Background
There are a number of reasons why companies may want to go global. First, it is a way of expanding their market without branching into different kinds of businesses. Second, it allows companies to make economically beneficial alliances in order to maximize their own business, such as outsourcing labor intensive, low skill work, trading resources for finished work, process seem recycled goods elsewhere in taking advantage of skills which are historically present in certain locations. These reasons, tend to be connected with medium to large companies. Small companies find that going global can increase their market for niche products.
With the Internet as a marketing tool and efficient and fast distribution chains, these companies can market niche products around the world. For any of these to be successful, however, the companies need to create a strategy for dealing with the problems of international business. These may include cultural differences, political or economic risks and simple logistics. It is the aim of this paper to give a broad overview with a detailed look at strategies to solve these problems, and the relevant theories behind them. We will use some concrete examples to illustrate the points.
Introduction
In light of the problems mentioned above, we will take the three major areas in turn that affect businesses the when they enter into the eye global market: cultural differences and problems, political and economic risk and logistics. These three areas are key to success or failure. A company must create a viable strategy for dealing with these before embarking on international trade, or they may find themselves quickly running home to the mother country.
In the area of cultural differences, there can be some major problems of communication. Miscommunication can have disastrous effects in international business, especially in the areas of communicating with foreign political powers, including bureaucrats. Miscommunication can seriously damage business relationships with other companies and suppliers. Miscommunication can prevent the smooth operation of foreign locations with employees local to the area.
Cultural differences can seriously impede communication, since words alone do not comprise understanding. A second area where cultural differences can create large problems is in marketing. Sometimes words don’t translate well, and sometimes they simply sound bad in a foreign language. This can even include the brand name. There have been instances where brand names have been modified, because the sound in the foreign language had a bad connotation.
Perhaps the most serious area of problems is that a value differences. When the cultures values are infringed, even though this may be explainable by misunderstanding, it still points out that cultural difference, are much more serious than miscommunication. Serious mistakes concerning cultural values point out that the company didn’t care enough to find out the values of the people with whom they intend doing business.
Political and economic risks may include regime changes, nationalization or miscalculations in cost and potential profit. A change of regime can invalidate any agreements made with the previous rulers. In many cases, when the company has made investments in land, resources and materials or equipment, this presents a huge temptation for the new regime to simply nationalize the assets. This can easily happen in small countries where the regime changes are often and fast.
These types of scenarios carry extreme economic risks, considering the amount of loss that accompanies them. In addition to these kinds of economic risks, there is always the risk that the Company has miscalculated the cost of doing business, because of things they did not know about the foreign country, or because of other factors, such as licensing, obtaining and customizing a location, hiring local workers or any number of other costs that simply might have been overlooked. This is a good reason to do a very detailed study of the markets, the business process that is proposed for the international branch and of the political and economic system that the company proposes to enter.
The area of logistics seems quite simple, but things such as timetables, storage, transport and security can make logistics a virtual nightmare. There are so many pitfalls in creating and maintaining the supply and marketing chains that any company would be wise to create a team to study just these problems, or to hire an outside consultant. Very often logistics problems will not show up until the company has made substantial investment. This makes it difficult to pull out without large losses. In addition to these problems, logistics are impacted heavily by the other two factors: culture and socio-political factors, economics and by environmental concerns.
There are many other problems that any company might encounter when embarking on foreign trade. However, these three areas are fairly unique to international trade, as they don’t have as much impact in domestic environments, and that impact that they do have is very different when comparing international and domestic locations. This therefore this paper will focus upon these areas, and the strategies needed in order to resolve the problems which may arise.
The very rapidity of communications and transportation around the globe that has made international business highly profitable also creates rapid change, and all companies engaging in international trade must be ready to deal with this. It is hoped that this will help the company and its managers to create a plan for embarking upon international business that will enable them to become successful.
We will use a small company which makes sealing liners for bottle and jar caps: Integrated Liner Technologies, as an example. This company may or may not be contemplating going global, but it could expand its market in this way, and the CEO, Paul Petrosino, is not needed for daily operations of the domestic operation, because the team he created works very well. (Sichko 2008)
Most pharmaceuticals companies are already global. However, to serve their international operations, they must either buy domestic supplies and ship, or buy from foreign suppliers. Integrated Liner Technologies had a streamlined and efficient operation to produce high quality products with outstanding regularity. The materials: silicone, Teflon and rubber, come mostly from foreign suppliers. Therefore, branching into the international market can be leveraged by using these suppliers to supply the international branch (es).
Globalization Forces
Donald Ball et al (2006) explain that, “There are five major kinds of drivers, all based on change, that are leading international firms to the globalization of their operations:
Political
The trend is for unification, especially among groups of nations. However, many barriers to trade are coming down also.
Technological
Technology has made possible the rapid exchange of information, and, more importantly, the rapid development of new technology, often via international cooperation.
Market
Globalization is increasing the market in every sector, because business is connected to a business which goes international may also go international, in order to retain that customer in the foreign environment.
Cost
Economies of scale to reduce unit costs are always a management goal. One means of achieving them is to globalize product lines to reduce development, production, and inventory costs. The company can also locate production in countries where the costs of the factors of production are lower.
Competitive
New firms are entering the market from developing countries, and many firms find it necessary to globalize in order to protect their home markets.
These factors, the rapid development of some areas of the world (China, for example), the growth of many foreign economies and the interdependence of global economies are pushing globalization forward. However, there is a need for rules which impedes it while the world community creates them and they become accepted practice around the world. This means that companies need managers who can project the current status to extrapolate the future, anticipate change and foster innovation to deal with it.
Hanvanich, Sangphet, Sivakumar, K. and Hult (2006) In China, any company providing products or support already provided by government owned entities must be a joint venture with a Chinese company. For example, Natoil-Varco (Natoil-Varco Website 2008) partners with the Chinese oil companies, even though it supplies the hardware and expertise for maintenance of their facilities.
Before considering where to establish an international installation, Paul Petrosino needs to find out about the foreign branches of the companies her serves. It is possible that they can give him invaluable advice and even offer some kind of partnership or joint venture where they are established. After all, it would benefit them to have these supplies produced closer to the place of application. These companies will still be his primary market overseas, at least at first. The technology has possible applications for other industries also, and these could be explored after the base clients are secured.
Establishing Goals
Before embarking on international business, every company needs to assess the goals it has better driving it to the international market. There are a number of ways for any company to become involved in international business. They include direct foreign investment, international cooperative agreements between companies which serve each other’s needs, such as buyers and suppliers, establishment of foreign branches, joint ventures and partnerships. Which of these any company chooses depends entirely upon its goals.
Direct foreign investment may risk only capital, and the benefits may be both capital return and increased international influence and prestige. International cooperative agreements may be made between retailers and manufacturers in order to take advantage of lower labor costs in foreign countries. These may also include parts of the supply chain, and even the natural resources. In these cases, the company’s only need to cooperate and neither company is actually established in the other’s country.
Establishing a branch or subsidiary in a foreign country can be quite complex, but it may be the only way to enter into that market, because the foreign country wants both investment and employment. Many foreign countries require either a partnership were a joint venture from any company that wishes to enter their market. In this way, they ensure that their own domestic enterprises reap benefits that will remain even if the association is dissolved. (Barkema et al 1997)
Once Paul Petrosino canvasses his clients which have international installations he can discuss his ideas for going international with them. They are clients and not competitors, so they will be ready to cooperate if it looks like it can benefit both parties. It is probable that one or more will be interested in a joint venture. This can help Integrated Liner Technologies to surmount all the political hurdles as their partner will know all the necessary things to be done. Legal issues will have been investigated by the partner and local connections will already have been made.
Factors Impacting Companies Entering The International Market
Cultural Factors
Value System
The culture of a people is the sum total of the value system upon which it is built. Three major aspect of culture are language, food and religion or ethical beliefs. In looking at the Hoffstede (1989 ), This is an era of rapid change, where companies must strive to keep up, or the gap of understanding can swallow up the firm. Barkema and Vermeulen (1997) studied International Joint Ventures and measured the impact of Hofstede’s Cultural Dimensions (Hofstede, Geert 1989), including the Long Term Outlook and their findings indicated that the recently added portion of Uncertainty Avoidance Factor and the long Term Outlook were key factors in predicting success or failure of an International Joint Venture.
See Appendix B for a descriptive chart of Hofstede’s Cultural Dimensions. This study identified very large differences in cultural acceptance of uncertainty as strong factors figuring in failures of International Joint Ventures. Countries which had a high tolerance for uncertainty generally enjoy more success with IJVs. If the two countries have similar cultural tolerance of future based outcomes, then any large differences in the tolerance of uncertainty were balanced and counteracted. (Barkema, Harry G.; Vermeulen, Freek 1997)
For Integrated Liner Technologies, Paul Petrosino will have to study the local cultures and learn some of the language. He will have to create his foreign team, probably with a mix of people from home and people local to the new location. Since their product is not sold retail there is no need to study advertising impact. However, he needs to know the local workforce and their value systems in order to put together an efficient and loyal workforce. Since the company is not labor intensive, he only needs a small group of well trained individuals. However, he may have to train that workforce himself, or hire a trainer, since ht e specific skills he needs may not be readily available.
In examining Paul Petrosino’s past performance, it is probably that he will not have much trouble adjusting to a foreign culture, since he is a very flexible person. Providing he does his homework, he should have no trouble in creating alliances and cultivating a good management team. His preference for a monitored laissez-faire type management, coupled with his ability to inspire the team and willingness to be available to solve problems, he should be able to build a small organization to handle the first foreign subsidiary. After the first is solidly established, he can consider other possibilities.
The Values Within the Cultural System
Aesthetics
Aesthetics is the culture’s sense of beauty and taste. It shows in the culture’s art, drama, music, folklore, and dances. If the “foreigner” has an extremely different sense of aesthetics, he may not be as trusted, due to suspicion that he has the wrong sense of value. Extremes in taste should not be demonstrated by the foreigners, since it is these which have the most potential to offend. One example is when ATT fulfilled an order to supply cables to NTT in Japan. While the cables met all the specifications laid down, the Japanese rejected them on sight because they were ugly. (Bahn and Toscano 2006)
Attitudes and Beliefs
Attitudes toward Time
One major problem that American firms often have is the clock. Schedules and deadlines are outlined and distributed, and people are expected to honor them. In addition, work time is expected to take precedence over leisure time. This is not the attitude in countries around the world. In many parts of Europe, there is an afternoon rest which is honored. Americans are always concerned with time, and this often causes friction with other cultures with different values. In some countries showing up early for a meeting is an insult, while in others, showing up less than ten minutes early is seen as a sign you don’t care about the meeting. (Ball et al 2006) FedEx failed to consider cultural differences on time: In Spain the workers preferred very late office hours, because they take a three hour break in the afternoon at siesta time.(Kwintessential 2008)
Attitudes toward Achievement and Work
The way people think about their work varies from culture to culture. In some cultures a person’s identity is defined by their work, while in others it is based in religion or family or even socio-political group. A western company with the old Puritan work ethic may be disappointed and think that foreign employees are lazy or not committed if they connect their identity to anything else. Managers need to know how the host culture thinks about work, so they can modify their reactions to it.
For example, Hong Kong workers are almost workaholics, but they are not always on time for work. “A sales manager in Hong Kong tried to control employee’s promptness at work. He insisted they come to work on time instead of 15 minutes late. They complied, but then left exactly on time instead of working into the evening as they previously had done. Much work was left unfinished until the manager relented and they returned to their usual time schedule.” (Kwintessential 2008)
Attitudes toward Change
As Hofstede (1989) noted, there are differences in how much and how any given culture tolerates change. Generally more highly industrialized cultures tolerate more change than developing cultures. Theocracies, that is, cultures ruled by their religious doctrine are less tolerant of change
Religion
There are many cultures whose government mandates close attention to religion, or where traditionally the people live their religion. This must be respected if the guest company expects any kind of return, either politically, materially or commercially. People who live by any strong tradition are much more likely to informally boycott brands which they perceive as no respecting their value systems.
Material Culture
When modern cultures first came into contact with less developed people, a major difference identified centered upon how material goods were distributed, and though less extreme, those differences still exist among the world’s cultures. Many American Indian tribes did not understand ownership at all when the “white man” arrived. Total sharing of resources was important to their survival, so there was no ownership. The measure of hospitality is often based on the same set of rules, and foreign companies are expected to show the same level of hospitality as their hosts.
Education
Basic education, though better and more available than in the past, is still unevenly distributed. This can have an impact upon political negotiations and even more so on human resource development. Some foreign populations cannot do what the average sixth grader from a western country can do, while others would dance circles around western high school graduates. This knowledge is important to the development of a work force. Extra training may be needed in some locations and extra development opportunities in others.
Language and Communications
Definition: The word “communication” comes from the Latin root “communicare” (to make common to many, share or impart, partake in common) through the French and finally to English. (Barnhart, Robert 1995) This gives a clue to the immense breadth of the subject of communication, which includes any method of transmission of ideas and impressions or any other information, defining “information” as human usable data.
Communication is probably the most important area requiring attention when any company wants to expand internationally. Misunderstandings can cause terrible problems, and these can be based in oral communication, written communication or even environmental communication. These are all methods of transmission of messages. That the method of transmission of communication is written or spoken does not mean that the communication is straightforward without nuance, but only that these are different.
Oral Communication
Most managers are fairly well schooled in oral communications skills in their own culture or maybe even two if they have ethnic origins foreign to their home country. However, they may need to brush up on the cultural nuances of the host country to avoid possibly damaging miscommunications. Such things as how to address others and who initiates switching to first names and when varies around the world. Even the tonal qualities of spoken language is different around the world. Many foreigners who speak English well cannot hear or imitate North American tone, accent or rhythm. Since we listen primarily to these cues and only the major words, it can make a huge difference. (Little, L. (July 1999)
Written Language
While written communication is generally more formal, even contract language needs to be clearly understood. For example, in China there is no established “rule of law” so contracts, while used as guidelines, and actually required, are only as good as the people making them. Advertisements and slogans can be minefields, since one must consider both translation and interpretation. “American Motors tried to market its new car, the Matador, based on the image of courage and strength. However, in Puerto Rico the name means “killer” and was not popular on the hazardous roads in the country.” (Kwintessential 2008)
Unspoken Language
Much communication is not via words at all. It is closely tied to the culture, and can be as simple as a look or as complicated as how a dinner setting is arranged. These are the most important, and learning the foreign language can often help the manager learn many of these even if he or she never really learns to speak the languages very well. Such things as a close office door signals different things around the world. Hall points out that in America, it means the manager is busy, but in Germany it only means he is tidy. In the United States the larger most remote offices are given to higher status executives, while these may be assigned differently elsewhere. In Japan the upper management will not be on the top floor, and in France they will be located quite centrally.
“The angle and distance of conversation is an important indicator of cultural respect and comfort. In China if you watch a conversation between Chinese executives and newly arrived westerners, you will see them constantly turning as the Chinese try to get face to face and the westerners try to get at a 40 or so degree angle. This appears like an interesting dance from a distance, but the speakers are seldom aware of it.” (Andrusyshyn, Karena 2002) It is a different pattern in other cultures, but we try to adjust distance and angel in conversation for comfort.
The Language of Gift Giving
Gift giving is an important part of getting acquainted in most cultures and most business people use this a lot, but you must know the etiquette of gifts and giving to avoid really detrimental mistakes. The wrong gift or given at the wrong time can send an opposite message than intended.
Relationship building is primary in some cultures, and gift giving is part of this process. There are cultures in which the relationship is very important while others consider it a low priority. This was a barrier to Siemens in China when they first arrived, until they learned from hired Chinese managers. (from conversation with Chinese manage who prefers to stay anonymous)
Societal Organization
A cultural change is believed to be a major reason for the success of Walt Disney Productions in Japan. They may have changed Japanese social history with the idea of family fun. “Families now account for half of the park’s visitors. An executive of the park owners states, leisure was not always a part of the Japanese lifestyle. Fathers used to see family outings as a duty.” (The Columbian 1994)
Rules for Cultural Adjustment
In order to carry on business of any kind across borders, everyone involved with contact should follow this plan:
Be prepared
Do your homework. Study the culture. If you can get a mentor do so, and do lots of reading on social and business etiquette, history and folklore, current affairs (including political relations between your two countries), the value system, geography, national pride (artists, musicians, sports), religion and political frameworks.
Slow down
When you need to rush, your hosts will let you know. Most countries do business and life at a more leisurely pace than the west.
Establish trust
Often very formal business relationships will not work. Product quality, pricing, and clear contracts are not nearly as important as the “personal relationship and trust”which take care and time.
Understand the importance of language
Obviously, translations must be done by a fluent professional who speaks both languages. It is more interpretation than translation. Even if there is an interpreter, learning the foreign language of the host is desirable as it shows a willingness to learn and certain amount of respect, even if the person does not speak well.
Respect the culture
As a Saudi Arabian official states in one of the Going International films (2008), “Americans in foreign countries have a tendency to treat the natives as foreigners, and they forget that actually it is they who are the foreigners themselves!” Understanding this is the first step in learning to use cultural differences to gain a strategic advantage.
Economics and Politics
Generally, the wealthier a country is, the more telephone lines it has. Source: World Development Indicators 2000, 2001, (August 6, 2004)
Understand the purpose of economic analyses
Firms need to regularly assess so they can forecast economic conditions at the local, state, and national levels. When embarking upon international operations, this economic analysis becomes extremely complex, since there is a dual character to the change, that of operating on two administrative levels: foreign and international.
Recognize the dimensions of the economy, both social and economic
The functional areas of a firm, i.e. operations, require data on the size and rates of change of a number factors. GDP, GNI, distribution of income, personal consumption habits, private investment, unit labor costs, and financial data, such as exchange rates, inflation rates, interest rates, and the amount of a nation’s foreign debt. The principal socioeconomic dimensions are total population, rates of growth, age distribution, population density, and population distribution. All of these factors bear close study.
Understand the nation’s consumption patterns and purchasing power parity
Marketers must know how discretionary incomes are used, since this is the source oif the company’s income. Purchasing power parity (PPP) tells a lot they need to know, about the prospective customers and prospective employees. When GDP appears to be too low to indicate a viable market, switching to GDP based on PPP can show the true situation. (Fortress of Mercantilism1988) Chinese salaries are traditionally very low, but free health care, employee benefits, government retirement and subsidized housing change the whole picture.
Understand variable labor costs
Hourly labor rates, especially when stated in U.S. dollars, change rather rapidly. There are three factors that are responsible:
- real changes in compensation,
- changes in productivity, and
- changes in exchange rates.
International Debt
Understand the significance of the large foreign debts of some nations
Large foreign debts may be a sign the government will impose exchange controls. If the country’s export earnings go to service its external debt, there will be little left for local use. The government might also add price and wage controls. There is also the possibility that firms can buy some of the discounted debt to obtain local currency at a favorable exchange rate.
Tariffs, Taxes, Quotas, and Other Trade Obstacles
These are so complicated you may need one specialist to take care of them or the business could get into deep and costly trouble.
Accounting Practices
There are so many variables here in each jurisdiction that using a combination of one international expert and one local to the host country is desirable. These people can be the same who take care of tariffs, taxes and other trade laws. (Appleyard and Field 1992)
Of the economic factors listed, Paul Petrosino only really needs to be concerned about those affecting the workforce. The other considerations apply more to companies which will sell to foreign consumers. Even when Integrated Liner Technologies is ready to expand its client base internationally, there will be some restrictions governed by the agreements with the partner organization. However, the technology can be applied to other industries, any which use capped containers. This idea should be explored for possible product expansion.
Political Factors
Political factors stem from several variables:
- The ideology of the populace
- This is not necessarily obvious, since ideology is how they believe, their value system and it may differ from their government.
- The economic development and the poverty rate
- Remember the “real” buying power is more important than the monetary exchange rates
- Government ownership of resources and control
- This can be an asset or a hindrance
- Competition and Government support or subsidy-protection
- This is a really important factor is choosing products and setting prices. It is difficult to compete with government subsidized producers.
- Privatization
- Free enterprise means higher competition, but if the government owns everything it may be impossible to fight the monopoly.
- Terrorism
- Many places in the world are dangerous. If it is too dangerous it may be costly for bringing in employees and for insurance.
Government Stability
Government changes can cause the complete loss of a foreign installation, as has happened many times in South America. Once your company is nationalized you have lost it.
Country Risk Assessment (CRA)
Assessing the political risks in any geographical location can be the difference between success and failure, especially when there are multiple choices for locations. This is one reason why China is doing so well, because while it can be difficult to do business there, the regime is relatively stable by comparison with many small countries.
Intellectual Property and Patent Protection
This becomes very important when the product is copyrightable or patentable. You also need to know all the ins and outs of getting proper protection and what that does for your company.
These political factors will be already covered by the partner organization for Integrated Liner Technologies. Therefore, they only need to consult with the partner and take their advice, or allow someone from the partner organization to take care of these details.
Conclusion
There are many factors to consider carefully before any company branches into international business on any scale. There are social, cultural, business, political, economic, geographical, logistical and financial concerns to be carefully investigated. Careful planning is mandatory. It is very recommended to hire professionals for advice in many areas. It is not simply adding distance and cost to production. It is entering an alien world where you are the “newbie”. For lack of space, this paper gives only an overview of the areas which must be considered.
Integrated Liner Technologies, if it partners with one of its current clients should be able to expand internationally very successfully in a very gradual fashion. Once the first foreign installation is successfully running, others can be considered. In addition to new markets for current products, new applications for the technology can be explored. Paul Petrosino is an ideal type of manager to head up this kind of venture, since hs highly adept at team building.
Suggestions
Because the first step into the global marketplace is really difficult, and important for the future possibilities, there is simply no replacement for a motivated guide in the form of a partner, an affiliate or a joint venture with a foreign company. There are all kinds of pitfall here also, but if there is a profit motive for insuring your success, most foreign companies will do their very best for you.
Integrated Liner Technologies in partnership with a current client has a distinct advantage in international expansion. They have a valuable niche product with a large possible market. The technology may be adaptable to other applications. The outlook for this kind of venture into the global market is excellent.
Appendix A
Appendix B
Geert Hofstede’s Cultural Dimensions
- Power Distance Index (PDI) that is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society’s level of inequality is endorsed by the followers as much as by the leaders. Power and inequality, of course, are extremely fundamental facts of any society and anybody with some international experience will be aware that ‘all societies are unequal, but some are more unequal than others’.
- Individualism (IDV) on the one side versus its opposite, collectivism, that is the degree to which individuals are inte-grated into groups. On the individualist side we find societies in which the ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty. The word ‘collectivism’ in this sense has no political meaning: it refers to the group, not to the state. Again, the issue addressed by this dimension is an extremely fundamental one, regarding all societies in the world.
- Masculinity (MAS) versus its opposite, femininity, refers to the distribution of roles between the genders which is another fundamental issue for any society to which a range of solutions are found. The IBM studies revealed that (a) women’s values differ less among societies than men’s values; (b) men’s values from one country to another contain a dimension from very assertive and competitive and maximally different from women’s values on the one side, to modest and caring and similar to women’s values on the other. The assertive pole has been called ‘masculine’ and the modest, caring pole ‘feminine’. The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are somewhat assertive and competitive, but not as much as the men, so that these countries show a gap between men’s values and women’s values.
- Uncertainty Avoidance Index (UAI) deals with a society’s tolerance for uncertainty and ambiguity; it ultimately refers to man’s search for Truth. It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Unstructured situations are novel, unknown, surprising, different from usual. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute Truth; ‘there can only be one Truth and we have it’. People in uncertainty avoiding countries are also more emotional, and motivated by inner nervous energy. The opposite type, uncertainty accepting cultures, are more tolerant of opinions different from what they are used to; they try to have as few rules as possible, and on the philosophical and religious level they are relativist and allow many currents to flow side by side. People within these cultures are more phlegmatic and contemplative, and not expected by their environment to express emotions.
- Long-Term Orientation (LTO) versus short-term orientation: this fifth dimension was found in a study among students in 23 countries around the world, using a questionnaire designed by Chinese scholars It can be said to deal with Virtue regardless of Truth. Values associated with Long Term Orientation are thrift and perseverance; values associated with Short Term Orientation are respect for tradition, fulfilling social obligations, and protecting one’s ‘face’. Both the positively and the negatively rated values of this dimension are found in the teachings of Confucius, the most influential Chinese philosopher who lived around 500 B.C.; however, the dimension also applies to countries without a Confucian heritage. Source for Article: (Barkema, Harry G.; Vermeulen, Freek 1997)
Differences in uncertainty avoidance are difficult to cope with in the case of international cooperation [Hofstede 19891. They imply differences in how people perceive opportunities and threats in their environment, and how they act upon them [Schneider and De Meyer 19911. Organizations in countries characterized by high uncertainty avoidance tend to respond to uncertainty in the environment by building up a system of high formalization and hierarchy [Hofstede 19801. Employees in these countries turn to this system when confronted with events in the environment; they feel uncomfortable without such a system to hold on to. In countries where uncertainty avoidance is low, however, people feel equally uncomfortable with rigid rules and hierarchy.
They feel much more attracted to flexible, ad hoc structures which leave much room for improvisation and negotiation. Uncertainty avoidance, at either pole of the dimension, reflects deep psychological needs concerning control and security [Hofstede 1989, 19911. In sum, we expect that differences in uncertainty avoidance lead to differences in how partners perceive and respond to events in the environment of the IJV, which will likely breed disagreement and dispute between the partners, and have a detrimental impact on the IJV’s chances of survival.
Power distance and individualism directly bear on issues of internal integration and influence relationships with personnel, such as the organization’s choice of control forms, reward systems and so on [Hofstede 1980; Kim, Park and Suzuki 1990; Lebas and Weigenstein 19861. However, management of personnel is usually one of the first activities to be left to the local partner to organize [Hofstede 1991; Rosten 1991; Stopford and Wells 19721. Soeters and Schreuder [I9881 found that U.S. multinationals did not transfer cultural values related to power distance and individualism to their Dutch subsidiaries. This suggests that tensions between the partners associated with differences along these dimensions can typically be avoided.
Furthermore, Hofstede [I9851 and Shenkar and Zeira [I9921 suggest that having partners from both “feminine” and “masculine” cultures may even benefit the IJV. The aggressive attitude of one partner (aimed at individual achievement and performance) and the relationship orientation of the other (cf. Hofstede [1980]) may complement each other rather than collide. The above discussion suggests the following hypothesis: HI: Differences in uncertainty avoidance between home and host country – rather than differences in power distance, individualism and masculinity – have a negative impact on IJV survival.
IJV Survival and Long- Term Orientation
Hofstede’s fifth dimension, long-term orientation [Hofstede and Bond 1988; Hofstede 19911, captures the extent to which people have a pragmatic future oriented perspective rather than a focus on the present. People in societies characterized by a long-term orientation know many truths and have a thrift for investment. In this sense, they are dynamic in their thinking. Relationships
are largely ordered on the basis of status. In societies with little long-term orientation, people believe there is one absolute truth and expect quick results. This represents a more static attitude [Hofstede and Bond 19881.” Differences in the long-term orientation of the partners will therefore likely
lead to differences in objectives and in perceived opportunities and threats in the environment of the IJV [Schneider 1988; Schneider and De Meyer 19911. For instance, one partner may have a sense of urgency and favor quick results, while the other has a long-term view and is more oriented towards investments in financial assets and in building up a relationship with the partner. Such differences will likely breed tensions and increase the probability of untimely dissolution of the IJV.
Yeh and Lawrence [I9951 recently argued that Hofstede’s fifth dimension, long-term orientation, is actually strongly related to individualism. Societies in which people have a long-term orientation would tend to be collectivistic whereas those that are less long-term-oriented are more individualistic. However, we believe that the view that collectivism and long-term orientation represent the same aspect of culture is too much of a simplification.
Research on Western IJVs in China – the country with the highest score on long-term orientation – suggests that different time perspectives and issues of status [Tai 19881 rather than different attitudes towards individualism lead to cultural clashes [Baird, Lyles and Wharton 19901. It is difficult for Westerners to understand and handle the differences in time horizon with their Chinese partner, yet handling such differences is a prerequisite for successful cooperation [Beamish and Wang 1989; Davidson 19871.
The above discussion suggests that differences in long-term orientation cause problems in IJVs, while differences in power distance, individualism and masculinity do not necessarily lead to problems. Formally: H2: Differences in long-term orientation between home and host country – rather than differences in power distance, individualism and masculinity – have a negative impact on IJV survival. Source: Salk and Shenkar, 2001.
The British Parent. Saxony (pseudonym) was a highly diversified global firm. While its European bulk chemical business had been losing money, Saxony as a whole was profitable and a strong competitor. Initial contact depicted its culture as decidedly Anglo-Saxon: polite, gentlemanly, and task oriented. Its structure was highly formal, with detailed career planning and written documentation. Very few non-Anglo-Saxons were in the upper ranks of the firm’s bulk business. Saxony offered employment security and had low managerial turnover.
The Italian Parent. Large and diversified, Italico’s (pseudonym) bulk chemical business was concentrated in Southern Europe. It grew out of government-mandated acquisitions and mergers of state-owned and private firms, many of which were poor performers. Recent restructuring resulted in a centralized, but informal structure. Managers preferred verbal to paper communication. The key role played by powerful patrons and networks, rather than formal structures, arose from a deeper assumption of preserving ambiguity, and thus room for personal maneuvering. Careers relied on personal networks. Italico offered high job security.
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