was available.42

Eiffel Tower CultureEiffel Tower culture is characterized by strong emphasis on hierarchy and orientation to the task. Under this organizational culture, jobs are well defined, employees know what they are supposed to do, and everything is coordinated from the top. As a result, this culture—like the Eiffel Tower itself—is steep, narrow at the top, and broad at the base. Unlike family culture, where the leader is revered and considered to be the source of all power, the person holding the top position in the Eiffel Tower culture could be replaced at any time, and this would have no effect on the work that organization members are doing or on the organization’s reasons for existence. In this culture, rela-tionships are specific, and status remains with the job. Therefore, if the boss of an Eiffel Tower subsidiary were playing golf with a subordinate, the subordinate would not feel any pressure to let the boss win. In addition, these managers seldom create off-the-job relationships with their people because they believe this could affect their rational judgment. In fact, this culture operates very much like a formal hierarchy—impersonal and efficient.

Each role at each level of the hierarchy is described; rated for its difficulty, com-plexity, and responsibility; and has a salary attached to it. Then follows a search for a person to fill it. In considering applicants for the role, the personnel department will treat everyone equally and neutrally, match the person’s skills and aptitudes with the job requirements, and award the job to the best fit between role and person. The same pro-cedure is followed in evaluations and promotions.43

family cultureA culture that is characterized by a strong emphasis on hierarchy and orientation to the person.

Eiffel Tower cultureA culture that is characterized by strong emphasis on hierarchy and orientation to the task.

Chapter 6 Organizational Cultures and Diversity 193

Eiffel Tower culture most commonly is found in northwestern European countries. Examples include Denmark, Germany, and the Netherlands. The way that people in this culture learn and change differs sharply from that in the family culture. Learning involves the accumulation of skills necessary to fit a role, and organizations will use qualifications in deciding how to schedule, deploy, and reshuffle personnel to meet their needs. The organization also will employ such rational procedures as assessment centers, appraisal systems, training and development programs, and job rotation in man-aging its human resources. All these procedures help ensure that a formal hierarchic or bureaucracy-like approach works well. When changes need to be made, however, the Eiffel Tower culture often is ill-equipped to handle things. Manuals must be rewritten, procedures changed, job descriptions altered, promotions reconsidered, and qualifica-tions reassessed.

Because the Eiffel Tower culture does not rely on values that are similar to those in most U.S. MNCs, U.S. expatriate managers often have difficulty initiating change in this culture. As Trompenaars notes:

An American manager responsible for initiating change in a German company described to me the difficulties he had in making progress, although the German managers had discussed the new strategy in depth and made significant contributions to its formulation. Through informal channels, he had eventually discovered that his mistake was not having formalized the changes to structure or job descriptions. In the absence of a new organization chart, this Eiffel Tower company was unable to change.44

Guided Missile CultureGuided missile culture is characterized by strong emphasis on equality in the work-place and orientation to the task. This organizational culture is oriented to work, which typically is undertaken by teams or project groups. Unlike the Eiffel Tower culture, where job assignments are fixed and limited, personnel in the guided missile culture do whatever it takes to get the job done. This culture gets its name from high-tech orga-nizations such as the National Aeronautics and Space Administration (NASA), which pioneered the use of project groups working on space probes that resembled guided missiles. In these large project teams, more than a hundred different types of engineers often were responsible for building, say, a lunar landing module. The team member whose contribution would be crucial at any given time in the project typically could not be known in advance. Therefore, all types of engineers had to work in close harmony and cooperate with everyone on the team.

To be successful, the best form of synthesis must be used in the course of working on the project. For example, in a guided missile project, formal hierarchical considerations are given low priority, and individual expertise is of greatest importance. Additionally, all team members are equal (or at least potentially equal) because their relative contri-butions to the project are not yet known. All teams treat each other with respect because they may need the other for assistance. This egalitarian and task-driven organizational culture fits well with the national cultures of the United States and United Kingdom, which helps explain why high-tech MNCs commonly locate their operations in these countries.

Unlike family and Eiffel Tower cultures, change in guided missile culture comes quickly. Goals are accomplished, and teams are reconfigured and assigned new objec-tives. People move from group to group, and loyalties to one’s profession and project often are greater than loyalties to the organization itself.

Trompenaars found that the motivation of those in guided missile cultures tends to be more intrinsic than just concern for money and benefits. Team members become enthusiastic about, and identify with, the struggle toward attaining their goal. For example, a project team that is designing and building a new computer for the Asian market may be highly motivated to create a machine that is at the leading edge of

guided missile cultureA culture that is characterized by strong emphasis on equality in the workplace and orientation to the task.

194 Part 2 The Role of Culture

technology, user-friendly, and likely to sweep the market. Everything else is second-ary to this overriding objective. Thus, both intragroup and intergroup conflicts are minimized and petty problems between team members set aside; everyone is so com-mitted to the project’s main goal that no one has time for petty disagreements. As Trompenaars notes:

This culture tends to be individualistic since it allows for a wide variety of differently spe-cialized persons to work with each other on a temporary basis. The scenery of faces keeps changing. Only the pursuit of chosen lines of personal development is constant. The team is a vehicle for the shared enthusiasm of its members, but is itself disposable and will be discarded when the project ends. Members are garrulous, idiosyncratic, and intelligent, but their mutuality is a means, not an end. It is a way of enjoying the journey. They do not need to know each other intimately, and may avoid doing so. Management by objectives is the language spoken, and people are paid for performance.45

Incubator CultureIncubator culture is the fourth major type of organizational culture that Trompenaars identified, and it is characterized by strong emphasis on equality and personal orientation. This culture is based heavily on the existential idea that organizations per se are second-ary to the fulfillment of the individuals within them. This culture is based on the prem-ise that the role of organizations is to serve as incubators for the self-expression and self-fulfillment of their members; as a result, this culture often has little formal structure. Participants in an incubator culture are there primarily to perform roles such as confirm-ing, criticizing, developing, finding resources for, or helping complete the development of an innovative product or service. These cultures often are found among start-up firms in Silicon Valley, California, or Silicon Glen, Scotland. These incubator-type organiza-tions typically are entrepreneurial and often founded and made up by a creative team who left larger, Eiffel Tower-type employers. They want to be part of an organization where their creative talents will not be stifled.

Incubator cultures often create environments where participants thrive on an intense, emotional commitment to the nature of the work. For example, the group may be in the process of gene splitting that could lead to radical medical break-throughs and extend life. Often, personnel in such cultures are overworked, and the enterprise typically is underfunded. As breakthroughs occur and the company gains stability, however, it starts moving down the road toward commercialization and profit. In turn, this engenders the need to hire more people and develop formalized procedures for ensuring the smooth flow of operations. In this process of growth and maturity, the unique characteristics of the incubator culture begin to wane and disap-pear, and the culture is replaced by one of the other types (family, Eiffel Tower, or guided missile).

As noted, change in the incubator culture often is fast and spontaneous. All par-ticipants are working toward the same objective. Because there may not yet be a customer who is using the final output, however, the problem itself often is open to redefinition, and the solution typically is generic, aimed at a universe of applications. Meanwhile, motivation of the personnel remains highly intrinsic and intense, and it is common to find employees working 70 hours a week—and loving it. The participants are more concerned with the unfolding creative process than they are in gathering power or ensur-ing personal monetary gain. In sharp contrast to the family culture, leadership in this incubator culture is achieved, not gained by position.

The four organizational cultures described by Trompenaars are “pure” types and seldom exist in practice. Rather the types are mixed and, as shown in Table 6–3, overlaid with one of the four major types of culture dominating the corporate scene. Recently, Trompenaars and his associates have created a questionnaire designed to identify national patterns of corporate culture, as shown in Figure 6–3.

incubator cultureA culture that is characterized by strong emphasis on equality and orientation to the person.

Chapter 6 Organizational Cultures and Diversity 195

Table 6–3Summary Characteristics of the Four Corporate Cultures

Corporate Culture

Family

Diffuse relationships to organic whole to which one is bonded.

Status is ascribed to parent figures who are close and powerful.

Intuitive, holistic, lateral, and error correcting.

Family members.

“Father” changes course.Intrinsic satisfaction in  being loved and respected.Management by subjectives.Turn other cheek, save other’s face, do not lose power game.

Eiffel Tower

Specific role in mechanical system of required interaction.

Status is ascribed to superior roles that are distant yet powerful.

Logical, analytical, vertical, and rationally efficient.

Human resources.

Change rules and procedures.Promotion to greater position, larger role.

Management by job description.Criticism is accusation of irrationalism unless there are procedures to arbitrate conflicts.

Guided Missile

Specific tasks in cybernetic system targeted on shared objectives.Status is achieved by project group members who con-tribute to targeted goal.Problem centered, professional, practical, and cross-disciplinary.Specialists and experts.Shift aim as target moves.Pay or credit for performance and problems solved. Management by objectives.

Constructive task-related only, then admit error and correct fast.

Incubator

Diffuse, spontaneous relationships growing out of shared creative process.Status is achieved by individuals exempli-fying creativity and growth.

Process oriented, creative, ad hoc, and inspirational.

Co-creators.

Improvise and attune.

Participation in the process of creating new realities.Management by enthusiasm.Improve creative idea, not negate it.

Characteristic

Relationships between employees

Attitude toward authority

Ways of thinking and learning

Attitudes toward peopleWays of changing

Ways of motivating and rewarding

Criticism and conflict resolution

Source: Adapted from Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diversity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 183.

Source: Adapted from Fons Trompenaars and Charles Hampden-Turner, Riding the Waves of Culture: Understanding Diversity in Global Business, 2nd ed. (New York: McGraw-Hill, 1998), p. 184.

SwitzerlandSweden

Norway

Ireland

HungaryNew Zealand

MexicoFinland

ItalyVenezuela

NigeriaAustraliaGreece

Belgium

Israel

SpainIndia

South Korea

GermanyFrance

CanadaUK

USA

Egalitarian

Hierarchical

Person Task

Denmark

Figure 6–3National Patterns of Corporate Culture

196

■ Managing Multiculturalism and DiversityAs the International Management in Action box on Matsushita indicates, success in the international arena often is greatly determined by an MNC’s ability to manage both multiculturalism and diversity.46 Both domestically and internationally, organizations find themselves leading workforces that have a variety of cultures (and subcultures) and con-sist of a largely diverse population of women, men, young and old people, blacks, whites, Latins, Asians, Arabs, Indians, and many others.

Phases of Multicultural DevelopmentThe effect of multiculturalism and diversity will vary depending on the stage of the firm in its international evolution. Figure 6–4  depicts the characteristics of the major phases in this evolution. For example, Adler has noted that international cultural diversity has minimal impact on domestic organizations, although domestic multiculturalism has a highly significant impact. As firms begin exporting to foreign clients, however, and become what she calls “international corporations” (Phase II in Figure 6–4), they must

International Management in Action

Matsushita Goes Global www.panasonic.com

In recent years, growing numbers of multinationals have begun to expand their operations, realizing that if they do not increase their worldwide presence now, they likely will be left behind in the near future. In turn, this has created a number of different challenges for these MNCs, including making a fit between their home orga-nizational culture and the organizational cultures at local levels in the different countries where the MNC oper-ates. Matsushita provides an excellent example of how to handle this challenge with its macromicro approach. This huge, Japanese MNC has developed a number of guidelines that it uses in setting up and operating its more than 150 industrial units. At the same time, the company complements these macro guidelines with on-site micro techniques that help create the most appro-priate organizational culture in the subsidiary. At the macro level, Matsushita employs six overall guidelines that are followed in all locales: (1) Be a good corporate citizen in every country by, among other things, respecting cultures, customs, and languages. (2)  Give overseas operations the best manufacturing technology the company has available. (3) Keep the expa-triate head count down, and groom local management to take over. (4) Let operating plants set their own rules, fine-tuning manufacturing processes to match the skills of the workers. (5) Create local research and develop-ment to tailor products to markets. (6) Encourage com-petition between overseas outposts and plants back home. Working within these macro guidelines, Matsu-shita then allows each local unit to create its own cul-ture. The Malaysian operations are a good example. Matsushita has erected 23 subsidiaries in Malaysia that collectively consist of about 30,000 employees. Less than 1 percent of the employee population, however, is Japanese. From these Malaysian operations, Matsushita has been producing more than 1.3 million televisions

and 1.8 million air conditioners annually, and 75 percent of these units are shipped overseas. To produce this output, local plants reflect Malaysia’s cultural mosaic of Muslim Malays, ethnic Chinese, and Indians. To accom-modate this diversity, Matsushita cafeterias offer Malay-sian, Chinese, and Indian food, and to accommodate Muslim religious customs, Matsushita provides special prayer rooms at each plant and allows two prayer ses-sions per shift. How well does this Malaysian workforce perform for the Japanese MNC? In the past, the Malaysian plants’ slogan was “Let’s catch up with Japan.” Today, how-ever, these plants frequently outperform their Japa-nese counterparts in both quality and efficiency. The comparison with Japan no longer is used. Additionally, Matsushita has found that the Malaysian culture is very flexible, and the locals are able to work well with almost any employer.  Today, Matsushita faces a number of important challenges, including remaining profitable in a slow-growth, high-cost Japanese economy. Fortunately, this MNC is doing extremely well overseas, which is buy-ing it time to get its house in order back home. A great amount of this success results from the MNC’s ability to nurture and manage overseas organizational cul-tures (such as in Malaysia) that are both diverse and highly productive.

Source: P. Christopher Earley and Harbir Singh, “International and Intercultural Management Research: What’s Next,” Academy of Man-agement Journal, June 1995, pp. 327–340; Karen Lowry Miller, “Siemens Shapes Up,” BusinessWeek, May 1, 1995, pp. 52–53; Christine M. Riordan and Robert J. Vandenberg, “A Central Question in Cross-Cultural Research: Do Employees of Different Cultures Interpret Work-Related Measures in an Equivalent Manner?” Journal of Management 20, no. 3 (1994), pp. 643–671; Brenton R. Schlender, “Matsushita Shows How to Go Global,” Fortune, July 11, 1994, pp. 159–166.

Chapter 6 Organizational Cultures and Diversity 197

adapt their approach and products to those of the local market. For these international firms, the impact of multiculturalism is highly significant. As companies become what she calls “multinational corporations” (Phase III), they often find that price tends to dominate all other considerations and the direct impact of culture may lessen slightly. For those who continue this international evolution and become full-blown “global corporations” (Phase IV), the impact of culture again becomes extremely important.47

As shown in Figure 6–5, international cultural diversity traditionally affects neither the domestic firm’s organizational culture nor its relationship with its customers

Phase I:Domestic

Corporations

Orientation:Product/Service

Profit Margin:High

Perspective:Ethnocentric

Structure:Functional Divisions

Competitive Strategy:Domestic

Market:Small/Domestic

R&D Sales:High

Exports:None

Technology:Proprietary

Competitors:None

Phase II:InternationalCorporations

Orientation:Market

Profit Margin:Decreasing

Perspective:Polycentric

Structure:Functional Divisions

Competitive Strategy:Multidomestic

Market:Large/

Multidomestic

R&D Sales:Decreasing

Exports:Growing

Technology:Shared

Competitors:Few

Phase III:MultinationalCorporations

Orientation:Price

Profit Margin:Very Low

Perspective:Multinational

Structure:Multinational Lines

Competitive Strategy:Multinational

Market:Large/Multinational

R&D Sales:Very Low

Exports:Large/Saturated

Technology:Widely Shared

Competitors:Many

Phase IV:Global

Corporations

Orientation:Strategy

Profit Margin:High, But

Decreasing

Perspective:Multicentric

Structure:Global Alliances/

Hierarchy

Competitive Strategy:Global

Market:Largest/Global

R&D Sales:Very High

Exports:Imports &Exports

Technology:InstantlyShared

Competitors:Significant

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from Nancy J. Adler, International Dimensions of Organizational Behavior, 5th ed. © 2008 South-Western, a part of Cengage Learning, Inc.

Figure 6–4International Corporation Evolution

Phase 1

Domesticfirms

Phase 2

Internationalfirms

Phase 3

Multinationalfirms

Phase 4

Globalfirms

Source: From Nancy J. Adler, International Dimensions of Organizational Behavior, 5th ed. © 2008 South-Western, a part of Cengage Learning, Inc. Reproduced by permission. www.cengage.com/permissions.

Figure 6–5Locations of International Cross-Cultural Interaction

198 Part 2 The Role of Culture

or clients. These firms work domestically, and only domestic multiculturalism has a  direct impact on their dynamics as well as on their relationship to the external environment.

Conversely, among international firms, which focus on exporting and producing abroad, cultural diversity has a strong impact on their external relationships with poten-tial buyers and foreign employees. In particular, these firms rely heavily on expatriate managers to help manage operations; as a result, the diversity focus is from the inside out. This is the reverse of what happens in multinational firms, where there is less emphasis on managing cultural differences outside the firm and more on managing cul-tural diversity within the company. This is because multinational firms hire personnel from all over the world. As shown in Figure 6–5, this results in a diversity focus that is primarily internal.

Global firms need both an internal and an external diversity focus (again see Figure 6–5). To be effective, everyone in the global organization needs to develop cross-cultural skills that allow them to work effectively with internal personnel as well as external customers, clients, and suppliers.

Types of MulticulturalismFor the international management arena, there are several ways of examining multicul-turalism and diversity. One is to focus on the domestic multicultural and diverse work-force that operates in the MNC’s home country. In addition to domestic multiculturalism, there is the diverse workforce in other geographic locales, and increasingly common are the mix of domestic and overseas personnel found in today’s MNCs. The following discussion examines both domestic and group multiculturalism and the potential prob-lems and strengths.

Domestic Multiculturalism It is not necessary for today’s organizations to do busi-ness in another country to encounter people with diverse cultural backgrounds. Cultur-ally distinct populations can be found within organizations almost everywhere in the world. In Singapore, for example, there are four distinct cultural and linguistic groups: Chinese, Eurasian, Indian, and Malay. In Switzerland, there are four distinct ethnic communities: French, German, Italian, and Romansch. In Belgium, there are two linguistic groups: French and Flemish. In the United States, millions of first-generation immigrants have brought both their languages and their cultures. In Los Angeles, for example, there are more Samoans than on the island of Samoa, more Israelis than in any other city outside Israel, and more first- and second-generation Mexicans than in any other city except Mexico City. In Miami, over one-half the population is Latin, and most residents speak Spanish fluently. More Puerto Ricans live in New York City than in Puerto Rico.

It is even possible to examine domestic multiculturalism within the same ethnic groups. For example, Lee, after conducting research in Singapore among small Chinese family businesses, found that the viewpoints of the older generation differ sharply from those of the younger generation.48  Older generations tend to stress hierarchies, ethics, group dynamics, and the status quo, while the younger generations focus on worker responsibility, strategy, individual performance, and striving for new horizons. These differences can slow organizational processes as one generation considers the other to be ineffective in its methods. Managers, therefore, need to consider employees on an individual basis and try to compile techniques that convey a common message, ultimately maximizing productivity while satisfying everyone across the ages. In short, there is considerable multicultural diversity domestically in organizations throughout the world, and this trend will continue. For example, the U.S. civilian labor force of the next decade will change dramatically in ethnic composition. In particular, there will be a significantly lower percentage of white males in the workforce and a growing percentage of women, African Americans, Hispanics, and Asians.

Chapter 6 Organizational Cultures and Diversity 199

Group Multiculturalism There are a number of ways that diverse groups can be cat-egorized. Four of the most common include

1. Homogeneous groups, in which members have similar backgrounds and gen-erally perceive, interpret, and evaluate events in similar ways. An example would be a group of male German bankers who are forecasting the economic outlook for a foreign investment.

2. Token groups, in which all members but one have the same background. An example would be a group of Japanese retailers and a British attorney who are looking into the benefits and shortcomings of setting up operations in Bermuda.

3. Bicultural groups, in which two or more members represent each of two distinct cultures. An example would be a group of four Mexicans and four Canadians who have formed a team to investigate the possibility of investing in Russia.

4. Multicultural groups, in which there are individuals from three or more different ethnic backgrounds. An example is a group of three American, three German, three Uruguayan, and three Chinese managers who are looking into mining operations in Chile.

As the diversity of a group increases, the likelihood of all members perceiving things in the same way decreases sharply. Attitudes, perceptions, and communication in general may be a problem. On the other hand, there also are significant advantages associated with the effective use of multicultural, diverse groups. Sometimes, local laws require a certain level of diversity in the workplace. More and more, people are moving to other countries to find the jobs that match their skills. International managers need to be cognizant of the likelihood that they will oversee a group that represents many cul-tures, not just the pervasive culture associated with that country. The following sections examine the potential problems and the advantages of workplace diversity.

Potential Problems Associated with DiversityOverall, diversity may cause a lack of cohesion that results in the unit’s inability to take concerted action, be productive, and create a work environment that is conducive to both efficiency and effectiveness. These potential problems are rooted in people’s attitudes. An example of an attitudinal problem in a diverse group may be the mistrust of others. For example, many U.S. managers who work for Japanese operations in the United States complain that Japanese managers often huddle together and discuss matters in their native language. The U.S. managers wonder aloud why the Japanese do not speak English. What are they talking about that they do not want anyone else to hear? In fact, the Japanese often find it easier to communicate among themselves in their native language, and because no Americans are present, the Japanese managers ask why they should speak English. If there is no reason for anyone else to be privy to our conversation, why should we not opt for our own language? Nevertheless, such practices do tend to promote an atmosphere of mistrust.

Another potential problem may be perceptual. Unfortunately, when culturally diverse groups come together, they often bring preconceived stereotypes with them. In initial meetings, for example, engineers from economically advanced countries often are perceived as more knowledgeable than those from less advanced countries. In turn, this perception can result in status-related problems because some of the group initially are regarded as more competent than others and likely are accorded status on this basis. As the diverse group works together, erroneous perceptions often are corrected, but this takes time. In one diverse group consisting of engineers from a major Japanese firm and a world-class U.S. firm, a Japanese engineer was assigned a technical task because of his stereotyped technical educational background. The group soon realized that this particular

homogeneous groupA group in which members have similar backgrounds and generally perceive, interpret, and evaluate events in similar ways.

token groupsA group in which all members but one have the same background, such as a group of Japanese retailers and a British attorney.

bicultural groupA group in which two or more members represent each of two distinct cultures, such as four Mexicans and four Taiwanese who have formed a team to investigate the possibility of investing in a venture.

multicultural groupA group in which there are individuals from three or more different ethnic backgrounds, such as three American, three German, three Uruguayan, and three Chinese managers who are looking into mining operations in South Africa.

200 Part 2 The Role of Culture

Japanese engineer was not capable of doing this job because for the last four years, he had been responsible for coordinating routine quality and no longer was on the techno-logical cutting edge. His engineering degree from the University of Tokyo had resulted in the other members perceiving him as technically competent and able to carry out the task; this perception proved to be incorrect.

A related problem is inaccurate biases. For example, it is well known that Japanese companies depend on groups to make decisions. Entrepreneurial behavior, individualism, and originality are typically downplayed.49  However, in a growing number of Japanese firms, this stereotype is proving to be incorrect.50  Here is an example.

Mr. Uchida, a 28-year-old executive in a small software company, dyes his hair brown, keeps a sleeping bag by his desk for late nights in the office and occasionally takes the day off to go windsurfing. “Sometimes I listen to soft music to soothe my feelings, and sometimes I listen to hard music to build my energy,” said Mr. Uchida, who manages the technology development division of the Rimnet Corporation, an Internet access provider. “It’s important that we always keep in touch with our sensibilities when we want to generate ideas.” The creative whiz kid, a business personality often prized by corporate America, has come to Japan Inc. Unlikely as it might seem in a country renowned for its deference to authority and its devotion to group solidarity, freethinkers like Mr. Uchida are popping up all over the workplace. Nonconformity is suddenly in.51

Still another potential problem with diverse groups is miscommunication or inaccurate communication, which can occur for a number of reasons. Misunderstandings can be caused by a speaker using words that are not clear to other members. For example, in a diverse group in which one of the authors was working, a British manager told her U.S. colleagues, “I will fax you this report in a fortnight.” When the author asked the Americans when they would be getting the report, most of them believed it would be arriving in four days. They did not know that the common British word fortnight (14 nights) means two weeks.

Another contribution to miscommunication may be the way in which situations are interpreted. Many Japanese nod their heads when others talk, but this does not mean that they agree with what is being said. They are merely being polite and attentive. In many societies, it is impolite to say no, and if the listener believes that the other person wants a positive answer, the listener will say yes even though this is incorrect. As a result, many U.S. managers find out that promises made by individuals from other cultures cannot be taken at face value—and in many instances, the other individual assumes that the American realizes this!

Diversity also may lead to communication problems because of different percep-tions of time. For example, many Japanese will not agree to a course of action on the spot. They will not act until they have discussed the matter with their own people because they do not feel empowered to act alone. Many Latin managers refuse to be held to a strict timetable because they do not have the same time urgency that U.S. managers do. Here is another example, as described by a European manager:

In attempting to plan a new project, a three-person team composed of managers from Britain, France, and Switzerland failed to reach agreement. To the others, the British representative appeared unable to accept any systematic approach; he wanted to discuss all potential prob-lems before making a decision. The French and Swiss representatives agreed to examine everything before making a decision, but then disagreed on the sequence and scheduling of operations. The Swiss, being more pessimistic in their planning, allocated more time for each suboperation than did the French. As a result, although everybody agreed on its valid-ity, we never started the project. If the project had been discussed by three Frenchmen, three Swiss, or three Britons, a decision, good or bad, would have been made. The project would not have been stalled for lack of agreement.52

Advantages of DiversityWhile there are some potential problems to overcome when using culturally diverse groups in today’s MNCs, there are also very many benefits to be gained.53 In particular,

Chapter 6 Organizational Cultures and Diversity 201

there is growing evidence that culturally diverse groups can enhance creativity, lead to better decisions, and result in more effective and productive performance.54

One main benefit of diversity is the generation of more and better ideas. Because group members come from a variety of cultures, they often are able to create a greater number of unique (and thus creative) solutions and recommendations. For example, a U.S. MNC recently was preparing to launch a new software package aimed at the mass consumer market. The company hoped to capitalize on the upcoming Christmas season with a strong advertising campaign in each of its international markets. A meeting of the sales managers from these markets in Spain, the Middle East, and Japan helped the company revise and better target its marketing effort. The Spanish manager suggested that the company focus its campaign around the coming of the Magi (January 6) and not Christmas (December 25) because in Latin cultures, gifts typically are exchanged on the date that the Magi brought their gifts. The Middle Eastern manager pointed out that most of his customers were not Christians, so a Christmas campaign would not have much meaning in his area. Instead, he suggested the company focus its sales campaign around the value of the software and how it could be useful to customers and not worry about getting the product shipped by early December at all. The Japanese manager concurred with his Middle Eastern colleague but further suggested that some of the colors being proposed for the sales brochure be changed to better fit with Japanese culture. Thanks to these diverse ideas, the sales campaign proved to be one of the most effective in the company’s history.

A second major benefit is that culturally diverse groups can prevent groupthink, which is caused by social conformity and pressures on individual members of a group to conform and reach consensus. When groupthink occurs, group participants come to believe that their ideas and actions are correct and that those who disagree with them are either uninformed or deliberately trying to sabotage their efforts. Multicultural diverse groups often are able to avoid this problem because the members do not think similarly or feel pressure to conform. As a result, they typically question each other, offer opinions and suggestions that are contrary to those held by others, and must be persuaded to change their minds. Therefore, unanimity is achieved only through a careful process of deliberation. Unlike homogeneous groups, where everyone can be “of one mind,” diverse groups may be slower to reach a general consensus, but the decision may be more effec-tive and free of “groupthink.”

Diversity in the workplace enhances more than just the internal operations—it enhances relationships to customers as well. It is commonly held that anyone will have insight into and connect better with others of the same nationality or cultural background, resulting in more quickly building trust and understanding of one another’s preferences. Therefore, if the customer base is composed of many cultures, it may benefit the com-pany to have representatives from corresponding nationalities. The U.S. multinational cosmetic firm Avon adopted this philosophy over a decade ago. When Avon observed an increase in the number of Korean shoppers at one of its U.S. locations, it quickly employed Korean sales staff.55 The external environment, even in the MNC home coun-try, can encompass many cultures that managers should bear in mind. Expanding diver-sity in the workplace to better serve the customer means that even local managers have an international exposure, further emphasizing the importance of learning about the multicultural surroundings.

Building Multicultural Team EffectivenessMulticulturally diverse teams have a great deal of potential, depending on how they are managed. As shown in Figure 6–6, Dr. Carol Kovach, who conducted research on the importance of leadership in managing cross-cultural groups, reports that if cross-cultural groups are led properly, they can indeed be highly effective; unfortunately, she also found that if they are not managed properly, they can be highly ineffective. In other words, diverse groups are more powerful than single-culture groups. They can hurt the organization, but

groupthinkSocial conformity and pressures on individual members of a group to conform and reach consensus.

202 Part 2 The Role of Culture

if managed effectively, they can be the best.56 The following sections provide the conditions and guidelines for managing diverse groups in today’s organizations effectively.

Understanding the Conditions for Effectiveness Multicultural teams are most effec-tive when they face tasks requiring innovativeness. They are far less effective when they are assigned to routine tasks.57  To achieve the greatest effectiveness from diverse teams, the focus of attention must be determined by the stage of team development (e.g., entry, working, and action stages). In the entry stage, the focus should be on building trust and developing team cohesion, as we saw in The World of International Management at the opening of the chapter. This can be difficult for diverse teams, whose members are ac-customed to working in different ways. For example, Americans, Germans, and Swiss typically spend little time getting to know each other; they find out the nature of the task and set about pursuing it on their own without first building trust and cohesion. This contrasts sharply with individuals from Latin America, Southern Europe, and the Middle East, where team members spend a great deal of initial time getting to know each other. This contrast between task-oriented and relationship-oriented members of a diverse team may slow progress due to communication and strategic barriers. To counteract this prob-lem, it is common in the entry stage of development to find experienced multicultural managers focusing attention on the team members’ equivalent professional qualifications and status. Once this professional similarity and respect are established, the group can begin forming a collective unit. In the work stage of development, attention may be di-rected more toward describing and analyzing the problem or task that has been assigned. This stage often is fairly easy for managers of multicultural teams because they can draw on the diversity of the members in generating ideas. As noted earlier, diverse groups tend to be most effective when dealing with situations that require innovative approaches.

In the action stage, the focus shifts to decision making and implementation. This can be a difficult phase because it often requires consensus building among the members. In achieving this objective, experienced managers work to help the diverse group recog-nize and facilitate the creation of ideas with which everyone can agree. In doing so, it is common to find strong emphasis on problem-solving techniques such as the nominal group technique (NGT), where the group members individually make contributions before group interaction takes place and consensus is reached.

Using the Proper Guidelines Some specific guidelines have proved to be helpful as a quick reference for managers when setting out to manage a culturally diverse team. Here are some of the most useful ideas:

1. Team members must be selected for their task-related abilities and not solely based on ethnicity. If the task is routine, homogeneous membership often is preferable; if the task is innovative, multicultural membership typically is best.

Highlyine�ective

Averagee�ectiveness

Highlye�ective

Cross-cultural groups

Single culture groupsFigure 6–6Group Effectiveness and Culture

Source: From Nancy J. Adler. International Dimensions of Organizational Behavior, 5th ed. © 2008 South-Western, a part of Cengage Learning, Inc. Reproduced by permission. www.cengage.com/permissions.

Chapter 6 Organizational Cultures and Diversity 203

2. Team members must recognize and be prepared to deal with their differences. The goal is to facilitate a better understanding of cross-cultural differences and generate a higher level of performance and rapport. In doing so, members need to become aware of their own stereotypes, as well as those of the others, and use this information to better understand the real differences that exist between them. This can then serve as a basis for determining how each indi-vidual member can contribute to the overall effectiveness of the team.

3. Because members of diverse teams tend to have more difficulty agreeing on their purpose and task than members of homogeneous groups, the team leader must help the group to identify and define its overall goal. This goal is most useful when it requires members to cooperate and develop mutual respect in carrying out their tasks.

4. Members must have equal power so that everyone can participate in the pro-cess; cultural dominance always is counterproductive. As a result, managers of culturally diverse teams distribute power according to each person’s ability to contribute to the task, not according to ethnicity.

5. It is important that all members have mutual respect for each other. This is often accomplished by managers choosing members of equal ability, making prior accomplishments and task-related skills known to the group, and mini-mizing early judgments based on ethnic stereotypes.

6. Because teams often have difficulty determining what is a good or a bad idea or decision, managers must give teams positive feedback on their process and output. This feedback helps the members see themselves as a team, and it teaches them to value and celebrate their diversity, recognize contributions made by the individual members, and trust the collective judgment of the group.

The World of International Management—RevisitedOur discussion in The World of International Management at the outset of the chapter introduced the challenges and the benefits of diverse, multicultural teams. These teams have become commonplace in organizations around the world as work becomes more flexible and less geographically bound. In addition, companies are looking to such teams to solve intractable problems and bring creativity and fresh thinking to their organiza-tions. Using what you have learned from this chapter, answer the following: (1) What steps should organizations take to get the most out of their global virtual teams? (2) What types of organizational culture (family, Eiffel Tower, guided missile, incubator) would be best for leveraging global teams? (3) What advantages and problems associated with diversity have been experienced by global teams? How might they be overcome? (4) What features of multicultural teams are most critical for successful global team col-laboration?

1. Organizational culture is a pattern of basic assump-tions developed by a group as it learns to cope with its problems of external adaptation and internal integration and taught to new members as the cor-rect way to perceive, think, and feel in relation to these problems. Some important characteristics of organizational culture include observed behavioral

regularities, norms, dominant values, philosophy, rules, and organizational climate.

2. Organizational cultures are shaped by a number of factors. These include the general relationship between employees and their organization; the hier-archic system of authority that defines the roles of managers and subordinates; and the general views

SUMMARY OF KEY POINTS

204 Part 2 The Role of Culture

that employees hold about the organization’s pur-pose, destiny, and goals and their place in the orga-nization. When examining these differences, Trompenaars suggested the use of two continua: equity-hierarchy and person-task orientation, result-ing in four basic types of organizational cultures: family, Eiffel Tower, guided missile, and incubator.

3. Family culture is characterized by strong emphasis on hierarchic authority and orientation to the per-son. Eiffel Tower culture is characterized by strong emphasis on hierarchy and orientation to the task. Guided missile culture is characterized by strong emphasis on equality in the workplace and orienta-tion to the task. Incubator culture is characterized by strong emphasis on equality and orientation to the person.

4. Success in the international arena often is heavily determined by a company’s ability to manage multiculturalism and diversity. Firms progress through four phases in their international evolution: (1) domestic corporation, (2) international

corporation, (3) multinational corporation, and (4) global corporation.

5. There are a number of ways to examine multicultur-alism and diversity. One is by looking at the domestic multicultural and diverse workforce that operates in the MNC’s home country. Another is by examining the variety of diverse groups that exist in MNCs, including homogeneous groups, token groups, bicultural groups, and multicultural groups. Several potential problems as well as advantages are associated with multicultural, diverse teams. Diverse teams are not only helpful to internal oper-ations but can enhance sales to customers as well, as shown at Avon.

6. A number of guidelines have proved to be particu-larly effective in managing culturally diverse groups. These include careful selection of the mem-bers, identification of the group’s goals, establish-ment of equal power and mutual respect among the participants, and delivering of positive feedback on performance.

KEY TERMS

bicultural group, 199Eiffel Tower culture, 192family culture, 192groupthink, 201

guided missile culture, 193homogeneous group, 199incubator culture, 194multicultural group, 199

organizational culture, 185token group, 199

REVIEW AND DISCUSSION QUESTIONS

1. Some researchers have found that when Germans work for a U.S. MNC, they become even more German, and when Americans work for a German MNC, they become even more American. Why would this knowledge be important to these MNCs?

2. When comparing the negotiating styles and strate-gies of French versus Spanish negotiators, a number of sharp contrasts are evident. What are three of these, and what could MNCs do to improve their position when negotiating with either group?

3. In which of the four types of organizational cultures—family, Eiffel Tower, guided missile, incubator—would most people in the United States feel comfortable? In which would most Japanese feel comfortable? Based on your answers, what conclu-sions could you draw regarding the importance of

understanding organizational culture for interna-tional management?

4. Most MNCs need not enter foreign markets to face the challenge of dealing with multiculturalism. Do you agree or disagree with this statement? Explain your answer.

5. What are some potential problems that must be overcome when using multicultural, diverse teams in today’s organizations? What are some recognized advantages? Identify and discuss two of each.

6. A number of guidelines can be valuable in helping MNCs to make diverse teams more effective. What are five of these? How do these relate to the guide-lines established by Matsushita, as discussed in the International Management in Action box?

Chapter 6 Organizational Cultures and Diversity 205

Based in China, Lenovo is one of the largest computer brands in the world. Several years ago, Lenovo pur-chased IBM’s PC business and now sells more comput-ers to retail customers and businesses than any other company in the world. From its base in China, it is moving aggressively into global markets, especially emerging countries like India. Visit Lenovo’s website at lenovo.com  and review some of the latest developments. In particular, pay close attention to its product line and international expansion. Using the country/language tab in the bottom right of the screen, choose three different countries where the firm is doing business: one from the Americas, one from Europe, and one from Southeast Asia or India. (The sites are all presented in the local language, so you might want to

make India or Hong Kong your choice because this site is in English.) Compare and contrast the product offer-ings and ways in which HP goes about marketing itself over the web in these locations. What do you see as some of the major differences? Second, using Figure 6–2 and Table 6–3 as your guide, in what way are differences in organizational cultures internationally likely to present significant challenges to Lenovo’s efforts to create a smooth-running international enterprise? Look at the web page showing Lenovo’s leadership team. What do you notice? What would you see as two of the critical issues with which management will have to deal? Third, what are two steps that you think Lenovo will have to take in order to build multicultural team effectiveness? What are two guidelines that can help it do this?

INTERNET EXERCISE: LENOVO’S INTERNATIONAL FOCUS

1. “A Shared Value Around the World,” Deloitte, www2.deloitte.com/bh/en/pages/about-deloitte/ articles/shared-value.html.

2. Bradley L. Kirkman, Benson Rosen, Cristina Gibson, and Paul E. Tesluk, “Five Challenges to Virtual Team Success: Lessons from Sabre, Inc.,” Academy of Management Executive 16, no. 3 (August 2002), pp. 67–79, retrieved from EBSCOhost: http://turbo.kean.edu/~jmcgill/sabre.htm.

3. Ibid. 4. Juliet Bourke, “Working in Multicultural Teams:

A Case Study,” Deloitte, www2.deloitte.com/au/ en/pages/human-capital/articles/working- multicultural-teams.html.

5. Ibid. 6. Deloitte, “Deloitte Celebrates Five-Year Anniversary

of Business Chemistry,”  press release, April 6, 2015,  www2.deloitte.com/us/en/pages/about-deloitte/articles/press-releases/deloitte-business-chemistry-relationships-teamwork.html.

7. Melanie Doulton, “Tips for Working in Global Teams,” The Institute (IEEE), January 5, 2007.

8. Steven R. Rayner, “The Virtual Team Challenge,” Rayner & Associates, Inc., 1997.

9. Kirkman, Rosen, Gibson, and Tesluk, “Five Challenges to Virtual Team Success.”

10. Rayner, “The Virtual Team Challenge.”11. Kirkman, Rosen, Gibson, and Tesluk, “Five

Challenges to Virtual Team Success.”12. Doulton, “Tips for Working in Global Teams.”

13. Kirkman, Rosen, Gibson, and Tesluk, “Five Challenges to Virtual Team Success.”

14. Ibid.15. Ibid.16. Rayner, “The Virtual Team Challenge.”17. Ibid.18. Lisa Hoecklin, Managing Cultural Differences:

Strategies for Competitive Advantage (Workingham, England: Addison-Wesley, 1995), p. 146.

19. Edgar H. Schein, Organizational Culture and Lead-ership, 2nd ed. (San Francisco: Jossey-Bass, 1997), p. 12.

20. Fred Luthans, Organizational Behavior, 10th ed. (New York: McGraw-Hill/Irwin, 2005), pp. 110–111.

21. In addition, see W. Mathew Jeuchter, Caroline Fisher, and Randall J. Alford, “Five Conditions for High-Performance Cultures,” Training and Develop-ment Journal, May 1998, pp. 63–67.

22. “Our Leadership Team,” AstraZeneca, https://www.astrazeneca.com/our-company/leadership.html#!.

23. AstraZeneca, What Science Can Do: AstraZeneca Annual Report and Form 20-F Information 2014 (March 23, 2015),  https://www.astrazeneca.com/ content/dam/az/our-company/Documents/2014-Annual-report.pdf.

24. AstraZeneca, Health: AstraZeneca Annual Report and Form 20-F Information 2011  (2012),  https://www.astrazeneca.com/content/dam/az/our-company/investor-relations/presentations-and-webcast/Annual-Reports/2011-Annual-report.pdf.

ENDNOTES

206 Part 2 The Role of Culture

44. Ibid., p. 167.45. Ibid., p. 172.46. For more, see Rose Mary Wentling and Nilda

Palma-Rivas, “Current Status of Diversity Initiatives in Selected Multinational Corporations,” Human Resource Development Quarterly, Spring 2000, pp.  35–60.

47. Adler, International Dimensions of Organizational Behavior, p. 121.

48. Jean Lee, “Culture and Management: A Study of Small Chinese Family Business in Singapore,” Journal of Small Business Management, July 1996, p. 65.

49. Noboru Yoshimura and Philip Anderson, Inside the Kaisha: Demystifying Japanese Business Behavior (Boston: Harvard Business School Press, 1997).

50. Edmund L. Andrews, “Meet the Maverick of Japan, Inc.” New York Times, October 12, 1995, pp. C1, C4.

51. Sheryl WuDunn, “Incubators of Creativity,” New York Times, October 9, 1997, pp. C1, C21.

52. Adler, International Dimensions of Organizational Behavior, p. 132.

53. Adele Thomas and Mike Bendixen, “The Manage-ment Implications of Ethnicity in South Africa,” Journal of International Business Studies, Third Quarter 2000, pp. 507–519.

54. John M. Ivencevich and Jacqueline A. Gilbert, “Diver-sity Management: Time for a New Approach,” Public Personnel Management, Spring 2000, pp. 75–92.

55. “Over the Rainbow,” Economist Online, November 20, 1997, http://www.economist.com/node/106483.

56. See, for example, Betty Jane Punnett and Jason Clemens, “Cross-National Diversity: Implications for International Expansion Decisions,” Journal of World Business 34, no. 2 (1999), pp. 128–138.

57. Adler, International Dimensions of Organizational Behavior, p. 137.

58. CIA, “Nigeria,”  The World Factbook  (2016),  https://www.cia.gov/library/publications/the-world-factbook/geos/ni.html.

59. Ibid.60. CIA. 2016. “The World Factbook,” https://www.cia.

gov/library/publications/the-world-factbook/geos/ ni.html.

61. Ibid.62. Jim Stenman and Peter Guest, “The Man Who

Wants to Make Hollywood Move to Nigeria,”  CNN.com, October 25, 2015,  www.cnn.com/2015/10/23/africa/nollywood-hits-london-mpkaru-abudu/.

63. Ibid.

25. Prashant Kale, Harbir Singh, and Anand Raman, “Don’t Integrate Your Acquisitions, Partner with Them,”  Harvard Business Review, December 2009,  https://webcache.googleusercontent.com/search?q=cache:lajyv0FdxQQJ:https://hbr.org/2009/12/dont-integrate-your-acquisitions-partner-with-them+&cd=1&hl=en&ct=clnk&gl=us.

26. Oh Hwa-seok, “Tata Daewoo: An Indian Success Story in Korea,”  Asia-Pacific Business & Technology Report, January 1, 2010,  www.biztechreport.com/story/378-tata-daewoo-indian-success-story-korea.

27. Kale, Singh, and Raman, “Don’t Integrate Your Acquisitions, Partner with Them.”

28. Hoecklin, Managing Cultural Differences, p. 145.29. Andre Laurent, “The Cultural Diversity of Western

Conceptions of Management,” International Studies of Management and Organization, Spring–Summer 1983, pp. 75–96.

30. Nancy J. Adler, International Dimensions of Orga-nizational Behavior, 2nd ed. (Boston: PWS-Kent Publishing, 1991), pp. 58–59.

31. William Holstein, “Lucent-Alcatel: Why Cross- Cultural Mergers Are So Tough,”  CBS Money Watch, November 6, 2007,  www.cbsnews.com/news/lucent-alcatel-why-cross-cultural-mergers-are-so-tough/.

32. David Jolly, “Culture Clash Hits Home at Alcatel-Lucent,” New York Times, July 29, 2008, www.nytimes.com/2008/07/29/business/worldbusiness/29iht-alcatel.4.14867263.html?_r=0.

33. Holstein, “Lucent-Alcatel: Why Cross-Cultural Mergers Are So Tough.”

34. Jolly, “Culture Clash Hits Home at Alcatel-Lucent.”35. Hoecklin, Managing Cultural Differences, p. 151.36. Robert Hughes, “Weekend Journal: Futures and

Options: Global Culture,” The Wall Street Journal, October 10, 2003, p. W2.

37. Rita A. Numeroff and Michael N. Abrams, “Integrating Corporate Culture from International M&As,” HR Focus, June 1998, p. 12.

38. Ibid.39. See Maddy Janssens, Jeanne M. Brett, and Frank J.

Smith, “Confirmatory Cross-Cultural Research: Testing the Viability of a Corporation-Wide Safety Policy,” Academy of Management Journal, June 1995, pp. 364–382.

40. Fons Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Burr Ridge, IL: Irwin, 1994), p. 154.

41. Ibid.42. Ibid., p. 156.43. Ibid., p. 164.

207

You Be the International Management ConsultantThe Nigerian owner of the Filmhouse Cinemas fran-chise, Kene Mpkaru, has announced a significant expan-sion of his company’s presence in the country. Although the movie industry in Nigeria currently consists of viewers watching movies in their homes, Mpkaru believes there is growth potential for in-theater watch-ing. Mpkaru has some expertise in the movie theater business; prior to owning his Nigerian franchise, he worked for a European franchise and oversaw substan-tial expansion. Currently, Filmhouse has nine movie theaters in Nigeria, and the company plans to open 16  additional locations. The greatest challenge to doing business in the country is the relatively low purchasing power of the consumers, with more than 60 percent of the population living below the poverty line. Prior to Filmhouse, Nigeria’s main movie theater option was a high-end theater that included a full dining experience, costing approximately US$40 per ticket.62 Nigeria has built a film industry of its own in recent years. The country’s movies, generally shot with very small budgets, are often released direct to DVD. This industry, referred to as “Nollywood,” accounts for approx-imately 1.5 percent of the nation’s GDP, or US$7 billion. For Filmhouse, this domestic industry could serve as an attractive expansion vehicle.63

Questions 1. If you were a consultant for Filmhouse, how would

you advise Kene Mpkaru regarding his next moves in Nigeria?

2. What specific aspects of the country would be positive for the company? What factors are negatives?

3. How would you deal with the wealth gap in the country?

4. Would you advise Filmhouse to concentrate on Nollywood productions or would you try to attract Hollywood movies?

Located in western Africa, Nigeria is situated between the countries of Benin and Cameroon on the Gulf of Guinea. The Niger River, perhaps the most important river in western Africa, flows into the country through Niger and empties into the Gulf of Guinea. The total land mass of Nigeria is six times the size of Georgia and slightly larger than twice the size of California. Natural resources include natural gas, petroleum, tin, iron ore, coal, limestone, nio-bium, lead, zinc, and arable land. The climate is tropical in most of the country, although the northern portion of the country is quite arid.58 With over 181,562,000 people and a growth rate of 2.5 percent, Nigeria is Africa’s most populous nation and one of the fastest growing. The official spoken language is English, due to Nigeria’s history as a part of the British Empire. The country is incredibly diverse, with more than 250 ethnic groups. Religiously, Nigeria is split evenly between Muslims and Christians. This spiritual division has led to significant unrest and civil wars from the time of its independence until recent history.59 The country’s population is younger than most. The largest segment of the population (43 percent) is 0–14 years old, and the second largest segment is 25–54 years old (30 percent). Wealth inequality is especially pro-nounced in Nigeria, leaving a large gap between the “haves” and “have nots.” With a GDP per capita in 2014 of US$3,001, 60 percent of the country’s population lives below the poverty line. Nigeria’s total 2014 GDP stood at US$568.5 billion and has been experiencing a strong decade of growth. In 2014, the economy expanded by 6.3  percent.60 The British Empire controlled a majority of Africa and, specifically, Nigeria from the early 19th century until the end of World War II. Nigeria gained its independence in 1960, but its politics consisted of military regimes and numerous coups. Military rule continued until the adop-tion of a new constitution in 1999, which transitioned the country’s government into a civilian one. Since this tran-sition, the political environment has been relatively stable, consisting of legitimate and regular elections. The country is, however, still feeling the effects of the four decades of corruption and mismanagement.61

Nigeria In the International Spotlight

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CROSS-CULTURAL COMMUNICATION AND NEGOTIATION

The World of International Management

Netflix’s Negotiations: China and Russia

T he year 2015 was a break-through year for Netflix. Just eight years after first entering the digital video-streaming industry, the company had evolved into the world’s largest provider of Internet-based content. In 2015 alone, Netflix launched service in 130 new countries, tripling the number of international markets it served.1  By the start of 2016, the com-pany, which originally started as a mail-order DVD rental ser-vice in 1997, had established video-streaming operations in nearly every country in the world. Of its 82 million subscribers, over 40 percent were outside of the U.S.2

Critical to this rapid expansion was Netflix’s entry strategy. As a digital service provider, without physical goods or merchan-dise being imported and exported into the countries in which it operates, Netflix has been able to skip the lengthy, typically required governmental negotiations that most other companies must endure when expanding into foreign markets. For the most part, Netflix’s strategy appears to have worked; the company has been able to operate across North and South America, Africa, and Europe without any governmental challenge. How-ever, in two major markets, Netflix is facing an increasing num-ber of setbacks due to negotiation and communication difficulties: in China, the company has found entry to require a long negotiation process, while in Russia, setbacks implemented by government officials appear to have resulted from Netflix’s lack of communication and negotiation prior to entry.

The Long Road Ahead in ChinaOf the four nations without access to Netflix, China stands out. While Crimea, North Korea, and Syria all suffer from political turmoil or sanctions that prevent Netflix’s entry, China seems like an ideal market for video-streaming services. With one billion consumers—many of whom are ascending into the middle class—the country has the potential to be Netflix’s largest subscription base. Why, then, hasn’t the company commenced operations in the world’s most populous country?

Communication takes on special importance in international management because of the difficulties in conveying meanings between parties from different cultures. The problems of mis-interpretation and error are compounded in the international context. Chapter 7 examines how the communication process in general works, and it looks at the downward and upward communication flows that commonly are used in international communication. Then the chapter examines the major barriers to effective international communication and reviews ways of dealing with these communication problems. Finally, one important dimension of international communication, interna-tional negotiation, is examined, with particular attention to how negotiation approaches and strategies must be adapted to different cultural environments. The specific objectives of this chapter are

1. DEFINE the term communication, examine some examples of verbal communication styles, and explain the importance of message interpretation.

2. ANALYZE the common downward and upward communi-cation flows used in international communication.

3. EXAMINE the language, perception, and culture of com-munication and nonverbal barriers to effective international communications.

4. PRESENT the steps that can be taken to overcome inter-national communication problems.

5. DEVELOP approaches to international negotiations that respond to differences in culture.

6. REVIEW different negotiating and bargaining behaviors that may improve negotiations and outcomes.

209

Russian Troubles Mounting?In January 2016, Netflix successfully launched in Russia to much fanfare and consumer excitement. In the hours after the initial announcement, expatriates and Russians alike took their excite-ment to social media. Despite the successful launch, Netflix has since been saddled with numerous government-initiated setbacks. Culturally, Netflix may have misjudged the regulatory and governmental environment in Russia. The Russian government funds and controls much of the country’s media services, and Netflix’s lack of open communication and disclosure regarding its expansion plans may have resulted in a backlash against the company. Shortly have Netflix’s launch, the Russian gov-ernment insisted that Netflix must approach and initiate discus-sions with government officials if it wishes to continue operating in the country. Russian deputy communications man-ager Alexei Volin warned that “Before entering the market, Netflix should have had consultations with Russian representa-tives, including the regulatory agencies.”8

In February 2016, one month after Netflix’s arrival in Russia, the government increased its demands, directly stat-ing that Netflix must receive broadcasting licenses to operate within the country or face suspension.9  Legislation was also introduced that would create a value-added tax on digital sales, increasing the cost of doing business for Netflix within Russia.10

By March 2016, the Russian government had begun devel-oping new regulations for foreign video-streaming services, like Netflix. Under the new rules, Netflix would be required to partner with a local Russian media provider. Additionally, 80 percent of Netflix’s content would have to be available in the Russian language, and 30 percent would have to be produced in Russia.11

Netflix may have been able to avoid these setbacks if it had fully understood the cultural differences between the gov-ernments in Russia and the U.S. Though its entry strategy worked in more democratic nations, Netflix’s lack of communi-cation with the regulatory agencies in Russia resulted in swift restrictions and increased taxes. Whether or not Netflix decides to continue its operations in Russia remains to be seen. Decreasing interest from Russian consumers, coupled with additional headache from regulators, may ultimately result in a withdrawal from Russia altogether.12

Unlike in other markets, Netflix must have specific govern-mental approval to operate in China. Negotiations in China have notoriously taken long periods of time to complete; Apple spent years negotiating with Chinese officials to receive permis-sion to sell its iPhone within the country.3  Additionally, Chinese regulators exert heavy control over content. All shows, includ-ing original programming produced by Netflix, would undergo censoring prior to inclusion on the Chinese Netflix platform.4

Domestic streaming services, though lacking the infrastruc-ture and content selection that Netflix boasts, add an addi-tional layer of complexity to negotiations. Most of the domestic streaming services are free to the public and funded by the government, giving the Chinese government a stake in Net-flix’s competitors. Netflix may be required to partner with one of these local providers to gain a media license, resulting in a loss of some control over its operations.5    To ensure success in China, Netflix will first have to man-age the negotiation process with government officials. Any misunderstanding will likely result in further setbacks for Netf-lix. According to Harvard Business Review, there are multiple cultural differences when negotiating in China of which com-panies like Netflix should be aware, a few of which include

∙ Formality in business dealings is critical in China, whereas informality is commonplace in the U.S. Failure to address Chinese business partners by their rank or importance could be seen as insulting, ultimately lead-ing to a deterioration of negotiations.

∙ The presence of a high-level company official, like the CEO, at the bargaining table is culturally seen as increas-ing the level of seriousness and can significantly improve the outcome of the negotiations for the company.

∙ Chinese negotiators tend to require a longer period of relationship-building than their U.S. counterparts. It is not uncommon for several months of vetting to be required before discussions become more serious and detailed. Rushing a deal may be perceived as culturally rude.6

Netflix appears prepared for a long period of continued negotiations in China. Early in 2016, Netflix CEO Reed Hastings stated that the company has “a very long term look” regarding China. “It could be a many years discussion or it could happen faster than that.”7

210 Part 2 The Role of Culture

The opening World of International Management illustrates how cultural differences between a U.S. multinational company, like Netflix, and foreign governments can result in long or troublesome negotiations, and how the misjudgment of culture can result in difficulties for a company attempting to expand into new markets. Netflix’s lack of understanding in regards to the operation of the Russian government resulted in setbacks after launching service in the country, and Netflix’s ongoing negotiations with China will likely take many years to complete. Though fast expansion, like Netflix was able to achieve, can result in profits and high success, the cultural differences in communication and negotiations can lead to financial setbacks.

In this chapter, we explore communication and negotiation styles across cultures, emphasizing the importance of understanding different approaches to the development of effective international communication and negotiation strategies.

■ The Overall Communication ProcessCommunication is the process of transferring meanings from sender to receiver. On the surface, this appears to be a fairly straightforward process. On analysis, however, there are a great many problems in the international arena that can result in the failure to transfer meanings correctly.

In addition, as suggested in the opening World of International Management, the means and modes of communication have changed dramatically in recent decades. For example, the advent of the telephone, then Internet, and most recently personal communication devices (“smartphones”) has influenced how, when, and why people communicate. These trends have both benefits and disadvantages. On the plus side, we have many more opportunities to com-municate rapidly, without delays or filters, and often can incorporate rich content, such as photos, videos, and links to other information, in our exchanges. On the other hand, some are concerned that these devices are rendering our communication less meaningful and per-sonal. In a recent book, Nicholas Carr argues that when we go online, “we enter an environ-ment that promotes cursory reading, hurried and distracted thinking, and superficial learning.” Mr. Carr calls the web “a technology of forgetfulness.” Web pages draw us into a myriad of embedded links while we are assaulted by other messages via e-mail, RSS, and Twitter and Facebook accounts. He suggests that greater access to knowledge is not the same as greater knowledge and that an ever-increasing plethora of facts and data is not the same as wisdom.13

Despite these concerns, communication—verbal and otherwise—remains an impor-tant dimension of international management. In this chapter, we survey different com-munication styles, how communication is processed and interpreted, and how culture and language influence communication (and miscommunication).

Verbal Communication StylesOne way of examining the ways in which individuals convey information is by looking at their communication styles. In particular, as has been noted by Hall, context plays a key role in explaining many communication differences.14 Context is information that surrounds a communication and helps convey the message. In high-context societies, such as Japan and many Arab countries, messages are often highly coded and implicit. As a result, the receiver’s job is to interpret what the message means by correctly filtering through what is being said and the way in which the message is being conveyed. This approach is in sharp contrast to low-context societies such as the United States and Canada, where the message is explicit and the speaker says precisely what he or she means. These contextual factors must be considered when marketing messages are being developed in disparate societies. For example, promotions in Japan should be subtle and convey a sense of community (high context). Similar segments in the United States, a low-context envi-ronment, should be responsive to expectations for more explicit messages. Figure 7–1 provides an international comparison of high-context and low-context societies. In addi-tion, Table 7–1 presents some of the major characteristics of communication styles.

communicationThe process of transferring meanings from sender to receiver.

contextInformation that surrounds a communication and helps convey the message.

Chapter 7 Cross-Cultural Communication and Negotiation 211

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CanadaFinlandGermanyIcelandNorwaySwedenSwitzerlandUnited KingdomUnited States

AfghanistanBrazilChinaEgyptIndiaIranItaly

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Source:  Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from Terence Brake, Danielle Medina Walker, and Thomas D. Walker, Doing Business Internationally: The Guide to Cross-Cultural Success  (Burr Ridge, IL: Irwin, 1994), and Sarah Griffith, “Intercultural Business Communication: High Context vs. Low Context Communication,” HubPages, 2011, http://hubpages.com/business/Intercultural-Business-Communication-High-Context-vs-Low-Context-Communication. 

Figure 7–1 High-/Low-Context Communication: An International Comparison

Table 7–1Major Characteristics of Verbal Styles

Cultures in Which Major Interaction Focus Characteristic Verbal Style Variation and Content Is Found

Indirect vs. direct Indirect Implicit messages Collective, high context Direct Explicit messages Individualistic, low contextSuccinct vs. Elaborate High quantity of talk Moderate uncertainty elaborate avoidance, high context Exacting Moderate amount Low uncertainty of talk avoidance, low context Succinct Low amount of talk High uncertainty avoidance, high contextContextual vs. Contextual Focus on the High power distance, personal speaker and role collective, high context relationships Personal Focus on the Low power distance, speaker and personal individualistic, low relationships contextAffective vs. Affective Process-oriented and Collective, high context Instrumental receiver-focused language Instrumental Goal-oriented and Individualistic, low sender-focused context language

212 Part 2 The Role of Culture

Indirect and Direct Styles In high-context cultures, messages are implicit and indirect. One reason is that those who are communicating—family, friends, co-workers, clients—tend to have both close personal relationships and large information networks. As a result, each knows a lot about others in the communication network; they do not have to rely on language alone to communicate. Voice intonation, timing, and facial expressions can all play roles in conveying information.

In low-context cultures, people often meet only to accomplish objectives. Since they do not know each other very well, they tend to be direct and focused in their com-munications.

One way of comparing these two kinds of culture—high context and low context—is by finding out what types of questions are typically asked when someone is contacted and told to attend a meeting. In a high-context culture, it is common for the person to ask, “Who will be at this meeting?” so he or she knows how to prepare for appropriate personal interactions. In contrast, in a low-context culture, the individual is likely to ask, “What is the meeting going to be about?” so he or she knows how to properly organize for the engagement. In the high-context society, the person focuses on the environment in which the meeting will take place. In the low-context society, the individual is most interested in the objectives that are to be accomplished at the meeting.

Elaborate to Succinct Styles There are three degrees of communication quantity—elaborate, exacting, and succinct. In high-context societies, the elaborate style is often very common. There is a great deal of talking, description includes much detail, and people often repeat themselves. This elaborate style is widely used in Arabic countries.

The exacting style is more common in nations such as England, Germany, and Sweden. This style focuses on precision and the use of the right amount of words to convey the message. If a person uses too many words, this is considered exaggeration; if the individual relies on too few, the result is an ambiguous message.

The succinct style is most common in Asia, where people tend to say few words and allow understatements, pauses, and silence to convey meaning. In particular, in unfamiliar situations, communicators are succinct in order to avoid risking a loss of face.

Researchers have found that the elaborating style is more popular in high-context cultures that have a moderate degree of uncertainty avoidance. The exacting style is more common in low-context, low-uncertainty-avoidance cultures. The succinct style is more common in high-context cultures with considerable uncertainty avoidance.

Contextual and Personal Styles A contextual style is one that focuses on the speaker and relationship of the parties. For example, in Asian cultures people use words that reflect the role and hierarchical relationship of those in the conversation. As a result, in an organizational setting, speakers will choose words that indicate their status relative to the status of the others. Commenting on this idea, Yoshimura and Anderson have noted that white-collar, middle-management employees in Japan, commonly known as salary-men, quickly learn how to communicate with others in the organization by understanding the context and reference group of the other party:

A salaryman can hardly say a word to another person without implicitly defining the refer-ence groups to which he thinks both of them belong. . . . [This is because] failing to use proper language is socially embarrassing, and the correct form of Japanese to use with someone else depends not only on the relationship between the two people, but also on the relationship between their reference groups. Juniors defer to seniors in Japan, but even this relationship is complicated when the junior person works for a much more prestigious organization (for example, a government bureau) than the senior. [As a result, it is] likely that both will use the polite form to avoid social embarrassment.15

A personal style focuses on the speaker and the reduction of barriers between the parties. In the United States, for example, it is common to use first names and to address others informally and directly on an equal basis.

Chapter 7 Cross-Cultural Communication and Negotiation 213

Researchers have found that the contextual style is often associated with high-power-distance, collective, high-context cultures. Examples include Japan, India, and Ghana. In contrast, the personal style is more popular in low-power-distance, individu-alistic, low-context cultures. Examples include the United States, Australia, and Canada.

Affective and Instrumental Styles The affective style is characterized by language that requires the listener to carefully note what is being said and to observe how the sender is presenting the message. Quite often the meaning that is being conveyed is nonverbal and requires the receiver to use his or her intuitive skills in deciphering what is being said. The part of the message that is being left out may be just as important as the part that is being included. In contrast, the instrumental style is goal-oriented and focuses on the sender. The individual clearly lets the other party know what he or she wants the other party to know.

The affective style is common in collective, high-context cultures such as the Mid-dle East, Latin America, and Asia. The instrumental style is more commonly found in individualistic, low-context cultures such as Switzerland, Denmark, and the United States.

Table 7–2 provides a brief description of the four verbal styles that are used in select countries. A close look at the table helps explain why managers in Japan can have great difficulty communicating with their counterparts in the United States and vice versa: The verbal styles do not match in any context.

Interpretation of CommunicationsThe effectiveness of communication in the international context often is determined by how closely the sender and receiver have the same meaning for the same message.16,17 If this meaning is different, effective communication will not occur. A good example is the U.S. firm that wanted to increase worker output among its Japanese personnel. This firm put an individual incentive plan into effect, whereby workers would be given extra pay based on their work output. The plan, which had worked well in the United States, was a total flop. The Japanese were accustomed to working in groups and to being rewarded as a group. In another case, a U.S. firm offered a bonus to anyone who would provide suggestions that resulted in increased productivity. The Japanese workers rejected this idea because they felt that no one working alone is responsible for increased pro-ductivity. It is always a group effort. When the company changed the system and began rewarding group productivity, it was successful in gaining support for the program.

Table 7–2Verbal Styles Used in 10 Select Countries

Indirect vs. Elaborate vs. Contextual vs. Affective vs. Country Direct Succinct Personal Instrumental

Australia Direct Exacting Personal InstrumentalCanada Direct Exacting Personal InstrumentalDenmark Direct Exacting Personal InstrumentalEgypt Indirect Elaborate Contextual AffectiveEngland Direct Exacting Personal InstrumentalJapan Indirect Succinct Contextual AffectiveKorea Indirect Succinct Contextual AffectiveSaudi Arabia Indirect Elaborate Contextual AffectiveSweden Direct Exacting Personal InstrumentalUnited States Direct Exacting Personal Instrumental

Source: Anne Marie Francesco and Barry Allen Gold, International Organizational Behavior: Text, Readings, Cases, and Skills, 1st ed. (Upper Saddle River, NJ: Prentice Hall, 1998). © 1998. Reproduced by permission of Barry Allen Gold.

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A related case occurs when both parties agree on the content of the message, but one party believes it is necessary to persuade the other to accept the message. Here is an example:

Motorola University recently prepared carefully for a presentation in China. After consider-able thought, the presenters entitled it “Relationships do not retire.” The gist of the presen-tation was that Motorola had come to China in order to stay and help the economy to create wealth. Relationships with Chinese suppliers, subcontractors and employees would constitute a permanent commitment to building Chinese economic infrastructure and earning hard currency through exports. The Chinese audience listened politely to this presentation but was quiet when invited to ask questions. Finally one manager put up his hand and said: “Can you tell us about pay for performance?”18

Quite obviously, the Motorola presenter believed that it was necessary to convince the audience that the company was in China for the long run. Those in attendance, how-ever, had already accepted this idea and wanted to move on to other issues.

Still another example has been provided by Adler, who has pointed out that people doing business in a foreign culture often misinterpret the meaning of messages. As a result, they arrive at erroneous conclusions, as in the following story of a Canadian doing business in the Middle East. The Canadian was surprised when his meeting with a high-ranking official was not held in a closed office and was constantly interrupted:

Using the Canadian-based cultural assumptions that (a) important people have large private offices with secretaries to monitor the flow of people into the office, and (b) important business takes precedence over less important business and is therefore not interrupted, the Canadian interprets the . . . open office and constant interruptions to mean that the official is neither as high ranking nor as interested in conducting the business at hand as he had previously thought.19

■ Communication FlowsCommunication flows in international organizations move both down and up. However, there are some unique differences in organizations around the world.

Downward CommunicationDownward communication is the transmission of information from manager to subor-dinate. The primary purpose of the manager-initiated communication flow is to convey orders and information. Managers use this channel to let their people know what is to be done and how well they are doing. The channel facilitates the flow of information to those who need it for operational purposes.

Communicating with subordinates can be both challenging and difficult, especially if the manager delivering the news does not believe in the decision. Some suggest that managers should consider pushing back with superiors to gauge whether there is some flexibility. If you haven’t fully bought into it, “your employees will be able to tell in the tone of your voice or your body language that you do not believe in what you are doing,” says Ray Skiba, director of human resources at Streck, a manufacturer of clinical labora-tory products in Omaha, Nebraska. Whether or not this is successful, sending a mixed signal is never helpful.

“Once you’ve done your internal work, prepare yourself to deliver the message. If there was team involvement in the decision, ask one of the team members to listen to how you plan to address your employees. The more prepared you are, the better the outcome,” says Mr. Skiba. Next, consider your communication strategy. “Explain why the decision is important to the business, how the decision was made, and why it is important that the plan be exe-cuted,” says Kimberly Bishop, founder of a career management and leadership services consulting firm in New York. Give your employees ample time to digest the message. Since it took you some time to accept the information, realize that your employees will need time as well. “When the message has been delivered, be available to answer questions, be visible and approachable to help individuals get to the point of acceptance,” says Mr. Skiba.20

downward communicationThe transmission of information from manager to subordinate.

Chapter 7 Cross-Cultural Communication and Negotiation 215

In the international context, downward communication poses special challenges. For example, in Asian countries, as noted earlier, downward communication is less direct than in the United States. Orders tend to be implicit in nature. Conversely, in some European countries, downward communication is not only direct but extends beyond business matters. For example, one early study surveyed 299 U.S. and French managers regarding the nature of downward communication and the managerial authority they perceived themselves as having. This study found that U.S. managers basically used downward communication for work-related matters. A follow-up study investigated mat-ters that U.S. and French managers felt were within the purview of their authority.21 The major differences involved work-related and nonwork-related activities: U.S. managers felt that it was within their authority to communicate or attempt to influence their peo-ple’s social behavior only if it occurred on the job or it directly affected their work. For example, U.S. managers felt that it was proper to look into matters such as how much an individual drinks at lunch, whether the person uses profanity in the workplace, and how active the individual is in recruiting others to join the company. The French manag-ers were not as supportive of these activities. The researcher concluded that “the Amer-icans find it as difficult [as] or more difficult than the French to accept the legitimacy of managerial authority in areas unrelated to work.”22

Upward CommunicationUpward communication is the transfer of information from subordinate to superior. The primary purpose of this subordinate-initiated upward communication is to provide feed-back, ask questions, or obtain assistance from higher-level management. In recent years, there has been a call for and a concerted effort to promote more upward communication in the United States. In other countries, such as in Japan, Hong Kong, and Singapore, upward communication has long been a fact of life. Managers in these countries have extensively used suggestion systems and quality circles to get employee input and always are available to listen to their people’s concerns.

Here are some observations from the approach the Japanese firm Matsushita uses in dealing with employee suggestions:

Matsushita views employee recommendations as instrumental to making improvements on the shop floor and in the marketplace. [It believes] that a great many little people, paying attention each day to how to improve their jobs, can accomplish more than a whole head-quarters full of production engineers and planners. Praise and positive reinforcement are an important part of the Matsushita philosophy. . . . Approximately 90 percent of . . . sugges-tions receive rewards; most only a few dollars per month, but the message is reinforced constantly: “Think about your job; develop yourself and help us improve the company.” The best suggestions receive company-wide recognition and can earn substantial monetary rewards. Each year, many special awards are also given, including presidential prizes and various divisional honors.23

Matsushita has used the same approach wherever it has established plants world-wide, and the strategy has proved very successful. The company has all its employees begin the day by reciting its basic principles, beliefs, and values, which are summarized in Table 7–3, to reinforce in all employees the reason for the company’s existence and to provide a form of spiritual fabric to energize and sustain them. All employees see themselves as important members of a successful team, and they are willing to do what-ever is necessary to ensure the success of the group.

Outside these Asian countries, upward communication is not as popular. For example, in South America, many managers believe that employees should follow orders and not ask a lot of questions. German managers also make much less use of this form of communication. In most cases, however, evidence shows that employees prefer to have downward communication at least supplemented by upward channels. Unfortu-nately, such upward communication does not always occur because of a number of communication barriers.

upward communicationThe transfer of meaning from subordinate to superior.

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■ Communication BarriersA number of common communication barriers are relevant to international management. The more important barriers involve language, perception, culture, and nonverbal communication.

Language BarriersKnowledge of the home country’s language (the language used at the headquarters of the MNC) is important for personnel placed in a foreign assignment. If managers do not under-stand the language that is used at headquarters, they likely will make a wide assortment of errors. Additionally, many MNCs now prescribe English as the common language for inter-nal communication, so that managers can more easily convey information to their counter-parts in other geographically dispersed locales.24 Despite such progress, however, language training continues to lag in many areas, including in the United States, where only 8 percent of college students study a foreign language. However, in an increasing number of European countries, more and more young people are becoming multilingual.25 Table 7–4 shows the

Table 7–3Matsushita’s PhilosophyBasic Business Principles

To recognize our responsibilities as industrialists, to foster progress, to promote the general welfare of society, and to devote ourselves to the further development of world culture.

Employees CreedProgress and development can be realized only through the combined efforts and coopera-tion of each member of the company. Each of us, therefore, shall keep this idea constantly in mind as we devote ourselves to the continuous improvement of our company.

The Seven Spiritual Values1. National service through industry2. Fairness3. Harmony and cooperation4. Struggle for betterment

5. Courtesy and humility6. Adjustment and assimilation7. Gratitude

Table 7–4Multilingualism in the EU Classroom 2015

Percentage of Pupils in General Secondary Education Learning English, French, or German as a Foreign

Language, 2015

English French German

European Union 94.5 23.6 20.9Finland 99.6 16.7 24.8Germany 94.7 26.3 —Denmark 91.1 9.0 33.5Spain 97.7 22.3 1.2France 99.7 — 22.1Greece 94.1 4.4 2.1Italy 95.5 18.0 8.0Romania 99.9 85.0 12.0Britain — 27.3 9.4Ireland — 54.5 14.9Poland 93.7 8.2 48.8

Source: Eurostat (2015),  http://ec.europa.eu/eurostat/web/education-and-training/data/main-tables.

Chapter 7 Cross-Cultural Communication and Negotiation 217

Table 7–5Multilingualism in the U.S. College Classroom 2015

Number of Percentage of Total Language Studied Students Enrolled Student Population

Spanish 790,756 4.2%French 197,757 1.1%American Sign Language 109,577 0.6%German 86,700 0.5%Italian 71,285 0.4%Japanese 66,740 0.4%Chinese 61,055 0.3%Arabic 32,286 0.2%Total students studying any foreign language 1,522,070 8.1%

Source: Modern Language Association, Table 4, “Enrollments in Languages Other Than English in United States Institutions of Higher Education Fall 2013,” February 2015.

percentage of European students who are studying English, French, or German, and Table 7–5 shows the percentage of U.S. college students studying various foreign languages.

Language education is a good beginning, but it is also important to realize that the ability to speak the language used at MNC headquarters is often not enough to ensure that the personnel are capable of doing the work. Stout recently noted that many MNCs worldwide place a great deal of attention on the applicant’s ability to speak English without considering if the person has other necessary skills, such as the ability to inter-act well with others and the technical knowledge demanded by the job.26  Additionally, in interviewing people for jobs, he has noted that many interviewers fail to take into account the applicant’s culture. As a result, interviewers misinterpret behaviors such as quietness or shyness and use them to conclude that the applicant is not sufficiently con-fident or self-assured. Still another problem is that nonnative speakers may know the language but not be fully fluent, so they end up asking questions or making statements that convey the wrong message. After studying Japanese for only one year, Stout began interviewing candidates in their local language and made a number of mistakes. In one case, he reports, “a young woman admitted to having an adulterous affair—even though this was not even close to the topic I was inquiring about—because of my unskilled use of the language.”27

Written communication has been getting increased attention because poor writing is proving to be a greater barrier than poor talking. For example, Hildebrandt has found that among U.S. subsidiaries studied in Germany, language was a major problem when subsidiaries were sending written communications to the home office. The process often involved elaborate procedures associated with translating and reworking the report. Typ-ical steps included (1) holding a staff conference to determine what was to be included in the written message, (2) writing the initial draft in German, (3) rewriting the draft in German, (4) translating the material into English, (5) consulting with bilingual staff members regarding the translation, and (6) rewriting the English draft a series of addi-tional times until the paper was judged to be acceptable for transmission. The German managers admitted that they felt uncomfortable with writing because their command of written English was poor. As Hildebrandt noted:

All German managers commanding oral English stated that their grammatical competence was not sufficiently honed to produce a written English report of top quality. Even when professional translators from outside the company rewrote the German into English, German middle managers were unable to verify whether the report captured the substantive intent or included editorial alterations.28

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Problems associated with the translation of information from one language to another have been made even clearer by Schermerhorn, who conducted research among 153 Hong Kong Chinese bilinguals who were enrolled in an undergraduate management course at a major Hong Kong university. The students were given two scenarios, written in either English or Chinese. One scenario involved a manager who was providing some form of personal support or praise for a subordinate. The research used the following procedures:

[A] careful translation and back-translation method was followed to create the Chinese language versions of the research instruments. Two bilingual Hong Kong Chinese, both highly fluent in English and having expertise in the field of management, shared roles in the process. Each first translated one scenario and the evaluation questions into Chinese. Next they translated each other’s Chinese versions back into English, and dis-cussed and resolved translation differences in group consultation with the author. Finally, a Hong Kong professor read and interpreted the translations correctly as a final check of equivalency.29

The participants were asked to answer eight evaluation questions about these sce-narios. A significant difference between the two sets of responses was found. Those who were queried in Chinese gave different answers from those who were queried in English. This led Schermerhorn to conclude that language plays a key role in conveying information between cultures and that in cross-cultural management research, bilingual individuals should not be queried in their second language.

Cultural Barriers in Language Geographic distance poses challenges for international managers, but so do cultural and institutional distance. Previous research has conceptualized and measured cross-national differences primarily in terms of dyadic cultural distance; that is, comparing the “distance” of one culture to another. Some, however, have suggested that distance is a multidimensional construct that includes economic, financial, political, admin-istrative, cultural, demographic, knowledge, and global connectedness as well as geographic distance and cannot be summarized in one “score.”30 Nowhere does such cultural distance show up more vividly than in challenges to accurate communications.

As one dimension of such distance, cultural barriers have significant ramifica-tions for international communications. For example, research by Sims and Guice compared 214 letters of inquiry written by native and nonnative speakers of English to test the assumption that cultural factors affect business communication. Among other things, the researchers found that nonnative speakers used exaggerated polite-ness, provided unnecessary professional and personal information, and made inap-propriate requests of the other party. Commenting on the results and implications of their study, the researchers noted that their investigation indicated that the deviations from standard U.S. business communication practices were not specific to one or more nationalities. The deviations did not occur among specific nationalities but were spread throughout the sample of nonnative letters used for the study. Therefore, we can speculate that U.S. native speakers of English might have similar difficulties in international settings. In other words, a significant number of native speakers in the U.S. might deviate from the standard business communication practices of other cul-tures. Therefore, these native speakers need specific training in the business com-munication practices of the major cultures of the world so they can communicate successfully and acceptably with readers in those cultures.31

Research by Scott and Green has extended these findings, showing that even in English-speaking countries, there are different approaches to writing letters. In the United States, for example, it is common practice when constructing a bad-news letter to start out “with a pleasant, relevant, neutral, and transitional buffer statement; give the reasons for the unfavorable news before presenting the bad news; present the refusal in a positive manner; imply the bad news whenever possible; explain how the refusal is in the reader’s best interest; and suggest positive alternatives that build

Chapter 7 Cross-Cultural Communication and Negotiation 219

goodwill.”32  In Great Britain, however, it is common to start out by referring to the situation, discussing the reasons for the bad news, conveying the bad news (often quite bluntly), and concluding with an apology or statement of regret (something that is frowned on by business-letter experts in the United States) designed to keep the reader’s goodwill. Here is an example:

Lord Hanson has asked me to reply to your letter and questionnaire of February 12 which we received today. As you may imagine, we receive numerous requests to complete questionnaires or to participate in a survey, and this poses problems for us. You will appreciate that the time it would take to complete these requests would represent a full-time job, so we decided some while ago to decline such requests unless there was some obvious benefit to Hanson PLC and our stockholders. As I am sure you will understand, our prime responsibility is to look after our stockholders’ interests. I apologize that this will not have been the response that you were hoping for, but I wish you success with your research study.33

U.S. MNC managers would seldom, if ever, send that type of letter; it would be viewed as blunt and tactless. However, the indirect approach that Americans use would be viewed by their British counterparts as overly indirect and obviously insincere.

On the other hand, when compared to Asians, many American writers are far more blunt and direct. For example, Park, Dillon, and Mitchell reported that there are pro-nounced differences between the ways in which Americans and Asians write business letters of complaint. They compared the approach used by American managers for whom English is a first language, who wrote international business letters of complaint, with the approach of Korean managers for whom English is a second language, who wrote the same types of letters. They found that American writers used a direct organizational pattern and tended to state the main idea or problem first before sharing explanatory details that clearly related to the stated problem. In contrast, the standard Korean pattern was indirect and tended to delay the reader’s discovery of the main point. This led the researchers to conclude that the U.S.-generated letter might be regarded as rude by Asian readers, while American readers might regard the letter from the Korean writer as vague, emotional, and accusatory.34

Perceptual BarriersPerception is a person’s view of reality. How people see reality can vary and will influence their judgment and decision making.35  Examples abound, of course, of how perceptions play an important role in international management. Japanese stockbrokers who perceived that the chances of improving their career would be better with U.S. firms have changed jobs. Hong Kong hoteliers bought U.S. properties because they had the perception that if they could offer the same top-quality hotel service as back home, they could dominate the U.S. markets. Unfortunately, misperceptions can become a barrier to effective communication and thus decision making. For example, when the Clinton administration decided to allow Taiwan President Lee Tenghui to visit the United States, the Chinese (PRC) government perceived this as a threatening gesture and took actions of its own. Besides conducting dangerous war games very near Taiwan’s border as a warning to Taiwan not to become too bold in its quest for rec-ognition as a sovereign nation, the PRC also snubbed U.S. car manufacturers and gave a much-coveted $1 billion contract to Mercedes-Benz of Germany.36,37,38 In interna-tional incidents such as this, perception is critical, and misperceptions may get out of hand. The following sections provide examples of perceptual barriers and their results in the international business arena.

Advertising Messages One way that perception can prove to be a problem in inter-national management communication is the very basic misunderstandings caused when one side uses words or symbols that simply are misinterpreted by others. Many firms

perceptionA person’s view of reality.

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have found to their dismay that a failure to understand home-country perceptions can result in disastrous advertising programs, for instance. Here are two examples:

Ford . . . introduced a low cost truck, the “Fiera,” into some Spanish-speaking countries. Unfortunately, the name meant “ugly old woman” in Spanish. Needless to say, this name did not encourage sales. Ford also experienced slow sales when it introduced a top-of-the-line automobile, the “Comet,” in Mexico under the name “Caliente.” The puzzling low sales were finally understood when Ford discovered that “caliente” is slang for a street walker.39 One laundry detergent company certainly wishes now that it had contacted a few locals before it initiated its promotional campaign in the Middle East. All of the company’s adver-tisements pictured soiled clothes on the left, its box of soap in the middle, and clean clothes on the right. But, because in that area of the world people tend to read from the right to the left, many potential customers interpreted the message to indicate the soap actually soiled the clothes.40

There have been countless other such advertising blunders. Some speak to the political context, such as when Mercedes-Benz introduced its Grand Sports Tourer, or Mercedes GST, in Canada. Canadians were not very impressed because they used the letters GST to refer to Canadian socialism. Other times, the advertising is simply offen-sive. Bacardi, for example, advertised the fruity drink “Pavian” in Germany, believing that it was tres chic. “Pavian” to the German population, however, meant “baboon.” Needless to say, sales did not exceed expectations. The food and beverage industry may have experienced the worst string of bloopers. The Coors slogan “Turn It Loose” dis-mayed the Spanish, who thought it would cause intestinal problems. In Taiwan, Pepsi’s “Come alive with Pepsi” frightened consumers because it literally meant “Pepsi will bring your ancestors back from the grave.” Finally, even though Kentucky Fried Chicken is performing better in the Chinese market than in America, its catchphrase “Finger-licking good” was originally translated as “Eat your fingers off.”41

Managers must be very careful when they translate messages. As mentioned, some common phrases in one country will not mean the same thing in others. Evidently from the many examples, errors in translation occur frequently, but MNCs can still come out on top with care and persistence, always remembering that perception may create new reality.

View of Others Perception influences how individuals “see” others. A good example is provided by the perception of foreigners who reside in the United States by Americans and the perception of Americans by the rest of the world. Most Americans see themselves as extremely friendly, outgoing, and kind, and they believe that others also see them in this way. At the same time, many are not aware of the negative impressions they give to others. This has become especially salient in light of Americans’ reaction to the September 11, 2001, terror attacks and their conduct of the Iraq War, which have at times shaken the world view of the United States. It becomes a trying exercise to sort through truth and error in such circumstances.

An example in the business world where perception is all important and mispercep-tion may abound is the way in which people act, or should act, when initially meeting others. The International Management in Action feature “Doing It Right the First Time” provides some insight regarding how to conduct oneself when doing business in Japan.

Perceptions of others obviously may play a major role in the context of interna-tional management in the effects of the ways that international managers perceive their subordinates and their peers. For example, a study examined the perceptions that German and U.S. managers had of the qualifications of their peers (those on the same level and status), managers, and subordinates in Europe and Latin America.42 The findings showed that both the German and the U.S. respondents perceived their subordinates to be less qualified than their peers. However, although the Germans perceived their managers to have more managerial ability than their peers, the Americans felt that their South Amer-ican peers in many instances had qualifications equal to or better than the qualifications of their own managers. Quite obviously, these perceptions will affect how German and

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International Management in Action

Doing It Right the First Time

Like other countries of the world, Japan has its own business customs and culture. And when someone fails to adhere to tradition, the individual runs the risk of being perceived as ineffective or uncaring. The follow-ing addresses three areas that are important in being correctly perceived by one’s Japanese counterparts.

Business CardsThe exchange of business cards is an integral part of Japanese business etiquette, and Japanese business-people exchange these cards when meeting someone for the first time. Additionally, those who are most likely to interface with non-Japanese are supplied with busi-ness cards printed in Japanese on one side and a for-eign language, usually English, on the reverse side. This is aimed at enhancing recognition and pronunciation of Japanese names, which are often unfamiliar to foreign businesspeople. Conversely, it is advisable for foreign businesspeople to carry and exchange with their Japanese counterparts a similar type of card printed in Japanese and in their native language. These cards can often be obtained through business centers in major hotels. When receiving a card, it is considered common courtesy to offer one in return. In fact, not returning a card might convey the impression that the manager is not committed to a meaningful business relationship in the future. Business cards should be presented and received with both hands. When presenting one’s card, the pre-senter’s name should be facing the person who is receiving the card so the receiver can easily read it. When receiving a business card, it should be handled with care, and if the receiver is sitting at a conference or other type of table, the card should be placed in front of the individual for the duration of the meeting. It is considered rude to put a prospective business partner’s card in one’s pocket before sitting down to discuss busi-ness matters.

BowingAlthough the handshake is increasingly common in Japan, bowing remains the most prevalent formal method of greeting, saying goodbye, expressing gratitude, or apologizing to another person. When meeting foreign businesspeople, however, Japanese will often use the handshake or a combination of both a handshake and a bow, even though there are different forms and styles of bowing, depending on the relationship of the parties involved. Foreign businesspeople are not expected to be familiar with these intricacies, and therefore a deep nod of the head or a slight bow will suffice in most cases. Many foreign businesspeople are unsure whether to use a handshake or to bow. In these situations, it is best to wait and see if one’s Japanese counterpart offers a hand or prefers to bow and then to follow suit.

AttireMost Japanese businesspeople dress in conservative dark or navy blue suits, although slight variations in style and color have come to be accepted in recent years. As a general rule, what is acceptable business attire in virtually any industrialized country is usually regarded as good business attire in Japan as well. Although there is no need to conform precisely to the style of dress of the Japanese, good judgment should be exercised when selecting attire for a business meeting. If unsure about what constitutes appropriate attire for a particular situation, it is best to err on the conservative side.

Source: Japan: The Official Guide. Japan National Tourism Organiza-tion. http://www.jnto.go.jp/eng/indepth/exotic/lifestyle/bow.html (Accessed October 6, 2016).  Alan Rugman and Richard M. Hodgetts, International Business, 2nd ed. (London: Pearson, 2000), chapter 17; Philip R. Harris and Robert T. Moran, Managing Cultural Differences, 3rd ed. (Houston: Gulf Publishing, 1991), pp. 393–406; Sheida Hodge, Global Smarts (New York: Wiley, 2000), p. 76; Richard D. Lewis, When Cultures Collide (London: Nicholas Brealey, 1999), pp. 414–415.

U.S. expatriates communicate with their South American and other peers and subordi-nates, as well as how the expatriates communicate with their bosses.

Another study found that Western managers have more favorable attitudes toward women as managers than do Asian or Saudi managers.43 Japanese managers, according to one survey, also still regard women as superfluous to the effective running of their organizations and generally continue to not treat women as equals.44 Such perceptions obviously affect the way these managers interact and communicate with their female counterparts.

The Impact of CultureBesides language and perception, another major barrier to communication is culture, a topic that was given detailed attention in Chapter 4. Culture can affect communication in a number of ways, and one way is through the impact of cultural values.

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Cultural Values One expert on Middle Eastern countries notes that people there do not relate to and communicate with each other in a loose, general way as do those in the United States. Relationships are more intense and binding in the Middle East, and a wide variety of work-related values influence what people in the Middle East will and will not do.

In North American society, the generally professed prevalent pattern is one of nonclass-consciousness, as far as work is concerned. Students, for example, make extra pocket money by taking all sorts of part-time jobs—manual and otherwise—regardless of the socioeconomic stratum to which the individual belongs. The attitude is uninhibited. In the Middle East, the overruling obsession is how the money is made and via what kind of job.45

These types of values indirectly, and in many cases directly, affect communication between people from different cultures. For example, one would communicate differently with a “rich college student” from the United States than with one from Saudi Arabia. Similarly, when negotiating with managers from other cultures, knowing the way to handle the deal requires an understanding of cultural values.46

Another cultural value is the way that people use time. In the United States, people believe that time is an asset and is not to be wasted. This is an idea that has limited meaning in some other cultures. Various values are reinforced and reflected in proverbs that Americans are taught from an early age. These proverbs help to guide people’s behavior. Table 7–6 lists some examples.

Misinterpretation Cultural differences can cause misinterpretations both in how others see expatriate managers and in how the latter see themselves. For example, U.S. manag-ers doing business in Austria often misinterpret the fact that local businesspeople always address them in formal terms. They may view this as meaning that they are not friends or are not liked, but in fact, this formal behavior is the way that Austrians always conduct business. The informal, first-name approach used in the United States is not the style of the Austrians.

Culture even affects day-to-day activities of corporate communications.47 For exam-ple, when sending messages to international clients, American managers have to keep in mind that there are many things that are uniquely American and overseas managers may not be aware of them. As an example, daylight saving time is known to all Americans, but many Asian managers have no idea what the term means. Similarly, it is common for American managers to address memos to their “international office” without realizing that the managers who work in this office regard the American location as the

Table 7–6U.S. Proverbs Representing Cultural Values

Proverb Cultural Value

A penny saved is a penny earned. ThriftinessTime is money. Time thriftinessDon’t cry over spilt milk. PracticalityWaste not, want not. FrugalityEarly to bed, early to rise, makes one healthy, wealthy, and wise. Diligence; work ethicA stitch in time saves nine. Timeliness of actionIf at first you don’t succeed, try, try again. Persistence; work ethicTake care of today, and tomorrow will take care of itself. Preparation for future

Source: Adapted from Nancy J. Adler (with Allison Gunderson), International Dimensions of Organizational Behavior, 5th ed. (Mason, OH: South-Western, 2008), p. 84.

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“international” one! Other suggestions that can be of value to American managers who are engaged in international communications include

∙ Be careful not to use generalized statements about benefits, compensation, pay cycles, holidays, or policies in your worldwide communications. Work hours, vacation accrual, general business practices, and human resource issues vary widely from country to country.

∙ Because most of the world uses the metric system, be sure to include con-verted weights and measures in all internal and external communications.

∙ Keep in mind that even in English-speaking countries, words may have dif-ferent meanings. Not everyone knows what is meant by “counterclockwise” or “quite good.”

∙ Remember that letterhead and paper sizes differ worldwide. The 8½ × 11-inch page is a U.S. standard, but most countries use an A4 (8¼ × 11½ inch) size for their letterhead, with envelopes to match.

∙ Dollars are not unique to the United States. There are Australian, Bermudian, Canadian, Hong Kong, Taiwanese, and New Zealand dollars, among others. So when referring to American dollars, it is important to use “US$.”

Many Americans also have difficulty interpreting the effect of national values on work behavior. For example, why do French and German workers drink alcoholic bever-ages at lunchtime? Why are many European workers unwilling to work the night shift? Why do overseas affiliates contribute to the support of the employees’ work council or donate money to the support of kindergarten teachers in local schools? These types of actions are viewed by some people as wasteful, but those who know the culture of these countries realize that such actions promote the long-run good of the company. It is the outsider who is misinterpreting why these culturally specific actions are happening, and such misperceptions can become a barrier to effective communication.

Nonverbal CommunicationAnother major source of communication and perception problems is nonverbal com-munication, which is the transfer of meaning through means such as body language and use of physical space. Table 7–7 summarizes a number of dimensions of nonverbal com-munication. The general categories that are especially important to communication in international management are kinesics, proxemics, chronemics, and chromatics.

nonverbal communicationThe transfer of meaning through means such as body language and the use of physical space.

Table 7–7Common Forms of Nonverbal Communication

1. Facial expressions, including expressions such as a smile or a frown, which can convey a variety of emotions including happiness, anger, fear, or sadness.

2. Gestures, including waving, eye-rolling, and pointing.3. Paralinguistics, which includes non-language-based vocal factors such as tone, loudness,

and inflection.4. Body language and posture, such as arm-crossing and slouching.5. Proxemics, which refers to the personal space between two communicating people.6. Eye gaze, which can determine interest in the conversation, openness, hostility, and even

the level of honesty.7. Haptics, which refers to communication through touching.8. Appearance, including hairstyle, color, clothing, and hygiene.9. Artifacts, such as tools, charts, images, and other objects.

Source:  Adapted from Kendra Cherry, “Types of Non-Verbal Communication,” VeryWell, December 17, 2015,  https://www. verywell.com/types-of-nonverbal-communication-2795397.

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Kinesics Kinesics is the study of communication through body movement and facial expression. Primary areas of concern include eye contact, posture, and gestures. For ex-ample, when one communicates verbally with someone in the United States, it is good manners to look the other person in the eye. This area of communicating through the use of eye contact and gaze is known as oculesics. In some areas of the world, oculesics is an important consideration because of what people should not do, such as stare at others or maintain continuous eye contact, because it is considered impolite to do these things.

Another area of kinesics is posture, which can also cause problems. For example, when Americans are engaged in prolonged negotiations or meetings, it is not uncommon for them to relax and put their feet up on a chair or desk, but this is insulting behavior in the Middle East. Here is an example from a classroom situation:

In the midst of a discussion of a poem in the sophomore class of the English Department, the professor, who was British, took up the argument, started to explain the subtleties of the poem, and was carried away by the situation. He leaned back in his chair, put his feet up on the desk, and went on with the explanation. The class was furious. Before the end of the day, a demonstration by the University’s full student body had taken place. Petitions were submitted to the deans of the various facilities. The next day, the situation even made the newspaper headlines. The consequences of the act, that was innocently done, might seem ridiculous, funny, baffling, incomprehensible, or even incredible to a stranger. Yet, to the native, the students’ behavior was logical and in context. The students and their supporters were outraged because of the implications of the breach of the native behavioral pattern. In the Middle East, it is extremely insulting to have to sit facing two soles of the shoes of somebody.48

Gestures are also widely used and take many different forms. For example, Cana-dians shake hands, Japanese bow, and Middle Easterners of the same sex kiss on the cheek. Communicating through the use of bodily contact is known as haptics, and it is a widely used form of nonverbal communication.

Sometimes gestures present problems for expatriate managers because these behav-iors have different meanings depending on the country. For example, in the United States, putting the thumb and index finger together to form an “O” is the sign for “okay.” In Japan, this is the sign for money; in southern France, the gesture means “zero” or “worthless”; and in Brazil, it is regarded as a vulgar or obscene sign. In France and Belgium, snapping the fingers of both hands is considered vulgar; in Brazil, this gesture is used to indicate that something has been done for a long time. In Britain, the “V for victory” sign is given with the palm facing out; if the palm is facing in, this roughly means “shove it”; in non-British countries, the gesture means two of something and often is used when placing an order at a restaurant.49 Gibson, Hodgetts, and Blackwell found that many foreign students attending school in the United States have trouble communi-cating because they are unable to interpret some of the most common nonverbal gestures.50 A survey group of 44 Jamaican, Venezuelan, Colombian, Peruvian, Thai, Indian, and Japanese students at two major universities were given pictures of 20 universal cultural gestures, and each was asked to describe the nonverbal gestures illustrated. In 56 percent of the choices, the respondents either gave an interpretation that was markedly different from that of Americans or reported that the nonverbal gesture had no meaning in their culture. These findings help to reinforce the need to teach expatriates about local non-verbal communication.

Proxemics Proxemics is the study of the way that people use physical space to convey messages. For example, in the United States, there are four “distances” people use in com-municating on a face-to-face basis (see Figure 7–2). Intimate distance is used for very confidential communications. Personal distance is used for talking with family and close friends. Social distance is used to handle most business transactions. Public distance is used when calling across the room or giving a talk to a group.

One major problem for Americans communicating with people from the Middle East or South America is that the intimate or personal distance zones are violated.

kinesicsThe study of communication through body movement and facial expression.

oculesicsThe area of communication that deals with conveying messages through the use of eye contact and gaze.

hapticsCommunicating through the use of bodily contact.

proxemicsThe study of the way people use physical space to convey messages.

intimate distanceDistance between people that is used for very confidential communications.

personal distanceIn communicating, the physical distance used for talking with family and close friends.

social distanceIn communicating, the distance used to handle most business transactions.

public distanceIn communicating, the distance used when calling across the room or giving a talk to a group.

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