Euro DisneylandIn the Euro Disneyland case study (p. 257 in the textbook), many of the issues Disney had from the start related to cultural challenges expanding into France. Using Hofstede’s four cultural dimensions as a point of reference, how would you make the following decisions using the Business Problem Solving Model in the course content?
-Your well-written paper should meet the following requirements:-Answer each question under subtitle.- please see the textbook attached and use it as a main resource.-The paper should include: Introduction ,body and conclusion
International
Management
Culture, Strategy, and Behavior
Fred Luthans | Jonathan P. Doh
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International Management
Culture, Strategy, and Behavior
Tenth Edition
Jonathan P. Doh
Villanova University
Fred Luthans
University 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-
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2012, and 2009. No part of this publication may be reproduced or distributed in any form or by any means,
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United States.
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ISBN 978-1-259-70507-6
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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
University
Chi Anyansi-Archibong, North Carolina
A&T State University
Koren Borges, University of North
Florida
Lauryn De George, University of Central
Florida
Jae Jung, University of Missouri at Kansas
City
Manjula S. Salimath, University of North
Texas
Preface ix
Thomas M. Abbott, Post University
Yohannan T. Abraham, Southwest Missouri State
University
Janet S. Adams, Kennesaw State University
Irfan Ahmed, Sam Houston State University
Chi Anyansi-Archibong, North Carolina A&T State
University
Kibok Baik, James Madison University
R. B. Barton, Murray State University
Lawrence A. Beer, Arizona State University
Koren Borges, University of North Florida
Tope A. Bello, East Carolina University
Mauritz Blonder, Hofstra University
Gunther S. Boroschek, University of Massachusetts–Boston
Charles M. Byles, Virginia Commonwealth University
Constance Campbell, Georgia Southern University
Scott Kenneth Campbell, Georgia College & State
University
M. Suzanne Clinton, University of Central Oklahoma
Helen Deresky, SUNY Plattsburgh
Dr. Dharma deSilva, Center for International Business
Advancement (CIBA)
David Elloy, Gonzaga University
Val Finnigan, Leeds Metropolitan University
David M. Flynn, Hofstra University
Jan Flynn, Georgia College and State University
Joseph Richard Goldman, University of Minnesota
James Gran, Buena Vista University
Robert T. Green, University of Texas at Austin
Annette Gunter, University of Central Oklahoma
Jerry Haar, Florida International University–Miami
Jean M. Hanebury, Salisbury State University
Richard C. Hoffman, Salisbury State University
Johan Hough, University of South Africa
Julie Huang, Rio Hondo College
Mohd Nazari Ismail, University of Malaya
Steve Jenner, California State University–Dominguez Hills
James P. Johnson, Rollins College
Marjorie Jones, Nova Southeastern University
Jae C. Jung, University of Missouri–Kansas City
Ann Langlois, Palm Beach Atlantic University
Robert Kuhne, Hofstra University
Christine Lentz, Rider University
Ben Lever III, College of Charleston
Robert C. Maddox, University of Tennessee
Curtis Matherne III, East Tennessee State University
Douglas M. McCabe, Georgetown University
Jeanne M. McNett, Assumption College
Lauryn Migenes, University of Central Florida
Alan N. Miller, University of Nevada, Las Vegas
Ray Montagno, Ball State University
Rebecca J. Morris, University of Nebraska–Omaha
Ernst W. Neuland, University of Pretoria
William Newburry, Rutgers Business School
Yongsun Paik, Loyola Marymount University
Valerie S. Perotti, Rochester Institute of Technology
Richard B. Peterson, University of Washington
Suzanne J. Peterson, University of Nebraska–Lincoln
Joseph A. Petrick, Wright State University
Juan F. Ramirez, Nova Southeastern University
Richard David Ramsey, Southeastern Louisiana University
Owen Sevier, University of Central Oklahoma
Mansour Sharif-Zadeh, California State Polytechnic
University–Pomona
Emeric Solymossy, Western Illinois University.
Jane H. Standford, Texas A&M University–Kingsville
Dale V. Steinmann, San Francisco State University
Randall Stross, San Jose State University
George Sutija, Florida International University
Deanna Teel, Houston Community College
David Turnipseed, University of South Alabama–Mobile
Katheryn H. Ward, Chicago State University
Li Weixing, University of Nebraska–Lincoln
Aimee Wheaton, Regis College
Marion M. White, James Madison University
Timothy Wilkinson, University of Akron
George Yacus, Old Dominion University
Corinne Young, University of Tampa
Zhe Zhang, University of Central Florida–Orlando
Anatoly 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 Authors
JONATHAN 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 99
Brief Integrative Case 1.2: TOMS Puts Its Right Foot Forward 102
In-Depth Integrative Case 1.1: Student Advocacy and
“Sweatshop” Labor: The Case of Russell Athletic 107
In-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 248
Brief Integrative Case 2.2: Danone’s Wrangle with Wahaha 255
In-Depth Integrative Case 2.1a: Euro Disneyland 262
In-Depth Integrative Case 2.1b: Disney in Asia 273
In-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 415
In-Depth Integrative Case 3.1: Tata “Nano”:
The People’s Car 421
Part Two
Part Three
Brief Contents
Part 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 555
In-Depth Integrative Case 4.1: HSBC in China 563
In-Depth Integrative Case 4.2: Chiquita’s Global Turnaround 575
Skill-Building and Experiential Exercises 583
Glossary 599
Indexes 605
Part Four
Environmental Foundation
1 Globalization and International Linkages 2
The 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 44
The 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 Contents
Part 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 74
The 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 122
The 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 156
The 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 182
The 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 290
The 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 328
The 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 360
The 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 388
The 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 432
The 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 468
The 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 508
The 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 584
1. 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 ONE
ENVIRONMENTAL
FOUNDATION
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Chapter 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 Strategy
General 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 Connect
Though 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 their
mobile devices. Globally, the average user has 338 “friends”:
China India USA
P
o
p
u
la
ti
o
n
in
M
ill
io
n
s
0
200
400
600
800
1000
1200
1400
1600
If Facebook were a country, it would be the largest.
84%
of users are located
outside 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 Globally
In 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 Diplomacy
The 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
■ Introduction
Management 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
management
Process of completing
activities efficiently and
effectively with and through
other people.
international management
Process of applying
management concepts and
techniques in a multinational
environment and adapting
management practices to
different economic, political,
and cultural environments.
MNC
A firm having operations in
more than one country,
international sales, and a
nationality mix of managers
and owners.
Table 1–1
The 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 Internationalization
International 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 Change
Globalization 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
globalization
The process of social,
political, economic,
cultural, and technological
integration among countries
around the world.
offshoring
The process by which
companies undertake some
activities at offshore
locations instead of in their
countries of origin.
outsourcing
The subcontracting or
contracting out of activities
to endogenous organizations
that had previously been
performed by the firm.
Table 1–2
The 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 Trade
In 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 Trade
Early 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 Initiator
In 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 Imperative
The 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. History
The 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 Integration
One 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 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960–1961 Geneva Tariffs 26
(Dillon Round)
1964–1967 Geneva Tariffs and antidumping 62
(Kennedy Round) measures
1973–1979 Geneva Tariffs, nontariff measures, 102
(Tokyo Round) “framework” agreements
1986–1994 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 .
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 Union
A 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
Spain
Portugal
The Netherlands
Belgium
Poland
United
Kingdom
Italy
Austria
Czech Republic
Slovakia
Ireland
Denmark
Lithuania
Latvia
Estonia
Finland
Sweden
Hungary
Romania
Bulgaria
Greece
Slovenia
Cyprus
Malta
Turkey
Croatia Serbia
Albania
Luxembourg
Member States Candidate States
Figure 1–1
European 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 Demographics
The 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 Economy
Economic 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
Brazil
Indonesia
Turkey China
India
Russia
Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh.
Figure 1–3
E7 (Emerging Seven)
Economies
Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh.
Canada
United
States
United
Kingdom
France
Germany
Italy Japan
Figure 1–2
G7 (Group of Seven)
Economies
Chapter 1 Globalization and International Linkages 17
Table 1–4
The 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 2
China 10,355 2 53,553 1
Japan 4,770 3 7,914 6
Germany 3,820 4 6,338 10
France 2,902 5 5,207 12
United Kingdom 2,848 6 5,744 11
Brazil 2,244 7 8,534 5
Italy 2,129 8 3,617 16
Russia 2,057 9 6,610 8
India 2,048 10 27,937 3
Canada 1,794 11 3,583 17
Australia 1,483 12 2,903 19
South 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 1–5
The 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 1
United States 17,416 2 41,384 3
India 7,277 3 42,205 2
Japan 4,788 4 7,914 7
Germany 3,621 5 6,338 10
Russia 3,559 6 7,575 8
Brazil 3,073 7 9,164 5
France 2,587 8 5,207 13
Indonesia 2,554 9 12,210 4
United Kingdom 2,435 10 5,744 11
Mexico 2,143 11 8,014 6
Italy 2,066 12 3,617 18
South 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 1–6
Cities Expected to Contribute Most to Global Growth 2015–2030
(GDP contribution in billions)
City Country GDP Contribution
New York City United States 874
Shanghai China 734
Tianjin China 625
Beijing China 594
Los Angeles United States 522
Guangzhou China 510
Shenzhen China 508
London United Kingdom 476
Chongqing China 432
Suzhou China 394
Source: “Global Cities 2013,” Oxford Economics, 2015.
Table 1–7
Changing 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 Congo
10 Italy Mexico Ethiopia
11 France Japan Mexico
12 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 is
a. Japanese b. British c. U.S.-based d. French
3. The company that owns Jaguar is based in
a. Germany b. the U.S. c. the U.K. d. India
4. French’s Mustard is produced by a company based in
a. the U.K. b. the U.S. c. France d. Taiwan
5. The firm that owns Green Giant vegetables is
a. 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 1–9
World 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 −13
North 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 −2
South 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 −8
Europe 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 −14
Commonwealth 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 −37
Africa
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 −9
Middle East
Saudi Arabia 202 4 −3 −9 −41 172 12 8 3 −1
Iran 63 5 −21 8 −29 42 2 −14 4 −17
Asia 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 are
a. U.S.-based b. Swiss c. Dutch d. Turkish
7. The company that produces Vaseline is
a. French b. Anglo-Dutch c. German d. U.S.-based
8. The company that bought General Electric Appliances is headquartered in
a. France b. China c. Japan d. Germany
9. The company that owns Holiday Inn is headquartered in
a. Saudi Arabia b. France c. the U.S. d. Britain
10. Tropicana orange juice is owned by a company that is headquartered in
a. Mexico b. Canada c. the U.S. d. Japan
22 Part 1 Environmental Foundation
■ Global Economic Systems
The 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 Economy
A 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 1–10
Foreign Direct Investment Inflows, by Region
(in US$ billions)
2015 2014 2013
Developed economies $962.5 $522.0 $680.3
Developing economies 764.7 698.5 662.4
Africa 54.1 58.3 52.2
East and Southeast Asia 447.9 383.2 350.3
South Asia 50.5 41.4 35.6
West Asia 42.4 43.3 45.5
Latin America and the Caribbean 167.6 170.3 176.0
Transition economies 35.0 56.4 84.5
Source: UNCTAD, World Investment Report 2016 (June 21, 2016), Annex Table 1, http://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/Annex-Tables.aspx.
Table 1–11
Foreign Direct Investment Outflows, by Region
(in US$ billions)
2015 2014 2013
Developed economies $1,474.2 $800.7 $825.9
Developing 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 Economy
A 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 Economy
A 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 Regions
From 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).
24 Part 1 Environmental Foundation
Established Economies
North 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
maquiladora
A 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.
26 Part 1 Environmental Foundation
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 Economies
In 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.
keiretsu
In 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.
27
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.
28 Part 1 Environmental Foundation
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
chaebols
Very large, family-held
Korean conglomerates that
have considerable political
and economic power.
30 Part 1 Environmental Foundation
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 Verge
Around 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 1–12
Overview 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 3.6
Advanced 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 2.6
Emerging 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 3.0
World 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—Revisited
In 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 1–13
World’s Most Competitive Nations, 2015
Country Rank
USA 1
China–Hong Kong 2
Singapore 3
Switzerland 4
Canada 5
Luxembourg 6
Norway 7
Denmark 8
Sweden 9
Germany 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, 29
European Union, 12
foreign direct investment (FDI), 20
globalization, 7
international management, 5
keiretsu, 26
management, 5
maquiladora, 25
Ministry of International
Trade and Industry (MITI), 26
MNC, 5
North American Free Trade
Agreement (NAFTA), 11
offshoring, 7
outsourcing, 7
Trans-Pacific Partnership, 13
World 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/SB10001424053111904
772304576467873321597208.html.
17. “American Powerhouse Builds Global Profile,” The
Wall Street Journal Online, November 4, 2012,
http://online.wsj.com/article/SB10001424052970204
712904578092182301796600.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/
SB1000142405270230415720457947327285696915
0?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 (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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Chapter 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 Tool
While 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 Tool
In 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 Tool
Unlike 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 Environment
Both 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
Ideologies
Individualism 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
individualism
The 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).
48 Part 1 Environmental Foundation
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
collectivism
The 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).
socialism
A 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
50 Part 1 Environmental Foundation
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 Systems
There 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
democracy
A political system in which
the government is
controlled by the citizens
either directly or through
elections.
totalitarianism
A 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
Western
Sahara
Algeria
Tunisia Lebanon
Libya Egypt
Saudi
Arabia
Iraq
Syria
Kuwait
Jordan
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 Environment
One 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 Community
As 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/.
52
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 Law
When 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 law
Law that is derived from
interpretation of the Qur’an
and the teachings of the
Prophet Muhammad and is
found in most Islamic
countries.
socialist law
Law 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 law
Law that derives from
English law and is the
foundation of legislation in
the United States, Canada,
and England, among other
nations.
civil or code law
Law that is derived from
Roman law and is found in
the non-Islamic and
nonsocialist countries.
principle of sovereignty
An international principle
of law that holds that
governments have the right
to rule themselves as they
see fit.
nationality principle
A jurisdictional principle of
international law that holds
that every country has
jurisdiction over its citizens
no matter where they are
located.
territoriality principle
A jurisdictional principle of
international law that holds
that every nation has the
right of jurisdiction within
its legal territory.
protective principle
A 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.
54 Part 1 Environmental Foundation
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 Issues
The 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 comity
A 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 doctrine
A 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 Bailouts
The 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 Derivatives
The 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.
Bonuses
The 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 Agencies
The 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 Equity
The 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 Trading
The 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.
Privatization
Another 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 Risk
The 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 Requirements
The 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 Securitization
The 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.
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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 Investment
The 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 Innovation
The 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.
Biotechnology
The 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-Business
As 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 2–2
World 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 10.1
Oceania/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).
Telecommunications
One 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 Offshoring
As 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—Revisited
Political, 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 2–3
Winners 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
Difference
Percent
change2014 2024
Personal care aides
Registered nurses
Home health aides
Combined food preparation and serving workers,
including fast food
Retail salespersons
Nursing assistants
Customer service representatives
Cooks, restaurant
General and operations managers
Construction laborers
1768.4
2751.0
931.5
3159.7
4624.9
1492.1
2581.8
1109.7
2124.1
1159.1
2226.5
3190.3
1261.9
3503.2
4939.1
1754.1
2834.8
1268.7
2275.2
1306.5
458.1
439.3
348.4
343.5
314.2
262.0
252.9
158.9
151.1
147.4
25.9%
16.0
38.1
10.9
6.8
17.6
9.8
14.3
7.1
12.7
The 10 occupations with the largest projected employment declines, 2014–2024
Occupation
Employment
in millions
Difference
Percent
change2014 2024
Bookkeeping, accounting, and auditing clerks
Cooks, fast food
Postal service mail carriers
Executive secretaries and executive administrative
assistants
Farmworkers and laborers, crop, nursery, and
greenhouse
Sewing machine operators
Tellers
Postal service mail sorters, processors, and
processing machine operators
Cutting, punching, and press machine setters,
operators, and tenders, metal and plastic
Switchboard operators, including answering service
1760.3
524.4
297.4
776.6
470.2
153.9
520.5
117.6
192.2
112.4
1611.5
444.0
219.4
732.0
427.3
112.2
480.5
78.0
152.7
75.4
−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, 54
civil or code law, 53
collectivism, 48
common law, 53
democracy, 50
doctrine of comity, 54
Foreign Corrupt Practices Act
(FCPA), 55
individualism, 47
Islamic law, 53
nationality principle, 53
principle of sovereignty, 53
protective principle, 53
socialism, 48
socialist law, 53
territoriality principle, 53
totalitarianism, 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
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6. Andrew Byme and Erika Solomon, “Refugees
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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,
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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.
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trending-35116022.
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September 2015, www.comres.co.uk/polls/bbc-
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ENDNOTES
70 Part 1 Environmental Foundation
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32. David M. Herszenhorn, “Financial Overhaul Wins
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Beyond,” Jonesday.com, January 2010.
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37. Gabriel Wildau, “China Cautiously Embraces Priva-
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Times, September 25, 2015, www.ft.com/intl/cms/
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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-
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sales-1404469210.
39. Privatization Alert, Fdi.net, May 2010.
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41. Charles W. L. Hill, International Business (New
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42. Rebecca Buckman, “China Keeps Telecom Firms
Waiting on 3G,” The Wall Street Journal, May 13,
2004, p. B4.
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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-
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p. A11.
50. Congressional Budget Office,“Using Biofuel Tax
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51. Christopher Leonard, “Monsanto, BASF Join
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52. Doris De Guzman, “Monsanto Sows More Seeds,”
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53. “World’s First BSE-Immune Cow,” Asia Pacific
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54. Gretchen Vogel, “E.U. Parliament Votes to Ban
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tember 8, 2015, www.sciencemag.org/news/2015/09/
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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,
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57. “Deutsche Bank Govvie Honcho: Business as Usual
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Africa,” The Wall Street Journal Online, January 2,
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$19.4 Million, Police Say,” The Wall Street Journal
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iphones-worth-19-4-million-police-say/.
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Location Determinants of Discrete Offshoring
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after the Great Recession, Are the Good Jobs Ever
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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
Consultant
In 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
74
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Chapter 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—Patagonia
Founded 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.
75
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 Motors
Tesla 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—Nestlé
Founded 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 Responsibility
The 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 Management
Unbiased 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 Philosophy
There 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
ethics
The 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.
79
■ Human Rights
Human 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.
80 Part 1 Environmental Foundation
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 Practices
Labor 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 Development
Conservation 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 3–1
The Environmental
Kuznets Curve
P
o
llu
ti
o
n
Income per capita
Table 3–1
Highlights 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 MNCs
All 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
84
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 Cultures
As 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 Sustainability
In 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 3–2
Public 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 trade
An organized social
movement and market-
based approach that aims to
help producers in
developing countries obtain
better trading conditions
and promote sustainability.
Table 3–2
Principles 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
sustainability
Development 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 Governance
The 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.
Corruption
As 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 governance
The 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 3–3
Transparency 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.
0 Denmark
Hong Kong
South Korea
R
a
n
ki
n
g
H
ig
h
e
r
le
ve
ls
o
f
p
e
rc
e
iv
e
d
c
o
rr
u
p
tio
n
Lo
w
e
r
le
ve
ls
o
f
p
e
rc
e
iv
e
d
c
o
rr
u
p
tio
n
South Africa
Indonesia
Mexico
Russia
Somalia
China
India
Brazil
United States
United Kingdom
180
160
140
120
100
80
60
40
20
92 Part 1 Environmental Foundation
International Assistance
In 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 3–3
Copenhagen 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—Revisited
The 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 3–4
The 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, 90
corporate social responsibility
(CSR), 77
ethics, 77
fair trade, 87
nongovernmental organizations
(NGOs), 85
sustainability, 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 .
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%20
specifications%201 .
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/SB10001424127887323
301104578256183164905720.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
Consultant
As 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
Questions
Although 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
102
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 Experiment
On 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 campaign
is launched, increasing donations and brand awareness.
TOMS launches its eyewear brand, maintaining the
same “One for One” concept.
TOMS reaches the milestone of over 2 million shoes
donated.
TOMS reaches the milestone of over 10 million shoes
donated.
TOMS reaches the milestone of over 60 million shoes
donated.
TOMS Bag Collection is launched, focusing on donations
to aid mothers in childbirth.
TOMS Roasting Company begins business, expanding
TOMS’s product line into consumable products.
Sales begin. Following a string of positive press, shoe
sales skyrocket.
Blake Mycoskie founds TOMS & begins development
of 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 Problems
TOMS 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 Strategy
Early 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 Leader
Mycoskie 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 Influence
Through 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/SB100014240529702046322045771310
31031671906.
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 Sweatshops
Sweatshop 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
Introduction
In 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
Student Advocacy and “Sweatshop” Labor:
The Case of Russell Athletic
108 Part 1 Environmental Foundation
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 Dilemma
The 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 Initiatives
International 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 Pressure
The 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 Athletic
While 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
110 Part 1 Environmental Foundation
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 WRC
As 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 .
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
Calculation
The 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
In-Depth Integrative Case 1.2
The Ethics of Global Drug Pricing
114 Part 1 Environmental Foundation
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 World
Although 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
In-Depth Integrative Case 1.2 The Ethics of Global Drug Pricing 115
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 Kingdom
Norway 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 Comparison
Drug 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 degeneration
Eylea 2 mg 1,930 919 1,274 1,129 Macular degeneration
Rituxan/MabThera 500 mg 3,679 1,527 1,364 1,820 Rheumatoid arthritis
Neulasta 6 mg 3,620 1,018 1,072 n/a White blood cell deficiency
Ayastin 100 mg 685 399 379 398 Cancer
Prolia 60 mg 893 260 286 285 Osteoporosis
Alimta 100 mg 604 313 250 342 Lung cancer
Velcade 3.5 mg 1,610 1,332 1,191 n/a Cancer
Herceptin 100 mg 858 483 424 493 Breast cancer
Eligard 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” Drugs
Specialty 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 Italy
Another 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 Countries
Prescription 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
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$18,240
2005 2006 2007 2008 2009 2010 2011 2012 2013
$25,857
$28,118
$30,127
$33,032
$36,630
$43,697
$48,512
$53,384
A
n
n
u
al
R
et
ai
l P
ri
ce
o
f
T
h
er
ap
y
p
er
D
ru
g
Figure 1 Growth in Average Annual Cost of Specialty Drug Regime
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 World
The 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.=
3.29
2.84
2.81
2.77
2.47
2.08
1.94
1.56
3.01
2.84
2.64
2.57
2.51
2.30
2.23
1.93
1.73
1.45
0 1 2 3 4 5
1.50
2.569 n/a AbbVie Inc.
General Access to Medicine Management
Position
Access to Medicine
Index 2012
Position
Access to Medicine
Index 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 score
among 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 .
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 (last visited July 12, 2016).
45. Ibid.
46. Ibid.
ENDNOTES
PART TWO
THE ROLE
OF CULTURE
122
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Chapter 4
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 Denmark
When 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 Experiences
In 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 Debacle
Looking 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 Culture
The 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
culture
Acquired knowledge that
people use to interpret
experience and generate
social behavior. This
knowledge forms values,
creates attitudes, and
influences behavior.
Going Forward
Companies 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 Diversity
There 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 Handshake
United States Firm
Asian Gentle (shaking hands is unfamiliar and uncomfortable for some;
the exception is the Korean, who usually has a firm handshake)
British Soft
French Light and quick (not offered to superiors); repeated on arrival and departure
German Brusque and firm; repeated on arrival and departure
Latin American Moderate grasp; repeated frequently
Middle Eastern Gentle; repeated frequently
South 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 4–1
Priorities 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. Indirectness
10. 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 and
products of the society
The norms and values
that guide the society
The implicit, basic
assumptions
that guide people’s
behavior
Figure 4–1
A 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 4–2
Comparing Cultures as
Overlapping Normal
Distributions
128 Part 2 The Role of Culture
■ Values in Culture
A 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 Transition
Do 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.
values
Basic 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 Dimensions
Understanding 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.
Hofstede
In 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 distance
The extent to which less
powerful members of
institutions and
organizations accept that
power is distributed
unequally.
uncertainty avoidance
The extent to which people
feel threatened by ambiguous
situations and have created
beliefs and institutions that
try to avoid these.
individualism
The 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).
collectivism
The 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
masculinity
A cultural characteristic in
which the dominant values
in society are success,
money, and things.
Table 4–2
Countries and Regions Used in Hofstede’s Research
Arabic-speaking Ecuador Panama
countries (Egypt, Estonia Peru
Iraq, Kuwait, Finland Philippines
Lebanon, Libya, France Poland
Saudi Arabia, Germany Portugal
United Arab Great Britain Romania
Emirates) Greece Russia
Argentina Guatemala Salvador
Australia Hong Kong Serbia
Austria (China) Singapore
Bangladesh Hungary Slovakia
Belgium Flemish India Slovenia
(Dutch speaking) Indonesia South Africa
Belgium Walloon Iran Spain
(French speaking) Ireland Suriname
Brazil Israel Sweden
Bulgaria Italy Switzerland French
Canada Quebec Jamaica Switzerland German
Canada total Japan Taiwan
Chile Korea (South) Thailand
China Luxembourg Trinidad
Colombia Malaysia Turkey
Costa Rica Malta United States
Croatia Mexico Uruguay
Czech Republic Morocco Venezuela
Denmark Netherlands Vietnam
East 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.
femininity
A 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
G
D
P
p
er
C
ap
it
a
in
U
S
$
Germany
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0 10 20 30 40 50 60 70 80 90 100
0
⬥
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 4–3
Ten 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 tasks
Supposed to be proud of one’s country Trying to learn from other countries
Service to others is an important goal Thrift and perseverance are important
goals
Social spending and consumption Large savings quote, funds available
for investment
Students 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 4–5
Countries 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 4–4
Ten 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 leisure
More 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 4–6
Countries 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 4–7
Power Distance versus
Individualism
In
d
iv
id
u
al
is
m
(I
D
V
)
in
d
iv
id
u
al
is
t
Power Distance (PDI)small large
co
lle
ct
iv
is
t
5
85
75
65
55
45
35
25
15
95
10 30 50 70 90 110
Guatemala
Ecuador
Bang
lades
h
Pakis
tan
Chin
a,
Thail
and
Japa
n
Hong
Kong
Singa
pore
Mala
ysia
Philip
pines
India
Moro
cco
Arab
ctrs
S. Ko
rea
Taiw
an Vietn
am
W A
frica
E Afr
ica
Iran
Indon
esia
Colombia
Portugal
CroatiaGreece
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
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
PanamaVenezuela
slante
d
regular Europe and Anglo countries
Asia and Muslim countries
quadrant partition lines
Latin America
Legend
italics
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y
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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
U
n
ce
rt
a
in
ty
A
vo
id
a
n
ce
(
U
A
I)
st
ro
n
g
Power Distance (PDI)small large
w
e
a
k
5
85
95
75
65
55
45
35
25
15
115
105
10 30 50 70 90 110
Guatemala⬥
family
pyramid
market
machine
Chin
a
⬥
Thail
and⬥
Japa
n
⬥
Hong
Kong
⬥
Singa
pore
⬥
Mala
ysia
⬥
Philip
pines
⬥
India⬥
Moro
cco
⬥
Bang
lades
h
⬥
Arab
ctrs
⬥
S. Ko
rea
⬥
Taiw
an
⬥
Viet
nam
⬥
W A
frica
⬥
E Af
rica
⬥
Iran⬥
Indon
esia
⬥
Pakis
tan
⬥
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⬥
slant
ed
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 4–9
Masculinity versus
Uncertainty Avoidance
U
n
ce
rt
a
in
ty
A
vo
id
a
n
ce
(
U
A
I)
st
ro
n
g
Masculinity (MAS)feminine masculine
w
e
a
k
5
85
95
75
65
55
45
35
25
15
115
105
5 25 54 65 85
Guatemala ⬥
Chin
a
⬥
Thail
and
⬥
Japa
n ⬥
Hong
Kong
⬥
Singa
pore
⬥
Mala
ysia
⬥
Philip
pines
⬥
India⬥
Moro
cco
Bang
lades
h
⬥
Arab
ctrs,
⬥
S. Ko
rea
⬥
Taiw
an ⬥
Viet
nam
⬥
W A
frica
⬥E
Afri
ca ⬥
Iran⬥
Indon
esia⬥
Pakis
tan
⬥
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⬥
slant
ed
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.
Trompenaars
In 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
universalism
The belief that ideas and
practices can be applied
everywhere in the world
without modification.
particularism
The belief that
circumstances dictate how
ideas and practices should
be applied and that
something cannot be done
the same everywhere.
Table 4–5
Trompenaars’s Country Abbreviations
Abbreviation Country
ARG Argentina
AUS Austria
BEL Belgium
BRZ Brazil
CHI China
CIS Former Soviet Union
CZH Former Czechoslovakia
FRA France
GER Germany (excluding former East Germany)
HK Hong Kong
IDO Indonesia
ITA Italy
JPN Japan
MEX Mexico
NL Netherlands
SIN Singapore
SPA Spain
SWE Sweden
SWI Switzerland
THA Thailand
UK United Kingdom
USA United States
VEN 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 4–10
Trompenaars’s
Relationship Orientations
on Cultural Dimensions
Individualism vs. Communitarianism
Individualism
Sin
Communitarianism
ThaJpnIdoFraChiGerHK ItaVenBelSwiBrzSpa
NL
Swe
Aus
UKArg
CIS
Mex
CzhUSA
Achievement vs. Ascription
Achievement Ascription
Aus USA Ger Arg Tha Bel Fra Ita
Brz
NL
HK
Spa Jpn Czh Sin CIS Chi Ido VenSwi
UK
Swe
Mex
Specific vs. Di�use
Specific Di�use
Aus UK USA
Swi
Fra NL Bel Brz Czh Ido Spa Chi VenHK
Sin
Swe
CIS
Tha
Arg
Jpn
Mex
Ita
Ger
Neutral vs. Emotional
Neutral Emotional
Jpn UK Sin Aus Ido HK Tha Bel
Ger
Swe
Arg
USA
Czh
Fra
Spa Ita
Ven
CIS Brz Chi Swi NL Mex
Universalism
Universalism vs. Particularism
Particularism
USA Aus Ger
Swi
Swe UK NL Czh Ita Bel Brz Fra Jap
Sin
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 96
United States 95
Germany 90
United Kingdom 90
Netherlands 88
France 68
Japan 67
Singapore 67
Thailand 63
Hong Kong 56
Particularism (some or definite right)
China 48
South 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
communitarianism
Refers to people regarding
themselves as part of a
group.
Individualism (emphasis on larger responsibili-
ties and more income)
Canada 77
Thailand 71
United Kingdom 69
United States 67
Netherlands 64
France 61
Japan 61
China 54
Singapore 50
Hong Kong 47
Communitarianism (emphasis on the new group
of people)
Malaysia 38
Korea 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 culture
A culture in which emotions
are held in check.
emotional culture
A culture in which emotions
are expressed openly and
naturally.
specific culture
A 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 culture
A 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 culture
A culture in which people
are accorded status based
on how well they perform
their functions.
ascription culture
A 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 4–6
GLOBE 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 Management
GLOBE 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 Dimensions
Phase 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 Analysis
The 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 4–11
Comparing the Cultural
Dimension Research:
Geert Hofstede and
the GLOBE Project
Geert Hofstede
Dutch researcher
GLOBE Project
170 researchers
1980 (updated in 1988 & 2010) 2004 (Phase 1 – cultural dimensions)
Hofstede and the GLOBE Project: Comparing the Research
Scholars
Date
Completed
Identified Dimensions
Sample
Collectivism I
Collectivism II
Power Distance
Uncertainty Avoidance
Gender Egalitarianism
Assertiveness
Future Orientation
Performance Orientation
Humane Orientation
Managers from 951 companies
~17,000 participants
> 60 countries
Individualism
Power Distance
Uncertainty 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 4–12
Comparing Values and
Practices in Brazil
Assertiveness
Institutional Collectivism
In-Group CollectivismPower Distance
Performance Orientation Future Orientation
Gender EgalitarianismHumane Orientation
Uncertainty Avoidance
0
1
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—Revisited
This 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
Ta
b
le
4
–
7
G
lo
b
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P
h
as
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T
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ltu
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xa
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la
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b
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tw
e
e
n
le
ad
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h
ip
e
xp
e
ct
at
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s
(C
LT
s)
a
n
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O
b
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h
av
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r
•
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xa
m
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ith
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m
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4
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•
1
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f
th
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c
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m
p
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te
d
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s
1
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i
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a
d
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t
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•
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te
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w
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w
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re
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w
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m
p
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•
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•
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)
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6
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•
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te
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ly
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te
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(T
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s
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lid
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•
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xt
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al
ly
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ri
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n
te
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f
ir
m
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tc
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in
cl
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an
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f
th
e
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d
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st
ry
•
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al
id
at
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n
o
f
cu
ltu
re
a
n
d
l
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ad
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rs
h
ip
sc
al
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s
•
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an
ki
n
g
o
f
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2
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o
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ta
l
cu
ltu
re
s
o
n
9
c
u
ltu
re
d
im
e
n
si
o
n
s
•
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ro
u
p
in
g
o
f
6
2
c
u
ltu
re
s
in
to
1
0
c
u
ltu
re
cl
u
st
e
rs
•
C
re
at
io
n
o
f
2
1
p
ri
m
ar
y
le
ad
e
rs
h
ip
a
n
d
6
g
lo
b
al
l
e
ad
e
rs
h
ip
s
ca
le
s
•
D
e
te
rm
in
at
io
n
o
f
re
la
tio
n
sh
ip
s
b
e
tw
e
e
n
cu
ltu
re
d
im
e
n
si
o
n
s
an
d
l
e
ad
e
rs
h
ip
d
im
e
n
si
o
n
s
•
D
e
te
rm
in
at
io
n
o
f
u
n
iv
e
rs
al
ly
d
e
si
ra
b
le
an
d
c
u
ltu
ra
lly
s
p
e
ci
fic
l
e
ad
e
rs
h
ip
q
u
al
iti
e
s
(i.
e
.,
C
LT
s)
•
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ad
e
rs
t
e
n
d
t
o
b
e
h
av
e
i
n
a
m
an
n
e
r
e
xp
e
ct
e
d
w
ith
in
t
h
e
ir
c
o
u
n
tr
y
•
C
u
ltu
ra
l
va
lu
e
s
d
o
N
O
T
h
av
e
a
d
ir
e
ct
e
ff
e
ct
o
n
C
E
O
b
e
h
av
io
r;
r
at
h
e
r,
th
e
e
ff
e
ct
is
i
n
d
ir
e
ct
t
h
ro
u
g
h
C
LT
s
(c
u
ltu
ra
lly
e
n
d
o
rs
e
d
t
h
e
o
ry
—
i.e
.,
le
ad
e
rs
h
ip
e
xp
e
c-
ta
tio
n
s)
•
B
o
th
t
h
e
f
it
o
f
C
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O
b
e
h
av
io
rs
(
to
e
xp
e
c-
ta
tio
n
s)
a
n
d
d
e
g
re
e
o
f
le
ad
e
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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, 143
ascription culture, 143
collectivism, 130
communitarianism, 141
culture, 124
diffuse culture, 142
emotional culture, 142
femininity, 132
GLOBE, 130
individualism, 130
masculinity, 131
neutral culture, 142
particularism, 139
power distance, 130
specific culture, 142
uncertainty avoidance, 130
universalism, 139
values, 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 .
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 Consultant
Domestic 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
156
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IV
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H
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C
H
A
PT
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Chapter 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 Collective
At 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.
157
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 Focus
Apple 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 Property
Apple, 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 Management
Apple 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 Cultures
As 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 Predispositions
Most 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
predisposition
A nationalistic philosophy
of management whereby the
values and interests of the
parent company guide
strategic decisions.
polycentric predisposition
A philosophy of
management whereby
strategic decisions are
tailored to suit the cultures
of the countries where the
MNC operates.
regiocentric predisposition
A philosophy of
management whereby
the firm tries to blend its
own interests with those of
its subsidiaries on a
regional basis.
geocentric predisposition
A 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 Challenge
Despite 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 imperative
A belief that one worldwide
approach to doing business
is the key to both efficiency
and effectiveness.
Table 5–1
Orientation of an MNC under Different Profiles
Orientation of the Firm
Ethnocentric Polycentric Regiocentric Geocentric
Mission
Governance
Strategy
Structure
Culture
Technology
Marketing
Finance
Personnel
practices
Profitability (viability)
Top-down
Global integration
Hierarchical product
divisions
Home country
Mass production
Product development
determined primarily by
the needs of home
country customers
Repatriation 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 country
Batch production
Local product
development based
on local needs
Retention of profits in
host country
People 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
subsidiaries
Regional integration and
national responsiveness
Product and regional
organization tied through
a matrix
Regional
Flexible manufacturing
Standardized within
region, but not
across regions
Redistribution within
region
Regional people devel-
oped for key positions
anywhere in the region
Same as regiocentric
Mutually negotiated
at all levels of the
corporation
Global integration and
national responsiveness
A network of organiza-
tions (including some
stakeholders and com-
petitor organizations)
Global
Flexible manufacturing
Global 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.
162
■ Cross-Cultural Differences and Similarities
As 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 Simplification
Parochialism 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
parochialism
The 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
simplification
The process of exhibiting
the same orientation toward
different cultural groups.
Table 5–2
Six 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 Cultures
When 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 Cultures
We 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 Helicopter
Analysis Analysis Analysis Imagination
Helicopter Leadership Reality Reality
Leadership Helicopter Imagination Analysis
Imagination 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 pro
ductivity 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 China
Source: 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 Differences
Examination 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 5–2
GLOBE 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
0
1
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 Regions
More 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
guanxi
In 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—Revisited
Management 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, 159
geocentric predisposition, 159
globalization imperative, 160
guanxi, 171
parochialism, 162
polycentric predisposition, 159
regiocentric predisposition, 159
simplification, 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/80dda8efe70041f4b8aa3
12b14d67996/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/SB10001424052748
704878904575030901196923746.
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 Consultant
Tesco, 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
182
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Chapter 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.
Culture
At 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
Communication
Communicating 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 Telephone
Video
Conferencing
Face-to-Face
Interaction
184 Part 2 The Role of Culture
Trust
Kirkman 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 Teams
In 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 Culture
The 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 Characteristics
Organizational 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 culture
Shared 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 Cultures
There 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 6–1
Dimensions 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 6–1
Europeans’ 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 6–2
European Management Characteristics
Characteristic
Western Northern Eastern Southern
Dimension (United Kingdom) (France) (Germany) (Italy)
Corporate Commercial Administrative Industrial Familial
Management attributes
Behavior Experiential Professional Developmental Convivial
Attitude Sensation Thought Intuition Feeling
Institutional models
Function Salesmanship Control Production Personnel
Structure Transaction Hierarchy System Network
Societal ideas
Economics Free market Dirigiste Social market Communal
Philosophy Pragmatic Rational Holistic Humanistic
Cultural 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 MNCs
Organizational 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-oriented
culture
INCUBATOR
Project-oriented
culture
GUIDED MISSILE
EIFFEL TOWER
Role-oriented
culture
FAMILY
Power-oriented
culture
Person
Emphasis
Task
Emphasis
Equity
Hierarchy
Figure 6–2
Organizational 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 Culture
Family 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 Culture
Eiffel 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 culture
A culture that is
characterized by a strong
emphasis on hierarchy and
orientation to the person.
Eiffel Tower culture
A 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 Culture
Guided 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 culture
A 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 Culture
Incubator 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 culture
A culture that is
characterized by strong
emphasis on equality and
orientation to the person.
Chapter 6 Organizational Cultures and Diversity 195
Table 6–3
Summary 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
people
Ways 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.
Switzerland
Sweden
Norway
Ireland
Hungary
New Zealand
Mexico
Finland
Italy
Venezuela
NigeriaAustralia
Greece
Belgium
Israel
Spain
India
South Korea
Germany
France
Canada
UK
USA
Egalitarian
Hierarchical
Person Task
Denmark
Figure 6–3
National Patterns of
Corporate Culture
196
■ Managing Multiculturalism and Diversity
As 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 Development
The 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:
International
Corporations
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:
Multinational
Corporations
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:
Instantly
Shared
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 6–4
International Corporation
Evolution
Phase 1
Domestic
firms
Phase 2
International
firms
Phase 3
Multinational
firms
Phase 4
Global
firms
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 6–5
Locations 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 Multiculturalism
For 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 Diversity
Overall, 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 group
A group in which members
have similar backgrounds
and generally perceive,
interpret, and evaluate
events in similar ways.
token groups
A group in which all
members but one have the
same background, such as a
group of Japanese retailers
and a British attorney.
bicultural group
A 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 group
A 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 Diversity
While 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 Effectiveness
Multiculturally 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
groupthink
Social 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.
Highly
ine�ective
Average
e�ectiveness
Highly
e�ective
Cross-cultural groups
Single culture groups
Figure 6–6
Group 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—Revisited
Our 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, 199
Eiffel Tower culture, 192
family culture, 192
groupthink, 201
guided missile culture, 193
homogeneous group, 199
incubator culture, 194
multicultural group, 199
organizational culture, 185
token 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 .
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 .
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/searc
h?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
Consultant
The 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
208
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Chapter 7
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 China
Of 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 Process
Communication 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 Styles
One 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.
communication
The process of transferring
meanings from sender to
receiver.
context
Information that surrounds
a communication and helps
convey the message.
Chapter 7 Cross-Cultural Communication and Negotiation 211
Ty
p
ic
al
ly
H
ig
h
er
C
o
n
te
xt
Ty
p
ic
al
ly
L
o
w
er
C
o
n
te
xt Australia
Canada
Finland
Germany
Iceland
Norway
Sweden
Switzerland
United Kingdom
United States
Afghanistan
Brazil
China
Egypt
India
Iran
Italy
Japan
Korea
Pakistan
Russia
Saudi Arabia
Spain
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 7–1
Major 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 context
Succinct 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 context
Contextual 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 context
Affective 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 Communications
The 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 7–2
Verbal Styles Used in 10 Select Countries
Indirect vs. Elaborate vs. Contextual vs. Affective vs.
Country Direct Succinct Personal Instrumental
Australia Direct Exacting Personal Instrumental
Canada Direct Exacting Personal Instrumental
Denmark Direct Exacting Personal Instrumental
Egypt Indirect Elaborate Contextual Affective
England Direct Exacting Personal Instrumental
Japan Indirect Succinct Contextual Affective
Korea Indirect Succinct Contextual Affective
Saudi Arabia Indirect Elaborate Contextual Affective
Sweden Direct Exacting Personal Instrumental
United 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.
214 Part 2 The Role of Culture
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 Flows
Communication flows in international organizations move both down and up. However,
there are some unique differences in organizations around the world.
Downward Communication
Downward 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 communication
The 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 Communication
Upward 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 communication
The transfer of meaning
from subordinate to superior.
216 Part 2 The Role of Culture
■ Communication Barriers
A number of common communication barriers are relevant to international management. The
more important barriers involve language, perception, culture, and nonverbal communication.
Language Barriers
Knowledge 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 7–3
Matsushita’s Philosophy
Basic 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 Creed
Progress 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 Values
1. National service through industry
2. Fairness
3. Harmony and cooperation
4. Struggle for betterment
5. Courtesy and humility
6. Adjustment and assimilation
7. Gratitude
Table 7–4
Multilingualism 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 20.9
Finland 99.6 16.7 24.8
Germany 94.7 26.3 —
Denmark 91.1 9.0 33.5
Spain 97.7 22.3 1.2
France 99.7 — 22.1
Greece 94.1 4.4 2.1
Italy 95.5 18.0 8.0
Romania 99.9 85.0 12.0
Britain — 27.3 9.4
Ireland — 54.5 14.9
Poland 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 7–5
Multilingualism 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
218 Part 2 The Role of Culture
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 Barriers
Perception 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
perception
A person’s view of reality.
220 Part 2 The Role of Culture
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
221
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 Cards
The 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.
Bowing
Although 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.
Attire
Most 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 Culture
Besides 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.
222 Part 2 The Role of Culture
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 7–6
U.S. Proverbs Representing Cultural Values
Proverb Cultural Value
A penny saved is a penny earned. Thriftiness
Time is money. Time thriftiness
Don’t cry over spilt milk. Practicality
Waste not, want not. Frugality
Early to bed, early to rise, makes one healthy, wealthy, and wise. Diligence; work ethic
A stitch in time saves nine. Timeliness of action
If at first you don’t succeed, try, try again. Persistence; work ethic
Take 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.
Chapter 7 Cross-Cultural Communication and Negotiation 223
“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 Communication
Another 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 communication
The transfer of meaning
through means such as body
language and the use of
physical space.
Table 7–7
Common 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.
224 Part 2 The Role of Culture
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.
kinesics
The study of
communication through
body movement and facial
expression.
oculesics
The area of communication
that deals with conveying
messages through the use of
eye contact and gaze.
haptics
Communicating through the
use of bodily contact.
proxemics
The study of the way people
use physical space to
convey messages.
intimate distance
Distance between people that
is used for very confidential
communications.
personal distance
In communicating, the
physical distance used for
talking with family and close
friends.
social distance
In communicating, the
distance used to handle
most business transactions.
public distance
In communicating, the
distance used when calling
across the room or giving a
talk to a group.
Chapter 7 Cross-Cultural Communication and Negotiation 225
Americans often tend to be moving away in interpersonal communication with their
Middle Eastern or Latin counterparts, while the latter are trying to physically close the
gap. The American cannot understand why the other is standing so close; the latter can-
not understand why the American is being so reserved and standing so far away. The
result is a breakdown in communication.
Office layout is another good example of proxemics. In the United States, the more
important the manager, the larger the office, and often a secretary screens visitors and
keeps away those whom the manager does not wish to see. In Japan, most managers do
not have large offices, and even if they do, they spend a great deal of time out of the
office and with the employees. Thus, the Japanese have no trouble communicating
directly with their superiors. A Japanese manager staying in his office would be viewed
as a sign of distrust or anger toward the group.
Another way that office proxemics can affect communication is that in many Euro-
pean companies, no wall separates the space allocated to the senior-level manager from
that of the subordinates. Everyone works in the same large room. These working condi-
tions often are disconcerting to Americans, who tend to prefer more privacy.
Chronemics Chronemics refers to the way in which time is used in a culture. When
examined in terms of extremes, there are two types of time schedules: monochronic and
polychronic. A monochronic time schedule is one in which things are done in a linear
fashion. A manager will address Issue A first and then move on to Issue B. In individu-
alistic cultures such as the United States, Great Britain, Canada, and Australia, as well
as many of the cultures in Northern Europe, managers adhere to monochronic time
schedules. In these societies, time schedules are very important, and time is viewed as
something that can be controlled and should be used wisely.
This is in sharp contrast to polychronic time schedules, which are characterized
by people tending to do several things at the same time and placing higher value on
personal involvement than on getting things done on time. In these cultures, schedules
are subordinated to personal relationships. Regions of the world where polychronic time
schedules are common include Latin America and the Middle East.
When doing business in countries that adhere to monochronic time schedules, it is
important to be on time for meetings. Additionally, these meetings typically end at the
appointed time so that participants can be on time for their next meeting. When doing
business in countries that adhere to polychronic time schedules, it is common to find
business meetings starting late and finishing late.
Chromatics Chromatics is the use of color to communicate messages. Every society
uses chromatics, but in different ways. Colors that mean one thing in the United States
may mean something entirely different in Asia. For example, in the United States it is
common to wear black when one is in mourning, while in some locations in India
people wear white when they are in mourning. In Hong Kong red is used to signify
chronemics
The way in which time is
used in a culture.
monochronic time
schedule
A time schedule in which
things are done in a linear
fashion.
polychronic time schedule
A time schedule in which
people tend to do several
things at the same time and
place higher value on
personal involvement than on
getting things done on time.
chromatics
The use of color to
communicate messages.
Public distance
Social distance
Personal distance
Intimate distance
8′ to 10′
4′ to 8′
18″ to 4′
18″ Figure 7–2
Personal Space Categories
for Those in the United
States
Source: Adapted from Richard M. Hodgetts and Donald F. Kuratko, Management, 2nd ed. (San Diego, CA: Harcourt Brace Jovanovich,
1991), p. 384.
226 Part 2 The Role of Culture
happiness or luck and traditional bridal dresses are red; in the United States it is common
for the bride to wear white. In many Asian countries shampoos are dark in color because
users want the soap to be the same color as their hair and believe that if it were a light
color, it would remove color from their hair. In the United States shampoos tend to be
light in color because people see this as a sign of cleanliness and hygiene. In Chile a
gift of yellow roses conveys the message “I don’t like you,” but in the United States it
says quite the opposite.
Knowing the importance and the specifics of chromatics in a culture can be very
helpful because, among other things, such knowledge can help you avoid embarrassing
situations. A good example is the American manager in Peru who, upon finishing a one-
week visit to the Lima subsidiary, decided to thank the assistant who was assigned to
him. He sent her a dozen red roses. The lady understood the faux pas, but the American
manager was somewhat embarrassed when his Peruvian counterpart smilingly told him,
“It was really nice of you to buy her a present. However, red roses indicate a romantic
interest!”
■ Achieving Communication Effectiveness
A number of steps can be taken to improve communication effectiveness in the interna-
tional arena. These include improving feedback systems, providing language and cultural
training, and increasing flexibility and cooperation.
Improve Feedback Systems
One of the most important ways of improving communication effectiveness in the inter-
national context is to open up feedback systems. Feedback is particularly important
between parent companies and their affiliates. There are two basic types of feedback
systems: personal (e.g., face-to-face meetings, telephone conversations, and personalized
e-mail) and impersonal (e.g., reports, budgets, and plans). Both systems help affiliates
keep their home office aware of progress and, in turn, help the home office monitor and
control affiliate performance as well as set goals and standards.
At present, there seem to be varying degrees of feedback between the home offices
of MNCs and their affiliates. For example, one study evaluated the communication feed-
back between subsidiaries and home offices of 63 MNCs headquartered in Europe, Japan,
and North America.51 A marked difference was found between the way that U.S. com-
panies communicated with their subsidiaries and the way that European and Japanese
firms did. Over one-half of the U.S. subsidiaries responded that they received monthly
feedback from their parent companies, in contrast to less than 10 percent for the subsid-
iaries of European and Japanese firms. In addition, the Americans were much more
inclined to hold regular management meetings on a regional or worldwide basis. Seventy-
five percent of the U.S. companies had annual meetings for their affiliate top managers,
compared with less than 50 percent for the Europeans and Japanese. These findings may
help explain why many international subsidiaries and affiliates are not operating as effi-
ciently as they should. The units may not have sufficient contact with the home office.
They do not seem to be getting continuous assistance and feedback that are critical to
effective communication.
Provide Language Training
Besides improving feedback systems, another way to make communication more effective
in the international arena is through language training. Many host-country managers
cannot communicate well with their counterparts at headquarters. Because English has
become the international language of business, those who are not native speakers of
English should learn the language well enough so that face-to-face and telephone con-
versations and e-mail are possible. If the language of the home office is not English, this
Chapter 7 Cross-Cultural Communication and Negotiation 227
other language also should be learned. As a U.S. manager working for a Japanese MNC
recently told one of the authors, “The official international language of this company is
English. However, whenever the home-office people show up, they tend to cluster
together with their countrymen and speak Japanese. That’s why I’m trying to learn
Japanese. Let’s face it. They say all you need to know is English, but if you want to
really know what’s going on, you have to talk their language.”
Written communication also is extremely important in achieving effectiveness. As
noted earlier, when reports, letters, and e-mail messages are translated from one language
to another, preventing a loss of meaning is virtually impossible. Moreover, if the com-
munications are not written properly, they may not be given the attention they deserve.
The reader will allow poor grammar and syntax to influence his or her interpretation and
subsequent actions. Moreover, if readers cannot communicate in the language of those
who will be receiving their comments or questions about the report, their messages also
must be translated and likely will further lose meaning. Therefore, the process can con-
tinue on and on, each party failing to achieve full communication with the other. Hil-
debrandt has described the problems in this two-way process when an employee in a
foreign subsidiary writes a report and then sends it to his or her boss for forwarding to
the home office:
The general manager or vice president cannot be asked to be an editor. Yet they often send
statements along, knowingly, which are poorly written, grammatically imperfect, or generally
unclear. The time pressures do not permit otherwise. Predictably, questions are issued from
the States to the subsidiary and the complicated bilingual process now goes in reverse,
ultimately reaching the original . . . staff member, who receives the English questions
retranslated.52
Language training would help to alleviate such complicated communication problems.
Provide Cultural Training
It is very difficult to communicate effectively with someone from another culture unless
at least one party has some understanding of the other’s culture.53 Otherwise, communi-
cation likely will break down. This is particularly important for multinational companies
that have operations throughout the world.54 Although there always are important differ-
ences between countries, and even between subcultures of the same country, firms that
operate in South America find that the cultures of these countries have certain com-
monalities. These common factors also apply to Spain and Portugal. Therefore, a basic
understanding of Latin cultures can prove to be useful throughout a large region of the
world. The same is true of Anglo cultures, where norms and values tend to be somewhat
similar from one country to another. When a multinational has operations in South
America, Europe, and Asia, however, multicultural training becomes necessary. The
International Management in Action box “Communicating in Europe” provides some
specific examples of cultural differences.
As Chapter 4 pointed out, it is erroneous to generalize about an “international”
culture because the various nations and regions of the globe are so different. Training
must be conducted on a regional or country-specific basis. Failure to do so can result
in continuous communication breakdown.55 Many corporations are investing in pro-
grams to help train their executives in international communication. Such training has
become more common since it began in the 1970s as many Americans returned from
the Peace Corps with increased awareness of cultural differences. And this training is
not limited to those who travel themselves but is increasingly important for employees
who frequently interact with individuals from other cultures in their workplace or in
their communication.
“Whether a multinational or a start-up business out of a garage, everybody is global
these days,” said Dean Foster, president of Dean Foster Associates, an intercultural con-
sultancy in New York. “In today’s economy, there is no room for failure. Companies have
228
International Management in Action
Communicating in Europe
In Europe, many countries are within easy commuting
distance of their neighbors, so an expatriate who does
business in France on Monday may be in Germany on
Tuesday, Great Britain on Wednesday, Italy on Thursday,
and Spain on Friday. Each country has its own etiquette
regarding how to greet others and conduct oneself dur-
ing social and business meetings. The following sec-
tions examine some of the things that expatriate
managers need to know to communicate effectively.
France
When one is meeting with businesspeople in France,
promptness is expected, although tardiness of 5 to
10 minutes is not considered a major gaffe. The French
prefer to shake hands when introduced, and it is correct
to address them by title plus last name. When the meet-
ing is over, a handshake again is proper manners.
French executives try to keep their personal and pro-
fessional lives separate. As a result, most business
entertaining is done at restaurants or clubs. When gifts
are given to business associates, they should appeal to
intellectual or aesthetic pursuits as opposed to being
something that one’s company produces for sale on the
world market. In conversational discussions, topics such
as politics and money should be avoided. Also, humor
should be used carefully during business meetings.
Germany
German executives like to be greeted by their title, and
one should never refer to someone on a first-name basis
unless invited to do so. When introducing yourself, do not
use a title, just state your last name. Business appoint-
ments should be made well in advance, and punctuality
is important. Like the French, the Germans usually do not
entertain clients at home, so an invitation to a German
manager’s home is a special privilege and always should
be followed with a thank-you note. Additionally, as is the
case in France, one should avoid using humor during
business meetings. They are very serious when it comes
to business, so be as prepared as possible and keep
light-hearted banter to the German hosts’ discretion.
Great Britain
In Britain, it is common to shake hands on the first meet-
ing, and to be polite one should use last names and
appropriate titles when addressing the host, until invited
to use their first name. Punctuality again is important to
the British, so be prepared to be on time and get down
to business fairly quickly. The British are quite warm,
though, and an invitation to a British home is more likely
than in most other areas of Europe. You should always
bring a gift if invited to the host’s house; flowers,
chocolates, or books are acceptable.
During business meetings, suits and ties are common
dress; however, striped ties should be avoided if they
appear to be a copy of those worn by alumni of British
universities and schools or by members of military or
social clubs. Additionally, during social gatherings it is a
good idea not to discuss politics, religion, or gossip
about the monarchy unless the British person brings the
topic up first.
Italy
In traditional companies, executives are referred to by
title plus last name. It is common to shake hands when
being introduced, and if the individual is a university
graduate, the professional title dottore should be used.
Business appointments should be made well in
advance, and if you expect to be late, call the host and
explain the situation. In most cases, business is done at
the office, and when someone is invited to a restaurant,
this invitation is usually done to socialize and not to con-
tinue business discussions. If an expatriate is invited to
an Italian home, it is common to bring a gift for the host,
such as a bottle of wine or a box of chocolates. Flowers
are also acceptable, but be sure to send an uneven num-
ber and avoid chrysanthemums, a symbol of death, and
red roses, a sign of deep passion. Be sure to offer high-
quality gifts with the wrapping done well, as the Italians
are very generous when it comes to gifts. It is not a com-
mon practice to exchange them during business, but it is
recommended that you are prepared. During the dinner
conversation, there are a wide variety of acceptable top-
ics, including business, family matters, and soccer.
Spain
It is common to use first names when introducing or
talking to people in Spain, and close friends typically
greet each other with an embrace. Appointments should
be made in advance, but punctuality is not essential.
If one is invited to the home of a Spanish executive,
flowers or chocolates for the host are acceptable gifts.
If the invitation includes dinner, any business discus-
sions should be delayed until after coffee is served. Dur-
ing the social gathering, some topics that should be
avoided include religion, family, and work. Additionally,
humor rarely is used during formal occasions.
Source: Rosalie J. Tung, “How to Negotiate with the Japanese,” Cali-
fornia Management Review, Summer 1984, pp. 62–77; Carla Rapo-
port, “You Can Make Money in Japan,” Fortune, February 12, 1990,
pp. 85–92; Margaret A. Neale and Max H. Bazerman, “Negotiating
Rationally,” Academy of Management Executive, August 1992,
pp. 42–51; Martin J. Gannon, Understanding Global Cultures, 2nd ed.
(Thousand Oaks, CA: Sage, 2001), pp. 35–56; Sheida Hodge, Global
Smarts (New York: Wiley, 2000), chapter 14; Richard D. Lewis, When
Cultures Collide (London: Nicholas Brealey, 1999), pp. 400–415.
Chapter 7 Cross-Cultural Communication and Negotiation 229
to understand the culture they are working in from Day 1.” Mr. Foster recounted how an
American businessman recently gave four antique clocks wrapped in white paper to a
prospective client in China. What the man did not realize, he said, was that the words in
Mandarin for clock and the number four are similar to the word for death, and white is
a funeral color in many Asian countries. “The symbolism was so powerful,” Mr. Foster
said, that the man lost the deal.56 Chapter 14 will give considerable attention to cultural
training as part of selection for overseas assignments and human resource development.
Increase Flexibility and Cooperation
Effective international communications require increased flexibility and cooperation by
all parties.57 To improve understanding and cooperation, each party must be prepared to
give a little.58 Take the case of International Computers Ltd., a mainframe computer firm
that does a great deal of business in Japan. This firm urges its people to strive for suc-
cessful collaboration in their international partnerships and ventures. At the heart of this
process is effective communication. As Kenichi Ohmae put it:
We must recognize and accept the inescapable subtleties and difficulties of intercompany
relationships. This is the essential starting point. Then we must focus not on contractual or
equity-related issues but on the quality of the people at the interface between organizations.
Finally, we must understand that success requires frequent, rapport-building meetings by at
least three organizational levels: top management, staff, and line management at the working
level.59
■ Managing Cross-Cultural Negotiations
Closely related to communications but deserving special attention is managing negotia-
tions.60,61 Negotiation is the process of bargaining with one or more parties to arrive at
a solution that is acceptable to all. It has been estimated that managers can spend
50 percent or more of their time on negotiation processes.62 Therefore, it is a learnable
skill that is imperative not only for the international manager but for the domestic manager
as well because more and more domestic businesses are operating in multicultural envi-
ronments (see Chapter 6). Negotiation often follows assessing political environments and
is a natural approach to conflict management. Often, the MNC must negotiate with the
host country to secure the best possible arrangements. The MNC and the host country
will discuss the investment the MNC is prepared to make in return for certain guarantees
or concessions. The initial range of topics typically includes critical areas such as hiring
practices, direct financial investment, taxes, and ownership control. Negotiation also is
used in creating joint ventures with local firms and in getting the operation off the ground.
After the firm is operating, additional areas of negotiation include expansion of facilities,
use of more local managers, additional imports or exports of materials and finished goods,
and recapture of profits.
On a more macro level of international trade are the negotiations conducted
between countries. The current balance-of-trade problem between the United States and
China is one example. The massive debt problems of less developed countries and the
opening of trade with Eastern European and newly emerging economies are other
current examples.
Types of Negotiation
People enter into negotiations for a multitude of reasons, but the nature of the goal deter-
mines what kind of negotiation will take place. There are two types of negotiations that
we will discuss here: distributive and integrative negotiations. Distributive negotiations
occur when two parties with opposing goals compete over a set value.63 Consider a person
who passes a street vendor and sees an item he likes but considers the price, or set value,
a bit steep. The goal of the buyer is to procure the item at the lowest price, getting more
negotiation
Bargaining with one or
more parties for the purpose
of arriving at a solution
acceptable to all.
distributive negotiations
Bargaining that occurs
when two parties with
opposing goals compete
over a set value.
230 Part 2 The Role of Culture
value for his money, while the goal of the seller is to collect as much as possible to
maximize profits. Both are trying to get the best deal, but what translates into a gain by
one side is usually experienced as a loss by the other, otherwise known as a win-lose
situation. The relationship is focused on the individual and based on a short-term interac-
tion. More often than not, the people involved are not friends, or at least their personal
relationship is put aside in the matter. Information also plays an important role because
you do not want to expose too much and be vulnerable to counterattack.
Research has shown that first offers in a negotiation can be good predictors of
outcomes, which is why it is important to have a strong initial offer.64 This does not imply
that overly greedy or aggressive behavior is acceptable; this could be off-putting to the
other negotiator, causing her or him to walk away. In addition to limiting the amount of
information you disclose, it can be advantageous to know a little about the other side.
Integrative negotiation involves cooperation between the two groups to integrate
interests, create value, and invest in the agreement. Both groups work toward maximiz-
ing benefits for both sides and distributing those benefits. This method is sometimes
called the win-win scenario, which does not mean that everyone receives exactly what
they wish for, but instead that the compromise allows both sides to keep what is most
important and still gain on the deal. The relationship in this instance tends to be more
long term since both sides take time to really get to know the other side and what moti-
vates them. The focus is on the group, reaching for a best-case outcome where everyone
benefits. This is the most useful tactic when dealing with business negotiation, so from
this point on, we assume the integrative approach. Table 7–8 provides a summary of the
two types of negotiation.
The Negotiation Process
Several basic steps can be used to manage the negotiation process. Regardless of the
issues or personalities of the parties involved, this process typically begins with planning.
Planning Planning starts with the negotiators identifying the objectives they would like
to attain. Then they explore the possible options for reaching these objectives. Research
shows that the greater the number of options, the greater the chances for successful
negotiations. While this appears to be an obvious statement, research also reveals that
many negotiators do not alter their strategy when negotiating across cultures.65,66 Next,
consideration is given to areas of common ground between the parties. Other major areas
include (1) the setting of limits on single-point objectives, such as deciding to pay no
more than $10 million for the factory and $3 million for the land; (2) dividing issues into
short- and long-term considerations and deciding how to handle each; and (3) determining
the sequence in which to discuss the various issues.
Interpersonal Relationship Building The second phase of the negotiation process
involves getting to know the people on the other side. This “feeling out” period is
integrative negotiation
Bargaining that involves
cooperation between two
groups to integrate interests,
create value, and invest in
the agreement.
Table 7–8
Negotiation Types and Characteristics
Characteristic Distributive Negotiations Integrative Negotiations
Objective Claim maximum value Create and claim value
Motivation Individual-selfish benefit Group-cooperative benefit
Interests Divergent Overlapping
Relationship Short term Long term
Outcome Win-lose Win-win
Source: Adapted from Harvard Business Essentials: Negotiation (Boston: Harvard Business School Press, 2003), pp. 2–6.
Chapter 7 Cross-Cultural Communication and Negotiation 231
characterized by the desire to identify those who are reasonable and those who are not.
In contrast to negotiators in many other countries, those in the United States often give
little attention to this phase; they want to get down to business immediately, which often
is an ineffective approach. Adler notes:
Effective negotiators view luncheon, dinner, reception, ceremony, and tour invitations as
times for interpersonal relationship building and therefore as key to the negotiating process.
When American negotiators, often frustrated by the seemingly endless formalities, ceremo-
nies, and “small talk,” ask how long they must wait before beginning to “do business,” the
answer is simple: wait until your counterparts bring up business (and they will). Realize
that the work of conducting a successful negotiation has already begun, even if business has
yet to be mentioned.67
Exchanging Task-Related Information In this part of the negotiation process, each
group sets forth its position on the critical issues. These positions often will change later
in the negotiations. At this point, the participants are trying to find out what the other
party wants to attain and what it is willing to give up.
Persuasion This step of negotiations is considered by many to be the most important.
No side wants to give away more than it has to, but each knows that without giving some
concessions, it is unlikely to reach a final agreement. The success of the persuasion step
often depends on (1) how well the parties understand each other’s position, (2) the abil-
ity of each to identify areas of similarity and difference, (3) the ability to create new
options, and (4) the willingness to work toward a solution that allows all parties to walk
away feeling they have achieved their objectives.
Agreement The final phase of negotiations is the granting of concessions and hammer-
ing out a final agreement. Sometimes, this phase is carried out piecemeal, and concessions
and agreements are made on issues one at a time. This is the way negotiators from the
United States like to operate. As each issue is resolved, it is removed from the bargaining
table and interest is focused on the next. Asians and Russians, on the other hand, tend to
negotiate a final agreement on everything, and few concessions are given until the end.
Once again, as in all areas of communication, to negotiate effectively in the inter-
national arena, it is necessary to understand how cultural differences between the parties
affect the process.
Cultural Differences Affecting Negotiations
In international negotiations, participants tend to orient their approach and interests
around their home culture and their group’s needs and aspirations. This is natural. Yet,
to negotiate effectively, it is important to have a sound understanding of the other side’s
culture and position to better empathize and understand what they are about.68 The cul-
tural aspects managers should consider include communication patterns, time orientation,
and social behaviors.69 A number of useful steps can help in this process of understand-
ing. One negotiation expert recommends the following:
1. Do not identify the counterpart’s home culture too quickly. Common cues
(e.g., name, physical appearance, language, accent, location) may be unreli-
able. The counterpart probably belongs to more than one culture.
2. Beware of the Western bias toward “doing.” In Arab, Asian, and Latin
groups, ways of being (e.g., comportment, smell), feeling, thinking, and
talking can shape relationships more powerfully than doing.
3. Try to counteract the tendency to formulate simple, consistent, stable images.
4. Do not assume that all aspects of the culture are equally significant. In Japan,
consulting all relevant parties to a decision is more important than presenting
a gift.
232 Part 2 The Role of Culture
5. Recognize that norms for interactions involving outsiders may differ from
those for interactions between compatriots.
6. Do not overestimate your familiarity with your counterpart’s culture. An
American studying Japanese wrote New Year’s wishes to Japanese contacts in
basic Japanese characters but omitted one character. As a result, the message
became “Dead man, congratulations.”70
Other useful examples have been offered by Trompenaars and Hampden-Turner,
who note that a society’s culture often plays a major role in determining the effectiveness
of a negotiating approach. This is particularly true when the negotiating groups come
from decidedly different cultures such as an ascription society and an achievement soci-
ety. As noted in Chapter 4, in an ascription society, status is attributed based on birth,
kinship, gender, age, and personal connections. In an achievement society, status is deter-
mined by accomplishments. As a result, each side’s cultural perceptions can affect the
outcome of the negotiation. Here is an example:
Sending whiz-kids to deal with people 10–20 years their senior often insults the ascriptive
culture. The reaction may be: “Do these people think that they have reached our own level
of experience in half the time? That a 30-year-old American is good enough to negotiate
with a 50-year-old Greek or Italian?” Achievement cultures must understand that some
ascriptive cultures, the Japanese especially, spend much on training and in-house education
to ensure that older people actually are wiser for the years they have spent in the corporation
and for the sheer number of subordinates briefing them. It insults an ascriptive culture to
do anything which prevents the self-fulfilling nature of its beliefs. Older people are held to
be important so that they will be nourished and sustained by others’ respect. A stranger is
expected to facilitate this scheme, not challenge it.71
U.S. negotiators have a style that often differs from that of negotiators in many
other countries. Americans believe it is important to be factual and objective. In addition,
they often make early concessions to show the other party that they are flexible and
reasonable. Moreover, U.S. negotiators typically have authority to bind their party to an
agreement, so if the right deal is struck, the matter can be resolved quickly. This is why
deadlines are so important to Americans. They have come to do business, and they want
to get things resolved immediately.
A comparative example would be the Arabs, who in contrast to Americans, with
their logical approach, tend to use an emotional appeal in their negotiation style. They
analyze things subjectively and treat deadlines as only general guidelines for wrapping
up negotiations. They tend to open negotiations with an extreme initial position. How-
ever, the Arabs believe strongly in making concessions, do so throughout the bargaining
process, and almost always reciprocate an opponent’s concessions. They also seek to
build a long-term relationship with their bargaining partners. For these reasons, Americans
typically find it easier to negotiate with Arabs than with representatives from many other
regions of the world.
Another interesting comparative example is provided by the Chinese. In initial nego-
tiation meetings, it is common for Chinese negotiators to seek agreement on the general
focus of the meetings. The hammering out of specific details is postponed for later get-
togethers. By achieving agreement on the general framework within which the negotiations
will be conducted, the Chinese seek to limit and focus the discussions. Many Westerners
misunderstand what is happening during these initial meetings and believe the dialogue
consists mostly of rhetoric and general conversation. They are wrong and quite often are
surprised later on when the Chinese negotiators use the agreement on the framework and
principles as a basis for getting agreement on goals—and then insist that all discussions
on concrete arrangements be in accord with these agreed-upon goals. Simply put, what is
viewed as general conversation by many Western negotiators is regarded by the Chinese
as a formulation of the rules of the game that must be adhered to throughout the nego-
tiations. So in negotiating with the Chinese, it is important to come prepared to ensure
that one’s own agenda, framework, and principles are accepted by both parties.
Chapter 7 Cross-Cultural Communication and Negotiation 233
Before beginning any negotiations, negotiators should review the negotiating style
of the other parties. (Table 7–9 provides some insights regarding negotiation styles of
the United States, Japanese, Arabians, and Mexicans.) This review should help to answer
certain questions: What can we expect the other side to say and do? How are they likely
to respond to certain offers? When should the most important matters be introduced?
How quickly should concessions be made, and what type of reciprocity should be
expected? These types of questions help effectively prepare the negotiators. In addition,
the team will work on formulating negotiation tactics. The International Management in
Action “Negotiating with the Japanese” demonstrates such tactics, and the following
discussion gets into some of the specifics.
Sometimes, simply being familiar with the culture is still falling short of being
aptly informed. We discussed in Chapter 2 how the political and legal environment of a
country can have an influence over an MNC’s decision to open operations, and those
external factors are good to bear in mind when coming to an agreement. Both parties
may believe that the goals have been made clear, and on the surface a settlement may
deliver positive results. However, the subsequent actions taken by either company could
prove to exhibit even more barriers. Take Pirelli, an Italian tire maker that acquired
Continental Gummiwerke, its German competitor. Pirelli purchased the majority holdings
of Continental’s stock, a transaction that would translate into Pirelli having control of
the company if it occurred in the United States. When Pirelli attempted to make key
managerial decisions for its Continental unit, it discovered that in Germany, the corporate
governance in place allows German companies to block such actions, regardless of the
shareholder position. Furthermore, the labor force has quite a bit of leverage with its
Table 7–9
Negotiation Styles from a Cross-Cultural Perspective
Element United States Japanese Arabians Mexicans
Group composition Marketing oriented Function oriented Committee of specialists Friendship oriented
Number involved 2–3 4–7 4–6 2–3
Space orientation Confrontational;
competitive
Display harmonious
relationship
Status Close, friendly
Establishing rapport Short period; direct
to task
Longer period; until
harmony
Long period; until trusted Longer period; discuss
family
Exchange of
information
Documented; step by
step; multimedia
Extensive; concentrate
on receiving side
Less emphasis on technol-
ogy, more on relationship
Less emphasis on technol-
ogy, more on relationship
Persuasion tools Time pressure; loss
of saving/making
money
Maintain relationship
references; intergroup
connections
Go-between; hospitality Emphasis on family and on
social concerns; goodwill
measured in generations
Use of language Open, direct, sense
of urgency
Indirect, appreciative,
cooperative
Flattery, emotional,
religious
Respectful, gracious
First offer Fair ±5 to 10% ±10 to 20% ±20 to 50% Fair
Second offer Add to package;
sweeten the deal
−5% −10% Add an incentive
Final offer package Total package Makes no further
concessions
−25% Total
Decision-making
process
Top management
team
Collective Team makes recommen-
dation
Senior manager and
secretary
Decision maker Top management
team
Middle line with team
consensus
Senior manager Senior manager
Risk taking Calculated personal
responsibility
Low group
responsibility
Religion based Personally responsible
Source: Lillian H. Chaney and Jeanette S. Martin, International Business Communication, 3rd Edition © 2004. Electronically reproduced by permission of Pearson
Education, Inc., Upper Saddle River, New Jersey.
234
ability to elect members of the supervisory board, which in turn chooses the management
board.72 Pirelli essentially lost on an investment; that is, unless Continental can be prof-
itable under its current management. If Pirelli had known that this was going to happen,
it probably would have reconsidered. One solution could be for Pirelli’s management to
begin some positive rapport with the labor force to try to sway viewpoints internally.
The better option, though, would be for international managers to be as informed as
possible and avoid trouble before it occurs.
Negotiation Tactics
A number of specific tactics are used in international negotiation. The following discus-
sion examines some of the most common.
Location Where should negotiations take place? If the matter is very important, most
businesses will choose a neutral site. For example, U.S. firms negotiating with companies
from the Far East will meet in Hawaii, and South American companies negotiating with
European firms will meet halfway, in New York City. A number of benefits derive from
using a neutral site. One is that each party has limited access to its home office for re-
ceiving a great deal of negotiating information and advice and thus gaining an advantage
on the other. A second is that the cost of staying at the site often is quite high, so both
sides have an incentive to conclude their negotiations as quickly as possible. (Of course,
if one side enjoys the facilities and would like to stay as long as possible, the negotia-
tions could drag on.) A third is that most negotiators do not like to return home with
nothing to show for their efforts, so they are motivated to reach some type of agreement.
Time Limits Time limits are an important negotiation tactic when one party is under
a time constraint. This is particularly true when this party has agreed to meet at the home
International Management in Action
Negotiating with the Japanese
Some people believe that the most effective way of get-
ting the Japanese to open up their markets to the
United States is to use a form of strong-arm tactics, such
as putting the country on a list of those to be targeted
for retaliatory action. Others believe that this approach
will not be effective because the interests of the United
States and Japan are intertwined and we would be hurt-
ing ourselves as much as them. Regardless of which
group is right, one thing is certain: U.S. MNCs must learn
how to negotiate more effectively with the Japanese.
What can they do? Researchers have found that besides
patience and a little table pounding, a number of
important steps warrant consideration.
First, business firms need to prepare for their negotia-
tions by learning more about Japanese culture and the
“right” ways to conduct discussions. Those companies
with experience in these matters report that the two best
ways of doing this are to read books on Japanese busi-
ness practices and social customs and to hire experts to
train the negotiators. Other steps that are helpful include
putting the team through simulated negotiations and
hiring Japanese to assist in the negotiations.
Second, U.S. MNCs must learn patience and sincer-
ity. Negotiations are a two-way street that require the
mutual cooperation and efforts of both parties. The
U.S. negotiators must understand that many times,
Japanese negotiators do not have full authority to
make on-the-spot decisions. Authority must be given
by someone at the home office, and this failure to act
quickly should not be interpreted as a lack of sincerity
on the part of the Japanese negotiators.
Third, the MNC must have a unique good or service.
So many things are offered for sale in Japan that unless
the company has something that is truly different, per-
suading the other party to buy it is difficult.
Fourth, technical expertise often is viewed as a very
important contribution, and this often helps to win con-
cessions with the Japanese. The Japanese know that
the Americans, for example, still dominate the world
when it comes to certain types of technology and that
Japan is unable to compete effectively in these areas.
When such technical expertise is evident, it is very influ-
ential in persuading the Japanese to do business with
the company.
These four criteria are critical to effective nego-
tiations with the Japanese. MNCs that use them
report more successful experiences than those that
do not.
Chapter 7 Cross-Cultural Communication and Negotiation 235
site of the other party. For example, U.S. negotiators who go to London to discuss a joint
venture with a British firm often will have a scheduled return flight. Once their hosts
find out how long these individuals intend to stay, the British can plan their strategy
accordingly. The “real” negotiations are unlikely to begin until close to the time that the
Americans must leave. The British know that their guests will be anxious to strike some
type of deal before returning home, so the Americans are at a disadvantage.
Time limits can be used tactically even if the negotiators meet at a neutral site.
For example, most Americans like to be home with their families for Thanksgiving,
Christmas, and the New Year holiday. Negotiations held right before these dates put
Americans at a disadvantage because the other party knows when the Americans would
like to leave.
Buyer-Seller Relations How should buyers and sellers act? As noted earlier, Americans
believe in being objective and trading favors. When the negotiations are over, Americans
walk away with what they have received from the other party, and they expect the other
party to do the same. This is not the way negotiators in many other countries think,
however.
The Japanese, for example, believe that the buyers should get most of what they
want. On the other hand, they also believe that the seller should be taken care of through
reciprocal favors. The buyer must ensure that the seller has not been “picked clean.” For
example, when many Japanese firms first started doing business with large U.S. firms,
they were unaware of U.S. negotiating tactics. As a result, the Japanese thought the
Americans were taking advantage of them, whereas the Americans believed they were
driving a good, hard bargain.
The Brazilians are quite different from both the Americans and Japanese. Research-
ers have found that Brazilians do better when they are more deceptive and self-interested
and their opponents more open and honest than they are.73,74 Brazilians also tend to make
fewer promises and commitments than their opponents, and they are much more prone to
say no. However, Brazilians are more likely to make initial concessions. Overall, Brazilians
are more like Americans than Japanese in that they try to maximize their advantage, but
they are unlike Americans in that they do not feel obligated to be open and forthright in
their approach. Whether they are buyer or seller, they want to come out on top.
Negotiating for Mutual Benefit
When managers enter a negotiation with the intent to win and are not open to flexible
compromises, it can result in a stalemate. Ongoing discussion with little progress can
increase tensions between the two groups and create an impasse where groups become
more frustrated and aggressive, and no agreement can be reached.75 Ultimately, too much
focus on the plan with little concern for the viewpoint of the other group can lead to missed
opportunities. It is important to keep objectives in mind and at the forefront, but it should
not be a substitute for constructive discussions. Fisher and Ury, authors of the book Getting
to Yes, present five general principles to help avoid such disasters: (1) separate the people
from the problem, (2) focus on interests rather than positions, (3) generate a variety of
options before settling on an agreement (as mentioned earlier in this section), (4) insist that
the agreement be based on objective criteria, and (5) stand your ground.76
Separating the People from the Problem Often, when managers spend so much time
getting to know the issue, many become personally involved. Therefore, responses to a
particular position can be interpreted as a personal affront. In order to preserve the per-
sonal relationship and gain a clear perspective on the issue, it is important to distinguish
the problem from the individual.
When dealing with people, one barrier to complete understanding is the negotiating
parties’ perspectives. Negotiators should try to put themselves in the other’s shoes. Avoid
blame, and keep the atmosphere positive by attempting to alter proposals to better
236 Part 2 The Role of Culture
translate the objectives. The more inclusive the process, the more willing everyone will
be to find a solution that is mutually beneficial.
Emotional factors arise as well. Negotiators often experience some level of an
emotional reaction during the process, but it is not seen by the other side. Recognize
your own emotions and be open to hearing and accepting emotional concerns of the other
party. Do not respond in a defensive manner or give in to intense impulses. Ignoring the
intangible tension is not recommended; try to alleviate the situation through sympathetic
gestures such as apologies.
As mentioned earlier, good communication is imperative to reaching an agreement.
Talk to each other, instead of just rehashing grandiose aspects of the proposal. Listen to
responses and avoid passively sitting there while formulating a response. When appropri-
ate, summarize the key points by vocalizing your interpretation to the other side to ensure
correct evaluation of intentions.
Overall, don’t wait for issues to arise and react to them. Instead, go into discussion
with these guidelines already in play.
Focusing on Interests over Positions The position one side takes can be expressed
through a simple outline, but still does not provide the most useful information. Focusing
on interests gives one insight into the motivation behind why a particular position was
chosen. Digging deeper into the situation by both recognizing your own interests and
becoming more familiar with others’ interests will put all active partners in a better
position to defend their proposal. Simply stating, “This model works, and it is the best
option,” may not have much leverage. Discussing your motivation, such as, “I believe
our collaboration will enhance customer satisfaction, which is why I took on this project,”
will help others see the why, not just the what.
Hearing the incentive behind the project will make both sides more sympathetic,
and may keep things consistent. Be sure to consider the other side, but maintain focus
on your own concerns.
Generating Options Managers may feel pressured to come to an agreement quickly
for many reasons, especially if they hail from a country that puts a value on time. If
negotiations are with a group that does not consider time constraints, there may be
temptation to have only a few choices to narrow the focus and expedite decisions. It turns
out, though, that it is better for everyone to have a large number of options in case some
proposals prove to be unsatisfactory.
How do groups go about forming these proposals? First, they can meet to brainstorm
and formulate creative solutions through a sort of invention process. This includes shifting
thought focus among stating the problem, analyzing the issue, pondering general approaches,
and strategizing the actions. After creating the proposals, the groups can begin evaluating
the options and discuss improvements where necessary. Try to avoid the win-lose approach
by accentuating the points of parity. When groups do not see eye to eye, find options that
can work with both viewpoints by “look[ing] for items that are of low cost to you and high
benefit to them, and vice versa.”77 By offering proposals that the other side will agree to,
you can pinpoint the decision makers and tailor future suggestions toward them. Be sure to
support the validity of your proposal, but not to the point of being overbearing.
Using Objective Criteria In cases where there are no common interests, avoid tension
by looking for objective options. Legitimate, practical criteria could be formed by using
reliable third-party data, such as legal precedent. If both parties would accept being
bound to certain terms, then chances are the suggestions were derived from objective
criteria. The key is to emphasize the communal nature of the process. Inquire about why
the other group chose its particular ideas. It will help you both see the other side and
give you a springboard from which you can argue your views, which can be very per-
suasive. Overall, effective negotiations will result from international managers being
flexible but not folding to external pressures.
Chapter 7 Cross-Cultural Communication and Negotiation 237
These are just general guidelines to abide by to try and reach a mutual agreement.
The approaches will be more effective if the group adhering to the outline was the one
with more power. Fisher and Ury also looked at what managers should do if the other
party has the power.
Standing Ground Every discussion will have some imbalance of power, but there is
something negotiators can do to defend themselves. It may be tempting to create a “bot-
tom line,” or lowest possible set of options that one will accept, but it does not neces-
sarily accomplish the objective. When negotiators make a definitive decision before
engaging in discussion, they may soon find out that the terms never even surface. That
is not to say that their bottom line is below even the lowest offer, but instead that with-
out working with the other negotiators, they cannot accurately predict the proposals that
will be devised. So what should the “weaker” opponent do?
The reason two parties are involved in a negotiation is because they both want a
situation that will leave them better off than before. Therefore, no matter how long nego-
tiations drag on, neither side should agree to terms that will leave it worse off than its best
alternative to a negotiated agreement, or BATNA. Clearly defining and understanding the
BATNA will make it easier to know when it is time to leave a negotiation and empower
that side. An even better scenario would be if the negotiator learns of the other side’s
BATNA. As Fisher and Ury say: “Developing your BATNA thus not only enables you to
determine what is a minimally acceptable agreement, it will probably raise that minimum.”78
Even the most prepared manager can walk into a battle zone. At times, negotiators
will encounter rigid, irritable, caustic, and selfish opponents. A positional approach to
bargaining can cause tension, but the other side can opt for a principled angle. This entails
a calm demeanor and a focus on the issues. Instead of counterattacking, redirect the con-
versation to the problem and do not take any outbursts as personal attacks. Inquire about
their reasoning and try to take any negative statements as constructive. If no common
ground is reached, a neutral third party can come in to assess the desires of each side and
compose an initial proposal. Each group has the right to suggest alternative approaches,
but the third-party person has the last word in what the true “final draft” is. If the parties
decide it is still unacceptable, then it is time to walk away from negotiations.
Fisher and Ury compiled a comprehensive guide as to how to approach negotia-
tions. While no guideline has a 100 percent effective rate, their method helps gain a
position where both sides win.
Bargaining Behaviors
Closely related to the discussion of negotiation tactics are the different types of bargaining
behaviors, including both verbal and nonverbal behaviors. Verbal behaviors are an impor-
tant part of the negotiating process because they can improve the final outcome. Research
shows that the profits of the negotiators increase when they make high initial offers, ask
a lot of questions, and do not make many verbal commitments until the end of the nego-
tiating process. In short, verbal behaviors are critical to the success of negotiations.
Use of Extreme Behaviors Some negotiators begin by making extreme offers or requests.
The Chinese and Arabs are examples. Some negotiators, however, begin with an initial posi-
tion that is close to the one they are seeking. The Americans and Swedes are examples here.
Is one approach any more effective than the other? Research shows that extreme
positions tend to produce better results. Some of the reasons relate to the fact that an
extreme bargaining position (1) shows the other party that the bargainer will not be
exploited, (2) extends the negotiation and gives the bargainer a better opportunity to gain
information on the opponent, (3) allows more room for concessions, (4) modifies the
opponent’s beliefs about the bargainer’s preferences, (5) shows the opponent that the bar-
gainer is willing to play the game according to the usual norms, and (6) lets the bargainer
gain more than would probably be possible if a less extreme initial position had been taken.
238 Part 2 The Role of Culture
Although the use of extreme position bargaining is considered to be “un-American,”
many U.S. firms have used it successfully against foreign competitors. When Peter Ueber-
roth managed the Olympic Games in the United States in 1984, he turned a profit of well
over $100 million—and that was without the participation of Soviet-bloc countries, which
would have further increased the market potential of the games. In most other Olympiads,
sponsoring countries have lost hundreds of millions of dollars. How did Ueberroth do it?
One way was by using extreme position bargaining. For example, the Olympic Committee
felt that the Japanese should pay $10 million for the right to televise the games in the
country, so when the Japanese offered $6 million for the rights, the Olympic Committee
countered with $90 million. Eventually, the two sides agreed on $18.5 million. Through
the effective use of extreme position bargaining, Ueberroth got the Japanese to pay over
three times their original offer, an amount well in excess of the committee’s budget.
Promises, Threats, and Other Behaviors Another approach to bargaining is the use
of promises, threats, rewards, self-disclosures, and other behaviors that are designed to
influence the other party. These behaviors often are greatly influenced by the culture.
Graham conducted research using Japanese, U.S., and Brazilian businesspeople and
found that they employed a variety of different behaviors during a buyer-seller negotia-
tion simulation.79 Table 7–10 presents the results.
Table 7–10
Cross-Cultural Differences in Verbal Behavior of Japanese, U.S., and Brazilian Negotiators
Number of Times Tactic Was Used in
a Half-Hour Bargaining Session
Behavior and Definition Japanese United States Brazilian
Promise. A statement in which the source indicated an intention to provide the target
with a reinforcing consequence that the source anticipates the target will evaluate as
pleasant, positive, or rewarding.
7 8 3
Threat. Same as promise, except that the reinforcing consequences are thought to be
noxious, unpleasant, or punishing.
4 4 2
Recommendation. A statement in which the source predicts that a pleasant environmental
consequence will occur to the target. Its occurrence is not under the source’s control.
7 4 5
Warning. Same as recommendation except that the consequences are thought to be
unpleasant.
2 1 1
Reward. A statement by the source that is thought to create pleasant consequences
for the target.
1 2 2
Punishment. Same as reward, except that the consequences are thought to be unpleasant. 1 3 3
Positive normative appeal. A statement in which the source indicates that the target’s
past, present, or future behavior was or will be in conformity with social norms.
1 1 0
Negative normative appeal. Same as positive normative appeal, except that the tar-
get’s behavior is in violation of social norms.
3 1 1
Commitment. A statement by the source to the effect that its future bids will not go
below or above a certain level.
15 13 8
Self-disclosure. A statement in which the source reveals information about itself. 34 36 39
Question. A statement in which the source asks the target to reveal information about
itself.
20 20 22
Command. A statement in which the source suggests that the target perform a certain
behavior.
8 6 14
First offer. The profit level associated with each participant’s first offer. 61.5 57.3 75.2
Initial concession. The differences in profit between the first and second offer. 6.5 7.1 9.4
Number of no’s. Number of times the word “no” was used by bargainers per half-hour. 5.7 9.0 83.4
Source: Adapted from John L. Graham, “The Influence of Culture on the Process of Business Negotiations in an Exploratory Study,” Journal of International Business
Studies, Spring 1983, p. 88. Reprinted by permission from Macmillan Publishers Ltd., Journal of International Business Studies, March 1, 1985. Published by Palgrave
Macmillan.
Chapter 7 Cross-Cultural Communication and Negotiation 239
The table shows that Americans and Japanese make greater use of promises than
do Brazilians. The Japanese also rely heavily on recommendations and commitment.
The Brazilians use a discussion of rewards, commands, and self-disclosure more than
Americans and Japanese. The Brazilians also say no a great deal more and make first
offers that have higher-level profits than those of the others. Americans tend to oper-
ate between these two groups, although they do make less use of commands than
either of their opponents and make first offers that have lower profit levels than their
opponents’.
Nonverbal Behaviors Nonverbal behaviors also are very common during negotia-
tions. These behaviors refer to what people do rather than what they say. Nonverbal
behaviors sometimes are called the “silent language.” Typical examples include silent
periods, facial gazing, touching, and conversational overlaps. As seen in Figure 7–3,
the Japanese tend to use silent periods much more often than either Americans or
Brazilians during negotiations. In fact, in this study, the Brazilians did not use them
at all. The Brazilians did, however, make frequent use of other nonverbal behaviors.
They employed facial gazing almost four times more often than the Japanese and
almost twice as often as the Americans. In addition, although the Americans and
Japanese did not touch their opponents, the Brazilians made wide use of this nonver-
bal tactic. They also relied heavily on conversational overlaps, employing them more
than twice as often as the Japanese and almost three times as often as Americans.
Figure 7–3
Cross-Cultural Differences
in Nonverbal Behavior of
Japanese, U.S., and
Brazilian Negotiators
BrazilianUnited StatesJapanese
28.6
The number of times (per 10 minutes)
that both parties to the negotiation
would talk at the same time
10.3
12.6
BrazilianUnited StatesJapanese
5.2
The number of minutes negotiators
spend looking at their opponent’s
face per 10-minute period
3.3
1.3
BrazilianUnited StatesJapanese
0
3.5
5.5
Number of 10-second gaps
per 30 minutes of conversation
BrazilianUnited StatesJapanese
4.7
Incidents of negotiators’ touching
one another per half-hour
00
Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from John L. Graham,
“The Influence of Culture on the Process of Business Negotiations in an Exploratory Study,” Journal of International Business Studies,
Spring 1983, p. 88. Reprinted by permission from Macmillan Publishers Ltd., Journal of International Business Studies, March 1,
1985. Published by Palgrave Macmillan.
240 Part 2 The Role of Culture
Quite obviously, the Brazilians rely very heavily on nonverbal behaviors in their
negotiating.
The important thing to remember is that in international negotiations, people use
a wide variety of tactics, and the other side must be prepared to counter or find a way
of dealing with them. The response will depend on the situation. Managers from differ-
ent cultures will employ different tactics. Table 7–11 suggests some characteristics
needed in effective negotiators, as exemplified by various cultures. To the extent that
international managers have these characteristics, their success as negotiators should
increase.
Table 7–11
Culture-Specific Characteristics Needed by International Managers
for Effective Negotiations
U.S. managers • Preparation and planning skill Ability to think under pressure
Judgment and intelligence Verbal expressiveness Product
knowledge Ability to perceive and exploit power Integrity
Japanese managers • Dedication to job Ability to perceive and exploit power Ability
to win respect and confidence Integrity Listening skill Broad
perspective Verbal expressiveness
Chinese managers
(Taiwan)
• Persistence and determination Ability to win respect and confidence
Preparation and planning skill Product knowledge Interesting
Judgment and intelligence
Brazilian managers • Preparation and planning skill Ability to think under pressure Judg-
ment and intelligence Verbal expressiveness Product knowledge
Ability to perceive and exploit power Competitiveness
Source: Adapted from Nancy J. Adler, International Dimensions of Organizational Behavior, 2nd ed. (Boston: PWS-Kent
Publishing, 1991), p. 187; and from material provided by Professor John Graham, School of Business Administration,
University of Southern California, 1983.
The World of International Management—Revisited
The chapter’s opening World of International Management explored some of the inter-
national communication and negotiation challenges that Netflix has faced when expand-
ing into Russia and attempting to enter China. Despite an entry strategy that proved
successful in markets in Europe and the Americas, Netflix encountered a longer and
more complex negotiation process in China than expected. And in Russia, Netflix’s lack
of communication and its failure to recognize the necessary involvement of government
officials in its expansion plans resulted in a political backlash. As this chapter revealed,
understanding the communication styles of different cultures is a critical variable in
entering foreign markets, managing relationships among employees and customers, man-
agers and subordinates, and in all business relationships.
A key to success in today’s global economy is being able to communicate effec-
tively within and across national boundaries and to engage in effective negotiations across
cultures. Considering the communication challenges faced by offshoring firms, along
with what you have read in this chapter, answer the following questions: (1) How is
communication in India similar to that of Europe and North America? How is it differ-
ent? (2) What kind of managerial relationships could you assume exist between an
American financial services firm and its employees in India? (3) What kind of negotia-
tions could help engage Indian employees and overcome some of the cultural problems
encountered? How might culture play a role in the approach the Indian employees take
in their negotiation with the financial firm?
Chapter 7 Cross-Cultural Communication and Negotiation 241
1. Communication is the transfer of meaning from
sender to receiver. The key to the effectiveness of
communication is how accurately the receiver inter-
prets the intended meaning.
2. Communicating in the international business context
involves both downward and upward flows. Down-
ward flows convey information from superior to
subordinate; these flows vary considerably from
country to country. For example, the downward sys-
tem of organizational communication is much more
prevalent in France than in Japan. Upward commu-
nication conveys information from subordinate to
superior. In the United States and Japan, the upward
system is more common than in South America or
some European countries.
3. The international arena is characterized by a num-
ber of communication barriers. Some of the most
important are intrinsic to language, perception,
culture, and nonverbal communication. Language,
particularly in written communications, often
loses considerable meaning during interpretation.
Perception and culture can result in people’s see-
ing and interpreting things differently, and as a
result, communication can break down. Nonverbal
communication such as body language, facial
expressions, and use of physical space, time, and
even color often varies from country to country
and, if improper, often results in communication
problems.
4. A number of steps can be taken to improve com-
munication effectiveness. Some of the most impor-
tant include improving feedback, providing language
and cultural training, and encouraging flexibility
and cooperation. These steps can be particularly
helpful in overcoming communication barriers in
the international context and can lead to more
effective international management.
5. Negotiation is the process of bargaining with one or
more parties to arrive at a solution that is accept-
able to all. There are two basic types of negotia-
tion: distributive negotiation involves bargaining
over opposing goals while integrative negotiation
involves cooperation aimed at integrating interests.
The negotiation process involves five basic steps:
planning, interpersonal relationship building,
exchanging task-related information, persuasion, and
agreement. The way in which the process is carried
out often will vary because of cultural differences,
and it is important to understand them.
6. There are a wide variety of tactics used in interna-
tional negotiating. These include location, time lim-
its, buyer-seller relations, verbal behaviors, and
nonverbal behaviors.
7. Negotiating for mutual benefit is enhanced by sepa-
rating the people from the problem, focusing on
interests rather than positions, generating a variety
of options, insisting that the agreement be based on
objective criteria, and standing one’s ground.
SUMMARY OF KEY POINTS
KEY TERMS
chromatics, 225
chronemics, 225
communication, 210
context, 210
distributive negotiations, 229
downward communication, 214
haptics, 224
integrative negotiation, 230
intimate distance, 224
kinesics, 224
monochronic time schedule, 225
negotiation, 229
nonverbal communication, 223
oculesics, 224
perception, 219
personal distance, 224
polychronic time schedule, 225
proxemics, 224
public distance, 224
social distance, 224
upward communication, 215
REVIEW AND DISCUSSION QUESTIONS
1. How does explicit communication differ from
implicit communication? Which is one culture that
makes wide use of explicit communication? Implicit
communication? Describe how one would go about
conveying the following message in each of the two
cultures you identified: “You are trying very hard,
but you are still making too many mistakes.”
2. One of the major reasons that foreign expatriates
have difficulty doing business in the United States
is that they do not understand American slang. A
business executive recently gave the authors the fol-
lowing three examples of statements that had no
direct meaning for her because she was unfamiliar
with slang: “He was laughing like hell.” “Don’t
242 Part 2 The Role of Culture
6. For U.S. companies going abroad for the first time,
which form of nonverbal communication barrier
would be the greatest, kinesics or proxemics? Why?
Defend your answer.
7. If a company new to the international arena was
negotiating an agreement with a potential partner in
an overseas country, what basic steps should it be
prepared to implement? Identify and describe them.
8. Which elements of the negotiation process should
be done with only your group? Which events
should take place with all sides present? Why?
9. An American manager is trying to close a deal with
a Brazilian manager but has not heard back from
him for quite some time. The American is getting
very nervous that if he waits too long, he is going
to miss out on any backup options lost while wait-
ing for the Brazilian. What should the American
do? How can the American tell it is time to drop
the deal? Give some signs that suggest negotiations
will go no further.
10. Wilsten Inc. has been approached by a Japanese
firm that wants exclusive production and selling
rights for one of Wilsten’s new high-tech products.
What does Wilsten need to know about Japanese
bargaining behaviors to strike the best possible deal
with this company? Identify and describe five.
worry; it’s a piece of cake.” “Let’s throw these
ideas up against the wall and see if any of them
stick.” Why did the foreign expat have trouble
understanding these statements, and what could be
said instead?
3. Yamamoto Iron & Steel is considering setting up a
minimill outside Atlanta, Georgia. At present, the
company is planning to send a group of executives
to the area to talk with local and state officials
regarding this plant. In what way might mispercep-
tion be a barrier to effective communication
between the representatives for both sides? Identify
and discuss two examples.
4. Diaz Brothers is a winery in Barcelona. The com-
pany would like to expand operations to the
United States and begin distributing its products in
the Chicago area. If things work out well, the com-
pany then will expand to both coasts. In its busi-
ness dealings in the Midwest, how might culture
prove to be a communication barrier for the com-
pany’s representatives from Barcelona? Identify and
discuss two examples.
5. Why is nonverbal communication a barrier to effec-
tive communication? Would this barrier be greater
for Yamamoto Iron & Steel (question 3) or Diaz
Brothers (question 4)? Defend your answer.
For 11 straight years, the Toyota Camry has been the
best-selling car in the United States, and the firm’s
share of the American automobile market was solid.
However, the company is not resting on its laurels.
Toyota has expanded worldwide and is now doing
business in scores of countries. Visit the firm’s website
and find out what it has been up to lately. The address
is www.toyota.com. Then take a tour of the company’s
products and services including cars, air services, and
sports vehicles. Next, go to the jobs section site and
see what types of career opportunities there are at
Toyota. Finally, find out what Toyota is doing in your
particular locale. Then, drawing upon this information
and the material you read in the chapter, answer these
three questions: (1) What type of communication and
negotiation challenges do you think you would face if
you worked for Toyota and were in constant communi-
cation with home-office personnel in Japan? (2) What
type of communication training do you think the firm
would need to provide to you to ensure that you were
effective in dealing with senior-level Japanese manag-
ers in the hierarchy? (3) Using Table 7–1 as your
guide, what conclusions can you draw regarding com-
municating with the Japanese managers, and what
guidelines would you offer to a non-Japanese employee
who just entered the firm and is looking for advice
and guidance regarding how to communicate and nego-
tiate more effectively?
INTERNET EXERCISE: WORKING EFFECTIVELY AT TOYOTA
1. Adam Levine-Weinberg, “Netflix, Inc. Completes
Its Global Expansion (with 1 Big Asterisk),” The
Motley Fool, January 10, 2016, www.fool.com/
investing/general/2016/01/10/netflix-inc-completes-
its-global-expansion-with-on.aspx.
2. Julia Greenberg, “Netflix Expects to Add Fewer US
Users, So It’s Looking Abroad,” Wired, April 18,
2016, www.wired.com/2016/04/netflix-expects-add-
fewer-us-users-looking-abroad/.
ENDNOTES
Chapter 7 Cross-Cultural Communication and Negotiation 243
21. Giorgio Inzerilli, “The Legitimacy of Managerial
Authority: A Comparative Study,” National Acad-
emy of Management Proceedings (Detroit, 1980),
pp. 58–62.
22. Ibid., p. 62.
23. Richard Tanner Pascale and Anthony G. Athos, The
Art of Japanese Management (New York: Warner
Books, 1981), pp. 82–83.
24. Justin Fox, “The Triumph of English,” Fortune,
September 18, 2000, pp. 209–212.
25. See “Double or Quits,” The Economist, February
25, 1995, pp. 84–85.
26. Brock Stout, “Interviewing in Japan,” HR Magazine,
June 1998, p. 73.
27. Ibid., p. 75.
28. H. W. Hildebrandt, “Communication Barriers
between German Subsidiaries and Parent American
Companies,” Michigan Business Review, July 1973,
p. 9.
29. John R. Schermerhorn Jr., “Language Effects in
Cross-Cultural Management Research: An Empirical
Study and a Word of Caution,” National Academy
of Management Proceedings (New Orleans, 1987),
p. 103.
30. Heather Berry, Mauro F. Guillén, and Nan Zhou,
“An Institutional Approach to Cross-national Dis-
tance,” Journal of International Business Studies 41
(2010), pp. 1460–1480. doi: 10.1057/jibs.2010.28.
31. Brenda R. Sims and Stephen Guice, “Differences
between Business Letters from Native and Non-
Native Speakers of English,” Journal of Business
Communication, Winter 1991, p. 37.
32. James Calvert Scott and Diana J. Green, “British
Perspectives on Organizing Bad-News Letters:
Organizational Patterns Used by Major U.K. Com-
panies,” The Bulletin, March 1992, p. 17.
33. Ibid., pp. 18–19.
34. Mi Young Park, W. Tracy Dillon, and Kenneth L.
Mitchell, “Korean Business Letters: Strategies for
Effective Complaints in Cross-Cultural Communica-
tion,” Journal of Business Communication, July
1998, pp. 328–345.
35. As an example, see Jeremiah Sullivan, “What Are
the Functions of Corporate Home Pages?” Journal
of World Business 34, no. 2 (1999), pp. 193–211.
36. Joseph Kahn, “Fraying U.S.-Sino Ties Threaten Busi-
ness,” The Wall Street Journal, July 7, 1995, p. A6.
37. Nathaniel C. Nash, “China Gives Big Van Deal to
Mercedes,” New York Times, July 13, 1995, pp. C1, C5.
38. Seth Faison, “China Times a Business Deal to
Make a Point to America,” New York Times,
July 16, 1995, pp. 1, 6.
3. Julia Greenberg, “Netflix Is in ‘No Hurry’ to Go to
China,” Wired, January 19, 2016, www.wired.
com/2016/01/netflix-is-in-no-hurry-to-go-to-china/.
4. Julia Greenberg, “Netflix May Never Break into
China,” Wired, January 12, 2016, www.wired.
com/2016/01/netflix-may-never-break-into-china/.
5. Ibid.
6. John L. Graham and N. Mark Lam, “The Chinese
Negotiation,” Harvard Business Review, October 1,
2013.
7. Greenberg, “Netflix Is in ‘No Hurry’ to Go to China.”
8. Vladimir Kozlov, “Netflix May Have to Suspend
Operations in Russia, Says Government Minister,”
Hollywood Reporter, February 10, 2016,
www.hollywoodreporter.com/news/netflix-may-
have-suspend-operations-864130.
9. Ibid.
10. Vladimir Kozlov, “Netflix Faces More Restrictions
in Russia,” Hollywood Reporter, March 2,
2016, www.hollywoodreporter.com/news/netflix-
faces-more-restrictions-russia-872455.
11. Ibid.
12. Nathan McAlone, “Netflix Seems to Be Tanking in
Russia, but India and Other International Markets
Are Going Strong,” Business Insider, April 5,
2016, www.businessinsider.com/how-netflix-is-
doing-internationally-2016-4.
13. Nicholas Carr, The Shallows (New York: Norton,
2010).
14. E. T. Hall and E. Hall, “How Cultures Collide,” in
Culture, Communication, and Conflict: Readings in
Intercultural Relations, ed. G. R. Weaver (Needham
Heights, MA: Ginn Press, 1994).
15. Noboru Yoshimura and Philip Anderson, Inside the
Kaisha: Demystifying Japanese Business Behavior
(Boston: Harvard Business School Press, 1997), p. 59.
16. William C. Byham and George Dixon, “Through
Japanese Eyes,” Training and Development Journal,
March 1993, pp. 33–36.
17. Linda S. Dillon, “West Meets East,” Training and
Development Journal, March 1993, pp. 39–43.
18. 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. 204.
19. Nancy J. Adler (with Allison Gunderson), Interna-
tional Dimensions of Organizational Behavior, 5th
ed. (Mason, OH: South-Western, 2008), p. 80.
20. Toddi Gutner, “Delivering Unpopular News—When
You Haven’t Bought In,” The Wall Street Journal,
June 14, 2010, www.wsj.com/articles/SB100014240
52748703303904575293212841558170.
244 Part 2 The Role of Culture
Top Management Teams of MNCs,” Journal of
International Business Studies, Third Quarter 2000,
pp. 471–487.
55. Also see Linda Beamer, “Bridging Business
Cultures,” China Business Review, May–June 1998,
pp. 54–58.
56. Tanya Mohn, “Going Global, Stateside,” New York
Times, March 9, 2010, p. B9.
57. Michael D. Lord and Annette L. Ranft, “Organiza-
tional Learning about New International Markets:
Exploring the Internal Transfer of Local Market
Knowledge,” Journal of International Business
Studies, Fourth Quarter 2000, pp. 573–589.
58. Jennifer W. Spencer, “Knowledge Flows in the
Global Innovation System: Do U.S. Firms Share
More Scientific Knowledge Than Their Japanese
Rivals?” Journal of International Business Studies,
Third Quarter 2000, pp. 521–530.
59. Kenichi Ohmae, “The Global Logic of Strategic
Alliances,” Harvard Business Review, March–April
1989, p. 154.
60. See Hildy Teegen and Jonathan P. Doh, “U.S./
Mexican Alliance Negotiations: Cultural Impacts
on Trust, Authority and Performance,” Thunderbird
International Business Review 44, no. 6 (2002),
pp. 749–775.
61. See also Elise Campbell and Jeffrey J. Reuer,
“International Alliance Negotiations: Legal Issues
for General Managers,” Business Horizons,
January–February 2001, pp. 19–26.
62. Nina Reynolds, Antonis Simintiras, and Efi
Vlachou, “International Business Negotiations:
Present Knowledge and Direction for Future
Research,” International Marketing Review 20,
no. 3 (2003), p. 236.
63. Harvard Business Essentials: Negotiation (Boston:
Harvard Business School Press, 2003), p. 2.
64. Ibid., p. 4.
65. David K. Tse, June Francis, and Ian Walls, “Cul-
tural Differences in Conducting Intra- and Inter-
Cultural Negotiations: A Sino-Canadian
Comparison,” Journal of International Business
Studies, Third Quarter 1994, pp. 537–555.
66. Teegen and Doh, “U.S./Mexican Alliance Negotia-
tions,” pp. 749–775.
67. Adler and Gundersen, International Dimensions of
Organizational Behavior, p. 241.
68. Daniel Druckman, “Group Attachments in Negotia-
tion and Collective Action,” International Negotia-
tion 11 (2006), pp. 229–252.
69. Jeanne M. Brett, Debra L. Shapiro, and Anne L.
Lytle, “Breaking the Bonds of Reciprocity in
39. David A. Ricks, Big Business Blunders: Mistakes in
Multinational Marketing (Homewood, IL: Dow
Jones/Irwin, 1983), p. 39.
40. Ibid., p. 55.
41. John Kass, “Some Bright Ideas Get Lost in Transla-
tion,” Chicago Tribune online, April 20, 2007,
http://articles.chicagotribune.com/2007-04-20/
news/0704190692_1_gst-blunders-hungarian.
42. Edwin Miller, Bhal Bhatt, Raymond Hill, and Julian
Cattaneo, “Leadership Attitudes of American and
German Expatriate Managers in Europe and Latin
America,” National Academy of Management Pro-
ceedings (Detroit, 1980), pp. 53–57.
43. Abdul Rahim A. Al-Meer, “Attitudes Towards
Women as Managers: A Comparison of Asians,
Saudis and Westerners,” Arab Journal of the Social
Sciences, April 1988, pp. 139–149.
44. Sheryl WuDunn, “In Japan, Still Getting Tea and
No Sympathy,” New York Times, August 27, 1995,
p. E3.
45. Fathi S. Yousef, “Cross-Cultural Communication:
Aspects of the Contrastive Social Values between
North Americans and Middle Easterners,” Human
Organization, Winter 1974, p. 385.
46. Peter McKiernan and Chris Carter, “The Millen-
nium Nexus: Strategic Management at the Cross-
roads,” European Management Review 1, no. 1
(Spring 2004), p. 3.
47. R. Bruce Money, “Word-of-Mouth Referral Sources
for Buyers of International Corporate Financial Ser-
vices,” Journal of World Business 35, no. 3 (2000),
pp. 314–329.
48. Yousef, “Cross-Cultural Communication,” p. 383.
49. See Roger E. Axtell, ed., Do’s and Taboos around
the World (New York: Wiley, 1990), chapter 2.
50. Jane Whitney Gibson, Richard M. Hodgetts, and
Charles W. Blackwell, “Cultural Variations in
Nonverbal Communication,” 55th Annual Business
Communication Proceedings, San Antonio,
November 8–10, 1990, pp. 211–229.
51. William K. Brandt and James M. Hulbert, “Patterns
of Communications in the Multinational Corpora-
tion: An Empirical Study,” Journal of International
Business Studies, Spring 1976, pp. 57–64.
52. Hildebrandt, “Communication Barriers,” p. 9.
53. See, for example, George Ming-Hong Lai, “Know-
ing Who You Are Doing Business with in Japan: A
Managerial View of Keiretsu and Keiretsu Business
Groups,” Journal of World Business 34, no. 4
(1999), pp. 423–449.
54. Nicholas Athanassiou and Douglas Nigh,
“Internationalization, Tacit Knowledge and the
Chapter 7 Cross-Cultural Communication and Negotiation 245
78. Ibid., p. 111.
79. Graham, “The Influence of Culture on the Process
of Business Negotiations in an Exploratory Study,”
pp. 84, 88.
80. CIA, “China,” The World Factbook (2016), https://
www.cia.gov/library/publications/the-world-factbook/
geos/ch.html.
81. Ibid.
82. Neil Gough, “China G.D.P. Growth at Slowest Pace
Since 2009, Data Shows,” New York Times, January
18, 2016, www.nytimes.com/2016/01/19/business/
international/china-gdp-economy.html?_r=0.
83. Hao Li, “Doing Business in China: Cultural Differ-
ences to Watch for,” International Business Times,
February 16, 2012, www.ibtimes.com/doing-
business-china-cultural-differences-watch-411996.
84. Jason Kirby, “Why China Is So Worried about
Labour Unrest,” Maclean’s, June 10, 2015,
www.macleans.ca/economy/economicanalysis/why-
china-is-so-worried-about-labour-unrest/.
85. Shaun Rein, “What Coca-Cola Did Wrong, and
Right, in China,” Forbes.com, March 24,
2009, www.forbes.com/2009/03/24/coca-cola-china-
leadership-citizenship-huiyuan.html.
86. Ibid.
Negotiations,” Academy of Management Journal,
August 1998, pp. 410–424.
70. Stephen E. Weiss, “Negotiating with ‘Romans’—
Part 2,” Sloan Management Review, Spring 1994,
p. 89.
71. Trompenaars and Hampden-Turner, Riding the
Waves of Culture, p. 112.
72. James K. Sebenius, “The Hidden Challenge of
Cross-Border Negotiations,” Harvard Business
Review, March 2002, pp. 4–12.
73. John L. Graham, “Brazilian, Japanese, and
American Business Negotiations,” Journal of Inter-
national Business Studies, Spring–Summer 1983,
pp. 47–61.
74. John L. Graham, “The Influence of Culture on the
Process of Business Negotiations in an Exploratory
Study,” Journal of International Business Studies,
Spring 1983, pp. 81–96.
75. William Zartman, “Negotiating Internal, Ethnic and
Identity Conflicts in a Globalized World,” Interna-
tional Negotiation 11 (2006), pp. 253–272.
76. Roger Fisher and William Ury, Getting to Yes:
Negotiating Agreement Without Giving In (New
York: Penguin Books, 1983), p. 11.
77. Ibid., p. 79.
246
to be more accustomed to flexibility, while Chinese
employees tend to be more comfortable in structured and
hierarchical work environments.83
China operates under a communist political system.
While the country continues to address criticisms regard-
ing corruption, censorship, and a lack of transparency,
political unrest remains evident. In 2014, the number of
reported labor strikes reached 1,300. Chinese officials
have attempted to control labor protests by banning inde-
pendent labor unions, requiring any organization that
wishes to unionize to register with the government. In
addition, relations between the U.S. and China have some-
times been strained, fueled by allegations that the Chinese
government has orchestrated security hacks of U.S. pri-
vate firms and government agencies.84
In addition to the environmental pollution challenges
mentioned above, China has been facing several geopo-
litical challenges. First, the government is seeking to take
a more prominent role in global security and economic
issues. Second, China has faced challenges in controlling
its real estate and stock market. After a dramatic increase
in real estate values in the 2010–2015 period and a tur-
bulent stock market in 2016, Chinese officials are attempt-
ing to address concerns about excessive liquidity and lack
of market transparency. Some foreign investors have
become somewhat leery, adopting a “wait and see” attitude
for the time being.
You Be the International Management
Consultant
In 2009, the Chinese government rejected a proposed
acquisition of Huiyuan Juice by Coca Cola. As part of the
deal, worth US$2.3 billion, Coke would have invested a
further US$2 billion in its Chinese operations in addition
to the purchase price of Huiyan. The Chinese government
nonetheless scotched the deal, due to concerns of poten-
tial monopolization of the fruit juice and beverage indus-
try by the combined company. The rejection of the deal
caused other foreign investors to wonder if the Chinese
government was sending a signal that it intended to scru-
tinize foreign investment projects more closely in the
future.85
Retail sales in China continue to grow at double-digit
rates despite the global financial crisis and the overall
slowdown of China’s economy. Indeed, when it comes to
certain durable and nondurable goods, some economists
China
Located in the eastern portion of Asia, China’s main
waterways are the East China Sea, Korean Bay, Yellow
Sea, and South China Sea. China shares a border with
many important economies in East, South, and Central
Asia, including India, North Korea, Pakistan, Russia,
and Vietnam. The country has an extremely diverse cli-
mate, ranging from subarctic in the north to tropical in
the south. Natural resources are extensive and include
coal, iron ore, petroleum, natural gas, mercury, tin,
tungsten, antimony, manganese, molybdenum, vana-
dium, magnetite, aluminum, lead, zinc, rare earth ele-
ments, uranium, hydropower potential (world’s largest),
and arable land.80
The current population is estimated at 1.37 billion
people, making China, for now, the most populous
country in the world. With 56 separate ethnic groups
recognized within the country, China is much more
diverse than many assume. The citizens in China speak
one of three main languages: Mandarin, which is the
official language; Cantonese; and Shanghainese. Reli-
gion is divided among Buddhism, Christianity, and a
smaller segment of “folk religions.” China is a fairly
average-aged nation. The largest age group is made up
of those between the ages of 25 and 54 years old, which
is estimated at around 50 percent of the population. The
median age is 36.8 years old. Once a largely agricultural
country, urban centers of China now account for slightly
more than half the population.81
China’s GDP for 2014 was US$10.36 trillion. How-
ever, having experienced annual GDP growth rates of
between 7 and 14 percent for more than 15 years, China’s
economic expansion of 6.8 percent in 2015 was perceived
by economists as dangerously slow. China, like many
countries, faces issues stemming from pollution. Air pol-
lution (greenhouse gases) and acid rain are common.
Today, the country is the world’s largest single emitter of
carbon dioxide from the burning of fossil fuels.82
China ranks 84th out of 185 nations in the World
Bank’s survey of “Ease of Doing Business.” Foreign com-
panies can find it difficult to compete on an equal playing
field with domestic competitors, often based on either real
or perceived favoritism from the government. Associated
with this issue is a perceived lack of transparency from
the government and relatively poor intellectual property
rights enforcement. Culturally, Western companies often
find it difficult to manage Chinese employees due to stark
differences between the two countries. U.S. managers tend
In the International
Spotlight
can bring positive economic development to the
country?
3. Is the prospect of China’s sheer volume of potential
customers too good to pass up? Or do the actions
of the government and the country’s recent stock
market woes indicate a signal that investment
should be reconsidered?
Source: “China’s Economy: After the Stimulus,” China Business
Review, July 2010, pp. 30–33; Tran Van Hoa, “Impact of the WTO
Membership, Regional Economic Integration, and Structural Change on
China’s Trade and Growth,” Review of Development Economics,
August 2010, pp. 577–591; James Miles, “After the Olympics,”
Economist, December 21, 2008, p. 58; “The Next China,” Economist,
July 31, 2010, pp. 48–50; “China Revises Up 2010 GDP Expansion,”
People’s Daily Online, September 8, 2011, english.peopledaily.com.cn/.
believe China should no longer be considered an emerging
market. The country is now the largest market for cars
globally and, despite its own recent setbacks, Yum!
Brands generates about a third of its revenue from its KFC
and Pizza Hut sales within China. The country remains
an especially attractive host for foreign direct investment,
given its large market and continued growth.86
Questions
1. If you are working as a consultant for Coca Cola,
how does the dismissal of the deal by the Chinese
government affect your continued investment in the
country?
2. What more could private business, like Coca Cola,
do to convince the government that new enterprise
Chapter 7 Cross-Cultural Communication and Negotiation 247
248
Brief Integrative Case 2.1
Coca-Cola in India
attractive market.5 From 2003–2006, foreign investment
doubled to $6 billion. Imported goods have become a sta-
tus symbol for the burgeoning middle class.6
Coca-Cola has been targeting India for potential
growth, as Indians consume an average of 12 eight-ounce
beverages per year. In comparison, Brazil consumers
drink roughly 240 beverages per year on average. Despite
the relatively low amount of beverages consumed by India
on average, India has been one of Coke’s best emerging
market plays. In 2014, India surpassed Germany as Coca-
Cola’s sixth largest market. During the January to March
period of 2014, sales volumes in India increased 6 per-
cent. This growth is on par with Coca-Cola’s other emerg-
ing market operations in China (12 percent growth over
the same period) and Brazil (4 percent growth over the
same period).7 As part of its investment plan, Coca-Cola
plans to expand capacity at all 13 of its bottling plants,
which should help expand the company’s distribution
throughout the country. Coca-Cola is aiming to double
both revenue and volume in India by the year 2020.8
In 2014 FDI in India stood at $33.9 billion.9 In 2015,
India overtook the United States and China as the top
destination for FDI, according to a report by the Financial
Times.10 A 2015 survey of Japanese manufacturers con-
ducted by the Japan Bank for International Cooperation
ranked India as the most promising country for overseas
business operations.11
India’s GDP grew at the impressive average annual rate
of 8.5 percent during the six years spanning 2003–2008.
Even the global financial crisis, which began in Septem-
ber 2008, only cut the rate of growth by 2–3 percentage
points, and the economy has continued to grow at the
annual rate of 6–7 percent in the years since the crisis.12,13
But the country needs more investment in manufacturing
if it hopes to improve the lives of the 350 million people
living in poverty.14
Coca-Cola and Other Soft Drink
Investment in India
Coca-Cola had experienced previous confrontations with
the Indian government. In 1977, Coke had pulled out of
India when the government demanded its secret formula.15
Circumstances have dramatically improved over the
years for soft drink providers of India. Coke and Pepsi
have invested nearly $2 billion in India over the years.
They employ about 12,500 people directly and support
Coca-Cola is a brand name known throughout the entire
world. With stagnant soft drink sales in markets like
Europe and North America, Coca-Cola has aggressively
looked to new, expanding markets to continue to grow its
brand. India, with 1.2 billion consumers, has been a pri-
mary target for Coca-Cola; through acquisitions and
clever marketing, the company now covers 60 percent of
India’s $1 billion soft drink market.
Coca-Cola’s expansion in India has not been without
minor setbacks, however. In 2006–2007, Coca-Cola faced
some difficult challenges in the region of Kerala, India,
after it was accused of using water that contained pesti-
cides in its bottling plants. An environmental group, the
Center for Science and Environment (CSE), found
57 bottles of Coke and Pepsi products from 12 Indian
states that contained unsafe levels of pesticides.1 The
Kerala minister of health, R. Ashok, imposed a ban on
the manufacture and sale of Coca-Cola products in the
region. Coca-Cola then arranged to have its drinks tested
in a British lab, and the report found that the amount of
pesticides found in Pepsi and Coca-Cola drinks was harm-
less to the body.2 Coca-Cola then ran numerous ads to
regain consumers’ confidence in its products and brand.
However, these efforts did not satisfy the environmental
groups or the minister of health.
India’s Changing Marketplace
During the 1960s and 1970s, India’s economy faced
many challenges, growing only an average of 3–3.5 per-
cent per year. Numerous obstacles hindered foreign com-
panies from investing in India, and many restrictions on
economic activity caused huge difficulties for Indian
firms and a lack of interest among foreign investors. For
many years the government had problems implementing
reform and overcoming bureaucratic and political divi-
sions. Business activity has traditionally been underval-
ued in India; leisure is typically given more value than
work. Stemming from India’s colonial legacy, Indians
are highly suspicious of foreign investors. Indeed, there
have been a few well-publicized disputes between the
Indian government and foreign investors.3
More recently, however, many Western companies are
finding an easier time doing business in India.4 In 1991,
political conditions had changed, many restrictions were
eased, and economic reforms came into force. With more
than 1 billion consumers, India has become an increasingly
Brief Integrative Case 2.1 Coca-Cola in India 249
“Pepsi and Coke are doing our work for us. Now the whole
nation knows that there is a pesticide problem.”23
Coca-Cola fought back against the accusations. “No
Indian soft drink makers have been tested for similar vio-
lations even though pesticides could be in their products
such as milk and bottled teas. If pesticides are in the
groundwater, why isn’t anyone else being tested? We are
continuously being challenged because of who we are,”
said Atul Singh, CEO of Coca-Cola India.24
Some believe that Coca-Cola was targeted to bring the
subject of pesticides in consumer products to light. “If you
target multinational corporations, you get more publicity,”
adds Arvind Kumar, a researcher at the watchdog group
Toxic Links. “Pesticides are in everything in India.”25
India’s Response to the Allegations
After CSE’s discovery of the unsafe levels of pesti-
cides,26 some suggested the high levels of pesticides
came from sugar, which is 10 percent of the soft drink
content. However, laboratories found the sugar samples
to be pesticide free.27
Kerala is run by a communist government and a chief
minister who still claims to have a revolutionary objec-
tion to the evils of capitalism.28 Defenders of Coca-Cola
claim that this is a large reason for the pesticide findings
in Coca-Cola products. After the ban was placed on all
Coca-Cola and PepsiCo products in the region of Kerala,
Coca-Cola took its case to the state court to defend its
products and name. The court said that the state govern-
ment had no jurisdiction to impose a ban on the manu-
facture and sale of products.29 Kerala then lifted the
statewide ban on Coke products.30
In March 2010, after several years of tense battles, the
Indian unit of Coca-Cola Company was asked to pay $47
million in compensation for causing environmental dam-
age at its bottling plant in the southern Indian state of
Kerala. A state government panel said Coca-Cola’s sub-
sidiary, Hindustan Coca-Cola Beverages Pvt Ltd (HCBPL),
was responsible for depleting groundwater and dumping
toxic waste around its Palakkad plant between 1999 and
2004. Protests by farmers, complaining about the alleged
pollution, forced Coca-Cola to close down the plant in
2005. Coca-Cola responded that HCBPL was not respon-
sible for pollution in Palakkad, but the final decision on
the compensation will be taken by the state government.31
Pepsi’s Experience in India
PepsiCo has had an equally noticeable presence in India, and
it is not surprising that the company has weathered the same
storms as its rival Coca-Cola. In addition to claims of exces-
sive water use, a CSE pesticide study, performed in August
2006, accused Pepsi of having 30 times the “unofficial” pes-
ticide limit in its beverages (Coke was claimed to be 27 times
200,000 indirectly through their purchases of sugar, pack-
aging material, and shipping services. Coke is India’s
number-one consumer of mango pulp for its local soft
drink offerings.16 Coca-Cola in India is also the largest
domestic buyer of sugar and green coffee beans.17 From
1994 to 2003, Coca-Cola sales in India more than doubled.
In 2008–2009 Coca-Cola announced its plans to invest
more than $250 million in India over the next three years.
The money would be used for everything from expanding
bottling capacity to buying delivery trucks and refrigera-
tors for small retailers. The new money meant around a
20 percent increase in the total Coca-Cola has invested in
India.18 Coca-Cola’s sales in India climbed 31 percent in
the three months ended March 31, 2009, compared to a
year earlier. That’s the highest volume growth of any of
Coke’s markets.19
Furthermore, Coca-Cola announced plans in 2012 to
invest upwards of US$5 billion in India by 2020. This
investment marks a 150 percent increase over the announced
plans from 2011 to invest up to US$2 billion in India over
the next five years. Putting this investment in perspective,
Coca-Cola has invested a total of just over US$2 billion in
its India operations over the past 20 years. Despite the large
investment in India, Coca-Cola will see serious competition
from Pepsi in this market. Together Coke and Pepsi
make up 97 percent of the market for carbonated soft drinks
in India, where soda sales overall are estimated to be
US$1.05 billion. Coke accounted for 60 percent of all sales
while Pepsi received 37 percent of the market share.20
Royal Crown Cola (RC Cola) is the world’s third larg-
est brand of soft drinks. The brand was purchased in 2001
by Cott Beverages and entered the Indian market in 2003.
For production in India, the company hired three licensing
and franchising bottlers. In order to ensure that it was not
associated with the pesticide accusations against Pepsi
and Coke, RC Cola immediately had its groundwater
tested by the testing institute SGS India Pvt Ltd.21
The Charges against Coke
The pesticide issue began in 2002 in Plachimada, India.
Villagers thought that water levels had sunk and the
drinking water was contaminated by Coke’s plant. They
launched a vigil at the plant, and two years later, Coke’s
license was canceled. Coca-Cola’s most recent pesticide
issue began at a bottling plant in Mehdiganj. The plant
was accused of exploiting the groundwater and polluting
it with toxic metals.22 Karnataka R. Ashok, the health
minister of Kerala, India, banned the sale of all Coca-Cola
and PepsiCo products, claiming that the drinks contained
unsafe levels of pesticides.
The alleged contamination of the water launched a
debate on everything from pesticide-polluted water to the
Indian middle-class’s addiction to unhealthy, processed
foods. “It’s wonderful,” said Sunita Narin, director of CSE.
250 Part 2 The Role of Culture
severe water shortages, locating water-extracting plants in
“drought prone” areas, further limiting water access by
contaminating the surrounding land and groundwater, and
irresponsibly disposing of toxic waste. Colleges and uni-
versities throughout the United States, U.K., and Canada
have joined in holding the company accountable for its
overseas business practices by banning Coca-Cola prod-
ucts on their campuses until more positive results are
reported. However, critics have argued that TERI’s assess-
ment would undoubtedly be biased because the organiza-
tion has been largely funded by the Coca-Cola Company.36
Coca-Cola stands behind the safety of its products.
“Multinational corporations provide an easy target,” says
Amulya Ganguli, a political analyst in New Delhi. “These
corporations are believed to be greedy, devoted solely to
profit, and uncaring about the health of the consumers.”
There is also a deeply rooted distrust of big business, and
particularly foreign big business, in India.37 This is a
reminder that there will continue to be obstacles, as there
were in the past, to foreign investments in India.
In order to reaffirm their presence in India, Coke and
Pepsi have run separate ads insisting that their drinks are
safe. Coke’s ad said, “Is there anything safer for you to
drink?” and invited Indians to visit its plants to see how
the beverage is made.38 Nevertheless, in July 2006, Coke
reported a 12 percent decline in sales.39
Coca-Cola has undertaken various initiatives to improve
the drinking water conditions around the world. It has
formally pledged support for the United Nations Global
Compact and co-founded the Global Water Challenge,
which improves water access and sanitation in countries
in critical need. It is improving energy efficiency through
the use of hydrofluorocarbon-free insulation for 98 per-
cent of new refrigerator sales and marketing equipment.
Specifically, in India, Coke has stated, “More than one-
third of the total water that is used in operations is renewed
and returned to groundwater systems.”40 Among its first
water renewal projects was installation of 270 rainwater
the limit in this study).32 These findings, coupled with the
original 2003 CSE study that first tarnished the cola compa-
nies’ image, have prompted numerous consumers to stop
their cola consumption. Some have even taken to the streets,
burning pictures of Pepsi bottles in protest.
Indra Nooyi, CEO of PepsiCo Inc. and a native of
India, is all too familiar with the issues of water con-
tamination and water shortages. Yet, in light of the recent
claims made against Pepsi, she has expressed frustration
with the exaggerated CSE findings (local tea and coffee
have thousands of times the alleged pesticide level found
in Pepsi products) and the disproportionate reaction to
Pepsi’s water-use practices (pointing out that soft drinks
and bottled water account for less than 0.04 percent of
industrial water usage in India).33
In order to reaffirm the safety and popularity of its
products, Pepsi has taken on a celebrity-studded ad cam-
paign across India, as well as continued its legacy of cor-
porate social responsibility (CSR). Some of Pepsi’s CSR
efforts have involved digging village wells, “harvesting”
rainwater, and teaching better techniques for growing rice
and tomatoes.34 Pepsi has also initiated efforts to reduce
water waste at its Indian facilities.
Although Pepsi sales are back on the rise, Nooyi real-
izes that she should have acted sooner to counteract CSE’s
claims about Pepsi products. From here on out, the com-
pany must be more attentive to its water-use practices; but
Nooyi also notes, “We have to invest, too, in educating
communities in how to farm better, collect water, and then
work with industry to retrofit plants and recycle.”35
Coke’s Social Responsibility Commitments
Coca-Cola has recently employed The Energy and
Resources Institute (TERI) to assess its operations in
India. The investigations have been conducted because of
claims that Coca-Cola has engaged in unethical production
practices in India. These alleged practices include causing
Table 1 A Timeline of Coca-Cola in Kerala, India
1977 Coca-Cola pulls out of India when the government demands its secret formula.
1991 Restrictions are eased in India for easier international business development.
1999 A report is published by the All-Indian Coordinated Research Program stating that 20% of all Indian food commod-
ities exceed the maximum pesticide residue level and 43% of milk exceeds the maximum residue levels of DDT.
2002 Villagers in Plachimada, India, make the accusation that Coke’s bottling plant is contaminating their drinking water.
2003 The Center for Science and Environment produces a study that finds unsafe levels of pesticides in Coca-Cola
products in India.
January 2004 Parliament in India forms a Joint Parliamentary Committee to investigate the charges by the CSE.
March 2004 A Coca-Cola bottling facility is shut down in Plachimada, India.
2004 Indian government announces new regulations for carbonated soft drinks based on European Union standards.
2005 Coca-Cola co-founds the Global Water Challenge, develops the Global Community-Watershed Partnership, and
establishes the Ethics and Compliance Committee.
August 2006 The CSE produces another report finding 57 Coke and Pepsi products from 12 Indian states that contain unsafe
pesticide levels.
September 2006 India’s high court overturns the ban on the sale of Coke products in Kerala.
March 2010 Indian unit of Coca-Cola Co. asked by state government to pay $47 million compensation for causing environmen-
tal damage at its bottling plant in Kerala.
Brief Integrative Case 2.1 Coca-Cola in India 251
beverages and their production. For us that means reduc-
ing the amount of water used to produce our beverages,
recycling water used for manufacturing processes so it can
be returned safely to the environment, and replenishing
water in communities and nature through locally relevant
projects.” Coca-Cola hopes to spread these practices to
other members of its supply chain, particularly the sugar
cane industry. The Coca-Cola–WWF partnership is also
focused on climate protection and protection of seven of
the world’s “most critical freshwater basins,” including
the Yangtze in China. Although Coca-Cola’s corporate
social responsibility efforts have included other projects
with the WWF in the past, it hopes that this official part-
nership will help achieve larger-scale results.44
As a part of its 2013 goals, Coca-Cola and the WWF
committed to achieve 100 percent replenishment of all
water used, 75 percent recycling rate in developing mar-
kets, 30 percent plant-based packaging by 2020, and
25 percent improvement to water efficiency by 2020.45
Figures 1 and 2 highlight Coca-Cola’s rapidly declining
water use on a per-plant and systemwide basis that
occurred between 2002 and 2005.
catching devices.41 Later, Coca-Cola expanded the num-
ber of rainwater harvesting projects by partnering with the
Central Ground Water Authority (CGWA), State Ground
Water Boards, schools, colleges, NGOs, and local com-
munities to combat water scarcity. According to Coca-
Cola India’s 2007–2008 Environment Report, the company
was actively engaged in 400 rainwater harvesting projects
running across 17 states. These efforts were contributing
to the company’s eventual target of being a “net zero” user
of groundwater, a goal that it achieved in 2009.42
Having inspected its own water-use habits, Coca-Cola
has vowed to reduce the amount of water it uses in its
bottling operations. As of 2014, Coca-Cola had reduced
the amount of water needed to make one liter of Coke to
2.03 liters (compared with 2.70 liters a decade before).43
At the June 2007 annual meeting of the World Wildlife
Fund (WWF) in Beijing, Coca-Cola announced its multi-
year partnership with the organization “to conserve and
protect freshwater resources,” and in 2013, the partnership
was expanded to include new goals. E. Neville Isdell,
chair and CEO of the Coca-Cola Company, said, “Our
goal is to replace every drop of water we use in our
3.2
2002 2003 2004 2005
2.6
2.72
2.9
3.12
Average Plant Ratios
Years
W
at
er
U
se
R
at
io
li
te
rs
/l
it
er
o
f
p
ro
d
u
ct
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3
3.1
Figure 1
Coca-Cola’s Water Use:
Historical Average Plant
Ratios
Source: The Coca-Cola Company, 2005 Environmental Report, www.thecocacolacompany.com/citizenship/environmental_report2005 .
Figure 2
Coca-Cola’s Water Use:
Systemwide Total
2002 2003 2004 2005
Years
305
310
260
265
270
275
280
285
290
295
300
278
283
297
307
Systemwide Total
W
at
er
U
se
To
ta
l i
n
b
ill
io
n
li
te
rs
Source: The Coca-Cola Company, 2005 Environmental Report, www.thecocacolacompany.com/citizenship/environmental_report2005 .
252 Part 2 The Role of Culture
focused too much on the charges instead of winning back
the support of its customers. “Here people interpret
silence as guilt,” said Mr. Seth, Coke’s Indian public rela-
tions expert.
Ms. Bjorhus, the Coke communications director, said
she could now see how the environmental group had
picked Coca-Cola as a way of attracting attention to the
broader problem of pesticide contamination in Indian food
products. Coca-Cola stands behind its products as being
pesticide free. It is now up to the Indian consumer to
decide the success of Coca-Cola in future years.
Nevertheless, Coca-Cola has been optimistic about its
future in India. While India was still among the countries
with the lowest per capita consumption of Coke, in 2014
it was the second-fastest-growing region in terms of Coca-
Cola unit case volume growth. Coca-Cola recorded a
2 percent growth in sales in 2014 and most of it came
from India, Russia, Brazil, and China, even as the com-
pany faced hard economic times elsewhere in the world.49
The Global Water Challenge
A decade ago in 2007, one out of every five people glob-
ally lacked access to clean drinking water.50 In August
2006, an international conference was held in Stockholm,
Sweden, to discuss global water issues. A UN study
reported that many large water corporations have decreased
their investments in developing countries because of high
political and financial risks. Even nations that have had
abundant water supplies are experiencing significant
reductions. These reductions are believed to be caused by
two factors: the decline in rainfall and increased evapora-
tion of water due to global warming and the loss of wet-
lands. Water is something that affects every person each
and every day. The executive director of the Stockholm
Water Institute, Anders Berntell, noted that water affects
the areas of agriculture, energy, transportation, forestry,
trade, financing, and social and political security. The
Food and Agriculture Organization points out, “Agriculture
is the world’s largest water consumer. Any water crisis
will therefore also create a food crisis.”
There have been attempts to improve the water condi-
tions around the world. The United Nations recently released
the World Water Development Report. This report was com-
piled by 24 UN agencies and claimed that, in actuality, only
12 percent of the funds targeted for water and sanitation
improvement reached those most in need. The United
Nations stated that more than 1.1 billion people still lack
access to improved water resources. Nearly two-thirds of the
1.1 billion live in Asia.51 In China, nearly a quarter of the
population is unable to access clean drinking water. Over
half of China’s major waterways are also polluted. The Insti-
tute of Public and Environmental Affairs reported that 34
foreign-owned or joint-venture companies, including Pepsi,
have caused water pollution problems in China. Ma Jun, the
Coca-Cola has also established EthicsLine, which is a
global web and telephone information and reporting ser-
vice that allows anyone to report confidential information
to a third party. Service is toll free—24 hours a day—and
translators are available. Coca-Cola is currently focusing
on improving standards through the global water chal-
lenge and enhancing global packaging to make it more
environmentally friendly. It is also working on promoting
nutrition and physical education by launching programs
throughout the world. For example, in January 2009,
Coca-Cola India announced a partnership with the Bharat
Integrated Social Welfare Agency (BISWA) to build
awareness regarding micro-nutrient malnutrition (or “hid-
den hunger”) in the “bottom of the socio-economic pyra-
mid” population in India. The two partners will work
together to establish a successful income-generation
model for communities through self-help groups in Sam-
balpur in Odisha and also provide them with affordable
alternatives to alleviate “hidden hunger.” The first product
developed by Coca-Cola India to address the issue of
“hidden hunger” is Vitingo, a tasty, affordable, and
refreshing orange-flavored beverage fortified with micro-
nutrients.
During the past decade, the Coca-Cola Company has
invested more than US$1 billion in India, making it one
of India’s top international investors. By 2020, the com-
pany will have invested over US$5 billion. Almost all the
goods and services required to produce and market Coca-
Cola are made in India. The Coca-Cola Company directly
employs approximately 5,500 local people in India; and
indirectly, its business in India creates employment for
more than 150,000 people.46 Hindustan Coca-Cola Bever-
ages Pvt Ltd operates 22 bottling plants, some of which
are located in economically underdeveloped areas of the
country. The Coca-Cola system also includes 23 franchise-
operated plants and has one facility that manufactures
concentrates or beverage bases.47
Lessons Learned
Yet Coca-Cola was caught off guard by its experience in
India. Coke did not fully appreciate how quickly local
politicians would attack Coke in light of the test results,
nor did it respond quickly enough to the anxieties of its
consumers. The company failed to realize how fast news
travels in modern India. India represents only about 1 per-
cent of Coca-Cola’s global volume, but it is central to the
company’s long-term growth strategy. The company
needed to take action fast.48
In what Coke thought to be a respectful and immediate
time frame, it formed committees in India and the United
States. The committees worked on rebuttals and had their
own labs commission the tests, and then they commented
in detail. Coke also directed reporters to Internet blogs
full of entries that were pro-Coke. Critics say that Coke
Brief Integrative Case 2.1 Coca-Cola in India 253
Questions for Review
1. What aspects of U.S. culture and of Indian culture
may have been causes of Coke’s difficulties in
India?
2. How might Coca-Cola have responded differently
when this situation first occurred, especially in
terms of responding to negative perceptions among
Indians of Coke and other MNCs?
3. If Coca-Cola wants to obtain more of India’s soft
drink market, what changes does it need to make?
4. How might companies like Coca-Cola and PepsiCo
demonstrate their commitment to working with
different countries and respecting the cultural and
natural environments of those societies?
Source: This case was prepared by Jaclyn Johns of Villanova University under the
supervision of Professor Jonathan Doh as the basis for class discussion. Additional
research assistance was provided by Courtney Asher, Tetyana Azarova, and Ben Littell.
It is not intended to illustrate either effective or ineffective managerial capability or
administrative responsibility.
institute’s founder, said, “We’re not talking about very high
standards. These companies are known for their commit-
ment to the environment.”52
According to the 2016 UN World Water Development
Report, the world’s population will grow by 33 percent
by 2050, resulting in over 2 billion more people living in
water-stressed areas. An estimated one-third of the global
population does not have access to safe drinking water or
adequate sanitation. By 2050, the population living in
urban environments will double.53
With businesses expanding globally, water is a crucial
resource, and water issues will increasingly affect all indus-
tries. With water conditions improving at a slower rate than
business development, businesses will have to take on the
responsibility of not only finding an adequate supply of the
diminishing resource but also making sure the water is safe
for all to consume. This responsibility is going to be an
additional cost to companies, but a necessary one that will
prevent loss of sales in the future. Coca-Cola’s specific
situation in India is a reminder for all global corporations.
1. Peter Wonacott and Chad Terhune, “Politics & Eco-
nomics: Path to India’s Market Dotted with Pot-
holes; Savvy Cola Giants Stumble over Local
Agendas; KFC Climbs Back from Abyss,” The Wall
Street Journal, September 12, 2006, p. A6.
2. “CSE Report on Pesticide Residue Inconclu-
sive,” Businessline, August 27, 2006, p. 1.
3. Rajesh Kumar and Verner Worm, “Institutional
Dynamics and the Negotiation Process: Comparing
India and China,” International Journal of Conflict
Management 15, no. 3 (2004), p. 304.
4. Wonacott and Terhune, “Politics & Economics.”
5. Archna Shukla, “Message Will Always Be More
Important Than Medium,” Business Today, August
27, 2006, p. 102.
6. Mark Sappenfield, “India’s Cola Revolt Taps into
Old Distrust: Behind Contradictory Reports of Pes-
ticides in Coke and Pepsi Is an Underlying Wari-
ness of Foreign Companies,” The Christian Science
Monitor, September 1, 2006, p. 6.
7. Siddharth Cavale, “Coca-Cola Sales Beat Estimates
as China Volumes Soar,” Reuters, April 15,
2014, www.reuters.com/article/us-cocacola-results-
idUSBREA3E0R220140415.
8. Nikhil Gulati and Runman Ahmed, “India Has 1.2
Billion People but Not Enough Drink Coke,” The
Wall Street Journal Online, July 13, 2012, http://
www.wsj.com/articles/SB1000142405270230487030
4577490092413939410.
9. “Foreign Direct Investment, Net Inflows (BoP, cur-
rent US$),” World Bank, http://data.worldbank.org/
indicator/BX.KLT.DINV.CD.WD.
10. Courtney Fingar, “India Grabs Investment League
Pole Position,” Financial Times, September 29,
2915, www.ft.com/intl/cms/s/3/fdd0e3c2-65fc-11e5-
97d0-1456a776a4f5.html#axzz45LofBnIo.
11. “Survey Shows India as the Favorite Investment
Target,” Nikkei Asian Review, December 9,
2015, http://asia.nikkei.com/Business/Trends/Survey-
shows-India-as-the-favorite-investment-target.
12. Arvind Panagariya, “Building a Modern
India,” Business Standard India 2010.
13. “GDP Growth (annual %),” World Bank, http://data.
worldbank.org/indicator/NY.GDP.MKTP.KD.ZG.
14. Brian Bremner, Nandini Lakshman, and Diane Brady,
“India: Behind the Scare over Pesticides in Pepsi and
Coke,” BusinessWeek, September 4, 2006, p. 43.
15. Sappenfield, “India’s Cola Revolt Taps into Old
Distrust.”
16. Bremner, Lakshman, and Brady, “India: Behind the
Scare over Pesticides in Pepsi and Coke.”
17. Coca-Cola India, “Environment Report 2007–2008.”
Accessed 2008.
ENDNOTES
254 Part 2 The Role of Culture
39. Wonacott and Terhune, “Politics & Economics.”
40. “CSR Initiatives: Strengthening Communities
through Water Conservation,” CSR News, October
2007, http://newsletters.cii.in/newsletters/csr/
october07/spot_lite.html.
41. Ibid.
42. Coca-Cola India, “Environment Report 2007–2008.”
43. “Improving Our Water Efficiency,” Coca-Cola
Company, www.coca-colacompany.com/stories/
setting-a-new-goal-for-water-efficiency/.
44. Coca-Cola Company, “The Coca-Cola Company
Pledges to Replace the Water It Uses in Its Bever-
ages and Their Production,” press release, June 5,
2007, http://www.worldwildlife.org/press-releases/
the-coca-cola-company-pledges-to-replace-the-water-
it-uses-in-its-beverages-and-their-production.
45. Jay Moye, “Beyond Water: Coca-Cola Expands
Partnership with WWF, Announces Ambitious
Environmental Goals,” Coca-Cola Company,
July 9, 2013, www.coca-colacompany.com/
stories/beyond-water-coca-cola-expands-partnership-
with-wwf-announces-ambitious-environmental-
goals/.
46. Coca-Cola India, “Environment Report
2007–2008.”
47. Ibid.
48. Gentleman, “For 2 Giants of Soft Drinks, a Crisis
in Crucial Market.”
49. Cavale, “Coca-Cola Sales Beat Estimates as China
Volumes Soar.”
50. Kenneth E. Behring, “Water Research; Researchers
Are Raising Awareness of the Global Drinking
Water Crisis,” Health & Medicine Week, October
16, 2006, p. 1339.
51. Thalif Deen, “Development: Water, Water Every-
where Is Thing of the Past,” Global Information
Network, August 22, 2006, p. 1.
52. Loretta Chao and Shai Oster, “China Study Says
Foreigners Violate Clean-Water Rules,” The Wall
Street Journal, October 30, 2006, p. B7.
53. United Nations, World Water Development
Report 2016: Water and Jobs (March 22, 2016),
http://unesdoc.unesco.org/images/0024/002439/
243938e .
18. Eric Bellman, “Coke Sees Strong Demand across
India, Plans Investment,” The Wall Street Journal,
June 30, 2009, http://online.wsj.com/article/
SB124055692273452331.html?mod= googlenews_wsj.
19. Ibid.
20. Gulati and Ahmed, “India Has 1.2 Billion People
but Not Enough Drink Coke.”
21. Ratna Bhushan, “RC Cola Comes to India,”
Businessline, October 7, 2003, p. 1.
22. “India: Reports of Contaminated Soda Dry up
Coke, Pepsi Sales,” Global Information Network,
September 7, 2006, p. 1.
23. Aryn Baker, “India’s Storm in a Cola
Cup,” Time International, August 21, 2006, p. 8.
24. Bremner, Lakshman, and Brady, “India: Behind the
Scare over Pesticides in Pepsi and Coke.”
25. Sappenfield, “India’s Cola Revolt Taps into Old
Distrust.”
26. Wonacott and Terhune, “Politics & Economics.”
27. “India: Reports of Contaminated Soda Dry up
Coke, Pepsi Sales.”
28. Sappenfield, “India’s Cola Revolt Taps into Old
Distrust.”
29. “Coca-Cola Co.: India’s Kerala State Cancels Ban
on Coke, Pepsi Drinks,” The Wall Street Journal,
September 25, 2006, p. A11.
30. Ibid.
31. “Coca-Cola India Unit Asked to Pay $47 Million
Damages,” Reuters, March 23, 2010, www.reuters.
com/article/idUSSGE62M0AV20100323.
32. Diane Brady, “Pepsi: Repairing a Poisoned Reputa-
tion in India,” BusinessWeek, June 11, 2007.
33. Ibid.
34. Ibid.
35. Ibid.
36. Amit Srivastava, “Coca-Cola Funded Group Investi-
gates Coca-Cola in India,” India Resource Center,
April 16, 2007, www.indiaresource.org/campaigns/
coke/2007/coketeri.html.
37. Sappenfield, “India’s Cola Revolt Taps into Old
Distrust.”
38. Amelia Gentleman, “For 2 Giants of Soft Drinks, a
Crisis in Crucial Market,” New York Times, August
23, 2006, p. C3.
255
Dannon became the first company to sell perishable dairy
products coast to coast in the U.S.5
In 1967, Danone merged with leading French fresh
cheese producer Gervais to become Gervais Danone. In
1973, Gervais Danone merged with Boussois-Souchon-
Neuvesel (BSN), a company that had also acquired the
Alsacian brewer Kronenbourg and Evian mineral water.6
In 1987, Gervais Danone acquired European biscuit man-
ufacturer Général Biscuit, owners of the LU brand, and
in 1989, it bought out the European biscuit operations of
Nabisco.
In 1994, BSN changed its name to Groupe Danone,
adopting the name of the Group’s best-known international
brand. Under its current CEO, Franck Riboud, the com-
pany has pursued its focus on the three product groups:
dairy, beverages, and cereals.7 Today, Danone’s mission is
to produce healthy, nutritious, and affordable food and
beverage products for as many people as possible.
Danone’s Global Growth
Danone, with 160 plants and nearly 100,000 employees,
has a presence in all five continents and over 120 coun-
tries. In 2015, Danone recorded €21.1 billion in sales, a
nearly 30 percent increase from its €15.2 billion in sales
in 2008. Danone enjoys leading positions in healthy food:8
∙ No. 1 worldwide in fresh dairy products
∙ No. 2 worldwide in bottled water
∙ No. 2 worldwide in baby nutrition
∙ No. 1 in Europe in medical nutrition
Its portfolio of brands and products includes Activia,
a probiotic dairy product line; Danette, a brand of cream
desserts; Nutricia, an infant product line; Danonino, a
brand of yogurts; and Evian, a brand of bottled water.9
Listed on Euronext Paris, Danone is also ranked among
the main indexes of social responsibility: Dow Jones Sus-
tainability Index Stoxx and World, ASPI Eurozone
(Advanced Sustainable Performance Indices), and Ethibel
Sustainability index. Danone has ranked number 51 in top
100 international brands according to Interbrand 2015
Best Global Brand valuation, with the brand value of
$8.6 billion.10
In 2014, Danone recorded an organic growth rate of
4.7 percent despite a weak European economy, further
strengthening its global standing. The group’s perfor-
mance is the result of a balanced strategy that builds on
In 1996, Danone Group and Wahaha Group combined
forces in a joint venture (JV) to form the largest beverage
company in China. A longstanding trademark dispute
between the JV members, embedded within a broader
clash of national and organizational cultures, came to a
head. Valuable lessons can be learned from this dispute
for investors considering joint ventures in China.
The Wahaha Joint Venture was established in 1996 by
Hangzhou Wahaha Food Group Co. Ltd., Danone Group,
and Bai Fu Qin Ltd. In 1997, Danone bought the interests
of Bai Fu Qin and gained legal control of the JV with
51 percent of the shares. While members of the JV are
entitled to use the JV’s Wahaha trademark, in 2000, the
Wahaha Group developed companies outside of the JV
that sold products similar to those of the JV and used the
JV’s trademark. The Danone Group objected and sought
to purchase those non-JV companies.1
In April 2007, Danone offered RMB4 billion to
acquire 51 percent of the shares of Wahaha’s five non-JV
companies. Wahaha Group rejected the offer. Subse-
quently, Danone filed more than 30 lawsuits against
Wahaha for violating the contract and illegally using the
JV’s Wahaha trademark in countries such as France,
Italy, the U.S., and China.2
Danone’s Background
Danone traces its routes to Europe in the early 20th century.
In 1919, Isaac Carasso opened a small yogurt stand in
Spain. He named it “Danone,” meaning “Little Daniel,”
after his son. Carasso was aware of new methods of milk
fermentation conducted at the Pasteur Institute in Paris. He
decided to merge these new techniques with traditional prac-
tices for making yogurt. The first industrial manufacturer of
yogurt was started.3
Following his success in Europe, Carasso immigrated
to the U.S. to expand his market. He changed the Danone
name to Dannon Milk products, Inc., and founded the first
American yogurt company in 1942 in New York. Distri-
bution began on a small scale. When Dannon introduced
the “fruit on the bottom” line in 1947, sales soared. The
following year, he sold his company’s interest and returned
to Spain to manage his family’s original business.4
By 1950, Dannon had expanded to other U.S. states in
the Northeast. It also broadened the line by introducing
low-fat yogurt that targeted the health-conscious con-
sumer. Sales continued to rise. Dannon expanded across
the country throughout the 1960s and 1970s. In 1979,
Brief Integrative Case 2.2
Danone’s Wrangle with Wahaha
256 Part 2 The Role of Culture
Danone Strategy in China
Danone entered the Chinese market in the late 1980s.
Since then, it has invested heavily in China, building fac-
tories and expanding production. Today, Danone has
70 factories in China, including Danone Biscuits, Robust,
Wahaha, and Health. Ten percent of Danone’s workforce
is located in China. Danone sells primarily yogurt, bis-
cuits, and beverages in the Chinese market.16 By 2014,
Danone’s Asia-Pacific division employed 28,000 people
in the Asia-Pacific area, which was almost 30 percent of
Danone’s total employees.
In the early 2000s, Danone’s Wahaha was China’s larg-
est beverage company. In 2008, 57 percent of Danone’s
Asian sales were in China. Two billion liters of Wahaha
were sold in 2004, making it the market leader in China
with a 30 percent market share.17 In Asia, in 2007, Danone
Group was the market leader with a 20 percent share of
a 34-billion-liter market. In comparison, rivals Coca-Cola
and Nestlé had a 7 percent and 2 percent share, respec-
tively. Evian, its global brand, was sold alongside of local
brands such as China’s Wahaha.
In the past 20 years, Danone has purchased shares of
many of the top beverage companies in China: 51 percent
of the shares of the companies owned by Wahaha Group,
98 percent of Robust Group, 50 percent of Shanghai Mal-
ing Aquarius Co., Ltd., 54.2 percent of Shenzhen Yili
Mineral Water Company, 22.18 percent of China Huiyuan
Group, 50 percent of Mengniu, and 20.01 percent of
Bright dairy. These companies, leaders in their industry,
all own trademarks that are well-known in China.18
However, while expanding into the Chinese market,
Danone faced challenges due to lack of market knowl-
edge. In 2000, Danone purchased Robust, the then- second-
largest company in the Chinese beverage industry. Sales
of Robust had reached RMB2 billion in 1999. After the
purchase, Danone dismissed the original management and
managed Robust directly. Because its new management
was not familiar with the Chinese beverage market, Robust
struggled. Its tea and milk products almost disappeared
from the market. During 2005–2006, the company lost
RMB 150 million.19
Wahaha Company
The Wahaha company was established in 1987 by a retired
teacher, Mr. Zong Qinghou. In 1989, the enterprise opened
its first plant, Wahaha Nutritional Food Factory, to pro-
duce “Wahaha Oral Liquid for Children,” a nutritional
drink for kids. The name Wahaha was meant to evoke a
laughing child, combining the character for baby (wa)
with the sound of laughter.20 After its launch, Wahaha
won a rapid public acceptance. By 1991, the company’s
sales revenue grew beyond 100 million renminbi (¥).21
In 1991, with the support of the Hangzhou local district
government, Wahaha Nutritional Food Factory merged
international expansion, a growing commitment to inno-
vation, and strengthening health-oriented brands. Danone
invests heavily in research and development—€276 mil-
lion in 2015. One hundred percent of projects currently
in the pipeline focus on health and nutrition.11
As of 2014, Danone is the world’s second largest pro-
ducer of bottled water. Danone owns the world’s top-
selling brand of packaged water, Aqua, which recorded
sales of 11 billion liters in 2014. With Evian and Volvic,
Danone also owns two of the five worldwide brands of
bottled water.12 Its revenue from water products amounted
to €4.2 billion in 2014: China, France, Indonesia, and
Mexico accounted for the most sales. Growth is strongest
in China, Indonesia, and Argentina, with emerging mar-
kets accounting for 70 percent of all of Danone’s bottled
water sales.13
In the mid-1990s, Danone did 80 percent of its busi-
ness in Western Europe. Until 1996, the company was
present in about a dozen markets including pasta, confec-
tionery, biscuits, ready-to-serve meals, and beer. The
company realized that it is difficult to achieve simultane-
ous growth in all these markets. Therefore, they decided
to concentrate on the few markets that showed the most
growth potential and were consistent with Danone’s focus
on health. Starting in 1997, the Group decided to focus
on three business lines worldwide (Fresh Dairy Products,
Beverages, as well as Biscuits and Cereal Products), and
the rest of the business lines were divested. This freed the
company’s financial and human resources and allowed for
quick expansion into new markets in Asia, Africa, Eastern
Europe, and Latin America. In less than 10 years, the
contribution of emerging markets to sales rose from zero
to 40 percent while that of Western Europe went below
50 percent.14 By 2014, emerging markets accounted for
60 percent of all growth, with over 60 percent of all
employees working outside of Europe.15
In 2007, the same year that it attempted to acquire
51 percent of the shares of Wahaha’s five non-JV com-
panies, Danone marked the end of a 10-year refocusing
strategy period during which the Group’s activities were
refocused in the area of health. That year, the Group
sold nearly all of its Biscuits and Cereal Products busi-
ness to the Kraft Foods group, while adding Baby
Nutrition and Medical Nutrition to its portfolio by
acquiring Numico.
Danone is now centered on 4 business lines:
1. Fresh Dairy Products, representing approximately
53 percent of consolidated sales for 2014.
2. Waters, representing approximately 20 percent of
consolidated sales for 2014.
3. Baby Nutrition, representing approximately 21 per-
cent of consolidated sales for 2014.
4. Medical Nutrition, representing approximately 7 per-
cent of consolidated sales for 2014.
Brief Integrative Case 2.2 Danone’s Wrangle with Wahaha 257
Association, Wahaha contributed 55.57 percent to the
Association Top 10’s overall production, 65.84 percent to
its revenue, and 73.16 percent to its profit tax. According
to Zong Qinghou, the president of Wahaha: “As China
becomes the world’s largest food and beverage market,
we’ll be a major player in the global market.” Wahaha
implements a strategy of “local production and local dis-
tribution’’ and has built an excellent production-distribu-
tion network. Its Wahaha R&D center and Analysis
Center provide guarantees for high product quality.26
Danone-Wahaha Joint Venture Conflict
The Wahaha joint venture (JV) was formed in 1996 with
three participants: Hangzhou Wahaha Food Group
(Wahaha Group); Danone Group, a French corporation
(Danone); and Bai Fu Qin, a Hong Kong corporation
(Baifu). Danone and Baifu did not invest directly in the
JV. Instead, Danone and Baifu formed Jin Jia Investment,
a Singapore corporation (Jinjia). Upon the formation of
the JV, Wahaha Group owned 49 percent of the shares of
the JV and Jinjia owned 51 percent of the shares of the
JV. This structure led to immediate misunderstandings
between the participants. From Wahaha Group’s point of
view—with the division of ownership at 49 percent Wahaha
Group, 25.5 percent Danone, and 25.5 percent Baifu—it
was the majority shareholder in the JV. Figure 1 shows the
initial structure of the JV. Since Wahaha Group felt it
controlled the JV, it was relatively unconcerned when it
transferred its trademark to the JV.27
In 1998, Danone bought out the interest of Baifu in
Jinjia, becoming 100 percent owner of Jinjia and effec-
tively the 51 percent owner of the JV. This gave it legal
control over the JV because of its right to elect the board
of directors. For the first time, the Wahaha Group and
Zong realized two things: (1) They had given complete
with Hangzhou Canning Food Factory, a state-owned
enterprise, to form the Hangzhou Wahaha Group Corpo-
ration. After mergers with three more companies, Wahaha
became the biggest corporation of its district.22
Since 1997, Wahaha has set up many new subsidiaries.
It was aided by state and local government because its
continuous expansion helped create new jobs and its
increased profits led to more tax revenues.
In 1996, the Hangzhou Wahaha Group Corporation
began a joint venture with Danone Group and formed five
new subsidiaries, which attracted a $45 million foreign
investment and then added another $26.2 million invest-
ment. With the investment funds, Wahaha brought world-
class advanced production lines from Germany, America,
Italy, Japan, and Canada into its sites. The terms of the
Danone-Wahaha joint venture allowed Wahaha to retain all
managerial and operating rights as well as the brand name
Wahaha. In the next eight years, the company established
40 subsidiaries in China, and in 1998 launched its own
brand, “Future Cola,” to compete against Coke and Pepsi.23
In 2000, the company produced 2.24 million tons of bev-
erages with sales revenue of $5.4 billion. The production
accounted for 15 percent of the Chinese output of beverages.
The group became the biggest company in the beverage
industry of China with total assets of $4.4 billion.24
Back in 2007, it produced 6.89 million tons of bever-
age with a sales revenue of $25.8 billion. Today, Hang-
zhou Wahaha Group Co., Ltd., is still a leading beverage
producer in China with over 60,000 employees and 150
subsidiaries, though sales have dropped since 2013 due to
the shrinking carbonated beverage market. The company
product category contains more than 100 varieties, such
as milk drinks, drinking water, carbonated drinks, tea
drinks, canned food, and health care products.25
According to a report on the “Top 10 Beverage
Companies” released by the China Beverage Industry
The Wahaha Joint Venture
Jin Jia Investment
Co. Ltd.
51%
WAHAHA G ROUP
Bai Fu Qin Ltd
50%
Danone Group
50%
Wahaha Group
(led by Chairman
Zong Qinghou)
40%
Hierarchy of the Initial Wahaha Joint Venture Figure 1
Structure of Initial Wahaha
Joint Venture
Source: Steven M. Dickinson, “Danone v. Wahaha,” China Economic Review, September 1, 2007, http://www.chinaeconomicreview.com/
node/24126.
258 Part 2 The Role of Culture
appear to have been owned in part by Wahaha Group and
in part by an offshore British Virgin Islands company
controlled by Zong’s daughter and wife. Neither Danone
nor Wahaha Group receives any benefits from the profits
of these non-JV companies. According to press reports in
China, products from the non-JV companies and the JV
were sold by the same sales staff working for the same
sales company, all ultimately managed by Zong.33
In 2005, Danone realized the situation and insisted it
be given a 51 percent ownership interest in the non-JV
companies. Wahaha Group and Zong, who by this time
was one of the richest men in China, refused.34
Details of the Dispute
In April 2006, Wahaha was informed by its 10-year JV
partner Danone that it had breached the contract by estab-
lishing nonjoint ventures that had infringed upon the
interests of Danone. Danone proposed to purchase 51 per-
cent of the shares of Wahaha’s nonjoint ventures.35 The
move was opposed by Wahaha. In May 2007, Danone
formally initiated a proceeding, claiming that Wahaha’s
establishment of nonjoint ventures as well as the illegal
use of the “Wahaha” trademark had seriously violated the
noncompete clause. The two parties carried on 10 lawsuits
in and out of China, and all the ruled cases between
Wahaha and Danone have ended in Wahaha’s favor.36
On February 3, 2009, a California court in the United
States dismissed Danone’s accusation against the wife and
daughter of Zong Qinghou and ruled that the dispute
between Danone and Wahaha should be settled in China.
In addition, Danone’s lawsuits against Wahaha were
rejected by courts in Italy and France; and a series of
lawsuits brought by Danone in China against Zong Qing-
hou and Wahaha’s nonjoint ventures all ended in failure.37
The rationality of the existence of the nonjoint ven-
tures, the ownership of the “Wahaha” trademark, and the
noncompete clause issue were the key points of the
Danone-Wahaha dispute.38 In 1996, Wahaha offered a list
of 10 subsidiaries to Danone, which, after evaluation,
selected four. Jinja Investments Pte Ltd. (a Singapore-
based joint venture between Danone Asia Pte Ltd. and
Hong Kong Peregrine Investment, of which Danone is the
controlling shareholder); Hangzhou Wahaha Group Co.,
Ltd.; and Zhejiang Wahaha Industrial Holdings Ltd.
jointly invested to form five joint venture enterprises, with
shareholdings of 51 percent, 39 percent, and 10 percent,
respectively. In 1998, Hong Kong Peregrine sold its stake
in Jinja Investments to Danone, which makes Danone the
sole shareholder of Jinja Investments, giving it the control
of over 51 percent of the joint ventures. Wahaha and
Danone cooperated on the basis of joint venture enter-
prises, rather than the complete acquisition of Wahaha by
Danone. As a result, Wahaha was always independent,
and its nonjoint ventures have existed and developed since
control over their trademark to the JV and (2) a foreign
company was now in control of the JV. From a legal
standpoint, this result was implied by the structure of the
JV from the very beginning. However, it is clear from
public statements that the Wahaha Group did not under-
stand the implications when they entered into the venture.
The Danone “takeover” in 1998 therefore produced sig-
nificant resentment on the part of Wahaha Group. Rightly
or not, Wahaha felt that Danone misled them from the
very beginning.28
When the JV was formed, Wahaha Group was a state-
owned enterprise owned by the Hangzhou city govern-
ment. After formation of the JV, it was converted into a
private corporation, effectively controlled by Zong. This
set the stage for Wahaha Group’s decision to take back
control of the trademark it felt had been unfairly trans-
ferred to Danone. Zong and his employees now viewed
the transferred trademark as their personal property.29
When the JV was formed, Wahaha Group obtained an
appraisal of its trademark valuing it at RMB100 million
(US$13.2 million). The trademark was its sole contribu-
tion to the JV, while Jinjia contributed RMB500 million
(US$66.1 million) in cash. Wahaha Group also agreed not
to use the trademark for any independent business activity
or allow it to be used by any other entity. However, the
trademark transfer was rejected by China’s Trademark
Office. It took the position that, as the well-known mark
of a state-owned enterprise, the trademark belonged to the
state and Wahaha Group did not have the right to transfer
it to a private company.30
Rather than terminate the JV, the shareholders (now
Danone and Wahaha Group) decided to work around the
approval issue by entering into an exclusive license agree-
ment for the trademark in 1999. Because the license
agreement was intended to be the functional equivalent of
a sale of the trademark, they were concerned the Trade-
mark Office would refuse to register the license. There-
fore, they only registered an abbreviated license. This was
accepted by the Trademark Office, which never saw the
full license. As a result, Wahaha Group never transferred
ownership of the Wahaha trademark to the JV, just the
exclusive license. Thus, Wahaha Group never complied
with its basic obligation for capitalization of the JV. It
does not appear that any of the JV documents were revised
to deal with this changed situation.31
Although Danone was the majority shareholder and
maintained a majority interest on the board of directors,
day-to-day management of the JV was delegated entirely
to Zong. He filled management positions with his family
members and employees of the Wahaha Group. Under
Zong’s management, the JV became the largest Chinese
bottled water and beverage company.32
Beginning in 2000, the Wahaha Group created a series
of companies that sold the same products as the JV and
used the Wahaha trademark. The non-JV companies
Brief Integrative Case 2.2 Danone’s Wrangle with Wahaha 259
received a profit of RMB3.554 billion as of 2007. On the
other hand, Danone acquired several strong competitors of
Wahaha including Robust, Huiyuan, and Shanghai Maling
Aquariust. Wahaha saw Robust as its biggest rival. Wahaha
was disappointed that Danone failed to hold up its end of
the bargain of “jointly exploring markets in and out of
China” listed in the JV contract.46
Through the influence of the Chinese and French gov-
ernments, Danone and Wahaha reached a peaceful settle-
ment in late 2007. However, Danone’s proposal to sell its
shares in the joint ventures to Wahaha for RMB50 billion
(finally reduced to approximately RMB20 billion) was
rejected by Wahaha.47
After the negotiations were suspended, the two parties
again turned to legal action. All the ruled cases, both in
China and abroad, have ruled against Danone.48
Conflict Resolution
In late September 2009, France’s Groupe Danone SA
agreed to accept a cash settlement to relinquish claims to
the name Wahaha. In a joint statement issued September
30, 2009, Danone announced a settlement with China’s
Hangzhou Wahaha Group Co. by saying its 51 percent
share in joint ventures that make soft drinks and related
products will be sold to the businesses’ Chinese partners.
“The completion of this settlement will put an end to all
legal proceedings related to the disputes between the two
parties,” the statement said.49
The feud over control of the Wahaha empire offered a
glimpse into the breakup of a major Asian–foreign joint
venture. Danone’s strategy to publicly confront its partner
and Wahaha’s strategy to respond with its own accusa-
tions marked a break with prevailing business practice in
China, where problems have usually been settled with
face-saving, private negotiations.50
Analysts said the case served to reinforce how difficult
it is to operate a partnership in China. “That’s a key lesson:
To build a [brand] business in China you need to build
from the ground up,” said Jonathan Chajet, China manag-
ing director for consultancy Interbrand.51 Foreign firms
such as Procter & Gamble, Starbucks, and General Motors
have operated wholly or in part through joint ventures in
China. But executives involved say the expectations of for-
eign and local parties can conflict in a JV; for instance,
when an international company is striving for efficiencies
and profits that match its global goals while the local
partner—sometimes an arm of the Chinese government—
strives to maximize employment or improve technology.
At other times, partners have stolen corporate secrets or
cheated and otherwise sabotaged a venture, while legal
avenues have had little effect on disputes over operations.52
Danone, which reported the Wahaha business gener-
ated about 10 percent of its global revenue in 2006 but
has since adjusted how it accounted for Wahaha, said it
1996. Relevant transactions of Wahaha’s nonjoint ven-
tures and joint ventures were disclosed fully and frankly
by the auditing reports of PricewaterhouseCoopers, an
accounting firm appointed by Danone. Meanwhile, during
the 11-year cooperation, Danone assigned a finance direc-
tor to locate in the headquarters of Wahaha Group to audit
the latter’s financial information.39
Danone and Wahaha had signed in succession three rel-
evant agreements concerning the ownership of the “Wahaha”
brand name. In 1997, the two parties signed a trademark
transfer agreement, with an intention to transfer the “Wahaha”
trademark to the joint ventures. The move, however, was not
approved by the State Trademark Office.40 For this reason,
the two parties signed in 1999 the trademark licensing con-
tract. According to law, the same subject cannot be synchro-
nously transferred and licensed for use to others by the same
host. Therefore, the signing and fulfillment of the trademark
licensing contract showed that the two parties had agreed to
the invalidation of the transfer agreement. The “Wahaha”
brand should belong to the Wahaha Group, while the joint
ventures only have the right of use.41
In October 2005, the two parties signed the No. 1
amendment agreement to the trademark licensing con-
tract, in which it confirmed Party A (Hangzhou Wahaha
Group Co., Ltd.) as owner of the trademark. In addition,
the second provision of the amendment agreement clearly
stated that the several Wahaha subsidiaries listed in the
fifth annex of the licensing contract as well as other
Wahaha subsidiaries (referred to as “licensed Wahaha
enterprises”) established by Party A or its affiliates fol-
lowing the signing of the licensing contract also have the
right granted by one party to use the trademark. The
“licensed Wahaha enterprises” involved in the amendment
agreement refer to the nonjoint ventures.42 According to
related files, Wahaha maintains the ownership of the
“Wahaha” trademark, while its nonjoint ventures have the
right to use the trademark.43 The Wahaha brand is among
the most famous in China. It ranked No. 16 among domes-
tic brands and is worth US$2.2 billion, according to a
recent report by Shanghai research firm Hurun Report.
Wahaha doesn’t publicly disclose financial figures.44
Ventures and Acquisitions
Several years ago, as Wahaha sought to expand its market,
Wahaha suggested adding online new production lines by
increasing investment, while Danone requested Wahaha
outsource to product processing suppliers for its joint ven-
tures. Wahaha saw the shortcomings in using product pro-
cessing suppliers, so it set up nonjoint ventures to meet
production needs. Wahaha believed that the existence and
operation of the nonjoint ventures did not adversely affect
the interest of Danone.45
During the 11 years that followed 1996, Danone invested
less than RMB1.4 billion in Wahaha’s joint ventures but
260 Part 2 The Role of Culture
Questions for Review
1. When and how did Danone expand into the Chinese
market? What problems did Danone Group encoun-
ter while operating in China?
2. How was the Danone and Wahaha JV formed?
What was its structure? Why did Danone decide
to form a joint venture rather than establish a
100 percent-owned subsidiary?
3. What was the problem of the Danone-Wahaha joint
venture that triggered the conflict between the com-
panies? What were the differences in Danone’s and
Wahaha’s understanding of their own respective
roles and responsibilities in this venture? What
aspects of national and organizational culture
affected this perspective?
4. Was Danone successful in proving its claims in
court? How was the conflict between the two com-
panies resolved? What were the key lessons for
Danone about doing business in China?
5. Did Danone follow the advice regarding JVs in
China mentioned in the list just above? Which
aspects did it follow and which did it not?
Source: This case was prepared by Tetyana Azarova of Villanova University under the
supervision of Professor Jonathan Doh as the basis for class discussion. Additional
research assistance was provided by Kelley Bergsma and Ben Littell. It is not intended
to illustrate either effective or ineffective managerial capability or administrative
responsibility.
expects no impact on its income statement from the settle-
ment. In China, it will be left with a much smaller foot-
print and is essentially starting over.53 Danone’s CEO
Franck Riboud stated: “Danone has a long-standing com-
mitment to China, where it has been present since 1987,
and we are keen to accelerate the success of our Chinese
activities.” China is Danone’s fourth-largest market after
France, Spain, and the U.S., contributing about €1bn, or
8 percent, of Danone’s revenues.54
Lessons Learned55
What can potential foreign investors learn from this dis-
pute? Although JVs in China can be quite difficult, with
proper planning and management, they can be successful.
In the case of the Wahaha–Danone JV, many basic rules
of JV operations in China were violated, virtually guar-
anteeing the JV’s destruction. According to Steve Dickin-
son, lawyer at Harris Moure PLC, the primary rules
violated are as follows:56
1. Don’t use technical legal techniques to assert or
gain control in a JV.
2. Do not expect that a 51 percent ownership interest
in a JV will necessarily provide effective control.
3. Do not proceed with a JV formed on a weak or
uncertain legal basis.
4. The foreign party must actively supervise or partici-
pate in the day-to-day management of the JV.
1. Patti Waldmeir and Sundeep Tucker, “Danone to
Quit Joint Venture with Wahaha French Group to
Focus on Expanding Own Units in China,” Finan-
cial Times, September 30, 2009, https://www.ft.
com/content/849e7eda-ad87-11de-bb8a-
00144feabdc0.
2. Wahaha Group, “Danone Encounters Continuous
Frustration in China and a Murky Future Due to
Unsuccessful Litigations,” press release, PR News-
wire, September 9, 2008, www.prnewswire.co.uk/
news-releases/danone-encounters-continuous-
frustration-in-china-and-a-murky-future-due-to-
unsuccessful-litigations-152564955.html.
3. “Our Heritage,” Danone, www.danone.com/en/for-
all/our-mission-in-action/our-heritage/.
4. Ibid.
5. Ibid.
6. Bill Bruce, “Danone Celebrates Its 90th Birthday,”
April 14, 2009, www.foodbev.com/news/danone-
celebrates-its-90th-birthday/.
7. Ibid.
8. Danone, 2014 Annual Report, February 20, 2015.
9. Danone, www.danone.com/en.
10. “Rankings,” Interbrand, http://interbrand.com/
best-brands/best-global-brands/2015/ranking/.
11. “Research at Danone,” Danone, www.danone.com/
en/for-all/research-innovation/our-research-at-a-
glance/.
12. “Waters,” Danone, www.danone.com/en/brands/
business/beverages.html.
13. Ibid.
14. Danone 2008 Annual Report: Economic and Social
Report.
15. Danone 2014 Annual Report: Economic and Social
Report.
16. Shangguan Zhoudong, “Danone’s Quick Expansion
in China,” China Daily, June 15, 2007, www.
chinadaily.com.cn/bizchina/2007–06/15/content_
895462.htm.
ENDNOTES
Brief Integrative Case 2.2 Danone’s Wrangle with Wahaha 261
http://www.journalist-association.eu/archive/news.
php?newsid=19477.
36. Ibid.
37. Ibid.
38. Ibid.
39. Ibid.
40. Ibid.
41. Ibid.
42. Ibid.
43. Ibid.
44. Ibid.
45. Ibid.
46. Ibid.
47. Ibid.
48. Ibid.
49. J. T. Areddy, “Danone Pulls Out of Disputed
China Venture,” The Wall Street Journal,
October 1, 2009, http://online.wsj.com/article/
SB125428911997751859.html.
50. Ibid.
51. Ibid.
52. Ibid.
53. Ibid.
54. Waldmeir and Tucker, “Danone to Quit Joint Ven-
ture with Wahaha.”
55. Dickinson, “Danone v. Wahaha.”
56. Ibid.
17. T. C. Melewar, E. Badal, and J. Small, “Danone
Branding Strategy in China,” Brand Manage-
ment 13, no. 6 (July 2006), pp. 407–417.
18. “Danone Encounters Continuous Frustration in
China.”
19. Ibid.
20. Vivian Wai-yin Kwok, “A Pyrrhic Victory for
Danone in China,” Forbes, August 6, 2007, www.
forbes.com/2007/06/08/wahaha-danone-zong-mar-
kets-equity-cx_vk_0608markets2.html.
21. Wahaha, http://en.wahaha.com.cn/aboutus/index.htm.
22. Ibid.
23. Ibid.
24. Ibid.
25. Ibid.
26. Ibid.
27. Steven M. Dickinson, “Danone v. Wahaha,” China
Economic Review, September 1, 2007, www.
chinaeconomicreview.com/node/24126.
28. Dickinson, “Views You Can Use.”
29. Dickinson, “Danone v. Wahaha.”
30. Ibid.
31. Ibid.
32. Ibid.
33. Ibid.
34. Ibid.
35. Baoxiu Ye, “Wahaha Reviews 21:0 Whitewash
Against Danone,” PR Newswire, April 13, 2009,
262
Despite the frustrations, Eisner was tirelessly upbeat
about the project. “Instant hits are things that go away
quickly, and things that grow slowly and are part of the
culture are what we look for,” he said. “What we created
in France is the biggest private investment in a foreign
country by an American company ever. And it’s gonna
pay off.”
In the Beginning
Disney’s story is the classic American rags-to-riches
story, which started in a small Kansas City advertising
office where Mickey was a real mouse prowling the
unknown Walt Disney floor. Originally, Mickey was
named Mortimer, until a dissenting Mrs. Disney stepped
in. How close Mickey was to Walt Disney is evidenced
by the fact that when filming, Disney himself dubbed the
mouse’s voice. Only in later films did Mickey get a dif-
ferent voice. Disney made many sacrifices to promote his
hero-mascot, including selling his first car, a beloved
Moon Cabriolet, and humiliating himself in front of Louis
B. Mayer. “Get that mouse off the screen!” was the movie
mogul’s reported response to the cartoon character. Then,
in 1955, Disney had the brainstorm of sending his movie
characters out into the “real” world to mix with their fans,
and he battled skeptics to build the very first Disneyland
in Anaheim, California.
When Disney died in 1966, the company went into
virtual suspended animation. Its last big hit of that era
was 1969’s The Love Bug, about a Volkswagen named
Herbie. Today, Disney executives trace the problem to a
tyrannical CEO named E. Cardon Walker, who ruled the
company from 1976 to 1983, and to his successor, Ronald
W. Miller. Walker was quick to ridicule underlings in pub-
lic and impervious to any point of view but his own. He
made decisions according to what he thought Walt would
have done. Executives clinched arguments by quoting
Walt like the Scriptures or Marx, and the company even-
tually supplied a little book of the founder’s sayings. Mak-
ing the wholesome family movies Walt would have wanted
formed a key article of Walker’s creed. For example, a
poster advertising the unremarkable Condorman featured
actress Barbara Carrera in a slit skirt. Walker had the slit
painted over. With this as the context, studio producers
ground out a thin stream of tired, formulaic movies that
fewer and fewer customers would pay to see. In mid-1983,
a similar low-horsepower approach to television production
On January 18, 1993, Euro Disneyland chair Robert
Fitzpatrick announced he would leave that post on April
12 to begin his own consulting company. Quitting his
position exactly one year after the grand opening of Euro
Disneyland, Fitzpatrick with his resignation removed U.S.
management from the helm of the French theme park and
resort.
Fitzpatrick’s position was taken by a Frenchman, Philippe
Bourguignon, who had been Euro Disneyland’s senior vice
president for real estate. Bourguignon, 45 years old, faced
a net loss of FFr 188 million for Euro Disneyland’s fiscal
year, which ended September 1992. Also, between April
and September 1992, only 29 percent of the park’s total
visitors were French. Expectations were that closer to half
of all visitors would be French.
It was hoped that the promotion of Philippe Bourgui-
gnon would have a public relations benefit for Euro
Disneyland—a project that had been a publicist’s night-
mare from the beginning. One of the low points was at a
news conference prior to the park’s opening when protest-
ers pelted Michael Eisner, CEO of the Walt Disney Com-
pany, with rotten eggs. Within the first year of operation,
Disney had to compromise its “squeaky clean” image and
lift the alcohol ban at the park. Wine is now served at all
major restaurants.
Euro Disneyland, 49 percent owned by Walt Disney
Company, Burbank, California, originally forecasted 11
million visitors in the first year of operation. In January
1993 it appeared attendance would be closer to 10 mil-
lion. In response, management temporarily slashed prices
at the park for local residents to FFr 150 ($27.27) from
FFr 225 ($40.91) for adults and to FFr 100 from FFr 150
for children in order to lure more French during the slow,
wet winter months. The company also reduced prices at
its restaurants and hotels, which registered occupancy
rates of just 37 percent.
Bourguignon also faced other problems, such as the
second phase of development at Euro Disneyland, which
was expected to start in September 1993. It was unclear
how the company planned to finance its FFr 8–10 billion
cost. The company had steadily drained its cash reserves
(FFr 1.9 billion in May 1993) while piling up debt (FFr
21 billion in May 1993). Euro Disneyland admitted that
it and the Walt Disney Company were “exploring poten-
tial sources of financing for Euro Disneyland.” The com-
pany was also talking to banks about restructuring its
debts.
In-Depth Integrative Case 2.1a
Euro Disneyland
In-Depth Integrative Case 2.1a Euro Disneyland 263
“I knew that would hang a ‘For Sale’ sign over the com-
pany,” said Gold.
By resigning, Roy pushed over the first of a train of
dominoes that ultimately led to the result he most desired.
The company was raided, almost dismantled, greenmailed,
raided again, and sued left and right. But it miraculously
emerged with a skilled new top management with big
plans for a bright future. Roy Disney proposed Michael
Eisner as the CEO, but the board came close to rejecting
Eisner in favor of an older, more buttoned-down candidate.
Gold stepped in and made an impassioned speech to the
directors. “You see guys like Eisner as a little crazy . . .
but every studio in this country has been run by crazies.
What do you think Walt Disney was? The guy was off
the goddamned wall. This is a creative institution. It needs
to be run by crazies again.”
Meanwhile Eisner and Wells staged an all-out lobbying
campaign, calling on every board member except two,
who were abroad, to explain their views about the com-
pany’s future. “What was most important,” said Eisner,
“was that they saw I did not come in a tutu, and that I
was a serious person, and I understood a P&L, and I knew
the investment analysts, and I read Fortune.”
In September 1984, Michael Eisner was appointed
CEO and Frank Wells became president. Jeffrey Katzen-
berg, the 33-year-old, maniacal production chief, followed
Fisher from Paramount Pictures. He took over Disney’s
movie and television studios. “The key,” said Eisner, “is
to start off with a great idea.”
Disneyland in Anaheim, California
For a long time, Walt Disney had been concerned about
the lack of family-type entertainment available for his two
daughters. The amusement parks he saw around him were
mostly filthy traveling carnivals. They were often unsafe
and allowed unruly conduct on the premises. Disney envi-
sioned a place where people from all over the world
would be able to go for clean and safe fun. His dream
came true on July 17, 1955, when the gates first opened
at Disneyland in Anaheim, California.
Disneyland strives to generate the perfect fantasy. But
magic does not simply happen. The place is a marvel of
modern technology. Literally dozens of computers, huge
banks of tape machines, film projectors, and electronic
controls lie behind the walls, beneath the floors, and
above the ceilings of dozens of rides and attractions. The
philosophy is that “Disneyland is the world’s biggest
stage, and the audience is right here on the stage,” said
Dick Hollinger, chief industrial engineer at Disneyland.
“It takes a tremendous amount of work to keep the stage
clean and working properly.”
Cleanliness is a primary concern. Before the park
opens at 8 a.m., the cleaning crew will have mopped,
hosed, and dried every sidewalk, street, floor, and counter.
led to CBS’s cancellation of the hour-long program The
Wonderful World of Disney, leaving the company without
a regular network show for the first time in
29 years. Like a reclusive hermit, the company lost touch
with the contemporary world.
Ron Miller’s brief reign was by contrast a model of
decentralization and delegation. Many attributed Miller’s
ascent to his marrying the boss’s daughter rather than to
any special gift. To shore Miller up, the board installed
Raymond L. Watson, former head of the Irvine Co., as
part-time chair. He quickly became full time.
Miller sensed the studio needed rejuvenation, and he
managed to produce the hit film Splash, featuring an
apparently (but not actually) bare-breasted mermaid,
under the newly devised Touchstone label. However, the
reluctance of freelance Hollywood talent to accommodate
Disney’s narrow range and stingy compensation often
kept his sound instincts from bearing fruit. “Card [Cardon
Walker] would listen but not hear,” said a former executive.
“Ron [Ron Miller] would listen but not act.”
Too many box office bombs contributed to a steady
erosion of profit. Profits of $135 million on revenues of
$915 million in 1980 dwindled to $93 million on revenues
of $1.3 billion in 1983. More alarmingly, revenues from
the company’s theme parks, about three-quarters of the
company’s total revenues, were showing signs of leveling
off. Disney’s stock slid from $84.375 a share to $48.75
between April 1983 and February 1984.
Through these years, Roy Disney Jr. simmered while
he watched the downfall of the national institution that his
uncle, Walt, and his father, Roy Disney Sr., had built. He
had long argued that the company’s constituent parts all
worked together to enhance each other. If movie and tele-
vision production weren’t revitalized, not only would that
source of revenue disappear, but the company and its
activities would also grow dim in the public eye. At the
same time, the stream of new ideas and characters that
kept people pouring into the parks and buying toys, books,
and records would dry up. Now his dire predictions were
coming true. His own personal shareholding had already
dropped from $96 million to $54 million. Walker’s treat-
ment of Ron Miller as the shining heir apparent and Roy
Disney as the idiot nephew helped drive Roy to quit as
Disney vice president in 1977 and to set up Shamrock
Holdings, a broadcasting and investment company.
In 1984, Roy teamed up with Stanley Gold, a tough-
talking lawyer and a brilliant strategist. Gold saw that the
falling stock price was bound to flush out a raider and
afford Roy Disney a chance to restore the company’s for-
tunes. They asked Frank Wells, vice chair of Warner
Bros., if he would take a top job in the company in the
event they offered it. Wells, a lawyer and a Rhodes
scholar, said yes. With that, Roy knew that what he would
hear in Disney’s boardroom would limit his freedom to
trade in its stock, so he quit the board on March 9, 1984.
264 Part 2 The Role of Culture
complexes: Future World, a series of pavilions designed to
show the technological advances of the next 25 years, and
World Showcase, a collection of foreign “villages.”
Tokyo Disneyland
It was Tokyo’s nastiest winter day in four years. Arctic
winds and 8 inches of snow lashed the city. Roads were
clogged and trains slowed down. But the bad weather
didn’t keep 13,200 hardy souls from Tokyo Disneyland.
Mikki Mausu, better known outside Japan as Mickey
Mouse, had taken the country by storm.
Located on a fringe of reclaimed shoreline in Urayasu
City on the outskirts of Tokyo, the park opened to the pub-
lic on April 15, 1983. In less than one year, over 10 million
people had passed through its gates, an attendance figure
that has been bettered every single year. On August 13,
1983, 93,000 people helped set a one-day attendance record
that easily eclipsed the old records established at the two
parent U.S. parks. Four years later, records again toppled
as the turnstiles clicked. The total this time: 111,500. By
1988, approximately 50 million people, or nearly half of
Japan’s population, had visited Tokyo Disneyland since its
opening. The steady cash flow pushed revenues for fiscal
year 1989 to $768 million, up 17 percent from 1988.
The 204-acre Tokyo Disneyland is owned and operated
by Oriental Land under license from the Walt Disney Co.
The 45-year contract gives Disney 10 percent of admis-
sions and 5 percent of food and merchandise sales, plus
licensing fees. Disney opted to take no equity in the proj-
ect and put no money down for construction. “I never had
the slightest doubt about the success of Disneyland in
Japan,” said Masatomo Takahashi, president of Oriental
Land Company. Oriental Land was so confident of the
success of Disney in Japan that it financed the park
entirely with debt, borrowing ¥180 billion ($1.5 billion at
February 1988 exchange rates). Takahashi added, “The
debt means nothing to me,” and with good reason. Accord-
ing to Fusahao Awata, who co-authored a book on Tokyo
Disneyland: “The Japanese yearn for [American culture].”
Soon after Tokyo Disneyland opened in April 1983,
five Shinto priests held a solemn dedication ceremony
near Cinderella’s castle. It is the only overtly Japanese
ritual seen so far in this sprawling theme park. What
visitors see is pure Americana. All signs are in English,
with only small katakana (a phonetic Japanese alphabet)
translations. Most of the food is American style, and the
attractions are cloned from Disney’s U.S. parks. Disney
also held firm on two fundamentals that strike the Japanese
as strange—no alcohol is allowed and no food may be
brought in from outside the park.
However, in Disney’s enthusiasm to make Tokyo a brick-
by-brick copy of Anaheim’s Magic Kingdom, there were a
few glitches. On opening day, the Tokyo park discovered
that almost 100 public telephones were placed too high for
Japanese guests to reach them comfortably. And many
More than 350 of the park’s 7,400 employees come on
duty at 1 a.m. to begin the daily cleanup routine. The
thousands of feet that walk through the park each day and
chewing gum do not mix; gum has always presented
major cleanup problems. The park’s janitors found long
ago that fire hoses with 90 pounds of water pressure
would not do the job. Now they use steam machines, razor
scrapers, and mops towed by Cushman scooters to literally
scour the streets and sidewalks daily.
It takes one person working a full eight-hour shift to
polish the brass on the Fantasyland merry-go-round. The
scrupulously manicured plantings throughout the park are
treated with growth-retarding hormones to keep the trees
and bushes from spreading beyond their assigned spaces
and destroying the carefully maintained five-eighths scale
modeling that is utilized in the park. The maintenance
supervisor of the Matterhorn bobsled ride personally walks
every foot of track and inspects every link of tow chain
every night, thus trusting his or her own eyes more than
the $2 million in safety equipment that is built into the ride.
Eisner himself pays obsessive attention to detail. Walk-
ing through Disneyland one Sunday afternoon, he peered
at the plastic leaves on the Swiss Family Robinson tree
house, noting that they periodically wear out and need to
be replaced leaf by leaf at a cost of $500,000. As his
family strolled through the park, he and his eldest son
Breck stooped to pick up the rare piece of litter that the
cleanup crew had somehow missed. This old-fashioned
dedication has paid off. Since opening day in 1955,
Disneyland has been a consistent moneymaker.
Disney World in Orlando, Florida
By the time Eisner arrived, Disney World in Orlando was
already on its way to becoming what it is today—the most
popular vacation destination in the United States. But the
company had neglected a rich niche in its business: hotels.
Disney’s three existing hotels, probably the most profit-
able in the United States, registered unheard-of occupancy
rates of 92 percent to 96 percent versus 66 percent for the
industry. Eisner promptly embarked on an ambitious
$1 billion hotel expansion plan. Two major hotels, Disney’s
Grand Floridian Beach Resort and Disney’s Caribbean
Beach Resort, were opened during 1987–89. Disney’s
Yacht Club and Beach Resort along with the Dolphin and
Swan Hotels, owned and operated by Tishman Realty &
Construction, Metropolitan Life Insurance, and Aoki Cor-
poration, opened during 1989–90. Adding 3,400 hotel
rooms and 250,000 square feet of convention space made
it the largest convention center east of the Mississippi.
In October 1982, Disney made a new addition to the
theme park—the Experimental Prototype Community of
Tomorrow, or EPCOT Center. E. Cardon Walker, then
president of the company, announced that EPCOT would
be a “permanent showcase, industrial park, and experimen-
tal housing center.” This new park consists of two large
In-Depth Integrative Case 2.1a Euro Disneyland 265
James B. Cora and his team of some 150 operations
experts did a little calculating and pointed out that it
would take 100,000 pigs to do the job. And then there
would be the smell . . .
The Japanese relented.
The Japanese were also uneasy about a rustic-looking
Westernland, Tokyo’s version of Frontierland. “The Japa-
nese like everything fresh and new when they put it in,”
said Cora. “They kept painting the wood and we kept
saying, ‘No, it’s got to look old.’” Finally the Disney crew
took the Japanese to Anaheim to give them a firsthand
look at the Old West.
Tokyo Disneyland opened just as the yen escalated in
value against the dollar, and the income level of the
Japanese registered a phenomenal improvement. During
this era of affluence, Tokyo Disneyland triggered an inter-
est in leisure. Its great success spurred the construction
of “leisurelands” throughout the country. This created an
increase in the Japanese people’s orientation toward
leisure. But demographics are the real key to Tokyo
Disneyland’s success. Thirty million Japanese live within
30 miles of the park. There are three times more than the
number of people in the same proximity to Anaheim’s
Disneyland. With the park proven such an unqualified hit,
and nearing capacity, Oriental Land and Disney mapped
out plans for a version of the Disney-MGM studio tour
next door. This time, Disney talked about taking a
50 percent stake in the project.
Building Euro Disneyland
On March 24, 1987, Michael Eisner and Jacques Chirac,
the French prime minister, signed a contract for the build-
ing of a Disney theme park at Marne-la-Vallee. Talks
between Disney and the French government had dragged
on for more than a year. At the signing, Robert Fitzpat-
rick, fluent in French, married to the former Sylvie
Blondet, and the recipient of two awards from the French
government, was introduced as the president of Euro
Disneyland. He was expected to be a key player in wooing
hungry customers found countertops above their reach at the
park’s snack stands.
“Everything we imported that worked in the United
States works here,” said Ronald D. Pogue, managing
director of Walt Disney Attractions Japan Ltd. “American
things like McDonald’s hamburgers and Kentucky Fried
Chicken are popular here with young people. We also
wanted visitors from Japan and Southeast Asia to feel they
were getting the real thing,” said Toshiharu Akiba, a staff
member of the Oriental Land publicity department.
Still, local sensibilities dictated a few changes. A Jap-
anese restaurant was added to please older patrons. The
Nautilus submarine is missing. More areas are covered
to protect against rain and snow. Lines for attractions had
to be redesigned so that people walking through the park
did not cross in front of patrons waiting to ride an attrac-
tion. “It’s very discourteous in Japan to have people cross
in front of somebody else,” explained James B. Cora,
managing director of operations for the Tokyo project.
The biggest differences between Japan and America have
come in slogans and ad copy. Although English is often
used, it’s “Japanized” English—the sort that would have
native speakers shaking their heads while the Japanese
nod happily in recognition. “Let’s Spring” was the motto
for one of their highly successful ad campaigns.
Pogue, visiting frequently from his base in California,
supervised seven resident American Disney managers
who work side by side with Japanese counterparts from
Oriental Land Co. to keep the park in tune with the Dis-
ney doctrine. American it may be, but Tokyo Disneyland
appeals to such deep-seated Japanese passions as cleanli-
ness, order, outstanding service, and technological wiz-
ardry. Japanese executives are impressed by Disney’s
detailed training manuals, which teach employees how to
make visitors feel like VIPs. Most worth emulating, say
the Japanese, is Disney’s ability to make even the lowliest
job seem glamorous. “They have changed the image of
dirty work,” said Hakuhodo Institute’s Sekizawa.
Disney Company did encounter a few unique cultural
problems when developing Tokyo Disneyland:
The problem: how to dispose of some 250 tons of trash that
would be generated weekly by Tokyo Disneyland visitors?
The standard Disney solution: trash compactors.
The Japanese proposal: pigs to eat the trash and be
slaughtered and sold at a profit.
Exhibit 1 How the Theme Parks Grew
1955 Disneyland
1966 Walt Disney’s death
1971 Walt Disney World in Orlando
1982 Epcot Center
1983 Tokyo Disneyland
1992 Euro Disneyland
Source: Stephen Koepp, “Do You Believe in Magic?” Time, April 25, 1988, pp. 66–73.
Exhibit 2 Investor’s Snapshot: The Walt Disney Company
(December 1989)
Sales (latest four quarters) $4.6 billion
Change from year earlier Up 33.6%
Net profit $703.3 million
Change Up 34.7%
Return on common stockholders’ equity 23.4%
Five-year average 20.3%
Stock price average (last 12 months) $60.50–$136.25
Recent share price $122.75
Price/Earnings Multiple 27
Total return to investor
(12 months to 11/3/89) 90.6%
Source: Fortune, December 4, 1989.
266 Part 2 The Role of Culture
40 percent foreign, with Disney taking 16.67 percent.
Euro Disneyland was expected to bring $600 million in
foreign investment into France each year.
As soon as the contract had been signed, individuals
and businesses began scurrying to somehow plug into the
Mickey Mouse money machine—all were hoping to ben-
efit from the American dream without leaving France. In
fact, one Paris daily, Liberation, actually sprouted mouse
ears over its front-page flag.
The $1.5 to $2 billion first-phase investment would
involve an amusement complex including hotels and res-
taurants, golf courses, and an aquatic park in addition to
a European version of the Magic Kingdom. The second
phase, scheduled to start after the gates opened in 1992,
called for the construction of a community around the
park, including a sports complex, technology park, confer-
ence center, theater, shopping mall, university campus,
villas, and condominiums. No price tag had been put on
the second phase, although it was expected to rival, if not
surpass, the first-phase investment. In November 1989,
Fitzpatrick announced that the Disney–MGM Studios,
Europe, would also open at Euro Disneyland in 1996,
resembling the enormously successful Disney–MGM Stu-
dios theme park at Disney World in Orlando. The new
studios would greatly enhance the Walt Disney Compa-
ny’s strategy of increasing its production of live action
and animated filmed entertainment in Europe for both the
European and world markets.
“The phone’s been ringing here ever since the
announcement,” said Marc Berthod of EpaMarne, the
government body that oversees the Marne-la-Vallee
region. “We’ve gotten calls from big companies as well
as small—everything from hotel chains to language inter-
preters all asking for details on Euro Disneyland. And the
individual mayors of the villages around here have been
swamped with calls from people looking for jobs,” he
added.
Euro Disneyland was expected to generate up to 28,000
jobs, providing a measure of relief for an area that had
suffered a 10 percent–plus unemployment rate for the pre-
vious year. It was also expected to light a fire under
France’s construction industry, which had been particularly
hard hit by France’s economic problems over the previous
year. Moreover, Euro Disneyland was expected to attract
many other investors to the depressed outskirts of Paris.
International Business Machines (IBM) and Banque
National de Paris were among those already building in
the area. In addition one of the new buildings going up
was a factory that would employ 400 outside workers to
wash the 50 tons of laundry expected to be generated per
day by Euro Disneyland’s 14,000 employees.
The impact of Euro Disneyland was also felt in the
real estate market. “Everyone who owns land around here
is holding on to it for the time being, at least until they
know what’s going to happen,” said Danny Theveno, a
support from the French establishment for the theme park.
As one analyst put it, Disney selected him to set up the
park because he is “more French than the French.”
Disney had been courted extensively by Spain and
France. The prime ministers of both countries ordered
their governments to lend Disney a hand in its quest for
a site. France set up a five-person team headed by Special
Advisor to Foreign Trade and Tourism Minister Edith
Cresson, and Spain’s negotiators included Ignacio Vasallo,
Director-General for the Promotion of Tourism. Disney
pummeled both governments with requests for detailed
information. “The only thing they haven’t asked us for is
the color of the tourists’ eyes,” moaned Vasallo.
The governments tried other enticements too. Spain
offered tax and labor incentives and possibly as much as
20,000 acres of land. The French package, although less
generous, included spending of $53 million to improve
highway access to the proposed site and perhaps speeding
up a $75 million subway project. For a long time, all that
smiling Disney officials would say was that Spain had
better weather while France had a better population base.
Officials explained that they picked France over Spain
because Marne-la-Vallee is advantageously close to one
of the world’s tourism capitals, while also being situated
within a day’s drive or train ride of some 30 million peo-
ple in France, Belgium, England, and Germany. Another
advantage mentioned was the availability of good trans-
portation. A train line that serves as part of the Paris
Metro subway system ran to Torcy, in the center of
Marne-la-Vallee, and the French government promised to
extend the line to the actual site of the park. The park
would also be served by A-4, a modern highway that runs
from Paris to the German border, as well as a freeway
that runs to Charles de Gaulle airport.
Once a letter of intent had been signed, sensing that
the French government was keen to not let the plan fail,
Disney held out for one concession after another. For
example, Disney negotiated for VAT (value-added tax) on
ticket sales to be cut from a normal 18.6 percent to
7 percent. A quarter of the investment in building the park
would come from subsidized loans. Additionally, any dis-
putes arising from the contract would be settled not in
French courts but by a special international panel of arbi-
trators. But Disney did have to agree to a clause in the
contract that would require it to respect and utilize French
culture in its themes.
The park was built on 4,460 acres of farmland in
Marne-la-Vallee, a rural corner of France 20 miles east of
Paris known mostly for sugar beets and Brie cheese.
Opening was planned for early 1992, and planners hoped
to attract some 10 million visitors a year. Approximately
$2.5 billion was needed to build the park, making it the
largest single foreign investment ever in France. A French
“pivot” company was formed to build the park with start-
ing capital of FFr 3 billion, split 60 percent French and
In-Depth Integrative Case 2.1a Euro Disneyland 267
problems to their countryside. Such a public relations pro-
gram was a rarity in France, where businesses make little
effort to establish good relations with local residents. Dis-
ney invited 400 local children to a birthday party for
Mickey Mouse, sent Mickey to area hospitals, and hosted
free trips to Disney World in Florida for dozens of local
officials and children.
“They’re experts at seduction, and they don’t hide the
fact that they’re trying to seduce you,” said Vincent Guar-
diola, an official with Banque Indosuez, one of the 17
banks wined and dined at Orlando and subsequently one
of the venture’s financial participants. “The French aren’t
used to this kind of public relations—it was unbeliev-
able.” Observers said that the goodwill efforts helped dis-
sipate initial objections to the project.
Financial Structuring at Euro Disneyland
Eisner was so keen on Euro Disneyland that Disney kept
a 49 percent stake in the project, while the remaining
51 percent of stock was distributed through the London,
Paris, and Brussels stock exchanges. Half the stock under
the offer was going to the French, 25 percent to the Eng-
lish, and the remainder distributed in the rest of the Euro-
pean community. The initial offer price of FFr 72 was
considerably higher than the pathfinder prospectus esti-
mate because the capacity of the park had been slightly
extended. Scarcity of stock was likely to push up the price,
which was expected to reach FFr 166 by opening day in
1992. This would give a compound return of 21 percent.
Walt Disney Company maintained management control
of the company. The U.S. company put up $160 million of
its own capital to fund the project, an investment that soared
in value to $2.4 billion after the popular stock offering in
Europe. French national and local authorities, by compari-
son, were providing about $800 million in low-interest loans
and poured at least that much again into infrastructure.
Other sources of funding were the park’s 12 corporate
sponsors, and Disney would pay them back in kind. The
“autopolis” ride, where kids ride cars, features coupes
emblazoned with the “Hot Wheels” logo. Mattel Inc.,
sponsor of the ride, was grateful for the boost to one of
its biggest toy lines.
The real payoff would begin once the park opened. The
Walt Disney Company would receive 10 percent of admis-
sion fees and 5 percent of food and merchandise revenue,
the same arrangement as in Japan. But in France, it would
also receive management fees, incentive fees, and 49 per-
cent of the profits.
A Saloman Brothers analyst estimated that the park
would pull in 3 to 4 million more visitors than the 11 mil-
lion the company expected in the first year. Other Wall
Street analysts cautioned that stock prices of both Walt
Disney Company and Euro Disney already contained all
the Euro optimism they could absorb. “Europeans visit
spokesperson for the town of Villiers on the western edge
of Marne-la-Vallee. Disney expected 11 million visitors
in the first year. The break-even point was estimated to
be between 7 and 8 million. One worry was that Euro
Disneyland would cannibalize the flow of European vis-
itors to Walt Disney World in Florida, but European
travel agents said that their customers were still eagerly
signing up for Florida, lured by the cheap dollar and the
promise of sunshine.
Protests of Cultural Imperialism
Disney faced French communists and intellectuals who
protested the building of Euro Disneyland. Ariane
Mnouchkine, a theater director, described it as a “cultural
Chernobyl.” “I wish with all my heart that the rebels
would set fire to Disneyland,” thundered a French intel-
lectual in the newspaper La Figaro. “Mickey Mouse,”
sniffed another, “is stifling individualism and transform-
ing children into consumers.” The theme park was damned
as an example of American “neoprovincialism.”
Farmers in the Marne-la-Vallee region posted protest
signs along the roadside featuring a mean-looking Mickey
Mouse and touting sentiments such as “Disney go home,”
“Stop the massacre,” and “Don’t gnaw away our national
wealth.” Farmers were upset partly because under the
terms of the contract, the French government would
expropriate the necessary land and sell it without profit
to the Euro Disneyland development company.
While local officials were sympathetic to the farmers’
position, they were unwilling to let their predicament inter-
fere with what some called “the deal of the century.” “For
many years these farmers have had the fortune to cultivate
what is considered some of the richest land in France,” said
Berthod. “Now they’ll have to find another occupation.”
Also less than enchanted about the prospect of a magic
kingdom rising among its midst was the communist-
dominated labor federation, the Confédération Générale du
Travail (CGT). Despite the job-creating potential of Euro
Disney, the CGT doubted its members would benefit. The
union had been fighting hard to stop the passage of a bill
that would give managers the right to establish flexible
hours for their workers. Flexible hours were believed to be
a prerequisite to the profitable operation of Euro
Disneyland, especially considering seasonal variations.
However, Disney proved to be relatively immune to the
anti-U.S. virus. In early 1985, one of the three state-
owned television networks signed a contract to broadcast
two hours of dubbed Disney programming every Saturday
evening. Soon after, Disney Channel became one of the
top-rated programs in France.
In 1987, the company launched an aggressive com-
munity relations program to calm the fears of politicians,
farmers, villagers, and even bankers that the project would
bring traffic congestion, noise, pollution, and other
268 Part 2 The Role of Culture
In Fantasyland, designers strived to avoid competing
with the nearby European reality of actual medieval towns,
cathedrals, and chateaux. While Disneyland’s castle is based
on Germany’s Neuschwanstein and Disney World’s is based
on a Loire Valley chateau, Euro Disney’s Le Château de la
Belle au Bois Dormant, as the French insisted Sleeping
Beauty be called, is more cartoonlike with stained glass
windows built by English craftspeople and depicting Disney
characters. Fanciful trees grow inside as well as a beanstalk.
The park is criss-crossed with covered walkways.
Eisner personally ordered the installation of 35 fireplaces
in hotels and restaurants. “People walk around Disney
World in Florida with humidity and temperatures in the
90s and they walk into an air-conditioned ride and say,
‘This is the greatest,’” said Eisner. “When it’s raining and
miserable, I hope they will walk into one of these lobbies
with the fireplace going and say the same thing.”
Children all over Europe were primed to consume.
Even one of the intellectuals who contributed to Le
Figaro’s Disney-bashing broadsheet was forced to admit
with resignation that his 10-year-old son “swears by
Michael Jackson.” At Euro Disneyland, under the name
“Captain EO,” Disney just so happened to have a Michael
Jackson attraction awaiting him.
Food Service and Accommodations
at Euro Disneyland
Disney expected to serve 15,000 to 17,000 meals per hour,
excluding snacks. Menus and service systems were devel-
oped so that they varied in both style and price. There is a
400-seat buffeteria, 6 table service restaurants, 12 counter
service units, 10 snack bars, 1 Discovery food court seating
850, 9 popcorn wagons, 15 ice-cream carts, 14 specialty
food carts, and 2 employee cafeterias. Restaurants were, in
fact, to be a showcase for American foods. The only excep-
tion to this is Fantasyland, which recreates European fables.
Here, food service will reflect the fable’s country of origin:
Pinocchio’s facility having German food; Cinderella’s,
French; Bella Notte’s, Italian; and so on.
Of course recipes were adapted for European tastes.
Because many Europeans don’t care much for very spicy
food, Tex-Mex recipes were toned down. A special coffee
blend had to be developed that would have universal
appeal. Hot dog carts would reflect the regionalism of
American tastes. There would be a ball park hot dog
(mild, steamed, a mixture of beef and pork), a New York
hot dog (all beef, and spicy), and a Chicago hot dog
(Vienna-style, similar to bratwurst).
Euro Disneyland has six theme hotels, which would offer
nearly 5,200 rooms on opening day; a campground (444
rental trailers and 181 camping sites); and single-family
homes on the periphery of the 27-hole golf course. Exhibit 4
provides an overview of the size, and main features of Euro
Disneyland. Exhibit 5 compares daily pass and accommoda-
tion prices of Euro Disneyland with Disney World Orlando.
Disney World in Florida as part of an ‘American experi-
ence,’” said Patrick P. Roper, marketing director of Alton
Towers, a successful British theme park near Manchester.
He doubted they would seek the suburbs of Paris as eagerly
as America and predicted attendance would trail Disney
projections. Exhibit 3 summarizes the history and major
milestones of Euro Disneyland.
The Layout of Euro Disneyland
Euro Disneyland is determinedly American in its theme.
There was an alcohol ban in the park despite the attitude
among the French that wine with a meal is a God-given
right. Designers presented a plan for a Main Street USA
based on scenes of America in the 1920s because research
indicated that Europeans loved the Prohibition era. Eisner
decreed that images of gangsters and speakeasies were too
negative. Though made more ornate and Victorian than Walt
Disney’s idealized Midwestern small town, Main Street
remained Main Street. Steamships leave from Main Street
through the Grand Canyon Diorama en route to Frontierland.
The familiar Disney Tomorrowland, with its dated
images of the space age, was jettisoned entirely. It was
replaced by a gleaming brass and wood complex called
Discoverland, which was based on themes of Jules Verne
and Leonardo da Vinci. Eisner ordered $8 or $10 million
in extras to the “Visionarium” exhibit, a 360-degree movie
about French culture that was required by the French in
their original contract. French and English are the official
languages at the park, and multilingual guides are available
to help Dutch, German, Spanish, and Italian visitors.
With the American Wild West being so frequently cap-
tured on film, Europeans have their own idea of what life
was like back then. Frontierland reinforces those images.
A runaway mine train takes guests through the canyons
and mines of Gold Rush country. There is a paddle-wheel
steamboat reminiscent of Mark Twain, Indian explorer
canoes, and a phantom manor from the Gold Rush days.
Exhibit 3 Chronology of the Euro Disneyland Deal
1984–85 Disney negotiates with Spain and France to cre-
ate a European theme park. Chooses France as
the site.
1987 Disney signs letter of intent with the French
government.
1988 Selects lead commercial bank lenders for the
senior portion of the project. Forms the Société
en Nom Collectif (SNC). Begins planning for the
equity offering of 51% of Euro Disneyland as
required in the letter of intent.
1989 European press and stock analysts visit Walt
Disney World in Orlando. Begin extensive news
and television campaign. Stock starts trading at
20–25 percent premium from the issue price.
Source: Geraldine E. Willigan, “The Value-Adding CFO: An Interview with Disney’s Gary
Wilson,” Harvard Business Review, January–February 1990, pp. 85–93.
In-Depth Integrative Case 2.1a Euro Disneyland 269
with the earring’s diameter no more than three-quarters of
an inch. Neither men nor women can wear more than one
ring on each hand. Further, women were required to wear
appropriate undergarments and only transparent panty
hose, not black or anything with fancy designs. Though a
daily bath was not specified in the rules, the applicant’s
video depicted a shower scene and informed applicants
that they were expected to show up for work “fresh and
clean each day.” Similar rules are in force at Disney’s three
other theme parks in the United States and Japan.
In the United States, some labor unions representing Dis-
ney employees have occasionally protested the company’s
strict appearance code, but with little success. French labor
unions began protesting when Disneyland opened its “casting
center” and invited applicants to “play the role of [their lives]”
and to take a “unique opportunity to marry work and magic.”
The CGT handed out leaflets in front of the center to warn
applicants of the appearance code, which they believed rep-
resented “an attack on individual liberty.” A more mainstream
union, the Confédération Française Démocratique du Travail
(CFDT), appealed to the Labor Ministry to halt Disney’s vio-
lation of “human dignity.” French law prohibits employers
from restricting individual and collective liberties unless the
restrictions can be justified by the nature of the task to be
accomplished and are proportional to that end.
Degelmann, however, said that the company was “well
aware of the cultural differences” between the United
States and France and as a result had “toned down” the
wording in the original American version of the guidebook.
He pointed out that many companies, particularly airlines,
maintained appearance codes just as strict. “We happened
to put ours in writing,” he added. In any case, he said that
he knew of no one who had refused to take the job
because of the rules and that no more than
5 percent of the people showing up for interviews had
decided not to proceed after watching the video, which
also detailed transportation and salary.
Fitzpatrick also defended the dress code, although he
conceded that Disney might have been a little naive in
presenting things so directly. He added, “Only in France
is there still a communist party. There is not even one in
Russia any more. The ironic thing is that I could fill the
park with CGT requests for tickets.”
Another big challenge lay in getting the mostly French
“cast members,” as Disney calls its employees, to break
their ancient cultural aversions to smiling and being
consistently polite to park guests. The individualistic
French had to be molded into the squeaky-clean Disney
image. Rival theme parks in the area, loosely modeled on
the Disney system, had already encountered trouble keep-
ing smiles on the faces of the staff, who sometimes took
on the demeanor of subway ticket clerks.
The delicate matter of hiring French citizens as opposed
to other nationals was examined in the more than two-year-
long preagreement negotiations between the French govern-
Disney’s Strict Appearance Code
Antoine Guervil stood at his post in front of the l,000-
room Cheyenne Hotel at Euro Disneyland, practicing his
“Howdy!” When Guervil, a political refugee from Haiti,
said the word, it sounded more like “Audi.” Native French
speakers have trouble with the aspirated “h” sound in
words like “hay” and “Hank” and “howdy.” Guervil had
been given the job of wearing a cowboy costume and
booming a happy, welcoming howdy to guests as they
entered the Cheyenne, styled after a Western movie set.
“Audi,” said Guervil, the strain of linguistic effort
showing on his face. This was clearly a struggle. Unless
things got better, it was not hard to imagine objections
from Renault, the French car company that was one of the
corporate sponsors of the park. Picture the rage of a
French auto executive arriving with his or her family at
the Renault-sponsored Euro Disneyland, only to hear the
doorman of a Disney hotel advertising a German car.
Such were the problems Disney faced while hiring some
12,000 people to maintain and populate its Euro Disney-
land theme park. A handbook of detailed rules on accept-
able clothing, hairstyles, and jewelry, among other things,
embroiled the company in a legal and cultural dispute. Crit-
ics asked how the brash Americans could be so insensitive
to French culture, individualism, and privacy. Disney offi-
cials insisted that a ruling that barred them from imposing
a squeaky-clean employment standard could threaten the
image and long-term success of the park.
“For us, the appearance code has a real effect from a
product identification standpoint,” said Thor Degelmann,
vice president for human resources for Euro Disneyland.
“Without it we wouldn’t be presenting the Disney product
that people would be expecting.”
The rules, spelled out in a video presentation and
detailed in a guide handbook, went beyond height and
weight standards. They required men’s hair to be cut above
the collar and ears with no beards or mustaches. Any tat-
toos must be covered. Women must keep their hair in one
“natural color” with no frosting or streaking, and they may
make only limited use of makeup like mascara. False eye-
lashes, eyeliners, and eye pencil were completely off lim-
its. Fingernails can’t pass the end of the fingers. As for
jewelry, women can wear only one earring in each ear,
Exhibit 4 The Euro Disneyland Resort
5,000 acres in size
30 attractions
12,000 employees
6 hotels (with 5,184 rooms)
10 theme restaurants
414 cabins
181 camping sites
Source: Roger Cohen, “Threat of Strikes in Euro Disney Debut,” New York Times, April
10, 1992, p. 20.
270 Part 2 The Role of Culture
below 25,000, less than half the park’s capacity and way
below expectations. Many people may have heeded the
advice to stay home or, more likely, were deterred by a
one-day strike that cut the direct rail link to Euro Disney-
land from the center of Paris. Queues for the main rides,
such as Pirates of the Caribbean and Big Thunder Moun-
tain railroad, were averaging around 15 minutes less than
on an ordinary day at Disney World, Florida.
Disney executives put on a brave face, claiming that
attendance was better than at first days for other Disney
theme parks in Florida, California, and Japan. However,
there was no disguising the fact that after spending thou-
sands of dollars on the preopening celebrations, Euro Dis-
ney would have appreciated some impressively long
traffic jams on the auto route.
Other Operating Problems
When the French government changed hands in 1986, work
ground to a halt, as the negotiator appointed by the Conser-
vative government threw out much of the groundwork pre-
pared by his Socialist predecessor. The legalistic approach
taken by the Americans also bogged down talks, as it meant
planning ahead for every conceivable contingency. At the
same time, right-wing groups who saw the park as an inva-
sion of “chewing-gum jobs” and U.S. pop culture also
fought hard for a greater “local cultural context.”
On opening day, English visitors found the French
reluctant to play the game of queuing. “The French seem
to think that if God had meant them to queue, He wouldn’t
have given them elbows,” they commented. Different cul-
tures have different definitions of personal space, and
Disney guests faced problems of people getting too close
or pressing around those who left too much space between
themselves and the person in front.
Disney placed its first ads for work bids in English,
leaving small- and medium-sized French firms feeling like
foreigners in their own land. Eventually, Disney set up a
data bank with information on over 20,000 French and
European firms looking for work, and the local Chamber
of Commerce developed a video text information bank
with Disney that small- and medium-sized companies
ment and Disney. The final agreement called for Disney to
make a maximum effort to tap into the local labor market.
At the same time, it was understood that for Euro Disneyland
to work, its staff must mirror the multicountry makeup of
its guests. “Casting centers” were set up in Paris, London,
Amsterdam, and Frankfurt. “We are concentrating on the
local labor market, but we are also looking for workers who
are German, English, Italian, Spanish, or other nationalities
and who have good communication skills, are outgoing,
speak two European languages—French plus one other—
and like being around people,” said Degelmann.
Stephane Baudet, a 28-year-old trumpet player from
Paris, refused to audition for a job in a Disney brass band
when he learned he would have to cut his ponytail. “Some
people will turn themselves into a pumpkin to work at
Euro Disneyland,” he said. “But not me.”
Opening Day at Euro Disneyland
A few days before the grand opening of Euro Disneyland,
hundreds of French visitors were invited to a preopening
party. They gazed perplexed at what was placed before
them. It was a heaping plate of spare ribs. The visitors
were at the Buffalo Bill Wild West Show, a cavernous
theater featuring a panoply of “Le Far West,” including 20
imported buffaloes. And Disney deliberately didn’t provide
silverware. “There was a moment of consternation,” recalls
Fitzpatrick. “Then they just kind of said, ‘The hell with
it,’ and dug in.” There was one problem. The guests
couldn’t master the art of gnawing ribs and applauding at
the same time. So Disney planned to provide more napkins
and teach visitors to stamp with their feet.
On April 12, 1992, the opening day of Euro Disney-
land, France-Soir enthusiastically predicted Disney
dementia. “Mickey! It’s Madness” read its front-page
headline, warning of chaos on the roads and suggesting
that people might have to be turned away. A French gov-
ernment survey indicated that half a million might turn
up with 90,000 cars trying to get in. French radio warned
traffic to avoid the area.
By lunchtime on opening day, the Euro Disneyland car
park was less than half full, suggesting an attendance of
Exhibit 5 What Price Mickey?
Euro Disneyland Disney World, Orlando
Peak Season Hotel Rates
4-person room $97–$345 $104–$455
Campground Space
$48 $30–$49
One-Day Pass
Children $26 $26
Adults $40 33
Source: BusinessWeek, March 30, 1992.
In-Depth Integrative Case 2.1a Euro Disneyland 271
thought about these and other problems, the previous
year’s losses and the prospect of losses again in the cur-
rent year, with their negative impact on the company’s
stock price, weighed heavily on his mind.
Questions for Review
1. Using Hofstede’s four cultural dimensions as a
point of reference, what are some of the main cul-
tural differences between the United States and
France?
2. In what way has Trompenaars’s research helped
explain cultural differences between the United
States and France?
3. In managing its Euro Disneyland operations, what
are three mistakes that the company made? Explain.
4. Based on its experience, what are three lessons the
company should have learned about how to deal
with diversity? Describe each.
Source: This case was prepared by Research Assistant Sonali Krishna under the direc-
tion of Professors J. Stewart Black and Hal B. Gregersen as the basis for class discus-
sion. It is not intended to illustrate either effective or ineffective managerial capability
or administrative responsibility. J. S. Black, and H. B. Gregersen, “EuroDisneyland,” in
Cases in International Organizational Behavior, ed. G. Oddou and M. Mendenhall
(Malden, MA: Blackwell Publishers, 1998). Copyright © 1998 by J. Stewart Black and
Hal B. Gregersen. All rights reserved. Used with permission.
through France and Europe would be able to tap into. “The
work will come, but many local companies have got to
learn that they don’t simply have the right to a chunk of
work without competing,” said a chamber official.
Efforts were made to ensure that sooner, rather than
later, European nationals take over the day-to-day running
of the park. Although there were only 23 U.S. expatriates
among the employees, they controlled the show and held
most of the top jobs. Each senior manager had the task
of choosing his or her European successor.
Disney was also forced to bail out 40 subcontractors
who were working for the Gabot-Eremco construction
contracting group, which had been unable to honor all of
its commitments. Some of the subcontractors said they
faced bankruptcy if they were not paid for their work on
Euro Disneyland. A Disney spokesperson said that the
payments would be less than $20.3 million and the com-
pany had already paid Gabot-Eremco for work on the
park. Gabot-Eremco and 15 other main contractors
demanded $157 million in additional fees from Disney for
work that they said was added to the project after the
initial contracts were signed. Disney rejected the claim
and sought government intervention. Disney said that
under no circumstances would it pay Gabot-Eremco and
accused its officers of incompetence. As Bourguignon
A Further Look at Euro Disneyland in
Recent Years:
As discussed in In-Depth Integrative Case 2.1a, Euro
Disneyland faced major hurdles in its early years. In
May 1992, roughly 25 percent of Euro Disney’s work-
force (approximately 3,000 people) resigned from their
jobs citing unacceptable working conditions. As a
result, the Euro Disney Company stock price declined
and Euro Disney announced an expected net loss in its
first year of operation of approximately 300 million
French francs in July of 1992.1 Since then, Euro Dis-
neyland has enacted some major changes—many with
great success.
In an effort to improve attendance, Disney began
serving alcoholic beverages with meals inside the Euro
Disneyland Park in June of 1993.2 In March of 1994,
Disney offered the banks a deal: Disney would provide
additional capital to ensure that it continues to operate
if the banks agreed to restructure the US$1 billion of
debt. If the banks did not agree, Disney was prepared
to close the park and default on the loans. Disney put
additional pressure on the banks by publicly announc-
ing the possible closure of the park unless the debt was
restructured. The banks agreed to Disney’s demands
and wrote off the next two years of interest payments
along with a three-year period where loan repayments
would be postponed. In return, The Walt Disney Com-
pany agreed to restructure its own loan arrangements
at the new park valued at US$210 million.3
A turnaround began to blossom shortly after restruc-
turing. In 1995, Disney reported that attendance had
increased 21 percent from 8.8 million to 10.7 million
year over year with hotel occupancy also increasing
from 60 percent to 68.5 percent.4 The Euro Disney
Resort was renamed to Disneyland Paris in 1994 and,
in July of 1995, the company reported its first quarterly
profit of US$35.3 million. Disneyland Paris ended 1995
with a profit of US$22.8 million. Disney opened a sec-
ond theme park in France, Walt Disney Studios Park, in
March of 2002.5 The two combined parks had a total
attendance in 2015 of over 14.8 million, making it
Europe’s most visited themed attraction.6
In January 2015, Euro Disney S.C.A. shareholders
approved a one billion euro recapitalization plan.
Funded by the Walt Disney Company, the plan aims to
improve the long-term cash position of Disneyland Paris,
putting an end to the reoccurring debt crises that have
plagued Euro Disney S.C.A. over its two-decade history.
Per the terms of the deal, the existing debt held by Walt
Disney Company will be converted to equity, further
increasing the American company’s investment in the
European operations.7
272 Part 2 The Role of Culture
1. Anna Willard, James Mackenzie, James Grubel,
Wayne Cole, Tova Cohen, Alan Raybould, and Jon-
athan Thatcher. “FACTBOX: Who’s Next? Coun-
tries at Risk of Recession,” Reuters, March 3,
2009, www.reuters.com/article/financial-recession-
risk-idUSSP40009620090304.
2. “Euro Disney Adding Alcohol,” New York Times,
June 12, 1993, www.nytimes.com/1993/06/12/
business/euro-disney-adding-alcohol.html.
3. “The History of DisneyLand Paris,” Solarius, July 4,
2006. www.solarius.com/dvp/dlp/dlp-history.htm.
4. Christian Sylt, “Magic Results: Euro Disney Plans
New Hotels,” August 17, 2008, www.independent.
co.uk/news/business/news/magic-results-euro-disney-
plans-new-hotels-899529.html.
5. Euro Disney S.C.A., “Euro Disney S.C.A. Reports
Fiscal Year 2011 Results,” November 9,
2011, http://corporate.disneylandparis.com/CORP/
EN/Neutral/Images/uk-2011-11-09-euro-disney-sca-
reports-annual-results-for-fiscal-year-2011 .
6. “Disneyland Paris Visitor Numbers Down Since
Attacks,” RFI, February 10, 2016, http://en.rfi.fr/
france/20160210-disneyland-paris-visitor-numbers-
down-attacks.
7. Euro Disney S.C.A., First Quarter Announcement,
January 16, 2015, http://disneylandparis-news.com/
wp-content/uploads/2015/01/uk-2015-01-16-cp-Q1-
revenues .
ENDNOTES
273
36,000 jobs. The first phase of the park was to include a
10-million-annual-visitor Disneyland-based theme park;
2,100 hotel rooms; and a 300,000-square-foot retail, dining,
and entertainment complex.2
In order to make the park “culturally sensitive,” Jay
Rasulo, president of Walt Disney Parks & Resorts,
announced that Hong Kong Disneyland would be trilin-
gual with English, Cantonese, and Mandarin. The park
would also include a fantasy garden for taking pictures
with the Disney characters (popular among Asian tour-
ists), as well as more covered and rainproof spaces to
accommodate the “drizzly” climate.3
Unfortunately, Disney soon realized that its attempts at
cultural sensitivity had not gone far enough. For instance,
the decision to serve shark fin soup, a local favorite,
greatly angered environmentalists. The park ultimately
had to remove the dish from its menus. Park executives
also failed to plan for the large influx of visitors around
the Chinese New Year in early 2006, forcing them to turn
away numerous patrons who had valid tickets. Unsurpris-
ingly, this led to customer outrage and negative media
coverage of the relatively new theme park.
Other criticisms of the park have included its small
scale and slow pace of expansion. Hong Kong Disneyland
opened with only 16 attractions and “one classic Disney
thrill ride, Space Mountain, compared to 52 at Disneyland
Resort Paris [formerly Euro Disneyland].”4 However, the
government has made plans to increase the size of the
park by acquiring land adjacent to the existing facilities.
Likely due to its small size and fewer attractions, Hong
Kong Disneyland pulled in only 5.2 million guests during
its first 12 months, less than the estimated 5.6 million.5 In
the years since, additional attractions have been added
into the existing park, helping to increase attendance;
however, the park is still facing financial pressure. In
2015, the park posted a US$19 million loss.6
Battle over Hong Kong Park Expansion
Expanding the size of the theme park in Hong Kong by
about a third has always been a part of Disney’s long-term
plan. In 2007, Disney began the process of trying to obtain
the local government’s financial support for these plans.
At that time, however, the park had been performing well
below its projected sales number, and the government,
which is 57 percent stockholder in this business, expressed
serious doubts in the need to fund the further expansion.
Hong Kong Disneyland attracted about 15 million visitors
After its success with Tokyo Disneyland in the 1980s,
Disney began to realize the vast potential of the Asian
market. The theme park industry throughout Asia has
been very successful in recent years, with a range of
regional and international companies all trying to enter
the market. Disney has been one of the major participants,
opening Hong Kong Disneyland in 2005 and Shanghai
Disney Resort in 2016, and discussing future operations
in other Asian cities.
Disney’s Push into China
After Disney’s success in Tokyo, China became a serious
option for its next theme park venture in light of the coun-
try’s impressive population and economic growth through-
out the 1990s and 2000s. Successful sales associated with
the Disney movie The Lion King, in 1996, also convinced
Disney officials that China was a promising location.
However, consumer enthusiasm for theme parks in China
was at a low in the late 1990s. “Between 1993 and 1998,
more than 2,000 theme parks had been opened in China,”
and “many projects were swamped by excessive competi-
tion, poor market projections, high costs, and relentless
interference from local officials,” forcing several hundred
to be closed.1 Nevertheless, Disney continued to pursue
plans for two parks in China, focusing efforts on both
Hong Kong and Shanghai.
Hong Kong Disneyland
Plans in Hong Kong, which culminated in the opening of
Hong Kong Disneyland in September 2005, began after
the 1997–1998 Asian financial crisis. Despite the poor
economic condition of Hong Kong in the late 1990s, Dis-
ney was still optimistic about prospects for a theme park
in the “city of life.” Hong Kong, already an international
tourist destination, would draw Disneyland patrons pri-
marily from China, Taiwan, and Southeast Asia.
The official park plans were announced in November
1999 as a joint venture between the Walt Disney Company
and the Hong Kong SAR Government. Unlike its experi-
ence in Tokyo, where Disney handed the reins over com-
pletely to a foreign company (the Oriental Land Company),
Disney decided to take more direct control over this new
park. The park was built on Lantau Island at Penny’s Bay,
within the six-mile stretch separating the international
airport and downtown. Hong Kong Disneyland was esti-
mated to create 18,000 jobs upon opening and ultimately
In-Depth Integrative Case 2.1b
Disney in Asia
274 Part 2 The Role of Culture
credit facility of about US$40 million. Hong Kong, which
shouldered much of the $3.5 billion original construction
cost, did not add any new capital. “Disney is making a
substantial investment in this important project,” Leslie
Goodman, a Disney vice president, said in a state-
ment.13 Groundbreaking on three new “lands” for the park
commenced later that year, with “Toy Story Land”
opening in 2011, “Grizzly Gulch” opening in 2012, and
“Mystic Point” opening in 2013. The three new lands
increased the overall size of Hong Kong Disneyland by
25 percent, and there are now more than 100 attractions
within the park.14 If these expansions will be enough to
bring profitability to Hong Kong Disneyland remains yet
to be seen, as future expansion at the park beyond these
three new lands remains uncertain.
Uncertainty in Mainland China
Shanghai, known as the “Paris of the Orient,” was an
attractive site for a second Chinese park to Disney offi-
cials because of its growing commercialization and indus-
trialization and its already extant transportation access. A
Disney theme park in Shanghai would be mutually ben-
eficial for the company and the nation of China. From
Disney’s perspective, it would gain access to one of the
world’s largest potential markets (and also compete with
Universal Studios’ new theme park). From the perspective
of Chinese government officials, Disney’s mainland
Shanghai park would be a long-awaited mark of interna-
tional success for a communist nation.15
Initially planners hoped to have a Disneyland operating
in Shanghai prior to the World Expo in 2010. However,
a series of delays plagued the Shanghai park’s progress.
The Chinese government, fearing that a Shanghai park
would damper the success of the newly opened Hong
Kong park, intentionally delayed the park’s construction
in the mid 2000s.16 Additionally, in the wake of a corrup-
tion scandal within the Communist Party in Beijing in
2005, the necessary government approvals for the project
stalled to a halt. For a time, it appeared as though the
plans for the Shanghai park would not come to fruition,
leaving Disney to consider other options for the construc-
tion of its new park.17
Disney Gets Green Light for Shanghai Park
After a few years, Walt Disney Co. revisited its plans to
build a park in Shanghai, China. In January 2009, Disney
presented a $3.59 billion proposal to the Chinese central
government, outlining plans for a jointly owned park,
hotel, and shopping development.18 The timing could not
have been better for Disney to seek approval; in the wake
of the global economic crisis, the prospective creation of
50,000 new jobs amid a cooling Chinese economy was
especially attractive to the Chinese government.19
total in its first three and a half years, or about 4.3 million
a year. That figure fell short of the original projection of
more than 5 million a year.7 Although Disney did not
release financial figures to the public, Euromonitor esti-
mated the park had an operating loss of $46 million in its
first year, and lost $162 million the following year.8
By 2008, Disney’s officials were publicly stressing the
importance of park expansion for the overall viability of
the project. At that time, the park occupied 126 hectares
and had only four “lands”—Fantasyland, Tomorrowland,
Adventureland, and Main Street USA—and two hotels.
Hong Kong Disneyland Managing Director Andrew Kam
emphasized that expansion would be vital to the park’s
success. In a September 2008 release, Kam said the park
had plenty of room to grow because it was only using half
of the land available: “Expansion is part of the strategy
to make this park work for Hong Kong,”9 At the time, an
expansion was estimated to cost as much as 3 billion
Hong Kong dollars, or US$387 million. In December
2008, the Sing Tao Daily newspaper in Hong Kong
reported that Disney, in what was deemed an unusual con-
cession, might give the government a greater share in the
project in repayment of a cash loan of nearly $800 million
that the city had extended previously to the theme park.10
In 2009, unable to come to agreement with the Hong
Kong government, Disney put on hold its long-awaited
plans to expand the park. In a statement from Disney’s
Burbank (Calif.) office, the company said it was laying
off employees in Hong Kong after failing to reach an
agreement with the Hong Kong government to fund a
much-needed expansion. According to Disney, “The
uncertainty of the outcome requires us to immediately
suspend all creative and design work on the project.”
Thirty Hong Kong–based Disney “Imagineers,” who
helped to plan and design new parks, would be losing
their jobs.11 Business news sources at the time noted
that one reason Disney might be willing to end nego-
tiations with the Hong Kong government was the com-
pany’s progress in negotiations with Shanghai officials
to open a theme park there that would be much larger
and an arguably more exciting China project. A Shang-
hai park would be easier for many Chinese families to
visit. However, the possible shift of mainland Chinese
visitors away from Hong Kong in favor of Shanghai
could mean a drop of as much as 60 percent in visitor
numbers to the Hong Kong park, according to Euro-
monitor’s estimates.12
In June of 2009 Disney and Hong Kong’s government
finally reached a deal to modestly expand the territories of
the Disneyland theme park at a cost of about $465 million.
Under terms of the deal, the entertainment giant contrib-
uted all the necessary new capital for construction as well
as sustaining the park’s operation during the building
phases. It also converted about $350 million in loans into
equity to help with funding, and agreed to keep open a
In-Depth Integrative Case 2.1b Disney in Asia 275
said Christopher Marangi, senior analyst with Gabelli
and Co. in New York.27
Disney has implemented unique approaches to ticket
pricing at its Shanghai park in an effort to maximize
attendance and profit. Unlike other theme parks, where
the cost of entry remains the same regardless of the day,
Shanghai Disneyland features “demand pricing.” On
days that are more crowded, such as weekends and dur-
ing the summer, “peak” prices are enacted. Though
ticket prices start much lower at the Shanghai park than
at the Hong Kong park, the peak pricing structure
results in admission price increases of over 25 percent
on certain days.28
There are certain public concerns that the new
Shanghai park, which is Disney’s sixth, will inevitably
affect the Hong Kong park. The main concern is that
the Hong Kong park’s revenue may be cannibalized,
worsening the financial perspectives of the already-
underperforming Hong Kong park.29 However, Disney
thinks that both parks will complement each other rather
than be competitors. Disney’s main points are that
Shanghai is close to a number of other major cities
within easy driving distance, including Nanjing, Suzhou,
and Hangzhou, and that Shanghai’s own population of
around 19 million, combined with tens of millions more
within a three-hour driving radius, would provide a
more-than-ample base of local users for the park. There
are analysts, like Paul Tang, chief economist at Bank of
East Asia, who share this optimism, projecting that
“visitors from Guangdong and southern China will still
find Hong Kong more convenient, while Shanghai will
attract visitors from nor ther n and easter n
China.”30 Indeed, Disney reported a 36 percent increase
in profit at its Hong Kong park in early 2015.31
The critics of the Shanghai park, on the other hand,
are convinced that this project is a bigger threat to the
Hong Kong park than anybody can imagine. According
to Parita Chitakasem, research manager at Euromonitor
International in Singapore, who specializes in theme
parks, “Disneyland Shanghai will have two big features
which will make it more attractive than its Hong Kong
counterpart: Although it is still early days, Disneyland in
Shanghai will probably offer a much better experience for
your money than Disneyland in Hong Kong—Shanghai’s
Disneyland is three times bigger than Hong Kong Disney-
land. Also, for visitors from mainland China, it will be
much easier to travel to Disneyland in Shanghai, as there
are no visa/cross border concerns to take care of.”32
Though only one phase of Shanghai Disneyland has
opened, its true impact on Hong Kong Disneyland will
not be known for several years; stagnant growth in atten-
dance at the Hong Kong park validates the concerns that
many have expressed; in 2015, a year before Shanghai
Disneyland even opened, the Hong Kong park only saw
a one percent increase in attendance.33
The preliminary agreement was signed in January
2009. According to the proposal, Disney would take a
43 percent equity stake in Shanghai Disneyland, with 57
percent owned by the Shanghai government, forming a
joint-venture company.20 The preliminary agreement out-
lined a six-year construction period for the first phase,
with the projected opening of the park scheduled for 2014.
Disney would pay $300 million to $600 million in capital
expenses for the park in exchange for 5 percent of the
ticket sales and 10 percent of the concessions.21 According
to the preliminary agreement, Shanghai Disneyland, the
first park at the resort, would incorporate Chinese cultural
features as well as attractions built around traditional
Disney characters and themes. Additionally, the ownership
structure would contain some aspects of Disney’s Hong
Kong joint venture agreement. According to The Wall
Street Journal, a newly formed Shanghai company named
Shendi would hold the local government’s interest in the
park. Shendi is owned by two business entities under dis-
trict governments in Shanghai, as well as a third company
owned by the municipal government’s propaganda
bureau.22 After almost a year of negotiation, in November
2009, Disney finally received an approval from the Chinese
government to proceed with its Shanghai park plan.23
Disney acted quickly to gather all other necessary
approvals and documents that were needed for the park
construction. In April 2010, the land needed for the
park was approved. In 2010, over 2,000 households and
nearly 300 companies were relocated to clear the way
for the first phase of construction. In an effort to keep
the public informed, the head of Pudong New District,
where the park is sited, announced that the first phase
of the project will span four square kilometers, with the
theme park itself covering a square kilometer.24 Con-
struction on the first phase, which includes the Shang-
hai Disneyland Park and two hotels, broke ground in
2011.25 Despite the initial difficulties that Disney faced
throughout the early 2000s in gaining approval for the
Shanghai park, the five-year construction phase pro-
ceeded relatively smoothly.
As the 2016 opening neared, public excitement for the
park grew. More than five million people flooded the
park’s official website following its March 2016 launch.
Tickets for the park’s opening two weeks sold out months
in advance, and, on a single weekend in May, more than
100,000 people traveled to the still-unopened park just
to peer through the gates and shop at stores on the
perimeter.26 The park officially opened to the public on
June 16, 2016.
Analysts see the move as an important step forward
for Disney and other Western media firms to make
inroads into the vast and untapped Chinese media and
entertainment market. “They’ve been laying the ground-
work for a park for many years by exposing the popula-
tion to Disney properties, film, TV and merchandising,”
276 Part 2 The Role of Culture
be innovative and strategic in order to maintain sales.
Existing theme parks in the region have proven that a
carefully crafted strategy can lead to increased sales; after
a 20 percent drop in attendance in the early 2000s, Uni-
versal Studios in Japan was able to rebound to record
growth in 2015 by introducing new innovative attractions,
including a Harry Potter-themed area within the park and
a multiple-month-long Anime event.36
In spite of underperformance of some theme parks,
Asia is still viewed by many as the most attractive region
for the entertainment industry. Attendance may be stag-
nating in some parts of the world, but a growing middle
class with disposable incomes to match is making the
Asia-Pacific region a prime target for investors and theme
park owners. “China will lead the way,” said Kelven Tan,
Southeast Asia’s representative for the International Asso-
ciation of Amusement Parks and Attractions, an industry
group. “The critical mass really came about with the
resurgence of China. You need a good source of people;
you also need labor and you need cheap land.”37
That’s what the people behind the Universal Studios in
Singapore are betting. Developers aim to tap the wallets
of Singapore’s 4.6 million residents and 9.7 million tour-
ists a year and its proximity to populous areas of Indone-
sia and southern Malaysia. Opening in spring of 2010, it
became the island nation’s first bona fide amusement
park. Outside this and other foreign brands like Legoland,
which opened parks in Johor, Malaysia, in 2012 and in
Dubai, UAE, in 2016, home-grown companies like
Genting in Malaysia and OTC Enterprise Corp. in China
are aggressively looking to take advantage of the burgeon-
ing market in their backyards.38
Overall spending on entertainment and media in Asia
Pacific is set to increase to over US$700 billion by 2019,
doubling the amount spent just ten years earlier, according
to a 2015 report by McKinsey. By 2019, Asia Pacific will
account for over 40 percent of global spending on enter-
tainment and media.39 “It’s an up-and-coming market, and
growing quite fast,” said Christian Aaen, Hong Kong–
based regional director for AECOM Economics, a con-
sulting firm that specializes in the entertainment and
leisure industries. MGM Studios and Paramount, too, are
scouting around Asia for future projects.
In light of these optimistic projections, it is reasonable
to assume that Disney may consider expansion to other
Asian countries such as Malaysia, South Korea, or Singa-
pore, where Disney appeared to have seriously considered
a park. Given that the Hong Kong and Shanghai park
future expansions are on track, Disney now has the expe-
rience and motivation to further penetrate the Asian region.
In this regard, Disney has opened English language learn-
ing centers across China.40 This could constitute a broader
push by Disney to establish a strong Asian presence across
its businesses and brands, a move that would undoubtedly
involve the theme park operations as a central component.
Other Asian Ventures
The Walt Disney Company has also looked into building
other theme parks and resorts in Asia. Based on its suc-
cessful operation of two theme parks in the United States
(at Anaheim and Orlando), Disney believes that it can
have more than one park per region. Another strategically
located park in Asia, officials agreed, would not compete
with Tokyo Disneyland, Hong Kong Disneyland, or
Shanghai Disneyland, but rather bring in a new set of
customers.
One such strategic location is the state of Johor in
Malaysia. Malaysian officials wanted to develop Johor in
order to rival its neighbor, Singapore, as a tourist attrac-
tion. (Two large casinos were built in Singapore in 2006.)
However, Disney claimed to have no existing plans or
discussions for building a park in Malaysia. Alannah
Goss, a spokeswoman for Disney’s Asian operations
based in Hong Kong, said, “We are constantly evaluating
strategic markets in the world to grow our park and resort
business and the Disney brand. We continue to evaluate
markets but at this time, we have no plans to announce
regarding a park in Malaysia.”34
Singapore, in its effort to expand its tourism industry,
had also expressed interest in being host to the next Dis-
neyland theme park. Although rumors of a Singapore
Disneyland were quickly dismissed, some reports sug-
gested there were exploratory discussions of locations at
either Marina East or Seletar. Residents of Singapore
expressed concern that the park would not be competitive,
even against the smaller-scale Hong Kong Disneyland.
Their primary fears included limited attractions (based on
size and local regulations), hot weather, and high ticket
prices.
Disney’s Future in Asia
Although Disney is wise to enter the Asian market with
its new theme parks, it still faces many obstacles. One is
finding the right location. Lee Hoon, professor of tourism
management at Yanyang University in Seoul, noted,
“Often, more important than content is whether a venue
is located in a metropolis, whether it’s easily accessible
by public transportation.” Often tied to issues of location
is the additional threat of competition, both from local
attractions and from those of other international corpora-
tions. It seems that Asian travelers are loyal to their local
attractions, evidenced by the success of South Korea’s
Everland theme park and Hong Kong’s own Ocean Park
(which brought in more visitors than Hong Kong Disney-
land in 2006).35 The stiff competition of the theme park
industry in Asia will center on not only which park can
create a surge of interest in its first year but also which
can build a loyal base of repeat customers.
Despite its already large size, the Asian theme park
industry is still developing. Disney officials will need to
In-Depth Integrative Case 2.1b Disney in Asia 277
project? What do you think is the likelihood that it
will “cannibalize” the Hong Kong park?
4. What location would you recommend for Disney’s
next theme park in Asia? Why?
Source: This case was prepared by Courtney Asher under the supervision of Professor
Jonathan Doh of Villanova University as the basis for class discussion. Additional
research assistance was provided by Benjamin Littell. It is not intended to illustrate
either effective or ineffective managerial capability or administrative responsibility.
Questions for Review
1. What cultural challenges are posed by Disney’s
expansion into Asia? How are these different from
those in Europe?
2. How do cultural variables influence the location
choice of theme parks around the world?
3. Why was Disney’s Shanghai theme park so contro-
versial? What are the risks and benefits of this
1. Raymond H. Lopez, “Disney in Asia, Again?”
March 2002, http://appserv.pace.edu/emplibrary/
FINAL.Asiacasestudy .
2. Ibid.
3. Thomas Crampton, “Disney’s New Hong Kong Park
to Be ‘Culturally Sensitive’: Mickey Mouse Learns
Chinese,” International Herald Tribune, January 13,
2003, www.iht.com/articles/2003/01/13/disney_
ed3__0.php.
4. Michael Schuman, “Disney’s Hong Kong Head-
ache,” Time, May 8, 2006, www.time.com/time/mag-
azine/article/0,9171,501060515-1191881,00.html.
5. Kim Soyoung and George Chen, “Hollywood
Chases Asia Theme Park Rainbow,” Reuters Busi-
nessNews, May 23, 2007, www.reuters.com/article/
businesspro-hollywood-studios-asia-dc-idUS-
SEO35257720070523.
6. Chuan Xu and Nicole Liu, “Hong Kong Disneyland
Reports Loss for 2015 as Number of Visitors
Drops,” Los Angeles Times, February 16,
2016, www.latimes.com/entertainment/envelope/
cotown/la-et-ct-hong-kong-disneyland-loss-
20160216-story.html.
7. “Cuts Cloud Hong Kong Disneyland Expansion,”
Financial Times, March 17, 2009, https://www.ft.
com/content/c59c5a72-12bb-11de-9848-
0000779fd2ac.
8. “Hong Kong Disneyland’s Future Is in Dan-
ger,” BusinessWeek, March 17, 2009, http://www.
bloomberg.com/news/articles/2009-03-17/hong-
kong-disneylands-future-is-in-danger.
9. Ibid.
10. “Disney Puts Hong Kong Expansion on
Hold,” Reuters, March 16, 2009, www.reuters.com/
article/industryNews/idUSTRE52G0I120090317.
11. “Hong Kong Disneyland’s Future Is in Danger.”
12. Ibid.
13. “Disney, Hong Kong Reach $465m Expansion
Deal,” China Daily, June 30, 2009, www.chinadaily.
com.cn/china/2009–06/30/content_8338445.htm.
14. Ricky Brigante, “Mystic Point Grand Opening Cel-
ebrated at Hong Kong Disneyland with Debut of
Groundbreaking Mystic Manor Dark Ride,” Inside
the Magic, May 16, 2013, www.insidethemagic.
net/2013/05/mystic-point-grand-opening-celebrated-
at-hong-kong-disneyland-with-debut-of-groundbreak-
ing-mystic-manor-dark-ride/.
15. Lopez, “Disney in Asia, Again?”
16. Tammy Tam, “China’s Two Disneylands: Competi-
tors or Complementary Attractions?” South China
Morning Post, January 31, 2016, www.scmp.com/
news/hong-kong/economy/article/1907607/chinas-
two-disneylands-competitors-or-complementary.
17. “Disney’s Shanghai Park Plan in Doubt: Company
Mulls Move to Another Location in China,” NBC-
News.com, December 11, 2006, www.nbcnews.com/
id/16153207/ns/business-world_business/t/disneys-
shanghai-park-plan-doubt/#.WDJZb-YrKUk.
18. J. T. Areddy and P. Sanders, “Disney’s Shanghai
Park Plan Advances,” The Wall Street Journal, Jan-
uary 12, 2009, p. A1.
19. Ibid.
20. “The Speculation Ends—Shanghai Disney Ready to
Roll,” January 13, 2009, CN News, www.china.org.
cn/business/news/2009-01/13/content_17101032.htm.
21. “Walt Disney, Shanghai Propose New Theme Park
in China (Update 1),” Bloomberg, January 9,
2009, www.bloomberg.com/apps/news?pid=2060108
0&sid=atGa2ymXAMM8&refer=asia.
22. Areddy and Sanders, “Disney’s Shanghai Park Plan
Advances.”
23. Samuel Shen and Sue Zeidler, “Disney Takes China
Stride as Shanghai Park Gets Nod,” Reuters,
November 4, 2009, www.reuters.com/article/
idUSTRE5A31TC20091104.
24. “Shanghai Disney to Get Approved Land in
July,” China Daily, April 4, 2010, www.chinadaily.
com.cn/china/2010–04/14/content_9730662.htm.
25. Thomas Smith, “Shanghai Disney Resort Ground-
breaking Ceremony Marks Historic Day,” Disney,
ENDNOTES
278 Part 2 The Role of Culture
33. Sung, “Hong Kong Disneyland Profits Up 36pc
Despite Slowdown in Visitor Growth.”
34. “Malaysia Discussing Building Disney Park: Would
Be First Such Attraction in Southeast Asia,” Associ-
ated Press, May 30, 2006, www.msnbc.msn.com/
id/13045465/.
35. Soyoung and Chen, “Hollywood Chases Asia
Theme Park Rainbow.”
36. “Visitors Hit Record at USJ, Fall at Tokyo Disney
Resort,” Japan Times, October 1, 2015, www.
japantimes.co.jp/news/2015/10/01/business/
corporate-business/visitors-hit-record-usj-fall-tokyo-
disney-resort/#.VtIJ8_krLRY.
37. Hana R. Alberts, “Tokyo Disneyland? Asia’s Top
12 Amusement Parks,” February 13, 2010,
www.ctvnews.ca/tokyo-disneyland-asia-s-top-
12-amusement-parks-1.483175.
38. Ibid.
39. McKinsey, Global Media Report 2015 (December
2015).
40. “FAQ,” Disney English, http://disneyenglish.
disneycareers.com/en/faq/general/.
April 8, 2011, https://disneyparks.disney.go.com/
blog/2011/04/shanghai-disney-resort-groundbreak-
ing-ceremony-marks-historic-day/.
26. David Barboza and Brooks Barnes, “How China
Won the Keys to Disney’s Magic Kingdom,” New
York Times, June 14, 2016, www.nytimes.com/2016/
06/15/business/international/china-disney.html.
27. Shen and Zeidler, “Disney Takes China Stride as
Shanghai Park Gets Nod.”
28. Mandy Zuo and Nikki Sun, “How Shanghai Dis-
neyland’s Tickets Will Cost More (and Less) Than
Hong Kong’s,” South China Morning Post, Febru-
ary 3, 2016, www.scmp.com/news/china/money-
wealth/article/1908881/how-shanghai-disneylands-
tickets-will-cost-more-and-less.
29. Tam, “China’s Two Disneylands.”
30. Shen and Zeidler, “Disney Takes China Stride as
Shanghai Park Gets Nod.”
31. Timmy Sung, “Hong Kong Disneyland Profits Up
36pc Despite Slowdown in Visitor Growth,” South
China Morning Post, February 10, 2015, www.
scmp.com/news/hong-kong/article/1708237/hong-
kong-disneyland-profits-36pc-despite-slowdown-visi-
tor-number.
32. Frederik Balfour, “Disney Shanghai: Good for
China, Bad for Hong Kong,” BusinessWeek,
November 5, 2009.
279
operations, with 6,300 stores and more than 900,000 asso-
ciates in 27 countries outside the continental U.S.5 (See
Exhibit 1.) According to international chief C. Douglas
McMillon, Walmart is “progressing from being a domes-
tic company with an international division to being a
global company.” In two decades Walmart International
has become a $100 billion business. If it were a stand-
alone company, it would rank among the top five global
retailers.6 (See Exhibit 2.) Walmart International’s
Introduction
In 1991, Walmart became an international company when
it opened a Sam’s Club near Mexico City. Just two years
later, Walmart International was created. Since venturing
into Mexico in 1991, Walmart International has grown
somewhat erratically. During the 1990s, the retailer
exported its big-box, low-price model, an approach the
company expected to be as successful in foreign markets
as it was in the United States. Although Walmart has had
success in several overseas markets, this success has been
far from universal. For example, in Mexico, China, and the
U.K., the company’s efforts to offer the lowest price to
customers backfired because of resistance from established
retailers. And in Germany, Walmart could not seem to fit
its model to local tastes and preferences. In Japan, its joint
venture had a series of setbacks, many related to buying
habits for which the Walmart model did not respond well.
In Mexico, three of the largest domestic retailers con-
structed a joint buying and operational alliance solely to
compete with Walmart.1 Its presence in Hong Kong ended
after only two years during the 1990s, and it shuttered
operations in Indonesia in the mid-1990s after rioting inci-
dents in Jakarta. Walmart also owned approximately 16
stores in South Korea and 85 in Germany; however, it sold
off these operations in 2006 after merchandise failed to
match consumer tastes, distribution and re-bagging prob-
lems arose, and strong loyalties to other brands made
attracting customers difficult and expensive.2
In addition, labor advocates and environmentalists have
created headaches for the U.S. behemoth, making contin-
ued expansion both cumbersome and expensive. For
instance, in 2006, Walmart faced a strong public relations
campaign from the All-China Federation of Trade Unions
(ACFTU) over Walmart’s refusal to let its workers in
China unionize. Walmart was eventually forced to con-
cede, perhaps because the Chinese government also lent
its weight to the ACFTU’s campaign in its effort to estab-
lish unions in all foreign-funded enterprises throughout
the country.3 Despite its public battle with the ACFTU,
Walmart China received the Howard Award for “Most
Respectable Foreign Enterprise in China” in 2014.4 As
Walmart continues to expand its global operations, ana-
lysts are curious to see how the company is received and
whether consumers’ opinions in fragmented market set-
tings are a match with Walmart’s low-price model.
Notwithstanding these challenges, today Walmart
International is a fast-growing part of Walmart’s overall
In-Depth Integrative Case 2.2
Walmart’s Global Strategies
Exhibit 1 Walmart International Operations, June 2015
Retail Units
Market (June 2015) Date of Entry
Mexico 2,360 November 1991
Canada 400 November 1994
Brazil 499 May 1995
Argentina 108 August 1995
China 433 August 1996
United Kingdom 621 July 1999
Japan 346 March 2002
Costa Rica 225 September 2005
El Salvador 91 September 2005
Guatemala 223 September 2005
Honduras 82 September 2005
Nicaragua 88 September 2005
Chile 399 January 2009
India 21 May 2009
Source: “Where in the World Is Walmart?” Walmart, http://corporate.walmart.com/our-
story/our-locations (last visited March 3, 2016).
Exhibit 2 The Largest Global Retailers, 2014
Walmart $476bn
$105bn Costco
$99bn Carrefour
$99bn
$99bn
Lidl
Tesco
$98bn Kroger
$86bn Metro Ag
$81bn Aldi
$79bn Home Depot
$73bn Target
Source: Original graphic created based on information from Deloitte (www2.deloitte.
com/an/en/pages/about-deloitte/articles/consumerbusiness.html).
280 Part 2 The Role of Culture
Walmart Early Internationalization
In venturing beyond its large domestic market, Walmart
had a number of regional options, including entering
Europe, Asia, or other countries in the Western hemi-
sphere. (See Exhibits 3 and 4.) At the time, however,
Walmart lacked the requisite financial, organizational, and
managerial resources to pursue multiple countries simul-
taneously. Instead, it opted for a logically sequenced
approach to market entry that would allow it to apply the
learning gained from its initial entries to subsequent ones.
In the end, during the first five years of its globalization
(1991 to 1995), Walmart decided to concentrate heavily
on establishing a presence in the Americas: Mexico,
Brazil, Argentina, and Canada. Obviously, Canada had the
business environment closest to the U.S. and appeared
to be the easiest entry destination. The other countries
that Walmart chose as its first global points of entry—
business represents a solid chunk of Walmart’s overall
$482 billion in revenue for the fiscal year 2015.7
With a market capitalization of more than $200 billion
in 2016, Walmart is worth as much as the gross domestic
product of Algeria. Four of America’s 10 richest indi-
viduals are from Walmart’s low-profile Walton family,
which still owns a 40 percent controlling stake. The com-
pany’s portfolio ranges from superstores in the U.S. to
neighborhood markets in Brazil, bodegas in Mexico, the
ASDA supermarket chain in Britain, Japan’s nationwide
network of Seiyu shops, and a controlling stake in South
African retailer Massmart. Walmart sources many of its
products from low-cost Chinese suppliers. The pressure
group China Labour Watch estimates that if it were a
country, Walmart would rank as China’s seventh largest
trading partner, just ahead of the U.K., spending more
than $18 billion annually on Chinese goods.8
Exhibit 3 Walmart International Retail Unit Count (2001–2006)
Country 2001 2002 2003 2004 2005 2006
Argentina 11 11 11 11 11 11
Brazil 20 22 22 25 149 295
Canada 174 196 213 235 262 278
China 11 19 26 34 43 56
Germany 94 95 94 92 91 88
Japan 0 0 0 0 0 398
Mexico 499 551 597 623 679 774
Puerto Rico 15 17 52 53 54 54
UK 241 250 258 267 282 315
South Korea 6 9 15 15 16 16
Total 1,071 1,170 1,288 1,355 1,587 2,285
Source: Walmart Annual Reports for fiscal years 2001, 2002, 2003, 2004, 2005, 2006.
Exhibit 4 Walmart International Retail Unit Count (2006–2015)
Country 2007 2008 2009 2010 2011 2012 2013 2014 2015
Argentina 13 21 28 43 63 88 94 104 105
Brazil 299 313 345 434 479 512 558 556 557
Canada 289 305 318 317 325 333 379 389 394
Chile 0 0 197 252 279 316 329 380 404
China 73 202 243 279 328 370 393 405 411
Costa Rica 137 149 164 170 180 200 205 214 217
El Salvador 63 70 77 77 78 79 80 83 89
Guatemala 132 145 160 164 175 200 206 209 217
Honduras 41 47 50 53 56 70 72 75 81
India 0 0 0 1 5 15 20 20 20
Japan 392 394 371 371 414 419 438 438 431
Mexico 889 1,023 1,197 1,469 1,730 2,088 2,353 2,199 2,290
Nicaragua 40 46 51 55 60 73 79 80 86
Puerto Rico 54 54 56 56 55 56 55 56 55
UK 335 352 358 371 385 541 565 576 592
Total 2,757 3,121 3,615 4,112 4,612 5,360 5,826 5,784 5,949
Source: Walmart Annual Reports for fiscal years 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015.
In-Depth Integrative Case 2.2 Walmart’s Global Strategies 281
business in over 145 cities throughout Mexico. Opening
nearly 100 stores in 2015, Wal-Mex has shown no signs
of slowing down. As of 2016, it operated over 2,200
stores in Mexico.14
The rapid growth of Wal-Mex over the last decade has
not been problem-free. A 2012 report by the New York
Times uncovered widespread bribery occurring at the
Wal-Mex executive level, resulting in a three-year-long
corruption investigation by the U.S. Justice Department.
According to the New York Times report, a senior Walmart
lawyer was contacted by a former executive at Walmart
de Mexico in September 2005. In the e-mail and follow-
up conversations, the former executive (later identified as
the lawyer in charge of obtaining construction permits for
Walmart de Mexico) indicated that Walmart de Mexico
had paid bribes for permits throughout the country to fuel
growth prospects. In response, Walmart dispatched inves-
tigators to Mexico City. Those investigators found over-
whelming evidence of bribery and hundreds of suspect
payments totaling more than US$24 million. The investi-
gation also found that Walmart de Mexico’s top execu-
tives had taken steps to conceal the evidence from
Walmart’s headquarters.15 Shortly after the investigation
commenced, Walmart warned shareholders that its reputa-
tion could be affected by the bribery scandal. Shares
dropped by 5 percent in April 2015, representing approx-
imately US$10 billion in value. Walmart noted that inqui-
ries from media and law enforcement could affect the
“perception among certain audiences of its role as a cor-
porate citizen.”16 Between 2012 and 2015, roughly two
dozen representatives from the U.S. Justice Department,
FBI, SEC, and IRS became involved in the investigation.17
In the wake of the investigation and bribery charges,
Walmart has created a new executive position to ensure
that all Walmart employees are complying with the U.S.
Foreign Corrupt Practices Act.18
In late 2006 the company was also approved by Mexico’s
Finance Ministry to open its own bank. In a country
where 75 percent of citizens have never had a bank
account due to high fees, “Banco Walmart de Mexico
Adelante” added much-needed competition to the finan-
cial services industry and offered consumers lower fees
than traditional banks.19 In November 2007, Wal-Mex
opened its first consumer bank, Banco Walmart, in Toluca;
by December 2014, the company had opened branches in
2,100 stores. Banco Walmart especially targeted the low-
income market in a country where just 24 percent of
households have savings accounts, compared with 55 per-
cent in Chile. In the short term, this strategy included
luring newcomers with easy instructions and entry points,
like minimum balances of less than $5 and no commis-
sions, compared with $100 minimums at competing
banks. Long term, Wal-Mex’s plans included boosting
sales via debit cards and easing users into more profitable
services like insurance. In 2014 alone, credit card sales
Mexico (1991), Brazil (1994), and Argentina (1995)—were
those with the three largest populations in Latin America.9
The European market had certain characteristics that
made it less attractive to Walmart as a first point of entry.
The European retail industry was mature, implying that a
new entrant would have to take market share away from
an existing player—a very difficult task. Additionally,
there were well-entrenched competitors on the scene (e.g.,
Carrefour in France and Metro A.G. in Germany) that
would likely retaliate vigorously against any new player.
Further, as with most newcomers, Walmart’s relatively
small size and lack of strong local customer relationships
would be severe handicaps in the European arena. In addi-
tion, the higher growth rates of Latin American and Asian
markets would have made a delayed entry into those mar-
kets extremely costly in terms of lost opportunities. In
contrast, the opportunity costs of delaying acquisition-
based entries into European markets appeared to be rela-
tively small.10
While the Asian markets had huge potential when
Walmart launched its globalization effort in 1991, they
were the most distant geographically and different cultur-
ally and logistically from the U.S. market. It would have
taken considerable financial and managerial resources to
establish a presence in Asia.11 However, by 1996, Walmart
felt ready to take on the Asian challenge and it targeted
China. This choice made sense in that the lower purchas-
ing power of the Chinese consumer offered huge potential
to a low-price retailer like Walmart. Still, China’s cultural,
linguistic, and geographical distance from the United
States presented relatively high entry barriers, so Walmart
decided to use two beachheads as learning vehicles for
establishing an Asian presence.12
During 1992–93, Walmart agreed to sell low-priced
products to two Japanese retailers, Ito-Yokado and Yao-
han, that would market these products in Japan, Singa-
pore, Hong Kong, Malaysia, Thailand, Indonesia, and the
Philippines. Then, in 1994, Walmart entered Hong Kong
through a joint venture with the C.P. Pokphand Company,
a Thailand-based conglomerate, to open three Value Club
membership discount stores in Hong Kong.13
Success in Mexico and China
Overall, Walmart has had a very successful experience in
Mexico. In 1991 Walmart entered into a joint venture with
retail conglomerate Cifra and opened a Sam’s Club in
Mexico City. In 1997 it gained a majority position in the
company and in 2001 changed the store name to Walmart
de Mexico, or, more commonly, “Wal-Mex.” In addition
to its 256 Walmart Supercenters and 161 Sam’s Club
warehouses, Wal-Mex also operates Bodega food and gen-
eral merchandise discount stores, Superama supermarkets,
and Suburbia apparel stores. The majority of its stores are
located in and around Mexico City; however, it does
282 Part 2 The Role of Culture
high-quality general merchandise and food. Germany was
seen as the largest single base for retailing in Europe.
Wertkauf’s annual sales were about $1.4 billion, and its
stores operated similar to the popular Walmart Super-
center format in the U.S. Walmart’s executives considered
Wertkauf as an “excellent fit” for Walmart and hoped that
it would provide the company with an ideal entry into a
new market.30
However, Walmart’s operations in Germany quickly
turned into a costly struggle. There were a number of
critical factors that the company underestimated when it
entered the new market. First of all, the stores of the
acquired German retail chain were geographically dis-
persed and often in poor locations. Also, Walmart had
faced some serious cultural differences, which it tried to
resolve by making one error after another. For example,
the company initially installed American managers, who
made some well-intentioned cultural gaffes, like offering
to bag groceries for customers (Germans prefer to bag
their own groceries) or instructing clerks to smile at cus-
tomers (Germans, used to brusque service, were put off).31
Other problems, however, were largely outside
Walmart’s control. Two German discounters, Aldi and
Lidl, dominated the grocery business, with smaller shops
that featured cut-rate, though still good-quality, food. Aldi
also heavily promoted one-week sales, featuring deeply
discounted merchandise, ranging from wine to garden
hoses, that draw customers back. While Walmart’s vast
size gave it enormous leverage in purchasing clothing and
other goods, it had to buy much of the food for its German
stores locally. And there, it lacked the muscle of Aldi,
which had 4,100 shops and a presence in nearly every
town in the country.32
“Germany is the home of the discounter,” said Mark
Josefson, a retail analyst at Kepler Securities in Frankfurt.
“Walmart is not competing on price, and that is one of its
main attributes in its home market.” Beyond these com-
petitive pressures, there was another serious factor to con-
sider, namely that the German consumer was one of the
most parsimonious and price-conscious in Europe. Profit
margins in German retailing were the lowest in Europe.33
Walmart struggled in Germany for almost 8 years.
Analysts said that Walmart Germany was losing about
€200 million (£137 million) a year on a turnover of about
€2 billion, despite several attempts to turn around the
business. In 2006 it finally made the decision to withdraw
from the German market, by selling its 85 German stores
to the rival supermarket chain Metro and taking a pre-tax
loss of about $1 billion (£536 million) on the failed ven-
ture.34 The decision to sell out to the Metro Group came
two months after Walmart sold its 16 stores in South
Korea and it appeared a rare retreat by the world’s largest
retailer from its breakneck global expansion.35
In contrast, Walmart’s second retail destination in
Europe, the United Kingdom, has brought the company
grew by 50 percent, with over a half of a million active
credit card users in total. Later that year, Wal-Mex cashed
in on the successes of Banco Walmart by selling the busi-
ness to Inbursa for US$250 million.20,21
Wal-Mex’s plans for future growth involve more heav-
ily targeting the 16–24-year-old age group, which consti-
tutes 55 percent of Mexico’s population. In 2016, Mexico
ranked as Walmart’s number one international destination
with over 2,300 retail outlets, far ahead of its second
major international destination, the United Kingdom,
which had only 600 stores.22 In 2014, Walmart de Mexico
was a top performer globally with a gross margin of 22
percent and 9.7 percent growth in operating income over
the previous year.23
Though not as easy as its experience in Mexico,
Walmart has also found decent success in China. Walmart
entered the Chinese market in 1996 when it opened a
Supercenter and Sam’s Club in Shenzen. As of 2016 the
company had expanded to 433 stores with over 100,000
employees. In order to cater to its Chinese shoppers,
Walmart has introduced “retail-tainment” and attempted
to create a more hands-on shopping experience.24 China’s
Tourism Bureau even named one underground Walmart
store a tourist destination.25
In addition to its own stores, Walmart has had a stake
in the Taiwanese Bounteous Company Ltd., which owned
the popular chain of Trust-Mart stores.26 In late 2006, The
Wall Street Journal publicized a $1 billion deal between
Walmart and Bounteous, in which Walmart would acquire
Trust-Mart’s 100 stores over the course of three years. In
light of Walmart’s slowing U.S. sales and the termination
of its operations in Germany and South Korea, the com-
pany’s expansion in China is quite timely. Like its opera-
tions in Mexico, Walmart has also entered the Chinese
financial service industry, by introducing a credit card
with Bank of Communications Ltd.27
Walmart’s expansion has not gone unnoticed. Domestic
Chinese rivals have also built up their businesses in order
to compete. Shanghai Bailan Group purchased four rival
supermarkets and department stores nearly a decade ago,
now employing over 200,000 and operating over 6,000
stores.28 China Resources Enterprise has hired away man-
agers from foreign chains and cut staff in order to increase
its profitability.29 While these efforts signal greater com-
petition for Walmart in particular, they are necessary for
domestic companies to survive in China’s $4 trillion retail
market, which has been increasingly competitive ever
since the country joined the WTO and dropped restrictions
on foreign retailers.
Mixed Results in Europe and Japan
In 1998 Walmart entered the European market through
Germany by acquiring 21 Wertkauf hypermarkets, one-
stop shopping centers that offered a broad assortment of
In-Depth Integrative Case 2.2 Walmart’s Global Strategies 283
the store. Taking a page from Britain’s ASDA, Seiyu
instead used its marketing dollars to compare prices
against competitors. With the pressure of prolonged reces-
sion, Japanese consumers have finally accepted that they
can buy quality merchandise for a lower price.41 After
spending 100 billion yen (roughly $1.2 billion), Walmart’s
situation in Japan had stabilized by 2010, with two years
of consistent profits.42 As of 2016, Walmart holds at about
440 Seiyu stores across Japan.
Refocusing on Latin America
The year 2005 became another turning point in Walmart’s
strategy. Somewhat frustrated by strategic failure in Ger-
many, and very slow expansion in the developed countries
like Canada and the U.K., the company has turned its
focus toward Latin America. Walmart has decided to
leverage its positive experience in Mexico toward other
South American countries. In 2005 Walmart successfully
entered this market with the purchase of a 33-1/3 percent
interest in Central American Retail Holding Company
(CARHCO) from the Dutch retailer Royal Ahold NV.
CARHCO is Central America’s largest retailer, with
363 supermarkets and other stores in the following five
countries: Guatemala (120), El Salvador (57), Honduras
(32), Nicaragua (30), and Costa Rica (124). CARHCO has
approximately 23,000 associates. Its sales during 2004
were approximately $2.0 billion.43
Prior to that, in March 2004, Walmart bought a
118-store supermarket chain, Bompreco, in northeastern
Brazil for $300 million, also from Royal Ahold of the
Netherlands. This acquisition has significantly increased
Walmart’s competitive position in the country. In 2006 the
company made another successful deal with Portugal-
based Sonae by purchasing its 140 Brazilian stores for
$757 million. The Sonae purchase was expected to boost
Walmart’s presence in Brazil’s wealthier southern states.
With the Sonae acquisition, the Walmart store count
increased to 295 units in 17 of Brazil’s 26 states. How-
ever, this move made Walmart only the third-largest
retailer in Brazil, following Carrefour of France and Com-
panhia Brasileira de Distribuio Po de Acar.44
Brazilian operations, however, have struggled in recent
years. Frustrated by lackluster operating profit margins,
Walmart invested US$22 billion between 2010 and 2015
in capital improvements to spur sales in Brazil. Between
2007 and 2013, the number of Walmart locations across
Brazil doubled. Despite the investment, sales growth con-
tinued to stall. By 2013, Walmart had posted its fifth con-
secutive operating loss in Brazil. In December 2015,
Walmart strategically closed 60 stores across Brazil, rep-
resenting 10 percent of its operations.45
Another step in the sequence of its strategic moves in
Latin America was Walmart’s expansion into Chile. In
2009 Walmart acquired a majority stake of D&S’s (short
much-needed success. Walmart entered the U.K. market
in June 1999 by acquiring ASDA Group PLC, Britain’s
third-largest food retailer. Walmart offered £6.7 billion
($10.8 billion). The cash deal, which topped a rival bid
from the British retail group Kingfisher PLC, was pre-
dicted to double Walmart’s international business at a
stroke and put it in a position to expand its retailing exper-
tise throughout Europe.36
Walmart executives said they hoped to draw upon
ASDA’s management talent and experience. ASDA’s
stores are a little less than half the size of Walmart’s
supercenters of more than 200,000 square feet (18,000
square meters) in the United States, but the lack of space
in much of Europe for new out-of-town shopping develop-
ments could make ASDA’s formula more relevant as a
platform for expansion.37
However, while the chain has been only a moderate
success, delivering consistent results, Walmart has been
frustrated in its efforts to expand, though competing in
Britain’s feverishly competitive supermarket industry has
taught Walmart a good deal. Nevertheless, ASDA is now
something of a center for excellence for its global grocery
sales. The head of global marketing for Walmart is based
at ASDA’s head office in Leeds. And, in an example of
Walmart’s global distribution muscle, The Wall Street
Journal recently reported that the best-selling wine in the
whole of Japan is an own-label ASDA Bordeaux.38
The third major strategic step in Walmart’s early 2000s
global expansion was entering the Japanese market. In
2002 Walmart set foot in Japan with the purchase of a 6
percent stake in the 371-store Seiyu chain. Despite con-
tinued losses, Walmart gradually raised its stake, making
Seiyu a wholly owned subsidiary in June 2008. Walmart
has had to confront numerous issues in Japan, from long-
time Seiyu managers resisting its initiatives to a tendency
among Japanese shoppers to equate low prices with infe-
rior products. Also, bulk deals did not play well in a coun-
try where many lived in small urban apartments, and the
country’s grocery distribution system was populated with
wholesalers who brokered deals between suppliers and
retailers, skimming profits. Even rival Carrefour aban-
doned this market.39
Edward J. Kolodzieski was the man in charge of turn-
ing Seiyu around. As CEO of Walmart Japan, Kolodzieski
has slashed expenses, closed 20 stores, and cut 29 percent
of corporate staff. In-store butchers were removed, with
most meat now processed in a central facility. With the
freed-up floor space, Seiyu bulked up meals-to-go offer-
ings. To bypass the middlemen, Seiyu has also boosted
the number of products it imports directly from manufac-
turers by 25 percent in 2009, and also focused on increas-
ing sales of its own private-label brands.40
The biggest change, however, was a shift away from
weekly specials to “everyday low prices” in areas like
baby care and pet products, and, eventually, throughout
284 Part 2 The Role of Culture
115 new stores, creating 30,000 new jobs. The new stores
will increase Walmart China’s total store count to 530.
Additionally, Walmart will invest US$60 million to
remodel and refresh a portion of the existing Chinese
stores that it operates.51
Rather than being the “largest” retailer in China,
Walmart is aiming to be the most trusted. This long-term
goal includes improving the perceived quality of the
goods it sells. Though online retailer Alibaba still holds
a dominant lead in online market share, part of Walmart’s
strategy includes embracing online sales. In 2012, the
company acquired Yihaodian, an online retailer that sells
perishable goods, and in 2015, Walmart released a cell
phone app to provide consumers with the ability to order
products for either home or in-store delivery.52
India
The other attractive growing market from the BRIC group
that also drew Walmart’s attention is India. India is widely
regarded as one of the world’s fastest-growing retail mar-
kets—and one of the most frustrating for foreign retailers.
Despite the liberalization of the Indian economy, foreign
companies are still prohibited from owning a majority
stake in grocery stores. Due to the legal and logistical
difficulties of entering the Indian marketplace, Walmart
has adopted a strategy of partnering with local companies.
Walmart originally joined with the Bharti Group, an
Indian conglomerate, to form a joint venture intended to
open stores under the Best Price Modern Wholesale brand
name. During their five-year partnership, Walmart and the
Bharti Group opened 20 stores in urban centers across
India. Though the partnership was amicably dissolved in
2013, Walmart remains open to using the joint-venture
approach as it expands across the country.53
In the summer of 2015, Walmart announced aggressive
expansion plans with a renewed focus on wholesaling
stores as opposed to traditional retail. While government
restrictions prevent majority ownership of grocery stores
by foreigners, there are no restrictions over wholesalers.
By 2020, Walmart plans to open 50 new stores, more than
tripling its current number. These new stores, acting as a
one-stop shop for a variety of grocery-type items, are tar-
geting small business owners as customers, rather than
everyday consumers. In total, Walmart will invest between
US$240 and US$300 million in the Indian market, creat-
ing 2,000 permanent jobs.54,55,56
Canada
Established in 1994 and headquartered in Mississauga,
Ontario, Walmart Canada currently operates 394 stores
and serves more than 1 million customers each day across
Canada. Walmart is Canada’s third-largest employer with
more than 90,000 associates and was recently named one
of Canada’s top ten corporate cultures by Waterstone
Human Capital.57
for Distribución y Servicio) 224-store chain for $1.6 bil-
lion. In acquiring D&S, the nation’s leading grocer and
third-largest retailer, Walmart hopes to cement its domi-
nance in Latin America, where it is by far the biggest
retailer with $38 billion in sales, estimates research firm
Planet Retail, double that of its closest rival, Carrefour. In
Chile, Walmart enters a market that has long been inhos-
pitable to foreign retailers. Home Depot, Carrefour, and
JCPenney are among the companies that have tried, and
failed, to make it in Chile, a nation of 17 million with the
sixth-largest retail market in Latin America.46
Walmart has increased D&S’s expansion budget from
$150 million to $250 million, which would go toward
opening nearly 70 stores in fiscal year 2010, many of
them small stores that cater to lower-income shoppers,
according to Vicente Trius, Walmart Latin America’s
president and CEO. The appeal of D&S goes well beyond
its stores. About 1.7 million Chileans carry a Presto card
issued by its financial services unit, up from 1.2 million
in 2004. “There is a saying here that large retailers gener-
ate sales with [stores] and earnings with their credit
cards,” says Rodrigo Rivera, a partner with the Boston
Consulting Group in Santiago.47
Indeed, analysts estimate some South American retail
chains generate upwards of 70 percent of their profits
from financial services. (At D&S that figure is just
17 percent.) Walmart already offers financial services in
Mexico and Brazil, though its attempts to launch a bank
in the U.S. have failed. The retailer is keen to grow the
Presto business by adding more low-risk services such as
selling life insurance for outside vendors.48
Walmart’s Plans for 2016 Forward
After several years of rapid international growth, Walmart
presented revised plans in 2016 aimed at retooling its
existing stores while continuing global expansion. Inter-
nationally, the company plans to refocus on neighborhood
stores and supercenters, which will better meet market
demands. Throughout 2016, Walmart identified and
closed 115 significantly underperforming international
locations, impacting roughly 6,000 employees. More than
half of the store closures occurred in Brazil, with the
remainder spread across South America.49
Despite the strategic closings, more than 200 new
international locations, consisting of supercenters and
local neighborhood stores, were opened internationally in
2016. This results in the largest, fastest international
expansion in Walmart’s history. In particular, the Indian,
Chinese, Canadian, and African markets are key to
Walmart’s future international strategy.50
China
In 2015, Walmart announced ambitious growth plans for
China. By the end of 2017, the company hoped to open
In-Depth Integrative Case 2.2 Walmart’s Global Strategies 285
improve the user interface. Unlike Amazon, which has no
physical stores, Walmart sees digital ordering with in-
store pickup as a unique niche with potentially high
growth. Grocery items, with the need to be refrigerated,
are not able to be easily fulfilled by other online retailers,
like Amazon, but are well-suited for in-store pickup at a
Walmart. Using the Walmart app, customers can order
groceries and other fresh food items and quickly pick up
their merchandise in person.
Walmart is also developing and modernizing its deliv-
ery and fulfillment systems. To a large degree, this means
emulating Amazon’s strategy. To compete with Amazon’s
“Prime” shipping services, Walmart has begun offering
“Shipping Pass,” which provides users with unlimited
three-day shipping on all online orders. Amazon Prime
has led to increased consumer loyalty, a benefit Walmart
also hopes to gain. To modernize its delivery services and
increase its ability to ship to all locations around the
world, Amazon is currently developing drone delivery
services. In 2015, Walmart also announced its intent to
utilize drones in the near future.
Building an extensive online infrastructure has the sec-
ondary benefit of increasing the variety of digital products
that companies like Amazon and Walmart can offer. Spe-
cifically, companies with a massive networking infrastruc-
ture can provide customers with online services, like
cloud storage, using the servers that they already have
purchased. Amazon first took advantage of this by offer-
ing free storage space to Prime members and to other
customers for a monthly fee. Walmart has followed by
introducing OpenOps, an open-source cloud service.
Despite the progress, Walmart’s online sales still lag
far behind Amazon’s. While Walmart’s product line con-
sists of nearly a million items, Amazon boasts over
19 million. In 2015, despite the introduction of its
“Walmart Pay” mobile wallet and millions in investment,
Walmart’s online sales grew only 12 percent. During the
same period, Amazon’s sales grew by 20 percent, further
increasing its already overwhelming lead in global online
sales. By the end of the year, Walmart recorded US$13.7
billion in online sales while Amazon recorded a record
US$107 billion, leading some to question if Walmart
could ever pose as a serious e-commerce challenger.64,65
Continued Challenges with Corporate
Responsibility
Like other retailers, Walmart continues to face challenges
from its exposure to the realities of production and sales
in emerging and developing regions. On the sales side, as
noted above, Walmart has been embroiled in corruption
scandals in Mexico and India. On the production side, 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
In January 2015, Walmart Canada announced that the
company will invest several hundred million dollars in
capital improvements over the following year. Plans
included opening 30 new supercenters by the end of the
fiscal year, adding 230,000 square feet of additional retail
space. In total, about 1,000 new permanent in-store jobs
will be created by the new stores, as well as 3,700 con-
struction jobs.58
In addition to store expansions, Walmart Canada is
investing tens of millions of dollars into its distribution
network and e-commerce projects. Walmart Canada’s
website currently receives 400,000 customers every day
and boasts 150,000 different items for sale. Online order-
ing, with in-store pickup, constitutes a portion of this cur-
rent e-commerce investment. Walmart’s focus on
improving its distribution centers is aimed at increasing
the company’s market share in the fresh food and grocery
sector. Approximately 300 permanent jobs will be added
to the distribution side of the business with these invest-
ments.59
Walmart Canada has leveraged the failure of other for-
eign retailers within Canada to its advantage. In 2015,
Target announced that it would be withdrawing from the
Canadian market, leaving a network of 133 empty big-box
retail spaces in its wake. In mid-2015, Walmart Canada
agreed to purchase 13 former Target locations, as well as
a distribution center.60
South Africa
Walmart first emerged in South Africa through its US$2.4
billion purchase of 51 percent of Massmart, the country’s
third-largest retailer, in 2010. Since then, Walmart has
been slow to expand. A lack of infrastructure has caused
headaches; at the current time, distribution networks
across the country are inconsistent, increasing the amount
of time that it takes products to reach consumers. Addi-
tionally, there are not enough shopping centers and malls
to accommodate stores as large as Massmart. In response,
Walmart is moving toward building standalone stores. In
2015, Walmart constructed 19 new ground-up
stores.61 Walmart also views South Africa as a bridge to
the rapidly emerging African marketplace. In 2015,
Walmart announced plans to enter Nigeria, and the
Massmart brand has plans to open a few stores in strategic
locations in Angola.62,63
Walmart’s Global.com Challenge
to Amazon.com
Sensing the shift towards digital sales in both developed
and developing economies, Walmart has heavily invested
in building its e-commerce infrastructure. The company
spent tens of billions in 2015 alone.
With more commerce being conducted on smart-
phones, Walmart introduced a new mobile app in 2015 to
286 Part 2 The Role of Culture
lessons did Walmart learn from its experience in
Germany and in Japan?
3. How would you characterize Walmart’s Latin
America strategy? What countries were targeted as
part of this strategy? What potential does this
region bring to Walmart’s future global expansion?
What cultural challenges and opportunities has
Walmart faced in Latin America?
4. What group of countries will be targeted for
Walmart’s future growth? What are the attractive-
ness and risk profiles of these countries? What
regions of the world do you think will be vital for
Walmart’s future global expansion?
5. How would you characterize Walmart’s response to
pressure for greater ethics and social responsibilities
in its expansion strategy and supply chain? Are its
responses appropriate and adequate?
Exercise
You are part of Walmart’s global strategic planning group
and have been asked to explore the benefits and chal-
lenges of expansion into the following regions. Divide
your group into six teams, each representing a country or
region of the world other than North America.
Team Country/Region
1 Latin America
2 Western Europe
3 Central/Eastern Europe
4 Japan
5 China
6 Russia
Describe the opportunities and challenges of expansion in
your assigned country or region. Be sure to summarize
the cultural environment, how it differs from the U.S., and
what challenges that might pose for the company.
Source: This case was prepared by Tetyana Azarova of Villanova University 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.
clothing brands to take greater responsibility for the work-
ing conditions of the factories from which they source
products. What happened in Bangladesh has underscored
the difficulties and vulnerabilities of outsourcing produc-
tion to sometimes unreliable and unethical suppliers.
In early 2013, more than 1,000 workers were killed
when an eight-story garment factory in Dhaka caught fire
while thousands worked inside. Not two weeks later, a fire
killed eight workers in another site in Bangladesh. After
initially denying it had production at these locations,
Walmart eventually confirmed that it had ordered gar-
ments from a supplier who utilized the plant.66 Then, on
June 11, another fire erupted at a Dickies garment factory
on the outskirts of Dhaka, causing employees to run from
the building, raising further questions about safety in
Bangladeshi factories.67
As a result, Walmart and the Gap Inc. subsequently
announced their signing of the Bangladesh Worker Safety
Initiative to ensure factory safety in Bangladesh. This
agreement, backed by a $50 million commitment, will be
overseen by the Bipartisan Policy Center, a nonprofit
group based in Washington. As part of this effort, various
U.S. retail trade groups who had been concerned about
the legal liability associated with the competing,
European-dominated agreement will join with Walmart
and the Gap.68 On June 25, 2013, the Obama administra-
tion announced it was suspending trade privileges with
Bangladesh, removing the country from the list of coun-
tries with most-favored-trade status. The move came after
pressure from unions and continuing concerns about the
Bangladeshi government’s ability to maintain safe work-
ing conditions in its factories.69 Walmart and other retail-
ers continue to struggle with how to manage extended
global supply chains with multiple layers of suppliers.
Questions for Review
1. What was Walmart’s early global expansion strat-
egy? Why did it choose to first enter Mexico and
Canada rather than expand into Europe and Asia?
2. What cultural problems did Walmart face in some
of the international markets it entered? Which early
strategies succeeded and which failed? Why? What
1. Jennifer McTaggart, “Walmart versus the World,”
Progressive Grocer, October 15, 2003, p. 20.
2. “‘Walmart’ in Japan Sees Losses,” Associated
Press, August 23, 2006, www.sptimes.com/2006/
08/23/Business/_Wal_Mart__in_Japan_s.shtml.
3. David Lague, “Unions Triumphant at Walmart in
China,” New York Times, October 12, 2006, www.
nytimes.com/2006/10/12/business/worldbusiness/
12iht-unions.3134329.html?_r=0.
4. “China Fact Sheet,” Walmart Inc., www.wal-
martchina.com/english/walmart/award.htm.
5. “Where in the World Is Walmart?” Walmart, http://
corporate.walmart.com/our-story/our-locations (last
visited March 3, 2016).
ENDNOTES
In-Depth Integrative Case 2.2 Walmart’s Global Strategies 287
23. “Financial Highlights,” Walmart México y Cen-
troamérica, www.walmex.mx/informe/2014/en/
fortaleza_financiera/datos.html.
24. Clay Chandler, “The Great Walmart of China,” For-
tune, July 25, 2005, money.cnn.com/magazines/
fortune/fortune_archive/2005/07/25/8266651/index.htm.
25. Pallavi Gogoi, “Walmart’s China Card,” Business-
Week, July 26, 2005.
26. “Walmart’s Cheap Doubling in China,” 24/7 Wall
Street, February 27, 2007, www.247wallst.
com/2007/02/walmarts_cheap_.html.
27. “Walmart Buys China Grocery Chain,” Wire Ser-
vices, October 17, 2006, www.sptimes.com/2006/10/
17/Business/Wal_Mart_buys_China_g.shtml.
28. Bailian Group, www.bailiangroup.cn/html/english/.
29. Gogoi, “Walmart’s China Card.”
30. “Walmart Reaches Agreement to Acquire German
Hypermarket Chain,” Business Wire, December 18,
1997, www.thefreelibrary.com/Wal-mart+Reaches+
Agreement+To+Acquire+German+Hypermarket+
Chain.-a020081857.
31. Mark Lander, “Walmart Gives Up Germany—
Business—International Herald Tribune,” New York
Times, July 28, 2006, www.nytimes.com/2006/07/28/
business/worldbusiness/28iht-walmart.2325266.html.
32. Ibid.
33. Ibid.
34. Allan Hall, Tom Bawden, and Sarah Butler,
“Walmart Pulls Out of Germany at Cost of $1bn,”
The Times, July 29, 2006.
35. Lander, “Walmart Gives Up Germany.”
36. Tom Buerkle, “$10 Billion Gamble in U.K. Doubles
Its International Business: Walmart Takes Big Leap
into Europe,” New York Times, June 15, 1999, https://
web.archive.org/web/20080226063515/http://www.iht.
com/articles/1999/06/15/walmart.2.t.php.
37. Ibid.
38. Clark, “Wal-Mart, the U.S. Retailer Taking Over
the World by Stealth.”
39. Boyle, “Walmart’s Painful Lessons.”
40. Ibid.
41. Ibid.
42. Mariko Sanchanta, “Wal-Mart Bargain Shops for
Japanese Stores to Buy,” The Wall Street Journal,
November 15, 2010, p. B1.
43. “Wal-Mart Announces Central American Invest-
ment,” Walmart, September 20, 2005, http://corpo-
rate.walmart.com/_news_/news-archive/2005/09/20/
wal-mart-announces-central-american-investment.
44. Gordon Platt, “Wal-Mart Bets Big on Brazil’s
Market,” Global Finance, January 1, 2006,
6. Matthew Boyle, “Walmart’s Painful Lessons,”
BusinessWeek, October 13, 2009, https://www.
dii.uchile.cl/wp-content/uploads/2011/05/13_
BUSINESS_WEEK_WalMarts_Painful_Lessons .
7. “Annual Reports & Proxies,” Walmart, http://stock.
walmart.com/investors/financial-information/annual-
reports-and-proxies/default.aspx.
8. Andrew Clark, “Wal-Mart, the US Retailer Taking
Over the World by Stealth,” Guardian, January 12,
2010, www.guardian.co.uk/business/2010/jan/12/
walmart-companies-to-shape-the-decade.
9. Vijay Govindarajan and Anil K. Gupta, “Taking
Walmart Global: Lessons from Retailing’s Giant,”
Strategy + Business, June 19, 2002, www.strategy-
business.com/article/13866?pg=all.
10. Ibid.
11. Ibid.
12. Ibid.
13. Ibid.
14. Walmart Annual Report 2015.
15. David Barstow, “Vast Mexico Bribery Case Hushed
Up by Wal-Mart after Top-Level Struggle,” New
York Times, April 21, 2012, www.nytimes.
com/2012/04/22/business/at-wal-mart-in-mexico-a-
bribe-inquiry-silenced.html?_r=1.
16. Stephanie Clifford, “Bribery Case at Wal-Mart May
Widen,” New York Times, May 17, 2012, www.
nytimes.com/2012/05/18/business/wal-mart-con-
cedes-bribery-case-may-widen.html?pagewanted=all.
17. Aruna Viswanatha and Devlin Barrett, “Wal-Mart
Bribery Probe Finds Few Signs of Major Miscon-
duct in Mexico,” The Wall Street Journal, October
19, 2015, www.wsj.com/articles/wal-mart-bribery-
probe-finds-little-misconduct-in-mexico-1445215737.
18. David Welch, “Wal-Mart Mexico Probe
Threatening Global Growth Success:
Retail,” Bloomberg BusinessWeek, April 25,
2012, www.bloomberg.com/news/articles/
2012-04-25/wal-mart-mexico-probe-threatening-
global-growth-success-retail.
19. Geri Smith, “In Mexico, Banco Walmart,” Business-
Week, November 20, 2006.
20. Carolyn Whelan, “Walmart Gets Its Bank—in
Mexico,” Fortune, January 29, 2008, http://archive.
fortune.com/2008/01/28/news/international/walmart_
bank.fortune/index.htm?section=money_latest.
21. Amy Guthrie, “Wal-Mart de Mexico Sells Bank
Business to Inbursa,” The Wall Street Journal,
December 18, 2014, www.wsj.com/articles/wal-
mart-de-mexico-sells-bank-business-to-inbursa-
1418941370?cb=logged0.9633912930255639.
22. Walmart Annual Report 2015.
288 Part 2 The Role of Culture
archive/2015/02/11/walmart-canada-announces-
expansion-plans-retailer-continues-to-accelerate-
food-and-e-commerce-growth.
59. Ibid.
60. Phil Wahba, “Target’s Loss Is Wal-Mart’s Gain in
Canada,” Fortune, May 8, 2015, http://fortune.
com/2015/05/08/walmart-target-canada/.
61. Tiisetso Motsoeneng, “Wal-Mart Makes Slow Prog-
ress Navigating Africa’s Challenges,” Reuters,
June 2, 2015, www.reuters.com/article/us-wal-mart-
stores-africa-idUSKBN0OI12V20150602.
62. “Massmart Announces Plans to Expand to Angola,”
Ventures, April 9, 2014, http://venturesafrica.com/
massmart-announces-plans-to-expand-to-angola/.
63. Yomi Kazeem, “Walmart Is Planning to Open
Retail Outlets in Nigeria,” Quartz, July 31, 2015,
http://qz.com/469407/walmart-is-planning-to-open-
retail-outlets-in-nigeria/.
64. Phil Wahba, “In 2015, Amazon Ate Even More of
Walmart’s Lunch,” Fortune, December 22, 2015,
http://fortune.com/2015/12/22/retail-ecommerce-
2015-amazon-walmart/.
65. Madeline Vuong, “Walmart’s E-commerce Growth
Slows to 8% as Amazon Soars to Record Sales,”
Geek Wire, February 18, 2016, www.geekwire.
com/2016/walmart-and-amazon-face-off-over-online-
retail-market/.
66. Mathew Mosk, “Walmart Fires Supplier after
Bangladesh Revelation,” ABC News Blotter, May
15, 2013, http://abcnews.go.com/Blotter/wal-mart-
fires-supplier-bangladesh-revelation/
story?id=19188673#.Ua3fGEC7Itg.
67. Ulfikar Ali Manik and Jim Yardley, “Another
Garment Factory Scare in Bangladesh,” New York
Times, June 14, 2013, p. A11.
68. Steven Greenhouse, “U.S. Retailers Announce Safety
Plan,” New York Times, May 31, 2013, p. B6.
69. Steven Greenhouse, “Obama to Suspend Trade
Privileges with Bangladesh,” New York Times,
June 28, 2013, p. B1.
https://www.gfmag.com/magazine/january-2006/
milestones–wal-mart-bets-big-on-brazils-market-.
45. Brad Haynes and Nathan Layne, “Insight: Lost in
Translation—Wal-Mart Stumbles Hard in Brazil,”
Reuters, February 17, 2016, www.reuters.com/
article/us-walmart-brazil-idUSKCN0VQ0EQ.
46. Boyle, “Walmart’s Painful Lessons.”
47. Ibid.
48. Ibid.
49. Krystina Gustafson and Courtney Reagan, “Wal-Mart
to Close 269 Stores as It Retools Fleet,” CNBC,
January 15, 2016, www.cnbc.com/2016/01/15/
wal-mart-to-close-269-stores-as-it-retools-fleet.html.
50. Ibid.
51. Laurie Burkitt, “Wal-Mart Says It Will Go Slow in
China,” The Wall Street Journal, April 29,
2015, www.wsj.com/articles/wal-mart-to-open-115-
stores-in-china-by-2017-1430270579?cb=log
ged0.09944356285914002.
52. Ibid.
53. Shashank Bengali, “Wal-Mart, Thwarted by India’s
Retail Restrictions, Goes Big: Wholesale,” Los
Angeles Times, July 23, 2015, www.latimes.com/
world/asia/la-fg-india-walmart-20150723-story.html.
54. Ibid.
55. Shivani Shinde Nadhe, “Walmart Eyes $300-mn
Investment by 2020,” Business Standard, February
17, 2016, www.business-standard.com/article/com-
panies/walmart-chalks-out-expansion-plans-for-
india-116021600459_1.html.
56. Kurumi Fukushima, “Wal-mart Renews India Whole-
sale Expansion, Plans 50 New Stores by 2020,”
The Street, August 12, 2015, www.thestreet.com/
story/13253722/1/wal-mart-renews-india-wholesale-
expansion-plans-50-new-stores-by-2020.html.
57. Walmart Canada, www.walmartcanada.ca/about-us/.
58. “Walmart Canada Announces Expansion Plans;
Retailer Continues to Accelerate Food and
E-Commerce Growth,” Walmart, February 11,
2015, http://corporate.walmart.com/_news_/news-
PART THREE
INTERNATIONAL
STRATEGIC
MANAGEMENT
290
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The World of International
Management
GSK’s Prescription for Global
Growth
A s the world’s sixth largest pharmaceutical company, U.K.-based GlaxoSmithKline (GSK) is facing a rapidly changing
pharmaceutical environment. The decades of large profit mar-
gins built on exclusive “blockbuster” drugs appear to be over.
Patents are expiring at an increasing rate, undercutting “Big
Pharma’s” traditional pricing strategy. Growth in developed
markets has slowed significantly, forcing drug companies to
refocus their strategy on unfamiliar emerging marketplaces.
Even the physical makeup of the pharmaceutical industry has
changed as major pharmaceutical companies have acquired
other firms from related industries, including generics and bio-
tech companies. These changes mean that GSK’s executives,
as well as those at other “Big Pharma” companies, must craft
a new global strategy to adapt to industry trends.
Pharmerging Markets
Like most other industries, emerging markets hold tremendous
growth potential for the pharmaceutical industry. In recent
years, GSK has made these markets, which the IMS has coined
“pharmerging markets,” a central focus of its long-term global
sales strategy. By 2014, emerging markets accounted for over
a quarter of GSK’s revenue.1
By the end of 2017, the global market for pharmaceuticals is
expected to reach US$1.20 trillion annually, up from US$965 bil-
lion five years prior. This sales growth is disproportionately com-
ing from emerging markets. While the market for pharmaceuticals
is expected to grow by 14 to 17 percent in China and 11 to 14
percent in India through the end of 2017, Western Europe and
the U.S. will experience almost no growth in demand.2 Further-
more, in developed markets with publicly funded health care
plans, pressure by payers to curb drug spending growth will only
intensify. To continue to maintain growth, pharmaceutical compa-
nies like GSK will have to increasingly depend on consumers in
developing economies. The profit margins in the pharmerging
markets, however, may be limited. Individuals with lower incomes
may not be able to afford expensive medicines and many people
do not have access to health insurance. Still, as the standard of
All major MNCs formulate and implement strategies that result
from a careful analysis of both external and internal environ-
ments. In this process, an MNC will identify the market envi-
ronment for its goods and services and then evaluate its ability
and competitive advantage to capture the market. The success
of this strategic planning effort will largely depend on accurate
forecasting of the external environment and a realistic
appraisal of internal company strengths and weaknesses. In
recent years, MNCs have relied on their strategic plans to help
refocus their efforts by abandoning old domestic markets and
entering new global markets. This strategic global planning
process has been critical in their drive to gain market share,
increase profitability, and, in some cases, survive. Strategies
can be formulated from any level of management, but middle
management plays a key role in ensuring that decisions are
put into subsequent action.
Chapter 5 addressed overall management across cul-
tures. This chapter focuses on strategic management in the
international context, and the basic steps by which a strategic
plan is formulated and implemented are examined. The spe-
cific objectives of this chapter are
1. DISCUSS the meaning, needs, benefits, and approaches
of the strategic planning process for today’s MNCs.
2. UNDERSTAND the tension between pressures for global
integration and national responsiveness and the four basic
options for international strategies.
3. IDENTIFY the basic steps in strategic planning, including
environmental scanning, internal resource analysis of the
MNC’s strengths and weaknesses, and goal formulation.
4. DESCRIBE how an MNC implements the strategic plan,
such as how it chooses a site for overseas operations.
5. REVIEW the three major functions of marketing, produc-
tion, and finance that are used in implementing a strategic
plan.
6. EXPLAIN specialized strategies appropriate for emerging
markets and international new ventures.
Chapter 8
STRATEGY FORMULATION AND
IMPLEMENTATION
291
pharmaceutical market ranks only 14th in revenue, indicating
thin margins.11
GSK and its competitors in India are not without problems.
Pfizer and Sanofi-Aventis both had to recall drugs made by
their respective acquired firms in India. Also, the protection of
intellectual property rights is an issue. According to The New
York Times:
Trying to change its outlaw image as a maker of illegal knock-offs,
India toughened its patent laws in 2005. But dozens of intellectual
property suits are still being fought between Indian and foreign
firms in courts around the world. And big pharmaceutical compa-
nies still find securing protection of their intellectual property in
India difficult.
. . .
“Cost is one issue, and yes it is important, but there are two other
critical factors: intellectual property and quality and safety issues,”
said Panos Kalaritis, the chief operating officer of Irix Pharmaceuti-
cals, a Florence, S.C., contract research and manufacturing com-
pany, which competes with Indian laboratories and factories.12
Pricing and profit margins remain a challenge. It was
estimated that, in 2016, per capita pharmaceutical spending
in the U.S. approached US$900 but stood at only US$33 in
India.13 While one could argue that this shows great poten-
tial for future revenue growth in the region, it also highlights
the cultural and financial disparity between pharmerging
markets, like India, and those in Europe, Japan, and the U.S.
Foreign companies like GSK face steep competition from
domestic companies. Sun Pharmaceuticals, founded in 1981,
still holds a plurality of pharmaceutical sales in India.
A former GSK executive noted that there are large short-
term cost-saving gains by outsourcing to India. He asserted,
however, that these gains may fall over time. Indian workers’
wages may rise substantially and shipping materials to India
may become more expensive as the price of oil increases.14
A good manager assesses all risks from a long-term perspec-
tive; therefore, pharmaceutical executives need to take all
these factors into consideration.
Patent Expiration; Innovation Still Matters
In addition to market growth shifting to emerging economies,
GSK is facing another huge paradigm shift: patents are expir-
ing. In the early 2010s, GSK’s asthma drug Advair accounted
for 20 percent of its pharmaceutical sales worldwide; today,
with the expiration of Advair’s patent, generics threaten to
living rises in emerging economies, pharmaceutical companies
see potential in these markets.
Expanding into emerging markets is often accompanied
by difficult growing pains; GSK has not been immune to
these challenges. In the summer of 2013, GSK’s Chinese
operations were rocked by an unprecedented corruption and
bribery scandal. Chinese investigations found evidence of
widespread bribery of doctors, hospitals, and other medical
professionals by GSK representatives. In the wake of the
allegations, GSK’s third- and fourth-quarter sales in China
dropped by 61 and 29 percent respectively.3 In 2014, the
company was fined nearly US$500 million by Chinese
authorities. Additionally, four executives were convicted of
criminal offenses, with Mark Reilly, head of GSK’s Chinese
operations at the time, given a three-year suspended prison
sentence and fired from the company.4
Destination India
For GSK, as well as its competitors, India stands out as a
particularly attractive market. In 2014 alone, GSK invested
US$1 billion to increase its ownership share of its Indian
subsidiary from 50.7 percent to 75 percent.5 Today, the
company employs nearly 5,000 people in the country and
holds a 4 percent share of the market.6
Though the potential for consumer growth is common to all
pharmerging markets, India is also uniquely positioned for
manufacturing. Attractive labor costs, along with a skilled
workforce, make India perfect for research and development
efforts, drug manufacturing, and drug delivery. Moving opera-
tions to India has become commonplace in the industry. In
2015, GSK announced plans to build a US$153 million plant
near Bangalore. When completed, the facility will be GSK’s
sixth manufacturing facility in the country and will be capable
of manufacturing eight billion tablets and one billion capsules
every year.7
Today, the Indian pharmaceutical manufacturing industry is
the world’s third largest by volume.8 Much of this manufactur-
ing still comes from domestic companies. G.V. Prasad, chief
executive of Dr. Reddy’s Laboratories, told the New York Times
that Indian drug makers have the “ability to handle product
development on a massive scale at a low cost.”9 Dr. Reddy’s
diabetes drug has completed Phase 3 clinical trials, the last
step before seeking FDA approval.10 Despite holding a
top position in drug manufacturing by volume, the Indian
292 Part 3 International Strategic Management
significantly undercut its sales. GSK is not alone: In the indus-
try, the sheer volume of imminent patent expiration has been
dubbed as a “patent cliff.” With many blockbuster drugs intro-
duced in the late 1980s and early 1990s, patent expirations
are likely to peak in the coming years.
When companies lose their patent protection, they lose the
ability to charge premiums for their products. These premiums
are used to fund investments in research and development.
Developing a successful drug and achieving approval have
become incredibly expensive over the last 15 years; between
2003 and 2014, the average investment needed per success-
ful drug increased from US$800 million to US$2.6 billion.15
At the same time, governments are putting pressure on phar-
maceutical companies to cut prices. As a result of these price
pressures, many pharmaceutical companies have chosen to
reduce research and development and let go thousands of
scientists, especially in the U.S. and the U.K.
Most pharmaceutical companies’ strategies have focused
on developing and marketing blockbuster drugs targeted at
major diseases. During the 1990s, firms profited from their
blockbuster drugs, but now they are struggling. As their pat-
ents expire, generic competition will decrease their revenues
by an estimated hundreds of billions of U.S. dollars.
Research and development, leading to new drugs, is still
critical for GSK’s long-term success. In the wake of patent
expiration of many of GSK’s high-grossing drugs, the company
has worked to increase its portfolio by introducing new phar-
maceuticals to the market. By the end of 2015, GSK had more
than 40 experimental drugs in late-stage testing.16
New Strategies for New Times
Recent strategic moves by large industry players seem to indi-
cate that, in less developed markets, protecting patents may
be an impossible battle to win. For example, GSK has adopted
a policy of actually allowing patents to expire and/or licensing
patents to generic drug makers for a small royalty. This new
approach affects 85 low-income countries.17
Other pharmaceutical companies have adopted different
strategies, which the companies hope will enable them to
thrive in spite of the current challenges. Some companies,
such as Pfizer, are looking to enter what is viewed as the cut-
ting edge of biologically derived compounds (versus those that
are derived from generally “small” chemical compounds).
These companies are moving into the territory in search of
heftier margins and better protection from generics. Pfizer,
which bought Wyeth in part to acquire biotech experience, is
seeking to use biologics to improve aspects of drugs such as
Rituxan, a treatment for blood cancers and rheumatoid arthri-
tis, and Enbrel, an arthritis medicine.18 Roche Holding’s pur-
chase of the entirety of biopharmaceutical company Genentech
(it has held a majority stake since 1990) may have been
driven by a desire to further integrate management and prod-
uct development and achieve substantial cost savings. And
Genzyme, one of the largest biopharma firms, was acquired
by French drug maker Sanofi after entertaining offers from
various companies.19
Others are reemphasizing their vaccine businesses, which
had been viewed as relatively low-margin products with little
scope for dramatic innovation that could command premium
prices. At the same time, these firms are under pressure to
provide greater access and cheaper prices for those vaccines,
challenging their ability to depend upon these revenues.20
Some traditional “branded” companies are linking up with
generics in order to lower costs and reach broader markets. In
addition to the GSK strategy of licensing patents to generics men-
tioned above, Pfizer has expanded its licensing agreement with
Indian generics maker Aurobindo and has licensed 15 injectable
products from Indian generics firm Claris Lifesciences. Sanofi-
Aventis has purchased a number of South American generics com-
panies and GSK bought a 16 percent share of its South African
generics partner, Aspen Pharmacare.21 And Teva Pharmaceuticals,
an Israeli-based pharma firm, bought Ireland-based Allergan’s
generic portfolio for US$40 billion in 2015.22 This mixing of pre-
mium and low-cost products was unheard of just a decade ago.
Others are diversifying into a wider range of health care
products to generate more predictable income and avoid the
gyrations associated with “winner take all” blockbuster drugs.
For example, Merck’s mergers with Schering-Plough may have
been motivated, in part, by a desire to balance the volatility of
Merck’s drug portfolio with Schering-Plough’s extensive human
and animal health care product line.23
The pharmaceutical industry certainly needs managers who
are long-term strategists in order to navigate through the
waves of change that it is facing today.
Top Eight Drug Patents That Expired in 2016
Drug Patents Revenue in 2015
Company Expiring from Drug (in billions)
AstraZeneca Crestor $6.4
Daiichi Sankyo Benicar 2.6
Merck Zetia 2.6
AstraZeneca Seroquel XR 1.3
Eisai AcipHex Sprinkle 1.2
ViiV Healthcare Epzicom 1.0
Abbott Kaletra 1.0
Abbott Norvir 1.0
Source: Dickson Data, 2016.
Chapter 8 Strategy Formulation and Implementation 293
Strategic management—the formulation and implementation of a strategy—is a critical
function in today’s global business environment. GSK and the other large pharmaceuti-
cal companies are increasingly drawn to the international markets because of their
growth prospects and potential. At the same time, changes in health care markets in the
U.S. and Europe, including the expiration of patents and calls for greater cost contain-
ment, are exerting pressures on traditional companies to seek alternative income streams
but also to reshape their basic business models. The traditional approach to R&D and
drug development, which emphasized massive investments in a few potential “block-
busters,” may be giving way to alternative strategies, including greater emphasis on
what used to be considered “low margin” vaccines, a business line that provides a
dependable income stream.
This chapter will examine how multinational corporations use strategic manage-
ment in their global operations. When formulated and implemented wisely, strategic
management sets the course for a company’s future. It should answer two simple ques-
tions: “Where are we going?” and “How are we going to get there?” Some strategies are
consistent across markets, while others must be adapted to regional situations, but in
either case, a firm’s global strategy should support decision making in all major opera-
tions. In the case of large pharma companies, those questions are still being asked as the
industry undergoes a dramatic transformation, much of it associated with globalization,
competition from new players, changes in regulatory environment, and the implications
of these factors for business strategy.
As you read this chapter, think of yourself as a manager in a large pharmaceutical
company firm. How might you go about developing a strategic plan to capture greater
market share and expand the types of products you are selling? There are some basic
steps involved in creating a strategy, but first, let us take a look at what strategic man-
agement is and why it is so important.
■ Strategic Management
Strategic management is the process of determining an organization’s basic mission and
long-term objectives and then implementing a plan of action for pursuing this mission
and attaining these objectives. For most companies, regardless of how decentralized, the
top management team is responsible for setting the strategy. Middle management has
sometimes been viewed as primarily responsible for the strategic implementation process,
but now companies are realizing how imperative all levels of management are to the
entire process. For example, Volvo discovered that while managers do inform team mem-
bers of new strategic plans, the most informed, enthusiastic, and effective managers were
those who were involved in the entire process.24
As companies go international, strategic processes take on added dimensions. A
good example is provided by Citibank (a unit of Citicorp), which opened offices in China
in 1902 and continued to do business there until 1949, when communists took power.
However, in 1984 Citibank quietly returned, and over the last two decades the firm has
been slowly increasing its presence in China.25 Some ways Citibank has done this include
opening new branches, expanding the employee base, and increasing stakes in local
companies such as Shanghai Pudon Development Bank Co.26 The Chinese banking envi-
ronment is closely regulated by the government, and for many years, Citibank’s activities
were restricted to making local currency loans to foreign multinationals and their joint-
venture partners. As a result, the bank does only about 20 percent as much business here
as it does in South Korea. However, China’s admission into the World Trade Organization
(WTO) is changing all of this. Under WTO provisions, local corporations, such as the
personal computer maker Legend, electronic goods manufacturer Konda, consumer appli-
ance maker Haier, and telecom service provider China Telecom, will all be able to turn
to foreign banks for local currency loans. In 2007, Citibank was one of the first foreign
banks to incorporate locally within China. This gives Citibank a major opportunity to
expand operations. As of 2016, Citibank China now has branches in 13 Chinese cities
and earns roughly US$1 billion in revenue annually.27
strategic management
The process of determining
an organization’s
basic mission and long-
term objectives, then
implementing a plan of
action for attaining these
goals.
294 Part 3 International Strategic Management
Additionally, under WTO rules, the bank is allowed to offer consumer financial
services such as credit cards and home mortgages. Though the Chinese government orig-
inally resisted, Citibank was officially given the authorization to offer its own independent
credit cards in 2012.28 Citibank believes that there is a large pent-up demand for credit
cards, especially among businesspeople and yuppies who now carry thick wads of cur-
rency to pay their bills and make purchases. Another opportunity Citibank sees is in the
area of business-to-business (B2B) commerce. As more Chinese firms conduct commerce
over the Internet, there will be an increase in Net-related financial services. Citibank has
now hooked up with U.S.-based B2B site Commerce One to run its Net-based payment
systems, and the bank believes that it can provide this same service for Chinese exporters.
Notwithstanding the dramatic losses at Citibank as part of the global financial crisis, and
the move to downsize the firm and spin off some units, Citibank remains committed to
expansion in Asia. Over 700 branches are currently operating in 14 different Asian mar-
kets.29 In 2014, Citibank hired over 100 bankers to increase its product offerings in the
Asia-Pacific region.30 “We’re investing more in Asia now than at any time in our history,”
said Stephen Bird, co-chief executive officer of Citi Asia Pacific.31
While this chapter focuses on the larger picture of strategic planning, it is important
to remember that all stages of organizational change incorporate levels of strategy from
planning to implementation. This includes innovative ways to improve a product to
expanding to international operations.
The Growing Need for Strategic Management
One of the primary reasons that MNCs such as Citibank need strategic management is
to keep track of their increasingly diversified operations in a continuously changing
international environment. This need is particularly obvious when one considers the
amount of foreign direct investment (FDI) that has occurred in recent years. Statistics
reveal that FDI has grown three times faster than trade and four times faster than world
gross domestic product (GDP).32 These developments are resulting in a need to coordi-
nate and integrate diverse operations with a unified and agreed-on focus. There are many
examples of firms that are doing just this.
One is Ford Motor, which has reentered the market in Thailand and has built a
strong sales force to garner market share. The firm’s strategic plan here is based on
offering the right combination of price and financing to a carefully identified market
segment. In particular, Ford is working to keep down the monthly payments so that
customers can afford a new vehicle. Despite a coup d’etat in 2014 in Thailand, Ford
committed US$186 million in late 2015 to expand its existing Rayong automotive assem-
bly plant. First opened three years prior, the Rayong plant quickly outgrew its original
capacity of 180,000 automobiles per year. The new expansion aims to increase production
to meet consumer demand for the new Ford Ranger.33 Additionally, Ford and its Japanese
partner Mazda Motor Corp. invested about $1.5 billion in pickup-truck and passenger-car
factories in Thailand. Toyota, Honda Motor Co., and General Motors Co. have also built
plants in Thailand, Southeast Asia’s second-biggest economy, lured by tax incentives and
demand amid a domestic population of 70 million. Automakers produced over 1.9 million
vehicles in Thailand in 2015, surpassing the United Kingdom to become the 12th-largest
automobile manufacturer globally.34
General Electric provides another example that reflects the challenge managers face
in shedding unprofitable businesses in order to generate capital for expansion into higher-
growth product and/or geographic markets. Several years ago, General Electric Co. shed
its plastics business, selling it to a Saudi Arabian company for $11.6 billion, and, in
2016, it exited its iconic “white goods” (home appliances) business by selling its opera-
tions to Chinese company Haier for US$5.4 billion.35,36 In its place, GE is aggressively
expanding its infrastructure, health care, and environmental technologies businesses,
which it sees as providing better growth opportunities in emerging markets. Another
example is provided by Genzyme, the large biotech company, which indicated in 2010
Chapter 8 Strategy Formulation and Implementation 295
that it was pursuing “strategic alternatives” for its genetic-testing, diagnostics, and phar-
maceutical intermediates businesses, with potential options including a sale, spin-out, or
management buyout because these businesses did not fit with its longer-term strategy.37
Many thought this strategy could, in part, be in preparation for an eventual sale to a
larger pharmaceutical company, as a number of global firms have expressed interest in
acquiring the firm.38 Sure enough, in 2011, Genzyme was acquired by Sanofi, a French
MNC, for US$20.1 billion.39
Benefits of Strategic Planning
Now that the needs for strategic planning have been explored in our discussion, what are
some of the benefits? Many MNCs are convinced that strategic planning is critical to
their success, and these efforts are being conducted both at the home office and in the
subsidiaries. For example, one study found that 70 percent of the 56 U.S. MNC subsid-
iaries in Asia and Latin America had comprehensive 5- to 10-year plans.40 Others found
that U.S., European, and Japanese subsidiaries in Brazil were heavily planning-driven41
and that Australian manufacturing companies use planning systems that are very similar
to those of U.S. manufacturing firms.42
Do these strategic planning efforts really pay off? To date, the evidence is mixed.
Certainly, strategic planning helps an MNC to coordinate and monitor its far-flung oper-
ations and deal with political risk (see Chapter 10), competition, and currency instability.
Despite some obvious benefits, there is no definitive evidence that strategic plan-
ning in the international arena always results in higher profitability, especially when
MNCs try to use home strategies across different cultures (see Chapter 6). Most studies
that report favorable results were conducted at least a decade ago. Moreover, many of
these findings are tempered with contingency-based recommendations. For example, one
study found that when decisions were made mainly at the home office and close coor-
dination between the subsidiary and home office was required, return on investment was
negatively affected.43 Simply put, the home office ends up interfering with the subsidiary,
and profitability suffers.
Another study found that planning intensity (the degree to which a firm carries out
strategic planning) is an important variable in determining performance.44 Drawing on
results from 22 German MNCs representing 71 percent of Germany’s multinational enter-
prises, the study found that companies with only a few foreign affiliates performed best
with medium planning intensity. Those firms with high planning intensity tended to
exaggerate the emphasis, and profitability suffered. Companies that earned a high per-
centage of their total sales in overseas markets, however, did best with a high-intensity
planning process and poorly with a low-intensity process. Therefore, although strategic
planning usually seems to pay off, as with most other aspects of international manage-
ment, the specifics of the situation will dictate the success of the process.
Approaches to Formulating and Implementing Strategy
Four common approaches to formulating and implementing strategy are (1) focusing on
the economic imperative, (2) addressing the political imperative, (3) emphasizing the
quality imperative, and (4) implementing an administrative coordination strategy.
Economic Imperative MNCs that focus on the economic imperative employ a world-
wide strategy based on cost leadership, differentiation, and segmentation. Middle manag-
ers are the key to stimulating profit growth within a company, so expanding those efforts
on an international level is a necessary tool to learn for today’s new managers.45 Many
of these companies typically sell products for which a large portion of value is added in
the upstream activities of the industry’s value chain. By the time the product is ready to
be sold, much of its value has already been created through research and development,
manufacturing, and distribution. Some of the industries in this group include automobiles,
economic imperative
A worldwide strategy
based on cost leadership,
differentiation, and
segmentation.
296 Part 3 International Strategic Management
chemicals, heavy electrical systems, motorcycles, and steel. Because the product is basi-
cally homogeneous and requires no alteration to fit the needs of the specific country,
management uses a worldwide strategy that is consistent on a country-to-country basis.
The strategy is also used when the product is regarded as a generic good and
therefore does not have to be sold based on name brand or support service. A good
example is the European PC market. Initially, this market was dominated by such well-
known companies as IBM, Apple, and Compaq. However, more recently, clone manu-
facturers have begun to gain market share. This is because the most influential reasons
for buying a PC have changed. A few years ago, the main reasons were brand name,
service, and support. Today, price has emerged as a major input into the purchasing
decision. Customers now are much more computer literate, and they realize that many
PCs offer identical quality performance. Therefore, it does not pay to purchase a high-
priced name brand when a lower-priced clone will do the same things. As a result, the
economic imperative dominates the strategic plans of computer manufacturers. This pro-
cess has repeated in many industries as those products become commoditized.
Another economic imperative concept that has gained prominence in recent years is
global sourcing, which is proving very useful in formulating and implementing strategy.46
A good example is provided by the way in which manufacturers are reaching into the
supply chain and shortening the buying circle. Li & Fung, Hong Kong’s largest export
trading company, is one of the world’s leading innovators in the development of supply
chain management, and the company has managed to use its expertise to whittle costs to
the bone. Instead of buying fabric and yarn from one company and letting that firm work
on keeping its costs as low as possible, Li & Fung gets actively involved in managing the
entire process. How does it keep costs down for orders it receives from The Limited? The
chairman of the company explained the firm’s economic imperative strategy this way:
We come in and look at the whole supply chain. We know The Limited is going to order
100,000 garments, but we don’t know the style or the colors yet. The buyer will tell us that
five weeks before delivery. The trust between us and our supply network means that we can
reserve undyed yarn from the yarn supplier. I can lock up capacity at the mills for the weav-
ing and dying with the promise that they’ll get an order of a specified size; five weeks
before delivery, we will let them know what colors we want. Then I say the same thing to
the factories, “I don’t know the product specs yet, but I have organized the colors and the
fabric and the trim for you, and they’ll be delivered to you on this date and you’ll have
three weeks to produce so many garments.”
I’ve certainly made life harder for myself now. It would be easier to let the factories
worry about securing their own fabric and trim. But then the order would take three months,
not five weeks. So to shrink the delivery cycle, I go upstream to organize production. And
the shorter production time lets the retailer hold off before having to commit to a fashion
trend. It’s all about flexibility, response time, small production runs, small minimum-order
quantities, and the ability to shift direction as the trends move.47
Political Imperative MNCs using the political imperative approach to strategic plan-
ning are country-responsive; their approach is designed to protect local market niches.
The products sold by MNCs often have a large portion of their value added in the
downstream activities of the value chain. Industries such as insurance and consumer
packaged goods are examples—the success of the product or service generally depends
heavily on marketing, sales, and service. Typically, these industries use a country-centered
or multi-domestic strategy.
A good example of a country-centered strategy is provided by Thums Up, a local
drink that Coca-Cola bought from an Indian bottler in 1993. This drink was created back
in the 1970s, shortly after Coca-Cola pulled up stakes and left India. In the ensuing two
decades the drink, which is similar in taste to Coke, made major inroads in the Indian
market. But when Coca-Cola returned and bought the company, it decided to put Thums
Up on the back burner and began pushing its own soft drink. However, local buyers were
not interested. They continued to buy Thums Up, and Coca-Cola finally relented. Today
political imperative
Strategic formulation and
implementation utilizing
strategies that are country-
responsive and designed to
protect local market niches.
297
Thums Up is the firm’s second-biggest seller in India, just behind Coca-Cola’s Sprite,
and holds an overall 15 percent market share in the carbonated beverage market.48 The
company spends more money on this soft drink than it does on any of its other product
offerings, including Coke.49 As one observer noted, “In India the ‘Real Thing’ for Coca-
Cola is its Thums Up brand.” Recently, Coke has encountered challenges in India, as
described in Brief Integrative Case 2.1 at the end of Part Two, but the acknowledgment
that Thums Up was the best vehicle for expansion appears to have been validated: In
2015, the company’s sales volume grew more than 22 percent and its net profit grew by
over 40 percent, partly via a strategy of seeking to penetrate rural consumers, something
Thums Up is uniquely qualified to advance.50,51 Additionally, traditional Coke sales have
improved, and it is now one of the fastest-growing soft drinks in the country.52
Quality Imperative A quality imperative takes two interdependent paths: (1) a change
in attitudes and a raising of expectation for service quality and (2) the implementation of
management practices that are designed to make quality improvement an ongoing process.53
Commonly called total quality management, or simply TQM, the approach takes a wide
number of forms, including cross-training personnel to do the jobs of all members in their
work group, process reengineering designed to help identify and eliminate redundant tasks
and wasteful effort, and reward systems designed to reinforce quality performance.
TQM covers the full gamut, from strategy formulation to implementation. TQM
can be summarized as follows:
1. Quality is operationalized by meeting or exceeding customer expectations.
Customers include not only the buyer or external user of the product or ser-
vice but also the support personnel both inside and outside the organization
who are associated with the good or service.
quality imperative
Strategic formulation and
implementation utilizing
strategies of total quality
management to meet or
exceed customers’
expectations and
continuously improve
products or services.
International Management in Action
China’s Move into Africa
With limited commodities inside of its own borders,
China’s biggest industries have turned their focus out-
ward to acquire the resources necessary to fuel growth.
Africa, in particular, has held a key strategic position for
many Chinese companies. Over a million Chinese citi-
zens have moved to various African countries in the last
few years, and Chinese-African trade now totals more
than US$160 billion in goods every year. In 2016, the
Chinese government pledged an additional US$60 bil-
lion in loans and other financial assistance to African
countries.
China has built a strategy for dealing in Africa that
attempts to eliminate political uncertainty and risk. First,
China makes it clear that it has no political agenda for
the continent. The Chinese government has worked
with various African governments, from democracies to
dictatorships, and has intentionally steered clear of any
involvement in wars and other African foreign affairs.
Second, Chinese aid to African countries is not free
money, but rather loans and lines of credit that target
infrastructure and other capital improvements. In
essence, this aid is really an investment; the money is
utilized in ways that best suit China’s immediate needs
on the continent, rather than Africa’s needs. Third, China
maintains open communication with the governments of
the countries where it does business. This is
accomplished both on an individual basis, through vari-
ous cooperation agreements, and on a continent-wide
basis, through the Forum on China-Africa Cooperation
(FOCAC). The forum, which meets every three years,
involves representatives from China and more than 50
African countries. Chinese President Xi Jinping person-
ally attended the 2015 summit, giving him the chance
to network with the various country leaders on an indi-
vidual level.
China’s approach to Africa is not without controversy
within the international community. In many African
countries where China has invested, dictators with vari-
ous human rights violations still rule. Corruption from
these governments has led to extreme poverty and suf-
fering, and some have argued that China’s involvement
with these dictatorial governments condones their
actions. China also faces allegations of trying to “colo-
nize” Africa. While China has portrayed its investments
in Africa as a “win-win” situation for the local communi-
ties and the Chinese consumers, and Chinese investors
have provided many social projects, some have voiced
concern that, in realty, China is exploiting Africa’s poten-
tial future wealth by taking raw materials, manufacturing
products from those resources, and then selling finished
products back to Africans without transferring the knowl-
edge or skill set required to do the same.
298 Part 3 International Strategic Management
2. The quality strategy is formulated at the top management level and is diffused
throughout the organization. From top executives to hourly employees, every-
one operates under a TQM strategy of delivering quality products or services
to internal and external customers. Middle managers will better understand
and implement these strategies if they are a part of the process.
3. TQM techniques range from traditional inspection and statistical quality con-
trol to cutting-edge human resource management techniques, such as self-
managing teams and empowerment.54
Many MNCs make quality a major part of their overall strategy because they have
learned that this is the way to increase market share and profitability. Take the game
console industry, for example. In the early 2000s, the success of Sony’s PlayStation 2
left Nintendo fighting for market share with its less popular GameCube. A few years
later, Nintendo proved to have superior game console quality when it introduced the Wii,
leaving Sony scrambling after its less-than-successful launch of the PlayStation 3. By
2016, however, the tables had turned again, as Sony’s successful launch of Playstation 4
far outpaced the sales of Nintendo’s WiiU and Microsoft’s Xbox One.
The auto industry is also a good point of reference. While the U.S. automakers
have dramatically increased their overall quality in recent years to close the gap with
Japanese auto quality, Japanese firms continued to have fewer safety recalls. Despite
recent recalls, Toyota and Honda continue to be ranked very high by American consum-
ers, and Nissan’s and Subaru’s recent performances were also strong. However, in light
of continued improvements by U.S.-based producers, North American–based manufactur-
ers topped many Japanese brands in the J.D. Power and Associates’ 2016 Automotive
Dependability Study. Half of the top ten brands were U.S. based, with GM producing
the leading car for 8 out of the 19 industry segments.55
Apple Inc. has experienced rave quality reviews from customers and electronics
analysts for its line of Mac products, iPod, iPhone, and iPad. These devices have dem-
onstrated global appeal as Apple’s stock soared. Apple introduced the iPhone 6s concur-
rently in the U.S., U.K., France, Germany, Canada, China, Hong Kong, Singapore, and
Japan and made it available in over 70 countries within the first month of its launch, a
more aggressive worldwide launch timetable than in the past.56 More than 13 million
phones were sold in the first weekend, setting a new record.57 In response to several
quality-related issues that arose with the iPhone 5s and 6, Apple improved the memory,
processor speed, and camera on its iPhone 6s model.58
A growing number of MNCs are finding that they must continually revise their
strategies and make renewed commitment to the quality imperative because they are
being bested by emerging market forces. Motorola, for example, found that its failure to
anticipate the industry’s switch to digital cell technology was a costly one.59 In 1998 the
company dominated the U.S. handset market, and its StarTAC was popular worldwide.
Five years later, the firm’s share of the then $160 billion global market for handsets had
shrunk from 22 percent to 10 percent and was continuing to fall, while Nokia, Ericsson,
and Samsung in particular, with smaller, lighter, and more versatile offerings, were now
the dominant players.60 Motorola’s wireless network business also suffered, and in 2011,
Motorola partitioned its wireless company from its primary operations. Later that year,
Google acquired the new Motorola Mobility wireless division for US$12.5 billion.61 The
quality imperative is never-ending, and MNCs such as Motorola must meet this strategic
challenge or pay the price.
Administrative Coordination An administrative coordination approach to formula-
tion and implementation is one in which the MNC makes strategic decisions based on
the merits of the individual situation rather than using a predetermined economic or
political strategy. A good example is provided by Walmart, which has expanded rapidly
into Latin America in recent years. While many of the ideas that worked well in the
North American market served as the basis for operations in the Southern Hemisphere,
administrative
coordination
Strategic formulation and
implementation in which
the MNC makes strategic
decisions based on the
merits of the individual
situation rather than using a
predetermined
economically or politically
driven strategy.
Chapter 8 Strategy Formulation and Implementation 299
the company soon realized that it was doing business in a market where local tastes were
different and competition was strong.
Walmart is counting on its international operations to grow 25–30 percent annually,
and Latin American operations are critical to this objective. Despite this objective, the
company has faced losses in several of its Latin American businesses as it strives to
adapt to the local markets. The firm is learning, for example, that the timely delivery of
merchandise in places such as São Paulo, where there are continual traffic snarls and the
company uses contract truckers for delivery, is often far from ideal. Another challenge
is finding suppliers who can produce products to Walmart’s specification for easy-to-
handle packaging and quality control. A third challenge is learning to adapt to the culture.
For example, in Brazil, Walmart brought in stock-handling equipment that did not work
with standardized local pallets. It also installed a computerized bookkeeping system that
failed to take into account Brazil’s wildly complicated tax system. These missteps con-
tributed, in part, to the closing of multiple stores across Brazil in 2016. In-Depth Integra-
tive Case 2.2 at the end of Part Two provides more detail on Walmart’s successes and
challenges in the international marketplace, including those related to administrative
coordination.
Many large MNCs work to combine the economic, political, quality, and adminis-
trative approaches to strategic planning. For example, IBM relies on the economic imper-
ative when it has strong market power (especially in less developed countries), the
political and quality imperatives when the market requires a calculated response (Euro-
pean countries), and an administrative coordination strategy when rapid, flexible decision
making is needed to close the sale. Of the four, however, the first three approaches are
much more common because of the firm’s desire to coordinate its strategy both region-
ally and globally.
Global and Regional Strategies
A fundamental tension in international strategic management is the question of when to
pursue global or regional (or local) strategies. This is commonly referred to as the glo-
balization vs. national responsiveness conflict. As used here, global integration is the
production and distribution of products and services of a homogeneous type and quality
on a worldwide basis.62 To a growing extent, the customers of MNCs have homogenized
tastes, and this has helped to spread international consumerism. For example, throughout
North America, the EU, and Japan, there has been a growing acceptance of standardized,
yet increasingly personally, customized goods such as automobiles and computers. This
goal of efficient economic performance through a globalization and mass customization
strategy, however, has left MNCs open to the charge that they are overlooking the need
to address national responsiveness through Internet and intranet technology.
National responsiveness is the need to understand the different consumer tastes
in segmented regional markets and respond to different national standards and regulations
imposed by autonomous governments and agencies.63 For example, in designing and
building cars, international manufacturers now carefully tailor their offerings in the
American market. Toyota’s “full-size” T100 pickup proved much too small to attract U.S.
buyers. So the firm went back to the drawing board and created a full-size Tundra pickup
that is powered by a V-8 engine and has a cabin designed to “accommodate a passenger
wearing a 10-gallon cowboy hat.”64 In 2016, more than 15 years after its initial launch,
the Tundra was still selling over 100,000 units every year in the U.S.65 Honda developed
its Element SUV with more Americanized features, including enough interior room so
that travelers could eat and sleep in the vehicle. Mitsubishi has abandoned its idea of
making a global vehicle and has brought out its new Montero Sport SUV in the U.S.
market with the features it learned that Americans want: more horsepower, more interior
room, more comfort. Meanwhile, for over two decades, U.S. engineers and product
designers have been completely responsible for the development of most Nissan vehicles
sold in North America. Among other things, they are asking children between the ages
global integration
The production and
distribution of products and
services of a homogeneous
type and quality on a
worldwide basis.
national responsiveness
The need to understand the
different consumer tastes in
segmented regional markets
and respond to different
national standards and
regulations imposed by
autonomous governments
and agencies.
300 Part 3 International Strategic Management
of 8 and 15, in focus-group sessions, for ideas on storage, cup holders, and other refine-
ments that would make a full-size minivan more attractive to them.66
National responsiveness also relates to the need to adapt tools and techniques for
managing the local workforce. Sometimes what works well in one country does not work
in another, as seen in the following example:
An American computer company introduced pay-for-performance in both the USA and the
Middle East. It worked well in the USA and increased sales briefly in the Middle East before
a serious slump occurred. Inquiries showed that indeed the winners among salesmen in the
Middle East had done better, but the vast majority had done worse. The wish for their fel-
lows to succeed had been seriously eroded by the contest. Overall morale and sales were
down. Ill-will was contagious. When the bosses discovered that certain salespeople were
earning more than they did, high individual performances also ceased. But the principal
reason for eventually abandoning the system was the discovery that customers were being
loaded up with products they could not sell. As A tried to beat B to the bonus, the care of
customers began to slip, with serious, if delayed, results.67
Global Integration vs. National Responsiveness Matrix The issue of global integra-
tion versus national responsiveness can be further analyzed conceptually via a two-
dimensional matrix. Figure 8–1 provides an example.
The vertical axis in the figure measures the need for global integration. Movement
up the axis results in a greater degree of economic integration. Global integration gener-
ates economies of scale (takes advantage of large size) and also capitalizes on further
lowering unit costs (through experience curve benefits) as a firm moves into worldwide
markets selling its products or services. These economies are captured through central-
izing specific activities in the value-added chain. They also occur by reaping the benefits
of increased coordination and control of geographically dispersed activities.
The horizontal axis measures the need for multinationals to respond to national
responsiveness or differentiation. This suggests that MNCs must address local tastes and
G
lo
b
al
in
te
g
ra
ti
o
n
National responsiveness
High
Low
Global
strategy
1
Low
International
strategy
2
High
Transnational
strategy
3
Multi-domestic
strategy
4
Figure 8–1
Global Integration vs.
National Responsiveness
Source: Adapted from information in Christopher A. Bartlett and Sumantra Ghoshal, Managing Across Borders: The Transnational
Solution, 2nd ed. (Boston: Harvard Business School Press, 1998).
Chapter 8 Strategy Formulation and Implementation 301
government regulations. The result may be a geographic dispersion of activities or a
decentralization of coordination and control for individual MNCs.
Figure 8–1 depicts four basic situations in relation to the degrees of global integra-
tion versus national responsiveness. Quadrants 1 and 4 are the simplest cases. In quadrant
1, the need for integration is high and awareness of differentiation is low. In terms of
economies of scale, this situation leads to global strategies based on price competition.
A good example of this is Sony, which has standardized many aspects of its operations
and marketing over the years. A few years ago, Sony, along with Hitachi, Panasonic,
Philip, and Samsung, among others, worked to standardize the high-definition optical
disc industry under the Blu-ray format. Sony’s strong distribution network, coupled with
its globally popular Playstation 3 gaming console, allowed the company to push the use
of the Blu-ray format across markets all over the world. As a result, sales of Blu-ray
format discs were able to outpace those of competitor HD-DVD, giving Sony a major
advantage in the high-definition disc industry.68 In this quadrant-1 type of environment,
mergers and acquisitions often occur.
The opposite situation is represented by quadrant 4, where the need for differentiation
is high but the concern for integration low. This quadrant is referred to as multi- domestic
strategy. In this case, niche companies adapt products to satisfy the high demands of
differentiation and ignore economies of scale because integration is not very important.
An example of this is Philips, which provides medical equipment to doctors worldwide.
As diagnoses become more complex, Philips has to find new innovative ways to simplify
the machines used by doctors so that they can spend more time with patients. Yet the
medical systems of each country are so different that products must be adapted and
adjusted to the particular medical environment. Philips recently sought out opinions from
board members, and even asked for participation of fashion designers, to better under-
stand different strategic methods. By using this multidimensional information pool, Phil-
ips is moving toward offering even more differentiated products.69
Quadrants 2 and 3 reflect more complex environmental situations. Quadrant 2
incorporates those cases in which both the need for integration and awareness of dif-
ferentiation are low. Both the potential to obtain economies of scale and the benefits of
being sensitive to differentiation are of little value. Typical strategies in quadrant 2 are
characterized by increased international standardization of products and services. This
mixed approach is often referred to as international strategy.
This situation can lead to lower needs for centralized quality control and centralized
strategic decision making while eliminating requirements to adapt activities to individual
countries. This strategy is decreasingly employed as most industries and products face
one or both pressures for global integration and local responsiveness. Nonetheless, com-
panies may experience a very temporary phase in this quadrant, but the standards lie in
the other three.
In quadrant 3, the needs for integration and differentiation are high. There is a
strong need for integration in production along with higher requirements for regional
differentiation in marketing. MNCs trying to simultaneously achieve these objectives
often refer to them as transnational strategy. Quadrant 3 is the most challenging quad-
rant and the one where successful MNCs seek to operate. The problem for many MNCs,
however, is the cultural challenges associated with “localizing” a global focus. One good
example of a transnational company is Monsanto. Monsanto offers a very diverse line
of hybrid seeds to the agricultural industry. Hybrid seeds are genetically modified seeds
which are sterile and must be purchased at the beginning of each season for the specified
crop. Monsanto’s operations, discussed in Chapter 2, include finding new ways to dif-
ferentiate its product to best fit the surrounding market. The company offers products
which can withstand the various environments and climates of its global customers, from
herbicide and insect resistant strains to drought tolerance.70
Summary and Implications of the Four Basic Strategies MNCs can be characterized as
using one of four basic international strategies: an international strategy, a multi-domestic
global strategy
Integrated strategy based
primarily on price
competition.
multi-domestic strategy
Differentiated strategy
emphasizing local
adaptation.
international strategy
Mixed strategy combining
low demand for integration
and responsiveness.
transnational strategy
Integrated strategy
emphasizing both global
integration and local
responsiveness.
302 Part 3 International Strategic Management
strategy, a global strategy, and a transnational strategy. The appropriateness of each strategy
depends on pressures for cost reduction and local responsiveness in each country served.
Firms that pursue an international strategy have valuable core competencies that host- country
competitors do not possess and face minimal pressures for local responsiveness and cost
reductions. International firms such as McDonald’s, Walmart, and Microsoft have been
successful using an international strategy. Organizations pursuing a multi-domestic strategy
should do so when there is high pressure for local responsiveness and low pressures for cost
reductions. Changing offerings on a localized level increases a firm’s overall cost structure
but increases the likelihood that its products and services will be responsive to local needs
and therefore be successful.71
A global strategy is a low-cost strategy. Firms that experience high-cost pressures
should use a global strategy in an attempt to benefit from scale economies in production,
distribution, and marketing. By offering a standardized product worldwide, firms can
leverage their experience and use aggressive pricing schemes. This strategy makes most
sense where there are high cost pressures and low demand for localized product offerings.
A transnational strategy should be pursued when there are high-cost pressures and high
demands for local responsiveness. However, a transnational strategy is very difficult to
pursue effectively. Pressures for cost reduction and local responsiveness put contradictory
demands on a company because localized product offerings increase cost. Organizations
that can find appropriate synergies in global corporate functions are the ones that can
leverage a transnational strategy effectively.72
Recent analyses of the strategies of MNCs confirm these basic approaches. The
globalization–national responsiveness model, which was initially developed from nine
in-depth case studies, has been corroborated in large-scale empirical settings. Moreover,
it appears as if there are positive performance effects from tailoring the strategy to par-
ticular industry and country characteristics.73
■ The Basic Steps in Formulating Strategy
The needs, benefits, approaches, and predispositions of strategic planning serve as a point
of departure for the basic steps in formulating strategy. In international management,
strategic planning can be broken into the following steps: (1) scanning the external envi-
ronment for opportunities and threats; (2) conducting an internal resource analysis of
company strengths and weaknesses; and (3) formulating goals in light of the external
scanning and internal analysis. The following sections discuss each step in detail.
Environmental Scanning
Environmental scanning attempts to provide management with accurate forecasts of
trends that relate to external changes in geographic areas where the firm is currently
doing business or considering setting up operations. These changes relate to environmen-
tal factors that can affect the company and include the industry or market, technology,
regulatory, economic, social, and political aspects.
MNCs observe and evaluate an exorbitant amount of information, and while data
are usually collected for all forms of environmental factors, the order in which they
approach each factor and the extent to which they are studied depend on the industry
and the goals of the MNC.74 One of the most important foci is the industry or the mar-
ket. This includes the role of all potential competitors and the relationships surrounding
those competitors, such as affiliation with one another or the connection between the
company and its customers and suppliers. Monitoring changes in technology will also
help keep the company modern and innovative. Some technologic options managers may
wish to follow are those that influence business efficiencies or changes in production.
From a competitor standpoint, it is good to familiarize oneself with the rise of new
products or services and the existing infrastructure.
environmental scanning
The process of providing
management with accurate
forecasts of trends related to
external changes in
geographic areas where the
firm currently is doing
business or is considering
setting up operations.
Chapter 8 Strategy Formulation and Implementation 303
The regulatory environment can also change at any time, shifting laws or regulatory
guidelines. Managers should be aware of ownership or property rights within an area
and also what kind of employment practices are exhibited in a region. Minimum wage
laws and tax rates should also be considered because they can affect the hiring process
and company finances. This is different from the economic environment, which mainly
highlights rates, namely, rates of employment, exchange rates, inflation rates, and the
level of GNP for a country.
Appropriate observation of the social environment can help the company. Awareness
of demographic shifts including age, education, and income, coupled with in-depth knowl-
edge of consumer attitudes, is imperative for a company to assess whether its services
would be welcomed or not within a region. Finally, the political environment can impact
how a company runs operations. We discussed in Chapter 2 the different political systems
that exist across the world, and an understanding of those systems, along with the current
state of affairs, can alert MNCs to any warnings that may impede expansion.
After obtaining the information, MNCs then go through an analyzing process that
gives rise to the relevant features of the external environment. By performing analyses,
the company can discover the risks and opportunities involved in expanding to that
region. Typically, managers would communicate the results and then try to formulate the
best strategy to take advantage of a ripening market. However, the external environment
is not the only aspect to consider, and more information must be reviewed before those
steps can be applied.
Environmental scanning is central to discovering if an MNC can survive in a par-
ticular region; however, it is only effective if it is done consistently. The environment
changes very rapidly, and in order for firms to continually adapt, they must assess the
external dynamics that could bolster or hinder future productivity. Each country will have
a different perspective as to which factors create the most roadblocks and therefore must
be evaluated on a more consistent basis. For example, a recent study showed that while
both Malaysian and U.S. managers see competitors and the market as highly important,
the U.S. managers considered regulatory issues more relevant than the Malaysians did.
In this case, Malaysian MNCs have not been exposed to the sometimes strict directives
that U.S. MNCs can face.75
Netflix’s recent push into Europe provides an example of how this environmental
scanning process works. The company analyzed the wireless streaming environment in
Europe and concluded that the mobile market was ideal for penetration. As a result, it made
a number of strategic positioning moves. First, it signed a deal with Vodafone UK in 2014
to provide new customers with a free six-month subscription to Netflix. The deal includes
free 4G streaming for customers over their Vodafone devices, encouraging U.K. customers
to use Netflix while on the move. Later in 2014, Netflix rolled-out to six mainland Euro-
pean countries, including France, Germany, and Belgium, to compete directly against exist-
ing streaming providers for the more than 100 million potential customers in countries with
the highest existing Internet penetration.76 In 2015, Netflix began to roll out its subscrip-
tions to untapped European regions, with lower levels of penetration by both streaming
competitors and high-speed Internet providers. As a result, Netflix took losses in Europe
in 2015 and 2016; however, as Internet connectivity and mobile streaming continue to
increase in places like Spain, Italy, and eastern Europe, Netflix hopes that its investments
will result in large profits and a majority of the market across the European continent.77
Another example is Cisco Systems, the world’s largest maker of networking equip-
ment, which continues to grow rapidly through acquisitions. For more than 20 years,
acquisitions have comprised nearly half of its business activity, with start-up companies
key to its strategy. In November 2015, Cisco spent US$700 million to acquire Acano, a
British videoconferencing start-up, and in 2016, the company acquired Jasper Technolo-
gies, a start-up focused on wireless connections and the “Internet of things,” for US$1.4
billion.78 Cisco’s China strategy has resulted from careful scanning of the broad macro
political-economic environment as well as of the competitor landscape. Already the
world’s largest Internet and mobile phone market, China is likely to become even more
304 Part 3 International Strategic Management
crucial to the network equipment maker’s growth as the country’s burgeoning middle
class gains access to new technology. Joint ventures and acquisitions have been key to
Cisco when conducting business in China and maintaining sales. For example, in 2015,
Cisco joined with Chinese start-up Inspur Group to produce computer servers to compete
against Huawei Technologies Co. Ltd. and ZTE Corp., two large Chinese rivals. By
relying on acquisitions and JVs, Cisco is in a stronger position to work around difficult
regulations and government policies, even if overall trade tensions between the United
States and China continue.79,80 In 2015, Cisco committed to invest over US$10 billion
in the country over the next several years.81
Internal Resource Analysis
When formulating strategy, some firms wait until they have completed their environmen-
tal scanning before conducting an internal resource analysis, which is a microeconomic
aspect of activity. Others perform these two steps simultaneously. Internal resource anal-
ysis helps the firm to evaluate its current managerial, technical, material, and financial
resources and capabilities to better assess its strengths and weaknesses. This assessment
then is used by the MNC to determine its ability to take advantage of international mar-
ket opportunities. The primary thrust of this analysis is to match external opportunities
(gained through the environmental scan) with internal capabilities (gained through the
internal resource analysis). In other words, these evaluations should not be viewed as
how the environment creates a barrier to entry, but rather how companies can utilize
their resources and capabilities to best take advantage of environmental opportunities.
An internal analysis identifies the key factors for success that will dictate how well
the firm is likely to do. A key success factor (KSF) is a factor that is necessary for a
firm to compete effectively in a market niche. For example, a KSF for an international
airline is price. An airline that discounts its prices will gain market share vis-à-vis com-
petitors that do not. A second KSF for the airline is safety, and a third is quality of
service in terms of on-time departures and arrivals; convenient schedules; and friendly,
helpful personnel. In the automobile industry, quality of products has emerged as the
number-one KSF in world markets. Japanese firms have been able to invade the U.S.
auto market successfully because they have been able to prove that the quality of their
cars is better than that of the average domestically built U.S. car. Toyota and Honda have
had a quality edge over the competition in recent years in the eyes of U.S. car buyers.
A second KSF is styling. The redesigned Mini-Cooper has been successful, in part,
because customers like its unique look.
The key question for the management of an MNC is: Do we have the people and
resources that can help us to develop and sustain the necessary KSFs, or can we acquire
them? If the answer is yes, the recommendation would be to proceed. If the answer is
no, management would begin looking at other markets where it has, or can develop, the
necessary KSFs.
The balance between environmental scanning and internal resource analysis can be
quite delicate. Managers do not want to spend too much time looking inward; otherwise,
they could miss changes in the environment that would alter the company’s strengths and
weaknesses based on that market. Conversely, managers do not want to appraise the
outward view for too long as they could take time away from improving internal systems
and taking advantage of opportunities.
Goal Setting for Strategy Formulation
In practice, goal formulation often precedes the first two steps of environmental scanning
and internal resource analysis. As used here, however, the more specific goals for the
strategic plan come out of external scanning and internal analysis. MNCs pursue a variety
of such goals; Table 8–1 provides a list of the most common ones. These goals typically
serve as an umbrella beneath which the subsidiaries and other international groups operate.
key success factor (KSF)
A factor necessary for a
firm to effectively compete
in a market niche.
Chapter 8 Strategy Formulation and Implementation 305
Profitability and marketing goals almost always dominate the strategic plans of
today’s MNCs. Profitability, as shown in Table 8–1, is so important because MNCs
generally need higher profitability from their overseas operations than they do from their
domestic operations. The reason is quite simple: Setting up overseas operations involves
greater risk and effort. In addition, a firm that has done well domestically with a product
or service usually has done so because the competition is minimal or ineffective. Firms
with this advantage often find additional lucrative opportunities outside their borders.
Moreover, the more successful a firm is domestically, the more difficult it is to increase
market share without strong competitive response. International markets, however, offer
an ideal alternative to the desire for increased growth and profitability.
Another reason that profitability and marketing top the list is that these tend to be
more externally environmentally responsive, whereas production, finance, and personnel
functions tend to be more internally controlled. Thus, for strategic planning, profitability
and marketing goals are given higher importance and warrant closer attention. Ford’s
European operations offer an example. In recent years the automaker had been losing
market share in the EU. Starting in 2012, Ford instituted a major overhaul of its European
operations, restructuring and streamlining its processes. This included unloading the Land
Rover and Jaguar to Tata of India and its share of Volvo to China’s Geely. In seeking to
improve performance in Europe, Ford also began shipping more cars from its factory in
Thailand and, in so doing, saving on costs and increasing margins. Rather than spend
money creating European-centric cars, Ford also began selling its more global models
Table 8–1
Areas for Formulation of MNC Goals
Profitability
Level of profits
Return on assets, investment, equity, sales
Yearly profit growth
Yearly earnings per share growth
Marketing
Total sales volume
Market share—worldwide, region, country
Growth in sales volume
Growth in market share
Integration of country markets for marketing efficiency and effectiveness
Operations
Ratio of foreign to domestic production volume
Economies of scale via international production integration
Quality and cost control
Introduction of cost-efficient production methods
Finance
Financing of foreign affiliates—retained earnings or local borrowing
Taxation—minimizing tax burden globally
Optimum capital structure
Foreign exchange management—minimizing losses from foreign fluctuations
Human Resources
Recruitment and selection
Development of managers with global orientation
Management development of host-country nationals
Compensation and benefits
306 Part 3 International Strategic Management
within Europe. The restructuring has paid off for the company; after years of losses in
the European market, Ford posted profits in 2015 and 2016. Ford’s share of the European
market, standing at 7.5 percent in 2016, has also increased with its profitability.82
Once the strategic goals are set, the MNC will develop specific operational goals
and controls, usually through a two-way process at the subsidiary or affiliate level. Home-
office management will set certain parameters, and the overseas group will operate within
these guidelines. For example, the MNC headquarters may require periodic financial
reports, restrict on-site decisions to matters involving less than $100,000, and require
that all client contracts be cleared through the home office. These guidelines are designed
to ensure that the overseas group’s activities support the goals in the strategic plan and
that all units operate in a coordinated effort.
■ Strategy Implementation
Once formulated, the strategic plan next must be implemented. Strategy implementation
provides goods and services in accord with a plan of action. Quite often, this plan will
have an overall philosophy or series of guidelines that direct the process. In the case of
Japanese electronic-manufacturing firms entering the U.S. market, Chang has found a
common approach:
To reduce the risk of failure, these firms are entering their core businesses and those in
which they have stronger competitive advantages over local firms first. The learning from
early entry enables firms to launch further entry into areas in which they have the next
strongest competitive advantages. As learning accumulates, firms may overcome the disad-
vantages intrinsic to foreignness. Although primary learning takes place within firms through
learning by doing, they may also learn from other firms through the transfer or diffusion of
experience. This process is not automatic, however, and it may be enhanced by membership
in a corporate network: in firms associated with either horizontal or vertical business, groups
were more likely to initiate entries than independent firms. By learning from their own
sequential entry experience as well as from other firms in corporate networks, firms build
capabilities in foreign entry.83
International management must consider three general areas in strategy implemen-
tation. First, the MNC must decide where to locate operations. Second, the MNC must
carry out entry and ownership strategies (discussed in Chapter 9). Finally, management
must implement functional strategies in areas such as marketing, production, and finance.
Location Considerations for Implementation
In choosing a location, today’s MNC has two primary considerations: the country and the
specific locale within the chosen country. Quite often, the first choice is easier than the
second because there are many more alternatives from which to choose a specific locale.
The Country Traditionally, MNCs have invested in highly industrialized countries, and
research reveals that annual investments have been increasing substantially.
In the case of Japan, MNCs are actively engaged in mergers and acquisitions. Intuit
Inc. of Menlo Park, California, purchased a financial software specialist in Japan for
$52 million in stock and spent $30 million for the Nihon Mikon Company, which sells
small business accounting software. Accenture, based in Dublin, Ireland, acquired the
Japanese full-service digital agency IMJ in 2016 with the specific aim of gaining traction
in the local Japanese market.84 These purchases point to a new trend in Japan—the
acquisition of small firms. However, many larger purchases have also been made.
Foreign investors are also pouring into Mexico, although this investment activity
has generated some political controversy in the United States.85 One reason is that it is
a gateway to the American and Canadian markets. A second reason is that Mexico is a
very cost-effective place in which to manufacture goods. A third is that the declining
strategy implementation
The process of providing
goods and services in accord
with a plan of action.
Chapter 8 Strategy Formulation and Implementation 307
value of the peso after Mexico’s economic crisis in 1994 and 1995 hit many Mexican
businesses hard and left them vulnerable to mergers and acquisitions—an opportunity
not lost on many large multinationals. In the period 1996–1997, Britain’s B.A.T. Indus-
tries PLC took control of Cigarrera La Moderna, Mexico’s tobacco giant, in a $1.5 bil-
lion deal. A few days earlier, Philip Morris Cos. increased its stake in the second-largest
tobacco company, Cigarros La Tabacalera Mexicana SA, to 50 percent from about
29 percent for $400 million. Walmart Stores Inc. announced plans to acquire control of
Mexico’s largest retailer, Cifra SA, in a deal valued at more than $1 billion, eventually
becoming part of Walmex, Walmart’s Mexican subsidiary (see In-Depth Integrative
Case 2.2). A month later, Procter & Gamble Co. acquired a consumer-products concern,
Loreto y Pena Pobre, for $170 million.86 More recently, acquisitions of Mexican compa-
nies have continued, although for more strategic reasons. For example, in April 2015,
AT&T acquired Nextel Mexico for US$1.875 billion, citing the rapidly growing middle
class. In June 2013, Anheuser-Busch InBev and Grupo Modelo, Mexico’s largest brewer,
announced completion of their integration in a deal valued at $20.1 billion. In its press
release, AB InBev said, “The combination is a natural next step given the successful
long-term partnership between AB InBev and Grupo Modelo, which started more than
20 years ago. The combined company will benefit from the significant growth potential
that Modelo brands such as Corona have globally outside of the U.S., as well as locally
in Mexico, where there will also be opportunities to introduce AB InBev brands through
Modelo’s distribution network.”87,88
MNCs often invest in advanced industrialized countries because they offer the
largest markets for goods and services. In addition, the established country or geographic
locale may have legal restrictions related to imports, encouraging a local presence. Jap-
anese firms, for example, in complying with their voluntary export quotas of cars to the
United States as well as responding to dissatisfaction in Washington regarding the con-
tinuing trade imbalance with the United States, have established U.S.-based assembly
plants. In Europe, because of EU regulations for outsiders, most U.S. and Japanese MNCs
have operations in at least one European country, thus ensuring access to the European
community at large. In fact, the huge U.S. MNC ITT now operates in each of the original
12 EU countries.
Another consideration in choosing a country is the amount of government control
and restrictions on foreign investment. Traditionally, MNCs from around the world
resisted anything but very limited business in Eastern European countries with central
planning economies. The recent relaxing of the trade rules and move toward free-market
economies in the republics of the former Soviet Union and the other Eastern European
nations, however, have encouraged MNCs to rethink their positions; more and more are
making moves into this largely untapped part of the global market. The same is true in
India, although the political climate can be volatile and MNCs must carefully weigh the
risks of investing there. Restrictions on foreign investment also play a factor. Countries
such as China and India have required that control of the operation be in the hands of
local partners. MNCs that are reluctant to accept such conditions will not establish oper-
ations there.
In addition to these considerations, MNCs examine the specific benefits offered by
host countries, including low tax rates, rent-free land and buildings, low-interest or no-
interest loans, subsidized energy and transportation rates, and a well-developed infra-
structure that provides many of the services found back home (good roads,
communication systems, schools, health care, entertainment, and housing). These bene-
fits will be weighed against any disincentives or performance requirements that must be
met by the MNC, such as job-creation quotas, export minimums for generating foreign
currency, limits on local market growth, labor regulations, wage and price controls,
restrictions on profit repatriation, and controls on the transfer of technology.
Local Issues Once the MNC has selected the country in which to locate, the firm
must choose the specific locale. A number of factors influence this choice. Common
308 Part 3 International Strategic Management
considerations include access to markets, proximity to competitors, availability of trans-
portation and electric power, and desirability of the location for employees coming in
from the outside.
One study found that in selecting U.S. sites, both German and Japanese firms place
more importance on accessibility and desirability and less importance on financial con-
siderations.89 However, financial matters remain important: Many countries attempt to
lure MNCs to specific locales by offering special financial packages.
Another common consideration is the nature of the workforce. MNCs prefer to
locate near sources of available labor that can be readily trained to do the work. A
complementary consideration that often is unspoken is the presence and strength of
organized labor. Japanese firms in particular tend to avoid heavily unionized areas.
Still another consideration is the cost of doing business. Manufacturers often set up
operations in rural areas, commonly called “greenfield locations,” which are much less
expensive and do not have the problems of urban areas. Conversely, banks often choose
metropolitan areas because they feel they must have a presence in the business district.
Some MNCs opt for locales where the cost of running a small enterprise is sig-
nificantly lower than that of running a large one. In this way, they spread their risk, setting
up many small locations throughout the world rather than one or two large ones. Manu-
facturing firms are a good example. Some production firms feel that the economies of
scale associated with a large-scale plant are more than offset by potential problems that
can result should economic or political difficulties develop in the country. These firms’
strategy is to spread the risk by opting for a series of small plants throughout a wide
geographic region.90 This location strategy can also be beneficial for stockholders. Research
has found that MNCs with a presence in developing countries have significantly higher
market values than MNCs that operate only in countries that have advanced economies.91
Frontier Markets Sometimes referred to as pre-emerging, frontier markets are a unique
subset of emerging economies. Whereas most traditional emerging markets are finan-
cially linked to the economies of their more developed counterparts, frontier markets are
less correlated to the ups and downs of the global economy. From an investment point
of view, these markets offer potentially high rewards, but with high risk. The most com-
monly cited frontier markets are located in Africa and Asia.
Business initiatives in frontier markets require careful strategic considerations. One
potential approach is to joint-venture with a local company that specializes in the cultural
knowledge of the marketplace. The Mara Group, for example, is an African conglomer-
ate that conducts business in a variety of unrelated ventures across the continent. Rather
than focus on the financial and technical aspects of the business, the Mara Group pro-
vides the marketing, logistical, and bureaucratic assistance to its international partners.
The Mara Group also provides a trusted, recognizable brand name to foreign products.
Utilizing an office in Dubai, the Mara Group is able to stay well-connected with foreign
companies as well as with the African market. IBM is an example of an MNC that has
conducted business in frontier markets using a partnership with the Mara Group.92
Combining Country and Firm-Specific Factors
in International Strategy
International management scholars have developed a simple framework that builds upon
the integration-responsiveness framework to help managers understand the interaction
between the relative attractiveness of different country locations for a given activity and
the firm-level attributes or strengths that can be leveraged in that location.93 The first set
of factors is referred to as CSAs, or country-specific advantages, while the second is
referred to as FSAs, or firm-specific advantages. CSAs can be based on natural resource
endowments (minerals, energy, forests), the labor force, or less tangible factors that
include education and skills, institutional protections of intellectual property, entrepre-
neurial dynamism, or other factors unique to a given market. FSAs are unique capabilities
Chapter 8 Strategy Formulation and Implementation 309
proprietary to the organization that may be based on product or process technology,
marketing or distributional skills, or managerial know-how.
Managers of MNCs use strategies that build upon the interactions of CSAs and
FSAs. Figure 8–2 provides a graphical depiction of this framework. It should be empha-
sized that the “strength” or “weakness” of FSAs and CSAs is a relative notion that
depends on the relevant market and the CSAs and FSAs of potential competitors.
MNCs in quadrants 1, 2, and 3 would be expected to pursue different strategies.
Quadrant 1 firms would tend to emphasize cost leadership; they are likely to be resource-
based and/or mature, internationally oriented firms producing a commodity-type product.
Given these factors, FSAs tend to be less important compared to the CSAs of location
and energy costs, which are the main sources of the firm’s competitive advantage.
Quadrant 2 firms represent less efficient firms with few intrinsic CSAs or FSAs.
Quadrant 2 could also represent domestically based small and medium-sized firms with
little global exposure. Firms in quadrant 4 are generally differentiated firms with strong
FSAs in marketing and customization. These firms usually have strong brands. In quadrant
4 the FSAs dominate, so in world markets the home-country CSAs are not essential in
the long run. Quadrant 3 firms generally can choose either the cost or differentiation
strategies, or perhaps combine them because of the strength of both their CSAs and FSAs.
In terms of business strategy, firms in quadrants 2 and 3 can benefit from strategies
of both low cost and differentiation. Such a firm is constantly evaluating its production
mix. Quadrants 4 and 1 require specific strategies for different types of firms. For
instance, a quadrant 4 firm that has strong FSAs in marketing (customization) can oper-
ate internationally without reliance on its home-market CSA, or the CSAs of the host
nation. For such a firm, in quadrant 4, the CSA is not relevant. In contrast, quadrant 1
has mature multinationals or product divisions determined more by CSAs than by FSAs.
By improving potential FSAs in marketing or product innovation and increasing value
added through vertical integration, the quadrant 1 firm can move to quadrant 3.
C
o
u
n
tr
y-
sp
ec
ifi
c
ad
va
n
ta
g
es
(C
S
A
s)
Firm-specific advantages (FSAs)
Strong
Weak
1
Weak
2
Strong
Weak Strong
3
4
Figure 8–2
The CSA-FSA Matrix
Source: Alan Rugman and Jonathan P. Doh, Multinationals and Development, p. 13. Copyright © 2008. Reprinted by permission of
Yale University Press.
310 Part 3 International Strategic Management
The Role of the Functional Areas in Implementation
To implement strategies, MNCs must tap the primary functional areas of marketing,
production, and finance. The following sections examine the roles of these functions in
international strategy implementation.
Marketing The implementation of strategy from a marketing perspective must be de-
termined on a country-by-country basis. What works from the standpoint of marketing
in one locale may not necessarily succeed in another. In addition, the specific steps of a
marketing approach often are dictated by the overall strategic plan, which in turn is based
heavily on market analysis.
German auto firms in Japan are a good example of using marketing analysis to
meet customer needs. While automakers from Detriot have been boycotting Japanese auto
shows for a decade, the Germans have spent millions of dollars to build dealer, supplier,
and service-support networks in Japan, in addition to adapting their cars to Japanese
customers’ tastes. Volkswagen Audi Nippon has built a $320 million import facility on
a deepwater port. This operation, which includes an inspection center and parts ware-
house, processed over 100,000 cars in 2015 alone.94 Daimler and BMW both have intro-
duced lower-priced cars to attract a larger market segment. At the same time, German
manufacturers work hard to offer first-class service in their dealerships. As a result,
German automakers in recent years have sold almost three times as many cars in Japan
as their U.S. competitors do.
The Japanese also provide an excellent example of how the marketing process
works. In many cases, Japanese firms have followed a strategy of first building up their
market share at home and driving out imported goods. Then, the firms move into newly
developed countries, honing their marketing skills as they go along. Finally, the firms
move into fully developed countries, ready to compete with the best available. This pat-
tern of implementing strategy has been used in marketing autos, cameras, consumer
electronics, home appliances, petrochemicals, steel, and watches. For some products,
however, such as computers, the Japanese have moved from their home market directly
into fully developed countries and then on to the newly developing nations. Finally, the
Japanese have gone directly to developed countries to market products in some cases
because the market in Japan was too small. Such products include color TVs, Blu-ray
players, and sewing machines. In general, once a firm agrees on the goods it wants to
sell in the international marketplace, then the specific marketing strategy is implemented.
The implementation of marketing strategy in the international arena is built around
the well-known “four Ps” of marketing—product, price, promotion, and place. As noted
in the example of the Japanese, firms often develop and sell a product in local or periph-
eral markets before expanding to major overseas targets. If the product is designed spe-
cifically to meet an overseas demand, however, the process is more direct. Price largely
is a function of market demand.95 For example, the Japanese have found that the U.S.
microcomputer market is price-sensitive; by introducing lower-priced clones, the Japa-
nese have been able to make headway, especially in the portable laptop market. The last
two Ps, promotion and place, are dictated by local conditions and often left in the hands
of those running the subsidiary or affiliate. Local management may implement customer
sales incentives, for example, or make arrangements with dealers and salespeople who
are helping to move the product locally.
Production Although marketing usually dominates strategy implementation, the produc-
tion function also plays a role. If a company is going to export goods to a foreign market,
the production process traditionally has been handled through domestic operations. In
recent years, however, MNCs have found that whether they are exporting or producing
the goods locally in the host country, consideration of worldwide production is important.
For example, goods may be produced in foreign countries for export to other nations.
Sometimes, a plant will specialize in a particular product and export it to all the MNC’s
Chapter 8 Strategy Formulation and Implementation 311
markets; other times, a plant will produce goods only for a specific locale, such as Western
Europe or South America. Still other facilities will produce one or more components that
are shipped to a larger network of assembly plants. That last option has been widely adopted
by pharmaceutical firms and automakers such as Volkswagen and Honda.
As mentioned in the first part of the chapter, if the firm operates production plants
in different countries but makes no attempt to integrate its overall operations, the com-
pany is known as a multi-domestic. A recent trend has been away from this scattered
approach and toward global coordination of operations.
Finally, if the product is labor-intensive, as in the case of microcomputers, then
the trend is to farm the product out to low-cost sites such as Mexico or Brazil, where
the cost of labor is relatively low and the infrastructure (electric power, communications
systems, transportation systems) is sufficient to support production. Sometimes, multiple
sources of individual components are used; in other cases, one or two sources are suf-
ficient. In any event, careful coordination of the production function is needed when
implementing the strategy, and the result is a product that is truly global in nature.
Finance Use of the finance function to implement strategy normally is developed at
the home office and carried out by the overseas affiliate or branch. When a firm went
international in the past, the overseas operation commonly relied on the local area for
funds, but the rise of global financing has ended this practice. MNCs have learned that
transferring funds from one place in the world to another, or borrowing funds in the
international money markets, often is less expensive than relying on local sources.
Unfortunately, there are problems in these transfers.
Such a problem is representative of those faced by MNCs using the finance func-
tion to implement their strategies. One of an MNC’s biggest recent headaches when
implementing strategies in the financial dimension has been the revaluation of currencies.
For example, in the late 1990s, the U.S. dollar increased in value against the Japanese
yen. American overseas subsidiaries that held yen found their profits (in terms of dollars)
declining. The same was true for those subsidiaries that held Mexican pesos when that
government devalued the currency several years ago. When this happens, a subsidiary’s
profit will decline. After its initial introduction in 1999, the euro declined against the
U.S. dollar, but when the dollar subsequently came under pressure, the euro regained
strength. One of the more recent examples of financial issues is the expansive U.S. trade
deficit with China, where the potentially undervalued yuan has played a role.
When dealing with the inherent risk of volatile monetary exchange rates, some
MNCs have bought currency options that (for a price) guarantee convertibility at a spec-
ified rate. Others have developed countertrade strategies, whereby they receive products
in exchange for currency. For example, PepsiCo received payment in vodka for its prod-
ucts sold in Russia. Countertrade continues to be a popular form of international business,
especially in less developed countries and those with nonconvertible currencies.
■ Specialized Strategies
In addition to the basic steps in strategy formulation, the analysis of which strategies
may be appropriate based on the globalization vs. national responsiveness framework,
and the specific processes in strategy implementation, there are some circumstances that
may require specialized strategies. Two that have received considerable attention in recent
years are strategies for developing and emerging markets and strategies for international
entrepreneurship and new ventures.
Strategies for Emerging Markets
Emerging economies have assumed an increasingly important role in the global economy
and are predicted to compose more than half of global economic output by midcentury.
Partly in response to this growth, MNCs are directing increasing attention to those
312 Part 3 International Strategic Management
markets. Foreign direct investment (FDI) flows into developing countries—one measure
of increased integration and business activity between developed and emerging econo-
mies—grew from $23.7 billion in 1990 to a projected $850 billion in 2017. In 2015, FDI
inflows to developing Asia reached record highs of nearly US$500 billion, matching the
total amount received by all developed countries combined. In particular, the “BRIC”
economies have been among the largest recipients of FDI. In 2014, Brazil, Russia, India,
and China attracted a combined 20 percent of all global FDI inflows.96
At the same time, emerging economies pose exceptional risks due to their political
and economic volatility and their relatively underdeveloped institutional systems. These
risks show up in corruption, failure to enforce contracts, red tape and bureaucratic costs,
and general uncertainty in the legal and political environment.97,98 MNCs must adjust
their strategy to respond to these risks. For example, in these risky markets, it may be
wise to engage in arm’s-length or limited equity investments or to maintain greater con-
trol of operations by avoiding joint ventures or other shared ownership structures. In
other circumstances, it may be wiser to collaborate with a local partner who can help
buffer risks through its political connections. Some of the factors relating to these condi-
tions will be discussed in Chapters 9 and 10. However, two unique types of strategies
for emerging markets deserve particular attention here.
First-Mover Strategies Recent research has suggested that entry order into developing
countries may be particularly important given the transitional nature of these markets. In
general, in particular industries and economic environments, significant economies are
associated with first-mover or early-entry positioning—being the first or one of the first
to enter a market. These include capturing learning effects important for increasing mar-
ket share, achieving scale economies that accrue from opportunities for capturing that
greater share, and development of alliances with the most attractive (or in some cases
the only) local partner. In emerging economies that are undergoing rapid changes such
as privatization and market liberalization, there may be a narrow window of time within
which these opportunities can be best exploited. In these conditions, first-mover strategies
allow entrants to preempt competition, establish beachhead positions, and influence the
evolving competitive environment in a manner conducive to their long-term interests and
market position.
One study analyzed these benefits in the case of China, concluding that early
entrants have reaped substantial rewards for their efforts, especially when collaborations
with governments provided credible commitments that the deals struck in those early
years of liberalization would not later be undone. First-mover advantages in some other
transitional markets, such as Russia and Eastern Europe, are not so clear. Moreover, there
may be substantial risks to premature entry—that is, entry before the basic legal, insti-
tutional, and political frameworks for doing business have been established.99
Privatization presents a particularly powerful case supporting the competitive
effects of first-mover positioning. First movers who succeed in taking over newly
privatized state-owned enterprises, such as telecom and energy firms, possess a sig-
nificant advantage over later entrants, especially when market liberalization is delayed
and the host government provides protection to the newly privatized incumbent firms.
This was the case in 1998 when the Mexican government accepted a $1.757 billion
bid for a minority (20.4 percent) but controlling interest in Telefonos de Mexico
(Telmex) from an international consortium composed of Grupo Carso, Southwestern
Bell, and France Cable et Radio, an affiliate of France Telecom. Although the Mex-
ican market subsequently opened to competition, Telmex and its foreign partners (the
first movers) maintained monopoly control over local networks and were able to
bundle local and long-distance service, cross-market, and cross-subsidize, giving Tel-
mex a strong advantage. Moreover, the Mexican government was responsive to provid-
ing the Telmex consortium protection and financial support for infrastructure
investment, and it did so partly by charging new carriers to help Telmex pay for
Chapter 8 Strategy Formulation and Implementation 313
improvements needed for the long-distance network. In addition, Telmex was able to
charge relatively high fees to connect to its network, and the long delay between the
initial privatization and market opening allowed these advantages to persist.100 As of
2016, Telmex still controls 80 percent of all telephone lines in the country and holds
a 70 percent share of the wireless market.101
Strategies for the “Base of the Pyramid” Another area of increasing focus for
MNCs is the 6 billion or more potential customers around the world who have here-
tofore been mostly ignored by international business, even within emerging econo-
mies, where most MNCs target only the wealthiest consumers. Although FDI in
emerging economies has grown rapidly, most has been directed at the big emerging
markets previously mentioned—China, India, and Brazil—and even there, most MNC
emerging-market strategies have focused exclusively on the elite and emerging mid-
dle-class markets, ignoring the vast majority of people considered too poor to be
viable customers.102,103,104 Because of this focus, MNC strategies aimed at tailoring
existing practices and products to better fit the needs of emerging-market customers
have not succeeded in making products and services available to the mass markets in
the developing world—the 4 billion people at the bottom of the economic pyramid
who represent over half of the world’s population. Figure 8–3 shows the distribution
of population and income around the world.
A group of researchers and companies have begun exploring the potentially
untapped markets at the base of the pyramid (BOP). They have found that incremen-
tal adaptation of existing technologies and products is not effective at the BOP and
that the BOP forces MNCs to fundamentally rethink their strategies.105 Companies
must consider smaller-scale strategies and build relationships with local governments,
small entrepreneurs, and nonprofits rather than depend on established partners such
as central governments and large local companies. Building relationships directly and
at the local level contributes to the reputation and fosters the trust necessary to over-
come the lack of formal institutions such as intellectual property rights and the rule
of law. The BOP may also be an ideal environment for incubating new, leapfrog
technologies, including “disruptive” technologies that reduce environmental impacts
and increase social benefit such as renewable energy and wireless telecom. Finally,
business models forged successfully at the base of the pyramid have the potential to
travel profitably to higher-income markets because adding cost and features to a low-
cost model may be easier than removing cost and features from high-cost models.106 This
base of the pyramid
strategy
Strategy targeting low-
income customers in
developing countries.
Figure 8–3
The World Population and
Income Pyramid in 2016
Purchasing Power Parity,
in US Dollars
>$20,000
0.5 billion
$2,000–$20,000
2.4 billion
<$2,000
4.2 billion
Tier 1
59
%
33
%
8%
Tiers 2 & 3
Tier 4
Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from the World Bank.
314 Part 3 International Strategic Management
last finding has significant implications for the globalization–national responsiveness
framework introduced at the beginning of the chapter and for the potential for MNCs
to achieve a truly transnational strategy.107
Some researchers have proposed that collaboration and alliances with nonprofit
nongovernmental organizations (NGOs) can be a means to jump-start market entry in
BOP markets. Dahan, Doh, Oetzel, and Yaziji documented how collaborating with
NGOs can contribute complementary capabilities—both intangible assets such as
knowledge, reputation, and brand and tangible resources such as human capital, pro-
duction capabilities, and market access—along each stage of the value chain, affecting
many aspects of the business model. These initiatives enable participating firms to
create and deliver value in novel ways, while minimizing costs and risks. They high-
light, in particular, the competencies and resources that NGOs can bring to such
partnerships, including market expertise (needs identification, knowledge of certain
market segments); the value of NGO brands to customers; customer relationships;
legitimacy with civil society players and governments; and ownership of—or access
to—local distribution systems and local sourcing ability.108 Among the cross-sectoral
initiatives they profile is Nestlé’s cocoa initiatives in Africa. Together with a dozen
other major chocolate manufacturers, Nestlé has partnered with NGOs and local gov-
ernments in setting up programs to improve labor conditions and promote sustainable
farming practices in West Africa. Nestlé is at the forefront of the latter objective, with
its sponsorship of “farmers field schools” on the Ivory Coast,109 which support both
the production of higher-quality cocoa (thus ensuring Nestlé has access to that labor
and production) and the social benefits of that production. Table 8–2 summarizes the
findings of this research by presenting how NGOs and MNCs can build a business
model that creates both economic and social value.
Danone is another company that has targeted poor consumers through innovative
strategy and marketing. It is marketing a single-serving yogurt drink in many develop-
ing country markets around the world, some living on dollar-a-day food budgets, sell-
ing the drinkable yogurts for as little as 10 cents. In 2015, more than half of Danone’s
sales were from emerging markets—up from just 6 percent 15 years before.110 Other
companies are pursuing similar strategies, including adidas, which is experimenting
with a one-euro sneaker for barefoot Bangladeshis. L’Oréal is selling sample-sized
containers of shampoo and face cream in India for a few pennies each and Unilever
developed Cubitos, small cubes of flavoring that cost as little as two cents apiece, for
poor markets. Danone has leveraged this strategy in multiple markets with various
products. The baby food market has grown greatly in emerging markets; in 2014,
Danone announced aggressive plans to further expand in China based almost exclu-
sively on baby products.111 Danone says that the yogurt is a good match in Senegal
because it is meant as an on-the-go snack—well adapted for Senegalese consumers
who have three or four snacks during a day and only one main meal. The first yogurt
debuted in Indonesia over 10 years ago was an instant hit, selling 10 million bottles
in its first three months on the market. It is still one of Danone’s most popular products
in Indonesia, where the average per-capita income is about $11 a day. Danone partnered
with Muhammad Yunus, the Bangladeshi who later won the Nobel Peace Prize for
pioneering work in microfinance, to set up a joint venture called Grameen Danone
Foods Ltd. to sell a seven-cent yogurt product called Shokti Doi—which means “strong
yogurt.” Rich with vitamins and minerals, it was to be sold through local women who
would peddle it door to door on commission.112
The Danone venture with Grameen faced some setbacks: milk prices soared, fac-
tory openings were delayed, and the saleswomen couldn’t earn a living selling yogurt
alone. The Danone venture shifted strategies and now sells the bulk of Shokti Doi in
urban stores, not rural villages. But the knowledge gained through these experiences can
be essential for MNCs: Danone maintained the project in Bangladesh, which it says
provided useful insights for other parts of its business, and subsequently built a factory
in Thailand modeled on the Bangladesh facility.
Chapter 8 Strategy Formulation and Implementation 315
Table 8–2
Contributions by Nongovernmental Organizations to
Business Models in Developing Markets
Business
Activity and
Example
Market research:
Ashoka/FEC proj-
ect to provide
irrigation to small
farmers in Latin
America
R&D: Cemex’s
Patrimonio Hoy
program
Procurement
and Production:
Nestlé’s cocoa
farming initiatives
Marketing: P&G/
PSI and the Safe
Drinking Water
Alliance
Distribution:
HSBC Amah and
Islamic Relief
Comprehensive:
AtoZ Mosquito
Net Venture
Market Constraint and
NGO Contribution
Market constraint: Lack of knowl-
edge; overcoming information
asymmetries
NGO contribution: Identifying inno-
vative technologies developed for
unique local environment and
market conditions; identification
and aggregation of customer base
Market constraint: Lack of appro-
priately priced and designed
construction materials for self-
construction of housing and
financing
NGO contribution: Market testing
of products; incorporation of
customer feedback; use of internal
microcredit system to facilitate
purchase of newly developed
materials
Market constraint: Underdeveloped
human capital; need access to
local networks and supply chains
NGO contribution: Established rela-
tions with local communities and
host-country governments
Market constraint: Lack of knowl-
edge surrounding distribution
and use of water in developing
countries
NGO contribution: Input in product
development, co- branding, cus-
tomer education
Market constraint: Access to local
networks and supply chains
NGO contribution: May take on the
provision of some services itself
Market constraint: No single orga-
nization was able to develop and
distribute affordable mosquito nets
NGO contribution: Holistic and
fundamental rethinking of product/
process and construction of new
model tailored to specific context
Relation of New Model to
Prior Corporate or NGO
Business Model
New co-created business
model that enabled the
provision of irrigation ser-
vice to farmers, resulting
in a doubling or tripling of
their incomes; enabled pri-
vate sector firm to reach
new customers that would
otherwise be inaccessible
New co-created business
model that enabled
Cemex to expand its mar-
ket through reconfigura-
tion of its business model
and made it possible for
Patrimonio Hoy to expand
housing opportunities for
low-income families
Extends Nestlé’s existing
business model (supply
chain) and enables local
NGOs to increase employ-
ment and other social
benefits for residents
Extends P&G’s and PSI’s
existing business models
by expanding the market
for and the affordable
availability of water-
purification products
(P&G product development;
PSI’s distribution
networks)
Extends HSBC Amah’s
existing business model
Creation of new product
based on shared technol-
ogy and expertise. WHO
participation makes prod-
uct accessible to many
people in Africa. Substan-
tial financial and social
value created
Distribution of
Social and
Economic Benefits
Social and
economic
Social and
economic
Primarily
economic
Social and
economic
Primarily
economic
Social and
economic
Potential
Benefit(s) to Busi-
ness Model
Generation of
novel business
model
Generation of
novel business
model;
value creation;
cost minimization
Value creation;
value delivery;
cost minimization
Value creation
Value creation;
value delivery; cost
minimization
Source: Nicolas Dahan, Jonathan P. Doh, Jennifer Oetzel, and Michael Yaziji, “Corporate-NGO Collaboration: Creating New Business Models for Developing Markets,”
Long Range Planning 43, no. 2 (2010), pp. 337–338.
316
International Management in Action
Can Internet and Mobile Access Transform Poor Economies
at the Base of the Pyramid?
Developed countries have experienced dramatic
advances in information and communications technol-
ogy (ICT), notably, sharp increases in penetration of both
Internet and wireless phone networks. Developing
countries, especially the poorest countries of South Asia
and Africa, have not benefited from these trends. Some
entrepreneurs, however, see great potential in reaching
these “bottom of the pyramid markets,” although these
efforts have, to date, been challenging. Low literacy
rates, poor infrastructure, corruption and other political
interference, and incomplete business models have all
contributed to stillborn efforts. Yet, these entrepreneurs
have persevered.
In terms of wireless service and Internet services,
many view Africa as the next great frontier, despite the
fact that more than half the population lives on less than
$2 a day. From 2000 to 2015, Internet penetration in
Africa grew more than 7,000 percent, from just over
4 million in 2000 to 327 million in 2015 (see Table 2–2
in Chapter 2). The total number of mobile subscribers in
Africa stood at 386 million in 2015, representing an
increase of nearly 40 million in one year. Nearly 90 per-
cent of the continent’s population is covered by cellular
service.
The increase in the number of mobile cellular sub-
scriptions over the last five years has defied all predic-
tions and Africa remains the region with the highest
mobile growth rate. The continent has a high ratio of
mobile cellular subscriptions to fixed telephone lines,
and the high mobile cellular growth rate suggests that
Africa has taken the lead in the shift from fixed to mobile
telephony, a trend that can be observed worldwide. The
number of Internet users has also grown faster than in
other regions, though smartphones, which are the pri-
mary method of Internet access for Africans, still remain
financially out of reach for many. Data plans are too
expensive for the average African consumer, and at sev-
eral hundred dollars each, the phones themselves are
too expensive to purchase.
African countries are facing a number of challenges
in increasing ICT levels. These include the lack of full
liberalization of markets and the limited availability of
infrastructure, such as shortage of international Internet
bandwidth. According to a recent report by the U.N.’s
ITU agency, the cost of information technology and
communication services still far exceeds the average
salary. On the question of infrastructure, the report says
there are practically no cable networks and many coun-
tries face a shortage of international Internet bandwidth.
According to the ITU, the figures highlight the accelera-
tion of growth in African mobile and Internet markets
outside of South Africa in less than a decade. Growth in
Nigeria has been very strong. Kenya, Ghana, Tanzania,
and Cote d’Ivoire have also accounted for the change
in the distribution of mobile connections.
European companies were among the first to aggres-
sively pursue African cellular markets. Ericsson, Alcatel,
and Motorola have pushed into the region, and Eng-
land’s Vodafone Group PLC and France Télécom’s
Orange unit have set up operations around the region.
But other entrepreneurs have identified mobile service
and Internet services as a way to make money and
empower individuals.
Terracom, an Internet venture started by Greg Wyler,
an American tech entrepreneur, entered Rwanda and
was granted a contract to connect 300 schools to the
Internet. Later, the company bought 99 percent of the
shares in Rwandatel, the country’s national telecommu-
nications company, for $20 million. Africa’s only connec-
tion to the network of computers and fiber optic cables
that are the Internet’s backbone is a $600 million under-
sea cable running from Portugal down the west coast of
Africa. Built in 2002, the cable was supposed to provide
cheaper and faster web access, but it didn’t deliver. Add-
ing to the problem is that most of the satellites serving
Africa were launched nearly 20 years ago and are aging
or going out of commission. A satellite set to go into
service last year blew up on the launching pad. Power
is also an issue, as intermittent power failures in Rwanda
hamper efforts to provide a steady electricity source.
Meanwhile, Terracom’s venture has been plagued by
repeated setbacks, with both sides accusing the other
of failing to deliver on its promise. “The bottom line is
that he promised many things and didn’t deliver,” said
Albert Butare, the country’s telecommunications minister.
Africa Online, another venture, was the first Internet
service provider in Kenya (1995) and Cote d’Ivoire
(1996). It grew to span eight countries across Africa. The
company was founded in 1994 by three Kenyans who
met each other while students at MIT and Harvard. The
idea began as an online news service for Kenyans, which
developed from an online community hosted at MIT
called KenyaNet, one of several online communities that
were among the most fervent virtual communities in the
early pre-web 1990s. With the commercialization of the
Internet, Africa Online moved its focus away from provid-
ing news to connecting Africans on the continent to the
Internet. In 1995, the company was bought by Interna-
tional Wireless of Boston, which ultimately became Prod-
igy. During this period, Africa Online expanded rapidly
from its original operation in Kenya to Ghana, Cote
d’Ivoire, Tanzania, Uganda, Zambia, Zimbabwe, and Swa-
ziland, with the three Kenyans continuing to manage the
operation. Africa Online was the first commercial Internet
provider in Kenya and Cote d’Ivoire. In 2007, Africa
Online was purchased by South Africa’s Telkom.
What makes Africa’s mobile and Internet revolution
significant is its potential economic impact. The World
Bank has been a strong supporter of deploying wireless
and Internet communication to improve food production
Chapter 8 Strategy Formulation and Implementation 317
The BOP strategy is challenging to implement. Companies have to offer affordable
goods that are highly available in a community that is willing to accept the product. Most
importantly, however, is that the company must bring awareness of the product to the
general populace. Balancing these is not a simple task because advertising and efficient
distribution networks, for example, cost a significant amount, yet the companies cannot
add a high price tag. Furthermore, illiteracy issues, poor infrastructure, corruption, and
nonexistent distribution channels often associated with poverty-stricken societies deter
companies from wanting to invest. Despite the many barriers, companies can be success-
ful. In the early years of cell phone usage, Smart Communications Inc. saw that there
was a great opportunity to expand in the Philippines, where about half the population
lived in poverty. In 2002, the market forecasted that approximately 30 percent of the
population would be using mobile phones by 2008. Smart offered pay-as-you-go phones
that could be recharged using a microchip that was already in the cellular phones, mak-
ing it possible to recharge “over the air.” The company then began to offer pricing plans
that consisted of extremely small increments, so even the low-income consumer could
take advantage of the opportunity. It worked in Smart’s favor, as more and more people
began using the service daily, and the cellular industry reached a 30 percent margin in
2004, changing forecasts to a shocking 70 percent mobile phone usage rate by 2008.
Smart’s parent company experienced a more than tenfold increase in profits in 2004 as
compared to 2003, due in large part to focusing on the very lucrative market at the base
of the pyramid.113 To learn more about how mobile technology is reaching impoverished
countries, see the nearby International Management in Action box.
Entrepreneurial Strategy and New Ventures
In addition to strategies that must be tailored for the particular needs and circumstances
in emerging economies, specialized strategies are also required for the international man-
agement activities of entrepreneurial and new-venture firms. Most international manage-
ment activities take place within the context of medium-large MNCs, but, increasingly,
small and medium companies, often in the form of new ventures, are getting involved in
international management. This has been made possible by advances in telecommunica-
tion and Internet technologies and by greater efficiencies and lower costs in shipping,
allowing firms that were previously limited to local or national markets to access inter-
national customers. These new access channels, however, suggest particular strategies
that must be customized and tailored to the unique situations and resource limitations of
small, entrepreneurial firms.114,115
International Entrepreneurship International entrepreneurship has been defined as
“a combination of innovative, proactive, and risk-seeking behavior that crosses national
borders and is intended to create value in organizations.”116 The internationalization of
the marketplace and the increasing number of entrepreneurial firms in the global econ-
omy have created new opportunities for small and new-venture firms to accelerate inter-
international
entrepreneurship
A combination of
innovative, proactive, and
risk-seeking behavior that
crosses national boundaries
and is intended to create
value for organizations.
and other development. To some, mobile has become
a means to economic empowerment. For example, farm-
ers in Senegal now use their one mobile phone to find
eggplant buyers in Dakar willing to pay three times the
rate offered by local middlemen. These and other exam-
ples suggest the information and communication tech-
nology revolution may reap benefits for multinational
and local companies, as well as others who may improve
their economic situation by exploiting these new com-
munication opportunities.
Source: Mike Powell, “Culture and the Internet in Africa, a Challenge for
Political Economists,” Review of African Political Economy, June 2001,
p. 241; “The Digital Gap,” Economist, October 20, 2007, p. 64; “The
Mobile Revolution in Africa,” Global Finance, December 2009, p. 49;
“Reasons to Cut Off Mr. Mugabe,” Economist, April 13, 1996, p. 339.
318 Part 3 International Strategic Management
nationalization. This international entrepreneurial activity is being observed in even the
smallest and newest organizations. Indeed, one study among 57 privately held Finnish
electronics firms during the mid-1990s showed that firms that internationalize after they
are established domestically must overcome a number of barriers to that international
expansion, such as their domestic orientation, internal domestic political ties, and do-
mestic decision-making inertia. In contrast, firms that internationalize earlier face fewer
barriers to learning about the international environment.117 Thus, the earlier in its exis-
tence that an innovative firm internationalizes, the faster it is likely to grow both overall
and in foreign markets.
However, despite this new access, there remain limitations to international entre-
preneurial activities. In another study, researchers show that deploying a technological
learning advantage internationally is no simple process. They studied more than 300
private independent and corporate new ventures based in the United States. Building on
past research about the advantages of large, established multinational enterprises, their
results from 12 high-technology industries show that greater diversity of national environ-
ments is associated with increased technological learning opportunities even for new
ventures, whose internationalization is usually thought to be limited.118 In addition, the
breadth, depth, and speed of technological learning from varied international environ-
ments is significantly enhanced by formal organizational efforts to integrate knowledge
throughout a firm such as cross-functional teams and formal analysis of both successful
and failed projects. Further, the research shows that venture performance (growth
and return on equity) is improved by technological learning gained from international
environments.
International New Ventures and “Born-Global” Firms Another dimension of the
growth of international entrepreneurial activities is the increasing incidence of interna-
tional new ventures, or born-global firms—firms that engage in significant international
activity shortly after being established. Building on an empirical study of small firms in
Norway and France, researchers found that more than half of the exporting firms estab-
lished there since 1990 could be classified as “born globals.”119 Examining the differ-
ences between newly established firms with high or low export involvement levels
revealed that a decision maker’s global orientation and market conditions are important
factors.
Another study highlighted the critical role of innovative culture, as well as
knowledge and capabilities, in this unique breed of international, entrepreneurial
firms. An analysis of case studies and surveys revealed key strategies that engender
international success among these innovative firms.120 Successful born-global firms
leverage a distinctive mix of orientations and strategies that allow them to succeed in
diverse international markets. Their possession of the foundational capabilities of
international entrepreneurial orientation and international marketing orientation
engender the development of a specific collection of organizational strategies. The
most important business strategies employed by born-global firms are global techno-
logical competence, unique-products development, quality focus, and leveraging of
foreign distributor competences.121
There is a difference between born-global firms and born-international firms, as
one study showed. Born-international firms tend to export products close to markets, and
revenues from these outside markets contribute 25 percent or less of total revenues. Truly
born-global firms, however, tend to distribute goods to distant markets in multiple
regions, and revenues from international activities tend to surpass 25 percent. It has been
found that truly born-global firms tend to survive longer than other seemingly global
companies.122 However, being born global can simply be seen as accelerated internation-
alization. Another study compared born-global firms to those that sought out joint ven-
tures or acquisitions (see Chapter 9) as a method to expand internationally. Results
showed that while the market responds more positively to joint ventures or “partnerships,”
born-global firms
Firms that engage in
significant international
activities shortly after
being established.
Chapter 8 Strategy Formulation and Implementation 319
the extent to which a born-global is successful greatly depends on how developed the
area is that the company is moving into. In other words, while the market appreciates
already-established firms because they are familiar, if a start-up does not have the capital
to partner with well-known organizations and the international markets are open, then
born-global companies may show slightly lower returns in the beginning, but this is not
an indicator of survival or ultimate success.123
One clear example of a born-global firm is California-based Amazon.com. Like
most U.S. Internet firms, Amazon.com has been able to distribute its products and ser-
vices on an international scale from the outset. Although differing levels of cultural
similarities and technological sophistication impact Amazon’s potential for success inter-
nationally, the Internet as a medium has removed certain entry barriers that have his-
torically restricted quick market entry.124 Another example is New York–based online
trading and investing services E*Trade. The company was able to bring in revenues from
33 countries in only three years, clearly making it a global brand. Allowing customers
to actively participate in their investments while offering multilingual technical and pro-
fessional customer support allowed E*Trade to integrate its services in many countries.
The simplified website does not bombard consumers with extraneous information, and
allows each person to trade as much or as little as desired, making it inherently custom-
ized. It has not been a success story for its entire existence, however. The company was
in danger of being left behind when it could not get out of the red, but in 2005, the
company was able to become profitable due to the low cost of Internet business and its
extremely diverse customer base. Although it had its ups and downs in the following
years, it survived the financial crisis with fewer problems than many “bricks and mortar”
brokerages.
The Internet clearly provides one of the easiest and most efficient methods of
becoming global quickly, but it is important that awareness is brought to the business,
or it too can be lost in the digital maze of the World Wide Web. Now more than ever,
born-global as a corporate strategy is becoming more attractive and less risky. The open-
ing World of International Management feature of Chapter 11 provides a discussion of
the globalization and strategy of two online retailers.
The World of International Management—Revisited
Recall the World of International Management’s discussion of the pharmaceutical com-
pany GSK that opened this chapter. It is easy to see why pharmaceutical companies are
expanding globally and reshaping their business strategies accordingly. Large, traditional
pharmaceutical companies are facing pressures from a range of quarters, including new
competition from emerging markets. These firms are attempting to lower costs by col-
laborating with or merging with generic companies, diversifying their product portfolio
to provide more consistent revenue streams, investing in newer higher value-added com-
pounds that require biologic expertise, and leveraging their research and development
across products and geographies. This is truly an industry in transition, with globalization
itself as a major driver of the transformation.
Drawing on your understanding of the need for and the benefits of strategic man-
agement, answer these questions: (1) Which imperative is likely to be relatively most
important to MNCs in the coming decade: economic, political, or quality? (2) When
MNCs scan the environment, what are two key areas for consideration that they must
address? (3) Referring to the chapter’s opening World of International Management, how
would you characterize GSK’s strategy within the globalization–national responsiveness
framework? (4) Which FSAs and CSAs does it primarily rely upon? To what extent does
GSK use a “base of pyramid approach”? How would it affect the company if low-income
markets turned out to be a bust?
320 Part 3 International Strategic Management
1. There is a growing need for strategic management
among MNCs. Some of the primary reasons include
foreign direct investment is increasing; planning is
needed to coordinate and integrate increasingly
diverse operations via an overall focus; and emerging
international challenges require strategic planning.
2. A strategic plan can take on an economic focus, a
political focus, a quality focus, an administrative
coordination focus, or some variation of the four.
The global integration–national responsiveness
framework defines the four basic strategies
employed by MNCs: international, global, multi-
domestic, and transnational. Although transnational
is often the preferred strategy, it is also the most
difficult to implement.
3. Strategy formulation consists of several steps.
First, the MNC carries out external environmental
scanning to identify opportunities and threats. Next,
the firm conducts an internal resource analysis of
company strengths and weaknesses. Strategic goals
then are formulated in light of the results of these
external and internal analyses.
4. Strategy implementation is the process of providing
goods and services in accord with the predeter-
mined plan of action. This implementation typically
involves such considerations as deciding where to
locate operations, carrying out an entry and owner-
ship strategy, and using functional strategies to
implement the plan. Functional strategies focus on
marketing, production, and finance.
5. Strategies for emerging markets and international
entrepreneurship/new ventures may require
specialized approaches targeted to these unique
circumstances.
SUMMARY OF KEY POINTS
KEY TERMS
administrative coordination, 298
base of the pyramid strategy, 313
born-global firms, 318
economic imperative, 295
environmental scanning, 302
global integration, 299
global strategy, 301
international entrepreneurship, 317
international strategy, 301
key success factor (KSF), 304
multi-domestic strategy, 301
national responsiveness, 299
political imperative, 296
quality imperative, 297
strategic management, 293
strategy implementation, 306
transnational strategy, 301
REVIEW AND DISCUSSION QUESTIONS
1. Of the four imperatives discussed in this chapter—
economic, political, quality, and administration—
which would be most important to IBM in its
efforts to make inroads in the Pacific Rim market?
Would this emphasis be the same as that in the
United States, or would IBM be giving primary
attention to one of the other imperatives? Explain.
2. Define global integration as used in the context of
strategic international management. In what way
might globalization be a problem for a successful
national organization that is intent on going interna-
tional? In your answer, provide an example of the
problem.
3. Some international management experts contend
that globalization and national responsiveness are
diametrically opposed forces, and that to accom-
modate one, a multinational must relax its efforts
in the other. In what way is this an accurate
statement? In what way is it incomplete or
inaccurate?
4. Consider that both a retail chain and a manufactur-
ing company want to expand overseas. What envi-
ronmental factors would have the most impact on
these companies? What ratio of environmental scan-
ning to internal analysis should each employ? What
key factors of success differentiate the two?
5. Anheuser-Busch is attempting to expand in India,
where beer is not widely consumed and liquor dom-
inates the market. What areas should be targeted for
strategic goals? What could be some marketing
implications in the Indian market?
6. What particular conditions that MNCs face in emerg-
ing markets may require specialized strategies? What
strategies might be most appropriate in response?
How might a company identify opportunities at the
“base of the pyramid” (i.e., low-income markets)?
7. What conditions have allowed some firms to be
born global? What are some examples of born-
global companies?
Chapter 8 Strategy Formulation and Implementation 321
strategy? In your answer, include a discussion of
the implications from the standpoints of marketing,
production, and finance.
8. Mercedes changed its U.S. strategy by announcing
that it is developing cars for the $30,000 to $45,000
price range (as well as its typical upper-end cars).
What might have accounted for this change in
Infosys is one of the world’s largest IT service provid-
ers. It started in India but has rapidly expanded around
the world. It offers consulting services, outsourcing,
data storage, and other informational management ser-
vices to all industries. Go to Infosys’s website and
review the various services it offers. Then answer these
questions: How do you think international strategic
management is reflected in what you see on the web-
site? What major strategic planning steps would Infosys
need to carry out in order to remain a world leader with
such diverse offerings? What potential threat, if it
occurred, would prove most disastrous for Infosys, and
what could the company do to deal with the possibility
of this negative development?
INTERNET EXERCISE: INFOSYS’S GLOBAL STRATEGY
1. Andrew Ward, “GlaxoSmithKline Sticks with Bet
on Emerging Markets,” Financial Times, February
5, 2014, www.ft.com/cms/s/0/0846f824-8e53-11e3-
98c6-00144feab7de.html#axzz44WxDfZQu.
2. “IMS Institute Projects Global Pharma Market of
$1.17–1.20 Trillion in 2017,” Pharmaceutical
Commerce, January 20, 2014, www.pharmaceuti-
calcommerce.com/business_finance?articleid=2708
5&keyword=IMS%20Institute-global%20pharma-
market%20growth.
3. Ward, “GlaxoSmithKline Sticks with Bet on
Emerging Markets.”
4. Malcolm Moore, “China Fines Glaxo £297m for
Bribery, Mark Reilly Sentenced,” The Telegraph,
September 19, 2014, www.telegraph.co.uk/finance/
newsbysector/pharmaceuticalsandchemicals/
11108376/China-fines-Glaxo-297m-for-bribery-
Mark-Reilly-sentenced.html.
5. Ben Hirschler, “GSK Pays $1 Billion to Lift
Indian Unit Stake to 75 Percent,” Reuters,
March 10, 2014, www.reuters.com/article/us-
glaxosmithkline-india-idUSBREA2909U20140310.
6. GSK India, http://india-pharma.gsk.com/en-in/
about-us/.
7. Eric Palmer, “Glaxo Starts $153M Plant in India,”
Fierce Pharma Manufacturing, September 10,
2015, www.fiercepharmamanufacturing.com/story/
glaxo-starts-153m-plant-india/2015-09-10.
8. Manish Panchal, Charu Kapoor, and Mansi Mahajan,
“Success Strategies for Indian Pharma Industry in an
Uncertain World,” Business Standard, February 17,
2014, www.business-standard.com/content/b2b-
chemicals/success-strategies-for-indian-pharma-
industry-in-an-uncertain-world-114021701557_1.html.
9. Heather Timmons, “India Expands Role as Drug
Producer,” New York Times online, July 6, 2010,
http://www.nytimes.com/2010/07/07/business/
global/07indiadrug.html.
10. Ibid.
11. Panchal, Kapoor, and Mahajan, “Success
Strategies for Indian Pharma Industry in an
Uncertain World.”
12. Timmons, “India Expands Role as Drug
Producer.”
13. IMS Market Prognosis, Economic Intelligence
Unit, January 2012.
14. Dr. Derk Bergsma, former vice president of drug
discovery group at Glaxosmithkline, personal
interview, July 16, 2010.
15. “Cost to Develop and Win Marketing Approval for
a New Drug Is $2.6 Billion,” Tufts Center for the
Study of Drug Development, November 18, 2014,
http://csdd.tufts.edu/news/complete_story/pr_tufts_
csdd_2014_cost_study.
16. Andrew Ward, “GSK Unveils New Drugs to Boost
Growth,” Financial Times, November 3, 2015,
www.ft.com/intl/cms/s/0/04375ffa-8229-11e5-
84dc-31c8b3b18e5f.html#axzz44WxDfZQu.
17. Julia Kollewe, “GlaxoSmithKline to Lower Drug
Prices in Poorer Countries,” The Guardian, March
31, 2016, www.theguardian.com/business/2016/
mar/31/glaxosmithkline-to-lower-drug-prices-to-
help-poorer-countries.
18. Jonathan D. Rockoff and Peter Loftus, “Pfizer
Pushes on New Biotech Drugs,” The Wall Street
Journal, April 28, 2010, www.wsj.com/articles/SB1
0001424052748704464704575208580328253618.
ENDNOTES
322 Part 3 International Strategic Management
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Chapter 8 Strategy Formulation and Implementation 325
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116. Ibid., p. 902.
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120. Gary A. Knight and S. Tamar Cavusgil, “Innova-
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121. Ibid.
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104. C. K. Prahalad and Stuart L. Hart, “The Fortune
at the Bottom of the Pyramid,” Strategy + Busi-
ness 26 (2002), pp. 54–67.
105. Joan Enric Ricart, Michael J. Enright, Pankaj
Ghemawat, Stuart L. Hart, and Tarun Khanna,
“New Frontiers in International Strategy,” Journal
of International Business Studies 35, no. 3 (May
2004), pp. 175–200.
106. Ibid., pp. 194–195.
107. Erik Simanis, “At the Base of the Pyramid,” The
Wall Street Journal, October 26, 2009, p. R7,
http://eriksimanis.com/wp-content/uploads/2014/06/
Simanis-WSJ-Oct-26-2009 .
108. Nicolas Dahan, Jonathan P. Doh, Jennifer Oetzel,
and Michael Yaziji, “Corporate-NGO Collabora-
tion: Creating New Business Models for Develop-
ing Markets,” Long Range Planning 43, no. 2
(2010), pp. 326–342.
109. See http://www.nestlecocoaplan.com/farmer-train-
ing-in-cote-divoire/
110. Dimitra Defotis, “Danone: A Less Risky Emerg-
ing-Markets Play,” Barron’s, August 8,
2015, http://www.barrons.com/articles/danone-a-
less-risky-emerging-markets-play-1439013136
326 Part 3 International Strategic Management
129. Ibid.
130. Ibid.
131. Tim Bowler, “Falling Oil Prices: Who Are the
Winners and Losers?” BBC News, January 19,
2015, www.bbc.com/news/business-29643612.
132. “Saudi Arabia Renews Push for Foreign Investors
as Oil Cushion Shrinks,” Bloomberg, January 25,
2016, www.arabianbusiness.com/saudi-arabia-
renews-push-for-foreign-investors-as-oil-cushion-
shrinks-619785.html.
the Symposium,” Journal of International Busi-
ness 32, no. 1 (2001), pp. 617–640.
125. CIA, “Saudi Arabia,” The World Factbook (2016),
https://www.cia.gov/library/publications/the-world-
factbook/geos/sa.html.
126. Ibid.
127. World Bank, “Saudi Arabia,” World Development
Indicators (2016), http://data.worldbank.org/
indicator/NY.GDP.MKTP.KD.ZG/countries/
SA?display=graph.
128. CIA, “Saudi Arabia.”
327
In the International
Spotlight
16 percent of proven petroleum reserves. Foreign workers
play a vital role in the economy, with more than 6 million
expatriates employed in a variety of industries, especially
construction and manufacturing. The government is making
efforts to diversify its economy by growing the private sec-
tor and by seeking to employ more nationals, balancing the
workforce.130
As oil prices have plummeted in recent years due to a
variety of factors, Saudi Arabia and the other OPEC coun-
tries have been keeping output levels relatively high,
resulting in huge losses. While the country can cover the
deficits for the time being, a prolonged period of low oil
demand could have devastating effects on the economic
health of the country.131
You Be the International Management
Consultant
As oil prices continue to drop, Saudi Arabia is actively
seeking foreign investors to come into the country, espe-
cially in sectors such as transportation, health care, tour-
ism, and building materials. The country has also opened
the retail sector to companies seeking complete ownership
of their business, negating the need for joint venture part-
nerships. The Saudi officials courting foreign investors
say that, despite falling oil prices, the country’s other sec-
tors are still growing and provide excellent investment
opportunities. Moreover, officials have said they are will-
ing to discuss modifying any rule or regulation that might
impede investment by a major foreign company.132
Questions
1. Given that the country is actively seeking foreign
investors and appears to be creating a pro-business
atmosphere, what non-oil businesses do you think
would be best suited for expanding into Saudi
Arabia?
2. If you were a foreign investor, what concerns would
you have about the country? Would you make an
investment in the country?
Saudi Arabia is a large country in the Middle East cover-
ing 856,000 square miles. The country borders the Persian
Gulf to the north and the Red Sea to the south. About
one-fifth the size of the United States, its natural resources
include petroleum and natural gas (among the largest in
the world), iron ore, gold, and copper. The two major holy
cities of Islam are in Saudi Arabia: Mecca and Medina.125
With just over 27 million people, Saudi Arabia is
almost entirely Arab Muslim (approximately 90 percent
Sunni and 10 percent Shia). The country’s population
growth rate is estimated at 1.46 percent. Additionally, the
country’s population is overwhelmingly (approximately
90 percent) younger than 55 years of age. According to
U.N. reports, 30 percent of the country’s population con-
sists of immigrants.126
The country’s GDP in 2014 was US$746 billion.127
From 2011 through 2013, annual GDP growth plummeted
from 10 percent to 2.7 percent. With low oil prices world-
wide, Saudi Arabia’s GDP growth remains stunted at
about 3.5 percent.128
Saudi Arabia operates its government as a monarchy,
wherein the king makes all important official decisions.
The king appoints ministers who act as his advisers. In
2011, women were granted the right to vote and run for
seats in municipal elections, though gender oppression is
still commonplace and integrated into the legal system.
The country’s laws are based on Islamic law with some
Western elements incorporated. For many years, Saudi
Arabia has enjoyed favorable relationships with many
Western nations. As it is a large exporter of fossil fuel,
Western nations are somewhat dependent on maintaining
civility with the Saudis despite alleged human rights vio-
lations. In recent years, however, the Saudi monarchy and
royal family have been suspected of aiding terrorism
efforts, leading to somewhat strained relations with
countries in Europe and the U.S.129
The government maintains strong controls over the coun-
try’s economy, which is highly reliant on extraction and
production of oil and gas. It is the largest exporter of petro-
leum, is the leader of the Organization of Petroleum Export-
ing Countries (OPEC), and accounts for approximately
Saudi Arabia
328
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The World of International
Management
Building a Global Brand: Haier’s
Alignment of Strategy
and Structure
O riginally founded in 1984 as Qingdao Refrigerator Com-pany, Haier is the largest appliance manufacturer in China.
Partially state-owned, the company has expanded its product line
over the years to include computers, phones, washers, and other
kitchen appliances. Since first offering public shares in the
1990s, Haier has grown tremendously. In 2015, profits reached
US$2.7 billion on sales of more than US$32 billion. The company
accounts for 10 percent of all appliance sales worldwide.1 For
over five years, Haier has maintained its status as the world
leader in large appliance sales.
However, despite this success, most sales have been
confined to the Chinese market. This has left Haier particularly
susceptible to the volatility of the Chinese economy. For
example, in 2015, sales fell for the first time in years due to
slowing Chinese economic growth. Furthermore, increasing
competition in the domestic appliance marketplace and
growing online sales have cut Haier’s profit margin, forcing
Haier to expand beyond the Chinese market to achieve
growth. Expanding into regions around the globe has been a
difficult yet necessary transition for the company, requiring
careful strategic planning and positioning.
First, foreign acquisitions have enabled Haier to enter new,
more profitable markets around the globe. While Haier had
found success selling smaller appliances like window air-
conditioning units, to consumers in developed economies, the
market for large refrigerators and other major appliances has
been dominated by domestic brands. In 2012, Haier acquired
90 percent of New Zealand appliance maker Fisher & Paykel
for US$770 million. This acquisition provided Haier with access
to Fisher & Paykel’s patent portfolio while simultaneously
opening the Australian, New Zealand, and U.S. markets to
Haier’s existing product line. In developed economies, consum-
ers tend to purchase more expensive appliances, resulting in
greater profit margins than Haier is able to achieve in
China.2 Haier’s largest foreign acquisition occurred in 2016,
when it purchased GE’s appliance division for US$5.4 billion.
The success of an international firm can be greatly influenced
by how it enters and operates in new markets and by the
overall structure and design of its operations. There are a
wide variety of entry strategies and organizational structures
and designs from which to choose. Selecting the most appro-
priate strategy and structure depends on a number of factors,
such as the desire of the home office for control over its for-
eign operations and the demands placed on the overseas unit
by both the local market and the personnel who work there.
This chapter first discusses some entry strategies and
systems of ownership that MNCs may have to choose from
when deciding to expand abroad. With regard to the organiza-
tion itself, the chapter presents and analyzes traditional orga-
nizational structures for effective international operations. Then
it explores some of the new, nontraditional organizational
arrangements stemming from mergers, joint ventures, and the
Japanese concept of keiretsu. The specific objectives of this
chapter are
1. DESCRIBE how an MNC develops and implements entry
strategies and ownership structures.
2. EXAMINE the major types of entry strategies and organi-
zational structures used in handling international operations.
3. ANALYZE the advantages and disadvantages of each type
of organizational structure, including the conditions that
make one preferable to others.
4. DESCRIBE the recent, nontraditional organizational ar-
rangements coming out of mergers, joint ventures, keiret-
sus, and other new designs including electronic networks
and product development structures.
5. EXPLAIN how organizational characteristics such as for-
malization, specialization, and centralization influence how
the organization is structured and functions.
Chapter 9
ENTRY STRATEGIES AND
ORGANIZATIONAL STRUCTURES
329
2015, Haier broke ground on a US$72 million expansion to
the facility to meet increased U.S. demand. Today, Haier
maintains production facilities in over two dozen locations
outside of China.
Third, by focusing research and development efforts
towards the local market, Haier has been able to better
prepare itself for entry to new foreign markets. Using market
research and its well-designed distribution network, Haier
puts the consumer first by quickly altering its products to
suit the feedback it receives. In the U.S., Haier has opened
a design center specifically to cater products to the local
cultural habits. The company also operates research and
development centers in Europe, Australia, and Japan. Addi-
tionally, the company actively seeks feedback from sales-
people and consumers, often interviewing people while they
are shopping in stores.6 Haier’s approach to research and
development extends to the Internet, where the company
solicits ideas from various users. Haier refers to this strategy
as “Open Innovation.” By asking open-ended questions on
social media platforms—such as “What do you want in air
conditioning?”—Haier is able to gain insight from millions of
active consumers worldwide, modifying its approach to all
aspects of appliance design.7
By acquiring reputable foreign brands, opening manufactur-
ing facilities close to consumers, customizing its product line,
and reaching out directly to consumers for feedback, Haier
best positions itself to achieve success when expanding its
product line into new markets.
This deal was aimed directly at expanding Haier’s presence in
the U.S. market. Chinese brands, often seen as less reputable
by consumers in the United States, have historically struggled
to achieve any level of consumer confidence. By acquiring a
U.S. brand with a strong domestic reputation, Haier will be
able to sell its own products under a trusted brand name. As
part of its acquisition deal, Haier will be able to use the GE
label for 40 years and will maintain GE’s existing appliance
division headquarters in Kentucky.3
Second, Haier has strategically dispersed its manufactur-
ing facilities around the globe. This has allowed production
to match the niche needs of the local market. For example,
to meet the demands of the growing smartphone market in
southeast Asia, Haier opened a facility specifically for phone
production in Indonesia in 2014.4 In Africa, Haier maintains
five manufacturing facilities, tailoring products to best suit
the small, but growing, African middle class. In Nigeria, for
example, Haier builds and sells air conditioners, refrigera-
tors, and freezers to over half a million people annually,
making it the top kitchen appliance producer in the country.
To best meet the needs of the Nigerian consumer, Haier has
developed refrigerators that can keep food cold for over
100 hours, eliminating food loss during frequent electrical
service interruptions.5 In 2000, Haier became the first
Chinese company to open a production facility in the U.S.
when it completed its Haier Industrial Park in South Carolina.
Spanning over 100 acres and costing US$40 million, the
plant focuses on refrigerators for the American market. In
The World of International Management’s discussion of Haier provides a good example
of the entry and organizational challenges and options companies face as they do busi-
ness around the world. Haier localizes its image and product line to best suit its clientele
while maintaining the strategies that lead to low costs and strong design. In this chapter,
we review the basic entry strategies and organizational structures available to firms as
they expand their global reach.
■ Entry Strategies and Ownership Structures
There are a number of common entry strategies and ownership structures in international
operations. The most common entry approaches are wholly owned subsidiaries, mergers
and acquisitions, alliances and joint ventures, licensing agreements, franchising, and
basic export and import operations. Depending on the situation, any one of these can be
330 Part 3 International Strategic Management
a very effective way to implement an MNC’s strategy. We first look at exporting and
importing because it is not only one of the oldest approaches, but one that requires the
least investment by the MNC.
Export/Import
As noted in the discussion in Chapter 8 on international entrepreneurship and new ven-
tures, exporting and importing often are the only available choices for small and new
firms wanting to go international.8 These choices also provide an avenue for larger firms
that want to begin their international expansion with minimum investment and risk. The
paperwork associated with documentation and foreign-currency exchange can be turned
over to an export management company to handle, or the firm can handle things itself
by creating its own export department. Additionally, the firm can turn to major banks or
other specialists that, for a fee, will provide a variety of services, including letters of
credit, currency conversion, and related financial assistance.
A number of potential problems face firms that plan to export. For example, if a
foreign distributor does not work out well, some countries have strict rules about drop-
ping that distributor. So an MNC with a contractual agreement with a distributor could
be stuck with that distributor. On the other hand, if the firm decides to get more actively
involved, it may make direct investments in marketing facilities, such as warehouses,
sales offices, and transportation equipment, without making a direct investment in man-
ufacturing facilities overseas.
When importing goods, many MNCs source products from a wide range of sup-
pliers from all over the world. It is common to find U.S. firms purchasing supplies and
components from Korea, Taiwan, and Hong Kong. In Europe, there is so much trade
between EU countries that the entire process seldom is regarded as “international” in
focus by the MNCs that are involved.
Exporting and importing can provide easy access to overseas markets; however,
the strategy usually is transitional in nature. If the firm wishes to continue doing business
internationally, it will need to get more actively involved in terms of investment and take
on new risks.
Wholly Owned Subsidiary
Increasing in risk and involvement, a wholly owned subsidiary is an overseas operation
that is totally owned and controlled by an MNC. This option is often pursued by smaller
companies, especially if international or transaction costs, such as the cost of negotiating
and transferring information, are high.9 When MNCs make an initial investment in the
form of a wholly owned subsidiary in a foreign country, it is sometimes referred to as
“greenfield” or de novo (new) investment.
The primary reason for the use of wholly owned subsidiaries is a desire by the
MNC for total control and the belief that managerial efficiency will be better without
outside partners. Due to the sole ownership, it has been found that profits can be
higher with this venture and that there are clearer communications and shared visions.
However, there are some drawbacks. Typically, wholly owned subsidiaries face a high
risk with such a large investment in one area and are not very efficient with entering
multiple countries or markets. This can also lead to low international integration or
multinational involvement.10 Furthermore, host countries often feel that the MNC is
trying to gain economic control by setting up local operations but refusing to include
local partners. Some countries are concerned that the MNC will drive out local enter-
prises as opposed to helping develop them. In dealing with these concerns, many
newly developing countries prohibit wholly owned subsidiaries. Another drawback is
that home-country unions sometimes oppose the creation of foreign subsidiaries,
wholly owned subsidiary
An overseas operation that
is totally owned and
controlled by an MNC.
Chapter 9 Entry Strategies and Organizational Structures 331
which they see as an attempt to “export jobs,” particularly when the MNC exports
goods to another country and then decides to set up manufacturing operations there.
As a result, today many multinationals opt for a merger, alliance, or joint venture
rather than a wholly owned subsidiary.11
Mergers/Acquisitions
In recent years, a growing number of multinationals have acquired (fully or in part)
their subsidiaries through mergers/acquisitions. MNCs may choose this route in order
to quickly expand resources or construct high-profit products in a new market.12 Pur-
chasing a majority interest in another company is an expedient way to expand. A recent
example of a sizable cross-border acquisition was Brazilian Oi SA’s purchase of telecom
giant Portugal Telecom SGPS SA. The deal provided Oi with a stake in the reliable
Portuguese market and allowed the company to become more competitive in the global
telecom market.13 In 2013, purchases of foreign entities by companies located in devel-
oping markets accounted for 56 percent of all cross-border acquisitions, surpassing
developed nations for the first time. And by the first quarter of 2016, more than half
of all merger and acquisition deals were cross-border.14 Table 9–1 highlights the total
value of cross-regional transactions by region of the purchasing company for the first
quarter of 2016.
Cultural differences (see Chapter 6) and time constraints are the two most per-
vasive barriers.15 Even before agreements are reached, time is of great concern. While
managers do not want to force negotiations or rush a potential subsidiary’s decision,
waiting too long could result in missed opportunities due to bids from competitors or
a rapid change in the market. Once a merger or acquisition occurs, managers may find
it difficult to clearly communicate new operational goals to the foreign subsidiary,
which not only highlights cultural differences but also adds time and risk to a
company’s activities.
Transition costs also pose a problem in the postmerger environment. In 2014,
U.S.-based Microsoft bought Finnish-based Nokia’s Devices and Services Division in
an attempt to compete in the mobile phone market. At the time, the US$7 billion deal,
which included 10 years of exclusive use of Nokia’s mobile device patents, was called
a “win-win for employees, shareholders, and consumers of both companies” by then-
Microsoft CEO Steve Ballmer.16,17 However, integrating the new companies proved to
be incredibly difficult. In 2015, Microsoft was forced to take an impairment adjustment
merger/acquisition
The cross-border purchase
or exchange of equity
involving two or more
companies.
Table 9–1
Value of Cross-Region M&As by Select Region of
Purchaser, Q1 2016
Country/Region Volume Value (in billions US$)
World Total 711 $225.7
North America 245 66.9
Middle East 25 1.2
Europe 267 56.7
European Union 196 51.6
Other 71 5.1
Latin America 5 8.9
Asia-Pacific 157 91.0
Africa 12 1.1
Source: Adapted from Baker & McKenzie, “Cross Border M&A Index,” Q1 2016.
332 Part 3 International Strategic Management
of US$7.6 billion to write down its Nokia assets, and in the first two years after the
deal, more than 20,000 jobs were eliminated.18 Additionally, in late 2015, Microsoft
announced plans to restructure its entire phone hardware division, costing an additional
US$800 million.19 Today, Microsoft only maintains a 2.7 percent share of the global
mobile phone market, leaving Microsoft’s involvement in the mobile phone business
uncertain. These difficulties are not uncommon in large cross-border M&A deals; man-
agers need to be wary of such common complications and attempt to move forward by
enhancing communication and operational efficiency.
Alliances and Joint Ventures
An alliance is any type of cooperative relationship among two or more different firms.
An international alliance is composed of two or more firms from different countries.
Some alliances are temporary; others are more permanent. A joint venture (JV) can be
considered a specific type of alliance agreement under which two or more partners own
or control a business. An international joint venture (IJV) is a JV composed of two or
more firms from different countries. Alliances and joint ventures can take a number of
different forms, including cross-marketing arrangements, technology-sharing agreements,
production-contracting deals, and equity agreements. In some instances, two parties may
create a third, independent entity expressly for the purpose of developing a collaborative
relationship outside their core operations. Just like mergers and acquisitions, alliances
and joint ventures can pose substantial managerial challenges. We discuss some of these
at the end of the chapter and again in Chapter 10.
There are two types of alliances and joint ventures. The first type is the nonequity
venture, which is characterized by one group’s merely providing a service for another. The
group providing the service typically is more active than the other. Examples include a
consulting firm that is hired to provide analysis and evaluation and then make its recom-
mendations, an engineering or construction firm that contracts to design or build a dam or
series of apartment complexes in an undeveloped area of a partner’s country, or a mining
firm that has an agreement to extract a natural resource in the other party’s country.
The second type is the equity joint venture, which involves a financial investment
by the MNC parties involved. Many variations of this arrangement adjust the degree of
control that each of the parties will have and the amount of money, technological exper-
tise, and managerial expertise each will contribute to the JV.20
Most MNCs are more interested in the amount of control they will have over the
venture rather than their share of the profits. Similarly, local partners feel the same way,
which can result in problems. Nevertheless, alliances and joint ventures have become
very popular in recent years because of the significant operational benefits they offer to
both parties. Some of the most commonly cited advantages include
1. Improvement of efficiency. The creation of an alliance or JV can help the
partners achieve economies of scale and scope that would be difficult for one
firm operating alone to accomplish. Additionally, the partners can spread the
risks among themselves and profit from the synergies that arise from the
complementary resources.21
2. Access to knowledge. In alliances and JVs, each partner has access to the
knowledge and skills of the others. So one partner may bring financial and
technological resources to the venture while another brings knowledge of the
customer and market channels.
3. Mitigating political factors. A local partner can be very helpful in
dealing with political risk factors such as a hostile government or
restrictive legislation.
4. Overcoming collusion or restriction in competition. Alliances and JVs can
help partners overcome the effects of local collusion or limits being put on
foreign competition by becoming part of an “insider” group.22
alliance
Any type of cooperative
relationship among different
firms.
joint venture (JV)
An agreement under which
two or more partners own
or control a business.
Chapter 9 Entry Strategies and Organizational Structures 333
As noted above, alliance and JV partners often complement each other and can
thus reduce the risks associated with their operations and entering a foreign market. A
good example is European truck manufacturing and auto component industries. Firms in
both groups have found that the high cost of developing and building their products can
be offset through joint ventures.
One industry that has been very active in cross-border alliances is airlines. These
alliances have been prompted by slow growth in some markets, increased global com-
petition, and the competitive dynamics among domestic and global carriers. In 2014,
British Airways of the UK, Iberia of Spain, and American Airlines of the United States
expanded their existing alliance with the addition of TAM Airlines, headquartered in
Brazil.23 The move was prompted, in part, due to LAN Airlines’ acquisition of TAM,
merging two of South America’s largest carriers. Each carrier maintains its brand iden-
tity, with LAN and TAM owned under new Chilean holding company LATAM.24 The
structure mirrors those used by Air France and Lufthansa in their European acquisi-
tions.25 In general, airlines are discouraged from formal alliances because of concerns
about collusion and price-fixing, but many airlines have been granted waivers because
of a recognition by regulatory authorities that their very survival may depend on con-
solidation. More broadly, the structure of the global airline industry has evolved into
three large alliances in which member firms agree to code-sharing and reciprocity in
their frequent flyer programs. Table 9–2 shows the major alliances, their current mem-
bers, and their geographic scope and coverage.
Alliances and JVs are proving to be particularly popular as a means for doing
business in emerging-market countries. For example, in the early 1990s, foreigners signed
more than 3,000 joint-venture agreements in Eastern Europe and the former republics of
the Soviet Union, and such interest remains high today. However, careful analysis must
be undertaken to ensure that the market for the desired goods and services is sufficiently
large, that all parties understand their responsibilities, and that all are in agreement
regarding the overall operation of the venture. If these issues can be resolved, the venture
stands a good chance of success. The International Management in Action “Joint Ventur-
ing in Russia” illustrates some of the problems that need to be overcome in order for a
JV to be successful. Some of the other suggestions that have been offered by researchers
regarding participation in strategic alliances include
1. Know your partners well before an alliance is formed.
2. Expect differences in alliance objectives among potential partners headquar-
tered in different countries.
3. Realize that having the desired resource profiles does not guarantee that they
are complementary to your firm’s resources.
4. Be sensitive to your alliance partner’s needs.
5. After identifying the best partner, work on developing a relationship that is
built on trust, an especially important variable in some cultures.26,27
Alliances, Joint Ventures, and M&A: The Case
of the Automotive Industry
One industry that has been actively engaging in both alliances/JVs and mergers and
acquisitions is the global automotive industry. Indeed, often alliances and joint ven-
tures are the first step toward a merger or acquisition. In the 1970s, as domestic
producers in the United States and Europe began to face competition from abroad,
alliances and joint ventures were fueled in part by auto companies’ desire to adapt
and adjust to the changing global dynamics, especially the interest in smaller, high-
quality cars built by Japanese manufacturers. With periods of contraction during the
recessions of the early 1990s, late 1990s, and late 2000s, producers were pressured
to consolidate as a way to streamline production and cut costs. More recently, alliances,
334 Part 3 International Strategic Management
JVs, and M&As have been stimulated by a range of factors, including continued
overcapacity, emerging markets expansion, and demand for new types of vehicles,
including hybrid and electric.28
As discussed in Chapter 1, Renault and Nissan maintain a broad-based alliance
that includes an equity joint venture arrangement. As a result of Chrysler’s bank-
ruptcy, Fiat acquired the U.S. automaker in two transactions over a five-year period,
first buying a 20 percent stake in 2009 and later buying all of Chrysler’s remaining
shares in 2014.29,30
GM has long maintained a successful joint venture with China’s Shanghai
Automotive Industries Corporation (SAIC). Fiat’s joint venture with GAC (Guangzhou
AutomobileGroup), called GAC Fiat Automobiles Co., Ltd. and headquartered in
Table 9–2
Membership and Market Data for the Largest Airline Alliances (as of December 2015)
Star Alliance
(27 members,
Founded 1997)
Sky Team
(19 members,
Founded 2000)
One World
(13 members,
Founded 1999)
Rest of Industry
(selected major
nonaligned carriers)
Passengers per year 654 million 588 million 512 million
Destinations 1,312 1,052 1,010
Revenue (billion US$) 177.42 186.33 143.23
Major airlines Air Canada (founder)
Air China (2007)
Air New Zealand (1999)
Air India (2014)
ANA (1999)
Avianca (2012)
Copa Airlines (2012)
Lufthansa (founder)
SAS (founder)
Singapore Airlines (2000)
United Airlines (founder)
Aeroflot (2006)
Aeroméxico (founder)
Air France (founder)
Alitalia (2001)
China Airlines (2011)
Delta (founder)
KLM (2004)
Korean Air (founder)
Middle East Airlines
(2014)
Saudia (2012)
American Airlines (founder)
British Airways (founder)
Cathay Pacific (founder)
Iberia (1999)
Japan Airlines (2007)
LAN Airlines (2000)
Qantas (founder)
Qatar (2013)
TAM Airlines (2014)
JetBlue
Southwest
Aer Lingus
Icelandair
Virgin Atlantic
Emirates
Air India
Gulf Air
Qantas (founder)
China Airlines
Jet Airways
Network capacity
Within North America 23% 28% 15% 34%
Within South America 1 2 14 83
Within Europe 20 16 11 53
Within Middle East 2 0 3 95
Within Africa 23 10 4 63
Within Asia 35 11 9 45
Within Oceania 11 0 32 57
Between N. America
and Europe
27 34 21 18
Between N. America
and S. America
9 29 40 22
Between Europe and
S. America
20 28 22 30
Between N. America
and Asia
41 29 10 20
Between Europe and
Asia
36 22 19 23
Source: Adapted from Wikipedia, based on airline websites, https://en.wikipedia.org/wiki/Airline_alliance.
Chapter 9 Entry Strategies and Organizational Structures 335
Changsha, China, opened a Jeep production facility to meet growing demand for
SUVs in China in 2015. The rising power of China and India in the global automo-
tive industry has been made clear by the growth of brands such as Cherry and Tata,
and by two major acquisitions a few years ago. In 2010, the Chinese auto company
Geely bought Ford’s Volvo car unit for $1.8 billion. Reuters declared the deal to be
China’s “biggest overseas auto purchase,” which “underscores China’s arrival as a
major force in the global auto industry.” Two years earlier, another historic deal took
place when Indian auto company Tata Motors bought Ford’s Land Rover and Jaguar
brands. Volvo, Land Rover, and Jaguar are all European brands that Ford had
previously purchased.31,32
Finally, development of hybrid and electric vehicles has often taken the form of
joint ventures because (1) the technologies often do not exist in traditional automotive
companies and (2) the market prospect and regulatory uncertainties are high, prompting
companies to want to share risks with partners.
All of these collaborations—whether alliances, joint ventures, mergers, or
acquisitions—are fueled by opportunities created by integrating some combination of
market knowledge and access, technological and managerial capability, scale economies
and efficiency, and political and legal imperatives.
Licensing
Another way to gain market entry, which also may be considered a form of alliance, is
to acquire the right to a particular product by getting an exclusive license to make or
sell the good in a particular geographic locale. A license is an agreement that allows one
party to use an industrial property right in exchange for payment to the owning party. In
a typical arrangement, the party giving the license (the licensor) will allow the other (the
licensee) to use a patent, a trademark, or proprietary information in exchange for a fee.
The fee usually is based on sales, such as 1 percent of all revenues earned from an
industrial motor sold in Asia. The licensor typically restricts licensee sales to a particu-
lar geographic locale and limits the time period covered by the arrangement. The firm
in this example may have an exclusive right to sell this patented motor in Asia for the
next five years. This allows the licensor to seek licensees for other major geographic
locales, such as Europe, South America, and Australia.
Licensing is used under a number of common conditions. For example, the product
typically is in the mature stage of the product life cycle, competition is strong, and profit
margins are declining. Under these conditions, the licensor is unlikely to want to spend
money to enter foreign markets. However, if the company can find an MNC that is
already there and willing to add the product to its own current offerings, both sides can
benefit from the arrangement. A second common instance of licensing is evident when
foreign governments require newly entering firms to make a substantial direct investment
in the country. By licensing to a firm already there, the licensee avoids these high entry
costs. A third common condition is that the licensor usually is a small firm that lacks
financial and managerial resources. Finally, companies that spend a relatively large share
of their revenues on research and development (R&D) are likely to be licensors, and
those that spend very little on R&D are more likely to be licensees. In fact, some small
R&D firms make a handsome profit every year by developing and licensing new products
to large firms with diversified product lines.
Some licensors use their industrial property rights to develop and sell goods in
certain areas of the world and license others to handle other geographic locales. This
provides the licensor with a source of additional revenues, but the license usually is not
good for much more than a decade. This is a major disadvantage of licensing. In par-
ticular, if the product is very good, the competition will develop improvement patents
that allow it to sell similar goods or even new patents that make the current product
obsolete. Nevertheless, for the period during which the agreement is in effect, a license
can be a very low-cost way of gaining and exploiting foreign markets.
license
An agreement that allows
one party to use an
industrial property right in
exchange for payment to the
owning party.
336
International Management in Action
Joint Venturing in Russia www.rt.com
Joint venturing is becoming an increasingly popular
strategy for setting up international operations. Russia
is particularly interested in these arrangements because
of the benefits they offer for attracting foreign capital
and helping the country tap its natural resource wealth.
However, investors are finding that joint venturing in
Russia and the other republics of the former Soviet
Union can be fraught with problems. For example,
Royal Dutch Shell was recently pressured to give up its
majority stake in Sakhalin Island to Gazprom. BP has
been forced to renegotiate its contracts with its Russian
joint-venture partner, TNK. New laws will require foreign
investors interested in Russian energy projects to pair
with Kremlin-approved organizations, further empower-
ing the Russian company and government. Kremlin
power is not the only problem facing joint-venture
investors in Russia. Others include the following:
1. Many Russian partners view a joint venture as an
opportunity to travel abroad and gain access to
foreign currency; the business itself often is given
secondary consideration.
2. Finding a suitable partner, negotiating the deal,
and registering the joint venture often take up to
a year, mainly because the Russians are unaccus-
tomed to some of the basic steps in putting
together business deals.
3. Russian partners typically try to expand joint ven-
tures into unrelated activities.
4. Russians do not like to declare profits because a
two-year tax holiday on profits starts from the
moment the first profits are declared.
5. The government sometimes allows profits to be
repatriated in the form of countertrade. However,
much of what can be taken out of the country
has limited value because the government keeps
control of those resources that are most saleable
in the world market.
These representative problems indicate why there is
reluctance on the part of some MNCs to enter into joint
ventures in Russia. As one of them recently put it, “The
country may well turn into an economic sink hole.” As a
result, many MNCs are wary of potential contracts and
are proceeding with caution.
Sources: Keith A. Rosten, “Soviet–U.S. Joint Ventures: Pioneers
on a New Frontier,” California Management Review, Winter 1991,
pp. 88–108; Steven Greenhouse, “Chevron to Spend $10 Billion
to Seek Oil in Kazakhstan,” New York Times, May 19, 1992, pp. A1,
C9; Louis Uchitelle, “Givebacks by Chevron in Oil Deal,” New York
Times, May 23, 1992, pp. 17, 29; Craig Mellow, “Russia: Making
Cash from Chaos,” Fortune, April 17, 1995, pp. 145–151; Daniel J.
McCarthy and Sheila M. Puffer, “Strategic Investment Flexibility for
MNE Success in Russia,” Journal of World Business 32, no. 4
(1997), pp. 293–318; R. Bruce Money and Debra Colton, “The
Response of the ‘New Consumer’ to Promotion in the Transition
Economies of the Former Soviet Bloc,” Journal of World Business
35, no. 2 (2000), pp. 189–206.
Licenses are also common among large firms seeking to acquire technology to
bolster an existing product. For example, Microsoft announced it had agreed to a licens-
ing arrangement with ARM Holdings PLC that allows the software giant to design chips
based on ARM’s technology, a common component in smartphones and tablets.33
Franchising
Closely related to licensing is franchising. A franchise is a business arrangement under
which one party (the franchisor) allows another (the franchisee) to operate an enterprise
using its trademark, logo, product line, and methods of operation in return for a fee.
Franchising is widely used in the fast-food and hotel-motel industries. The concept is
very adaptable to the international arena, and with some minor adjustments for the local
market, it can result in a highly profitable business. In fast foods, McDonald’s, Burger
King, and Kentucky Fried Chicken have used franchise arrangements to expand into new
markets. In the hotel business, Holiday Inn, among others, has been very successful in
gaining worldwide presence through the effective use of franchisees.
Franchise agreements typically require payment of a fee up front and then a per-
centage of the revenues. In return, the franchisor provides assistance and, in some
instances, may require the purchase of goods or supplies to ensure the same quality of
goods or services worldwide. Franchising can be beneficial to both groups: It provides
the franchisor with a new stream of income and the franchisee with a time-proven concept
and products or services that can be quickly brought to market.
franchise
A business arrangement
under which one party (the
franchisor) allows another
(the franchisee) to operate
an enterprise using its
trademark, logo, product
line, and methods of
operation in return for a fee.
Chapter 9 Entry Strategies and Organizational Structures 337
■ The Organization Challenge
A natural outgrowth of general international strategy formulation and implementation
and specific decisions about how best to enter international markets is the question of
how best to structure the organization for international operations. A number of MNCs
have recently been rethinking their organizational approaches to international operations.
An excellent illustration of worldwide reorganizing is provided by Coca-Cola, which
now delegates a great deal of authority for operations to the local level. This move is
designed to increase the ability of the worldwide divisions to respond to their local mar-
kets. As a result, decisions related to advertising, products, and packaging are handled by
international division managers for their own geographic regions. As an example, in
Turkey the regional division has introduced a new pear-flavored drink, while Coke’s Ger-
man operation launched a berry-flavored Fanta. This “local” approach was designed to
help Coke improve its international reputation, although Coke’s new management is
rethinking some aspects of this approach in the face of increasing cost pressures.34 Even
so, Coke continues to diversify its offerings, despite an initial increase in cost. In Brazil,
for example, Coke was losing market share as local soda companies were offering low-
priced carbonated beverages. Coke offered only three bottle sizes, and simply cutting the
price of those did not seem to gain anything for the company. Now, Coke offers 18 dif-
ferent sizes in Brazil, which include many reusable glass bottles that can be returned for
credit. While this has not increased market share, it has boosted profits.35 In India, Coca-
Cola has notoriously experienced difficulty gaining market share for its classic Coke
brand. Rather than continue to push its signature product in India, Coke purchased the
local brand, Thums Up, in 1993. As of 2015, Coca-Cola products (including Thums Up)
maintained a 49 percent market share in India, far ahead of rival Pepsi’s 30 percent share.36
A second example of how firms are meeting international challenges through reor-
ganization is provided by Li & Fung, Hong Kong’s largest export trading company and an
innovator in the development of supply chain management. The company has global sup-
pliers worldwide that are responsible for providing the firm with a wide range of consumer
goods ranging from toys to fashion accessories to luggage. In recent years, Li & Fung
reorganized and now manages its day-to-day operations through a group of product manag-
ers who are responsible for their individual areas. This new organizational arrangement
emerged in a series of steps. In the late 1970s, the company was a regional sourcing agent.
Big international buyers would come to Li & Fung for assistance in getting materials and
products because the MNC was familiar with the producers throughout Asia and it knew
the complex government regulations and how to successfully work through them. The
MNC then moved into a more sophisticated stage in which it began developing the entire
process for the buyer from concept to prototype to delivery of the goods. By the late 1980s,
however, Hong Kong had become a very expensive place to manufacture products, and Li
& Fung changed its approach and began organizing around a new concept called “dispersed
manufacturing,” which draws heavily on dissection of the value chain and coordinating the
operations of many suppliers in different geographic locations. For example, when the
MNC receives an order from a European retailer to produce a large number of dresses, it
has to decide where to buy the yarn in the world market, which companies should get the
orders to weave and dye the cloth, where supplemental purchases such as buttons and zip-
pers should be made, and how final shipment must be made to the customer. Commenting
on this overall process, the company president noted:
This is a new type of value added, a truly global product that has never been seen before. The
label may say “Made in Thailand,” but it’s not a Thai product. We dissect the manufacturing
process and look for the best solution at each step. We’re not asking which country can do
the best job overall. Instead, we’re pulling apart the value chain and optimizing each step—and
we’re doing it globally. Not only do the benefits outweigh the costs of logistics and transpor-
tation, but the higher value added also lets us charge more for our services. We deliver a
sophisticated product and we deliver it fast. If you talk to the big global consumer products
companies, they are all moving in this direction—toward being best on a global scale.37
338 Part 3 International Strategic Management
■ Basic Organizational Structures
The preceding examples of Coca-Cola and Li & Fung suggest how MNCs are dramati-
cally reorganizing their operations to compete more effectively in the international arena.
For all MNCs following this strategic route, a number of basic organization structures
need to be considered. In many cases, the designs are similar to those used domestically;
however, significant differences may arise depending on the nature and scope of the
overseas businesses and the home office’s approach to controlling the foreign operation.
Ideally, an overseas affiliate or subsidiary will be designed to respond to specific con-
cerns, such as production technology or the need for specialized personnel. The overall
goal, however, is to meet the needs of both the local market and the home-office strategy
of globalization.
Figure 9–1 illustrates how the pressures for global integration and local responsive-
ness play out in a host of industries. As an MNC tries to balance these factors, an if-then
contingency approach can be used. If the strategy needed to respond quickly to the local
market changes, then there will be accompanying change in the organizational structure.
Despite the need for such a flexible, fast-changing, contingency-based approach, most
MNCs still slowly evolve through certain basic structural arrangements in international
operations. The following sections examine these structures, beginning with initial,
pre-international patterns.38
Initial Division Structure
Many firms make their initial entry into international markets by setting up a subsidiary
or by exporting locally produced goods or services. A subsidiary is a common organi-
zational arrangement for handling finance-related businesses or other operations that
require an on-site presence from the start. In recent years, many service organizations
have begun exporting their expertise. Examples include architectural services, legal ser-
vices, advertising, public relations, accounting, and management consulting. Research
and development firms also fall into this category, exporting products that have been
successfully developed and marketed locally.
An export arrangement is a common first choice among manufacturing firms, espe-
cially those with technologically advanced products. Because there is little, if any, com-
petition, the firm can charge a premium price and handle sales through an export manager.
Aircraft
Cameras
Consumer
electronics
Computers
Telecommunications
Synthetic fibers Steel
Clothing
Automobiles
Aerospace
Cement
High
Low
Packaged goods
Low High
Pressure for local responsiveness
P
re
ss
u
re
f
o
r
g
lo
b
a
l i
n
te
g
ra
ti
o
n
Figure 9–1
Organizational
Expectations of
Internationalization
Source: Adapted from Paul W. Beamish, J. Peter Killing, Donald J. LeCraw, and Harold Crookell, International Management: Text and
Cases (Homewood, IL: Irwin, 1991), p. 99.
Chapter 9 Entry Strategies and Organizational Structures 339
If the company has a narrow product line, the export manager usually reports directly to
the head of marketing, and international operations are coordinated by this department.
If the firm has a broad product line and intends to export a number of different products
into the international market, the export manager will head a separate department and
often report directly to the president. These two arrangements work well as long as the
company has little competition and is using international sales only to supplement domes-
tic efforts. Furthermore, an export arrangement allows the firm to reduce the risk and
size of investment in establishing significant international operations while at the same
time testing the size of international markets.
If overseas sales continue to increase, local governments often exert pressure in
these growing markets for setting up on-site manufacturing operations. A good example
is the General Motors-Shanghai Automotive Industry Group (SAIC) joint venture in
China mentioned earlier, in which a large percentage of all parts are made locally.39 Addi-
tionally, many firms find themselves facing increased competition in the foreign market.
Establishing foreign manufacturing subsidiaries can help the MNC deal with both of
these pressures. The overseas plants show the government that the firm wants to be a
good local citizen. At the same time, these plants help the MNC greatly reduce trans-
portation costs, thus making the product more competitive. This new structural arrange-
ment often takes a form similar to that shown in Figure 9–2. Each foreign subsidiary is
responsible for operations within its own geographic area, and the head of the subsidiary
reports either to a senior executive who is coordinating international operations or directly
to the home-office CEO.
International Division Structure
If international operations continue to grow and require more control, subsidiaries com-
monly are grouped into an international division structure, which handles all interna-
tional operations out of a division that is created for this purpose. In other words, a unit
is added on simply to deal with international issues, while the original organizational
structure is left intact. This structural arrangement is useful as it takes a great deal of
the burden off the CEO for monitoring the operations of a series of overseas subsidiar-
ies as well as domestic operations. Instead, the new head of the international division
coordinates and monitors overseas activities and reports directly to the CEO on these
matters. Figure 9–3 provides an example. PepsiCo reorganized its corporate structure into
six such global divisions covering the nearly 200 countries in which Pepsi does business.
These divisions are split geographically, with three North American units (North
American Beverages, Frito-Lay North America, and Quaker Foods North America) and
three international units (Latin America; Europe Sub-Saharan Africa; and Asia, Middle
East & North Africa). Each global division has self-sufficient operations and broad local
authority.
international division
structure
A structural arrangement
that handles all
international operations out
of a division created for this
purpose.
Home-o�ce
departments
Overseas
subsidiaries
Chief Executive O�cer
Finance
Human
Resources
Production Marketing
V.P. International
Operations
Egypt Australia ArgentinaFrance Japan
Figure 9–2
Use of Subsidiaries during
the Early Stage of
Internationalization
340 Part 3 International Strategic Management
Companies still in the developmental stages of international business involvement
are most likely to adopt the international division structure. Others that use this structural
arrangement include those with small international sales, limited geographic diversity, or
few executives with international expertise.
A number of advantages are associated with use of an international division struc-
ture. The grouping of international activities under one senior executive ensures that the
international focus receives top management’s attention. This structural arrangement also
allows the company to develop an overall, unified approach to international operations,
as well as a cadre of internationally experienced managers.
At the same time, the use of this structure does have a number of drawbacks. The
structure separates the domestic and international managers, which can result in two
different camps with divergent objectives. Also, as the international operation grows
larger, the home office may find it difficult to think and act strategically and to allocate
resources on a global basis; thus, the international division may be penalized. Finally,
most R&D efforts are domestically oriented, so ideas for new products or processes in
the international market often are given low priority.
Global Structural Arrangements
MNCs typically turn to global structural arrangements when they begin acquiring and
allocating their resources based on international opportunities and threats. The global
structural arrangement differs from the international division structure because, while
both have an international scope, the former focuses on greater expansion and integration
among international operations. This international perspective signifies a major change
in management strategy, and it is supported by the requisite changes in organization
structure. It is important to remember that a structural framework is chosen only after
the basic strategy is formulated, not vice versa. Global structures come in three common
types: product, area, and functional.
Global Product Division A global product division is a structural arrangement in which
domestic divisions are given worldwide responsibility for product groups. Figure 9–4
provides an illustration. As shown, the manager who is in charge of product division C
has authority for this product line on a global basis. This manager also has internal
global product division
A structural arrangement in
which domestic divisions
are given worldwide
responsibility for product
groups.
(Partial Organization Chart)
Home-o�ce
departments
Operating
divisions
Chief Executive O�cer
Finance
Human
Resources
Production Marketing
Domestic
Division:
Hardware
Domestic
Division:
Furniture
International
Division
Domestic
Division:
Paint
Domestic
Division:
Tools
JapanAustralia
MarketingO�ce
Operations
Italy
Government
Relations
Figure 9–3
An International Division
Structure
Chapter 9 Entry Strategies and Organizational Structures 341
functional support related to the product line. For example, all marketing, production, and
finance activities associated with product division C are under the control of this manager.
The global product divisions operate as profit centers. The products are generally
in the growth stage of the product life cycle, so they need to be promoted and marketed
carefully. In doing so, global product division managers generally run the operation with
considerable autonomy; they have the authority to make many important decisions
regarding the product. However, corporate headquarters usually will maintain control in
terms of budgetary constraints, home-office approval for certain decisions, and mainly
“bottom-line” (i.e., profit) results.
A global product structure provides the most benefits when the need for product
specification or differentiation in different markets is high. This often occurs when com-
panies offer a variety of products, the customer base is extremely diverse, or goods must
be modified to match local tastes (e.g., food or toys). Creating divisions that specialize
in each product set results in efficient alterations, especially because marketing, produc-
tion, and finance can be coordinated on a product-by-product basis. Furthermore, if a
product is in a different life cycle (mature versus growth stage) across regions, global
product divisions can ensure that each location responds appropriately. Other advantages
of a global product division structure can be summarized as follows:
It preserves product emphasis and promotes product planning on a global basis; it provides
a direct line of communication from the customer to those in the organization who have
product knowledge and expertise, thus enabling research and development to work on devel-
opment of products that serve the needs of the world customer; and it permits line and staff
managers within the division to gain an expertise in the technical and marketing aspects of
products assigned to them.40
Unfortunately, the approach also has some drawbacks. One is the necessity of
duplicating facilities and staff personnel within each division. A second is that division
(Partial Organization Chart)
Home-o�ce
departments
Operating
divisions
Chief Executive O�cer
Finance
Human
Resources
Production Marketing
Finance
Human
Resources
Production Marketing
Product
Division
C
Product
Division
D
Product
Division
E
Product
Division
A
Product
Division
B
Europe
Great Britain
France
Germany
Italy
Netherlands
Australia Far East
South
America
Africa
Figure 9–4
A Global Product Division
Structure
342 Part 3 International Strategic Management
managers may pursue currently attractive geographic prospects for their products and
neglect other areas with better long-term potential. A third is that many division manag-
ers spend too much time trying to tap the local rather than the international market
because it is more convenient and they are more experienced in domestic operations.
Global Area Division Instead of a global product division, some MNCs prefer to use
a global area division. In this structure, illustrated in Figure 9–5, global operations are
organized based on a geographic rather than a product orientation. This approach often
signals a major change in company strategy because now international operations are put
on the same level as domestic operations. In other words, European or Asian operations
are just as important to the company as North American operations. For example, when
British Petroleum purchased Standard Oil of Ohio, the firm revised its overall structure
and adopted a global area division structure. Under this arrangement, global division
managers are responsible for all business operations in their designated geographic area.
The CEO and other members of top management are charged with formulating the over-
all strategy that ensures that the global divisions all work in harmony.
A global area division structure most often is used by companies that are in mature
businesses and have narrow product lines that are differentiated by geographic area. For
example, the product has a strong demand in Europe but not in South America, or the
type of product that is offered in France differs from that sold in England. This is dif-
ferent from the global product division structure because each division focuses on
regional tastes and offers specialized products for and within that area, as opposed to
focusing on a product set and discovering where it can survive and subsequently distrib-
uting it to that region. In addition, the MNC usually seeks high economies of scale for
production, marketing, and resource-purchase integration in a particular area. Thus, by
manufacturing in this region rather than bringing the product in from somewhere else,
the firm is able to reduce cost per unit and offer a very competitive price. The geographic
structure also allows the division manager to cater to the tastes of the local market and
make rapid decisions to accommodate environmental changes. A good example is food
products. In the United States, soft drinks have less sugar than in South America, so the
manufacturing process must be slightly different in these two locales. Similarly, in
England, people prefer bland soups, but in France, the preference is for mildly spicy.
global area division
A structure under which
global operations are
organized on a geographic
rather than a product basis.
Figure 9–5
A Global Area Division
Structure
(Partial Organization Chart)
Home-o�ce
departments
Finance
Human
Resources
Production Marketing
Asia Africa
Operating
divisions
North
America
South
America
Great Britain
France
Germany
Italy
Netherlands
Area
Division A
Area
Division C
Area
Division D
Area
Division E
Area
Division B
Chief Executive O�cer
Europe
Chapter 9 Entry Strategies and Organizational Structures 343
A global area structure allows the geographic unit in a foods company to accommodate
such local preferences.
The primary disadvantage of the global area division structure is the difficulty
encountered in reconciling a product emphasis with a geographic orientation. For exam-
ple, if a product is sold worldwide, a number of different divisions are responsible for
sales. This lack of centralized management and control can result in increased costs and
duplication of effort on a region-by-region basis. A second drawback is that new R&D
efforts often are ignored by division groups because they are selling goods that have
reached the maturity stage. Their focus is not on the latest technologically superior goods
that will win in the market in the long run but on those that are proven winners and now
are being marketed conveniently worldwide.
Global Functional Division A global functional division organizes worldwide opera-
tions based primarily on function and secondarily on product. This approach is not widely
used other than by extractive companies, such as oil and mining firms. Figure 9–6
provides an example.
A number of important advantages are associated with the global functional divi-
sion structure. These include (1) an emphasis on functional expertise, (2) tight centralized
control, and (3) a relatively lean managerial staff. There also are some important disad-
vantages: (1) Coordination of manufacturing and marketing often is difficult; (2) manag-
ing multiple product lines can be very challenging because of the separation of
production and marketing into different departments; and (3) only the chief executive
officer can be held accountable for the profits. As a result, the global functional process
structure typically is favored only by firms that need tight, centralized coordination and
control of integrated production processes and firms that are involved in transporting
products and raw materials from one geographic area to another.
Mixed Organization Structures Some companies find that neither a global product,
an area, nor a functional arrangement is satisfactory. Instead they opt for a mixed
organization structure, which combines all three into an MNC that supplements its
primary structure with a secondary one and, perhaps, a tertiary one. For example, if a
company uses a global area approach, committees of functional managers may provide
assistance and support to the various geographic divisions. Conversely, if the firm uses
a global functional approach, product committees may be responsible for coordinating
transactions that cut across functional lines. In other cases, the organization will opt for
a matrix structure that results in managers’ having two or more bosses. Figure 9–7
illustrates this structure. In this arrangement, the MNC coordinates geographic and prod-
uct lines through use of a matrix design.
global functional division
A structure that organizes
worldwide operations
primarily based on function
and secondarily on product.
mixed organization
structure
A structure that is a
combination of a global
product, area, or functional
arrangement.
Figure 9–6
A Global Functional
Structure
(Partial Organization Chart)
Chief Executive O�cer
FinanceProduction Marketing
Foreign
Production
Product A
Product B
Product C
Product D
Domestic
Production
Product A
Product B
Product C
Product D
Foreign
Production
Product A
Product B
Product C
Product D
Domestic
Production
Product A
Product B
Product C
Product D
344 Part 3 International Strategic Management
In recent years, mixed organization structures have become increasingly popular.
In the 2010s, Sony’s electronic businesses, including personal computers, mobile phones,
and cable-television set-top boxes, were unified under a new management structure called
“One Sony.” Under this plan, electronic products and services are organized under one
of three core pillars: gaming, mobile, or digital imaging. The new management structure
is designed to decentralize the design-making process and empower individual business
groups to make quick decisions.41 Quite clearly, the company feels that it needs a mixed
structure in order to juggle all its worldwide holdings. Many other companies use a mixed
structure, and one survey has found that more than one-third of the responding firms
employ this organizational arrangement, while nearly one-fifth utilize global product
divisions and only about one-tenth exhibit initial division structures. Many advantages
can be gleaned from a mixed organization structure. In particular, it allows the organiza-
tion to create the specific type of design that best meets its needs. However, there are
shortcomings associated with matrix structures. The most important is that as the matrix
design’s complexity increases, coordinating the personnel and getting everyone to work
toward common goals often become difficult; too many groups go their own way. Thus,
many MNCs have not opted for a matrix structure; they have found that simple, lean
structures are the best design for them.
Transnational Network Structures
Besides matrix structures, another alternative international organizational design to
recently emerge is the transnational network structure. This is designed to help MNCs
take advantage of global economies of scale while also being responsive to local customer
demands. The design combines elements of classic functional, product, and geographic
structures while relying on a network arrangement to link the various worldwide subsid-
iaries. This configuration may appear very similar to the matrix, but it is much more
complex. While the matrix may use more than one strategy to supplement inefficient
operations, it is still fairly centralized in the sense that decisions are balanced between the
main headquarters and international subsidiaries. Transnational networks, however, are
convoluted integrations of business functions and communications where decisions are
made at the local level, but each grouping informs headquarters and sometimes each other.
At the center of the transnational network structure are nodes, which are units charged
with coordinating product, functional, and geographic information. Different product line
units and geographical area units have different structures depending on what is best for
their particular operations. A good example of how the transnational network structure
transnational network
structure
A multinational structural
arrangement that combines
elements of function,
product, and geographic
designs, while relying on a
network arrangement to link
worldwide subsidiaries.
(Partial Organization Chart)
Home-o�ce
departments
Operating
divisions
Chief Executive O�cer
Finance
Human
Resources
Production Marketing
Manager,
Industrial Goods
North America
Manager,
Industrial Goods
Europe
Industrial Goods EuropeNorth America
Figure 9–7
A Multinational Matrix
Structure
Chapter 9 Entry Strategies and Organizational Structures 345
works is provided by Philips (Koninklijke Philips Electronics N.V.), which has more than
100,000 employees and operations in more than 60 countries. Philips produces a diverse
product line ranging from light bulbs to defense systems. In 2015, the company split itself
into two distinct companies—Royal Philips, focused on the health/tech segment, and
Philips Lighting, focused on LED and lighting solutions—still comprised of three product
divisions with a varying number of subsidiaries in each. The focus of these subsidiaries
varies considerably. Some specialize in manufacturing, others in sales; some are closely
controlled by headquarters, and others are highly autonomous.
The basic structural framework of the transnational network consists of three com-
ponents: dispersed subunits, specialized operations, and interdependent relationships.
Dispersed subunits are subsidiaries that are located anywhere in the world where they
can benefit the organization. Some are designed to take advantage of low factor costs,
while others are responsible for providing information on new technologies or consumer
trends. Specialized operations are activities carried out by subunits that focus on par-
ticular product lines, research areas, and marketing areas, and are designed to tap special-
ized expertise or other resources in the company’s worldwide subsidiaries. Interdependent
relationships are used to share information and resources throughout the dispersed and
specialized subunits.
The transnational network structure is difficult to draw in the form of an organiza-
tion chart because it is complex and continually changing. However, Figure 9–8 provides
Portugal
Sweden
Spain
Belgium
Luxembourg
France Greece
Ireland
Egypt Kenya
South Africa
ZaireZambia
Zimbabwe Tunisia
Morocco
Tanzania
Nigeria
Pakistan
Bangladesh
India
Israel
Syria
Lebanon
Iraq
Korea
Hong
Kong
Taiwan
Singapore
Philippines
Indonesia
Malaysia
ThailandAustralia
New Zealand
Iran
Denmark
Italy
Holland
Canada
El Salvador
Brazil
Ecuador
Peru
Chile
Bolivia
Venezuela
Colombia
Paraguay
Uruguay
Argentina
Mexico
Switzerland
Finland
Norway
Austria
Turkey
U.K.
FRG
Japan
U.S.A.
Figure 9–8
The Network Structure
of N.V. Philips
346 Part 3 International Strategic Management
a view of Philips’s network structure. These complex networks can be compared to some
of the others that have been examined earlier in this chapter by looking at the ways in
which the enterprise attempts to exercise control. Table 9–3 provides such a comparison.
■ Nontraditional Organizational Arrangements
In recent years, MNCs have increasingly expanded their operations in ways that differ
from those used in the past. These include acquisitions, joint ventures, keiretsus, and
strategic alliances. These organizational arrangements do not use traditional hierarchical
structures and therefore cannot be shown graphically. The following sections describe
how they work.
Organizational Arrangements from Mergers, Acquisitions, Joint
Ventures, and Alliances
A recent development affecting the way that MNCs are organized is the increased use
of mergers and acquisitions (M&As). In recent years, the annual value of worldwide
M&As has reached as high as $6 trillion!
Among the larger cross-border M&A deals was Actavis’s purchase of Allergan for
US$70 billion in 2015. Actavis, an Ireland-based pharmaceutical company, worked to
integrate U.S.-based Allergan, the manufacturer of Botox, into its corporate structure
without sacrificing financial health. Actavis has a history of using layoffs to cut costs
when acquiring companies; 30 percent of the Warner Chilcott sales force was cut when
Actavis purchased the company in 2013.42 As part of the Activas-Allergan deal, nearly
1,500 jobs at Allergan were cut to boost margins. From January to September 2015,
Activas saw its stock price increase by 17 percent, suggesting analysts and investors
approved of the new approach.43
Other examples of recent organizational arrangements include joint-venture and
strategic alliance agreements in which each party contributes to the undertaking and
coordinates its efforts for the overall benefit of the venture.44 These arrangements can
take a variety of forms,45 although the steps that are followed in creating and operating
them often have a fair amount of similarity.
Table 9–3
Control Mechanisms Used in Select Multinational Organization Structures
Type of
Multinational
Structure
Output
Control
Bureaucratic
Control
Decision-Making
Control
Cultural
Control
International
division structure
Profit control. Have to follow
company policies.
Typically there is some
centralization.
Treated like all other
divisions.
Global area
division
Use of profit centers. Some policies and
procedures are
necessary.
Local units are given
autonomy.
Local subsidiary culture is
often the most important.
Global product
division
Unit output for supply;
sales volume for
sales.
Tight process controls
are used to maintain
product quality and
consistency.
Centralized at the
product-division
headquarters level.
Possible for some
companies, but not
always necessary.
Matrix structure Profit responsibility is
shared with product
and geographic units.
Not very important. Balanced between the
global area and product
units.
Culture must support the
shared decision making.
Transnational
network structure
Used for supplier
units and for some
independent profit
centers.
Not very important. Few decisions are cen-
tralized at headquarters;
most are centralized in
the key network nodes.
Organization culture
transcends national cultures,
supports sharing and
learning, and is the most
important control mechanism.
Chapter 9 Entry Strategies and Organizational Structures 347
One recent example of such an initiative was when U.S.-based Lockhead Martin
and Sikorsky, a division of U.S.-based United Technologies Group, began a joint venture
with UAE-based Emirates Defence Industries Company, owned by the oil-rich sheikdom’s
Mubadala Development, to service military aircraft in the Middle East. This JV was
designed, in part, to help support the emirate’s efforts to develop a domestic aircraft and
avionics industry. The JV will provide upgrades to the UAE’s Black Hawk helicopters
while building a foothold for Sikorsky in the Middle East. In 2015, Sikorsky opened an
office in Abu Dhabi to serve as a base for its continued joint ventures in the region with
Mubadala. The company hopes to capitalize on the increasing economic growth in the
region for years to come.46
Another example is the longstanding joint venture between General Motors and
Shanghai Automotive Industry Corporation (S.A.I.C.), which produces the Wuling line of
trucks and vans targeted to rural areas of China. In the 2010s, these JV partners introduced
a new passenger-car brand called Baojun, which means “treasured horse.” This basic car
line targets buyers outside China’s major metropolitan areas. Today, Baojun boasts a wide
variety of vehicles, including a minivan model. In 2015, the joint venture sold a record
2.04 million automobiles, representing a 13 percent increase over the previous year.47
These joint ventures require carefully formulated structures that allow each partner
to contribute what it does best and to coordinate their efforts efficiently. This calls for
clearly spelling out the responsibilities of all parties and identifying the authority that
each will have for meeting specific targets.
One of the main objectives in developing the structure for joint ventures is to help
the partners address and effectively meld their different values, management styles, action
orientation, and organization preferences. Table 9–4 shows how Western and Asian firms
differ in these four areas; the table also is useful for illustrating the types of consider-
ations that need to be addressed by MNCs from the same area of the world. Consider,
for example, Matsushita Electric Industrial and Hitachi Ltd. The two have a longstanding
agreement to join forces to develop new technology in three areas: smart cards, home
network systems, and recyclable and energy-efficient consumer electronics.48 The two
firms need to structure their organizational interface carefully to ensure effective
interaction, coordination, and cooperation.
Table 9–4
A Comparison of Asian and Western Management
Features
Western Asian
Basic values Individual Group
Legal Trust
Confrontational Compromising
Analytic Fluid
Organization Formal Informal
Fragmented Generalist
Hierarchical Integrated
Competitive Cooperative
Action Short term Long term
Control Human resource
Conflict Collaborative
Service-focused Customer-focused
Management style Rational Relationships
Structured Flexible
Directive Adaptive
Doing Understanding
Source: Based on Frederic Swierczek and Georges Hirsch, “Joint Ventures in Asia and
Multicultural Management,” European Management Journal, June 1994, p. 203.
348 Part 3 International Strategic Management
In each of these examples, the purchasing MNC fashioned a structural arrangement
that attempts to promote synergy while encouraging local initiative by the acquired firm.
The result is an organization design that draws on the more traditional structures that
have been examined here but still has a unique structure specifically addressing the needs
of the two firms.
In fact, strategic partners are so important to the success of many MNCs that it is
common to find them giving their partners direct access to their own computer systems.
In this way, for example, an outsourcer can quickly determine the MNC’s supply needs
and adjust its own production schedule to meet these demands. This same type of close
working B2B arrangement is used when providing services. For example, IBM works
closely with the giant French MNC Technicolor SA, providing data analysis, fleet man-
agement, and other tasks.49
Many companies are finding that M&As do not work out or they involve a con-
siderable financial risk because of the high sales price. Joint ventures and strategic alli-
ances are a good alternative. They provide MNCs with the opportunity to access a wide
variety of competencies, thus reducing their own costs while ensuring that they have a
reliable provider. In addition, joint ventures and strategic alliances help promote coop-
eration between the participating organizations.50
■ The Emergence of the Network Organizational Forms
Over the last few years there has been a major increase in the number of “electronic
freelancers”—individuals who work on a project for a company, usually via the Internet,
and move on to other employment when the assignment is done. In a way, these indi-
viduals represent a new type of electronic network organization—“a temporary
company”—that serves a particular, short-term purpose and then goes on to other assign-
ments. There are numerous examples.
Consider the way many manufacturers are today pursuing radical outsourcing strat-
egies, letting external agents perform more of their traditional activities. The U.S.
computer-display division of the Finnish company Nokia, for example, chose to enter the
U.S. display market with only five employees. Technical support, logistics, sales, and
marketing were all subcontracted to specialists around the country. With the online mar-
ketplace, many companies now never even touch the products that they sell. The entire
supply chain, from initial production through warehousing and shipping, is outsourced.
Companies like Nokia’s computer display division, with highly decentralized operations,
bear more resemblance to the network model of organization than to the traditional
industrial model.51
Many multinationals are beginning to rely increasingly on electronic freelancers
(e-lancers, for short) to perform key tasks for them. In the case of General Motors, for
example, outsourcers via computers work very closely with the company in providing
both design and engineering assistance. The rise of the multinational university is yet
another example. Growing numbers of academic institutions from Europe to North
America are now offering both undergraduate and graduate courses, and in some cases
full-fledged degree programs, via the Internet. In staffing these courses, the universities
rely heavily on e-lancers with PhD degrees who are responsible for delivering the courses
online. In most cases, the university has little face-to-face contact with these e-lancers.
Everything is done via computers.
These electronic network organizations are now becoming increasingly prominent.
MNCs are realizing that the outsourcing function can be delivered online. Examples
include design specifications, analytical computations, and consulting reports. So, in a
way, this new structure is a version of the matrix design discussed earlier in the chapter.
The major difference is that many of the people in the structure not only are temporary,
contingent employees but never see each other and communicate exclusively in an
electronic environment.
Chapter 9 Entry Strategies and Organizational Structures 349
Organizing for Product Integration
Another recent organizing development is the emergence of designs that are tailored
toward helping multinationals integrate product development into their worldwide
operations. In the recent past, the use of cross-functional coordination was helpful in
achieving this goal. However, MNCs have found that this arrangement results in peo-
ple spending less time within their functions and thus becoming less knowledgeable
regarding developments that are occurring in their specialized areas. A second short-
coming of the cross-functional approach is that it often leads to product teams becom-
ing autonomous and thus failing to integrate their overall efforts with the organization
at large.
Toyota created a structure that combines a highly formalized system with new
structural innovations that ensure that projects are flexibly managed and, at the same
time, able to benefit from the learning and experiences of other projects. In accomplishing
this, Toyota employs six organizational mechanisms.
One of these is called mutual adjustment. In most companies, this is achieved by
assigning people to a specific project and having them meet face to face and work out
a plan of action for designing the new product. At Toyota, however, design engineers
are not assigned to specific projects; rather, they remain in their functional area and
typically communicate through written messages. This approach ensures that all members
remain dedicated to their primary functional area and that they communicate succinctly
and directly with each other—thus saving time.
A second mechanism employed by Toyota is the use of direct, technically skilled
supervisors. In a typical arrangement, design engineers are led by individuals who are
no longer doing engineering work; they are primarily responsible for seeing that others
do this work. However, at Toyota supervisors remain highly skilled in the technical side
of the work and are responsible for mentoring, training, and developing their engineers.
So if anyone has a design-related problem, the supervisor is technically skilled and can
provide this assistance.
A third mechanism is the use of integrative leadership. In typical product design
structures, the manager in charge has full authority and relies on the engineering person-
nel to get the work done within time, cost, and quality parameters. At Toyota, however,
these managers are responsible for coordinating the work of the functional specialists
and serving less as a manager than as a lead designer on the entire project. In this way,
they serve as the glue that binds together the whole process.
In typical design operations, engineers are hired from universities or from other
companies where they have gained experience, and they remain in their engineering
position indefinitely. At Toyota most of the technical training is provided in-house, and
people are rotated within only one function, such as body engineers who work on auto-
body subsystems for most, if not all, of their careers. As a result, they are able to get
more work done faster because they do not have to communicate and coordinate con-
tinually with their counterparts regarding what needs to be done. They are so familiar
with their jobs that they know what needs to be done.
Another organizational difference is that in typical design work, each new product
calls for a new development process, and there are complex forms and bureaucratic
procedures for ensuring that everything is done correctly. At Toyota, standard milestones
are created by the project leader, and simple forms and procedures are employed so that
the work can be done simply and efficiently.
A final difference is that in many organizations design standards are obsolete and
rigid. At Toyota, these standards are maintained by the people who are doing the work
and are continually changed to meet new design demands.
The organizational approach used at Toyota is being carefully studied by other
world-class auto manufacturers, who are coming to realize that the old way of organizing
for product design is not sufficiently effective for dealing with the competitive challenges
of the new millennium. In particular, a new organizational emphasis has to be placed on
350 Part 3 International Strategic Management
better blending the personnel and the work. Commenting on all of this, a group of experts
who studied Toyota’s approach wrote:
The success of Toyota’s system rides squarely on the shoulders of its people. Successful
product development requires highly competent, highly skilled people with a lot of hands-on
experience, deep technical knowledge, and an eye for the overall system. When we look at
all the things that Toyota does well, we find two foundations for its product-development
system: chief engineers using their expertise to gain leadership, and functional engineers
using their expertise to reduce the amount of communication, supervision, trial and error,
and confusion in the process. All the other coordinating mechanisms and practices serve to
help highly skilled engineers do their job effectively. By contrast, many other companies
seem to aspire to develop systems “designed by geniuses to be run by idiots.” Toyota prefers
to develop and rely on the skill of its personnel, and it shapes its product-development
process around this central idea: people, not systems, design cars.52
■ Organizational Characteristics of MNCs
Although MNCs have similar organizational structures, they do not all operate in the
same way. A variety of factors that help explain the differences have been identified.53
These include overall strategy, employee attitudes, and local conditions. Of particular
significance to this discussion are the organizational characteristics of formalization,
specialization, and centralization.
Formalization
Formalization is the use of defined structures and systems in decision making, com-
municating, and controlling. Some countries make greater use of formalization than oth-
ers; in turn, this affects the day-to-day organizational functioning. One large research
study of Korean firms found that, unlike employees in the United States, Korean work-
ers perceive more positive work environments when expectations for their jobs are set
forth more strictly and formally. In short, Koreans respond very favorably to formaliza-
tion.54 Korean firms tend to be quite formal, but this may not hold throughout Asia. For
example, a study that investigated whether Japanese organizations are more formalized
than U.S. organizations found that although Japanese firms tend to use more labor-
intensive approaches to areas such as bookkeeping and office-related work than their
U.S. counterparts, no statistical data support the contention that Japanese firms are more
formalized.55
Another study of U.S. and Japanese firms in Taiwan divided formalization into two
categories: objective and subjective.56 Objective formalization was measured by things
such as the number of different documents given to employees, organizational charts,
information booklets, operating instructions, written job descriptions, procedure manuals,
written policies, and work-flow schedules and programs. Subjective formalization was
measured by the extent to which goals were left vague and unspecified, informal controls
were used, and culturally induced values facilitated getting things done.
Commenting on differences in the use of formalization, the researchers con-
cluded that American and Japanese firms appear to have almost the same level of
written goals or objectives for subordinates; written standards of performance apprais-
als; written schedules, programs, and work specifications; and written duties, author-
ity, and accountability. However, managers in Japanese firms perceive less
formalization than do managers in American firms. Less reliance on formal rules and
structure in Japanese firms is also revealed by the emphasis on a face-to-face or
behavioral mode of control indicated by the ratio of foreign expatriates to total
employees in subsidiaries.57
The study also found that U.S. MNCs tend to rely heavily on budgets, financial data,
and other formalized tools in controlling their subsidiary operations. This contrasts with
Japanese MNCs, in which wider use is made of face-to-face, informal controls. These
formalization
The use of defined
structures and systems in
decision making,
communicating, and
controlling.
Chapter 9 Entry Strategies and Organizational Structures 351
findings reveal that although the outward structural design of overseas subsidiaries may
appear to be similar, the internal functioning in characteristics such as formalization may
be quite different.
In recent years, this formal-informal characteristic of organizations has become the
focal point of increased scrutiny.58 One reason is that MNCs now realize there are two
dimensions of formality-informality that must be considered: internal and external. More-
over, to a large degree, these formal-informal relationships require different types of
networking. As Yoshino and Rangan noted, there are two approaches that firms that must
compete globally—and that includes most major firms—employ to achieve the layering
of competitive advantages: (1) developing extensive internal networks of international
subsidiaries in major national or regional markets and (2) forging external networks of
strategic alliances with firms around the world. These approaches are not mutually exclu-
sive, and increasingly firms are striving to build both types of networks.59
What is particularly interesting about these networking relationships is that each
places a different set of demands on the MNC. In particular, external networking with
joint-venture partners often involves ambiguous organizational mandates, less emphasis
on systems and more on people, and ambiguous lines of authority. This is a marked
difference from internal networking characteristics, where formality is much stronger
than informality and the enterprise can rely on a shared vision, clear organizational
mandates, and well-developed systems and lines of authority. Table 9–5 summarizes the
characteristics of these internal and external networks.
Specialization
As an organizational characteristic, specialization is the assigning of individuals to spe-
cific, well-defined tasks. Specialization in an international context can be classified into
horizontal and vertical specialization.
Horizontal specialization assigns jobs so that individuals are given a particular
function to perform, and people tend to stay within the confines of this area. Examples
include jobs in areas such as customer service, sales, recruiting, training, purchasing, and
marketing research. When there is a great deal of horizontal specialization, personnel
will develop functional expertise in one particular area.
Vertical specialization assigns work to groups or departments where individuals
are collectively responsible for performance. Vertical specialization also is characterized
by distinct differences between levels in the hierarchy such that those higher up are
accorded much more status than those farther down, and the overall structure usually is
quite tall.
In the earlier comparative study of 55 U.S. and 51 Japanese manufacturing plants,
Japanese organizations had lower functional specialization of employees. Specifically,
three-quarters of the functions listed were assigned to specialists in the U.S. plants, but
specialization
An organizational
characteristic that assigns
individuals to specific,
well-defined tasks.
horizontal specialization
The assignment of jobs so
that individuals are given a
particular function to
perform and tend to stay
within the confines of this
area.
vertical specialization
The assignment of work to
groups or departments
where individuals are
collectively responsible for
performance.Table 9–5
Internal versus External Networks
Managerial Dimensions Internal Network External Network
Shared vision Yes No
Animating mindset Cooperation Cooperation and competition
Organizational mandates Clear Ambiguous
Organizational objective Global optimization Develop win-win approaches
Emphasis on systems More Less
Emphasis on people Less More
Lines of authority Clear Ambiguous at best
Source: Information drawn from Michael Yoshino and N. S. Rangan, Strategic Alliances (Boston: Harvard Business School
Press, 1995), p. 203.
352 Part 3 International Strategic Management
less than one-third were assigned in the Japanese plants.60 Later studies with regard to
formalization have echoed this finding on specialization.
By contrast, studies find that the Japanese rely more heavily on vertical specializa-
tion. They have taller organization structures in contrast to the flatter designs of their
U.S. counterparts. Japanese departments and units also are more differentiated than
departments and units in U.S. organizations. Vertical specialization can be measured by
the amount of group activity as well, such as in quality circles. Japanese firms make
much greater use of quality circles than do U.S. firms. Vertical specialization also can
result in greater job routinization. Because one is collectively responsible for the work,
strong emphasis is placed on everyone’s doing the job in a predetermined way, refraining
from improvising, and structuring the work so that everyone can do the job after a short
training period. Again, Japanese organizations make much wider use of job routinization
than do U.S. organizations.
Centralization
Centralization is a management system in which important decisions are made at the
top. In an international context, the value of centralization will vary according to the
local environment and the goals of the organization. Many U.S. firms tend toward
decentralization, pushing decision making down the line and getting the lower-level
personnel involved. German MNCs centralize strategic headquarter-specific decisions
independent of the host country and decentralize operative decisions in accordance with
the local situation in the host country. The International Management in Action “Organiz-
ing in Germany” describes how relatively small German MNCs have been very success-
ful with such a decentralization strategy. In some cases, large firms have also been very
successful using a decentralized approach. Nokia, for example, has been described as
“one of the least hierarchical big companies on earth, a place where it is often profoundly
unclear who’s in charge.”61 This hands-off approach promotes creativity, entrepreneurial
effort, and personal responsibility. At the same time, however, in order to prevent oper-
ations from spinning out of control, the company exercises very tight financial discipline.
In contrast, researchers have found that Japanese organizations delegate less formal
authority than their U.S. counterparts but permit greater involvement in decisions by
employees lower in the hierarchy. At the same time, the Japanese manage to maintain
strong control over their lower-level personnel by limiting the amount of authority given
to the latter and carefully controlling and orchestrating worker involvement and participa-
tion in quality circles.62 Other studies show similar findings.63 When evaluating the pres-
ence of centralization by examining the amount of autonomy that Japanese give to their
subordinates, one study concluded:
In terms of job autonomy, employees in American firms have greater freedom to make their
decisions and their own rules than in Japanese firms. . . . Results show that managers in
American firms perceive a higher degree of delegation than do managers in Japanese firms.
Also, managers in American firms feel a much higher level of participation in the coordinat-
ing with other units, . . . in influencing the company’s policy related to their work, and in
influencing the company’s policy in areas not related to their work.64
The finding related to influence is explained in more detail in Table 9–6. U.S.
managers in Taiwanese subsidiaries felt that they had greater influence than did their
Japanese counterparts. Moreover, when statistically analyzed, these data proved to be
significant.
Putting Organizational Characteristics in Perspective
MNCs tend to organize their international operations in a manner similar to that used at
home. If the MNC tends to have high formalization, specialization, and centralization at
its home-based headquarters, these organizational characteristics probably will occur in
the firm’s international subsidiaries.65 Japanese and U.S. firms are good examples. As
centralization
A management system in
which important decisions
are made at the top.
decentralization
Pushing decision making
down the line and getting
the lower-level personnel
involved.
353
Table 9–6
Managers’ Influence in U.S. and Japanese Firms in Taiwan
Managers’ Work- U.S. Firm Japanese
Related Activity Average Firm Average
Assigning work to subordinates 4.72 3.96
Disciplining subordinates 4.07 3.82
Controlling subordinates’ work (quality and pace) 3.99 3.82
Controlling salary and promotion of subordinates 3.81 3.18
Hiring and placing subordinates 3.94 3.24
Setting the budget for own unit 3.45 3.16
Coordinating with other units 3.68 3.52
Influencing policy related to own work 3.22 2.85
Influencing policy not related to own work 2.29 1.94
Influencing superiors 3.02 3.00
Note: The highest score of means is 5 (very great influence); the lowest score is 1 (very little influence). The T-value for all
scores is significant at the .01 level.
Source: Adapted from Rhy-song Yeh and Tagi Sagafi-nejad, “Organizational Characteristics of American and Japanese Firms
in Taiwan,” National Academy of Management Proceedings (1987), p. 114.
International Management in Action
Organizing in Germany www.stihlusa.com/chainsaws
Like every other place in the world, Europe in general
and Germany in particular have gone through economic
ups and downs. German labor unions, the most power-
ful in Europe, were having to give ground, and major
corporations were scaling back operations and report-
ing losses. At the same time, a number of medium-sized
and small German companies continued to be some of
the most successful in the world. Part of this success
resulted from their carefully designed decentralized
organization structures, a result of company efforts to
remain close to the customer. The goal of these German
MNCs is to establish operations in overseas locales
where they can provide on-site assistance to buyers.
Moreover, in most cases these subsidiaries are wholly
owned by the company and have centralized controls
on profits.
A common practice among German MNCs is to over-
serve the market by providing more than is needed. For
example, when the auto firm BMW entered Japan, its
initial investment was several times higher than that
required to run a small operation; however, its high vis-
ibility and commitment to the market helped to create
customer awareness and build local prestige.
Another strategy is to leave expatriate managers in
their positions for extended periods of time. In this way,
they become familiar with the local culture and thus the
market, and they are better able to respond to customer
needs as well as problems. As a result, customers get
to know the firm’s personnel and are more willing to do
repeat business with them.
Still another strategy the German MNCs use is to
closely mesh the talents of the people with the needs
of the customers. For example, there is considerable
evidence that most customers value product quality,
closeness to the customer, service, economy, helpful
employees, technologic leadership, and innovativeness.
The German firms will overperform in the area that is
most important and thus further bond themselves to the
customer.
A final strategy is to develop strong self-reliance so
that when problems arise, they can be handled with in-
house personnel. This practice is a result of German
companies’ believing strongly in specialization and con-
centration of effort. They tend to do their own research
and to master production and service problems so that
if there is a problem, they can resolve it without having
to rely on outsiders.
How well do these German organizing efforts pay
off? Many of these relatively small companies hold
world market shares in the 70 to 90 percent range.
These are companies that no one has ever heard of,
such as Booder (fish-processing machines), Gehring
(honing machines), Korber/Hauni (cigarette machines),
Marklin & Cle (model railways), Stihl (chain saws), and
Webasto (sunroofs for cars). Even so, every one of these
companies is the market leader not only in Europe but
also throughout the world, and in some cases its relative
market strength is up to 10 times greater than that of
the nearest competitor.
Sources: Hermann Simon, “Lessons from Germany’s Midsize Giants,”
Harvard Business Review, March–April 1992, pp. 115–123; Carla
Rapoport, “Europe’s Slump Won’t End Soon,” Fortune, May 3, 1993,
pp. 82–87; Robert Neff and Douglas Harbrecht, “Germany’s Mighty
Unions Are Being Forced to Bend,” BusinessWeek, March 1, 1993,
pp. 52–56.
354 Part 3 International Strategic Management
the researchers of the comparative study in Taiwan concluded: “Almost 80 percent of
Japanese firms and more than 80 percent of American firms in the sample have been
operating in Taiwan for about ten years, but they maintain the traits of their distinct
cultural origins even though they have been operating in the same (Taiwanese)
environment for such a long time.”66
These findings also reveal that many enterprises view their international operations
as extensions of their domestic operations, thus disproving the widely held belief that
convergence occurs between overseas operations and local customs. In other words, there
is far less of an “international management melting pot” than many people realize.
European countries are finding that as they attempt to unify and do business with each
other, differing cultures (languages, religions, and values) are very difficult to overcome.
A major challenge for the years ahead will be bringing subsidiary organizational charac-
teristics more into line with local customs and cultures.
The World of International Management—Revisited
In this chapter, a number of different entry strategies and organizational arrangements
were discussed. Some of these are fairly standard approaches used by MNCs; others
represent hybrid or flexible arrangements. Increasingly, entry modes and organizational
structures involve collaborative relationships in which control and oversight are shared.
Review the chapter opening World of International Management discussion of Haier’s
integrated approach to global strategy, emphasizing both global and regional aspects.
Then think about the major themes of the chapter, forms of entry and organization struc-
ture, and answer the following questions: (1) Which organizational structure described
in the chapter does Haier’s “customer-oriented” structure most closely resemble? (2) How
might such a structure help or hinder entry into new markets? (3) Does a matrix or
customer-oriented structure lend itself better to forming joint ventures and alliances?
1. MNCs pursue a range of entry strategies in their
international operations. These include wholly
owned subsidiaries, mergers and acquisitions, alli-
ances and joint ventures, licensing and franchising,
and exporting. In general, the more cooperative
forms of entry (alliances, joint ventures, mergers,
licensing) are on the rise.
2. A number of different organizational structures are
used in international operations. Many MNCs begin
by using an export manager or subsidiary to handle
overseas business. As the operation grows or the
company expands into more markets, the firm often
will opt for an international division structure.
Further growth may result in adoption of a global
structural arrangement, such as a global production
division, global area division structure, global
functional division, or a mixture of these structures.
3. Although MNCs still use the various structural
designs that can be drawn in a hierarchical manner,
they recently have begun merging or acquiring other
firms or parts of other firms, and the resulting
organizational arrangements are quite different from
those of the past. The same is true of the many
joint ventures now taking place across the world.
One change stems from the Japanese concept of
keiretsu, which involves the vertical integration
and cooperation of a group of companies. Other
examples of new MNC organizational arrangements
include the emergence of electronic networks,
new approaches to organizing for production
development, and the more effective use of IT.
4. A variety of factors help to explain differences in
the way that international firms operate. Three orga-
nizational characteristics that are of particular
importance are formalization, specialization, and
centralization. These characteristics often vary from
country to country, so that Japanese firms will
conduct operations differently from U.S. firms, for
example. When MNCs set up international subsid-
iaries, they often use the same organizational tech-
niques they do at home without necessarily adjusting
their approach to better match the local conditions.
SUMMARY OF KEY POINTS
Chapter 9 Entry Strategies and Organizational Structures 355
KEY TERMS
alliance, 332
centralization, 352
decentralization, 352
formalization, 350
franchise, 336
global area division, 342
global functional division, 343
global product division, 340
horizontal specialization, 351
international division structure, 339
joint venture (JV), 332
license, 335
merger/acquisition, 331
mixed organization structure, 343
specialization, 351
transnational network structure, 344
vertical specialization, 351
wholly owned subsidiary, 330
REVIEW AND DISCUSSION QUESTIONS
1. One of the most common entry strategies for MNCs
is the joint venture. Why are so many companies
opting for this strategy? Would a fully owned
subsidiary be a better choice?
2. A small manufacturing firm believes there is a mar-
ket for handheld tools that are carefully crafted for
local markets. After spending two months in Europe,
the president of this firm believes that his company
can create a popular line of these tools. What type of
organization structure would be of most value to this
firm in its initial efforts to go international?
3. If the company in question 2 finds a major market
for its products in Europe and decides to expand
into Asia, would you recommend any change in its
organization structure? If yes, what would you sug-
gest? If no, why not?
4. If this same company finds after three years of
international effort that it is selling 50 percent of
its output overseas, what type of organizational
structure would you suggest for the future?
5. In what way do the concepts of formalization,
specialization, and centralization have an impact
on MNC organization structures? In your answer,
use a well-known firm such as IBM or Ford to
illustrate the practical expressions of these three
characteristics.
INTERNET EXERCISE: ORGANIZING FOR EFFECTIVENESS
Every MNC tries to drive down costs by getting its
goods and services to the market in the most efficient
way. Good examples include auto firms such as Ford
Motor and Volkswagen, which have worldwide opera-
tions. In recent years Ford has been expanding into
Europe and VW has begun setting up operations in
Latin America. By building cars closer to the market,
these companies hope to reduce their costs and be more
responsive to local needs. At the same time this strategy
requires a great deal of organization and coordination.
Visit the websites of both firms and examine the scope
of their operations. The web address for Ford Motor is
www.ford.com, and for Volkswagen it is www.vw.com.
Then, based on your findings, answer these questions:
What type of organizational arrangement(s) do you see
the two firms using in coordinating their worldwide
operations? Which of the two companies has the more
modern arrangement? Do you think this increases that
firm’s efficiency, or does it hamper the company’s
efforts to contain costs and be more competitive? Why?
1. “China’s Haier Profits Rise 20% in 2015,” China
Daily, January 25, 2016, www.chinadaily.com.cn/
business/2016-01/25/content_23227354.htm.
2. Rebecca Howard, “Haier Obtains More Than 90%
of Fisher & Paykel Shares,” The Wall Street Jour-
nal, November 5, 2012, www.wsj.com/articles/SB10
001424052970204349404578101793819992784?cb=
logged0.3215365471907483.
3. Laurie Burkitt, Joann S. Lublin, and Dana Mattioli,
“China’s Haier to Buy GE Appliance Business
for $5.4 Billion,” The Wall Street Journal,
January 15, 2016, www.wsj.com/articles/chinas-
haier-to-buy-ge-appliance-business-for-5-4-
billion-1452845661.
4. Khoirul Amin, “Haier to Operate First Global
Factory in Southeast Asia,” Jakarta Post, August
ENDNOTES
356 Part 3 International Strategic Management
17. “Worst Tech Mergers and Acquisitions: Nokia and
Microsoft, AOL and Time Warner,” ZDNet, Febru-
ary 13, 2016, www.zdnet.com/article/worst-tech-
mergers-and-acquisitions-nokia-and-microsoft-aol-
and-time-warner/.
18. Microsoft, “Microsoft Announces Restructuring of
Phone Hardware Business,” press release, July 8,
2015, https://news.microsoft.com/2015/07/08/
microsoft-announces-restructuring-of-phone-
hardware-business/.
19. Ranger, “Microsoft and Windows Phone.”
20. For additional insights into alliances and joint ven-
tures, see William Newburry and Yoram Zeira,
“General Differences between Equity International
Joint Ventures (EIJVs), International Acquisitions
(IAs) and International Greenfield Investments
(IGIs): Implications for Parent Companies,” Journal
of World Business 32, no. 2 (1997), pp. 87–102.
21. Also see David Lei, Robert A. Pitts, and John W.
Slocum Jr., “Building Cooperative Advantage: Man-
aging Strategic Alliances to Promote Organizational
Learning,” Journal of World Business 32, no. 3
(1997), pp. 203–222.
22. For more on this, see Ana Valdes Llaneza and Este-
ban Garcia-Canal, “Distinctive Features of Domestic
and International Joint Ventures,” Management
International Review 38, no. 1 (1998), pp. 49–66.
23. Kathryn M. Young, “LAN Colombia Joins One-
world; TAM to Join March 31, 2014,” ATWOnline,
October 1, 2013.
24. Brendan Sobie, “LAN and TAM to merge,” Flight
International, August 13, 2010.
25. Daniel Michaels and Peppi Kiviniemi, “Looming
Alliance to Boost BA,” The Wall Street Journal,
July 13, 2010, www.wsj.com/articles/SB1000142405
2748703283004575362941930464092.
26. For more on this, see Hildy J. Teegen and Jonathan
P. Doh, “U.S./Mexican Alliance Negotiations: Cul-
tural Impacts on Trust, Authority and Performance,”
Thunderbird International Business Review 44, no.
6 (2002), pp. 749–775.
27. See also Michael A. Hitt, M. Tina Dacin, Edward
Levitas, Jean-Luc Arregle, and Anca Borza,
“Partner Selection in Emerging and Developed
Market Contexts: Resource-Based and Organiza-
tional Learning Perspectives,” Academy of Manage-
ment Journal 43, no. 3 (2002), pp. 449–467.
28. Alan Ohnsman, “Hyundai Leads Asian Brands’ U.S.
Gains as Sales Slow,” Bloomberg Businessweek,
July 1, 2010.
29. Tommaso Ebhardt, “Marchionne Holds Talks to
Push Ahead Fiat-Chrysler Merger,” Bloomberg,
26, 2014, www.thejakartapost.com/news/2014/08/
26/haier-operate-first-global-factory-southeast-asia.
html.
5. Hou Liqiang, “Now for a Brand New Life,” China
Daily, April 3, 2015, http://africa.chinadaily.com.cn/
weekly/2015-04/03/content_19989392.htm.
6. Ariel Tung, “Home Appliance Maker Haier Taking
on America,” China Daily, August 3, 2012,
http://usa.chinadaily.com.cn/business/2012-08/03/
content_15641738.htm.
7. Bill Fischer, Umberto Lago, and Fang Liu, “The
Haier Road to Growth,” Strategy+Business, April
27, 2015, www.strategy-business.com/
article/00323?gko=c8c2a.
8. For more on this, see Donald F. Kuratko and Rich-
ard M. Hodgetts, Entrepreneurship: A Contempo-
rary Approach, 5th ed. (Ft. Worth, TX: Harcourt,
2001), pp. 529–535.
9. J. Contractor, “Contractual and Cooperative Forms
of International Business: Towards Unified Theory
of Model Choice,” Management International
Review 30, no. 1 (1990), pp. 31–54.
10. Peng S. Chan, “International Joint Ventures vs.
Wholly Owned Subsidiaries,” Multinational Busi-
ness Review 3, no. 1 (Spring 1995), pp. 37–44.
11. Harry Barkema and Freek Vermeulen, “Interna-
tional Expansion through Start-up or Acquisition:
A Learning Perspective,” Academy of Management
Journal, February 1998, pp. 7–26.
12. K. Carow, R. Heron, and T. Saxton, “Do Early
Birds Get the Returns? An Empirical Investigation
of Early-Mover Advantages in Acquisitions,”
Strategic Management Journal 25 (2004),
pp. 563–585.
13. Anabela Reis, “Oi, Portugal Telecom to Merge,
Creating $17 Billion Giant,” Bloomberg, October 2,
2013, www.bloomberg.com/news/articles/2013-10-
02/portugal-telecom-to-combine-with-oi-into-carrier-
led-by-bava.
14. Baker & McKenzie, “Cross Border M&A Index,”
Q1 2016, http://s3-eu-west-1.amazonaws.com/
papillon-local/uploads/6/11/baker_mckenzie_
global_m_a_index_q1_2016_final .
15. Christine T. W. Huang and Brian H. Kleiner, “New
Developments Concerning Managing Mergers and
Acquisitions,” Management Research News 27, no.
4–5 (2004), pp. 54–62.
16. Steve Ranger, “Microsoft and Windows Phone:
What Went Wrong, and Where Can They Go from
Here?” ZDNet, July 9, 2015, www.zdnet.com/
article/microsoft-and-windows-phone-what-went-
wrong-and-where-can-they-go-from-here/.
Chapter 9 Entry Strategies and Organizational Structures 357
44. Also see Andrew C. Inkpen and Adva Dinur,
“Knowledge Management Processes and Interna-
tional Joint Ventures,” Organization Science,
July–August 1998, pp. 454–468.
45. See, for example, John Child, “A Configurational
Analysis of International Joint Ventures,” Organiza-
tion Studies 23, no. 5 (2002), pp. 781–815.
46. Fareed Rahman, “Sikorsky to Expand in Region
with Office in Abu Dhabi,” Gulf News, February
25, 2015, http://gulfnews.com/business/aviation/
sikorsky-to-expand-in-region-with-office-in-abu-
dhabi-1.1462656.
47. Helen Hao, “SAIC-GM-Wuling Automobile Vehicle
Sales Advance 13% in 2015, Sharper Than Aver-
age,” Gasgoo, January 7, 2016, http://autonews.
gasgoo.com/40007598.html.
48. Miki Tanikawa, “Electronics Giants Join Forces in
Japan,” New York Times, May 24, 2001, p. W1.
49. Technicolor SA, “Technicolor Launches Virdata for
Monitoring, Management and Analytics of Internet
of Things and M2M Cloud Services,” press release,
January 3, 2014, www.technicolor.com/en/who-we-
are/press-news-center/press-releases/technicolor-
launches-virdata-monitoring-management-and-
analytics-internet-things-and-m2m-cloud-
services.
50. Matthew Schifrin, “Partner or Perish,” Forbes, May
21, 2001, p. 27.
51. Thomas W. Malone and Robert J. Laubacher, “The
Dawn of the E-Lance Economy,” Harvard Business
Review, September–October 1998, p. 148.
52. Durward K. Sobek II, Jeffrey K. Liker, and Allen
C. Ward, “Another Look at How Toyota Integrates
Product Development,” Harvard Business Review,
July–August 1998, p. 49.
53. Anne-Wil Harzing, “An Empirical Analysis and
Extension of the Bartlett and Ghoshal Typology of
Multinational Companies,” Journal of International
Business Studies, First Quarter 2000, pp. 101–120.
54. Steven M. Sommers, 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.
55. James R. Lincoln, Mitsuyo Hanada, and Kerry
McBride, “Organizational Structures in Japanese
and U.S. Manufacturing,” Administrative Science
Quarterly, September 1986, p. 356.
56. Rhy-song Yeh and Tagi Sagafi-nejad, “Organiza-
tional Characteristics of American and Japanese
Firms in Taiwan,” National Academy of Manage-
ment Proceedings (1987), pp. 111–115.
57. Ibid., p. 113.
June 7, 2013, www.bloomberg.com/news/2013-06-07/
fiat-in-talks-to-push-ahead-with-chrysler-merger.html.
30. James R. Healey, “Done Deal: Fiat Owns Chrysler,”
USA Today, January 21, 2014, www.usatoday.com/
story/money/cars/driveon/2014/01/21/done-deal-fiat-
now-owns-all-of-chrysler/4718529/.
31. Mark Milner, “Indian Firm Buys Jaguar and Land
Rover,” The Guardian, March 26, 2008, www.
guardian.co.uk/business/2008/mar/26/automotive.
mergersandacquisitions.
32. Bruce Nussbaum, “Tata Buys Land Rover and
Jaguar, Now It Has to ‘Nano’ Them,” BusinessWeek
online, March 27, 2008.
33. Don Clark, “Microsoft to License ARM Chip Tech-
nology,” The Wall Street Journal, July 26, 2010,
www.wsj.com/articles/SB1000142405274870424900
4575385472455356824.
34. Jenny Watts, “Is This the End for Coke’s ‘Think
Local’ Ad Strategy?” Campaign, October 12, 2001,
p. 17.
35. Jonathan Wheatley, “Coke Pops the Top off an
Emerging Market,” BusinessWeek, May 2, 2005,
online edition, www.bloomberg.com/news/articles/
2005-05-01/coke-pops-the-top-off-an-emerging-market.
36. “Market Share of Leading Carbonated Beverage
Companies Worldwide,” Statista, 2015, www.
statista.com/statistics/387318/market-share-of-
leading-carbonated-beverage-companies-worldwide/.
37. Joan Magretta, “Fast, Global, and Entrepreneurial:
Supply Chain Management, Hong Kong Style,”
Harvard Business Review, September–October
1998, p. 106.
38. See George S. Yip, Total Global Strategy II (Engle-
wood Cliffs, NJ: Prentice Hall, 2003), chapter 8.
39. Ibid.
40. A. V. Phatak, International Dimensions of Manage-
ment, 2nd ed. (Boston: PWS-Kent, 1989), pp. 92–93.
41. Mark Hachman, “‘One Sony’ Reorganization
Focuses on Games, Mobile, Imaging,” PCMag.com,
March 27, 2012, www.pcmag.com/article2/0,2817,
2402217,00.asp.
42. Carly Helfand, “With Veteran Job-Choppers Pfizer
and Allergan Joining Hands, How Many Layoffs
Are in the Cards?” Fierce Pharma, November 23,
2015, www.fiercepharma.com/story/veteran-job-
choppers-pfizer-and-allergan-joining-hands-how-
many-layoffs-are/2015-11-23.
43. Aliya Kaleem, “Allergan PLC (AGN) Stock Update:
Acquisitions to drive Future Growth,” Bidness,
September 16, 2015, www.bidnessetc.com/52718-
allergan-plc-agn-stock-update-acquisitions-to-drive-
future-growth/.
358 Part 3 International Strategic Management
65. Stephen Christophe and Ray Pfeiffer Jr., “The Valu-
ation of MNC International Operations during the
1990s,” Review of Quantitative Finance and
Accounting 18, no. 2 (March 2002), p. 119.
66. Tsuda, “The Future of the Organization,” p. 114.
67. CIA, “Mexico,” The World Factbook (2016), https://
www.cia.gov/library/publications/the-world-factbook/
geos/mx.html.
68. Ibid.
69. Heritage Foundation, “Mexico,” Index of Economic
Freedom (2016), www.heritage.org/index/country/
mexico.
70. Alejandro Madrazo, “Telecommunications: Mexico’s
New Reform,” Americas Quarterly, Summer 2013,
www.americasquarterly.org/content/telecommunica-
tions-mexicos-new-reform.
71. Ibid.
72. Bill Hofheimer, “Press Release: ESPN to Televise
Monday Night Football Game from Mexico City,”
February 5, 2016.
58. Abbass F. Alkhafaji, Competitive Global Manage-
ment: Principles and Strategies (Delray Beach, FL:
St. Lucie Press, 1995), pp. 390–391.
59. Michael Yoshino and N. S. Rangan, Strategic Alli-
ances (Boston: Harvard Business School Press,
1995), p. 195.
60. Lincoln, Hanada, and McBride, “Organizational
Structures,” p. 349.
61. Vito Racancelli, “Why Hung-Up Nokia Might Still
Be Decent Value Play,” Barron’s, May 24, 2004,
p. MW6.
62. Mark Lehrer and Kazuhiro Asakawa, “Unbundling
European Operations: Regional Management and
Corporate Flexibility in American and Japanese
MNCs,” Journal of World Business 34, no. 3
(1999), pp. 267–286.
63. Masumi Tsuda, “The Future of the Organization
and the Individual to Japanese Management,” Inter-
national Studies of Management and Organization,
Fall–Winter 1985, pp. 89–125.
64. Yeh and Sagafi-nejad, “Organizational Characteris-
tics,” p. 113.
359
In the International
Spotlight
monopoly. The country has already begun auctioning
exploration reserves in the Gulf of Mexico region. This
reform also creates new competition in the electricity
industry.71
You Be the International Management
Consultant
The National Football League (NFL) has gained attention
by its announced goal of making “American” football a
global sport. The NFL has hosted games in London,
Toronto, and Mexico in the past. Additionally, London
now hosts two games per year, and there has been serious
consideration regarding moving a franchise there. Over a
decade ago, in 2005, the NFL hosted a game in Mexico
City that drew 103,000 fans. In 2016, the league agreed
to return to Mexico with a least one regular-season game
per year for five consecutive years. “Expanding our Inter-
national Series of regular-season games to Mexico marks
an important step in our continued international growth,”
NFL Commissioner Roger Goodell said in a press confer-
ence ahead of the 2016 Super Bowl. “We have a tremen-
dous, passionate fan base in Mexico, and we know the
atmosphere on game day will be outstanding.” Mexico
appears fit for a new franchise due to its close proximity to
major U.S. cities, similar time zones, additional television
broadcasting options, and an enthusiastic fan base.72
Questions
1. If you worked as a consultant for the NFL, would
you recommend to the league commissioner that
the number of annual games played in Mexico be
increased? What about starting a new franchise in
Mexico City?
2. What aspects of the country would be cause for
concern?
3. Does Mexico’s history of state regulation over
telecommunications and energy affect your decision
for growth through television? What other concerns
might you have?
Mexico is located in North America and shares its north-
ern border with the United States. The country covers
756,000 square miles and is rich with petroleum, silver,
copper, gold, lead, zinc, natural gas, and timber. Mexico
is a rapidly emerging country. The population, growing at
more than 1 percent annually, consists of more than 120
million people, a third of whom are under 14 years old.
Roman Catholicism is the predominant religion and Span-
ish is the native language.67
With a GDP of US$1.29 trillion in 2014, the country
has consistently recorded strong annual growth. In the
past two decades, Mexico has been able to raise its GDP
per capita to US$17,881. Inflation hovers around 4 per-
cent and unemployment around 5 percent. As a result of
the North American Free Trade Agreement (NAFTA),
Mexico’s economy is tightly integrated to the United
States, and its performance and growth tend to follow
those of its larger neighbor to the north.68
Mexico is not without some issues common to other
emerging industrialized nations. The country suffers from
significant pollution issues, corruption from drug cartels,
and a lack of competition in its markets. The government
has made concerted efforts to tackle these issues with
some degree of success. Additionally, the legal system has
undergone a shift to curb the perception of corruption in
its courts. More notably, President Enrique Pena Nieto
went so far as to make constitutional reforms in the areas
of education, energy, and telecommunications. In 2013,
President Nieto signed a constitutional amendment that is
transforming the government’s role in the telecommunica-
tions industry. Under the new policies, the government
will act as a regulatory agency that will focus on antitrust
issues, and it will seek advice from a nonprofit, third
party about how to most efficiently manage the telecom
industry to reform its previous monopolistic structure.69,70
Similarly, the government is actively breaking oil
monopolies and working to open oil exploration rights to
foreign investors. This structural change means that oil
companies from all over the world will have the option of
investing in Mexico’s oil industry for the first time since
1938, when the government created its state-owned
Mexico
360
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The World of International
Management
Russian Roulette: Risks and
Political Uncertainty
I n the summer of 2013, British Petroleum (BP) investors had reason to be excited. In a historic deal, BP sold its stake in
its Russian joint venture, TNK-BP, to energy giant Rosneft.
In return, BP received over US$12 billion cash and nearly
20 percent in stock. This deal seemed like a win-win for BP
executives: BP had spent billions of dollars over many years
navigating uncertainty in Russia on its own. By holding a
minority stake in Rosneft, which is majority-owned by the
Russian government, BP could eliminate some political risk
while still capitalizing on the growing Russian energy industry.
Just one year later, however, BP issued a strong warning to
its investors. In the wake of the Russian government’s provoc-
ative foreign policy actions in Crimea, the international com-
munity slapped sanctions against numerous businesses and
individuals in Russia—including Rosneft chairman Igor Sechin.
BP’s 20 percent stake in Rosneft suddenly appeared just as
risky as its previous independent ventures in Russia.
Political uncertainty has long been a part of doing business
in Russia. For over 20 years, Russia’s often-unpredictable for-
eign policy actions have indirectly resulted in financial difficul-
ties for BP and other multinational companies working within
Russian borders. Additionally, internal actions by the Russian
government, which notoriously changes the “rules” of business
to best suit its needs, has led to risky and frustrating situations
for foreign companies that have invested in the country.
External Risk: International Sanctions and Russia
As mentioned above, Russia has recently angered many in the
international community by its annexation of the Crimean pen-
insula from Ukraine in early 2014. In February 2014, Ukrainian
President Yanukovynch, who was largely seen as pro-Russian
politically and culturally, was ousted from his presidency after
months of protests by Ukrainians who favored closer ties to
the European Union as opposed to Russia. Yanukovynch fled
to Russia, and Russian special forces stormed and seized the
Firms go international to become more competitive and profit-
able. Unfortunately, many risks accompany internationalization.
One of the biggest risks emerges from the political situation of
the countries in which the MNC does business. Terrorism is
also a worldwide concern that can create a large barrier to
MNC entry or survival in a country. MNCs must be able to
assess political risk and conduct skillful negotiations. An over-
view of the political environment in selected areas of the
world was provided in Chapter 2. This chapter specifically
examines the impact of political risk on MNCs and their subse-
quent decisions in managing it. One major way is through
effective evaluation and risk reduction. This process extends
from risk identification and quantification to the formulation of
appropriate responses, such as integration and protective and
defensive techniques.
This chapter also describes the process for developing
productive relationships with governments and for managing
alliances with foreign partners, many of which are influenced
by home- and host-government relations. The specific objec-
tives of this chapter are
1. EXAMINE how MNCs evaluate political risk.
2. PRESENT some common methods used for managing and
reducing political risk.
3. DISCUSS strategies to mitigate political risk and develop
productive relations with governments.
4. DESCRIBE challenges to and strategies for effectively
managing alliances.
Chapter 10
MANAGING POLITICAL RISK,
GOVERNMENT RELATIONS,
AND ALLIANCES
361
entities. As a result, many foreign companies have seen their
projects grind to a halt. U.S.-based ExxonMobil, which has a
joint venture in Russia with Rosneft, has been working to
expand oil drilling off the Russian coast. Under the sanctions,
however, high-tech equipment from the EU is not allowed to
be exported to Russia. Without this equipment, ExxonMobil is
stuck without the tools needed to explore and tap into the oil
reserves.7
The full impact of the 2014 economic sanctions is yet to be
realized and greatly depends on the future actions of the
Russian government. If the political discourse between Russia
and the EU changes, foreign companies with joint ventures in
Russia may be able to realize delayed profits from their invest-
ments in the country. However, ongoing or worsening political
disagreements would likely lead to increased losses and even-
tual exiting by foreign companies such as Renault.
Internal Risk: When Russia Changes the Rules
Conducting business in Russia as a foreign company is not just
risky for external political reasons; internal rule-changing by
the Russian government also poses the potential to lead to
major losses and frustration. In recent years, Netherlands-
based Royal Dutch Shell has experienced this risk firsthand. In
the early 2000s, investors in Royal Dutch Shell had reason to
be excited. With a 55 percent stake in the Sakhalin-II energy
project, Shell owned the majority share of the world’s largest
oil and gas project. The $22 billion project, centered off the
coast of mainland Russia, promised production of billions of
barrels of oil and gas.8
As work progressed on necessary infrastructure, however,
Shell’s cost estimates began to swell. Because the 1996
production-sharing agreement between Shell and the Russian
government allowed Shell to recoup all of its costs before
paying any royalty, cost overruns meant delayed and lost
funds for the Russian government. Furthermore, as the Russian
economy had improved significantly, the country could now
use its own oil and gas company Gazprom to remove the
fossil fuels itself.9
Later that year, the Russian government decided to
change the rules. The Russian Ministry of Natural Resources
announced it would revoke the environmental permits for
Sakhalin-II. Work on the two 400-mile-long pipelines—critical
to the completion of the project—was halted. The entire
Supreme Council within Crimea, raising a Russian flag over the
building. By mid-March, the overtaken Supreme Council of
Crimea authorized a referendum vote on the issue of acceding
the Crimean peninsula to Russia. The measure passed in a
highly suspicious public vote, in which many Russians and
other ineligible voters were found to have cast ballots. The
vote essentially freed Crimea of its ties to Ukraine and allowed
Russia to complete annexation on March 18, 2014. Human
Rights Watch, an NGO focused on identifying human rights
violations around the world, stated that anti-Russian
demonstrators and journalists in Crimea were attacked and
sometimes tortured during the turmoil.1
The international political fallout was swift. In March 2014,
the G8 block of nations suspended Russia (reverting the group
back to seven nations), the EU Commission released details to
enter a free-trade agreement with Ukraine by the end of the
year, and the United States sanctioned various key figures in
Russian business and politics. These actions, intended to finan-
cially stress Russia into compliance, also indirectly affected all
who conducted business in Russia.
Many foreign companies, like BP, have found themselves
incurring huge losses due to lost business and frozen assets.
BP’s third-quarter profits from its existing stake in Rosneft
dropped by US$700 million between 2013 and 2014.2 And in
the fourth quarter of 2014, BP posted a loss of nearly US$500
million from its Rosneft shares.3 Additionally, planned future
joint venture extract deals between BP and Rosneft were put
on hold in 2015.4
French car maker Renault, which through its Renault-Nissan
alliance controls nearly 50 percent of Russian automaker
AvtoVAZ, saw its Russian sales decrease by 8 percent in the
immediate wake of the sanctions in early 2014.5 Since then,
Renault has incurred major losses in Russia due to a weak-
ened economy and a depressed auto market. Due in large
part to the economic sanctions that, coupled with global gas
price decreases, have pushed Russia into its deepest reces-
sion in nearly 20 years, Renault saw its sales in Russia drop
by 32 percent in 2015. The Russian auto industry as a whole
saw sales fall by over 30 percent.6
The sanctions have also targeted infrastructure and devel-
opment projects. These types of projects, due to their com-
plexity, have historically been completed through joint ventures
between foreign corporations and Russian government
362 Part 3 International Strategic Management
Sakhalin-II project, and Shell’s enormous investment, was sud-
denly in jeopardy. Although the government claimed that
whale migration patterns were threatened by the project,
hence requiring the revocation of the permits, many analysts
saw this action as an effort by the frustrated Russian govern-
ment to force Shell to renegotiate its 1996 agreement, giving
Russia a larger slice of the profit pool. With $13 billion of
shareholder money invested in Sakhalin-II, and profitability still
a few years away, Shell was forced to accept new conditions
outlaid by the Russian government. The renegotiated
December 2006 deal included selling half of Shell’s shares to
Gazprom at discounted prices. Foreign partners Mitsubishi and
Mitsui also were forced to sell shares to Gazprom. As a result,
Shell was left with only a 27.5 percent share, while Gazprom
gained 50 percent plus one share, giving it majority control.
Shell also agreed to absorb over $3 billion in cost overruns,
meaning an additional $3 billion in future profits for the
Russian government. To stockholders, this new deal appeared
to provide no upside. Immediately following the 2006 deal,
environmental restrictions were lifted on the project and work
was permitted to continue.10
Shell’s experience with Sakhalin-II is not an isolated inci-
dent. As briefly mentioned above, BP’s former joint venture
with Russian investor AAR, TNK-BP, was plagued by similar
frustrations, ultimately leading to its sale to Rosneft in 2013.
Formed in 2003, the joint venture’s goal was to bring almost
12 billion barrels of Russian oil to the marketplace—constituting
a quarter of BP’s reserves. From the beginning of the alliance,
however, BP faced obstacles at almost every turn. In 2008,
when disagreements over future strategy emerged between
BP and AAR, BP executives suddenly experienced visa
problems, and BP CEO Robert Dudley became the subject
of a Russian criminal investigation. With talks at a standstill
and Dudley forced from the country, BP was strong-armed into
giving up most of its influence in the joint alliance to AAR.11
CEO Dudley was forced to remove himself from the project,
and AAR installed a new CEO.12 A few years later in 2011, BP
was blocked from creating a second Russian joint venture, this
time with Rosneft, following complaints from AAR.13 Frustrated,
BP finally sold its 50 percent stake to Rosneft in 2013.14
International managers interested in expanding into Russia,
or any emerging economy, must make a thorough assessment
of its political risk and the costs and benefits of joint ventures
with local partners. The World Bank is an excellent resource
for assessing political risk. In the latest IFC/World Bank report
“Doing Business 2016: Russian Federation,” Russia is ranked
119 out of 185 in the category of “Dealing with Construction
Permits.” The report states that it takes 42 different proce-
dures and at least 244 days (nearly two-thirds of a year) to
gather all of these permits.15
Russia is one of the most challenging countries in which to do business. Corruption, red
tape, security concerns, and overall lack of faith in governmental policies result in an
especially difficult political environment. Foreign energy companies faced all of these
issues and more in their effort to expand and operate in Russia. At first, these risks
appeared manageable and worth the lucrative returns, but over time, the environment was
just too much of a deterrent to their growth plans.
MNCs must be able to evaluate and manage political risks on a global scale and
contemplate the potential of alliances and other long-term cooperative relationships to
help mitigate risks. In this chapter, we explore strategies for evaluating political risks,
managing government relations, and developing and managing alliances with private and
public partners.
■ The Nature and Analysis of Political Risk
Both domestic and international political developments have a major impact on MNCs’
strategic plans. MNCs face hazards that originate directly from variation and unpredict-
ability in political and governance systems around the world. The state and its various
institutions and agencies continue to pose a direct threat to MNCs through policy shifts
in taxation or regulation, through outright or de facto expropriation, or by allowing the
exploitation of assets by local firms. As government policies change, MNCs must be
willing and able to adjust their strategies and practices to accommodate the new perspec-
tives and actual requirements. Moreover, in a growing number of geographic regions and
countries, governments appear to be less stable; therefore, these areas carry more risk
than they did in the past. Applied to international management, political risk is the
unanticipated likelihood that an MNC’s foreign investment will be constrained by a host
government’s policies. With increased terrorist attacks across the Middle East, Europe,
and North America, political risk assessment has become especially vital to MNCs.
political risk
The unanticipated
likelihood that a business’s
foreign investment will be
constrained by a host
government’s policy.
Chapter 10 Managing Political Risk, Government Relations, and Alliances 363
Today, almost all countries are interested in sustaining investment from MNCs.16 Yet
political risks persist, especially in the emerging economies of the world, which continue
to struggle with political and institutional instability. Examples of risk factors include
freezing the movement of assets out of the host country, placing limits on the remittance
of profits or capital, devaluing the currency, appropriating assets, and refusing to abide
by the contractual terms of agreements previously signed with the MNC. As rapid glo-
balization continues, MNCs must be aware of the political risk factors present in doing
business abroad and develop strategies to respond to them. Policy and control mecha-
nisms, along with awareness of the historical treatment of MNCs within certain nations,
allow firms to evaluate the inherent risk of doing business there.
The government of China, for example, was for years very anxious to see the
country admitted to the World Trade Organization (WTO). Yet even after its entry into
the WTO, China made decisions that were in its own best short-run interests but created
new political risks for MNCs doing business there. The Wall Street Journal reported that
even after it was admitted to the WTO, China undertook several actions regarding price
controls, foreign exchange restrictions, and other measures that appeared to signal it was
committed to maintaining control over the economy. One specific move was to “control
the flow of convertible currency out of the country. Officially described as a crackdown
on illegal transactions, the moves will effectively make it more difficult for both domestic
and international companies to move money in and out of China.”17,18
Some of the policies have since been relaxed; however, political risk still continues
to be a major consideration for multinationals doing business there. As was brought out
in Chapter 3, industrial piracy continues to be a big problem, and the Chinese govern-
ment has yet to take effective action against it. Chinese-produced projects accounted for
63 percent of all counterfeit goods introduced in the market in 2015, costing businesses
billions and resulting in thousands of job losses.19 One reason for the reluctance of the
Chinese government to take action may well be that state-owned factories are some of
the biggest counterfeiters. The motorcycle has been hit especially hard. Yamaha estimates
that five of every six motorcycles and scooters bearing its name in China are fake; some
state-owned factories turn out copies four months after Yamaha introduces a new model.
Yamaha has won numerous lawsuits over the years, but the penalties have been relatively
modest. Today, Yamaha maintains a website dedicated to helping consumers identify fake
bikes from authentic ones.20 Sometimes, counterfeiters are so efficient that the fake goods
reach the market even before the actual product. Nike, for example, experienced this with
its Air Max 360 when someone at the China office stole blueprints and began manufac-
turing. This is not the first instance of fake Nikes being sold in China and abroad. The
company often receives shipments of shoes or returns from customers that bear the very
recognizable swoosh logo but are in fact cheap knockoffs of the original.
Another common complaint is the way rules and regulations are interpreted in
China. Google’s attempted entry into China is an example (see Brief Integrative Case
3.1 at the end of Part Three). The cyber attacks on Google, apparently linked to govern-
ment concerns about Google’s content and a desire to limit that content, and ongoing
negotiations with the government as to what services and links would be available in
China, have resulted in a difficult and ambiguous situation for the company. Noting that
the Chinese government can “arbitrarily decide” the level of service Google Inc. can
provide in China, the company’s chief executive, Eric Schmidt, said, “‘We don’t know’
if what seems to have been a relatively minor disruption of Google’s search availability
in China Thursday was evidence of that government power.”21
These types of actions by the Chinese government increase the political risk of
doing business in China. On the other side of the coin, Chinese MNCs must also assess
the political risk inherent in doing business in the United States. The U.S. government
has begun to review its trade policy with China. In particular, American trade officials
claim that China has taken for granted its relationship with the United States and warn
that if markets there are not opened for American goods, there will be reciprocal action
against Chinese firms that are selling in the United States.22 Given the enormous trade
364 Part 3 International Strategic Management
deficit that the United States has with China, this situation could end up creating major
political risks for Chinese MNCs doing business in the politically stable but very risky
United States. In fact, tensions continue to rise as U.S. politicians have become frustrated
by China’s unwillingness to revalue the yuan, and concerns have grown over the safety
of goods imported from China. Tainted pet food, unsafe toys, suspect drywall imported
from China, and recalls by many U.S. companies that import products from China, such
as the massive toy recall by Mattel, have caused many in the United States to question
the safety and reliability of Chinese products.23
Macro and Micro Analysis of Political Risk
Firms evaluate political risk in a number of ways. One is through macro political risk
analysis, which reviews major political decisions that are likely to affect all business
conducted in the country. For example, China’s decision regarding restrictions on foreign-
exchange transactions represents a macro political risk because it affects all MNCs.
Another approach is micro political risk analysis, which is directed toward government
policies and actions that influence selected sectors of the economy or specific foreign
businesses. China’s government policies regarding investment in the telecommunications
industry fall into the micro political risk category. The following two sections examine
both of these areas requiring analysis—macro political risk and micro political risk—in
more depth.
Macro Risk Issues and Examples In recent years, macro risk analysis has become of
increasing concern to MNCs because of the growing number of countries that are find-
ing their economies in trouble, as in Southeast Asia, or, even worse, that are unable to
make the transition to a market-driven economy. A good example of the latter is Russia,
as we saw in The World of International Management. Russia has been tightening con-
trols on the flow of foreign currencies. This decision represents a change in direction
from the free-market principles that Russia had been following in order to ensure that it
continued to receive assistance from the International Monetary Fund.
India provides plenty of examples of macro political risks for MNCs. India’s legal
system is stymied by a labyrinth of laws and bureaucratic red tape. In 2015, the Indian
courts had a backlog of over 31.4 million cases. Additionally, the country had only
15 judges per million citizens, far fewer than the 100 judges per million citizens in the
U.S.24 Moreover, approximately one-quarter of these cases have been winding their way
through the legal system for more than five years. So while the government touts the
fact that Indian law offers strong protection to foreign firms against counterfeiters, an
MNC finding that it must rely on the Indian judicial system to enforce its proprietary
rights is likely to be sadly disappointed. As a result, many MNCs accept this risk as a
cost of doing business in India and formulate strategies for managing the problem. A
good example is provided by the Timken Company of Canton, Ohio, which makes bear-
ings and alloy steel. When Timken found that the Indian market was rampant with fake
Timken products, the MNC’s initial reaction was to sue the counterfeiters. However, after
realizing how long this would take, the MNC opted for a different strategy. Management
switched the packaging of its products from cardboard boxes to heat-sealed plastic with
eight-color printing and a hologram that could not be forged. Result: Within months, the
counterfeit market began drying up. The approach was so successful that Timken utilized
it when facing similar counterfeiting in China. Timken is not alone; there are many
counterfeit operations in India because the slow-moving judicial system encourages non-
compliance. In fact, some counterfeiters have found that by filing countersuits, they can
tie up a case in court for years.
Many other newly emerging economies, besides the big countries China, Russia,
and India, also present macro political risks for MNCs. In Vietnam, the communist
government earned a bad name among foreign investors because of all the pitfalls they
have to face. Until recently, the Vietnamese government required all foreign investors to
macro political risk
analysis
Analysis that reviews major
political decisions likely to
affect all enterprises in the
country.
micro political risk
analysis
Analysis directed toward
government policies and
actions that influence
selected sectors of the
economy or specific foreign
businesses in the country.
Chapter 10 Managing Political Risk, Government Relations, and Alliances 365
establish joint ventures with local partners. But even with this arrangement, getting things
done proved to be extremely slow and difficult because of the numerous levels of bureau-
cracy to be dealt with. One international manager described his MNC’s experience this
way: “The negotiations would follow a serpentine path, with breakthroughs in one session
often being erased in the next.”25 To date, macro political risks in Vietnam remain high,
although there is little risk of political instability. Investors continue to proceed with
caution, which may be a wise approach in an economy that could prove to be challenging
for an increasingly integrated global marketplace.
An example of a macro consideration of political risk would be an analysis of what
would happen to a company’s investment if opposition government leaders were to take
control. In the 1970s, U.S. companies in Iran failed to forecast the fall of the shah and
rise of Khomeini and, as a result, they lost their investment. Because of this Iranian
experience, the situation in Iraq under militant dictator Saddam Hussein and the subse-
quent instability after his removal, the terrorist attacks in Paris and New York by ethnic
Middle Easterners, and the recent rise of ISIS in Syria and Iraq, many MNCs now are
reluctant to invest very heavily in most Middle Eastern countries. Recently, the govern-
ment of Iran appeared to be interested in attracting foreign investment, but there is still
a great deal of concern that this region is too politically explosive.
Central, if not Eastern, Europe appears to be a better bet, as seen by the millions
of dollars that MNCs have poured into transition postcommunist countries such as
Hungary and Poland. This geographic region is also regarded as politically risky, how-
ever, given the ongoing conflict in Crimea, the breakup of Czechoslovakia into the
independent Czech Republic and Slovak Republic, the continuing problems in the former
Soviet republics, and the political instability in the entire region. As a result, many MNCs
have been tempering their expansion plans in these still emerging economies. Recently,
populist governments, somewhat hostile to capitalism and foreign investment, have
emerged in a number of Latin American countries, including Bolivia, Ecuador, and
Venezuela. In some cases, these governments have effectively forced divestment by
MNCs, as was the case in Venezuela in the petrochemical sector.
Still another area of consideration for MNCs regarding macro political risks is
government corruption, such as prevalence of bribery and government rules and regula-
tions that require the inclusion of certain locals in lucrative business deals. One of the
most commonly cited reasons for the severe economic problems in Indonesia in recent
years is the corrupt practices of the government. Because the family of former president
Suharto was involved in virtually every big business deal that took place under his
regime, many loans and major projects were approved by banks and government agencies
simply because these family members were part of the process. When these loans and
projects ran into trouble, more money was poured in to shore up things—and no one
dared to challenge these unsound decisions. President Widodo, elected in 2014, cam-
paigned on the promise of a clean break from previous corrupt practices, though many
problems still remain.
Which are the most and the least corrupt nations in the world? Table 10–1 provides
the results for 2015 of the Corruption Perceptions Index, which measures the perceived
level of public-sector corruption, in which 168 countries/territories were ranked. The
United States ended up in 16th position, illustrating that even the U.S. has work to do
in improving its business environment.
Micro Risk Issues and Examples Micro risk issues often take such forms as industry
regulation, taxes on specific types of business activity, and restrictive local laws. The
essence of these micro risk issues is that some MNCs are treated differently from others,
thus increasing the cost of doing business for some.
In 1992 American steel makers filed more than 80 complaints against 20 nations
on a single day. They charged that foreign steel makers were dumping their products in
the U.S. market at artificially low prices. In the first six months of 1998, the industry
again demanded action against foreign producers in Brazil, Japan, and Russia who were
366 Part 3 International Strategic Management
dumping steel in the United States at unfairly low prices. What was even more troubling
was that the American producers were in the process of negotiating with big auto and
appliance makers for the steel that is sold under long-term contracts. Because steel prices
had dropped sharply because of the alleged “dumping,” the American firms were con-
cerned that they would end up getting locked into contracts that offered very little, if any,
profit. The American steel makers were insisting that their government force foreign
producers to raise their prices.26 The George W. Bush administration did ultimately impose
tariffs on steel (these were, in part, subsequently rescinded). Such events underscore the
uncertainty and volatility associated with micro political risks, even in the United States.
World Trade Organization (WTO) and European Union (EU) regulations on American
MNCs have created new sorts of micro political risk. For example, the WTO ruled that the
United States’ 1916 Anti-Dumping Act violates global trade regulations and cannot be used
by American firms to fend off imports.27 Meanwhile on the European continent, the European
Commission is investigating complaints by PepsiCo and other competitors that Coca-Cola
has improperly attempted to shut down sales of its rivals.28 The EU examines all major
mergers and acquisitions and has the authority to block them. For example, the EU refused
to allow the General Electric (GE) and Honeywell merger, a prime example of the forces
of globalization (the EU was able to stop the actions of perhaps the most powerful U.S.
firm) as well as of the need for political risk analysis (GE needed to better assess and manage
the risk posed by the politicians and government bureaucrats in Brussels).
Other examples have included the EU’s denying Volvo and Scania approval to
merge and preventing Alcan Aluminum of Canada, Pechiney of France, and the Alusuisse
Table 10–1
Selected Ranking of Corruption in 2015 Transparency International
Corruption Perceptions Index from Least to Most Corrupt (Note: Some
countries are “tied”)
Rank Country/Territory
1 Denmark
2 Finland
3 Sweden
4 New Zealand
7 Switzerland
8 Singapore
9 Canada
10 Luxembourg
10 Germany
10 United Kingdom
16 United States
18 Japan
23 Chile
30 Poland
30 Taiwan
32 Israel
36 Spain
37 Korea (South)
48 Saudi Arabia
61 South Africa
61 Italy
76 Brazil
76 India
Rank Country/Territory
76 Thailand
83 China
88 Indonesia
88 Egypt
95 Mexico
99 Niger
107 Argentina
112 Vietnam
117 Pakistan
119 Russia
130 Iran
136 Nigeria
139 Kenya
147 Myanmar
150 Zimbabwe
150 Cambodia
154 Syria
158 Venezuela
158 Haiti
161 Iraq
163 Angola
166 Afghanistan
167 Somalia
Source: Transparency International, http://cpi.transparency.org.
Chapter 10 Managing Political Risk, Government Relations, and Alliances 367
Lonza Group of Switzerland, the world’s three largest aluminum companies, from com-
bining forces.29 Microsoft has also faced challenges in the EU, including well over a
billion dollars in fines in the last 15 years. In 2004, the European Commission issued
its decision regarding allegations of anticompetitive practices by Microsoft, finding that
Microsoft had engaged in such practices and issuing a sweeping set of penalties, includ-
ing the biggest fine it has ever levied, $613 million. The EC also says it will require that
the company offer computer makers in Europe two versions of its monopoly Windows
operating system, one with Windows Media Player, which lets users watch videos and
hear music, and one without. Microsoft must share technical information with rivals that
will help their server software work better with Windows: “We are simply ensuring that
anyone who develops new software has a fair opportunity to compete in the market-
place,”30 said Mario Monti, competition commissioner for the EU. Although Microsoft
had emerged generally unscathed from the extended litigation in the U.S. related to a
variety of allegedly anticompetitive practices, this EU decision constituted a major set-
back for the firm, and reflected the uniquely European perspective on these practices. In
2007, Microsoft lost its appeal and the ruling stood.31 In 2013, Microsoft was again fined,
this time for US$731 million, for ignoring previous promises and failing to give customers
a choice of web browser.32 These regulatory actions are good examples of the types of
micro risk issues that MNCs face from industry regulation.
In some instances, it is not clear whether macro or micro political risk is at work.
Research in Motion Ltd., the maker of the Blackberry line of smartphones, was threatened
with expulsion from a number of markets, including Saudi Arabia, United Arab Emirates,
and India, because of its proprietary encryption technology that makes it hard for countries
to access calls and messages, which some claim is necessary to protect national security.
The concerns center around corporate e-mail routed through the handsets and instant mes-
saging, which use high levels of encryption and proprietary technology. Consumer e-mails
sent over the devices are lightly encrypted and can be decoded by local wireless phone
companies. The governments have focused on RIM because it operates its own network of
servers and is therefore outside their legal jurisdiction and monitoring reach. RIM also
features corporate e-mail services that are heavily encrypted and that only each corporate
customer can access. This security has made RIM popular among companies and govern-
ments, but the target for governments. In this example, a company has been targeted
because of its unique product features and their implications for government security.33
Terrorism and Its Overseas Expansion
Terrorism has existed for centuries, but terrorism has become more of a concern every-
where over the last few years, and especially so in the United States and Europe in light
of the Paris, Madrid, London, and New York attacks. Terrorism is the use of force or
violence against others to promote political or social views. The ultimate goal of the
violence is for government and citizens to change policies and ultimately yield to the
beliefs of the terrorist group.34 Three types of terrorism exist: classic, amateur, and reli-
giously motivated.35 Classic terrorism entails a specific, well-defined objective pursued
by well-trained, professional, underground members. Amateur terrorism tends to occur
once and often has poorly defined objectives, and therefore members are not as commit-
ted. Religiously motivated terrorism is carried out by individuals holding very strong
core beliefs, regardless of how well defined their objectives are. The latter tends to be
more chaotic and scattered because the individuals involved are extremely passionate
about the cause, despite the lack of unified goals.
MNCs need to be wary of the combative political environment that may exist when
they seek to engage in overseas expansion in certain geographic areas. For example, the
Al Qaeda group has attacked in Yemen, Pakistan, Kuwait, Tunisia, and Kenya, to name
a few. Palestinian suicide bombers have blown up buses in Israel. Australian tourists were
killed in a massive attack in Bali, and a restaurant in the Philippines was the target of
similar assaults. The United States’s invasions of Afghanistan and Iraq have harmed
terrorism
The use of force or violence
against others to promote
political or social views.
368 Part 3 International Strategic Management
political relations with countries that did not agree with those actions.36 Violent conflicts
in Africa are ongoing and endemic. There have been bombings in the U.K., and France
has been affected by multiple attacks. In January 2015, 17 people were killed when ter-
rorists attacked the Charlie Hebdo newspaper headquarters, and in November 2015, over
130 people were killed in a series of ISIS-related terrorist attacks in Paris. As you well
know, the list is long and likely to get longer.
It is clear that terrorism within a country can have a significant impact on the MNC
in the macro sense. If a country has a high incidence of terrorist attacks against com-
mercial businesses specifically, companies will need to be even more wary about setting
up operations. Typically, terrorists target business areas or businesses that have high
status or those that have great influence on initiating change. While terrorists now use
an extensive array of attack methods, they tend to avoid institutions with high security;
most attacks on private businesses are either driven by the amateur terrorist or those that
are religiously motivated.37 There is no way to guarantee that companies can fully avoid
harm, but political risk analysis and preparation may forestall it. MNCs must thoroughly
evaluate the political environment, install modern security systems, compile a crisis hand-
book, and prepare employees for situations that may arise.
Analyzing the Expropriation Risk
Expropriation is the seizure of businesses with little, if any, compensation to the own-
ers. Such seizures of foreign enterprises by developing countries were quite common in
the old days. In addition, some takeovers were caused by indigenization laws, which
required that nationals hold a majority interest in the operation. Generally, expropriation
is more likely to occur in non-Western countries that are poor, relatively unstable, and
suspicious of foreign multinationals.
Some firms are more vulnerable to expropriation than others. Often, those at greatest
risk are in extractive, agricultural, or infrastructural industries such as utilities and trans-
portation because of their importance to the country. In addition, large firms often are more
likely targets than small firms because more is to be gained by expropriating large firms.
MNCs can take a wide variety of strategies to minimize their chances of expropriation.
They can bring in local partners. They can limit the use of high technology so that if the
firm is expropriated, the country cannot duplicate the technology. They also can acquire an
affiliate that depends on the parent company for key areas of the operation, such as financing,
research, and technology transfer, so that no practical value exists in seizing the affiliate.
■ Managing Political Risk and Government Relations
For many decades, businesses have been looking for ways to manage their political risk.
Quite often, the process begins with a detailed analysis of the various risks with which
the MNC will be confronted, including development of a comprehensive framework that
identifies the various risks and then assigns a quantitative risk or rating factor to them.
Developing a Comprehensive Framework or Quantitative Analysis
A comprehensive framework for managing political risk should consider all political risks
and identify those that are most important. Schmidt has offered a three-dimensional
framework that combines political risks, general investments, and special investments.38
Figure 10–1 illustrates this framework, and the following sections examine each dimen-
sion in detail.
Political Risks Political risks can be broken down into three basic categories: transfer
risks, operational risks, and ownership-control risks. Transfer risks stem from government
policies that limit the transfer of capital, payments, production, people, and technology in
or out of the country. Examples include tariffs on exports and imports as well as restric-
tions on exports, dividend remittance, and capital repatriation. Operational risks result
from government policies and procedures that directly constrain the management and
expropriation
The seizure of businesses
by a host country with little,
if any, compensation to the
owners.
indigenization laws
Laws that require nationals
to hold a majority interest
in an operation.
transfer risks
Government policies that
limit the transfer of capital,
payments, production,
people, and technology in
and out of the country.
operational risks
Government policies and
procedures that directly
constrain management and
performance of local
operations.
Chapter 10 Managing Political Risk, Government Relations, and Alliances 369
performance of local operations. Examples include price controls, financing restrictions,
export commitments, taxes, and local sourcing requirements. Ownership-control risks
are embodied in government policies or actions that inhibit ownership or control of local
operations. Examples include foreign-ownership limitations, pressure for local participa-
tion, confiscation, expropriation, and abrogation of proprietary rights. For example, the
Russian government canceled an agreement with the Exxon Corporation that would have
allowed the firm to tap huge oil deposits in the country’s far north. The Russian minister
for natural resources cited “legal irregularities” as the reason for the decision. As a result,
the $1.5 billion project came to a grinding halt. Commenting on the government’s action,
one Western investment banker in Russia said that “it raises the question of whether a
deal is a deal in Russia, because Exxon is meticulous to a fault in following the letter of
the law.”39 Abrogation of the agreement is an example of ownership-control risks.
For some other examples of political risks that must be managed, see the International
Management in Action box “Sometimes It’s All Politics” and the International Management
in Action box “Uber’s Global Expansion and Political Strategy” later in this chapter.
General Nature of Investment The general nature of investment examines whether the
company is making a conglomerate, vertical, or horizontal investment (see Figure 10–1).
In a conglomerate investment, the goods or services produced are not similar to those
produced at home. These types of investments usually are rated as high risk because foreign
governments see them as providing fewer benefits to the country and greater benefits to
the MNC than other investments. Vertical investments include the production of raw
materials or intermediate goods that are to be processed into final products. These invest-
ments run the risk of being taken over by the government because they are export-oriented,
and governments like a business that helps them generate foreign capital. Horizontal
investments involve the production of goods or services that are the same as those pro-
duced at home. These investments typically are made with an eye toward satisfying the
host country’s market demands. As a result, they are not very likely to be takeover targets.
Special Nature of Investment The special nature of foreign direct investment (FDI)
relates to the sector of economic activity, technological sophistication, and pattern of
ownership. There are three sectors of economic activity: (1) the primary sector, which
consists of agriculture, forestry, and mineral exploration and extraction; (2) the industrial
sector, consisting of manufacturing operations; and (3) the service sector, which includes
transportation, finance, insurance, and related industries. Levels of technological
sophistication characterize science-based industry and non-science-based industry. The
difference between them is that science-based industry requires the continuous introduction
conglomerate investment
A type of high-risk
investment in which goods
or services produced are not
similar to those produced at
home.
vertical investment
The production of raw
materials or intermediate
goods that are to be
processed into final
products.
horizontal investment
An MNC investment in
foreign operations to
produce the same goods or
services as those produced
at home.
Conglomerate
G
e
n
e
ra
l i
n
ve
st
m
e
n
ts
Horizontal
Vertical
Transfer Operational Ownership
control
Low Low Low
High High High
High
Sp
ec
ial
in
ve
stm
en
ts
I
II
III
IV
V
High High
Low Low Low
Political risks
Figure 10–1
A Three-Dimensional
Framework for Assessing
Political Risk
Source: David A. Schmidt, “Analyzing Political Risk,” Business Horizons, August 1986, p. 50. Elsevier, 1986.
ownership-control risks
Government policies or
actions that inhibit
ownership or control of
local operations.
370
International Management in Action
Sometimes It’s All Politics http://www.nytimes.com/2010/03/23/business/global/23enron.html
One of the biggest problems in doing business internation-
ally is that yesterday’s agreement with a government may
be canceled or delayed by today’s politicians who dis-
agree with that earlier decision. Enron, the now bankrupt
Houston-based U.S. energy consortium, discovered this
when its power project in Dabhol, India, became the focal
point of political interest. India’s economic nationalists
began accelerating a campaign to scrap a high-profile,
U.S.-backed power project despite warnings of potential
damage to the confidence of foreign investors in the coun-
try. These politicians wanted to abandon the $2.8 billion
deal as well as all other power projects in the country that
had been approved under the government’s “fast track”
provisions. The contract for the two-stage, 2,000-megawatt
plant was signed before the current politicians came to
power in Maharashtra, the state where Dabhol is located.
What effect would this political move have on foreign
investment in India? A number of foreign investors indi-
cated that if the Enron project were canceled, they
would review their investment plans for the country.
A survey of international energy companies by the
East-West Center in Hawaii found that of 13 Asian econ-
omies, India’s investment climate ranked fifth from the
bottom for power-sector investment. This seemed to
have little effect on the politicians, who proceeded to
cancel the project. Members of the political opposition
who supported the project called it a mere political ploy
designed to appeal to voters in the upcoming elections,
and they urged foreign investors to sit tight and ride out
the political storm. Many of these investors appeared to
be apprehensive about taking such advice, and Enron
announced plans for taking the case to international
arbitration to reclaim the $300 million it had invested in
the project—as well as $300 million in damages.
Eventually things were straightened out, but only for
a while. Later the Maharashtra State Electric Board
defaulted on $64 million in unpaid power bills. The
board said that the company was charging too much for
power, and Enron served notice that it would terminate
the power supply contract and pull out. As of fall 2002,
following Enron’s own collapse, the power purchase
agreement was to be reworked, and the foreign
investors—Enron’s creditors GE and Bechtel—were look-
ing to divest their stakes in the venture, scrambling to
recover whatever they could from the project.
The political climate in India is not unique. Russia
also offers its share of jitters to investors. In particular,
many joint ventures that were created during the
Gorbachev era now are having problems. A good exam-
ple is Moscow’s Radisson-Slavjanskaya Hotel venture, in
which American Business Centers of Irvine, California,
owns a 40 percent stake. American Business Centers
manages several floors of offices in the hotel, and now
that the venture is making money, it appears that the
Irvine firm’s Russian partners and the Radisson hotel
people are trying to oust them. The president of
American Business Centers claims that his partners feel
they do not need him any longer.
The dilemma faced by American Business Centers is
becoming increasingly common in Russia. For example,
the Seattle-based firm Radio Page entered into a joint
venture with Moscow Public Telephone Network and
another Russian company to offer paging services.
Together, they built a system of telephone pagers in the
Moscow region. Radio Page held a 51 percent stake.
When annual revenues hit $5 million and the venture
was on the verge of making $1 million, the agreement
began to unravel. The Russian partners demanded con-
trol of the operation and even threatened to pull the
critical radio frequencies if they did not get their way.
There is little that foreign joint-venture firms doing
business in high-risk countries can do except try to nego-
tiate with their partners. For instance, the political situa-
tion in Russia is so unstable that support from one
government ministry may be offset by opposition from
another, or, worse yet, the individuals supporting the for-
eign firm may be ousted from their jobs tomorrow. Eco-
nomic considerations tend to be the main reason why
firms seek international partners, but sometimes it seems
that everything boils down to politics and the risks asso-
ciated with dealing in this political environment.
Sources: John Stackhouse, “India Sours on Foreign Investment,” Globe
and Mail, August 10, 1995, sec. 2, pp. 1–2; Peter Galuszka and
Susan Chandler, “A Plague of Disjointed Ventures,” BusinessWeek,
May 1, 1995, p. 55; Marcus W. Brauchli, “Politics Threaten Power
Project in India,” The Wall Street Journal, July 3, 1995, p. A14; “Enron,
and On and On,” The Economist, April 21, 2001, pp. 56–57; Saritha
Rai, “Enron Unit Moves to End India Contract for Power,” New York
Times, May 22, 2001, pp. W1, W7; “Enron Properties Outside the U.S.
Hit Auction Block,” The Wall Street Journal, January, 22, 2002, p. A6.
of new products or processes. Patterns of ownership relate to whether businesses are
wholly or partially owned.
The special nature of FDI can be categorized as one of five types (see Figure 10–1).
Type I is the highest-risk venture; type V is the lowest-risk venture. This risk factor is
assigned based on sector, technology, and ownership. Primary sector industries usually have
the highest risk factor, service sector industries have the next highest, and industrial sector
industries have the lowest. Firms with technology that is not available to the government
should the firm be taken over have lower risk than those with technology that is easily
acquired. Wholly owned subsidiaries have higher risk than partially owned subsidiaries.
Chapter 10 Managing Political Risk, Government Relations, and Alliances 371
Using a framework similar to that provided in Figure 10–1 helps MNCs to under-
stand and manage their political risks. A way to complement this framework approach
is to give specific risk ratings to various criteria and make a final compilation.
Quantifying the Variables in Managing Political Risk Some MNCs attempt to man-
age political risk through a quantification process in which a range of variables are si-
multaneously analyzed to derive an overall rating of the degree of political risk in a given
jurisdiction. This would allow an MNC, for example, to compare how risky a particular
venture would be in Russia and in Argentina.
Factors that are typically quantified reflect the political and economic environ-
ment, domestic economic conditions, and external economic conditions. Each factor
is given a minimum or maximum score, and the scores are tallied to provide an
overall evaluation of the risk. Table 10–2 provides an example of a quantitative list
of political risk criteria.
Table 10–2
Criteria for Quantifying Political Risk
Scores
Major Area Criteria Minimum Maximum
Political and economic 1. Stability of the political system 3 14
environment 2. Imminent internal conflicts 0 14
3. Threats to stability emanating from the outside world 0 12
4. Degree of control of the economic system 5 9
5. Reliability of the country as a trading partner 4 12
6. Constitutional guarantees 2 12
7. Effectiveness of public administration 3 12
8. Labor relations and social peace 3 15
Domestic economic 9. Size of population 4 8
conditions 10. Per capita income 2 10
11. Economic growth during previous 5 years 2 7
12. Prospective growth during next 3 years 3 10
13. Inflation during previous 2 years 2 10
14. Accessibility of domestic capital market to foreigners 3 7
15. Availability of high-quality local labor 2 8
16. Possibility of giving employment to foreign nationals 2 8
17. Availability of energy resources 2 14
18. Legal requirements concerning environmental protection 4 8
19. Traffic system and communication 2 14
External economic 20. Restrictions imposed on imports 2 10
relations 21. Restrictions imposed on exports 2 10
22. Restrictions imposed on foreign investments in the country 3 9
23. Freedom to set up or engage in partnerships 3 9
24. Legal protection for brands and products 3 9
25. Restrictions imposed on monetary transfers 2 8
26. Revaluations against the home market currency during
previous 5 years 2 7
27. Development of the balance of payments 2 9
28. Drain on foreign funds through oil and other energy imports 3 14
29. International financial standing 3 8
30. Restrictions imposed on the exchange of local money into
foreign currencies 2 8
Source: E. Diehtl and H. G. Koglmayr, “Country Risk Ratings,” Management International Review 26, no. 4 (1986), p. 6.
372
International Management in Action
Uber’s Global Expansion and Political Strategy
Over the course of just a few years, Uber, the taxicab
alternative founded in San Francisco in 2009, has dis-
rupted the traditional “vehicle for hire” transportation
model on a worldwide scale. Whereas a typical taxicab
company may purchase a fleet of cars and hire drivers
for those cars, Uber functions as a facilitator for a user-
generated ride-sharing network. Both riders and drivers,
using their own personal vehicles, connect through the
company’s phone application. Using this technology,
drivers and riders are able to connect within seconds,
resulting in an increased number of fare-paying rides
that a driver is able to complete and a decreased wait-
time for riders when compared to hailing a traditional
taxicab. Uber offers numerous additional advantages to
riders and drivers over traditional taxicab service, includ-
ing more efficient service, competitive pricing, increased
access to the market for those who would like to be
drivers, and easier payment for services. Since 2011,
Uber has expanded exponentially. As of 2016, Uber
was operating in 66 countries worldwide.
Taxicab companies, often wielding great political
influence, have attempted to halt Uber’s disruptive
expansion. Knowing that Uber relies heavily on deregu-
lation in the marketplace to function effectively, tradi-
tional taxicab companies have lobbied for extensive
regulations and licenses for all ride-sharing programs.
However, as Uber is an Internet-based service with little
in-country infrastructure, most countries have faced
unprecedented difficulty when attempting to impose
restrictions.
Many cities and countries have unsuccessfully
attempted to completely eliminate Uber service. In
2014, the city of Brussels banned the app outright,
imposing a fine of US$13,500 to Uber for every time
the company offered fares to drivers who are not
licensed taxicab operators. The personal vehicles for
over a dozen Uber drivers were impounded. However,
growing consumer demand forced authorities to cave;
by early 2015, the Brussels government had begun
deliberations on the legalization of for-profit ride-sharing
programs, like Uber.
In 2014 and 2015, French courts fined Uber multiple
times for operating illegal, unlicensed services, and
more than 100 Uber drivers were ticketed. Despite
these threats, Uber continued to operate its services
and, with increasing ridership and available drivers,
French authorities have stopped actively pursuing legal
actions against drivers. Similarly, in 2015 Uber’s ser-
vices were deemed illegal by the Brazilian court system,
and phone service providers were ordered to block the
downloading of the app. However, within just a few
weeks, the court reversed course and eliminated the
policy of restricting the use of the app.
Uber’s political strategy in Brussels, France, and
Brazil, like elsewhere, has been to continue to defy any
regulation imposed or threatened in the short term,
knowing that consumer demand will ultimately force gov-
ernments to permit their service. To build enough con-
sumer support and awareness to effectively implement
this strategy, the company has intentionally spent hun-
dreds of millions of U.S. dollars to advertise its services
across the global audience. Uber is uniquely positioned
to utilize this type of political strategy; while other com-
panies must maintain hard assets in countries in which
they operate, Uber relies on locals, who own their own
cars, to keep the business moving. While a government
can somewhat easily shutter a retail store or seize
assets, Internet-based facilitation apps are nearly impos-
sible to ban in free economies. Despite Uber’s remaining
technically illegal in many countries in which it operates,
consumer demand for Uber has resulted in minimal
enforcement and punishments. This strategy, though
effective, has not been cheap. In 2014 alone, Uber lost
over US$200 million in its international operations.
A great deal of political risk remains for Uber as it
continues to push into new markets. In India, Uber has
faced backlash and a temporary ban after several inci-
dents involving rider safety, including violent crime.
China, with a highly urbanized middle class, holds more
potential for the company than perhaps any other mar-
ket. However, as companies like Google have experi-
enced firsthand, the Chinese government holds more
political power over the Internet than perhaps any other
nation. It is estimated that Uber is spending more than
US$1 billion annually to advertise its services within
China alone. Succeeding in China will likely involve
more negotiation and regulation than Uber has been
required to complete elsewhere.
As a company dedicated to the development of dis-
ruptive solutions to market demands, Uber will likely
face continued political pressures as it develops new
technology in the future. For example, Uber’s street test-
ing of driverless vehicles in Pittsburgh, Pennsylvania, in
2015 resulted in regulatory discussions in various cities
and states across the United States. Going forward,
however, the company should find confidence in the
success of its past strategies for global growth; Uber
has proven that consumer buy-in is perhaps the most
powerful tool when facing political risk and difficulties,
regardless of region or country.
Sources: Douglas MacMillan, “Uber Spends Big on International
Expansion,” The Wall Street Journal, March 3, 2016, www.wsj.com/
articles/uber-spends-big-on-international-expansion-1456960083;
Joanna Sugden, Aditi Malhotra, and Douglas MacMillan, “Uber under
Attack around the Globe,” The Wall Street Journal, December 9,
2014, www.wsj.com/articles/india-advises-all-states-to-ban-uber-and-
other-car-hailing-services-1418119647; Leila Abboud and Jeremy
Wagstaff, “Legal Troubles, Market Realities Threaten Uber’s Global
Push,” Reuters, October 5, 2015, www.reuters.com/article/us-uber-
global-insight-idUSKCN0RZ0A220151005.
Chapter 10 Managing Political Risk, Government Relations, and Alliances 373
Techniques for Responding to Political Risk
Once political risk has been analyzed by a framework, quantitative analysis, or both, the
MNC then will attempt to manage the risk further through a carefully developed response.
The MNC can also proactively improve its relationship with governments by means of
preemptive political strategies to mitigate risk before it appears. Three related strategies
should be considered: (1) relative bargaining power analysis; (2) integrative, protective,
and defensive techniques; and (3) proactive political strategies.
Relative Bargaining Power Analysis
The theory behind relative bargaining power is quite simple. The MNC works to main-
tain a bargaining power position stronger than that of the host country. A good example
arises when the MNC has proprietary technology that will be unavailable to the host
country if the operation is expropriated or the firm is forced to abide by government
decisions that are unacceptable to it. Over time, of course, this technology may become
common, and the firm will lose its bargaining power. To prevent this from happening,
the firm will work to develop new technology that again establishes the balance of power
in its favor. As long as the host country stands to lose more than it will gain by taking
action against the company, the firm has successfully minimized its political risk by
establishing an effective bargaining position. Figure 10–2 provides an example. As long
as the MNC’s bargaining power remains at or above the diagonal line, the government
will not intervene. At point E in the figure, this power declines, and the host country
will begin to intervene.40
Gaining bargaining power depends on many factors, such as the host country’s
perception of the MNC’s size, experience, and legitimacy. Furthermore, the ability to
bargain and achieve security does not necessarily mean that the MNC must be aggressive
or engage in a “power play.” Enticing the host country with products or services that
could benefit it in the short run could result in retaliatory actions if the MNC is not able
to innovate or the host country grows weary of a lack of power.
Integrative, Protective, and Defensive Techniques Another way that MNCs attempt
to protect themselves from expropriation or minimize government interference in their
operations is to use integration and the implementation of protective and defensive tech-
niques. Integrative techniques are designed to help the overseas operation become part
of the host country’s infrastructure. The objective is to be perceived as “less foreign”
integrative techniques
Techniques that help the
overseas operation become
a part of the host country’s
infrastructure.
High
B
a
rg
a
in
in
g
p
o
w
e
r
Low
Initial
investment
Subsidiary’s
bargaining power
Intervention
occurs
Host nation’s
bargaining power
Time
A
B
C
D
E
Source: Adapted from Thomas A. Pointer, “Political Risk: Managing Government Intervention,” in International Management: Text and
Cases, ed. Paul W. Beamish, J. Peter Killing, Donald J. LeCraw, and Harold Crookell (Homewood, IL: Irwin, 1991), p. 125.
Figure 10–2
Relative Bargaining Power
over Time
374 Part 3 International Strategic Management
and thus unlikely to be the target of government action. Some of the most integrative
techniques include (1) developing good relations with the host government and other
local political groups; (2) producing as much of the product locally as possible with the
use of in-country suppliers and subcontractors, thus making it a “domestic” product; (3)
creating joint ventures and hiring local people to manage and run the operation; (4) do-
ing as much local research and development as possible; and (5) developing effective
labor-management relations.
At the same time, MNCs should be cognizant of how integrated they become in
foreign markets. It is recommended that managers seek to maintain close ties between
the subsidiary and the parent company, and not fully integrate into the host country.
There is no guarantee that host countries will completely treat the MNC as a domestic
company, making true competition difficult. Therefore, other, more distant techniques
may be beneficial.
Protective and defensive techniques are designed to discourage the host govern-
ment from interfering in operations, mainly by avoiding complex ties to the host coun-
try’s economy. In contrast to the integrative techniques, these actually encourage
nonintegration of the enterprise in the local environment. Examples include (1) doing as
little local manufacturing as possible and conducting all research and development out-
side the country, (2) limiting the responsibility of local personnel and hiring only those
who are vital to the operation, (3) raising capital from local banks and the host govern-
ment as well as outside sources, and (4) diversifying production of the product among
a number of countries.
Companies are more likely to use a protective-defensive strategy or a balance over
completely integrating into another country, as illustrated in Figure 10–3. Organizations
with an emphasis on innovative technology, such as Microsoft, prefer a protective tech-
nique as a way to safeguard against actions such as counterfeiting. MNCs that have
products that are labor-intensive and have a high value to weight ratio also prefer protec-
tive methods, though there exists some integration. Here, strong global marketing systems
are needed to sell the product, which is why integration occurs on some level despite
the more cost-efficient method of either manufacturing in the home country or simply
outsourcing construction to lower-wage regions.
Developing countries do not hold advanced management skills in as high regard as
do developed countries. For this reason, when selling products such as food, which
requires advanced marketing and management skills, it is best to employ a mixed strategy
protective and defensive
techniques
Techniques that discourage
the host government from
interfering in operations.
High 20
Moderate 10
In
te
g
ra
ti
ve
t
e
ch
n
iq
u
e
s
Low 1
1
Low
10
Moderate
(7, 10)
Advanced
management skill
(11, 14)
Low or stable technology
(14, 3)
Dynamic high technology
Unified logistic,
labor transmission
(16, 6)
Protective/defensive techniques
20
High
Figure 10–3
Use of Integrative and
Protective-Defensive
Techniques by Firms in
Select Industries
Source: Adapted from Ann Gregory, “Firm Characteristic and Political Risk Reduction in Overseas Ventures,” National Academy of
Management Proceedings (New York, 1982), p. 77.
Chapter 10 Managing Political Risk, Government Relations, and Alliances 375
(see Figure 10–3). That is, integration is necessary in order to effectively manufacture the
product to local tastes and advertise, and there is little need for the company to distance
operations from the host country in a manner tailored to local preferences. Finally, indus-
tries that utilize little technology, such as steel manufacturing, exhibit the strongest inte-
grative technique while still employing a defensive strategy. These companies require
integration to ensure long-term production for projects, but may not desire to become
completely enveloped in the host country’s economy due to possibilities such as the host
government suddenly requiring a greater share of profits generated by the MNC.
Proactive Political Strategies As mentioned at the beginning of the chapter, despite
the general trend of developing countries seeking MNC investment, many developing-
country governments continue to engage in practices that effectively overturn or renege
on past deals.41 For example, in the wake of the Arab Spring, leaders of a number of
countries in which autocratic or dictatorial governments controlled negotiations with
foreign investors were toppled. The ousting of leaders in Tunisia, Egypt, and Libya led
to a backlash against incumbent foreign investors and forced many project leaders to
withdraw or renegotiate the terms of their investments.
In Egypt, President Mubarak’s 30-year dictatorship left foreign investors, whose
reputations were closely associated with his legacy, facing a challenging environment for
preserving the economic viability of their presence. For example, Mexican multinational
company Cemex SAB was stripped of its more than 20-year ownership of Egypt’s Assiut
Cement Company, with Egyptian courts ruling that Mubarak did not have the right to
privatize the formerly public company. After the government annexed control of a fruit
and vegetable company owned by the Saudis, investors sued in international court for
US$250 million.42 Even land ownership has been challenged; Dubai-based Damac Prop-
erties Company filed complaints after 30 million square meters that it had purchased
nearly a decade prior was taken by the new goverment. In total, more than US$10 billion
worth of land has been seized, affecting 54 million square meters and multiple land
owners.43 The increased uncertainty has negatively affected Egypt’s ability to attract FDI,
as investors have fled the country for less risky investments in countries with more
stable governments.44
Often the challenges and complexity associated with government’s tendency to seek
to renegotiate investment rules and contracts are worsened by the participation of both
national and subcentral governments in the project. In India, Brazil, and, increasingly,
China, states and provinces wield significant power, and this has been a particular prob-
lem in the development and financing of power, water, and transport projects. The Linha
Amarela project in Rio de Janeiro, an urban expressway that begins in the residential
area of Rio and provides a direct link to the downtown area, was initially bid with an
official traffic estimate of around 55,000 cars per day in 1993–1994. However, when
construction was complete and the road opened for business in 1998, traffic exceeded
that amount, reaching 80,000 vehicles per day in early 2001. When the new mayor of
Rio, Cesar Maia, took office on January 1, 2001, he issued a number of decrees over-
turning policies of his predecessor. One of these decrees unilaterally dropped the toll by
20 percent, squeezing the foreign owner of the concession.
In addition to the approaches mentioned above, how else can MNCs respond to
such unpredictable government decisions? Because government policies can have a sig-
nificant impact on business activities and many governments face competing pressures
from a range of stakeholders, corporations must adopt various proactive political
strategies both to affect government policy and to respond to competitors’ efforts to
influence that policy. Comprehensive strategies are especially important in unstable and
transitional policy environments.45 These strategies are designed, in part, to develop and
maintain ongoing favorable relationships with government policy makers as a tool to
mitigate risk before it becomes unmanageable. Broadly, strategies may include leveraging
bilateral, regional, and international trade and investment agreements, drawing on bilat-
eral and multilateral financial support, and using project finance structures to separate
proactive political
strategies
Lobbying, campaign
financing, advocacy, and
other political interventions
designed to shape and
influence the political
decisions prior to their
impact on the firm.
376
International Management in Action
Managing when in Crisis: AirAsia
In late 2014, low-cost carrier AirAsia suffered its first
major tragedy: Flight 8501, en route from Indonesia to
Singapore, crashed into the Java Sea. All 162 passen-
gers and crew on board were killed. Passenger airplane
crashes are major international news stories, and for a
growing company from an emerging market, managing
reputation with future potential customers in places like
Europe and the U.S. is critical. For many outside of Asia,
this tragedy would be the first time they had even heard
of AirAsia. In an attempt to mitigate a long-lasting public
relations nightmare, AirAsia took a simple, yet effective
approach to its crisis management strategy: provide as
much open communication as possible in the days and
weeks after the crash.
Social media accounted for a large part of this strat-
egy. AirAsia CEO Tony Fernandes used his Twitter
account to share the latest information available on the
crash, express condolences, rally his employees, and
update the media on the recovery efforts. Additionally,
the company was able to correct media reports and
rumors before they damaged the company’s reputation
even further. For example, a few days after the crash,
AirAsia faced additional scrutiny when it was revealed
that the company did not have the required permits to
make that flight routing on that day. Though the lack of
required permits did not contribute to the crash, the rev-
elation called into question the authenticity of the infor-
mation that the company was disseminating. Fernandes
immediately took to Twitter to confirm AirAsia’s mistake.
By openly owning the failures that his airline had made,
Fernandes was able to keep consumer trust levels from
sinking further.
This approach of instant, open communication in the
wake of a tragedy is uncommon in the airline industry.
When a Malaysia Airlines flight disappeared just a year
earlier, the company made no public comments or
remarks, instead staying completely silent until it could
accurately confirm information it was receiving. The
company paid heavily for its poor-received response;
later that year, the company was restructured and re-
nationalized due to huge losses. In the days and weeks
after the Flight 8501 crisis, however, AirAsia was able
to avoid much of the pain that its rivals had faced after
similar tragedies. AirAsia’s stock price held steady, indi-
cating the long-term trust that its investors still had in
the company. In the year after the crash, passenger
numbers increased by 11 percent and profitability
returned to the company for the first time in two years.
Though difficult to plan for, crises in the airline industry
are an inevitable part of the business, and mishandling the
reaction to a tragedy can result in major financial losses.
With AirAsia’s successful crisis management strategy of
open and honest communication as an example, other
airline companies can begin to plan a framework of how
they will shape their response to an unpredictable tragedy.
Source: Bruce Einhorn, “AirAsia CEO Turns to Twitter for Crisis Man-
agement,” Bloomberg, January 5, 2015, www.bloomberg.com/news/
articles/2015-01-05/airasia-ceo-tony-fernandes-manages-crisis-with-
social-media.
project exposure from overall firm risk. They also can include entering markets early in
the privatization-liberalization cycle (the first-mover strategy discussed in Chapter 8),
establishing a local presence and partnering with local firms, and pursuing preemptive
stakeholder management strategies to secure relationships with all relevant actors.46
More specific proactive political strategies include formal lobbying, campaign
financing, seeking advocacy through the embassy and consulates of the home country,
and more formal public relations and public affairs activities such as grassroots cam-
paigning and advertising.47 Strategies must vary based on the particular political system
(parliamentary vs. nonparliamentary), distribution of power (highly centralized vs. decen-
tralized), and other variations in political systems.48 However, MNCs have the option of
purchasing political risk insurance, which could be used across cultures and systems and
protect the company from inherent uncertainty. This option has been available for decades,
but many have not utilized it because risk assessment is so subjective and unpredictable
that most companies choose to forgo coverage.49 MNCs that are concerned with currency
convertibility issues, political unrest, or exporting matters may want to take a closer look.
Insurance terms range anywhere from 3 to 15 years or more and can cover up to
$80 million per risk.50 As an MNC increases exporting or overseas operations, the
benefits of coverage may outweigh the cost of the insurance.
Developing and maintaining ongoing relationships with political actors, including
officials in power and in opposition parties, and with the range of stakeholders, includ-
ing nongovernmental organizations (NGOs) and others, can help buffer host-government
actions that may constrain or undermine MNC strategies and plans.51 In the previous
Chapter 10 Managing Political Risk, Government Relations, and Alliances 377
examples, had investors made low-level contacts with opposition groups, they might have
aggravated existing strains in relationships with governments but secured some protec-
tions for the future. Knowing when—and how—to exercise such relationships is a
difficult but necessary strategy.
How does an MNC know which strategy to pursue? There is no straightforward
answer to this question because strategic responses depend on a multitude of factors. The
nature of the industry, the firm’s technological capabilities, local conditions in a host
country, management skills and philosophies, logistics, and labor transmission are just a
few ways decisions are impacted. No one strategy is guaranteed to work, but building a
relationship with all parties involved could assist in the betterment of any method an
MNC employs.
■ Managing Alliances
Another dimension of management strategy related to political risk and government rela-
tions is managing relationships with alliance partners. Some partners may be current or
former state-owned enterprises; others may be controlled or influenced by government
agencies. For example, in China, most foreign investors have some sort of alliance or
joint-venture relationships with Chinese state-owned enterprises. AB Volvo, which had
not been able to previously penetrate the Chinese truck market, entered into a strategic
alliance with state-owned automobile producer Dongfeng Motors in 2013. The deal not
only expands Volvo’s heavy-duty truck presence in China but also will result in Volvo
becoming the largest truck manufacturer in the world.52 Siemens has effectively used
joint ventures as a part of its strategy for doing business in China for many years. Some
recent examples of Siemens’s strategy in action include a 2014 deal with Beijing Auto-
motive Industry Holding to manufacture drive-train components, a 2012 deal with the
Wasion Group to expand the market for its meter data management solutions, and a 2011
deal with Shanghai Electric to penetrate the Chinese wind power market, which is the
largest in the world.53,54,55 As mentioned in Chapter 9, alliances and joint ventures can
significantly improve the success of MNC entry and operation in many international
markets, especially emerging economies. Managing the relationships inherent in alliances,
especially when governments are involved, can be especially challenging.
The Alliance Challenge
A rich and increasingly diverse recent literature has examined the motivations for col-
lective action through international strategic alliances (ISAs). Researchers have begun to
focus on specific explanations of ISA formation, the conditions that appear to lead to
better or worse ISA performance and endurance, and the primary factors motivating firms
to enter into such relationships.56 Motivating factors include faster entry and payback,
economies of scale and rationalization, complementary technologies and patents, and
co-opting or blocking competition.57
In the strategic alliance literature, several researchers have argued that learning can
be a powerful force in the initial motivations for, and ultimate success of, ISAs.58 Some
kinds of local knowledge cannot be internalized simply as a result of an MNC entering
and operating in a foreign market; acquisition of some kinds of local knowledge requires
local firm participation. Collaboration facilitates rapid market entry by allowing firms to
share costs and risks, combine product and market complementarities, and reduce the
time-to-market.59
How an alliance relationship is developed is largely a function of interfirm nego-
tiation. Alliances are an arena where both value-claiming activities (competitive, distribu-
tive negotiation) and value-creating activities (collaborative, integrative negotiation) take
place. In order to lay claim to a larger share of the alliance pie, firms tend to seek an
advantage over their partners. Firms do this by possessing superior resources or alterna-
tives beyond the scope of the alliance. However, in order to create a “larger pie” through
378 Part 3 International Strategic Management
the combination of partner-firm resources and activities, firms must balance authority,
allowing each firm to dictate certain activities within the alliance, and commit to sharing
and reciprocity where each partner firm plays some decision-making role. In these
instances, alliance partners can create value through specialization gains or when the
rationalization of redundant activities results in enhanced performance for the partners.60
A fundamental challenge of alliances is managing operations with partners from
different national cultures (as previously discussed in Chapter 5). Cultural differences
may create uncertainties and misunderstandings in the relationship, which may lead to
conflict and even dissolution of the venture. Indeed, an alliance may be viewed as a
temporal structure designed to address a particular problem during a period in time; all
alliances eventually outlast their purpose.
Differences in the cultural backgrounds of partners can potentially cause problems
in alliances. One study tried to determine whether some differences are more disruptive
than others. The researchers found that differences in uncertainty avoidance and in long-
term orientation, in particular, cause problems (see Chapter 4 for cultural dimensions).
These differences have a negative impact on survival and decrease the likelihood that
firms will enter a foreign country through an alliance rather than a wholly owned sub-
sidiary.61 Apparently, these differences, which translate into differences in how partners
perceive and adapt to opportunities and threats in their environment, are more difficult
to resolve than differences in other cultural dimensions. Perhaps cultural differences in
power distance, individualism, and masculinity are more easily resolved because they are
mainly reflected in different attitudes toward the management of personnel—something
firms can make explicit.
Successful management of alliances depends on situational conditions, management
instruments, and performance criteria. Success factors may include partner selection,
cooperation agreement, management structure, acculturation process, and knowledge man-
agement.62 In particular, partner selection and task selection criteria have been identified
as critical variables that influence alliance success or failure. Conducting due diligence,
choosing the right partners, and defining the scope and limit of the alliance appear to be
the most important elements in determining if an alliance will succeed or fail.
One difficult but important aspect of successful alliance management is preparation
for the likely eventual termination of the alliance.63 Many firms are caught off guard
when their partners are better prepared to deal with issues related to termination of the
alliance than they are. After studying two dozen successful alliance “divorces,” a group
of researchers identified a number of legal and business issues that were critical to suc-
cessful divorces. Legal issues include the conditions of termination, the disposition of
assets and liabilities, dispute resolution, distributorship arrangements, protection of pro-
prietary information and property, and rights over sales territories and obligations to
customers. Business issues include the basic decision to exit, people-related issues, and
relations with the host government. Alliances, like individual businesses, experience a
life cycle, as illustrated in Figure 10–4. Recognizing the point at which your alliance
exists in the life cycle can help determine a proactive strategy to sustain the relationship
and work toward a common goal.
The Role of Host Governments in Alliances
As previously mentioned, host governments are active in mandating that investors take
on partners, and these mandates can pose managerial and operational challenges for
MNCs. Many host governments require investors to share ownership of their subsidiaries
with local partners—in some cases, state-owned or state-controlled partners. These man-
dates can include specific requirements that investors select local state-owned firms
(China) or that investors form joint ventures to meet local regulatory requirements where
restrictions or local-content rules apply (Central and Eastern Europe).64
Even when host governments do not require alliances or JV as a condition for entry,
many MNCs find that having alliance or JV partners is advantageous to their entry and
Chapter 10 Managing Political Risk, Government Relations, and Alliances 379
expansion. This is especially so in highly regulated industries such as banking, telecom-
munications, and health care. In a study conducted of alliances among global telecom-
munications firms, firms were found to establish alliances with local partners primarily
to gain market access and to contend with local regulations.65 In another study, also of
telecommunications projects in emerging markets, firms were found to take on local
partners as a way to cope with emerging-market environments characterized by arbitrary
and unpredictable corruption.66
Even when alliances are dissolved, host governments can have a role. In particular,
the host government of a partner may be unwilling to permit the alliance to terminate.
It could object to the termination in an overt way, such as not permitting a foreign part-
ner to sell its interest in the alliance.67 There are also subtle ways to discourage a partner
from leaving an alliance, such as blocking the repatriation of the foreign partner’s invest-
ments in the alliance. It is also important to consider carefully the long-term effects of
terminating an alliance on the ability of the company to do business in the same host
country in the future.
In sum, host governments have a substantial role in the terms under which alliances
are initially formed, the way in which they are managed, and even the terms of their
dissolution. MNCs must be aware of these influences and use carefully crafted strategies
to manage host-government involvement in their alliances.
Examples of Challenges and Opportunities in Alliance Management
Alliances and JVs are increasingly common modes of entry and operation in international
business. A number of recent examples illustrate the challenges and opportunities associ-
ated with managing alliances.
A good example is provided by Ford Motor and Mazda. For a number of years,
the two had a strategic alliance. With guidance from its American partner, Mazda was
able to trim costs and introduce a host of popular new models in Asia. At the same time,
ALLIANCE
START UP
G
ro
w
th
Time
ALLIANCE
PROFESSIONAL
ALLIANCE
HOCKEY STICK
GROWTH
ALLIANCE
MATURE
ALLIANCE
SUSTAINING
Conception and
strategic
development,
planning team
development,
internal signo�,
creation of
operating plan,
launch and start
up. Could also be
re-launch.
Growth and
achievement of
initial growth or
success-related
milestones.
Professionalizing
of the alliance
activity and
metrics.
Maturing stage of
alliance life and
restructuring of
goals and
milestones.
Conflict resolu-
tion, redefinition
of success. Law-
yers play large
and active role.
ALLIANCE
DECLINING
Alliance
termination or
complete
remediation.
Potential
termination and
reorganizing of
team members
and composition.
Adjust team
changes and
maturing.
Figure 10–4 Alliance Life Cycle
Source: From Larraine Segil, “Metrics to Successfully Manage Alliances,” Strategy & Leadership 22, no. 5 (2005), p. 47.
380 Part 3 International Strategic Management
the company began to gain ground in both North America and Europe. Part of this suc-
cess was accounted for by Ford executives who reined in Mazda’s freewheeling engineers
and forced them to share auto platforms and to source more components overseas. Mazda
also began following Ford’s advice to use customer clinics, thus helping the company to
develop low-priced, compact sport vehicles that have proved to be very popular in the
Japanese market. Although Ford divested the majority of its Mazda shares and severed
production ties in 2010, the two automakers continue to share technology and work
together on mutually beneficial joint ventures.68
Starbucks Coffee International of Seattle, Washington, has developed numerous joint
ventures in the various provinces of China. One of the first of these was with the Beijing
Mei Da Coffee Company, with the goal of opening coffee houses. Getting local consum-
ers to switch from tea to coffee is a major challenge. However, the joint venture focused
on the training of local managers who will run the coffee shops. Recruits were sent to
Tacoma, Washington, to learn how to make the various types of Starbucks coffee and to
get a firsthand look at the company’s culture. As one of the general managers for the Mei
Da Company put it, “People don’t go to Starbucks for the coffee but for the experience.
Focusing on the development of employees so that they can deliver that experience is our
priority for now.”69 Part of Starbucks’s strategy was also to show the new recruits that
there are career and personal development opportunities in this new venture. This is an
important area of emphasis for the firm because there is a major shortage of management
personnel in China. As a result, many companies raid the management ranks of others,
offering lucrative financial arrangements to those who are willing to change companies.
One way that Starbucks dealt with this was by encouraging the trainees to take responsi-
bility, question the system, take risks, and make changes that will keep the customers
coming back. Although the relationship began as a joint venture, Starbucks ultimately
bought out this joint venture partner, a common progression as foreign and local partners
begin to collaborate more closely and complete integration is desirable. A more recent
joint venture, formed with the Ai Ni Group of the Yunnan Province, will provide Star-
bucks with locally grown coffee from the region to sell within China. This agreement fits
into Starbucks’s larger goal of opening hundreds of new locations across the coun-
try.70,71 Joint ventures have worked for Starbucks in other Asian nations as well. In India,
Starbucks has entered a joint venture with Tata, the conglomerate involved in automotive
production, informational systems, and beverages such as tea.
As these examples show, MNCs are and will be making a host of decisions related
to IJVs. In Russia, the current trend is to renegotiate many of the old agreements and
seek smaller deals that entail less bureaucratic red tape and are easier to bring to fruition.
At the same time, the U.S. administration is trying to create a plan for providing assis-
tance to the former Soviet republics, and this likely will generate increased interest in
the use of IJVs.
Besides the former Soviet Union, other areas of the world previously closed to
foreign investment are beginning to open up. One of these is Vietnam, which had a very
auspicious beginning in the early 1990s when investors began flocking there. During this
time period, Japan’s Idemitsu Oil Development Company signed a deal with the
Vietnamese government that gave the company the right to explore an offshore oil and
gas field in the Gulf of Tonkin. A number of U.S. companies also targeted Vietnam for
investment, and Citibank and Bank of America both were approved for branch status by
the government. The bulk of their business was to be in wholesale banking and, in the
case of Bank of America, advising the government on financing the rebuilding of the
nation’s weak power sector. Other firms that began giving serious consideration to
Vietnam included AT&T, Coca-Cola, General Electric, ExxonMobil, and Ralston Purina,
to name but five. As a result, by 1996 the country was attracting over $8 billion annually
in FDI. In the late 1990s and early 2000s, however, FDI dropped sharply. In recent years,
it has risen sharply again.
The sometimes bureaucratic communist government often sends mixed signals to
foreign investors. Ford Motor Company’s experience in Vietnam between 2000 and 2015
Chapter 10 Managing Political Risk, Government Relations, and Alliances 381
offers a good example. Ford Motor had spent over $100 million to build a factory near
Hanoi, but because of pressure from its local rival, the Vietnam Motor Corporation, it
took 16 months for Ford to get approval to sell its Laser sedan. By the end of 2000, the
company had sold fewer than 1,000 vehicles, a far cry from the 14,000 that had been
initially projected.72 Many other firms reported similar experiences. Consequently, the
Vietnamese government tried to turn things around by undertaking domestic economic
reform, pursuing international trade agreements, and encouraging foreign investment,
especially joint ventures.73 Among other things, the country’s coffee production was
skyrocketing, and Vietnam exported over 20 percent of its coffee to the United States;
so it is in the best interests of the country to open its markets. At the same time, a grow-
ing number of multinationals were reexamining Vietnam’s potential and looking to cre-
ate strategic alliances that will help them establish a foothold in one of the more
promising emerging economies in Asia.74 After several years, this approach seems to be
paying off. Vietnam has passed a domestic enterprise law and investment law easing and
clarifying foreign investment and business rules, including those pertaining to joint ven-
tures; signed a trade agreement with the United States; and, in 2005, joined the WTO.
As a result, foreign investment is once again on the rise, reaching a record US$14.5
billion in 2015.75 Also in 2015, Ford had its best ever sales year in Vietnam, selling
20,740 units.76
The World of International Management—Revisited
A wide range of risks emanate from the political environment in which MNCs operate,
and firms can employ an equally diverse set of strategies to mitigate those risks and
improve their relations with governments. Both BP and Shell faced a series of challenges
in Russia that they sought to overcome using a range of strategies. BP traded its joint
venture for shares in government-owned Rosneft, mitigating internal political risk between
the Russian government and BP’s operations in the country but exposing it to some
additional external political risk in the wake of Russia’s annexation of Crimea and the
resulting sanctions. Shell chose to continue with its ongoing operations but to defer
further investment, but ultimately Shell was forced to exit and under unfavorable condi-
tions. After reading this chapter and considering the challenges associated with doing
business in Russia, answer the following questions: (1) What are two main concerns that
MNCs should evaluate when doing business in Russia? (2) How can MNCs protect
themselves from government action? (3) What proactive political strategies might help
protect MNCs from future changes in the political environment? (4) How might alliances
and joint ventures reduce risk and help relationships with government actors and other
stakeholders?
1. Political risk is the likelihood that the foreign
investment of a business will be constrained by a
host government’s policies. In dealing with this
risk, companies conduct both macro and micro
political risk analyses. Specific consideration is
given to changing host-government policies, expro-
priation, and operational profitability risk.
2. MNCs attempt to manage their political risk in two
basic ways. One is by developing a comprehensive
framework for identifying and describing these
risks. This includes consideration of political,
operational, and ownership-control risks. A second is
by quantifying the variables that constitute the risk.
3. Common risk management strategies are the use of
relative bargaining power; integrative, protective,
and defensive techniques; and proactive political
strategies.
4. Effective alliance management includes carefully
selecting partners, defining the tasks and scope of
the alliance, addressing cross-cultural differences,
and responding to host-government requirements.
SUMMARY OF KEY POINTS
382 Part 3 International Strategic Management
KEY TERMS
conglomerate investment, 369
expropriation, 368
horizontal investment, 369
indigenization laws, 368
integrative techniques, 373
macro political risk analysis, 364
micro political risk
analysis, 364
operational risks, 368
ownership-control risks, 369
political risk, 362
proactive political strategies, 375
protective and defensive
techniques, 374
terrorism, 367
transfer risks, 368
vertical investment, 369
1. What types of political risk would a company enter-
ing Russia face? Identify and describe three. What
types of political risk would a company entering
France face? Identify and describe three. How are
these risks similar? How are they different?
2. Most firms attempt to quantify their political risk,
although they do not assign specific weights to the
respective criteria. Why is this approach so popu-
lar? Would the companies be better off assigning
weights to each of the risks being assumed? Defend
your answer.
3. How has terrorism impacted foreign interest in Iran
and Saudi Arabia, considering the vast oil reserves
that are there? How have terrorist attacks affected
political relationships between countries such as the
United States and Russia?
4. If a high-tech firm wanted to set up operations in
Iran, what steps might it take to ensure that the
subsidiary would not be expropriated? Identify and
describe three strategies that would be particularly
helpful. How might proactive political strategies
help protect firms from future changes in the
political environment?
5. What are some of the challenges associated with
managing alliances? How do host governments
affect these?
REVIEW AND DISCUSSION QUESTIONS
Asia still offers great opportunities for multinational
firms. However, given the slowdown that has occurred
in this region in recent years, there are also great risks
associated with doing business there. The large Finnish-
based MNC, Nokia, has determined that the opportuni-
ties are worth the risk and has staked a large claim in
China and is determined to be a major player in the
emerging Asian market. Visit its website at www.nokia.
com and focus your attention on what this well-known
MNC is now doing in Asia. Drawing from specific
information obtained from the website, this chapter,
and your reading of the current news, answer these
questions: What political risks does Nokia face in Asia,
particularly China? How can Nokia manage these risks?
How can effective international negotiating skills be of
value to the firm in reducing its political risk and
increasing its competitive advantage in this area of the
world?
INTERNET EXERCISE: NOKIA IN CHINA
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Chapter 10 Managing Political Risk, Government Relations, and Alliances 383
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investors-preparing-250m-claim-against-egypt.
43. Abde Latif Wahba and Zainab Fattah, “Egypt
Seizes Land Valued at $10.6 Billion from Inves-
tors,” Bloomberg, June 6, 2012, www.bloomberg.
com/news/articles/2012-06-06/egypt-seized-10-6-
billion-of-land-from-firms-minister-says.
44. Nadine Marroushi, “Egypt Post-Mubarak Legal
Challenges Test Foreign Investors,” Bloomberg,
October 17, 2012, www.bloomberg.com/news/arti-
cles/2012-10-16/egypt-post-mubarak-legal-chal-
lenges-testing-foreign-investors.
45. See Jonathan P. Doh and John A. Pearce II,
“Corporate Entrepreneurship and Real Options
in Transitional Policy Environments: Theory
Chapter 10 Managing Political Risk, Government Relations, and Alliances 385
2010, https://media.ford.com/content/fordmedia/fna/
us/en/news/2010/11/18/ford-to-change-stake-in-
mazda--both-companies-remain-committed-t.html.
69. Edward Norton, “Starbucks in China,” The Econo-
mist, October 4, 2001, pp. 80–82.
70. “Starbucks Acquires Beijing Mei Da Coffee,” Asia
Times, October 27, 2006, www.atimes.com/atimes/
China_Business/HJ27Cb02.html.
71. Melissa Allison, “Starbucks Enters Joint Venture in
China,” Seattle Times, July 14, 2011, www.seattle-
times.com/business/starbucks-enters-joint-venture-in-
china/.
72. Frederick Balfour, “Back on the Radar Screen,”
BusinessWeek, November 2000, p. 27.
73. Henry Gallagher, “A Private Sector Surfaces in
Vietnam,” The World & I 18, no. 11 (November
2003), p. 56.
74. Trien Nguyen, “From Plan to Market: The Eco-
nomic Transition in Vietnam,” Journal of Economic
Literature 38, no. 3 (September 2000), p. 683.
75. “Vietnam Foreign Direct Investment,” Trading Eco-
nomics, 2016, www.tradingeconomics.com/vietnam/
foreign-direct-investment.
76. “Ford Delivers Record Sales in ASEAN Region in
2015,” Vietnam Investment Review, January 26,
2016, www.vir.com.vn/ford-delivers-record-sales-for-
asean-region-in-2015.html.
77. CIA, “Brazil,” The World Factbook (2016), https://
www.cia.gov/library/publications/the-world-factbook/
geos/br.html.
78. World Bank, “Brazil,” World Development Indica-
tors (2015), http://data.worldbank.org/country/brazil.
79. CIA. 2016. “The World Factbook,” https://www.cia.
gov/library/publications/the-world-factbook/geos/br.
html.
80. Ibid.
81. Matt Bonesteel, “Brazil Is Melting Down Ahead of
the 2016 Rio Olympics,” Washington Post, Septem-
ber 10, 2015, https://www.washingtonpost.com/
news/early-lead/wp/2015/09/10/brazil-is-melting-
down-ahead-of-the-2016-rio-olympics/.
59. Shige Makino and Andrew Delios, “Local Knowl-
edge Transfer and Performance: Implications for
Alliance Formation in Asia,” Journal of Interna-
tional Business Studies 27 (1996), pp. 905–927.
60. Hildy Teegen and Jonathan P. Doh, “U.S./Mexican
Alliance Negotiations: Cultural Impacts on
Trust, Authority and Performance,” Thunderbird
International Business Review 44, no. 6 (2002),
pp. 749–775.
61. Harry G. Barkema and Freek Vermeulen, “What
Differences in the Cultural Backgrounds of Partners
Are Detrimental for International Joint Ventures?”
Journal of International Business Studies 28, no. 4
(1997), pp. 845–864.
62. Dirk Holtbrugge, “Management of International
Strategic Business Cooperation: Situation Condi-
tions, Performance Criteria, and Success Factors,”
Thunderbird International Business Review 46,
no. 3 (May–June 2004), pp. 255–274.
63. Manuel G. Serapio Jr. and Wayner F. Cascio, “End
Games in International Alliances,” Academy of
Management Executive 10, no. 1 (February 1996),
pp. 62–73.
64. Julia G. Djarova, “Foreign Investment Strategies
and the Attractiveness of Central and Eastern
Europe,” International Studies in Management and
Organization 29, no. 1 (Spring 1999), pp. 14–23.
65. Jonathan P. Doh and Hildy Teegen, “Government
Mandates and Local Partner Participation in Emerg-
ing Markets: Policy and Performance Implications
for Government and Business Strategies,” paper
presented at the annual meeting of the Academy of
International Business, Phoenix, AZ, November 20,
2002.
66. Jonathan P. Doh, Peter Rodriguez, Klaus Uhlenbruck,
Jamie Collins, and Lorraine Eden, “Coping with
Corruption in Foreign Markets,” Academy of Man-
agement Executive 17, no. 3 (2003), pp. 114–127.
67. Serapio and Cascio, “End Games in International
Alliances,” pp. 71–72.
68. Ford Motor Company, “Ford to Change Stake in
Mazda; Both Companies Remain Committed to
Strategic Partnership,” press release, November 18,
In the International
Spotlight
386
citrus, and beef. Textiles, shoes, chemicals, cement,
lumber, iron ore, tin, steel, aircraft, and motor vehicles
constitute its main manufactured products. In the global
industrial and manufacturing sectors, Brazil has been
suffering largely due to its reliance on commodity
exports, which have seen demand fall. Brazil is fre-
quently ranked as a difficult place to conduct business
(the country finished 116th out of 185 nations in the
2015 “ease of doing business” rankings). In September
2015, Brazil’s debt rating was downgraded to “junk,”
making it even more difficult to find foreign investors
and international credit markets.80
Brazil was chosen as the host country for both the
2014 World Cup and the 2016 Summer Olympics.
Events such as these give a country the chance to grab
worldwide attention and showcase the best that their
country has to offer. Additionally, if well managed,
these types of events can be a net-positive economi-
cally due to ticket sales, sponsorship, and television
deals. While the 2014 World Cup was held without any
major disruptions, the 2016 Olympics faced numerous
issues in the months leading up to the event. Negative
press over inadequate infrastructure, construction
worker safety, and contaminated water causing serious
disease dominated news coverage in the spring of 2016.
Furthermore, public concern over the spread of the
Zika virus resulted in lower-than-expected ticket sales
and fewer tourists.81
Despite these challenges, Brazil remains the largest
and most important economy in South America and one
that will continue to exert influence over the greater
global environment.
You Be the International Management
Consultant
In 2009, Brazil’s economy was booming. It was receiving
substantial foreign investment from both developed and
developing countries, and the country was one of the
emerging markets most closely watched for opportunity
and growth. All signs suggested that Brazil and its econ-
omy were headed in a strong direction. However, in the
wake of low oil prices and economic recession in 2015,
foreign investors have reason for doubt. In addition, many
Brazil is located in eastern South America along the
Atlantic Ocean. With a land area just smaller than that of
the United States, the country possesses abundant natural
resources, including bauxite, gold, iron ore, manganese,
nickel, phosphates, platinum, tin, rare earth elements, ura-
nium, petroleum, hydropower, and timber. The country
also features a number of globally competitive manufac-
turing companies. Embraer, one of the world’s leading
producers of mid-range passenger and military aircraft,
and Odebrecht, a diversified conglomerate that develops
and installs mass transit systems, sports stadiums, chemi-
cal production facilities and other infrastructure projects,
are both located in Brazil.77
Gaining its independence from Portugal in 1822,
Brazil adopted a federative republic system of govern-
ment. This governmental process includes compulsory
voting requirements for those between the ages of
18 and 70. With more than 200 million people and
annual growth of about 1 percent, Brazil is one of the
most populous countries in the world. The country has
moved towards urbanization over the last 50 years;
nearly 20 percent of its population now lives in either
São Paulo or Rio de Janeiro. Brazil is a diverse place
culturally and ethnically. The primary and official lan-
guage is Portuguese, but Spanish, German, Japanese,
and English are also spoken with some regularity. The
country is predominantly Christian, with two-thirds of
all Brazilians identifying as Roman Catholic. Like most
growing developing nations, the vast majority of the
population is younger than 55 years old and the median
age is only 31.1 years old.78
Brazil has the largest economy in all of South
America and the eighth largest in the world. That being
said, the economy has faced serious challenges both
recently and historically, including multiple reces-
sions, high inflation, and currency volatility. In 2014,
Brazil’s GDP was US$2.347 trillion, but growth has
been erratic. After a surging economic expansion of
7.6 percent in 2010, the GDP annual growth rate has
been on a steady decline, with just 0.1 percent growth
in 2014 and negative growth in 2015. Inf lation of
nearly 10 percent was a major issue in the country in
2015, as was high unemployment.79
The country’s main agricultural products include cof-
fee, soybeans, wheat, rice, corn, sugarcane, cocoa,
Brazil
Questions
1. As an international management consultant, what
advice would you give to a foreign company look-
ing to move operations into Brazil?
2. Do you think Brazil still holds the potential for
future growth?
3. As an investor, do you think that the “buy low”
mindset applies to Brazil? If not, what changes
would you like to see before making any investment
in the country?
investors are fleeing from country after a bribery scandal
involving the country’s state-owned oil company,
Petrobras, broke in 2015, ultimately bringing down
Brazil’s president. Petrobras reported losses of US$2 bil-
lion solely as a result of the scandal.
One organization that has pulled out is the Bill and
Melinda Gates’ Foundation, which has not only decided
to cease operations in the country, but is also suing the
oil company for its role in the scandal and various invest-
ments that the company made. Furthermore, several states
in the U.S. invested pension funds in Brazil’s economy
and are suing for close to $100 billion.
Chapter 10 Managing Political Risk, Government Relations, and Alliances 387
388
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Chapter 11
MANAGEMENT DECISION
AND CONTROL
Although they are not directly related to internationalization,
decision making and control are two management functions
that play critical roles in international operations. In decision
making, a manager chooses a course of action among alter-
natives. In controlling, the manager evaluates results in rela-
tion to plans or objectives and decides what action, if any, to
take. How these functions are carried out is influenced by the
international context. An organization can employ a central-
ized or decentralized management system depending on such
factors as company philosophy or competition. The company
also has an array of measures and tools it can use to evalu-
ate firm performance and restructuring options. As with most
international operations, culture plays a significant role in
what is important in both decision-making processes and
control features, and can affect MNC decisions when forming
relationships with subsidiaries.
This chapter examines the different decision-making
and controlling management functions used by MNCs, notes
some of the major factors that account for differences
between these functions, and identifies the major challenges
of the years ahead. The specific objectives of this chapter are
1. PROVIDE comparative examples of decision making in dif-
ferent countries.
2. PRESENT some of the major factors affecting the degree
of decision-making authority given to overseas units.
3. COMPARE and CONTRAST direct controls with
indirect controls.
4. DESCRIBE some of the major differences in the ways that
MNCs control operations.
5. DISCUSS some of the specific performance measures that
are used to control international operations.
The World of International
Management
Global Online Retail: Amazon v.
Alibaba
O ver the last two decades, the Internet has revolution-ized the way customers around the world shop. Accord-
ing to Forrester Research, U.S. online retail sales alone will
reach $523 billion by 2020.1 Within the U.S., no online mer-
chant has had more success than Amazon. Started in 1995 as
a small bookseller, the ecommerce website now sells a vari-
ety of products to individuals across North America. While the
U.S. has traditionally been the leader in ecommerce, online
retail in countries around the world has been growing at a
rapid pace.
Perhaps most surprising is the sudden surge of the Alibaba
Group, an online Chinese retail conglomerate. Consisting of
multiple ecommerce-related websites, the Alibaba Group’s
combined US$462 billion in transactions in 2015 totaled more
than eBay and Amazon combined.2 And Alibaba’s Tmall, the
direct competitor to Amazon, is expected to become the
largest individual ecommerce site within the decade, surpassing
Amazon in total revenue. Despite similar successes in the
ecommerce marketplace, managers at Amazon and Alibaba
have taken different approaches to the marketplace. What
competitive strategies do these two companies use, and which
company stands a better shot at long-term success?
Conglomerate versus Specializer
The Alibaba Group is a conglomerate of over a half-dozen
individual ecommerce websites, combining business-to-
business, business-to-consumer, and consumer-to-consumer
transactions under a single ownership umbrella. Through its
diverse set of websites, the company can cater to virtually
any type of transaction, whether it is a small personal pur-
chase or a multi-million-dollar business transaction. In addi-
tion to providing traditional ecommerce services, the Alibaba
Group has branched into web-based business solutions. Uti-
lizing its existing infrastructure, Alibaba provides cloud com-
puting and data services to companies of all sizes and has
even created its own mobile operating system. Alibaba also
operates Alipay, a secure payment transfer service, giving
389
inventory, directly sell products, or control distribution. Rather,
it simply provides a digital space for those activities to hap-
pen. As a result, fixed assets are kept to a minimum. Going
forward, the Alibaba Group sees this “efficiency” as a key
business strength. While Amazon’s scale of operations is capi-
tal intensive, Alibaba’s approach allows for extra financial flex-
ibility, as it does not need to build, staff, and maintain regional
warehouses. One major downside, however, is that Alibaba
gives up control over the shipping and distribution operations
of its merchants, meaning that mistakes by third-party busi-
nesses could reflect negatively on the company as a whole.
Furthermore, the company misses out on possible financial
gains from direct-to-consumer selling.10
Growth Potential
Although both companies are online, and therefore “global,”
the geographic positioning of Amazon and Alibaba affects their
potential future growth. Amazon, founded nearly 20 years ago,
grew into the largest online retailer in the world due to its
geographic advantages. The North American ecommerce mar-
ket currently accounts for over 30 percent of all global online
sales, and this region is overwhelmingly dominated by
Amazon. In fact, Alibaba has not even attempted to enter the
North American marketplace due to Amazon’s strength.
Although Amazon will likely continue to lead business-to-
consumer sales in North America, the future growth potential
of Amazon is somewhat limited. North America has nearly
90 percent Internet penetration, and the population growth of
the region has rapidly slowed. In 2014, online sales totals in
Asia-Pacific surpassed North American for the first time. In
the coming years, North America’s share of global ecommerce
will decrease to around 25 percent while Asia-Pacific’s share
will increase to nearly 40 percent.11 Unless Amazon actively
expands into other regions across the globe, its revenues will
likely stagnate.12
Alibaba’s foothold in Asia holds far more growth potential.
Internet penetration in China currently stands at just
50 percent, leaving plenty of room for growth with unreached
customers. Furthermore, nearly 40 percent of the world’s
population resides in Asia, and the population growth rates
within Southeast Asia far exceed those of North America. As
wealth continues to accumulate in the region, Internet access
and ecommerce will likely expand. If the Alibaba Group
can maintain its strong standing in Asia, revenue will grow
significantly over the next decade.13
the company control over the entire purchase process.
Alipay is now used for over half of all online purchases in
the country.3 Together, the Alibaba Group conglomerate now
accounts for 60 percent of all packages shipped within
China and 80 percent of all online sales.4,5
Amazon, unlike Alibaba, specializes primarily in just busi-
ness-to-consumer sales. As a result, Amazon’s target market is
significantly smaller, but more loyal, than Alibaba’s. With a pri-
mary focus on personal purchases, Amazon has grown into the
world’s largest online retailer. Recently, however, Amazon has
made an effort to expand its offerings. Utilizing the information
infrastructure that it established for its traditional business
operations, Amazon now offers video streaming, cloud stor-
age, and other web services. And in an attempt to enter the
growing tablet market, Amazon released its Kindle Fire. It’s
seventh edition of the Fire, released in late 2015, retails for
under US$50, making it one of the most affordable tablets on
the market. The core of Amazon’s revenue, however, is still
generated from its specialization in business-to-consumer
transactions.6,7
Merchant versus Facilitator
Amazon not only hosts third-party sellers, but the company
also acts as a direct merchant itself. Amazon buys and sells
merchandise, ships products, and warehouses inventory. The
company currently has over 100 distribution centers strategi-
cally spread across the United States, with roughly one
million square feet of storage space per center. This direct-
seller approach allows Amazon to quickly adapt to changes
in demand. The company can directly control the timeliness
and quality of most products sold over its interface, giving it
the ability to provide unmatched service features, like single-
day delivery. By 2016, over 30 percent of the general U.S.
population and more than 50 percent of its frequent custom-
ers were located with 20 miles of an Amazon warehouse.8
Furthermore, by hosting third-party merchants, Amazon is
able to generate additional revenue on products sold by its
users. However, Amazon’s merchant strategy, requiring a
large investment in fixed assets, has resulted in minimal prof-
its for the company. Though it does not have quite the level
of expenses that traditional physical stores have, Amazon’s
margin is tightened by the other necessary investments, like
labor and warehouses.9
Alibaba, on the other hand, acts solely as a facilitator for
sales between third parties. The company does not carry an
390 Part 3 International Strategic Management
Whether Amazon’s strategy as a specialized direct seller or Alibaba’s strategy as a third-
party facilitator will lead to greater long-term success is yet to be seen. As Internet usage
increases and ecommerce expands beyond North America, managers of companies like
Amazon and Alibaba will need to implement new strategies to adapt to the changing
marketplace. The advent of online retail has certainly challenged some aspects of
managerial decision making for all ecommerce companies.
■ Decision-Making Process and Challenges
The managerial decision-making process, choosing a course of action among alternatives,
is a common business practice becoming more and more relevant for the international
manager as globalization becomes more pervasive. The decision-making process is often
linear, though looping back is common, and consists of the general phases outlined in
Figure 11–1. The degree to which managers are involved in this procedure depends on the
structure of the subsidiaries and the locus of decision making. If decision making is cen-
tralized, most important decisions are made at the top; if decision making is decentralized,
decisions are delegated to operating personnel. Decision making is used to solve a myriad
of issues, including helping the subsidiary respond to economic and political demands of
the host country. Decisions that are heavily economic in orientation concentrate on such
aspects as return on investment (ROI) for overseas operations. In other instances, cultural
differences can both inspire and motivate the process and outcome of decision making.
For example, Ford Motor Company designed and built an inexpensive vehicle, the
Ikon, for the Indian market. Engineers took apart the Ford Fiesta and totally rebuilt the
car to address buyer needs. Some of the changes that were made included raising the
amount of rear headroom to accommodate men in turbans, adjusting doors so that they
opened wider in order to avoid catching the flowing saris of women, fitting intake valves
decision making
The process of choosing a
course of action among
alternatives.
Problem perception
Process
1
Problem identification
Problem formulation
Search for alternatives
Evaluation of alternatives
Choice of alternatives
Problem PerceptionStart of operation
Implementation
Control
2
Stage
3
4
5
6
7
8
9
Source: Jette Schramm-Nielsen, “Cultural Dimensions of Decision Making: Denmark and France Compared,” Journal of Managerial
Psychology 16, no. 6 (2001), p. 408.
Figure 11–1
Decision-Making Process
Chapter 11 Management Decision and Control 391
to avoid auto flooding during the monsoon season, toughening shock absorbers to handle
the pockmarked city streets, and adjusting the air-conditioning system to deal with the
intense summer heat.14 As a result of these decisions, the car sold very well in India.
Ford replicated that same strategy with the Ikon’s successor, the Fiesta Mark VI.
Santander, the largest bank in Europe by market capitalization, is vesting more autonomy
in its subsidiaries by listing subsidiaries in its principal foreign markets and thereby
strengthening their independence and autonomy from the Spanish headquarters. A num-
ber of European banks, including Santander and HSBC Holdings PLC (see In-Depth
Integrative Case 4.1 at the end of Part Four), establish foreign subsidiaries as opposed
to direct branches. Santander Chief Executive Officer Alfredo Saenz said, “We also
believe it’s good for the local management teams, because having local minority share-
holders breathing down their neck keeps them on their toes, and it’s a good way of
identifying the franchise as local, instead of foreign.” In addition, the IPO boosted the
visibility of the bank in Brazil, resulted in greater access to local capital, and put a higher
value on the franchise than what analysts were giving it before the float. When Santander
sold 15 percent of its Brazilian unit, the unit alone was valued at €34 billion, more than
European rivals Deutsche Bank or Société Générale.15
The way in which decision making is carried out will be influenced by a number
of factors. We will first look at some of the factors, then provide some comparative
examples in order to illustrate some of the differences.
Factors Affecting Decision-Making Authority
A number of factors influence international managers’ conclusions about retaining author-
ity or delegating decision making to a subsidiary. Table 11–1 lists some of the most
important situational factors, and the following discussion evaluates the influential aspects.
One of the major concerns for organizations is how efficient the processes are that
are put in place. The size of a company can have great importance in this realm. Larger
organizations may choose to centralize authority for critical decisions in order to ensure
efficiency through greater coordination and integration of operations. The same holds
true for companies that have a high degree of interdependence because there is a greater
need for coordination. This is especially relevant when organizations provide a large
investment because they prefer to keep track of progress. It is quite common for the
Table 11–1
Factors That Influence Centralization or Decentralization
of Decision Making in Subsidiary Operations
Encourage Centralization Encourage Decentralization
Large size Small size
Large capital investment Small capital investment
Relatively high importance to MNC Relatively low importance to MNC
Highly competitive environment Stable environment
Strong volume-to-unit-cost relationship Weak volume-to-unit-cost relationship
High degree of technology Moderate to low degree of technology
Strong importance attached to brand Little importance attached to brand name,
name, patent rights, etc. patent rights, etc.
Low level of product diversification High level of product diversification
Homogeneous product lines Heterogeneous product lines
Small geographic distance between Large geographic distance between home
home office and subsidiary office and subsidiary
High interdependence between the units Low interdependence between the units
Fewer highly competent managers More highly competent managers in host
in host country country
Much experience in international business Little experience in international business
392 Part 3 International Strategic Management
investing company to send home-office personnel to the subsidiary and report on the
situation, and for subsidiary managers to submit periodic reports. Both of the above
scenarios imply that the subsidiary is of great importance to the MNC, and it is custom-
ary in these situations for subsidiary managers to clear any decisions with the home
office before implementation. In fact, MNCs often will hire someone who they know
will respond to their directives and will regard this individual as an extension of the
central management staff.
Another efficiency checkpoint arises when competition is high. In domestic situa-
tions, when competition increases, management will decentralize authority and give the
local manager greater decision-making authority. This reduces the time that is needed for
responding to competitive threats. In the international arena, however, sometimes the oppo-
site approach is used. As competition increases and profit margins are driven down, home-
office management often seeks to standardize product and marketing decisions to reduce
cost and maintain profitability. Many upper-level operating decisions are made by central
management and merely implemented by the subsidiary, although, in some instances, com-
panies still opt to decentralize operations if product diversification is necessary. Kraft Heinz
Company provides an example of a recent effort to centralize operations to improve effi-
ciency and competitiveness. Following H. J. Heinz’s 2015 acquisition of the Kraft Foods
Group, seven manufacturing facilities were closed to consolidate processes. Roughly 2,600
manufacturing jobs, representing 6 percent of the company’s workforce, were eliminated
by the closures. Additionally, 2,500 office jobs were eliminated to remove redundancy in
management positions. The consolidation aims to increase global growth while decreasing
costs, resulting in US$1.5 billion in savings. Kraft Heinz plans to invest millions in upgrad-
ing the remaining manufacturing facilities to meet increasing product demand, strengthen-
ing the acquired company and making the combined firm leaner and better positioned
globally.16 Firms that are able to produce large quantities will have a lower cost per unit
than those that produce at smaller amounts, and home-office management will often take
the initiative to oversee sourcing, marketing, and overall strategy to keep costs down.
Efficient processes become increasingly important as diversification or differences
between the parent and subsidiary increase. This refers not only to specific products and
services that may need to be tailored to geographic areas, but also to the socioeconomic,
political, legal, and cultural environments in which the subsidiary exists. In this case, the
subsidiary would have superior staff and resources that would only become increasingly
skilled in manufacturing and marketing products at the local level over time. Decentral-
ization is emphasized here, and there exists a direct relationship between the physical
distance and different environments between the parent and subsidiary and the level of
decentralization. In other words, the farther apart the two units are in either geographical
area or cultural beliefs, the higher the level of decentralization.
Experience proves to be a simple indicator of efficiency. For example, if the sub-
sidiary has highly competent local managers, the chances for decentralization are
increased because the home office has more confidence in delegating to the local level
and less to gain by making all the important decisions. Conversely, if the local managers
are inexperienced or not highly effective, the MNC likely will centralize decision making
and make many of the major decisions at headquarters. Furthermore, if the firm itself
has a great deal of international experience, its operations will likely be more centralized
as it has already exhibited a high efficiency level and increasing management decision
making at the local level may slow processes.
Protection of goods and services is also important to an MNC. It would not be a
very lucrative experience to spend valuable time and money on R&D processes only to
have competitors successfully mimic products and essentially take away market share.
For this reason and many others, it is common for MNCs to centralize operations when
dealing with sophisticated levels of technology. This is particularly true for high-tech,
research-intensive firms such as computer and pharmaceutical companies, which do not
want their technology controlled at the local level. Furthermore, a company is likely to
centralize decision-making processes when there are important brand names or patent
rights involved as it wants to create as much protection as possible.
Chapter 11 Management Decision and Control 393
In some areas of operation, MNCs tend to retain decision making at the top
(centralization); other areas fall within the domain of subsidiary management
(decentralization). It is most common to find finance, R&D, and strategic planning deci-
sions being made at MNC headquarters with the subsidiaries working within the param-
eters established by the home office. In addition, when the subsidiary is selling new
products in growing markets, centralized decision making is more likely. As the product
line matures and the subsidiary managers gain experience, however, the company will
start to rely more on decentralized decision making. These decisions involve planning
and budgeting systems, performance evaluations, assignment of managers to the subsid-
iary, and use of coordinating committees to mesh the operations of the subsidiary with
the worldwide operations of the MNC. The right degree of centralized or decentralized
decision making can be critical to the success of the MNC.
Deloitte, the accounting and management consulting firm, describes some of the
challenges associated with postmerger integration in the area of centralization and
decentralization:
The union of two European engineering companies is a prime example of a merger that brought
together companies with very different structures—a business unit of a much larger corporation
and a stand-alone company. The business unit had a more decentralized management approach
with responsibilities delegated within functional areas such as procurement and IT. In contrast,
the stand-alone company had a more centralized approach with a strong corporate headquarters
retaining control over IT, finance, procurement and HR. Bringing these two disparate structures
together without reconciling these differences almost destroyed the new company. Sales plum-
meted and key people left, unable to adjust to the new corporate structure. Within three years
the company collapsed, to be swiftly scooped up by a competitor.17
Cultural Differences and Comparative Examples of Decision Making
Culture, whether outside or within the organization (see Chapters 4 and 6, respectively),
has an effect on how individuals and businesses perceive situations and subsequently react.
This knowledge raises the question: Do decision-making philosophies and practices differ
from country to country? Research shows that to some extent they do, although there also
is evidence that many international operations, regardless of foreign or domestic ownership,
use similar decision-making norms.
One study showed that French and Danish managers do not approach the decision-
making process in the same manner.18 The French managers tend to spend ample time
on searching for and evaluating alternatives (see Figure 11–1), exhibiting rationality and
intelligence in each option. While the French approach each opportunity with a sense of
creativity and logic, they tend to become quite emotionally charged rather quickly if
challenged. Middle managers report to higher-level managers, who ultimately make the
final decision. Therefore, the individualistic nature of the French creates an environment
in which middle managers vie for the recognition and praise of the upper management.
Furthermore, middle-management implementation of ideas tends to be lacking because
that stage is often seen as boring, practical work that lacks the prestige managers strive
to achieve. Control, discussed later in the chapter, is quite high in the French firms at
every level, so where implementation fails, control will compensate.
Danish managers tend to emphasize different stages in the decision-making process
(see Figure 11–1). They do not spend as much time searching or analyzing alternatives
to optimize production but instead choose the option that can be started and implemented
quickly and still bring about the relative desired results. They are less emotionally respon-
sive and tend to take a straightforward approach. Danes do not emphasize control in
operations because it tends to be a sign that management lacks confidence in the areas
that “require” high control. The cooperative as opposed to individualistic emphasis in
Danish corporations, coupled with a results-oriented environment, breeds a situation in
which decisions are made quickly and middle managers are given autonomy.
Overall, the pragmatic nature of the Danes and the French need for intellectual
prowess mark why each is more adept at different stages of the decision-making process.
394 Part 3 International Strategic Management
The French tend to be better at stages 4, 5, and 9, while the Danes are more adept at
stages 6, 7, and 8 (see Figure 11–1). As one Danish manager in France says:
They [Danes and Frenchmen] do not analyze and synthesize the same way. The French tend
to think that the Danes are not thorough enough, and the Danes tend to think that the French
are too complicated. At his desk, the Frenchman tends to keep on working on the case. He
seems to agree neither with his surroundings nor with himself. This means that when he
has analyzed a case and has come to a conclusion, then he would like to go over it once
more. I think that Frenchmen think in a more synthetic way . . . and he has a tendency to
say: “well, yes, but what if it can still be done in another maybe smarter way.” This means
that in fact he is wasting time instead of making improvements.19
In Germany, managers focus more on productivity and quality of goods and ser-
vices than on managing subordinates, which often translates into companies pursuing
long-term approaches. In addition, management education is highly technical, and a legal
system called codetermination requires workers and their managers to discuss major
decisions. As a result, German MNCs tend to be fairly centralized, autocratic, and hier-
archical. Scandinavian countries also have codetermination, but the Swedes focus much
more on quality of work life and the importance of the individual in the organization.
As a result, decision making in Sweden is decentralized and participative.
The Japanese are somewhat different from the Europeans, though they still employ
a long-term focus. They make heavy use of a decision-making process called ringisei,
or decision making by consensus. Under this system, any changes in procedures and
routines, tactics, and even strategies of a firm are organized by those directly concerned
with those changes. The final decision is made at the top level after an elaborate exam-
ination of the proposal through successively higher levels in the management hierarchy,
and results in acceptance or rejection of a decision only through consensus at every
echelon of the management structure.20
Sometimes Japanese consensus decision making can be very time-consuming. How-
ever, in practice most Japanese managers know how to respond to “suggestions” from the
top and to act accordingly—thus saving a great deal of time. Many outsiders misunder-
stand how Japanese managers make such decisions. In Japan, what should be done is
called tatemae, whereas what one really feels, which may be quite different, is honne.
Because it is vital to do what others expect in a given context, situations arise that often
strike Westerners as a game of charades. Nevertheless, it is very important in Japan to
play out the situation according to what each person believes others expect to happen.
Another cultural difference is how managers view time in the decision-making
process. As we saw from the French-Danish example earlier, the French do not value
time as much as their counterparts. The French want to ensure that the best alternative
was put into action, whereas the Danes want to act first and take advantage of opportu-
nities. This is key in many international decision-making processes, as globalization has
opened the door to extreme competition, and all players need to be able to both identify
and make the most of profitable prospects.
In another study of decision making in teams composed of Swedes, Germans, and
combinations of the two, researchers found Swedish teams featured higher team orienta-
tion, flatter organizational hierarchies, and more open-minded and informal work atti-
tudes. In this study, German team members were perceived to be faster in decision
making, to have clearer responsibilities for the individual, and to be more willing to
accept a changed or unpopular decision. In Swedish teams, decision making appeared
more transparent and less formal. On German teams, the process is largely dominated
by the decision authority of an expert in the field. This is in contrast to the group
decision-making style used in Swedish teams.21
Total Quality Management Decisions
To achieve world-class competitiveness, MNCs are finding that a commitment to total
quality management is critical. Total quality management (TQM) is an organizational
codetermination
A legal system that requires
workers and their managers
to discuss major decisions.
ringisei
A Japanese term that means
“decision making by
consensus.”
tatemae
A Japanese term that means
“doing the right thing”
according to the norm.
honne
A Japanese term that
means “what one really
wants to do.”
total quality management
(TQM)
An organizational strategy
and the accompanying
techniques that result in the
delivery of high-quality
products or services to
customers.
Chapter 11 Management Decision and Control 395
strategy and accompanying techniques that result in delivery of high-quality products or
services to customers.22 The concept and techniques of TQM, which were introduced in
Chapter 8 in relation to strategic planning, also are relevant to decision making and
controlling.
One of the primary areas where TQM is having a big impact is in manufacturing.
A number of TQM techniques have been successfully applied to improve the quality of
manufactured goods. One is the use of concurrent engineering/interfunctional teams in
which designers, engineers, production specialists, and customers work together to
develop new products. This approach involves all the necessary parties and overcomes
what used to be an all-too-common procedure: The design people would tell the manu-
facturing group what to produce, and the latter would send the finished product to retail
stores for sale to the customer. Today, MNCs taking a TQM approach are customer-
driven. They use TQM techniques to tailor their output to customer needs, and they
require the same approach from their own suppliers.23 Recently, Lenovo has transformed
its design process from an engineer-driven one to a customer-driven one. In 2016, the
company developed and began using an application that pulls together unstructured cus-
tomer feedback from a variety of sources, including YouTube comments, online forums,
and traditional call centers, and organizes the data in a useful way so that Lenovo can
design tablets and products that best meet consumer demands.24
A particularly critical issue is how much decision making to delegate to subordi-
nates. TQM uses employee empowerment. Individuals and teams are encouraged to
generate and implement ideas for improving quality and are given the decision-making
authority and necessary resources and information to implement them. Many MNCs have
had outstanding success with empowerment. For example, General Electric credits
employee empowerment for cutting in half the time needed to change product-mix
production of its dishwashers in response to market demand.
Another TQM technique that is successfully employed by MNCs is rewards and
recognition. These range from increases in pay and benefits to the use of merit pay,
discretionary bonuses, pay-for-skills and knowledge plans, plaques, and public recogni-
tion. The important thing to realize is that the rewards and recognition approaches that
work well in one country may be ineffective in another. For example, individual recog-
nition in the U.S. may be appropriate and valued by workers, but in Japan, group rewards
are more appropriate as Japanese do not like to be singled out for personal praise.
Similarly, although putting a picture or plaque on the wall to honor an individual is
common practice in the United States, these rewards are frowned on in Finland, for they
remind the workers that their neighbors, the Russians, used this system to encourage
people to increase output (but not necessarily quality), and while the Russian economy
is beginning to make headway, it was once in shambles in part due to poor decision
making.
Still another technique associated with TQM is the use of ongoing training to
achieve continual improvement. This training takes a wide variety of forms, ranging from
statistical quality control techniques to team meetings designed to generate ideas for
streamlining operations and eliminating waste. In all cases, the objective is to apply what
the Japanese call kaizen, or continuous improvement. By adopting a TQM perspective
and applying the techniques discussed earlier, MNCs find that they can both develop and
maintain a worldwide competitive edge. A good example is provided by Herman Miller,
the American office furniture company. Herman Miller manufactures some of the best-
selling office task chairs worldwide. Over the last 15 years, the company has used the
kaizen mindset to improve quality by 1,000 percent and productivity by 500 percent.
Originally, it took approximately 82 seconds for Herman Miller to produce a single chair
from its production line. Today, it only takes 17 seconds.25 Table 11–2 provides some
examples of the new thinking that is now emerging regarding quality.
Ford Motor Company has been able to thrive in the post-global recession environ-
ment due in part to its implementation of kaizen principles. As a former vice president
at Boeing, Ford CEO Alan Mulally brought the philosophy with him when he came to
empowerment
The process of giving
individuals and teams the
resources, information, and
authority they need to
develop ideas and
effectively implement them.
kaizen
A Japanese term that means
“continuous improvement.”
396 Part 3 International Strategic Management
the company in 2006. By focusing on implementing more efficient procedures, Ford was
able to create 5,000 new jobs in the United States in 2014.26
Indirectly related to TQM is ISO 9000, International Standards Organization (ISO)
certification, to ensure quality products and services. Areas that are examined by the ISO
certification team include design (product or service specifications), process control
(instruction for manufacturing or service functions), purchasing, service (e.g., instruc-
tions for conducting after-sales service), inspection and testing, and training. ISO 9000
certification is becoming a necessary prerequisite to doing business in the EU, but it also
is increasingly used as a screening criterion for bidding on contracts or getting business
in the United States and other parts of the world.
Decisions for Attacking the Competition
Another series of key decisions relates to MNC actions that are designed to attack the
competition and gain a foothold in world markets. An example is Ford Motor Company’s
decision to challenge other automakers, like Tata, and to be a major player in developing
markets, such as Asia and Africa. As a result of this decision, Ford has been shifting
production closer to the local consumer and away from its stagnant U.S. home market.
In 2015, Ford announced plans to open a manufacturing plant for its pickup truck, the
Ranger, in Lagos, Nigeria. As Ford’s first plant in Africa outside of South Africa, the
new Lagos facility aims to provide Ford with the infrastructure and manufacturing
Table 11–2
The Emergence of New Beliefs Regarding Quality
Old Myth New Truth
Quality is the responsibility of the people
in the Quality Control Department.
Quality is everyone’s job.
Training is costly. Training does not cost; it saves.
New quality programs have high initial
costs.
The best quality programs do not have up-front
costs.
Better quality will cost the company a lot
of money.
As quality goes up, costs come down.
The measurement of data should be kept
to a minimum.
An organization cannot have too much relevant
data on hand.
It is human to make mistakes. Perfection—total customer satisfaction—is a
standard that should be vigorously pursued.
Some defects are major and should be
addressed, but many are minor and can be
ignored.
No defects are acceptable, regardless of
whether they are major or minor.
Quality improvements are made in small,
continuous steps.
In improving quality, both small and large
improvements are necessary.
Quality improvement takes time. Quality does not take time; it saves time.
Haste makes waste. Thoughtful speed improves quality.
Quality programs are best oriented toward
areas such as products and manufacturing.
Quality is important in all areas, including
administration and service.
After a number of quality improvements,
customers are no longer able to see addi-
tional improvements.
Customers are able to see all improvements,
including those in price, delivery, and
performance.
Good ideas can be found throughout the
organization.
Good ideas can be found everywhere, includ-
ing in the operations of competitors and orga-
nizations providing similar goods and services.
Suppliers need to be price competitive. Suppliers need to be quality competitive.
Source: Reported in Richard M. Hodgetts, Measures of Quality and High Performance (New York: American Management
Association, 1998), p. 14.
Chapter 11 Management Decision and Control 397
capacity necessary for future growth.27 Ford has also opened plants in China and Thailand
in recent years, with the ability to produce more than 100,000 vehicles every year for
the local Asian market.28
Another example of decision making for attacking the competition is provided by
the global luxury car industry. While German automakers Audi, Mercedes-Benz, and
BMW all share the same goal of leading the international luxury vehicle market, the
companies are taking different approaches to beat the competition. Audi has made the
decision to target younger professionals in established markets. This strategy is reflected
in the company’s new, trendy body designs. Though the demographics of the luxury
vehicle market favors older consumers, Audi’s approach has been fairly successful. More
than 90,000 units are now sold annually in the U.S., vaulting Audi into fourth place in
the local market. Conversely, BMW has attempted to undermine the competition by
focusing on providing more options and personalization for its consumers. With a variety
of engine and body options, the company offers more than 100 different combinations
for its luxury vehicles in the U.S. And Mercedes, which holds the largest share of the
luxury vehicle market, has taken a lowest-cost strategy. With its CLA 250 starting at
under US$30,000, the luxury sedan offers high value for a price that is less than that of
the average car sale in the U.S.29
■ Decision and Control Linkages
Decision making and controlling are two vital and often interlinked functions of inter-
national management. As an example of a company that struggled with control issues,
Canadian company Blackberry Limited (formerly Research in Motion) ultimately failed
in the smartphone industry due to its slow market response. Over the course of just six
years, Blackberry evolved from the most promising phone producer to just a footnote.
In 2009, Blackberry was one of the fastest-growing companies in the world, with an
84 percent increase in earnings.30 Blackberry held an estimated 41 percent share of the
smartphone market in the U.S. by 2010, making it more popular than Apple’s iPhone.
However, as Apple and Samsung introduced touchscreens and innovated to meet cus-
tomer demands, Blackberry continued producing phones with full keyboards. In the high-
tech sector, where the pace of change is incredibly fast, Blackberry’s resistance to meet
customer expectations led to a rapid decline in market share. By the time Blackberry
finally adapted to the evolving mobile market, it was too late; by 2015, Blackberry’s
market share dropped to just 1 percent.31,32
Another example of how the control function plays out is Universal Studios Japan.
To attract visitors to the Osaka location, this new theme park was specially built based
on feedback from Japanese tourists at Universal parks in Orlando and Los Angeles. The
company wanted to learn what these visitors liked and disliked and then use this infor-
mation in its Osaka park. One theme clearly emerged: The Japanese wanted an authentic
American experience but also expected the park to cater to their own cultural preferences.
In the process of controlling the creation of the new park, thousands of decisions were
made regarding what to include and what to leave out. For example, seafood pizza and
gumbo-style soup were put on the menu, but a fried-shrimp concoction with colored rice
crackers was rejected. It was decided that in a musical number based on the movie
Beetlejuice, the main character should talk in Japanese and his sidekicks would speak
and sing in English. The decision to put in a restaurant called Shakin’s, based on the
1906 San Francisco earthquake, turned out to be not a good idea because Osaka has had
terrible earthquakes that killed thousands of people.
Other decisions were made to give the “American” park a uniquely Japanese flavor.
The nation’s penchant for buying edible souvenirs inspired a 6,000-square-foot confection
shop packed with Japanese sweets such as dinosaur-shaped bean cakes. Restrooms
include Japanese-style squat toilets. Even the park layout caters to the tendency of
Japanese crowds to flow clockwise in an orderly manner, contrary to more chaotic U.S.
controlling
The process of evaluating
results in relation to plans
or objectives and deciding
what action, if any, to take.
398 Part 3 International Strategic Management
crowds that steer right. And millions of dollars were spent on the Jurassic Park water
slide to widen the landing pond, redesign boat hulls, and install underwater wave- damping
panels to reduce spray. Why? Many fastidious Japanese don’t like to get wet, even on
what’s billed as one of the world’s biggest water slides.33
The efforts to design a uniquely Japanese theme park with an American feel seem
to be paying off. Fifteen years after first opening, Universal Studios Japan is now the
fifth-most-visited amusement park worldwide, attracting over 13 million visitors in
2015.34 Universal Studios Japan is the only non-Disney park to make the top-ten atten-
dance list.35 The company has discovered that creating an emotional connection between
the consumer and the park, instead of focusing on the power of Hollywood, encourages
people to frequent the park. The success that Universal has had in integrating Japanese
and American culture has encouraged the company to expand further into the Asian
market; in fact, plans are already in place to open Universal Studios in Moscow, Beijing,
and South Korea between 2020 and 2022.36,37 (See related discussion in In-Depth Integra-
tive Case 2.1b on Disney in Asia at end of Part Two.)
■ The Controlling Process
As we’ve stated, controlling involves evaluating results in relation to plans or objectives
and deciding what action to take next. An excellent illustration of this process can be
seen through ConocoPhillips’ recent strategic changes to its investments in Russia. Over
two decades ago, shortly after the collapse of the Soviet Union, the U.S.-based company
joined with Russian-based Rosneft to form the Polar Lights Company. The investment
looked like a wise decision initially; teaming with Rosneft would allow ConocoPhillips
access to Russia’s massive oil and gas fields, and the deal made ConocoPhillips one of
the largest foreign players inside of Russia. By the early 2000s, however, high taxes and
unrealized returns worried executives and shareholders. After years of losses,
ConocoPhillips sold its 50 percent stake in the joint venture in December 2015, freeing
up capital for investments in more lucrative markets and projects.38
The control process is of course crucial for MNCs in the fast-moving personal
computer (PC) business. Until the mid-1990s, PCs were built using the traditional model
shown in Figure 11–2. Today the direct-sales model and the hybrid model are the most
common. PC firms are finding that they must keep on the cutting edge more than any
other industry because of the relentless pace of technological change. This is where the
control function becomes especially critical for success. For example, stringent controls
keep the inventory in the system as small as possible. PCs are manufactured using a
just-in-time approach (a customer orders the unit and has it made to specifications) or
an almost just-in-time approach (a retailer orders 30 units and sells them all within a few
weeks). Because technology in the PC industry changes so quickly, any units that are
not sold in retail outlets within 60 days may be outdated and must be severely discounted
and sold for whatever the market will bear. In turn, these costs are often assumed by the
manufacturer. As a result, PC manufacturers are very much inclined to build to order or
to ship in quantities that can be sold quickly. In this way the firm’s control system helps
ensure that inventory moves through the system profitably.39
Of particular interest is how companies attempt to control their overseas operations
to become integrated, coordinated units. A number of control problems may arise:
(1) The objectives of the overseas operation and the corporation conflict. (2) The objec-
tives of joint-venture partners and corporate management are not in accord. (3) Degrees
of experience and competence in planning vary widely among managers running the
various overseas units. (4) Finally, there may be basic philosophic disagreements about
the objectives and policies of international operations, largely because of cultural differ-
ences between home- and host-country managers. The following discussion examines the
various types of control that are used in international operations and the approaches that
are often employed in dealing with typical problems.
Chapter 11 Management Decision and Control 399
Types of Control
There are two common, complementary ways of looking at how MNCs control opera-
tions. One way is by determining whether the enterprise chooses to use internal or
external control in devising its overall strategy. The other is by looking at the ways in
which the organization uses direct and indirect controls.
Internal and External Control From an internal control standpoint, an MNC will focus
on the things that it does best. At the same time, of course, management wants to ensure
that there is a market for the goods and services that it is offering. So the company first
needs to find out what the customers want and be prepared to respond appropriately.
This requires an external control focus. Naturally, every MNC will give consideration to
both internal and external perspectives on control. However, one is often given more
attention than the other. In explaining this idea, Trompenaars and Hampden-Turner set
forth four management views regarding how a control strategy should be devised and
implemented:
1. No one dealing with customers is without a strategy of sorts. Our task is
to find out which of these strategies work, which don’t, and why. Devising
our own strategy in the abstract and imposing it downwards only spreads
confusion.
2. No one dealing with customers is without a strategy of sorts. Our task is to
find out which of these strategies work and then create a master strategy from
proven successful initiatives by encouraging and combining the best.
Customers buy
the PCs from
the retailers
and receive
assistance in
setting up the
entire system.
Orders are
then received
from retailers
and the PCs
are shipped
to them by
the distributors.
The units are
ordered by
distributors
and shipped
to the latters’
warehouses.
The manufacturer
builds the PCs
and stores them
in the warehouse.
The parts are
warehoused
until they are
needed by the
manufacturer.
Based on sales
forecasts, a
manufacturer
orders parts for
the PCs.
Traditional Model
On the dealer's behalf,
the distributor ships
the computer directly
to the customer. The
dealer then provides
setup and additional
services for a separate
fee.
The distributor
gathers the parts
to assemble the
computer to the
customer's
specifications.
The customer orders
a computer through
a retailer or directly
from the manufacturer,
and the order is
forwarded to the
distributor.
The shells are shipped
to the distributors, and
component suppliers
establish a parts
inventory with, or near,
that of the distributor.
The computer
manufacturer
builds shells: a
case, power
supply, USB
ports, basic
circuitry.
Hybrid Model
The manufacturer
ships the computer
directly to the
customer.
The manufacturer
builds the computer
to the customer's
exact specifications.
Business and
individual
customers place
orders by phone
or over the
Internet.
The manufacturer
orders a small
number of parts
from its suppliers.
Direct-Sales Model
Figure 11–2 Models of PC Manufacturing
400 Part 3 International Strategic Management
3. To be a leader is to be the chief deviser of strategy. Using all the experience,
information, and intelligence we can mobilize, we need to devise an innova-
tive strategy and then cascade it down the hierarchy.
4. To be a leader is to be the chief deviser of strategy. Using all the experience,
information, and intelligence we can mobilize, we must create a broad thrust,
while leaving it to subordinates to fit these to customer needs.
Trompenaars and Hampden-Turner ask managers to rank each of these four state-
ments by placing a “1” next to the one they feel would most likely be used in their
company, a “2” next to the second most likely, on down to a “4” next to the one that
would be the last choice. This ranking helps managers better see whether they use an
external or an internal control approach. Answer 1 focuses most strongly on an external-
directed approach and rejects the internal control option. Answer 3 represents the oppo-
site. Answer 2 affirms a connection between an external-directed strategy and an
inner-directed one, whereas answer 4 does the opposite.40
Cultures differ in the control approach they use. For example, among U.S. MNCs
it is common to find managers using an internal control approach. Among Asian firms
an external control approach is more typical. Table 11–3 provides some contrasts between
the two.
Direct Controls Direct controls involve the use of face-to-face or personal meetings
to monitor operations. A good example is how International Telephone and Telegraph
(ITT) holds monthly management meetings at its New York headquarters. These meet-
ings are run by the CEO of the company, and reports are submitted by each ITT unit
manager throughout the world. Problems are discussed, goals set, evaluations made, and
actions taken that will help the unit improve its effectiveness.
Another common form of direct control is visits by top executives to overseas
affiliates or subsidiaries. During these visits, top managers can learn firsthand the prob-
lems and challenges facing the unit and offer assistance.
A third form is the staffing practices of MNCs. By determining whom to send
overseas to run the unit, the corporation can directly control how the operation will be
run. The company will want the manager to make operating decisions and handle
direct controls
The use of face-to-face or
personal meetings for the
purpose of monitoring
operations.
Table 11–3
The Impact of Internal- and External-Oriented Cultures on the Control Process
Key Differences Between . . .
Internal Control External Control
Often dominating attitude bordering on aggressiveness Often flexible attitude, willing to compromise and keep the
toward the environment. peace.
Conflict and resistance mean that a person has convictions. Harmony, responsiveness, and sensibility are encouraged.
The focus is on self, function, one’s own group, and The focus is on others such as customers, partners, and
one’s own organization. colleagues.
There is discomfort when the environment seems “out There is comfort with waves, shifts, and cycles, which are
of control” or changeable. regarded as “natural.”
Tips for Doing Business with . . .
Internally Controlled (for externals) Externally Controlled (for internals)
Playing “hardball” is legitimate to test the resilience Softness, persistence, politeness, and long patience will get
of an opponent. rewards.
It is most important to “win your objective.” It is most important to maintain one’s relationships with others.
Win some, lose some. Win together, lose apart.
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), pp. 160–161.
Chapter 11 Management Decision and Control 401
day-to-day matters, but the individual also will know which decisions should be cleared
with the home office. In fact, this approach to direct control sometimes results in a man-
ager who is more responsive to central management than to the needs of the local unit.
And finally, a fourth form is the organizational structure itself. By designing a
structure that makes the unit highly responsive to home-office requests and communica-
tions, the MNC ensures that all overseas operations are run in accord with central man-
agement’s desires. This structure can be established through formal reporting relationships
and chain of command (who reports to whom).
Indirect Controls Indirect controls involve the use of reports and other written forms
of communication to control operations. One of the most common examples is the use of
monthly operating reports that are sent to the home office. Other examples, which typically
are used to supplement the operating report, include financial statements, such as balance
sheets, income statements, cash budgets, and financial ratios that provide insights into the
unit’s financial health. The home office will use these operating and financial data to
evaluate how well things are going and make decisions regarding necessary changes. Three
sets of financial statements usually are required from subsidiaries: (1) statements prepared
to meet the national accounting standards and procedures prescribed by law and other
professional organizations in the host country, (2) statements prepared to comply with the
accounting principles and standards required by the home country, and (3) statements
prepared to meet the financial consolidation requirements of the home country.
Indirect controls are particularly important in international management because of
the great expense associated with direct methods of control. Typically, MNCs will use
indirect controls to monitor performance on a monthly basis, whereas direct controls are
used semiannually or annually. This dual approach often provides the company with
effective control of its operations at a price that also is cost-effective.
Approaches to Control
International managers can employ many different approaches to control. These
approaches typically are dictated by the MNC’s philosophy of control, the economic
environment in which the overseas unit is operating, and the needs and desires of the
managerial personnel who staff the unit. Working within control parameters, MNCs will
structure their processes so that they are as efficient and effective as possible. Typically,
the tools used will give the unit manager the autonomy needed to adapt to changes in
the market as well as to attract competent local personnel. These tools will also provide
for coordination of operations with the home office, so that the overseas unit operates
in harmony with the MNC’s overall strategic plan.
Some control tools are universal. For example, all MNCs use financial tools in
monitoring overseas units. This was true as long as four decades ago, when the following
was reported:
The cross-cultural homogeneity in financial control is in marked contrast to the heterogeneity
exercised over the areas of international operations. American subsidiaries of Italian and
Scandinavian firms are virtually independent operationally from their parents in functions
pertaining to marketing, production, and research and development; whereas, the subsidiar-
ies of German and British firms have limited freedom in these areas. Almost no autonomy
on financial matters is given by any nationality to the subsidiaries.41
Some Major Differences MNCs control operations in many different ways, and these
often vary considerably from country to country. For example, how British firms moni-
tor their overseas operations often is different from how German or French firms do.
Similarly, U.S. MNCs tend to have their own approach to controlling, and it differs from
both European and Japanese approaches. When Horovitz examined the key characteristics
of top management control in Great Britain, Germany, and France, he found that British
controls had four common characteristics: (1) Financial records were sophisticated and
indirect controls
The use of reports and
other written forms of
communication to control
operations.
402 Part 3 International Strategic Management
heavily emphasized. (2) Top management tended to focus its attention on major problem
areas and did not get involved in specific, detailed matters of control. (3) Control was
used more for general guidance than for surveillance. (4) Operating units had a large
amount of marketing autonomy.42
This model was in marked contrast to that of German managers, who employed
very detailed control and focused attention on all variances large and small. These man-
agers also placed heavy control on the production area and stressed operational effi-
ciency. In achieving this centralized control, managers used a large central staff for
measuring performance, analyzing variances, and compiling quantitative reports for
senior executives. Overall, the control process in the German firms was used as a polic-
ing and surveillance instrument. French managers employed a control system that was
closer to that of the Germans than to the British. Control was used more for surveillance
than for guiding operations, and the process was centrally administered. Even so, the
French system was less systematic and sophisticated.43
How do U.S. MNCs differ from their European counterparts? One comparative
study found that a major difference is that U.S. firms tend to rely much more heavily on
reports and other performance-related data. Americans make greater use of output control,
and Europeans rely more heavily on behavioral control. Commenting on the differences
between these two groups, the researcher noted: “This pattern appears to be quite robust
and continues to exist even when a number of common factors that seem to influence
control are taken into account.”44 Some specific findings from this study include
1. Control in U.S. MNCs focuses more on the quantifiable, objective aspects of
a foreign subsidiary, whereas control in European MNCs tends to be used to
measure more qualitative aspects. The U.S. approach allows comparative anal-
yses between other foreign operations as well as domestic units; the European
measures are more flexible and allow control to be exercised on a unit-by-
unit basis.
2. Control in U.S. MNCs requires more precise plans and budgets in generating
suitable standards for comparison. Control in European MNCs requires a high
level of companywide understanding and agreement regarding what consti-
tutes appropriate behavior and how such behavior supports the goals of both
the subsidiary and the parent firm.
3. Control in U.S. MNCs requires large central staffs and centralized information-
processing capability. Control in European MNCs requires a larger cadre of
capable expatriate managers who are willing to spend long periods of time
abroad. This control characteristic is reflected in the career approaches used
in the various MNCs. Although U.S. multinationals do not encourage lengthy
stays in foreign management positions, European MNCs often regard these
positions as stepping-stones to higher offices.
4. Control in European MNCs requires more decentralization of operating
decision making than does control in U.S. MNCs.
5. Control in European MNCs favors short vertical spans or reporting channels
from the foreign subsidiary to responsible positions in the parent.45
As noted in the discussion of decision making, these differences help explain why
many researchers have found European subsidiaries to be more decentralized than U.S.
subsidiaries. Europeans rely on the managerial personnel they assign from headquarters
to run the unit properly. Americans tend to hire a greater percentage of local management
people and control operations through reports and other objective, performance-related
data. The difference results in Europeans’ relying more on socio-emotional control
systems and Americans’ opting for task-oriented, objective control systems.
Evaluating Approaches to Control Is one control approach any better than the other?
The answer is that each seems to work best for its respective group. Some studies predict
Chapter 11 Management Decision and Control 403
that as MNCs increase in size, they likely will move toward the objective orientation of
the U.S. MNCs. Commenting on the data gathered from large German and U.S. MNCs,
two researchers concluded:
Control mechanisms have to be harmonized with the main characteristics of management
corporate structure to become an integrated part of the global organization concept and to
meet situational needs. Trying to explain the differences in concepts of control, we have to
consider that the companies of the U.S. sample were much larger and more diversified.
Accordingly, they use different corporate structures, combining operational units into larger
units and integrating these through primarily centralized, indirect, and task-oriented control.
The German companies have not (yet) reached this size and complexity, so a behavioral
model of control seems to be fitting.46
So in deciding which form of control to use, MNCs must determine whether they want
a more bureaucratic or a more cultural control approach; and from the cultural perspec-
tive, it must be remembered that this control will vary across subsidiaries.
■ Performance Evaluation as a Mechanism of Control
A number of performance measures are used for control purposes. Three of the most
common evaluate financial performance, quality performance, and personnel performance.
Financial Performance
Financial performance evaluation of a foreign subsidiary or affiliate is usually based on
profit and loss and return on investment. Profit and loss (P&L) is the amount remaining
after all expenses are deducted from total revenues. Return on investment (ROI) is
measured by dividing profit by assets; some firms use profit divided by owners’ equity
(return on owners’ investment, or ROOI) in referring to the return-on-investment perfor-
mance measure. In any case, the most important part of the ROI calculation is profits,
which often can be manipulated by management. Thus, the amount of profit directly
relates to how well or how poorly a unit is judged to perform. For example, if an MNC
has an operation in both country A and country B and taxes are lower in country A, the
MNC may be able to benefit if the two units have occasion to do business with each
other. This benefit can be accomplished by having the unit in country A charge higher
prices than usual to the unit in country B, thus providing greater net profits to the MNC.
Simply put, sometimes differences in tax rates can be used to maximize overall MNC
profits. This same basic form of manipulation can be used in transferring money from
one country to another, which can be explained as follows:
Transfer prices are manipulated upward or downward depending on whether the parent com-
pany wishes to inject or remove cash into or from a subsidiary. Prices on imports by a
subsidiary from a related subsidiary are raised if the multinational company wishes to move
funds from the receiver to the seller, but they are lowered if the objective is to keep the funds
in the importing subsidiary. . . . Multinational companies have been known to use transfer
pricing for moving excess cash from subsidiaries located in countries with weak currencies
to countries with strong currencies in order to protect the value of their current assets.47
The so-called bottom-line (i.e., profit or loss) performance of subsidiaries also can
be affected by a devaluation or revaluation of local currency. For example, if a country
devalues its currency, then subsidiary export sales will increase because the price of these
goods will be lower for foreign buyers, whose currencies now have greater purchasing
power. If the country revalues its currency, then export sales will decline because the
price of goods for foreign buyers will rise because their currencies now have less pur-
chasing power in the subsidiary’s country. Likewise, a devaluation of the currency will
increase the cost of imported materials and supplies for the subsidiary, and a revaluation
will decrease these costs because of the relative changes in the purchasing power of local
currency. Because devaluation and revaluation of local currency are outside the control
profit
The amount remaining after
all expenses are deducted
from total revenues.
return on investment (ROI)
Return measured by
dividing profit by assets.
404 Part 3 International Strategic Management
of the overseas unit, bottom-line performance sometimes will be a result of external
conditions that do not accurately reflect how well the operation actually is being run,
which should be considered when evaluating a subsidiary’s performance.
Of course, not all bottom-line financial performance is a result of manipulation or
external economic conditions. Frequently, other forces account for the problem. For
example, Volkswagen has long struggled to meet profit margin goals in recent years. One
reason for this poor performance is that labor costs in Lower Saxony, where approxi-
mately half its workforce is located and workers are strongly unionized, are very high.
Workers here produce only 40 vehicles per employee annually, in contrast to the VW
plant in Navarra, Spain, which turns out 79 vehicles per employee per year. Why doesn’t
VW move work to lower-cost production sites? The major reason is that the state of
Lower Saxony owns 19 percent of the company’s voting stock, so the workers’ jobs are
protected. As recently as 2014, Volkswagen management proposed massive cost-cutting
measures to increase profitability, but union representatives in Lower Saxony have fought
back fearing local job losses.48,49 Simply put, relying solely on financial results to evaluate
performance can result in misleading conclusions.
Quality Performance
Just as quality has become a major focus in decision making, it also is a major dimension
of the modern control process of MNCs. The term quality control (QC) has been around
for a long time, and it is a major function of production and operations management.
Besides the TQM techniques of concurrent engineering/interfunctional teams, employee
empowerment, reward/recognition systems, and training, discussed earlier in this chapter
in the context of decision making, another technique more directly associated with the
control function is the use of quality circles, which have been popularized by the Japanese.
A quality control circle (QCC) is a group of workers who meet on a regular basis to
discuss ways of improving the quality of work. This approach has helped many MNCs
improve the quality of their goods and services dramatically.
Why are Japanese-made goods of higher quality than the goods of many other
countries? The answer cannot rest solely on technology because many MNCs have the
same or superior technology, or the financial ability to purchase it. There must be other
causal factors. The nearby International Management in Action box “How the Japanese
Do Things Differently” gives some details about these factors. One study attempted to
answer the question by examining the differences between Japanese and U.S. manufactur-
ers of air conditioners.50 In this analysis, many of the commonly cited reasons for supe-
rior Japanese quality were discovered to be inaccurate. So what were the reasons for the
quality differences?
One reason was the focus on keeping the workplace clean and ensuring that all
machinery and equipment were properly maintained. The Japanese firms were more
careful in handling incoming parts and materials, work-in-process, and finished products
than their U.S. counterparts. Japanese companies also employed equipment fixtures to a
greater extent than did U.S. manufacturers in ensuring proper alignment of parts during
final assembly.
The Japanese minimized worker error by assigning new employees to existing work
teams or pairing them with supervisors. In this way, the new workers gained important
experience under the watchful eye of someone who could correct their mistakes.
Another interesting finding was that the Japanese made effective use of QCCs.
Quality targets were set, and responsibility for their attainment then fell on the circle
while management provided support assistance. This was stated by the researcher as
follows:
In supporting the activities of their QCCs, the Japanese firms in this industry routinely col-
lected extensive quality data. Information on defects was compiled daily, and analyzed for
trends. Perhaps most important, the data were made easily accessible to line workers, often
in the form of publicly posted charts. More detailed data were available to QCCs on request.51
quality control circle
(QCC)
A group of workers who
meet on a regular basis to
discuss ways of improving
the quality of work.
405
International Management in Action
How the Japanese Do Things Differently
Japanese firms do a number of things extremely well.
One is to train their people carefully, a strategy that
many successful U.S. firms also employ. Another is to try
to remain on the technological cutting edge. A third,
increasingly important because of its uniqueness to the
Japanese, is to keep a keen focus on developing and
bringing to market goods that are competitively priced.
In contrast to Western firms, many Japanese compa-
nies use a “target cost” approach. Like other multina-
tional firms, Japanese companies begin the new product
development process by conducting marketing research
and examining the characteristics of the product to be
produced. At this point, however, the Japanese take a
different approach. The traditional approach used by
MNCs around the world is next to go into designing,
engineering, and supplier pricing and then to determine
if the cost is sufficiently competitive to move ahead with
manufacturing. Japanese manufacturers, in contrast, first
determine the price that the consumer most likely will
accept, and then they work with design, engineering,
and supply people to ensure that the product can be
produced at this price. The other major difference is that
after most firms manufacture a product, they will engage
in periodic cost reductions. The Japanese, however, use
a kaizen approach, which fosters continuous cost-
reduction efforts.
The critical difference between the two systems is
that the Japanese get costs out of the product during
the planning and design stage. Additionally, they look at
profit in terms of product lines rather than just individual
goods, so a consumer product that would be rejected
for production by a U.S. or European firm because its
projected profitability is too low may be accepted by a
Japanese firm because the product will attract addi-
tional customers to other offerings in the line. A good
example is Sony, which decided to build a smaller
version of its compact personal stereo system and mar-
ket it to older consumers. Sony knew that the profit-
ability of the unit would not be as high as usual, but it
went ahead because the product would provide another
market niche for the firm and strengthen its reputation.
Also, a side benefit is that once a product is out there,
it may appeal to an unanticipated market. This was the
case with Sony’s compact personal stereo system. The
unit caught on with young people, and Sony’s sales
were 50 percent greater than anticipated. Had Sony
based its manufacturing decision solely on “stand-alone”
profitability, the unit never would have been produced.
These approaches are not unique to Japanese firms.
Foreign companies operating in Japan are catching on
and using them as well. Coca-Cola Japan is the leading
company in the Japanese soft drink market, which sees
the introduction of more than 1,000 new products each
year. Most offerings do not last very long, and a cost
accountant might well argue that it is not worth the
effort to produce them. However, Coca-Cola introduces
one new product a month. Most of these sodas, soft
drinks, and cold coffees survive less than 90 days, but
Coke does not let the short-term bottom line dictate the
decision. The firm goes beyond quick profitability and
looks at the overall picture. Result: Coca-Cola continues
to be the leading soft drink firm in Japan despite com-
petition that often is more vigorous than that in the
United States.
Sources: Ford S. Worthy, “Japan’s Smart Secret Weapon,” Fortune,
August 12, 1991, pp. 72–75; Brenton R. Schlender, “Hard Times for
High Tech,” Fortune, March 22, 1993, p. 98; Ronald Henkoff, “Compa-
nies That Train Best,” Fortune, March 22, 1993; Jim Carlton, “Sega
Leaps Ahead by Shipping New Player Early,” The Wall Street Journal,
May 11, 1995, pp. B1, B3; Jeffrey K. Liker and Yen-Chun Wu,
“Japanese Automakers, U.S. Suppliers and Supply-Chain Superiority,”
Sloan Management Review, Fall 2000, pp. 81–93.
This finding pointed out an important difference between Americans and Japanese.
The Japanese pushed data on quality down to the operating employees in the quality
circles, whereas Americans tended to aggregate the quality data into summary reports
aimed at middle and upper management.
Another important difference is that the Japanese tend to build in early warning
systems so that they know when something is going wrong. Incoming field data, for
example, are reviewed immediately by the quality department, and problems are assigned
to one of two categories: routine or emergency. Special efforts then are made to resolve
the emergency problems as quickly as possible. High failure rates attributable to a single
persistent problem are identified and handled much faster than they would be in U.S.
firms. Still another reason is that the Japanese work closely with their suppliers so that
the latter’s quality increases. In fact, research shows that among suppliers that have
contracts with both American and Japanese auto plants in the United States, the Japanese
plants get higher performance from their suppliers than do the American.52 The Japanese
are able to accomplish this because they work closely with their suppliers and help them
develop lean manufacturing capabilities. Some of the steps that Japanese manufacturers
406 Part 3 International Strategic Management
take in doing this include (1) leveling their own production schedules in order to avoid
big spikes in demand, thus allowing their suppliers to hold less inventory; (2) encourag-
ing their suppliers to ship only what is needed by the assembly plant at a particular time,
even if this means sending partially filled trucks; and (3) creating a disciplined system
of delivery time windows during which all parts have to be received at the delivery plant.
A close look at Table 11–4 shows that the 91 suppliers who were working for both
Japanese and American auto firms performed more efficiently for their Japanese customers
than for their American customers.
Management attitudes toward quality also were quite different. The Japanese phi-
losophy is: “Anything worth doing in the area of quality is worth overdoing.” Workers
are trained for all jobs on the line, even though they eventually are assigned to a
single workstation. This method of “training overkill” ensures that everyone can per-
form every job perfectly and results in two important outcomes: (1) If someone is
moved to another job, he or she can handle the work without any additional assistance.
(2) The workers realize that management puts an extremely high value on the need for
quality. When questioned regarding whether their approach to quality resulted in spend-
ing more money than was necessary, the Japanese managers disagreed. They believed
that quality improvement was technically possible and economically feasible. They did
not accept the common U.S. strategy of building a product with quality that was “good
enough.”
These managers were speaking only for their own firms, however. Some evidence
shows that, at least in the short run, an overfocus on quality may become economically
unwise. Even so, firms must remember that quality goods and services lead in the long
run to repeat business, which translates into profits and growth. From a control stand-
point, the major issue is how to identify quality problems and resolve them as efficiently
as possible. One approach that has gained acceptance in the United States is outlined
by Genichi Taguchi, one of the foremost authorities on quality control. Taguchi’s method
is to dispense with highly sophisticated statistical methods unless more fundamental
ways do not work. Figure 11–3 compares the use of the Taguchi method and the
Table 11–4
Performance of Suppliers When Serving U.S.- and Japanese-Owned Auto Plants
Chrysler Ford GM Honda Nissan Toyota
Performance Suppliers Suppliers Suppliers Suppliers Suppliers Suppliers
Indicators (n = 26) (n = 42) (n = 23) (n = 22) (n = 16) (n = 37)
Inventory turnover 28.3 24.4 25.5 38.4 49.2 52.4
Work-in-process 3.0 3.9 7.2 4.0 3.8 3.0
Finished-goods
storage time 4.8 5.4 6.6 5.3 4.9 3.2
Inventory on
the truck 2.1 4.5 2.6 2.8 2.08 1.61
Inventory maintained
at the customer’s site 3.5 4.8 3.1 4.0 2.8 2.3
Percentage change in
manufacturing costs
compared to the
previous year 0.69% 0.58% 0.74% −0.9% −0.7% −1.3%
Percentage of late
deliveries 4.4% 7.70% 3.04% 2.11% 1.08% 0.44%
Emergency shipping
cost (per million sales
dollars) in previous year $1,235 $446 $616 $423 $379 $204
Source: Adapted from Jeffrey K. Liker and Yen-Chun Wu, “Japanese Automakers, U.S. Suppliers and Supply-Chain Superiority,” Sloan Management Review, Fall 2000, p. 84.
Chapter 11 Management Decision and Control 407
traditional method to identify the cause of defects in the paint on a minivan hood. The
Taguchi approach to solving quality control problems is proving to be so effective that
many MNCs are adopting it. They also are realizing that the belief that Japanese firms
will correct quality control problems regardless of the cost is not true. As Taguchi puts
it, “the more efficient approach is to identify the things that can be controlled at a
reasonable cost in an organized manner, and simply ignore those too expensive to con-
trol.”53,54 To the extent that U.S. MNCs can do this, they will be able to compete on
the basis of quality.
Personnel Performance
Besides financial techniques and the emphasis on quality, another key area of control is
personnel performance evaluation. This type of evaluation can take a number of different
forms, although there is a great deal of agreement from firm to firm about the general
criteria to be measured. Table 11–5 provides a list of the most reputable companies as
calculated by the Reputation Institute in conjunction with Forbes magazine. The “repu-
tation pulse” measure incorporates a range of criteria, including the trust, admiration,
and esteem that stakeholders have for a company.
In describing what makes another group of companies successful—the “World’s
Most Admired” firms—consultants at the Hay Group made an analysis of the best global
firms, focusing especially on their personnel and talent management systems, identifying
seven common themes:
1. Top managers at the most-admired companies take their mission statements
seriously and expect everyone else to do the same.
2. Success attracts the best people—and the best people sustain success.
3. The top companies know precisely what they are looking for.
4. These firms see career development as an investment, not a chore.
5. Whenever possible, these companies promote from within.
6. Performance is rewarded.
7. The firms are genuinely interested in what their employees think, and they
measure work satisfaction often and thoroughly.55
Production problem:
Blemishes appear
in paint on finished
hood.
Perform experiment:
Change one factor
and hold the others
constant in a
production run
involving 70 hoods.
Measure results:
If problem is not solved,
design experiment with
another 70 hoods, varying
di�erent factors while
holding others constant.
Repeat experiments:
Each of the possible causes
must be studied in separate
production runs of 70 hoods
until the culprit is found.
Traditional Method Possible causes are studied one by one while holding the other factors constant.
Production
problem:
Blemishes appear
in paint on
finished hood.
Brainstorming
session:
Identify factors
that could be
responsible.
Employ Taguchi
statistical sampling
method: A handful
of experiments are
designed, in which
many of the possible
causes are varied,
based on statistical
techniques.
Experimental
production runs:
Eight sets of five
hoods each are
produced, varying
several of the
possible causes at
once.
Confirm results:
The experiments
are evaluated
and a changed
production run
is made to
confirm the
findings.
Taguchi Method Brainstorming and a few bold experiments seek to quickly find the problem.
Figure 11–3 Solving a Quality Problem: Taguchi Method vs. Traditional Method
Source: From information reported in John Holusha, “Improving Quality, the Japanese Way,” New York Times, July 20, 1988, p. 35.
408 Part 3 International Strategic Management
One of the most common approaches to personnel performance evaluation is the
periodic appraisal of work performance. Although the objective is similar from coun-
try to country, how performance appraisals are done differs. For example, effective
employee performance in one country is not always judged to be effective in another.
Awareness of international differences is particularly important when expatriate man-
agers evaluate local managers on the basis of home-country standards. A good exam-
ple comes out of a survey that found Japanese managers in U.S.-based manufacturing
firms gave higher evaluations to Japanese personnel than to Americans. The results led
the researcher to conclude: “It seems that cultural differences and diversified approaches
to management in MNCs of different nationalities will always create a situation where
some bias in performance appraisal may exist.”56 Dealing with these biases is a big
challenge facing MNCs.
Another important difference is how personnel performance control actually is
conducted. A study that compared personnel control approaches used by Japanese man-
agers in Japan with those employed by U.S. managers in the United States found marked
Table 11–5
World’s Most Reputable Companies, 2016
RepTrakTM 100: The Most Reputable Companies in the World: Pulse Score and Rank
Home RepTrakTM
Company Country Rank Pulse Score
Rolex Switzerland 1 78.4
The Walt Disney Company U.S. 2 78.2
Google U.S. 3 78.1
BMW Group Germany 4 77.9
Daimler (Mercedes-Benz) Germany 5 77.7
LEGO Group Denmark 6 77.4
Microsoft U.S. 7 77.0
Canon Japan 8 76.9
Sony Japan 9 76.7
Apple U.S. 10 76.6
Intel U.S. 11 76.4
adidas Group Germany 12 76.1
Nike U.S. 13 75.9
Rolls-Royce Aerospace U.K. 14 75.8
Michelin France 15 75.7
Johnson & Johnson U.S. 16 75.2
Samsung Electronics South Korea 17 75.0
Ferrero Italy 18 74.8
Nintendo Japan 19 74.7
Levi-Strauss & Co. U.S. 20 74.3
Amazon.com U.S. 21 74.3
Nestlé Switzerland 22 74.0
Philips Electronics Netherlands 23 73.8
L’Oreal France 24 73.7
Robert Bosch Germany 25 73.7
Panasonic Japan 26 73.6
IKEA Sweden 27 73.6
Colgate-Palmolive U.S. 28 73.6
Source: “Global RepTrakTM 100,” Reputation Institute (2016), https://www.reputationinstitute.com/global-reptrak-summary-2016.
Chapter 11 Management Decision and Control 409
differences.57 For example, when Japanese work groups were successful because of the
actions of a particular individual, the Japanese manager tended to give credit to the whole
group. When the group was unsuccessful because of the actions of a particular indi-
vidual, however, the Japanese manager tended to perceive this one employee as respon-
sible. In addition, the more unexpected the poor performance, the greater was the
likelihood that the individual would be responsible. In contrast, individuals in the United
States typically were given the credit when things went well and the blame when
performance was poor.
Other differences relate to how rewards and monitoring of personnel performance
are handled. Both U.S. and Japanese managers offered greater rewards and more freedom
from close monitoring to individuals when they were associated with successful perfor-
mance, no matter what the influence of the group on the performance. The Americans
carried this tendency further than the Japanese in the case of rewards, including giving
high rewards to a person who was a “lone wolf.”58
A comparison of these two approaches to personnel evaluation shows that the
Japanese tend to use a more social or group orientation, while the Americans are more
individualistic (for more, see Chapter 4). The researchers found that overall, however,
the approaches were quite similar and that the control of personnel performance by
Japanese and U.S. managers is far more similar than different.
Such similarity also can be found in assessment centers used to evaluate employees.
An assessment center is an evaluation tool that is used to identify individuals with the
potential to be selected for or promoted to higher-level positions. Used by large U.S.
MNCs for many years, these centers also are employed around the world. A typical
assessment center would involve simulation exercises such as these: (1) in-basket exer-
cises that require managerial attention, (2) a committee exercise in which the candidates
must work as a team in making decisions, (3) business decision exercises in which
participants compete in the same market, (4) preparation of a business plan, and (5) a
letter-writing exercise. These forms of evaluation are beginning to gain support because
they are more comprehensive than simple checklists or the use of a test or an interview
and thus better able to identify those managers who are most likely to succeed when
hired or promoted.
assessment center
An evaluation tool used to
identify individuals with
potential to be selected or
promoted to higher-level
positions.
The World of International Management—Revisited
This chapter focuses on two areas that are essential to any company joining the race to
compete in online retail or to develop productive contracting relationships for outsourc-
ing in this area: management decision and control systems. The rapid growth in online
retail poses substantial challenges in the areas of management decision and control. For
example, many companies rely on extensive and sophisticated web infrastructure to mar-
ket and fulfill orders; any breakdown in these systems can have substantial ramifications
for smooth operations and overall reputation. The implications for these firms’ control
process are obvious. Further, many companies, even large ones, outsource these functions
to one of the large online retailers such as Amazon.com, further exacerbating the possible
misconnection between management and customers.
Review the opening World of International Management discussion of online
retailers and think about the principal considerations in international management deci-
sion making and control processes you have read about in this chapter. Then, answer the
following questions: (1) How might differences in national and corporate culture impede
timely decisions and control processes among existing and potential competitors in online
retail? (2) To what extent should total quality management and quality control be con-
sidered when establishing an online retail presence or contracting with another firm to
provide it? (3) What specific decision and control systems or tools would be helpful in
overseeing an online presence (either internal or outsourced)?
410 Part 3 International Strategic Management
1. Decision making involves choosing from among
alternatives. Some countries tend to use more cen-
tralized decision making than do others, so that
more decisions are made at the top of the MNC
than are delegated to the subsidiaries and operating
levels.
2. A number of factors help influence whether deci-
sion making will be centralized or decentralized,
including company size, amount of capital invest-
ment, relative importance of the overseas unit to the
MNC, volume-to-unit-cost relationship, level of
product diversification, distance between the home
office and the subsidiary, and the competence of
managers in the host country.
3. There are a number of decision-making challenges
with which MNCs currently are confronted. These
include total quality management (TQM) decisions
and strategies for attacking the competition, among
others.
4. Controlling involves evaluating results in relation to
plans or objectives and then taking action to correct
deviations. MNCs control their overseas operations
in a number of ways. Most combine direct and
indirect controls. Some prefer heavily quantifiable
methods, and others opt for more qualitative
approaches. Some prefer decentralized approaches;
others opt for greater centralization.
5. Three of the most common performance measures
used to control subsidiaries are in the financial, quality,
and personnel areas. Financial performance typically is
measured by profit and return on investment. Quality
performance often is controlled through quality circles.
Personnel performance typically is judged through
performance evaluation techniques.
SUMMARY OF KEY POINTS
KEY TERMS
assessment center, 409
codetermination, 394
controlling, 397
decision making, 390
direct controls, 400
empowerment, 395
honne, 394
indirect controls, 401
kaizen, 395
profit, 403
quality control circle (QCC), 404
return on investment (ROI), 403
ringisei, 394
tatemae, 394
total quality management (TQM), 394
REVIEW AND DISCUSSION QUESTIONS
1. A British computer firm is acquiring a smaller
competitor located in Frankfurt. What are two likely
differences in the way these two firms carry out the
decision-making process? How could these differ-
ences create a problem for the acquiring firm? Give
an example in each case.
2. Which cultures would be more likely to focus on
external controls? Which cultures would consider
direct controls to be more important than indirect
controls?
3. How would you explain a company’s decision to
employ centralized decision-making processes and
decentralized control processes, considering the two
are so interconnected? Provide an industry example
of where this may occur.
4. How are U.S. multinationals trying to introduce
total quality management into their operations?
Give two examples. Would a U.S. MNC doing busi-
ness in Germany find it easier to introduce TQM
concepts into German operations, or would there be
more receptivity to them back in the United States?
Why? What if the U.S. multinational were introduc-
ing these ideas into a Japanese subsidiary?
5. In what ways could an accelerated decision-making
process harm a company? Using Figure 11–1,
which stage(s) do you think would be most in dan-
ger of being overlooked?
6. A company practices personnel performance evalua-
tion through reviewing financial decisions manage-
ment has made, specifically focusing on ROI. How
is this approach beneficial to the company? Which
aspects could the company be neglecting? Which
cultures are most likely to employ this method?
Which cultures would avoid this tactic?
Chapter 11 Management Decision and Control 411
In Table 11–5, the most reputable global companies are
listed. Each company uses decision making and control-
ling to help ensure its success in the world market. Visit
these two companies’ corporate sites: Procter & Gamble
and Panasonic. Carefully examine what these firms are
doing. For example, what markets are they targeting?
What products and services are they offering? What
new markets are they entering? Then, after you are as
familiar with their operations as possible, answer these
two questions: (1) What types of factors may influence
future management decision making in these two com-
panies? (2) What types of control criteria would you
expect these companies to use in evaluating their opera-
tions and determining how well they are doing?
INTERNET EXERCISE: LOOKING AT THE BEST
1. Forrester Research Inc., “U.S. Cross-Channel
Retail Forecast, 2015 to 2020,” January 26, 2016.
2. Cyrus Lee, “Alibaba Achieves 3 Trillion Yuan
Transaction Volume Milestone,” ZDNet, March 22,
2016, www.zdnet.com/article/alibaba-achieves-
3-trillion-yuan-transaction-volume-milestone/.
3. “Alibaba: The world’s greatest bazaar,” The Econ
omist, March 23, 2013, http://www.economist.com/
news/briefing/21573980-alibaba-trailblazing-
chinese-internet-giant-will-soon-go-public-
worlds-greatest-bazaar
4. Jon Berkeley, “The Alibaba Phenomenon,” The
Economist, March 23, 2013, www.economist.com/
news/leaders/21573981-chinas-e-commerce-giant-
could-generate-enormous-wealthprovided-countrys-
rulers-leave-it.
5. Lianna B. Baker, Jessica Toonkel, and Ryan
Vlastelica, “Alibaba Surges 38 Percent on Massive
Demand in Market Debut,” Reuters, September
19, 2014, www.reuters.com/article/us-alibaba-ipo-
idUSKBN0HD2CO20140919.
6. Danielle Kucera, “Amazon Rises after Sales,
North American Margins Improve,” Bloomberg,
January 30, 2013, www.bloomberg.com/news/
2013-01-29/amazon-revenue-rises-22-percent-amid-
record-holiday-spending.html.
7. “Amazon Fire Tablets,” Amazon.com, https://
www.amazon.com/s/ref=nb_sb_noss_1?url=search-
alias%3Daps&field-keywords=amazon+fire+tablets
(list of current Fire tablets on Amazon, sorted by
price, as of April 2, 2016).
8. Jillian D’Onfro, “Here Are All of Amazon’s
Warehouses in the US,” Business Insider,
March 24, 2015, www.businessinsider.com/
how-many-fulfillment-centers-does-amazon-
have-in-the-us-2015-3.
9. Don Davis, “Amazon Will Top 100 Warehouses
by the Holidays, ChannelAdvisor Says,” Internet
Retailer, April 29, 2013, www.internetretailer.
com/2013/04/29/amazon-tops-100-warehouses.
10. Steven Millward, “Alibaba’s Jack Ma Talks
E-Commerce, Ecosystems, Slams the Broken
‘Amazon Model,’” Tech in Asia, March 21, 2013,
www.techinasia.com/alibaba-jack-ma-talks-b2c-
ecommerce/.
11. “Global B2C Ecommerce Sales to Hit $1.5 Tril-
lion This Year Driven by Growth in Emerging
Markets,” eMarketer, February 3, 2014, https://
www.emarketer.com/Article/Global-B2C-Ecom-
merce-Sales-Hit-15-Trillion-This-Year-Driven-by-
Growth-Emerging-Markets/1010575.
12. Clark Fredricksen. “Ecommerce Sales Topped $1
Trillion for First Time in 2012.” eMarketer.
February 5, 2013. http://www.emarketer.com/
Article/Ecommerce-Sales-Topped-1-Trillion-First-
Time-2012/1009649.
13. Ibid.
14. Jon E. Hilsenrath, “Ford Designs Ikon to Suit Indian
Tastes,” Globe and Mail, August 8, 2000, p. B10.
15. Christopher Bjork, “Santander Pursues Local List-
ings,” The Wall Street Journal, August 2, 2010,
www.wsj.com/articles/SB100014240527487039993
04575399182548231168.
16. Julie Jargon, “Kraft to Slash 2,600 More Jobs,
Close Seven Plants,” The Wall Street Journal,
November 4, 2015, www.wsj.com/articles/kraft-to-
slash-2-600-more-jobs-close-seven-
plants-1446668634.
17. Johannes Gerds, Freddy Strottmann, and
Pakshalika Jayaprakash, “Post Merger Integration:
Hard Data, Hard Truths,” Deloitte Review, issue 6
(2010), https://dupress.deloitte.com/dup-us-en/
deloitte-review/issue-6/post-merger-integration-
hard-data-hard-truths.html.
18. Jette Schramm-Nielsen, “Cultural Dimensions
of Decision Making: Denmark and France
ENDNOTES
412 Part 3 International Strategic Management
2015, www.comscore.com/Insights/Market-Rank-
ings/comScore-Reports-June-2015-US-Smartphone-
Subscriber-Market-Share.
33. Bill Spindle, “Cowboys and Samurai: The Japanizing
of Universal,” The Wall Street Journal, March 22,
2001, p. B6.
34. “Universal Studios Japan attracts record number of
visitors in fiscal 2015,” Japan Times, March 7,
2016, www.japantimes.co.jp/news/2016/03/07/busi-
ness/universal-studios-japan-attracts-record-num-
ber-visitors-fiscal-2015/.
35. Katia Hetter, “The World’s Most Popular Amuse-
ment Park Is . . .,” CNN, June 3, 2015, www.cnn.
com/2015/06/03/travel/feat-most-popular-theme-
parks-world-2014/.
36. Barry Neild, “Coming Soon: Best Theme Parks of
the Future,” CNN, October 24, 2014, www.cnn.
com/2014/10/19/travel/future-theme-parks/.
37. Kelly Olsen, “Universal Studios Plans Theme Park
in South Korea,” USAToday, May 23, 2007, online
edition, http://usatoday30.usatoday.com/travel/
news/2007-05-23-south-korea-theme-park_N.htm.
38. Jack Farchy, “Conoco Quits Russia after 25
Years,” Financial Times, December 22, 2015,
www.ft.com/intl/cms/s/0/01a4e6d2-a811-11e5-
955c-1e1d6de94879.html#axzz467r3KpE5.
39. Jim Middlemiss, “IT Challenge: Settlement,” Wall
Street Week, April 2004, p. 46.
40. Fons Trompenaars and Charles Hampden-Turner,
Riding the Waves of Culture: Understanding
Diversity in Global Business, 2nd ed. (New York:
McGraw-Hill, 1998), pp. 157–159.
41. John D. Daniels and Jeffrey Arpan, “Comparative
Home Country Influences on Management Prac-
tices Abroad,” Academy of Management Journal,
September 1972, p. 310.
42. Jacques H. Horovitz, “Management Control in
France, Great Britain and Germany,” Columbia
Journal of World Business, Summer 1978,
pp. 17–18.
43. Ibid., p. 18.
44. William G. Egelhoff, “Patterns of Control in U.S.,
U.K., and European Multinational Corporations,”
Journal of International Business Studies, Fall
1984, p. 81.
45. Ibid., pp. 81–82
46. M. Kreder and M. Zeller, “Control in German and
U.S. Companies,” Management International
Review 28, no. 3 (1988), pp. 64–65.
47. A. V. Phatak, International Dimensions of Man
agement, 2nd ed. (Boston: PWS-Kent, 1989),
p. 154.
Compared,” Journal of Managerial Psychology 16,
no. 6 (2001), pp. 404–423.
19. Ibid., pp. 410–411.
20. Raghu Nath, Comparative Management: A
Regional View (Cambridge, MA: Ballinger, 1988),
pp. 74–75.
21. Konrad Spang and Sinan Ozcan, “Cultural Differ-
ences in Decision Making in Project Teams,”
International Journal of Managing Projects in
Business 2, no. 1 (2009), pp. 70–93.
22. Sang M. Lee, Fred Luthans, and Richard M.
Hodgetts, “Total Quality Management: Implica-
tions for Central and Eastern Europe,” Organiza
tional Dynamics, Spring 1992, p. 45.
23. Daewoo Park and Herna A. Krishnan, “Under-
standing Supplier Selection Practices: Differences
between U.S. and Korean Executives,” Thunder
bird International Business Review, March–April
2001, pp. 243–255.
24. Sooraj Shah, “Lenovo Is Using Machine Learning
to Analyse Unstructured Data from YouTube and
Instagram,” Computing, April 21, 2016, www.
computing.co.uk/ctg/news/2455510/lenovo-is-
using-machine-learning-to-analyse-unstruc-
tured-data-from-youtube-and-instagram.
25. Louis Flory, “How 5 Companies Used Kaizen
Effectively,” Effex Management Solutions, October
7, 2014, http://blog.effexms.com/how-5-companies-
used-kaizen-effectively
26. Ibid.
27. “Ford’s Nigerian Plant Turns out First Vehicle,”
Automotive News, November 17, 2015, www.
autonews.com/article/20151117/OEM01/
151119869/fords-nigerian-plant-turns-out-first-
vehicle.
28. Ma Jie and Daniel Ten Kate, “Ford Opens
Thailand Plant to Expand Southeast Asian Export
Hub,” Bloomberg, May 2, 2012, www.bloomberg.
com/news/articles/2012-05-03/ford-opens-thailand-
plant-to-expand-southeast-asian-export-hub.
29. Lawrence Ulrich, “German Luxury Car Brands
Dominate and Look to Extend Their Lead,” New
York Times, July 3, 2015, www.nytimes.com/2015/
07/03/business/german-luxury-car-brands-domi-
nate-and-look-to-extend-their-lead.html?_r=0.
30. Sam Gustin, “The Fatal Mistake That Doomed
Blackberry,” Time, September 24, 2013, http://
business.time.com/2013/09/24/the-fatal-mistake-
that-doomed-blackberry/.
31. Ibid.
32. “comScore Reports June 2015 U.S. Smartphone
Subscriber Market Share,” comScore, August 7,
Chapter 11 Management Decision and Control 413
57. Jeremiah Sullivan, Terukiho Suzuki, and
Yasumasa Kondo, “Managerial Theories and the
Performance Control Process in Japanese and
American Work Groups,” National Academy of
Management Proceedings, San Diego, CA, 1985,
pp. 98–102.
58. Ibid.
59. CIA, “Japan,” The World Factbook (2016),
https://www.cia.gov/library/publications/the-
world-factbook/geos/ja.html.
60. Ibid.
61. World Bank, “Japan,” World Development Indica
tors (2016), http://data.worldbank.org/country/japan.
62. Max Nisen, “The Biggest Problem with Japanese
Corporate Culture Lives On,” Business Insider,
September 25, 2012, www.businessinsider.com/
the-biggest-problem-with-japanese-corporate-cul-
ture-lives-on-2012-9.
63. Gus Lubin, “This Olympus Fraud Is Bigger and
More Shocking Than You Realize,” Business
Insider, November 8, 2011, www.businessinsider.
com/tsuyoshi-kikukawa-olympus-2011-11.
64. Jonathan Soble and Paul Mozur, “In Industry
Shift, Sharp Looks Outside Japan for a Buyer,”
New York Times, February 4, 2016, www.nytimes.
com/2016/02/05/business/international/sharp-in-
search-for-buyer-says-its-leaning-toward-foxconn.
html?_r=0.
48. William Boston and Paul Hofheinz, “Once Again,
EU to Take Back Seat to VW,” The Wall Street
Journal, February 27, 2002, p. A16.
49. Andreas Cremer, Jan Schwartz, and Edward
Taylor, “In Push for Top Spot, Volkswagen Hits
Labor, Robot Problems,” Reuters, September 24,
2014, www.reuters.com/article/us-volkswagen-
mqb-insight-idUSKCN0HJ0WL20140924.
50. David A. Garvin, “Japanese Quality Management,”
Columbia Journal of World Business, Fall 1984,
pp. 3–12.
51. Ibid., p. 6.
52. Jeffrey K. Liker and Yen-Chun Wu, “Japanese
Automakers, U.S. Suppliers and Supply-Chain
Superiority,” Sloan Management Review, Fall
2000, pp. 81–93.
53. Cited in John Holusha, “Improving Quality, the
Japanese Way,” New York Times, July 20, 1988,
p. 25.
54. See also Richard Dauch, “Recipe for Success,”
Manufacturing Engineering 131, no. 2 (August
2003), p. 69.
55. “Key to Success: People, People, People,” Fortune,
October 27, 1997, p. 232.
56. Golpira Eshgi, “Nationality Bias and Performance
Evaluations in Multinational Corporations,”
National Academy of Management Proceedings,
San Diego, CA, 1985, p. 95.
In the International
Spotlight
414
sector solutions to economic underperformance. For
example, rather than allowing foreign investors to acquire
failing or underperforming Japanese businesses, the gov-
ernment instead seeks to support those domestic businesses
in the form of cash or loans.63
You Be the International Management
Consultant
One of Japan’s biggest companies is looking for a foreign
buyer. Sharp, Incorporated is a manufacturer of consumer
electronics, but it, along with Toshiba, Hitachi, and Sony,
has experienced significant difficulties in recent years. In
fact, sales have been so bad for these Japanese companies
that the Japanese government has had to provide financial
support. Sharp is suffering from its own high manufactur-
ing costs and lower-cost competition from China. Follow-
ing the government’s unsuccessful search for a Japanese
buyer, Sharp is now looking outside of the country for
help. Although Sharp is a major player in consumer elec-
tronics, foreign investors have found it difficult to com-
plete purchases of Japanese companies. Challenges
include cultural concerns, as well as more specific issues
regarding reluctant management and a protective govern-
ment. Sharp has received some offers from outside inves-
tors, but it has also received offers from Japanese
government–backed companies.64
Questions
1. If you were a foreign investor, would you want to
invest in a consumer electronics company in Japan?
2. Does the fact that the company has had past prob-
lems requiring government intervention affect your
initial decision?
3. How does it impact your decision that you would
be competing with a government-backed company
during the bid process?
Comprised of more than 3,000 islands, Japan is located
off the eastern cost of mainland Asia. Japan’s total land
mass is slightly less than that of California. The country
is largely mountainous and contains very few natural
resources. In fact, Japan is the largest importer of coal and
liquefied natural gas in the world.59
Japan is among the densest large countries in the
world. More than 90 percent of the country’s population,
estimated at nearly 130 million in total, lives in urban
areas. Approximately 38 million people live in Tokyo
alone. Japan’s population is much older than many other
countries with close to 80 percent of its people at 25 years
old or older and a median age of 46.5 years. The popula-
tion is expected to continue to slowly decline in the fore-
seeable future.60
Japan’s 2014 GDP was estimated at US$4.601 trillion,
making it the third largest economy in the world. Previ-
ously second to only the United States, the country’s flat
and sometimes declining economic growth rate has
allowed the fast-growing Chinese economy to overtake it
in total size. Japan’s economy has been struggling to gain
traction since the 1980s. This issue might be tied to its
public debt, which, in 2014, equaled more than 200 percent
of its annual GDP.61
Japan has a parliamentary government with a constitu-
tional monarchy. Its legal system is largely based on the
Western model with some elements of traditional Japa-
nese culture. The country’s corporate culture is often
criticized for the close business-government relationship
that many large companies have, leading many outsiders
to call the relationship “Japan, Inc.”62 This culture is also
very resistant to change and strives for stability, often
leading to substantial losses. For example, many experts
cite the close business-government relationship as a cause
of the Olympus scandal in 2011, in which the company,
with the help of governmental auditors, hid more than
US$1 billion in losses for two decades. The Japanese
government also has been criticized for blocking private
Japan
415
Three years later, in 2006, Google.com was again
blocked while Google.cn, Google’s Chinese subsidiary,
remained in operation. The following year, in 2007, CEO
Eric Schmidt gave an upbeat assessment of Google’s out-
look in China amid challenges of censorship issues and
competition from Baidu.com.
More Than a BackRub: Google’s
Rise to Power
But how did Google come to such international promi-
nence? In 1996, Stanford graduate students Larry Page
and Sergey Brin began collaborating on a search engine
called BackRub. This search engine got its name because
Page and Brin used backlinks to measure the importance
of a site.6 By using the innovation called PageRank, a new
system of ranking a website’s relevance using “an objec-
tive measure of its citation importance . . . according to
an idealized model of user behavior,”7 Page and Brin dra-
matically increased search relevance compared to other
search engines like Yahoo.
A little more than a year later, BackRub’s massive
bandwidth usage, which had downloaded over 30 million
indexable HTML pages, made it inoperable on the Stan-
ford server.8 From then on, Larry and Sergey realized the
potential of BackRub, changed its name to Google, and
moved their office to a colleague’s garage.9
Google’s first investor became interested in 1996 when
Sun Microsystem founder Andy Bechtolsheim provided a
$100,000 check, allowing Google to incorporate and
become officially Google Inc. In 1999, more investors
grew attracted to Page and Brin’s idea and, with an
increased budget of around $1 million, Google Inc. was
able to relocate to a real office in Palo Alto, where a staff
of only eight answered about 500,000 queries per day.10
In mid-1999 Google received an additional $25 million
in equity funding for its search engine from two venture
capital firms: Sequoia Capital and Kleiner Perkins
Caufield & Buyers. The confidence to invest such a large
amount of capital came from the previous experience
these VCs had in funding high-tech companies, such as
Amazon.com and Cisco Systems. Google’s engineering
genius and a monthly growth rate of 50 percent fueled
only by word of mouth easily proved its value to these
seasoned investors.11
By the year 2000, Google became the world’s largest
search engine, supporting 15 languages.12 Google’s service
was nothing new considering the existing search engines
Google in China
In early 2008 Guo Quan announced plans to sue Google
in the United States for blocking his entire name from
search results in China. But why was his name blocked
from search results? Guo Quan had published an open
letter in early January to his government leaders Hu Jintao
and Wu Bangguo, calling “for government reform [with]
multi-party democratic elections” that served the interests
of the common people.1 In response to his letter, the gov-
ernment labeled Guo as a dissident and a political danger.
He was ultimately arrested on charges of “subversion of
state power.”2
Guo Quan’s name might have forever been lost in the
shadow of the then-upcoming 2008 Beijing Summer
Olympics, but formal and informal networks of informa-
tion helped publicize his case; his harsh sentence, which
will have him imprisoned until at least 2019, and the fact
that he named Google in his suit have made him infa-
mous. The story of Guo Quan reflects the many chal-
lenges faced by Google over the course of the past decade
as it has attempted to expand globally. During this period,
Google’s relationship with China has undergone a series
of advances and setbacks, each reflecting in some way
China’s response to the challenges of the Internet and
social networking as well as Google’s difficulties of trans-
lating a uniquely North American business model to
countries and environments with different regulatory
regimes, legal environments, and fundamental values.
Rough Beginnings
At the break of the new millennium, Google began to
offer its search services in a Chinese-language format
with the hope of furthering its mission “to organize the
world’s information and make it universally accessible
and useful.”3 Disappointingly, the website was consis-
tently unavailable “about 10 percent of the time . . .
[and] slow and unreliable” due to “extensive filtering
performed by China’s licensed Internet service provid-
ers.”4 This sense of distrust persisted for another two
years until the autumn of 2002, when Google first
became completely unavailable in China because Google
claimed to have “stood by its principles and not
subject[ed] itself to Chinese laws and regulations.”5 The
dysfunctional use of Google search services for main-
landers continued and in December 2003, Google.com
was again blocked in China.
Brief Integrative Case 3.1
Google in China: Protecting Property and Rights
416 Part 3 International Strategic Management
about the close margin in market share and considered the
possibility of perhaps buying out Baidu in competition.
But instead, in mid-2006, Google made a fatal mistake,
selling its 2.6 percent stake of more than $60 million in
Baidu shares and introducing Google.cn to China.18
Nevertheless, Google.cn was launched with the prom-
ise that it would agree to block certain websites in return
for the opportunity to run local Chinese services.19 Google
promised to notify Chinese users when their search results
would be censored and also promised not to maintain any
services that involved personal or confidential data, like
Gmail or Blogger, on the mainland. Google.cn was a
response to improve the poor service Google believed it
was providing in China. As senior policy counsel Andrew
McLaughlin put it, “Google users in China today struggle
with a service that, to be blunt, isn’t very good . . . the
website is slow, and sometimes produces results that when
clicked on, stall out the user’s browser. Our Google News
service is never available; Google Images is accessible
only half the time . . . the level of service we’ve been able
to provide in China is not something we’re proud of.”20
Fundamentally, Google’s strategic move to create a
local presence with Google.cn was driven by its desire
to follow its mission of creating the most organized and
efficient search engine. However, while Google thought
it had the flexibility to set up a better search engine in
China, Baidu CEO Robin Li was already ahead of the
curve. While PageRank was being developed by Page
and Brin, Robin Li was simultaneously working on a
similar strategy for site-ranking called RankDex. As a
result, this similar search concept was brought to Baidu.
In the end, Google had erroneously presumed that it
could overtake Baidu by maximizing its core competen-
cies within China.21
Not only did Baidu have a strong competing search
engine against Google, but it also provided several innova-
tive search features customized for more local tastes. It
introduced community-oriented services, including
information-exchanging bulletin boards and instant messag-
ing. These extra services appealed strongly to Chinese
Internet users and put Baidu ahead of a foreign Google that
did not seem to understand the Chinese market as well.
In addition, Baidu also took an extra step that Google
missed by setting up “a national network of advertising
resellers in 200 Chinese cities to educate businesses about
the power of online advertising.”22 By specifically target-
ing the business market segment, Baidu aimed to secure
the Shanghai business sector. To secure the more general
student population in Beijing, Baidu also offered a search
engine that provided easy access to pirated film and music
downloads.23
While Baidu strategically offered services that targeted
specific market segments, Google was at a loss because
of its slow comprehension of the Chinese market. Among
one of the failures Google made was its attempt to rebrand
at the time, like Yahoo and AOL, but it was indisputable
that Google offered the best search services. The innova-
tive PageRank algorithm was combined with a minimalist
homepage that focused on its search tool and reminded
the user of its chief focus while helping to reinforce con-
fidence in its best feature. Having secured a solid foothold
in America, Google continued to seek more ways to
expand. Visionaries from the very beginning, Page and
Brin created Google to have “simplicity in our user inter-
face and the scalability in our back-end systems [that]
enables us to expand very quickly.”13
By anticipating the need to be flexible in order to
expand, Google was set to go global. And as Larry Page
remarked: “Google’s search engine has always had strong
global appeal. We attribute this success to the site’s sim-
plicity of design, ease of use, and highly relevant results.
By localizing our search services to new international
communities, Google will open up a host of new revenue,
sales, and partnership channels.”14
Unfortunately, Asian countries in general had always
been more difficult to penetrate because of competition
from well-established local search engines. As recently as
2015, local search engine Naver had a market share of
49.8 percent in South Korea, while Google had 36.9 per-
cent.15 Furthermore, China posed the greatest roadblock
with censorship and competition from Baidu. However,
with a population of one billion people and Internet usage
on a steady climb, Google was determined to establish a
stronger foothold in China.
China’s Internet Users and Population
Users Population
(millions) (millions) Percent
2004 96 1,310 7.3
2005 112 1,318 8.5
2006 140 1,326 10.5
2007 213 1,334 16.0
2008 303 1,343 22.6
2009 391 1,351 28.9
2010 466 1,360 34.3
2011 524 1,368 38.3
2012 564 1,377 41.0
2013 618 1,386 44.6
2014 642 1,394 46.0
Source: “China Internet Users,” Internet Live Stats, www.internetlivestats.com/internet-
users/china/.
Google vs. Baidu
China’s policies have directly influenced the competitive
landscape for search firms in China. In the space of Inter-
net search, Baidu is usually referred to as China’s Google.
But in reality, Baidu holds a strong market share lead over
Google.16 Prior to the launch of Google.cn in 2006 in
China, Google held 33.3 percent of the search engine mar-
ket share between Shanghai, Beijing, and Guangzhou
while Baidu held 47.9 percent.17 Google was optimistic
Brief Integrative Case 3.1 Google in China: Protecting Property and Rights 417
Secretary of State, called upon Beijing to carry out a thor-
ough and transparent investigation regarding the cyber hacks
of human rights activists’ e-mail accounts. Ultimately, she
threw her weight behind Google’s threat to pull out of China
unless Beijing permitted an “unfiltered search engine.”32
Following the conflict in January, Google formally
announced in March that all Google.cn users would be
directed to the uncensored Google.com.hk website instead.
According to Google, the decision reflected a legal move
that still allowed mainland users access to their search
engine.33 The move to stop offering a local search engine
and battling with China over censorship reflected a shift
in Google’s attitude, giving up competing with Baidu for
Internet usage. In April, Google’s share of Chinese Inter-
net searches dropped from 35.6 percent to 30.9 percent
and Baidu’s rose from 58.4 percent to 64 percent.34
Despite no longer providing Google.cn to China, Google
still cannot escape the censorship battles and attacks on
its server. In 2014, China restricted access to nearly all of
Google’s auxiliary services.35 Almost instantly, Google’s
market share in China dropped to less than 2 percent.
But criticisms of Google have not always been from
China. On March 22, 2011, New York Judge Denny Chin
rejected a settlement between Google and both the Authors
Guild and the Association of American Publishers (AAP).
The original settlement had included an annual payment of
$125 million in royalties to the copyright owners in order for
Google to continue its project of scanning and selling online
access to 150 million books.36 But copyright concerns per-
sisted because no one could establish ownership of the dig-
itized and scanned pages. It was concluded that Google’s
current pact would simply give the company an unfair advan-
tage over its competitors while rewarding it for engaging in
wholesale copying of copyrighted works without permission.
In October 2012, the AAP announced a new, yet contro-
versial, settlement deal with Google. For each book already
scanned by Google, publishers could choose to contact
Google for removal. Moving forward, every digitized book
catalog would first require an express opt-in from publish-
ers. None of the financial terms of the deal were released.
The Authors Guild, on the other hand, still remains in litiga-
tion, leading a class-action lawsuit criticizing Google for its
opt-out approach.37 In 2014, legal appeals were filed
challenging the validity of the financial settlement.
Google’s Future: Innovation & Alphabet Inc.
The challenges of censorship in China have forced Google
to look beyond the appeal of China’s gargantuan search
market. Instead, Google has shifted its focus to the oper-
ating systems of smartphones. At the end of 2015,
Google’s Android operating system enjoyed a market
share of nearly 75 percent. Android is closely held by
Google; so closely, in fact, that Google had been unwill-
ing to share the most recent versions of code with Chinese
Google.cn to Guge, which was Chinese for Harvest Song.
Six months after the launch of Guge, “72.6 percent
(62.8 percent of the users whose first choice was Google)
of the interviewed users still weren’t able to [recall] the
Chinese name of Google.”24 The lack of brand loyalty was
reflected in the insignificant number of Google users who
were willing to convert from using the Chinese version of
Google.com to Guge. Most users still preferred to use the
original Google.com that was only censored by the
People’s Republic of China.25
Google seemed to be fighting a losing battle, while
Baidu continued to receive positive press coverage during
its 2005 IPO on NASDAQ. Consequently, in just one year,
Baidu gained 14 percent of the search engine market share
while Google lost 8 percent.26
In the following year, 2007, Google fought hard to hold
onto its piece of the China market, increasing its total mar-
ket share from 19.2 percent to 22.8 percent while Baidu
fell from 63.7 percent to 58.1 percent. Google increased its
efforts by “hiring Chinese employees and . . . partnering
with Chinese technology firms . . . [and establishing] two
research centers, one in Beijing and one in Shanghai.”27
The small victory was short-lived as Google was
soon met with conflict from both China’s and the U.S.’s
governments.
The Challenge of Censorship:
Google under Fire
Shortly after Google.cn received its license from the
Chinese government in 2007, Google proceeded to sign a
set of guidelines, designed to reduce the risk that their
actions would lead to human rights abuses in China and
other countries.28 By promising to comply with censor-
ship when the government filed a formal request, this
effectively removed Google’s presence from the majority
of human rights activities.
From this point forward, Google was fiercely criticized
for running advertisements from nonlicensed medical
websites in 2008, launching free music services, scanning
books without proper copyright laws, and making porno-
graphic content easily available multiple times in 2009.29
What has unfolded in the most recent years has been the
climax of this drama between country and company.
On January 13, 2010, in response to an attack on the
Gmail accounts of human rights activists by the Chinese
government, Google released an initial statement saying
that it was ready to end censorship of its search ser-
vice.30 The announcement caused a stir, with speculations
that Google would pull out of China completely.
Soon afterwards, however, CEO Eric Schmidt released a
counterstatement stating that Google was planning to stay
in China, even if it was forced to close down its local search
services and just carry through with its other range of
services.31 In the same month, Hillary Clinton, the U.S.
418 Part 3 International Strategic Management
a separate case related to the Safari browser, the Federal
Trade Commission penalized Google $22.5 million, “the
largest civil penalty ever levied.”43 Future lawsuits are
likely to follow in the U.K. following a 2015 British Court
of Appeals ruling that citizens have the right to sue Google
for any misuse of private information.44
Google’s extensive reach in data is only growing in size.
At around the same time that Germany was bringing its
charges against Google, Google cemented its Global Human
Trafficking Hotline Network, committing $3 million to
bring together three NGOs: Polaris Project, Liberty Asia,
and La Strada International. But one question still remains,
even in the face of Google’s good intentions: Can this
company be trusted with sensitive information now regard-
ing potentially trafficked victims? Have we gone too far
by giving Google so much credit and by painting Google
with a philanthropic stroke? In response to these questions,
head of philanthropy at Palantir Technologies Jason Payne
points out, “Just because someone’s human rights have
been eviscerated, doesn’t mean that their civil liberties and
electronic rights can be eviscerated.”45 Regardless of
Google’s legal efforts and privacy challenges, it is still
pressing on with several innovative projects.
The most imaginative of Google’s upcoming projects
is a wearable beta technology device called Google Glass.
The thrust of this new device is in the power of voice
command for queries such as the weather, a built-in GPS,
and the ability to take point-of-view photos and videos
from an intimate perspective. All of this self-generated
media is then directly uploaded to a user’s Google+
account in private mode by default.46
Google is also considering several other projects includ-
ing Android@Home, Google’s attempt at home automa-
tion, connecting light bulbs, coffee pots, and alarm clocks.47
Another project is Google Fiber, which focuses on deliver-
ing Internet speeds “100 times faster than the average Inter-
net connection in the United States.”48 Driverless cars are
also another ambitious goal for the company, which would
go nicely with its current database of road maps. Google’s
strategy is clear: With billions of dollars spent on research
and development, Google knows that it has a responsibility
to push out products that no other company would dare to
dream about, all the while pursuing high-tech inventions
that integrate with our daily lives.
To better structure the company for future innovation
and diversification, Google reorganized itself under a
newly formed umbrella company, called Alphabet Inc., in
2015. Alphabet Inc. consists of multiple subsidiaries, each
with a distinct focus. Under this new corporate structure,
the Google Inc. brand continues to operate Google.com,
Google Maps, and YouTube, but the tasks associated with
other company goals are spread to newly created Alphabet
Inc. subsidiaries. Calico, incorporated in 2013, is centered
around biotech research and development, with a specific
focus on disease and aging. Google Capital and GV (for-
merly Google Ventures) function as the venture capital
smartphone developers. A recent example of this is when
Google forced the delayed release of a smartphone manu-
factured by Acer Inc., which ran an operating system
called Aliyun. This operating system was allegedly cre-
ated by taking Android’s software and making unapproved
changes that were headed by the Chinese ecommerce
organization Alibaba.38
Relationships are extremely hostile between Google
and China, and the options for China are quickly disap-
pearing. The only course of action left for China is to
build its own Chinese mobile-OS for Chinese mobile
devices.39 Mobile continues to dominate a large portion
of Google’s strategy. When Google purchased Motorola
Mobility in May 2012, it had hoped that the accompany-
ing treasure trove of over 17,000 patents would yield
innumerable benefits. But this has not been the case. After
the $12.4 billion purchase, Google still has yet to win a
decisive legal case with a big payoff.40 As a result, Google
sold Motorola Mobility in January 2014, though it retained
most of the patents as part of the deal.
Regardless of the challenges, Google still has accumu-
lated a powerful tool by acquiring Motorola Mobility’s
patents. Google now possesses among the best IPR for
designing devices, and Google has the software to supple-
ment those devices and integrate them vertically into its
online systems.41 Despite selling most of the hardware
business to Lenovo in 2014, this purchase was ultimately
consistent with Google’s hope to reposition itself as a
bigger player in the space of mobile technology.
The rate at which technology is becoming even more
integrated into our lives is astounding, and Google is on the
forefront of that mission. With its app for Android users,
called “Google Keep,” it hopes to target early software
adopters looking for another way to manage all of their
sticky notes, photos, and lists. But yet again, a central com-
ponent to this new advancement is trust. While some users
are easily giving up more private ground in the routine of
their daily lives, others are questioning whether or not the
free services are worth it, especially because similar projects
like Google Reader or iGoogle have been terminated.42
For Google, these privacy issues have taken off interna-
tionally. In April 2013, Germany prosecuted Google for
“scooping up sensitive personal information in the Street
View mapping project.” The total fine added up to $189,225,
which is a drop in the bucket compared to Google’s profits
of $10.7 billion in 2012. Such fees are usually already fac-
tored into the business expenses of large data-mining cor-
porations like Google. But these fines are not uncommon.
Rather, it is the opposite, and often considered regular
behavior. Google has accumulated several violations over
the years. In 2014, the French regulatory body CNIL forced
Google to pay a large fine. Additionally, the CNIL ruled
that if an individual asks for search results based on his or
her name to be removed from Google’s search engine,
Google must comply. In 2012, Google paid $7 million to
settle with 38 states that had filed against the company. In
Brief Integrative Case 3.1 Google in China: Protecting Property and Rights 419
and human ingenuity. At the same time, Google will con-
tinue to face political threats of censorship and information
restriction and challenges to its privacy policies and prac-
tices. But the reverberations from its new technology will
continue to generate commotion in the markets and chal-
lenges to governments and their information policies.
Questions for Review
1. How would you characterize China’s market for
online search and related services?
2. Why was Google initially attracted to China? What
changed its perspective?
3. Should companies like Google conform to the
Chinese government’s expectation regarding pri-
vacy, censorship, and distribution of information?
4. What advantages does Baidu have over Google
in the Chinese marketplace? How might Google
overcome those advantages?
5. What recommendations would you make for Google
in China going forward?
Source: This case was prepared by Karl Li and Pin-Pin Liao of Villanova University
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 illus-
trate either effective or ineffective managerial capability or administrative responsibility.
arms of Alphabet Inc., targeting both tech startups and
growth-stage companies. Perhaps the most interesting
subsidiary is Google X (known simply as “X”), which
functions as the heart of innovation at Alphabet Inc. As
a secret research and development lab, Google X is
responsible for developing the driverless car and Google
Glass. Another exciting project, called “Project Loon,”
involves the deployment of atmospheric balloons to
increase Internet access worldwide.
As Google expands, and its presence permeates devel-
oping markets, its opportunities are abundant. This is
especially true because most of the newly connected Inter-
net users are living in areas of conflict and could poten-
tially experience drastic changes to their social structures
as a result of interacting with Google. A company such
as Google could extend its influence beyond that of a
nation-state by empowering desperate citizens with the
ideas or information they need to incite a revolution. New
innovative Google projects, like “Project Loon,” will con-
nect the developing world with access to information and
communication in ways that were previously impossible.
Ultimately, Google’s international strategy will continue
to align itself with its information strategy, continually
leveraging the opportunities of both computational science
1. “Wife & Son of Well-Known Political Prisoner &
Christian, Guo Quan Arrive in US,” ChinaAid.org,
January 24, 2012, www.chinaaid.org/2012/01/wife-
son-of-well-known-political.html.
2. Ibid.
3. “About Google,” Google.com, May 7, 2013. www.
google.com/about/.
4. Justine Lau, “A History of Google in China,”
Financial Times Online, July 9, 2010, HYPERLINK
“http://www.ft.com/cms/s/0/faf86fbc-0009-11df-
8626-00144feabdc0.html?ft_site=falcon” \l
“axzz4S04lPr4a” www.ft.com/cms/s/0/faf86fbc-
0009-11df-8626-00144feabdc0.html?ft_
site=falcon#axzz4S04lPr4a.
5. Ibid.
6. John Battelle, “The Birth of Google,” Wired.com,
August 2005, www.wired.com/wired/archive/13.08/
battelle.html?tw=wn_tophead_4.
7. Lawrence Page, Sergey Brin, Rajeev Motwani, and
Terry Winograd, “The PageRank Citation Ranking:
Bringing Order to the Web,” Stanford Digital
Library Project, September 16, 1997, http://ilpubs.
stanford.edu:8090/422/1/1999-66 .
8. “BackRub,” Google Web Archives, December 4,
1997, http://web.archive.org/web/19971210065425/
backrub.stanford.edu/backrub.html.
9. “Google: Our History in Depth,” Google.com, May 7,
2013, www.google.com/about/company/history.
10. “If the Check Says ‘Google Inc.,’ We’re ‘Google
Inc.,’” Wired.com, September 7, 2007, www.wired.
com/science/discoveries/news/2007/09/
dayintech_0907.
11. “Google Receives $25 million in Equity Funding,”
Google Web Archives, June 7, 1997, http://web.
archive.org/web/20000309205910/http://www.
google.com/pressrel/pressrelease1.html.
12. “Google Goes Global with Addition of 10
Languages,” Google.com, May 9, 2000, http://
googlepress.blogspot.com/2000/05/google-goes-
global-with-addition-of-10.html.
13. “Internet and Search Engine Usage by Country,”
Internet World Stats, http://ptgmedia.pearsoncmg.
com/images/9780789747884/supplements/
9780789747884_appC .
14. “Google: Our History in Depth.”
15. Maureen Gleeson, “Why Google Can’t Dominate
Search in South Korea,” Oban Digital, January 30,
2015, www.obandigital.com/gb/blog/2015/01/30/
why-google-cant-dominate-search-in-south-korea/.
16. Ginny Marvin, “Google Still Dominant, but Baidu
Benefitting from Google Ban in China Says
eMarketer,” March 31, 2015, http://searchengineland.
ENDNOTES
420 Part 3 International Strategic Management
March 22, 2011, www.guardian.co.uk/technology/
2011/mar/23/google-online-library-plans-thwarted.
37. Julianne Pepitone, “Google Strikes Deal with Pub-
lishers over Universal Library,” CNNMoney.com,
October 4, 2012, http://money.cnn.com/2012/10/04/
technology/google-books-settlement/index.html.
38. Paul Mozur, “China Criticizes Android’s Domi-
nance,” The Wall Street Journal, March 5, 2013,
http://online.wsj.com/article/SB10001424127887324
539404578342132324098420.html.
39. J. O’Dell, “China: Google’s Too Controlling. We
Should Create Our Own Damn Smartphone OS,”
Venturebeat.com, March 5, 2013, http://venturebeat.
com/2013/03/05/china-google-android-drama/.
40. Susan Decker and Brian Womack, “Motorola
Buyout Fails to Yield Patent Jackpot for Google,”
Business Report, April 30, 2013, www.iol.co.za/
business/international/motorola-buyout-fails-to-
yield-patent-jackpot-for-google-1.1508190#.
UYQPdrXqnoI.
41. Google, “Facts about Google’s Acquisition of
Motorola,” press release, 2013, www.google.com/
press/motorola/.
42. Ezra Klein, “Google’s Trust Problem,” Washington
Post, March 21, 2013, www.washingtonpost.com/
blogs/wonkblog/wp/2013/03/21/googles-trust-
problem/.
43. Claire Cain Miller, “Stern Words, and a Pea-Size
Punishment, for Google,” New York Times, April 22,
2013, www.nytimes.com/2013/04/23/business/global/
stern-words-and-pea-size-punishment-for-google.html.
44. Kevin Cahill, “Google Appeal Ruling Should Send
Shivers through US Tech Companies,” Computer
Weekly, March 30, 2015, www.computerweekly.
com/news/4500243342/Google-appeal-ruling-should-
sent-shivers-through-US-tech-companies.
45. Liat Clark, “Google Launches Global Human Traf-
ficking Helpline and Data Network,” Arstechnica,
April 10, 2013, http://arstechnica.com/tech-
policy/2013/04/google-launches-global-human-
trafficking-helpline-and-data-network/.
46. Lance Ulanoff, “This Is Why Google Glass Is the
Future,” Mashable, April 30, 2013, http://mashable.
com/2013/04/30/google-glass-future/.
47. Eric Mack, “Google Future Tech: 10 Coolest
Google R&D Projects,” CIO.com, 2013, www.cio.
com/article/694854/Google_Future_Tech_10_Coolest_
Google_R_D_Projects?page5 11#slideshow.
48. Chris Ciaccia, “Google’s Future: Doing the
Impossible,” BGR, April 19, 2013, http://bgr.
com/2013/04/19/google-earnings-analysis-
q1-2013-449971/.
com/google-still-dominant-but-baidu-benefitting-from-
google-ban-in-china-says-emarketer-217745.
17. “Google Losing Market Share in China,” Search
Engine Journal, September 21, 2006, www.
searchenginejournal.com/google-losing-market-
share-in-china/3816.
18. Rebecca Fannin, “Why Google Is Quitting China,”
Forbes.com, January 15, 2010, www.forbes.com/
2010/01/15/baidu-china-search-intelligent-
technology-google.html.
19. “Google: Our History in Depth.”
20. Andrew McLaughlin, “Google in China,” Google’s
Official Blog, January 27, 2006, https://googleblog.
blogspot.com/2006/01/google-in-china.html.
21. Fannin, “Why Google Is Quitting China.”
22. Ibid.
23. “Google Losing Market Share in China.”
24. Ibid.
25. Ibid.
26. Ibid.
27. “Web History of China,” Timetoast.com, 2010,
www.timetoast.com/timelines/web-history-of-china.
28. Justine Lau, “A History of Google in China,”
Financial Times Online, July 9, 2010, www.ft.com/
cms/s/0/faf86fbc-0009-11df-8626-00144feabdc0.
html#axzz2MmJQVW1J.
29. Ibid.
30. Ibid.
31. “Google Aims to Stay in China Despite Censorship
Clash,” Financial Times, January 22, 2010,
www.ft.com/intl/cms/s/2/f9ff5bcc-06ce-11df-b058-
00144feabdc0.html#axzz2RynyO1Rd.
32. Chris McGreal and Bobbie Johnson, “Hillary
Clinton Criticises Beijing over Internet Censorship,”
The Guardian, January 21, 2010, https://www.
theguardian.com/world/2010/jan/21/hillary-clinton-
china-internet-censorship.
33. “A New Approach to China: An Update,” Google’s
Official Blog, March 22, 2010, http://googleblog.
blogspot.com/2010/03/new-approach-to-china-
update.html.
34. Loretta Chao, “Google Loses Chinese Market
Share,” The Wall Street Journal, April 27, 2010,
http://online.wsj.com/article/SB10001424052748703
465204575207833281993688.html.
35. Charles Riley, “The Great Firewall of China Is
Nearly Complete,” CNN Money, December 30,
2014, http://money.cnn.com/2014/12/30/technology/
china-internet-firewall-google/.
36. Dominic Rushe, “US Judge Writes Unhappy Ending
for Google’s Online Library Plans,” The Guardian,
421
Middle-class household incomes in India start at
roughly $6,000 a year, so a $3,000 car is the kind of
innovation that could create millions of new drivers. Eight
million Indians currently own cars, according to the
Mumbai-based credit-rating agency Crisil. Another
18 million have the means to buy one. However, the Nano
could increase that pool of potential auto owners by as
much as 65 percent, to 30 million. “This goes beyond
economics and class,” says Ravi Kant, managing director
of Tata Motors. “This crosses the urban-rural divide. Now
a car is within the reach of people who never imagined
they would own a car. It’s a triumph for our company.
And for India.”7
Designed with a Family in Mind
Though Nano’s design triggered different comments from
the public—some people called it handsome;8 others
called it egg shaped9—overall Tata Motors was very
proud of the design, which was developed with a family
in mind.10 From Tata’s perspective, the new Nano
addresses several key characteristics that Indian families
would prize in a car: low price, adequate comfort, fuel
efficiency, and safety.
According to Tata, Nano has a roomy passenger com-
partment with generous leg space and head room, and it
can comfortably seat four people. Four doors with high
seating position make ingress and egress easy. With a
snub nose and a sloping roof, the world’s cheapest car can
hold five people—if they squeeze.11 Nano’s dimensions
are as follows: length of 3.1 meters, width of 1.5 meters,
and height of 1.6 meters. Tata suggests these compact
dimensions should allow the car to effortlessly maneuver
on busy roads in cities as well as in rural areas. Its mono-
volume design, with wheels at the corners and the power
train at the rear, enables it to combine both space and
maneuverability.12 At 10 feet long, the Nano is about
2 feet shorter than a Mini Cooper.13
The car is available in both standard and deluxe ver-
sions. According to the company, both versions offer a
wide range of body colors and other accessories so that
the car can be customized to an individual’s prefer-
ences.14 But reviewers called the basic version spare: It
has no radio, no air bags, no passenger-side mirror, and
only one windshield wiper. If you want air conditioning
to cope with India’s brutal summers, you need to get the
deluxe version.
In January 2008 during India’s main auto show in New
Delhi, Tata Motors introduced to the Indian public its
ultra-cheap car “Nano” that was expected to retail for as
little as the equivalent of $2,500, or about the price of the
optional DVD player on the Lexus LX 470 sport utility
vehicle.1 This event had driven unprecedented public
attention because Tata’s new vehicle was projected to
revolutionize the auto industry.2
The emergence of Tata Motors on the global auto
scene marks the advent of India as a global center for
small-car production and represents a victory for those
who advocate making cheap goods for potential customers
at the “bottom of the pyramid” in emerging markets. Most
of all, the car could give millions of people now relegated
to lesser means of transportation the chance to drive cars.3
In India, there were an estimated 18 cars for every thou-
sand people in 2009, compared with 47 per thousand in
China and 802 in the U.S. Far more middle-class Indians
bought and transported their entire families on scooters.4
According to some analysts, Tata Motor’s Chairman
Ratan Tata hopes to use the Nano to become the Henry
Ford of emerging India, in part by offering a car at a
fraction of the price of rival products. The company is
gambling that its tiny price tag will make it appealing to
Indians who now drive motorcycles and scooters.
While India’s population is more than 1 billion people,
only around 1 million passenger cars were sold in the
country in 2007, one-tenth as many as in China. By con-
trast, more than 7 million motorcycles and scooters were
sold. Mr. Tata said the tiny car is aimed at keeping the
families of India’s growing middle class from having to
travel with as many as four people on a scooter.5
Speaking at the unveiling ceremony at the 9th Auto
Expo in New Delhi, Ratan Tata said, “I observed families
riding on two-wheelers—the father driving the scooter,
his young kid standing in front of him, his wife seated
behind him holding a little baby. It led me to wonder
whether one could conceive of a safe, affordable, all-
weather form of transport for such a family. Tata Motors’
engineers and designers gave their all for about four years
to realize this goal. Today, we indeed have a People’s Car,
which is affordable and yet built to meet safety require-
ments and emission norms, to be fuel efficient and low
on emissions. We are happy to present the People’s Car
to India and we hope it brings the joy, pride and utility
of owning a car to many families who need personal
mobility.”6
In-Depth Integrative Case 3.1
Tata “Nano”: The People’s Car
422 Part 3 International Strategic Management
three in passenger vehicles with winning products in the
compact, midsize car, and utility vehicle segments. The
company is the world’s fifth largest truck manufacturer and
the world’s second largest bus manufacturer. The compa-
ny’s 60,000 employees are guided by the vision to be “best
in the manner in which we operate, best in the products we
deliver, and best in our value system and ethics.”21
Established in 1945, Tata Motors’ presence cuts across
the length and breadth of India. Over 4 million Tata vehi-
cles ply on Indian roads since they first rolled out in 1954.
The company’s manufacturing base in India is spread
across Jamshedpur (Jharkhand), Pune (Maharashtra),
Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand), and
Dharwad (Karnataka). Following a strategic alliance with
Fiat in 2005, it has set up an industrial joint venture with
Fiat Group Automobiles at Ranjangaon (Maharashtra) to
produce both Fiat and Tata cars and Fiat powertrains. The
company is establishing a new plant at Sanand (Gujarat).
The company’s dealership, sales, services, and spare parts
network comprises over 3,500 touch points; Tata Motors
also distributes and markets Fiat-branded cars in India.22
Tata Motors has also emerged as an international auto-
mobile company. Through subsidiaries and associate com-
panies, Tata Motors has operations in the U.K., South
Korea, Thailand, and Spain. Among them is Jaguar Land
Rover, a business comprising the two iconic British brands
that was acquired in 2008. In 2004, it acquired the Daewoo
Commercial Vehicles Company, South Korea’s second
largest truck maker. The rechristened Tata Daewoo Com-
mercial Vehicles Company has launched several new
products in the Korean market, while also exporting these
products to several international markets. Today two-
thirds of heavy commercial vehicle exports out of South
Korea are from Tata Daewoo.23
In 2005, Tata Motors acquired a 21 percent stake in
Hispano Carrocera, a well-regarded Spanish bus and coach
manufacturer, and subsequently the remaining stake in
2009. Hispano’s presence is being expanded in other mar-
kets. In 2006, Tata Motors formed a joint venture with the
Brazil-based Marcopolo, a global leader in body building
for buses and coaches, to manufacture fully built buses and
coaches for India and select international markets. In 2006,
Tata Motors entered into a joint venture with Thonburi
Automotive Assembly Plant Company of Thailand to man-
ufacture and market the company’s pickup vehicles in
Thailand. The new plant of Tata Motors (Thailand) has
begun production of the Xenon pickup truck, with the
Xenon having been launched in Thailand in 2008.24
Tata Motors is also expanding its international foot-
print, established through exports since 1961. The com-
pany’s commercial and passenger vehicles are already
being marketed in several countries in Europe, Africa, the
Middle East, South East Asia, South Asia, and South
America. It has franchisee/joint venture assembly opera-
tions in Kenya, Bangladesh, Ukraine, Russia, Senegal,
and South Africa. Through its subsidiaries, the company
According to the company, Nano has a fuel-efficient
engine powered by the lean design strategy that has helped
minimize weight, maximize performance per unit of
energy consumed, and deliver higher fuel efficiency.15
The final design stands at 1,322 pounds, 528 pounds
lighter than the flyweight Honda Insight. To power it, the
engineers settled on a 33-horsepower, 623-cc, two- cylinder
engine housed in the rear; to service it, the mechanic must
remove a set of bolts in the 5.4-cubic-foot trunk. The pay-
off: an uncommonly efficient 47 miles per gallon running
at top speed (65 mph). But that doesn’t mean Nano own-
ers won’t spend a lot of time pumping gas—the minuscule
tank holds just 3.9 gallons.16
According to the company, the People’s Car’s safety
performance exceeds current Indian regulatory require-
ments. With an all-sheet-metal body, it has a strong pas-
senger compartment, with safety features such as crumple
zones, intrusion-resistant doors, seat belts, strong seats
and anchorages, and the rear tailgate glass bonded to the
body. Tubeless tires further enhance safety. Tata also
placed emphasis on environmental friendliness. Accord-
ing to a corporate press release, the People’s Car’s tailpipe
emission performance exceeds regulatory requirements. In
terms of overall pollutants, it has a lower pollution level
than two-wheelers being manufactured in India today.17
About Tata Motors
Tata Motors is a part of the Tata Group. The Tata Group
is considered the General Electric of India, a sprawling
conglomerate with a commanding presence in media, tele-
com, outsourcing, retailing, and real estate. Started in
1868 as a textile wholesaler, the company branched out
into luxury hotels after, as legend has it, founder Jamsetji
Tata was turned away from a posh establishment because
of his skin color. In 1945, a few years before the British
left India, Tata created Tata Motors and started producing
locomotives and, eventually, autos. In 1998, Tata Motors
introduced the country’s first indigenously designed car.
The homegrown Indica, which now sells for around
$6,000, became ubiquitous as a taxi.18
Meanwhile, the Tata Group has been expanding glob-
ally. It bought the tea company Tetley in 2000 and
acquired Anglo-Dutch steel giant Corus in 2007. It main-
tains Tata Consultancy Services offices in 54 countries
and owns hotels in Boston, New York, and San Francisco.
In March 2008, Tata Motors bought Jaguar and Land
Rover from the financially strangled Ford Motors.19
Tata Motors listed on the New York Stock Exchange in
2004. After thousands of changes, in the quarter ending
December 2006 Tata earned $116 million on revenue of
$1.55 billion. Annual revenue grew to $5.2 billion for the
fiscal year ending in March 2006.20 Now Tata Motors
Limited is India’s largest automobile company, with con-
solidated revenues of US$39 billion in 2015. It is the leader
in commercial vehicles in each segment, and among the top
In-Depth Integrative Case 3.1 Tata “Nano”: The People’s Car 423
1948 ∙ Steam road roller introduced in collaboration with
Marshall Sons (U.K.).
1954 ∙ Collaboration with Daimler Benz AG, West
Germany, for manufacture of medium commercial
vehicles. The first vehicle rolled out within 6 months
of the contract.
1959 ∙ Research and Development Centre set up at
Jamshedpur.
1961 ∙ Exports begin with the first truck being shipped to
Ceylon, now Sri Lanka.
1966 ∙ Setting up of the Engineering Research Centre at Pune
to provide impetus to automobile Research and Devel-
opment.
1971 ∙ Introduction of DI engines.
1977 ∙ First commercial vehicle manufactured in Pune.
1983 ∙ Manufacture of heavy commercial vehicle commences.
1985 ∙ First hydraulic excavator produced with Hitachi col-
laboration.
1986 ∙ Production of first light commercial vehicle, Tata 407,
indigenously designed, followed by Tata 608.
1989 ∙ Introduction of the Tatamobile 206—3rd LCV model.
1991 ∙ Launch of the 1st indigenous passenger car, Tata
Sierra.
∙ TAC 20 crane produced.
∙ One millionth vehicle rolled out.
1992 ∙ Launch of the Tata Estate.
1993 ∙ Joint venture agreement signed with Cummins Engine
Co. Inc. for the manufacture of high-horsepower and
emission-friendly diesel engines.
1994 ∙ Launch of Tata Sumo—the multi-utility vehicle.
∙ Launch of LPT 709—a full-forward-control, light
commercial vehicle.
∙ Joint venture agreement signed with M/s Daimler-Benz/
Mercedes-Benz for manufacture of Mercedes Benz
passenger cars in India.
∙ Joint venture agreement signed with Tata Holset Ltd.,
U.K., for manufacturing turbochargers to be used on
Cummins engines.
1995 ∙ Mercedes Benz car E220 launched.
1996 ∙ Tata Sumo deluxe launched.
1997 ∙ Tata Sierra Turbo launched.
∙ 100,000th Tata Sumo rolled out.
1998 ∙ Tata Safari—India’s first sports utility vehicle launched.
∙ Two millionth vehicle rolled out.
∙ Indica, India’s first fully indigenous passenger car,
launched.
1999 ∙ 115,000 bookings for Indica registered against full
payment within a week.
∙ Commercial production of Indica commences in full
swing.
2000 ∙ First consignment of 160 Indicas shipped to Malta.
∙ Indica with Bharat Stage 2 (Euro II)—compliant
diesel engine launched.
∙ Utility vehicles with Bharat 2 (Euro II)—compliant
engine launched.
∙ Indica 2000 (Euro II) with multipoint fuel-injection
petrol engine launched.
∙ Launch of CNG buses.
∙ Launch of 1109 vehicle—an intermediate commercial
vehicle.
is engaged in engineering and automotive solutions, con-
struction equipment manufacturing, automotive vehicle
components manufacturing and supply chain activities,
machine tools and factory automation solutions, high-
precision tooling and plastic and electronic components
for automotive and computer applications, and automotive
retailing and service operations.25
The foundation of the company’s growth over the last
50 years is a deep understanding of economic stimuli and
customer needs, and the ability to translate them into
customer-desired offerings through leading-edge R&D.
With over 3,000 engineers and scientists, the company’s
Engineering Research Centre, established in 1966, has
enabled pioneering technologies and products. The com-
pany today has R&D centers in Pune, Jamshedpur,
Lucknow, and Dharwad in India, and in South Korea,
Spain, and the U.K. It was Tata Motors that developed the
first indigenously developed light commercial vehicle,
India’s first sports utility vehicle, and, in 1998, the Tata
Indica, India’s first fully indigenous passenger car. Within
two years of launch, Tata Indica became India’s largest-
selling car in its segment. In 2005, Tata Motors created a
new segment by launching the Tata Ace, India’s first
indigenously developed mini-truck. In January 2008, Tata
Motors unveiled its People’s Car, the Tata Nano, which
was launched in India in March 2009.26
Tata Motors is equally focused on environment-friendly
technologies in emissions and alternative fuels. It has
developed electric and hybrid vehicles for both personal
and public transportation. It has also been implementing
several environment-friendly technologies in manufacturing
processes, significantly enhancing resource conservation.27
Tata Motors is committed to improving the quality of
life of communities by working on four thrust areas:
employability, education, health, and environment. The
firm’s activities touch the lives of more than a million
citizens. Its support for education and employability is
focused on youth and women, ranging from schools to tech-
nical education institutes, to actual facilitation of income
generation. In health, Tata’s intervention is in both preven-
tive and curative health care. The goal of environment pro-
tection is achieved through planting tree, conserving water
and creating new water bodies, and, last but not least, intro-
ducing appropriate technologies in Tata vehicles and oper-
ations for constantly enhancing environment care.28
Tata Motors Milestones
It has been a long and accelerating journey for Tata
Motors until it became India’s leading automobile manu-
facturer. Here are some significant milestones in the com-
pany’s journey toward excellence and leadership:29
1945 ∙ Tata Engineering and Locomotive Co. Ltd. was estab-
lished to manufacture locomotives and other engineer-
ing products.
424 Part 3 International Strategic Management
2006 ∙ Tata Motors vehicle sales in India cross four million
mark.
∙ Tata Motors unveils new long wheel base premium
Indigo & X-over concept at Auto Expo 2006.
∙ Indica V2 Xeta launched.
∙ Passenger vehicle sales in India cross one million mark.
∙ Tata Motors and Marcopolo, Brazil, announce joint
venture to manufacture fully built buses and coaches
for India and markets abroad.
∙ Tata Motors’ first plant for small cars to come up in
West Bengal.
∙ Tata Motors extends CNG options on its hatchback
and estate range.
∙ TDCV develops South Korea’s first LNG-powered
tractor-trailer.
∙ Tata Motors and Fiat Group announce three additional
cooperation agreements.
∙ Tata Motors introduces a new Indigo range.
2007 ∙ Construction of small car plant at Singur, West Bengal,
begins on January 21.
∙ New 2007 Indica V2 range is launched.
∙ Tata Motors launches the longwheel base Indigo XL,
India’s first stretch limousine.
∙ Common rail diesel (DICOR) engine extended to
Indigo sedan and estate range.
∙ Tata Motors and Thonburi Automotive Assembly
Plant Co. (Thonburi) announce formation of a joint
venture company in Thailand to manufacture, assem-
ble, and market pickup trucks.
∙ Rollout of 100,000th Ace.
∙ Tata-Fiat plant at Ranjangaon inaugurated.
∙ Launch of a new upgraded range of its entry-level
utility vehicle offering, the Tata Spacio.
∙ CRM-DMS initiative crosses the 1,000th location
milestone.
∙ Launch of Magic, a comfortable, safe, four-wheeler
public transportation mode, developed on the Ace
platform.
∙ Launch of Winger, India’s only maxi-van.
∙ Fiat Group and Tata Motors announce establishment
of joint venture in India.
∙ Launch of the Sumo Victa Turbo DI, the new upgraded
range of its entry-level utility vehicle, the Sumo Spacio.
∙ Tata Motors launches Indica V2 Turbo with dual air-
bags and ABS.
∙ Launch of new Safari DICOR 2.2 VTT range, pow-
ered by a new 2.2 L Direct Injection Common Rail
(DICOR) engine.
∙ Rollout of the one millionth passenger car off the
Indica platform.
2008 ∙ Ace plant at Pantnagar (Uttarakhand) begins production.
∙ Indica Vista, the new generation Indica, is launched.
∙ Tata Motors’ new plant for Nano to come up in Gujarat.
∙ Latest common rail diesel offering, the Indica V2
DICOR, launched.
∙ Indigo CS (Compact Sedan), world’s first sub-four-
meter sedan, launched.
∙ Launch of the new Sumo—Sumo Grande, which com-
bines the looks of an SUV with the comforts of a
family car.
2001 ∙ Indica V2 launched—2nd generation Indica.
∙ 100,000th Indica wheeled out.
∙ Launch of CNG Indica.
∙ Launch of the Tata Safari EX.
∙ Indica V2 becomes India’s number one car in its
segment.
∙ Exits joint venture with Daimler Chrysler.
2002 ∙ Unveiling of the Tata Sedan at Auto Expo 2002.
∙ Petrol version of Indica V2 launched.
∙ Launch of the EX series in commercial vehicles.
∙ Launch of the Tata 207 DI.
∙ 200,000th Indica rolled out.
∙ 500,000th passenger vehicle rolled out.
∙ Launch of the Tata Sumo ‘1’ Series.
∙ Launch of the Tata Indigo.
∙ Tata Engineering signed a product agreement with
MG Rover of the U.K.
2003 ∙ Launch of the Tata Safari Limited Edition.
∙ The Tata Indigo Station Wagon unveiled at the Geneva
Motor Show.
∙ On July 29, J. R. D. Tata’s birth anniversary, Tata
Engineering becomes Tata Motors Limited.
∙ Three millionth vehicle produced.
∙ First CityRover rolled out.
∙ 135 PS Tata Safari EXi Petrol launched.
∙ Tata SFC 407 EX Turbo launched.
2004 ∙ Tata Motors unveils new product range at Auto
Expo ’04.
∙ New Tata Indica V2 launched.
∙ Tata Motors and Daewoo Commercial Vehicle Co.
Ltd. sign investment agreement.
∙ Indigo Advent unveiled at Geneva Motor Show.
∙ Tata Motors completes acquisition of Daewoo Com-
mercial Vehicle Company.
∙ Tata LPT 909 EX launched.
∙ Tata Daewoo Commercial Vehicle Co. Ltd. (TDCV)
launches the heavy-duty truck NOVUS, in Korea.
∙ Sumo Victa launched.
∙ Indigo Marina launched.
∙ Tata Motors lists on the NYSE.
2005 ∙ Tata Motors rolls out the 500,000th passenger car
from its car plant facility in Pune.
∙ The Tata Xover unveiled at the 75th Geneva Motor Show.
∙ Branded buses and coaches—Starbus and Globus—
launched.
∙ Tata Motors acquires 21% stake in Hispano Carrocera
SA, Spanish bus manufacturing company.
∙ Tata Ace, India’s first mini truck, launched.
∙ Tata Motors wins JRD QV award for business excellence.
∙ The power-packed Safari Dicor is launched.
∙ Introduction of Indigo SX series, luxury variant of
Tata Indigo.
∙ Tata Motors launches Indica V2 Turbo Diesel.
∙ One millionth passenger car produced and sold.
∙ Inauguration of new factory at Jamshedpur for Novus.
∙ Tata TL 4×4, India’s first sports utility truck (SUT),
is launched.
∙ Launch of Tata Novus.
∙ Launch of Novus range of medium trucks in Korea,
by Tata Daewoo Commercial Vehicle Co. (TDCV).
In-Depth Integrative Case 3.1 Tata “Nano”: The People’s Car 425
the car is loaded, according to Mr. Chaturvedi of Lumax.
In lieu of the solid steel beam that typically connects
steering wheels to axles, one supplier, Sona Koyo Steer-
ing Systems, used a hollow tube, said Kiran Deshmukh,
the chief operating officer of the company, which is based
in Delhi.33
Also, Nano is smaller in overall dimensions than the
Suzuki Maruti, a similar but higher-priced low-cost com-
petitor assembled in India, but it offers about 20 percent
more seating capacity as a result of design choices such
as putting the wheels at the extreme edges of the car. The
Nano is also much lighter than comparable models as a
result of a reduction in the amount of steel in the car
(including the use of an aluminum engine) and the use of
lightweight steel where possible.34
However, Nano engineers and partners didn’t simply
strip features out of an existing car to create a new low-
cost model, which most other manufacturers have done
when making affordable cars. Instead, they looked at their
target customers’ lives for cost-cutting ideas. So, for
instance, the Nano has a smaller engine than other cars
because more horsepower would be wasted in India’s jam-
packed cities, where the average speed is 10 to 20 miles
per hour.35 The car currently meets all Indian emission,
pollution, and safety standards, although it only attains a
maximum speed of about 65 mph. The fuel efficiency is
also attractive to economy-driven consumers—nearly
50 miles to the gallon.36
Nano ultimately became a triumph of creativity and
innovation. For example, Tata Motors has filed for 34 pat-
ents associated with the design of the Nano, although some
suggest that measuring progress solely by patent creation
misses a key dimension of innovation. Some of the most
valuable innovations take existing, patented components
and remix them in ways that more effectively serve the
needs of large numbers of customers. The most innovative
aspect of the Nano is its modular design. The Nano is
constructed of components that can be built and shipped
separately to be assembled in a variety of locations. In
effect, the Nano is being sold in kits that are distributed,
assembled, and serviced by local entrepreneurs.37
As Ratan Tata, chair of the Tata group of companies,
observed in an interview with The Times of London: “A
bunch of entrepreneurs could establish an assembly oper-
ation and Tata Motors would train their people, would
oversee their quality assurance and they would become
satellite assembly operations for us. So we would create
entrepreneurs across the country that would produce the
car. We would produce the mass items and ship it to them
as kits. That is my idea of dispersing wealth. The service
person would be like an insurance agent who would be
trained, have a cell phone and scooter and would be
assigned to a set of customers.”38
This is part of a broader pattern of innovation emerg-
ing in India in a variety of markets, ranging from diesel
∙ Tata Motors unveils its People’s Car, Nano, at the
ninth Auto Expo.
∙ Xenon, one-ton pickup truck, launched in Thailand.
∙ Tata Motors signs definitive agreement with Ford
Motor Company to purchase Jaguar and Land Rover.
∙ Tata Motors completes acquisition of Jaguar Land
Rover.
∙ Tata Motors introduces new Super Milo range of
buses.
∙ Tata Motors is Official Vehicle Provider to Youth
Baton Relay for The III Commonwealth Youth Games,
Pune 2008.
∙ Indica Vista, the second generation Indica, is launched.
∙ Tata Motors launches passenger cars and the new
pickup in D.R. Congo.
2009 ∙ Tata Motors begins distribution of Prima World truck.
∙ Tata Motors launches the next generation all-new
Indigo MANZA.
∙ FREELANDER 2 launched in India.
∙ Tata Marcopolo Motors’ Dharwad plant begins
production.
∙ Tata Motors launches Nano—The People’s Car.
∙ Introduction of new world standard truck range.
∙ Launch of premium luxury vehicles Jaguar XF, XFR,
and XKR and Land Rover Discovery 3, Range Rover
Sport, and Range Rover from Jaguar and Land Rover
in India.
Secrets behind the Low Price
How could Tata Motors make a car so inexpensively? It
started by looking at everything from scratch, applying
what some analysts have described as “Gandhian engi-
neering” principles—deep frugality with a willingness to
challenge conventional wisdom. A lot of features that
Western consumers take for granted—air conditioning,
power brakes, radios, etc.—are missing from the entry-
level model.30
In order to succeed with building a low-cost affordable
car, Tata Motors began by studying and trying to under-
stand the customer. What do the customers need? What
do they really want? What can they afford? The customer
was ever-present in the development of the Nano. Tata
didn’t set the price of the Nano by calculating the cost of
production and then adding a margin. Rather, it set $2,500
as the price that it thought customers could pay and then
worked backward, with the help of partners willing to take
on a challenge, to build a $2,500 car that would reward
all involved with a small profit.31
More fundamentally, the engineers worked to do more
with less. Tata has been able to slash the price by asking
his engineers and suppliers to redesign the many compo-
nents to cut costs. The speedometer, for example, is in the
center of the dashboard over the air vents, not behind the
steering wheel, so the dashboard can be built with fewer
parts.32 To save $10, Tata engineers redesigned the sus-
pension to eliminate actuators in the headlights, the level-
ers that adjust the angle of the beam depending on how
426 Part 3 International Strategic Management
According a statement released by Tata Motors in
September 2008, work on the factory was close to com-
pletion. Up to 4,000 workers, including “several hundred
young residents from around the [Singur] region” were
said to have been employed by the factory during its con-
struction. But continuing the work with the ongoing pro-
tests proved too risky. Employees failed to show up for
work after threats from protestors. The protests also
snarled traffic in the region. Trucks loaded with food were
left on highways, their contents rotting in the sun.47
Ratan Tata, chair of the Tata Group and Tata Motors,
expressed concern that the factory in Singur was at seri-
ous risk. Commenting on the situation, a Tata Motors
spokesperson said, “The situation around the Nano plant
continues to be hostile and intimidating. There is no way
this plant could operate efficiently unless the environment
became congenial and supportive of the project. We came
to West Bengal hoping we could add value, prosperity and
create job opportunities in the communities in the state.”48
The dispute reflected a larger standoff between indus-
try in India and farmers unwilling to part with land in a
country where two-thirds of the billion-plus population
depends on agriculture. Unable to get satisfactory resolu-
tion of the dispute, on September 2, 2008, Tata Motors
announced that violent protests had forced it to suspend
all work at the plant. Tata Motors also said it was putting
together a detailed plan for the relocation of the plant and
machinery, and was evaluating options for manufacturing
the Nano at other company facilities.49
By October, the Singur protests had grown in size and
intensity. Highways surrounding the factory were at a
standstill, and workers were being threatened. Tata finally
abandoned the Singur factory, in which it had invested
$350 million.50 However, by that time the company had
received an invitation from another state to relocate its
Nano project. On October 7, 2008, the Gujarat govern-
ment and Tata Motors signed a MoU (memorandum of
understanding)51 in Ahmedabad, bringing the ambitious
Nano project to that state. Gujarat Chief Minister Naren-
dra Modi announced allocation of 11,000 acres of land at
Sanand near Ahmedabad to Tata Motors. The state gov-
ernment promised Tata various tax rebates and ready land
along with connectivity to the national highway. In addi-
tion, the company was assured that no bandh (bandh,
originally a Hindi word meaning “closed,” is a form of
protest used by political activists in some countries in
South Asia like India and Nepal)52 or labor unrest would
delay the project.53
Despite the Gujarat government’s assurances regard-
ing the safe and friendly business environment in its
state, the relocation of the plant to a new state was not
painless. In December 2008, several farmers filed a case
against the local Indian government and Tata Motors,
demanding better compensation for land sold to support
the Gujarat factory.54 Tata was pressured to find a quick
engines and agricultural products to financial services. In
fact, Tata envisions going even further, providing the tools
for local mechanics to assemble the car in existing auto
shops or even in new garages created to cater to remote
rural customers.39
Struggling with a Production Site
In spite of Tata’s great commitment to meet the transpor-
tation needs of the poor Indian population and its pledge
that the price of the car would not exceed $2,500 equiva-
lent, the company experienced a major challenge due to
unexpected problems at Tata’s proposed manufacturing
plant in Singur, in the eastern state of West Bengal, India,
that could have stopped the whole Nano project right at
the start.
In May 2006 Tata Motors announced that it would be
manufacturing Nano in Singur, West Bengal, India.40 Tata
made plans to acquire the land and build the plant for the
sole purpose of producing the Nano. The entire project,
including the purchase of more than 600 acres of land,
reportedly cost Tata Motors upwards of $350 million.41
The problems began immediately following Tata’s pur-
chase of the property from the West Bengal government.42
Prior to the purchase, the government didn’t actually own
the land, but acquired it from local farmers by imposing
the force of eminent domain.43 The communist government
of West Bengal was interested in bringing Tata Motors to
its state because it saw the Nano project as key to rejuvenat-
ing industries in West Bengal, a poor region that was tra-
ditionally focused on farming. Trouble began after the
government took over 1,000 acres (400 hectares) of farm-
land for the factory. The government offered compensation,
but some farmers with smaller land holdings refused that
compensation, demanding that the land be given back to
them. The disputed land measured about 400 acres.44
The protests hinged upon allegations that Tata forced
farmers from their land and handed out payments that were
a fraction of the land’s value. Mamata Banerjee, the fiery
chief of the Trinamool Congress, the West Bengali politi-
cal party staging the protest, demanded that Tata Motors
return 400 acres of land surrounding the Nano factory to
these farmers. Tata Motors stated that this land was neces-
sary for 60 parts suppliers to the Nano. The company
argued that keeping parts suppliers close to the plant was
vital to maintaining the Nano’s extremely low cost.45
At the peak of the protests in September 2008, over
30,000 activists and farmers besieged Singur, in West
Bengal state, to rally against the plant, reiterating their
claim that the land was forcibly taken from farmers and
that compensation was inadequate. The highway leading
to Singur was blockaded and Tata Motors was forced to
evacuate employees from the plant site. In response, the
company threatened to walk out of West Bengal if the
agitation was not quickly quelled.46
In-Depth Integrative Case 3.1 Tata “Nano”: The People’s Car 427
In late 2010, however, the buzz surrounding the Nano
began to take a dive, as minor defects were widely pub-
licized and Tata announced a somewhat disappointing
dip in sales. After selling nearly 10,000 cars a month
through the summer and early fall of 2010, sales dropped
off when stories circulated that some Nanos had caught
fire while others had poor service and performance.62 In
November 2010, just 509 Nanos were sold, despite brisk
sales for more expensive cars. Mercedes sells more than
500 cars a month in India. Sales temporary recovered but
have stabilized at around 2,500 cars per month since
about 2014, well below the predicted demand of 20,000
per month. Rising interest rates and fuel prices were
partially to blame for less-than-expected sales, but
Carl-Peter Forster (head of Tata Motors) discussed some
of the additional areas for improvement surrounding the
Nano—namely, the distribution scheme, marketing,
advertising, and an effective consumer finance sys-
tem.63 In an effort to counteract the disappointing sales,
Tata announced it was launching distribution in six new
provinces where the Nano had not yet been available.
Tata also unveiled a new finance scheme with 26 local
banks with interest rates from between 8 percent and
20 percent.64 Through early 2015, only 260,000 Nanos in
total had been sold. This number is significantly less than
the 250,000 cars the Nano was initially expected to sell
annually.65 Despite the lackluster performance of the
Nano, Tata Motors reported growth in consolidated rev-
enues of 12.9 percent between 2014 and 2015.66 The
Nano, though underperforming in sales, changed the con-
versation and proved that low-cost micro cars did have
market potential in India.
Global Race for Low-Cost Cars
The Nano is part of a global race to lower the prices
of entry-level cars for millions of new developing world
consumers. As growth slows in developed markets in
the West, automakers are looking to tap the rapid
growth in countries like India, China, and Brazil, where
the lowest-priced cars are often the best sellers. Maruti
Suzuki India Ltd., which is controlled by Japan’s
Suzuki Motor Corp., has dominated the Indian market
for decades; its least expensive model today sells for
around $5,000.67
As the buzz of Tata’s Nano dominated headlines, com-
petitors quickly introduced their own budget vehicles. For
example, Ford Motor Co. introduced the Figo, starting at
around US$7,000, to the BRICS markets in 2010. In
2016, Nissan Motor Co. launched its US$5,000 car, the
Datsun Redi-Go, in the Indian market. Hyundai launched
the Eon in 2011, and Renault-Nissan introduced the larger
but still ultra-low-cost Kwid, an SUV, in 2015. By 2020,
millions of ultra-low-cost vehicles will crowd narrow
alleyways throughout the world. Thus, what happened in
solution. Ultimately, it decided that Nano production
would begin at Tata’s existing factory in Pantnagar in the
northern state of Uttarakhand after receiving an addi-
tional allotment of land from the Uttarakhand govern-
ment to expand the Pantnagar factory for Nano production.
It became apparent that sales of the Nano in India, orig-
inally scheduled for October of 2008, would not begin
until the spring of 2009.55
Successful Launch, but Struggling Sales
Even though Tata was expected to solve the transportation
problem for thousands of Indians, and Nano’s launch was
a highly awaited public event, sales of the Nano were
delayed by at least six months after the land disputes.56
However, when Tata eventually announced Nano’s 2009
production plans, it quickly started generating the orders
at volumes that far exceeded expectations. As of May
2009, according to Bloomberg analysts, Tata Motors had
received 203,000 orders for its Nano, more than double
the initial sales plan. The company accepted the bookings
between April 9 and April 25, amounting to almost
25 billion rupees ($501 million), according to a Tata
Motors release. Deliveries were planned to start in July
of 2009 and were expected to be completed in the last
quarter of 2010, according to the company.57
Surging demand from first-time buyers and motorcy-
clists in India contrasted with plunging automobile sales
in the U.S. and Europe, where job losses and economic
recession were keeping consumers away from showrooms.
“The Nano has the potential to become a game-changer
for Tata in the long run,” said Gaurav Lohia, an analyst
at K.R. Choksey Shares & Securities Pvt. in Mumbai.
“Once you generate the volumes, you are the king.”58
According to the Society of Indian Automobile
Manufacturers, the [Nano] bookings represented about
17 percent of the 1.22 million passenger cars sold in
India, Asia’s fourth-largest automobile market, in the fis-
cal year ended March. Maruti Suzuki India Ltd., maker
of half the cars sold in the country, sold 636,707 units,
while Hyundai Motor Co. sold 244,030 and Tata Motors
sold 160,446.59
Due to its manufacturing capacity constraints, Tata
Motors would not be able to fill all the orders as quickly
as expected. The first Nanos were to roll out of the
Pantnagar plant, which could produce only 60,000 units a
year. Annual output was projected to increase by a further
350,000 units when the facility at Sanand in western India
was completed at the end of 2009. Therefore, Tata Motors
announced that it would choose the first 100,000 custom-
ers for the $2,500 Nano by a lottery, leaving the company
with at least a year of production as backlog.60 Production
for the Nano switched to Sanand in the summer of 2010,
but the factory was still unable to produce enough Nanos
to meet the initial demand.61
428 Part 3 International Strategic Management
people said that the Nano would have to go through many
upgrades in order to win the American consumer and in
order to meet the safety requirements. For example, in
most American cars, safety features alone cost more than
$2,500, according to Adrian Lund, president of the Insur-
ance Institute for Highway Safety in Arlington, VA.73 This
prediction eventually proved true. In 2014 the Nano
received a zero star safety rating from German testing
agencies, confirming the speculation that the Nano would
need to undergo significant design revisions if it were to
ever enter more developed markets.
As far as American consumer preferences are con-
cerned, a “U.S. Nano would also need to be nicer inside
to be attractive to buyers,” Tata representatives told
Autoblog Green. Reps from the blog drove the car around
Judson College in Alabama and concluded that Tata will
need to significantly improve the comfort level in the car.
Students all asked where the iPod connector was and why
there weren’t any cupholders. Those sorts of features
would be a part of the program if the car actually gets the
official green light. Tata Motors designers have time to
iron out these details, as any potential U.S. launch is still
likely to be years away.74
Optimists suggest that there is a big segment of
American consumers for whom Nano will be a “just
good enough” car because they do not need any fancy
features. For example, Volkswagen built millions of
Beetles for people who wanted a car for a simple
reason—to avoid walking—and this car became very
successful on the market because it resonated with the
needs of a large consumer segment that was looking for
this type of car. As inexpensive as Nano would be when
entering the U.S. market, it might challenge not only
new car models, but also the used car market because
the American consumer would have the ability to buy
a new Nano model for the price of a used car. This
purchase alternative may be another benefit attracting
the economy-driven consumers in the U.S., especially
in times of prolonged economic crisis and uncertain
gasoline prices.75
Bangalore would presage changes to come in Lagos, Rio
de Janeiro, and Budapest.68
The global market for low-priced cars could be
immense—the World Bank counts more than 800 million
people who earn between $3,600 and $11,000 annually.
In India, the new vehicle could change the taxi business
overnight and energize a cadre of small-time entrepre-
neurs by providing new levels of mobility, carrying capac-
ity, and social status.69
In spite of glamorous projections of high demand for
low-cost cars, some analysts pose serious concerns of the
overall profitability of budget car manufacturing. With the
rising competition in the low-cost vehicle market, increas-
ing cost pressure, and small profit margins, will the new
budget car models be able to recoup the R&D investment
and generate any profits? For example, on the eve of
the Nano launch, Mr. Tata said in an interview that
developing the new model cost between $380 million and
$435 million. He said without a better idea of future input
costs and demand, he could not predict how soon the proj-
ect would turn a profit or what the profit margin on the
cars would be. Should steel prices continue to rise, prices
may have to be adjusted.70
At such a low price, and with less-than-expected
sales figures, it could take a long time for Tata to recoup
its investment in developing the world’s cheapest car.
With profit margins as low as 5 percent, it could take
more than five years for the project to be in the black,
estimated Vaishali Jajoo, senior research analyst at
Angel Broking in Mumbai. “It depends on how the mar-
gins will be,” and at this price they are going to be very
low, she said.71
Although the competition in the low-cost-vehicle mar-
ket will remain fierce, Anil K. Gupta and Haiyan Wang,
two experts on India and China, said in a BusinessWeek
article that Tata’s Nano should be viewed as not just a
product for an identified market need today but also as a
platform for tomorrow. The key to leveraging any product
or service as a platform for future growth is to treat it as
a bundle of capabilities instead of becoming overly con-
strained by its current features, branding, distribution
channels, or targeted customers. Underlying capabilities—
either singly or in combination—can be leveraged across
different markets far more easily than is the case with end
products or services (look at corporate intranet searches
powered by Google). They can also be upgraded and/or
combined with new capabilities to create entirely new
products and services (this is how the iPod led to the
iPhone/iPod Touch).72
Tata Touching U.S. Ground
Tata showcased its Nano in the United States in January
2010 at the Detroit auto show and generated its first feed-
back from potential American customers. The comments
ranged from highly skeptical to very optimistic. Some © Shutterstock
In-Depth Integrative Case 3.1 Tata “Nano”: The People’s Car 429
trends in the auto industry, and possibly reshaping
the industry? What did Tata Motors teach other
automakers in terms of leadership and innovation?
5. Do you agree that there is a future for low-budget
cars like Nano in other markets besides India? Do
you think Tata Motors is going in the right direc-
tion by trying to develop its low-cost Nano models
adapted to European and U.S. markets? How would
you evaluate a likelihood of success of the Nano on
the U.S. market? What should Tata Motors do to
win American consumers?
Source: This case was prepared by Tetyana Azarova of Villanova University 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.
Questions for Review
1. What inspired Tata Motors to build the Nano? Why
was there a need for an inexpensive car in India?
2. What innovative steps did Tata undertake to design
the Nano in a way that would meet the $2,500 price
tag? Do you think that the low price automatically
means poor quality? How did Tata Motors address
the quality issue while developing its budget car?
3. What caused delay in Nano’s launch? What impor-
tant features of the Indian economic environment
were the key factors that caused the problem? What
does this story teach about risks of doing business
in India?
4. Would you agree that introduction of low-cost
models to the world auto market will be setting new
1. Anand Giridharadas, “Four Wheels for the Masses:
The $2,500 Car,” New York Times, January 8, 2008,
www.nytimes.com/2008/01/08/business/worldbusiness/
08indiacar.html?_r=1&ei=5065&en=35aebdd89f67e
699&ex=1200459600&partner=MYWAY&pagewant
ed=print.
2. Ruth David, “Tata Unveils the Nano, Its $2,500
Car,” Forbes, January 20, 2008, www.forbes.com/
2008/01/10/tata-motors-nano-markets-equity-cx_
rd_0110markets05.html.
3. Robyn Meredith, “The Next People Car,” Forbes,
April 17, 2009, http://finance.yahoo.com/family-
home/article/102865/the-next-peoples-car.
4. World Bank, “India,” Motor Vehicles (per 1,000
people) (2009).
5. Eric Bellman, “Tata’s High-Stakes Bet on Low-Cost
Car,” The Wall Street Journal, January 10, 2008,
http://online.wsj.com/article/SB119993102461279857.
html?mg=com-wsj.
6. Tata Motors, “Tata Motors Unveils the People’s Car,”
press release, January 10, 2008, www.tatamotors.
com/press/tata-motors-unveils-the-peoples-car/.
7. Scott Carney, “India’s 50-MPG Tata Nano: Auto
Solution or Pollution?” Wired Magazine, June 23,
2008, https://www.wired.com/2008/06/ff-tata/.
8. Bellman, “Tata’s High-Stakes Bet on Low-Cost Car.”
9. Vipin V. Nair, “Tata Motors Gets 203,000 Orders for
Nano, World’s Cheapest Car,” Bloomberg, May 4,
2009, http://tata-nano-booking.blogspot.com/2009/
05/tata-motors-gets-203000-orders-for-nano.html.
10. “Tata Motors Unveils the People’s Car.”
11. Ruth David, “Tata Unveils Nano, Its $2,500 Car.”
12. “Tata Motors Unveils the People’s Car.”
13. Ruth David, “Tata Unveils Nano, Its $2,500 Car.”
14. “Tata Motors Unveils the People’s Car.”
15. Ibid.
16. Carney, “India’s 50-MPG Tata Nano: Auto Solution
or Pollution?”
17. Ibid.
18. Ibid.
19. Ibid.
20. Meredith, “The Next People Car.”
21. “About Us,” Tata Motors, www.tatamotors.com/
about-us/.
22. Ibid.
23. Ibid.
24. Ibid.
25. Ibid.
26. Ibid.
27. Ibid.
28. Ibid.
29. Tata Motors: Milestones, http://www.tatamotors.
com/our_world/rearview.php?version=text.
30. John Hagel and John Seely Brown, “Learning from
Tata’s Nano,” BusinessWeek, February 27, 2008,
https://www.bloomberg.com/news/articles/2008-
02-27/learning-from-tatas-nanobusinessweek-
business-news-stock-market-and-financial-advice.
31. Jessie Scanlon, “What Can Tata’s Nano Teach
Detroit?” BusinessWeek, March 18, 2009, http://
economictimes.indiatimes.com/what-can-tatas-nano-
teach-detroit/articleshow/4289796.cms.
32. Bellman, “Tata’s High-Stakes Bet on Low-Cost Car.”
33. Anand Giridharadas, “Four Wheels for the Masses:
The $2,500 Car,” New York Times, January 8, 2008,
www.nytimes.com/2008/01/08/business/worldbusiness/
08indiacar.html?_r=1&ei=5065&en=35aebdd89f67e6
99&ex=1200459600&partner=MYWAY&pagewanted
=print.
ENDNOTES
430 Part 3 International Strategic Management
54. “Nano Car Project: Third Petition Filed in Gujarat
High Court,” Economic Times, December 18, 2008,
http://economictimes.indiatimes.com/News/News_
By_Industry/Auto/Automobiles/Nano_Car_Project_
Third_petition_filed_in_Gujarat_High_Court/
articleshow/3857739.cms.
55. Kurczewski, “Tough Times for the Tata Nano.”
56. Nair, “Tata Motors Gets 203,000 Orders for Nano,
World’s Cheapest Car.”
57. Ibid.
58. Ibid.
59. Ibid.
60. Ibid.
61. “Tata’s Nano: Stuck in Low Gear,” The Economist,
August 20, 2011, www.economist.com/node/
21526374.
62. Adam Werbach, “Fizzling Sales in India for the
Tata Nano, ‘The Peoples’s Car,’” The Atlantic,
December 3, 2010, www.theatlantic.com/business/
archive/2010/12/fizzling-sales-in-india-for-the-tata-
nano-the-peoples-car/67435/.
63. “Tata’s Nano: Stuck in Low Gear.”
64. Tim Pollard, “Tata Ramps Up Production of Nano
to Boost Slow Sales,” Automotive and Motoring
News, November 25, 2010, www.carmagazine.co.uk/
car-news/industry-news/tata/tata-ramps-up-production-
of-nano-to-boost-slow-sales/.
65. Sumant Banerji, “Tata Nano Turns Three; Life
Has Just Begun for the World’s Cheapest Car,”
Hindustan Times, July 16, 2012, www.hindustan-
times.com/autos/tata-nano-turns-three-life-has-just-
begun-for-the-world-s-cheapest-car/story-
gffl1uCmNHh0HryvSACvLL.html.
66. Tata Motors, Directors Report, FY 2015, www.
tatamotors.com/investors/financials/70-ar-html/
directors-report.html.
67. Bellman, “Tata’s High-Stakes Bet on Low-Cost Car.”
68. Carney, “India’s 50-MPG Tata Nano: Auto Solution
or Pollution?”
69. Ibid.
70. Bellman, “Tata’s High-Stakes Bet on Low-Cost Car.”
71. Ibid.
72. Anil K. Gupta and Haiyan Wang, “Tata Nano: Not
Just a Car but Also a Platform,” BusinessWeek,
January 29, 2010.
73. Giridharadas, “Four Wheels for the Masses: The
$2,500 Car.”
74. Matthew DeBord, “Is the Tata Nano America’s Good
Enough Car?” The Big Money, January 21, 2010.
75. Ibid.
34. Hagel and Brown, “Learning from Tata’s Nano.”
35. Scanlon, “What Can Tata’s Nano Teach Detroit?”
36. Hagel and Brown, “Learning from Tata’s Nano.”
37. Ibid.
38. Ibid.
39. Ibid.
40. “Villagers Raise Slogans against Car Company,”
The Hindu, May 26, 2006, www.thehindu.com/
todays-paper/tp-national/villagers-raise-slogans-
against-car-company/article3138420.ece.
41. Nick Kurczewski, “Tata Motors Shuts Down Nano
Factory,” September 3, 2008.
42. Stephanie Grimmett, “Tata Motors Makes Its Move
Out of Singur,” Seeking Alpha, September 5, 2008,
http://seekingalpha.com/article/94106–tata-motors-
makes-its-move-out-of-singur.
43. Ibid.
44. Rina Chandran and Sujoy Dhar, “Tata Motors
Says Looking for Alternative Nano Site,” Reuters,
September 2, 2008, www.reuters.com/article/
idUSDEL24564.
45. Kurczewski, “Tata Motors Shuts Down Nano Factory.”
46. Malini Hariharan, “INSIGHT: Singur Dispute Could
Hurt India Projects,” ICIS News, September 1, 2008,
www.icis.com/resources/news/2008/09/01/9153231/
insight-singur-dispute-could-hurt-india-projects/.
47. Ibid.
48. Ibid.
49. Chandran and Dhar, “Tata Motors Says Looking for
Alternative Nano Site.”
50. Nick Kurczewski, “Tough Times for the Tata
Nano,” New York Times, December 26, 2008, http://
wheels.blogs.nytimes.com/2008/12/26/tough-times-
for-the-tata-nano/.
51. A memorandum of understanding (MOU or MoU) is
a document describing a bilateral or multilateral
agreement between parties. It expresses a convergence
of will between the parties, indicating an intended
common line of action. It is often used in cases
where parties either do not imply a legal commitment
or in situations where the parties cannot create a
legally enforceable agreement. (Source: http://en.
wikipedia.org/wiki/Memorandum_of_understanding.)
52. During a bandh, a major political party or a large
chunk of a community declares a general strike, usu-
ally lasting one day. Often bandh means that the com-
munity or political party declaring a bandh expects the
general public to stay in their homes and strike work.
(Source: http://en.wikipedia.org/wiki/Bandh.)
53. “Buddha’s Loss Is Modi’s Gain as Nano Goes to
Gujarat,” NDTV, October 7, 2008.
PART FOUR
ORGANIZATIONAL
BEHAVIOR AND
HUMAN RESOURCE
MANAGEMENT
432
O
B
JE
C
T
IV
E
S
O
F
T
H
E
C
H
A
PT
E
R
The World of International
Management
Motivating Employees in a
Multicultural Context: Insights
from Emerging Markets
A ccording to Patricia Odell of PROMO magazine, “As U.S. companies continue to expand globally, currently
employing more than 60 million overseas workers, motivating
and rewarding these diverse workforces is a significant
challenge to organizations.” Bob Nelson, Ph.D., author of
1001 Ways to Reward Employees, told PROMO magazine,
“One size doesn’t fit all when it comes to employee motivation—
rewards that motivate best are those that are most valued
by the person you are trying to thank.”1
According to BusinessWeek, numerous well-known firms have
enlisted the help of Globoforce, an Irish company, to design
their corporate recognition programs. Globoforce’s program
lets employees choose a reward they want, such as tickets to
a concert or a $50 gift card to their favorite store. In this way,
Globoforce tailors rewards to specific employee preferences.2
This personalized approach to motivation appears to work well;
a 2016 study found that employees who received recognition
rewards were more likely to feel engaged in their jobs and
proud of their work.3
These employee preferences are often correlated with
culture. For example, in a certain Australian company, recog-
nizing specific employees through programs like “Employee of
the Month” effectively work as a strong motivator. Australian
employees, with an individualistic culture, tend to feel comfort-
able when specific key performers are rewarded for their indi-
vidual contributions, and many will work harder to achieve this
recognition. In a certain Chinese company, however, this same
approach may actually demotivate employees. Chinese
employees, who tend to be collectivist, may view an individual
award or bonus to be embarrassing. In this type of culture,
recognition of the entire workgroup might be more effective,
stengthening the entire team rather than causing division.4
Furthermore, managers must be aware that a reward in
one culture may be viewed differently in another culture.
Bob Nelson shares a story of how a pharmaceutical company
Motivation is closely related to the performance of human
resources in modern organizations. Although the motivation
process may be similar across cultures, there are clear differ-
ences in motivation that are culturally based. What motivates
employees in the United States may be only moderately
effective in Japan, France, or Nigeria. Therefore, although
motivation in the workplace is related to stimulating and
encouraging employee performance in many situations and
environments, an international context requires country-by-
country, or at least regional, examination of differences in
motivation and its sources.
This chapter examines motivation as a psychological
process and explores how motivation can be used to under-
stand and improve employee performance. It also identifies
and describes internationally researched work-motivation
theories and discusses their relevance for international
human resource management. The specific objectives of
this chapter are
1. DEFINE motivation, and explain it as a psychological
process.
2. EXAMINE the hierarchy-of-needs, two-factor, and
achievement motivation theories, and assess their value
to international human resource management.
3. DISCUSS how an understanding of employee satisfaction
can be useful in human resource management throughout
the world.
4. EXAMINE the value of process theories in motivating
employees worldwide.
5. UNDERSTAND the importance of job design, work
centrality, and rewards in motivating employees in an
international context.
Chapter 12
MOTIVATION ACROSS
CULTURES
433
that compensation had a limited role in motivating Chinese
employees. Jim Leininger of Watson Wyatt Beijing wrote:
Increasing employee satisfaction by raising salaries may result
in short-term retention, but employees who stay in your organi-
zation because of high salaries may also leave for higher sala-
ries. Thus, compensation is sometimes called a “hygiene issue.”
It is something that is not noticed until it is missing. A non-
competitive compensation system is easily “noticed” by employ-
ees and can lead to turnover. However, having high salary levels
does not necessarily lead to highly committed employees or
lower turnover. Other things become the distinguishing factors
once average compensation levels are satisfied.10
The following factors were found to be strong drivers of
employee commitment:
∙ Management effectiveness. Employees are motivated
when their managers have sound decision-making abil-
ity, successfully engage their employees, and value
their employees.
∙ Positive work environment. To be productive, employ-
ees need a healthy, safe workplace with access to
information needed to do their jobs.
∙ Objective performance management system. Watson
Wyatt’s 2003 compensation survey demonstrated that,
for the typical employee, at least one month’s salary
will be tied to a performance measure—either for the
employee personally or for the company itself.
Managers must ensure that the performance manage-
ment system is objective, fair, and clearly communi-
cated to employees.
∙ Clear communication. Managers can increase commit-
ment by making sure employees understand their
company’s goals, their own job, and the link between
their job and the customer.11
In contrast, Fisher and Yuan’s case study of Chinese employ-
ees of a major hotel in Shanghai found that good wages and
good working conditions were the most important motivating
factors. They discovered that employees’ intrinsic needs for
interesting work, personal growth, and involvement tended to
be lower, especially among older Chinese workers, as compared
with employees in Western cultures. According to Fisher and
Yuan, managers of MNCs with ventures in China should take
note that Chinese employees appreciate wage raises, increased
housing subsidies, and employee share ownership. Chinese
decided to give customized watches bearing the company logo
to all 44,000 employees around the world. When Nelson told
this story to Taiwanese employees of a different company, they
remarked that such a gift would never work in their culture.
Timepieces are associated with death in Taiwan and China.5
So, as a manager, how does one motivate employees? There
are general management principles that can be applied to most
cultural settings. But also, there are specific considerations
for each individual culture. Next, we mention some general
concepts that have proved useful and then discuss motivating
Chinese employees in particular.
Motivating Employees: General Principles
In its guide on how to motivate employees, The Wall Street
Journal suggests that motivation involves “creat[ing] conditions
that make people want to offer maximum effort, [having]
employees harness self-direction and self-control in pursuit of
common objectives, . . . [r]ewarding people for achievement,”
providing responsibility that allows them to rise to the challenge,
and “[u]nleashing their imagination, ingenuity and creativity. . . .”6
In addition, Bob Nelson notes that today employees
“expect work to be an integrated part of their lives—not their
entire lives.”7 Thus, managers can likely increase employee
motivation by offering more flexible working hours. With
technology, it has become much easier for employees to work
from home. Nelson also emphasizes that discussing career
options in the organization and providing learning and
development opportunities often motivates employees.8
Frequently, managers focus on extrinsic rewards, such as
pay, to motivate employees, while ignoring intrinsic rewards.
Kenneth Thomas told BusinessWeek, “Research shows that
managers underestimate the importance of intrinsic rewards.”
BusinessWeek describes intrinsic rewards as “the psychological
lift that employees get from doing work that matters to
them.”9 Intrinsic rewards include the personal feeling of
accomplishment that employees have when completing
work. In a collectivistic culture, such as Argentina, an intrinsic
reward may be the satisfaction of helping the group complete
a project. In an individualistic country, like the United Kingdom,
an intrinsic reward may be the satisfaction of personally
exceeding sales goals or efficiency.
Motivating Employees in China
A WorkChina™ employee opinion survey, consisting of
10,000 employees from 67 companies in China, found
434 Part 4 Organizational Behavior and Human Resource Management
Clearly, motivation is a matter of critical importance to international managers in orga-
nizations around the world that is much discussed and debated, as are the similarities
and differences among cultures as touching on what are perceived to be effective incen-
tives and rewards. While there are some common elements in effective motivation across
cultures, the role of pay (versus other forms of incentives) varies somewhat. Moreover,
the form and structure of financial rewards are distinct in different cultures. For instance,
the Australian and Chinese examples in the World of International Management above
demonstrates how individual rewards and incentives work well in culturally individual-
istic cultures such as Australia, while such approaches would be inappropriate and poten-
tially embarrassing in collectivist cultures such as China. The role of intrinsic
rewards—the psychological rewards that employees get from doing work that matters to
them—is important around the world; however, what is meaningful and rewarding may
vary from culture to culture. As MNCs shift from simply finding inexpensive employ-
ment bases to discovering new ways to enhance employee satisfaction, important ques-
tions begin to surface. Why does a relationship with an employee’s family make a
difference? What truly motivates workers in different cultures? What do they consider
important with regard to their perception of satisfaction? Employees typically seek more
than just fair compensation. They want to believe that they are making a difference in
some way. Effectively motivating across cultures can create competitive advantages that
are difficult for competitors to match. In this chapter, we provide some of the background
discussion about motivation, explore research in the area of motivation, and discuss the
implications of our knowledge about motivating employees across cultures.
■ The Nature of Motivation
Motivation is a psychological process through which unsatisfied wants or needs lead to
drives that are aimed at goals or incentives. A person with an unsatisfied need will under-
take goal-directed behavior to satisfy the need. Figure 12–1 shows the motivation process.
The three basic elements in this process are needs, drives, and goal attainment. The deter-
minants of motivation could be intrinsic, by which an individual experiences fulfillment
through carrying out an activity itself and helping others, or extrinsic, in the sense that
the external environment and result of the activity in the form of competition and compen-
sation or incentive plans are of greater importance.15 Motivation is an important topic in
international human resource management, especially so because many MNC managers
tend to assume they can motivate their overseas personnel with the same approaches that
are used in the home country. Whether this is true, or to what extent major differences in
culture require tailor-made, country-by-country motivation programs, is the source of
debate. As described in earlier chapters (especially Chapter 4), there obviously are some
motivational differences caused by culture. The major question is: Are these differences
motivation
A psychological process
through which unsatisfied
wants or needs lead to
drives that are aimed at
goals or incentives.
intrinsic
A determinant of motivation
by which an individual
experiences fulfillment
through carrying out an
activity and helping others.
extrinsic
A determinant of motivation
by which the external
environment and result
of the activity are of
greater importance
due to competition and
compensation or
incentive plans.
employees are also grateful when a manager is loyal to them.
This loyalty can be demonstrated through renewing employment
contracts and showing concern for employees’ families.12
Motivating Employees in the Global Workplace
In her article “Motivating Employees from Other Cultures,”
Sondra Thiederman offers tips to adapt one’s management style
to fit a multicultural context. First, she underscores the impor-
tance of interpreting situations accurately. For instance, many
managers “misinterpret the speaking of a foreign language in
the workplace as a sign of laziness, rudeness, and disrespect.”
In reality, “using another language is an effort to communicate a
job-related message accurately, a sign of extreme stress or
fatigue, or an effort to speed up the communication process.”13
Second, Thiederman notes that managers need to explain
their expectations to employees in such a way that they can be
understood by someone not raised in American culture. For
example, many cultures view complaining to superiors as a sign
of disloyalty. For an American manager, however, complaints
provide an opportunity to identify problems. Managers need to
explain to their workforce that good employees can bring up
problems to managers. Third, managers can motivate employ-
ees by offering positive reinforcement. Kind words can go a
long way in affirming the value of people of any culture.14
Drive toward goal to
satisfy need
Attainment of goal
(need satisfaction)
Unsatisfied
need
Figure 12–1
The Basic Motivation
Process
Chapter 12 Motivation Across Cultures 435
highly significant, or can an overall theory of work motivation apply throughout the world?
Considerable research on motivating human resources has been conducted in a large num-
ber of countries. Before reviewing these findings, let’s take a look at two generally agreed-on
starting assumptions about work motivation in the international arena.
The Universalist Assumption
The first assumption is that the motivation process is universal, that all people are motivated
to pursue goals they value—what the work-motivation theorists call goals with “high valence”
or “preference.” The process is universal; however, culture influences the specific content and
goals that are pursued. For example, one analysis suggests that the key incentive for many
U.S. workers is money; for Japanese employees, it is respect and power; and for Latin
American workers, it is an array of factors including family considerations, respect, job status,
and a good personal life. Similarly, the primary interest of the U.S. worker is him- or herself;
for the Japanese, it is group interest; and for the Latin American employee, it is the interest
of the employer.16 Simply put, motivation is universal, but its specific nature differs across
cultures, so no one motivation theory can be universally applied across cultures.
In the United States, personal success and professional achievement are important
motivators, and promotions and increased earnings are important goals. In China, group
affiliation is an important need, and social harmony is an important goal. Obviously,
Americans may value teamwork too, and Chinese workers wish to be well paid. However,
clearly, some of the ways to motivate U.S. employees and Chinese workers will differ.
The motivational process may be the same, but the specific needs and goals can be dif-
ferent between the two cultures. This conclusion was supported in a study by Welsh,
Luthans, and Sommer that examined the value of extrinsic rewards, behavioral manage-
ment, and participative techniques among Russian factory workers. The first two of these
motivational approaches worked well to increase worker performance, but the third did
not. The researchers noted that this study provides at least beginning evidence that U.S.-
based behavioral theories and techniques may be helpful in meeting the performance
challenges facing human resources management in rapidly changing and different cultural
environments. They found that two behavioral techniques—administering desirable
extrinsic rewards to employees contingent upon improved performance and providing
social reinforcement and feedback for functional behaviors and corrective feedback for
dysfunctional behaviors—significantly improved Russian factory workers’ performance.
By the same token, the study also points out the danger of making universalist assump-
tions about U.S.-based theories and techniques. In particular, the failure of the participa-
tive intervention does not indicate so much that this approach just won’t work across
cultures as that historical and cultural values and norms need to be recognized and
overcome for such a relatively sophisticated theory and technique to work effectively.17
At the same time, it is important to remember that as a growing number of
countries begin moving toward free-market economies and as new opportunities for
economic rewards emerge, the ways in which individuals in these nations are moti-
vated will change. Commenting on the management of Chinese personnel, for exam-
ple, Sergeant and Frenkel have pointed out that new labor laws now allow both state
enterprises and foreign-invested Chinese enterprises to set their own wage and salary
levels. However, companies have to be careful about believing that they can simply
go into the marketplace, pay high wages, and recruit highly motivated personnel. In
particular, the researchers note that
Devising reward packages for Chinese employees has been difficult because of the range
and complexity of nonwage benefits expected by workers as a legacy of the “iron rice bowl”
tradition. However, health and accident insurance, pensions, unemployment and other ben-
efits are increasingly being taken over by the state. There are two cultural impediments to
introducing greater differentials in pay among workers of similar status: importance accorded
to interpersonal harmony which would be disrupted by variations in earnings; and distrust
of performance appraisals because in state enterprises evaluations are based on ideological
principles and guanxi [connections].18
436 Part 4 Organizational Behavior and Human Resource Management
So some of what foreign MNCs would suspect about how to motivate Chinese
employees is accurate, but not all. The same is true, for example, about Japanese employ-
ees. Many people believe that all Japanese firms guarantee lifetime employment and that
this practice is motivational and results in a strong bond between employer and employee.
In truth, much of this is a myth. Actually, less than 28 percent (and decreasing) of the
workforce has any such guarantee, and in recent years a growing number of Japanese
employees have been finding that their firms may do the best they can to ensure jobs
for them but will not guarantee jobs if the company begins to face critical times. As in
the West, when a Japanese firm has a crisis, people are often let go. This was clearly
seen in recent years when the Japanese economy was stalled and the country’s jobless
rate hit new highs.19
In a test of the universalist assumption in developing countries, researchers mea-
sured the frequency with which managers were involved with certain skill activities, such
as negotiation, job planning, motivation, and decision making. Drawing from a sample
that included managers from Hungary and Senegal, they found that the relative frequency
with which managers from one stratum of one nation are involved in various skill activ-
ities reflects the relative frequency with which managers from other strata within the
same nation and from nations of different cultural-industrialized standing are also
involved in the same activities, providing in this case at least some general support for
the universalist hypothesis.20
The Assumption of Content and Process
The second starting assumption is that work-motivation theories can be broken down
into two general categories: content and process. Content theories explain work moti-
vation in terms of what arouses, energizes, or initiates employee behavior. Process
theories of work motivation explain how employee behavior is initiated, redirected,
and halted.21 Most research in international human resource management has been
content-oriented because these theories examine motivation in more general terms and
are more useful in creating a composite picture of employee motivation in a particu-
lar country or region. Process theories are more sophisticated and tend to focus on
individual behavior in specific settings. Thus, they have less value to the study of
employee motivation in international settings, although there has been some research
in this area as well. By far the majority of research studies in the international arena
have been content-driven, but this chapter examines research findings exploring both
the content and the process theories.
The next sections examine work motivation in an international setting by focusing
on the three content theories that have received the greatest amount of attention: the
hierarchy-of-needs theory, the two-factor motivation theory, and the achievement motiva-
tion theory. Then we focus on three process theories: equity theory, goal-setting theory,
and expectancy theory. Each theory offers important insights regarding the motivation
process for personnel in international settings.
■ The Hierarchy-of-Needs Theory
The hierarchy-of-needs theory is based primarily on work by Abraham Maslow, a well-
known humanistic psychologist.22 Maslow’s hierarchy of needs has received a great deal
of attention in the U.S. management and organizational behavior field and from interna-
tional management researchers, who have attempted to show its value in understanding
employee motivation throughout the world.23
The Maslow Theory
Maslow postulated that everyone has five basic needs that constitute a need hierarchy.
In ascending order, beginning with the most basic need and going up to the highest, they
content theories of
motivation
Theories that explain work
motivation in terms of what
arouses, energizes, or
initiates employee behavior.
process theories of
motivation
Theories that explain work
motivation by how employee
behavior is initiated,
redirected, and halted.
Chapter 12 Motivation Across Cultures 437
are physiological, safety, social, esteem, and self-actualization needs. Figure 12–2 illus-
trates this hierarchy.
Physiological needs are basic physical needs for water, food, clothing, and shelter.
Maslow contended that an individual’s drive to satisfy these physiological needs is greater
than the drive to satisfy any other type of need. In the context of work motivation, these
physiological needs often are satisfied through the wages and salaries paid by the organization.
Safety needs are desires for security, stability, and the absence of pain. Organiza-
tions typically help personnel to satisfy these needs through safety programs and equip-
ment, and by providing security through medical insurance, unemployment and retirement
plans, and similar benefits.
Social needs are desires to interact and affiliate with others and the need to feel
wanted by others. This desire for “belongingness” often is satisfied on the job through social
interaction within work groups in which people give and receive friendship. Social needs
can be satisfied not only in formally assigned work groups but also in informal groups.
Esteem needs are needs for power and status. Individuals need to feel important
and receive recognition from others. Promotions, awards, and feedback from the boss
lead to feelings of self-confidence, prestige, and self-importance.
Self-actualization needs reflect a desire to reach one’s full potential, to become
everything that one is capable of becoming as a human being. In an organization, an
individual may achieve self-actualization not so much through promotion but instead by
mastering his or her environment and setting and achieving personal goals.24
Maslow’s theory rests on a number of basic assumptions. One is that lower-level
needs must be satisfied before higher-level needs can be achieved. A second is that a
need that is satisfied no longer serves as a motivator. A third is that there are more ways
to satisfy higher-level needs than there are ways to satisfy lower-level needs. Some of
these assumptions came from Maslow’s original work, some came from others’ work,
and some were later modifications by Maslow himself. These assumptions have driven
much of the international research on the theory.
International Findings on Maslow’s Theory
Do people throughout the world have needs that are similar to those described in Maslow’s
need hierarchy? Research generally shows that they do. For example, in a classic study
undertaken by Haire, Ghiselli, and Porter, a sample of 3,641 managers from 14 countries
was surveyed. Although this study is quite dated, it remains the most comprehensive and
relevant one for showing different cultural impacts on employee motivation. Countries in
this survey included the United States, Argentina, Belgium, Chile, Denmark, England,
France, Germany, India, Italy, Japan, Norway, Spain, and Sweden.25 With some minor
modification, the researchers examined the need of satisfaction and need of importance
of the four highest-level needs in the Maslow hierarchy. Esteem needs were divided into
two groups: esteem and autonomy. The former included needs for self-esteem and prestige;
the latter, desires for authority and for opportunities for independent thought and action.
The results of the Haire group’s study showed that all these needs were important
to the respondents across cultures. It should be remembered, however, that the subjects
physiological needs
Basic physical needs for
water, food, clothing, and
shelter.
safety needs
Desires for security,
stability, and the absence
of pain.
social needs
Desires to interact and
affiliate with others and to
feel wanted by others.
esteem needs
Needs for power and status.
self-actualization needs
Desires to reach one’s full
potential, to become
everything one is capable of
becoming as a human being.
Self-actualization
Esteem
Social
Safety
Physiological
Figure 12–2
Maslow’s Need Hierarchy
438 Part 4 Organizational Behavior and Human Resource Management
in this huge international study were managers, not rank-and-file employees. Upper-level
needs were of particular importance to these managers. The findings for select country
clusters (Latin Europe, United States/United Kingdom, and Nordic Europe) show that
autonomy and self-actualization were the most important needs for the respondents. Inter-
estingly, these same managers reported that those were the needs with which they were
least satisfied, which led Haire and his associates to conclude:
It appears obvious, from an organizational point of view, that business firms, no matter what
country, will have to be concerned with the satisfaction of these needs for their managers
and executives. Both types of needs were regarded as relatively quite important by manag-
ers, but, at the present time at least, the degree to which they were fulfilled did not live up
to their expectations.26
Each country or geographic region appears to have its own need-satisfaction pro-
file. When using this information to motivate managers, MNCs would be wise to consider
the individual country’s or region’s profile and adjust their approach accordingly.
Some researchers have suggested that Maslow’s hierarchy is too Western, and a
more collectivist, Eastern perspective is necessary. Nevis believes that the Maslow hier-
archy reflects a culture that is Western-oriented and focused on the inner needs of indi-
viduals.27 Obviously, not all cultures function in this way: Asian cultures emphasize the
needs of society. Nevis suggested that a Chinese hierarchy of needs would have four
levels, which from lowest to highest would be (1) belonging (social), (2) physiological,
(3) safety, and (4) self-actualization in the service of society, as seen in Figure 12–3. If
this is true, MNCs attempting to do business in China must consider this revised hier-
archy and determine how they can modify their compensation and job-design programs
to accommodate the requisite motivational needs. In any event, Nevis’s idea is worth
considering because it forces the multinational firm to address work motivation based
on those cultural factors that are unique to its surroundings as opposed to a universal
approach.
The discussion so far indicates that even though the need-hierarchy concept is
culturally specific, it offers a useful way to study and apply work motivation internation-
ally. However, the well-known Dutch researcher Geert Hofstede and others have sug-
gested that need-satisfaction profiles are not a very useful way of addressing motivation
because there often are so many different subcultures within any given country that it
may be difficult or impossible to determine which culture variables are at work in any
particular work setting. The Haire and follow-up studies dealt only with managers.
Hofstede found that job categories are a more effective way of examining motivation.
He reported a linkage between job types and levels and the need hierarchy. Based on
Figure 12–3
Collectivist Need Hierarchy
Self-
actualization
(in the service
of society)
Safety
Physiological
Belonging (social)
Source: Patrick A. Gambrel and Rebecca Cianci, “Maslow’s Hierarchy of Needs: Does It Apply in a Collectivist Culture?” Journal of
Applied Management and Entrepreneurship 8, no. 2 (April 2003), p. 157.
Chapter 12 Motivation Across Cultures 439
survey results from over 60,000 people in more than 50 countries who were asked to
rank a series of 19 work goals (see Tables 12–1 and 12–2), he found that
∙ The top four goals ranked by professionals corresponded to “high” Maslow
needs.
∙ The top four goals ranked by clerks corresponded to “middle” Maslow needs.
∙ The top four goals ranked by unskilled workers corresponded to “low”
Maslow needs.
∙ Managers and technicians showed a mixed picture—having at least one goal
in the “high” Maslow category.28
The tables from Hofstede’s research show that self-actualization and esteem needs
rank highest for professionals and managers, and that security, earnings, benefits, and phys-
ical working conditions are most important to low-level, unskilled workers. These findings
illustrate that job categories and levels may have a dramatic effect on motivation and may
well offset cultural considerations. As Hofstede noted, “There are greater differences between
job categories than there are between countries when it comes to employee motivation.”29
In deciding how to motivate human resources in different countries or help them
to attain need satisfaction, researchers such as Hofstede recommend that MNCs focus
Table 12–1
Top-Ranking Goals for Professional Technical Personnel from a Large
Variety of Countries
Rank Goal Questionnaire Wording
1 Training Have training opportunities (to improve your present skills
or learn new skills)
2 Challenge Have challenging work to do—work from which you can
get a personal sense of accomplishment
3 Autonomy Have considerable freedom to adopt your own approach
to the job
4 Up-to-dateness Keep up-to-date with the technical developments relating
to your job
5 Use of skills Fully use your skills and abilities on the job
6 Advancement Have an opportunity for advancement to higher-level job
7 Recognition Get the recognition you deserve when you do a good job
8 Earnings Have an opportunity for high earnings
9 Cooperation Work with people who cooperate well with one another
10 Manager Have a good working relationship with your manager
11 Personal time Have a job which leaves you sufficient time for your per-
sonal or family life
12 Friendly department Work in a congenial and friendly atmosphere
13 Company Have a job which allows you to make a real contribution
contribution to the success of your company
14 Efficient department Work in a department which is run efficiently
15 Security Have the security that you will be able to work for your
company as long as you want to
16 Desirable area Live in an area desirable to you and your family
17 Benefits Have good fringe benefits
18 Physical conditions Have good physical working conditions (good ventilation
and lighting, adequate work space, etc.)
19 Successful Work in a company which is regarded in your country
company as successful
Source: From Geert H. Hofstede, “The Colors of Collars,” Columbia Journal of World Business, September 1972, p. 74.
440
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441
most heavily on giving physical rewards to lower-level personnel and on creating for
middle- and upper-level personnel a climate in which there is challenge, autonomy, the
ability to use one’s skills, and cooperation. Some companies are finding innovative ways
to create motivation throughout the organization, from lower-level employees to middle
management, by altering HR strategies. The nearby International Management in Action
“McDonald’s Latin Flavor” provides an example of how focusing on employees’ needs
can both increase sales for the company and keep personnel on board.
Overall, there seems to be little doubt that need-hierarchy theory is useful in helping
to identify motivational factors for international human resource management. This theory
alone is not sufficient, however. Other content theories, such as the two-factor theory, add
further understanding and effective practical application for motivating personnel.
International Management in Action
McDonald’s Latin Flavor
McDonald’s was once the leader of “fast and friendly”
service, according to customer opinions of Latin American
restaurants. Over time, the company saw its margins
quickly shrinking, and in some areas of Latin America,
competitors were edging ahead. With managerial turn-
over at 40 percent, and an astounding 90 to 100 per-
cent turnover rate among employees between 16 and
18 years old, it was clear that motivation and morale
were too low for a sustainable work environment.
Clearly, something had to change.
In the past, organizational operations were carried
out on a country-by-country basis, where initiatives were
created to mirror the specific region in a way McDonald’s
calls “freedom within a framework.” The stagnant sales
and dissatisfied employees indicated that while the
company could survive, altering initiatives could lead to
further success. The human resources department rec-
ognized its crucial role in changing the atmosphere, and
soon plans emerged. First, it modified the HR board to
include one member from each country. This provided
efficient communication, collaboration, and coordination
among the Latin American countries. A three-year plan
was then set in place, accentuating a continuous-
improvement mentality that would keep processes and
employee satisfaction in check. However, no plan is
effective unless it is put into action.
McDonald’s began a point reward system in which
each store was allotted a base number of points, depend-
ing on sales for that store. A competitive structure was
then furthered by allowing lower-level employees to
increase points by filling out operational surveys, a tactic
used to promote product knowledge and enhance
employee skills. These points could then be cashed in
for prizes such as backpacks and even an iPod. Further-
more, global recognition programs were instilled that
rewarded top-performing employees. For example,
McDonald’s sent the top 300 performers from around the
world to the Turin Winter Olympics, where crew members
attended various McDonald’s-sponsored events and, of
course, the Olympic games. Managers were also given
the opportunity to profit from their actions, and the com-
pany stressed creativity throughout the process. Periodic
meetings among regional managers allowed each to
share “best practices” that have helped each store, and
company strategies were often brought to the table to
better inform those in charge. A Latin American Ray Kroc
Award program was created to bring the top 1 percent
of managers in the region to McDonald’s headquarters,
where participants had a chance to meet with top execu-
tives and engage in forums. The company further encour-
aged success through offering managers the opportunity
to take business classes at surrounding universities and
work toward a degree. Furthermore, managers engaged
in training courses that shifted focus from administrative
work to customers and employees under the assumption
that given a more hands-on approach, personnel can bet-
ter understand and achieve organizational and personal
satisfaction goals.
McDonald’s seems to have made all the right moves.
Employees at every level are more motivated, and it
shows in the numbers. After implementing the new HR
strategy, sales in Latin America initially increased by
13 percent and continued to grow by 11.6 percent the
next year. More crew members and managers remained
at the stores as well, with turnover reducing to 70 per-
cent and 25 percent, respectively. Furthermore, employee
surveys indicated that there was an increase of overall
commitment to the company by 9 percent, far surpassing
the goal of 3–4 percent projected by the company.
Latin America sent a strong message to McDonald’s
without having to say a word. Personnel originally did not
feel challenged and therefore sought other lucrative
endeavors. McDonald’s global strategy clearly was not uni-
versal, and in order to successfully integrate, local responses
were imperative (see Chapter 8). The company’s ability to
balance its global HR standardization with regional cultures
proved to be beneficial to all. Motivating personnel to
achieve goals through rewards programs keeps morale
high, and could save McDonald’s a great deal of money as
retention rates rise and the need for new worker training
declines. Employees have had a taste of the revised HR
programs, and it shows they like the new Latin flavor.
Source: “Putting the Front Line First: McDonald’s Commitment to
Employees Bolsters the Bottom Line,” Hewitt, vol. 9, issue 1.
442 Part 4 Organizational Behavior and Human Resource Management
■ The Two-Factor Theory of Motivation
The two-factor theory was formulated by well-known work-motivation theorist Frederick
Herzberg and his colleagues. Like Maslow’s theory, Herzberg’s has been a focus of
attention in international human resource management research over the years. This two-
factor theory is closely linked to the need hierarchy.
The Herzberg Theory
The two-factor theory of motivation holds that two sets of factors influence job
satisfaction: hygiene factors and motivators. The data from which the theory was
developed were collected through a critical incident methodology that asked the
respondents to answer two basic types of questions: (1) When did you feel particularly
good about your job? (2) When did you feel exceptionally bad about your job?
Responses to the first question generally related to job content and included factors
such as achievement, recognition, responsibility, advancement, and the work itself.
Herzberg called these job-content factors motivators. Responses to the second ques-
tion related to job context and included factors such as salary, interpersonal relations,
technical supervision, working conditions, and company policies and administration.
Herzberg called these job-context variables hygiene factors. Table 12–3 lists both
groups of factors. A close look at the two lists shows that the motivators are heavily
psychological and relate to Maslow’s upper-level needs and the hygiene factors are
environmental in nature and relate more to Maslow’s lower-level needs. Table 12–4
illustrates this linkage.
The two-factor theory holds that motivators and hygiene factors relate to employee
satisfaction. This relationship is more complex than the traditional view that employees
are either satisfied or dissatisfied. According to the two-factor theory, if hygiene factors
are not taken care of or are deficient, there will be dissatisfaction (see Figure 12–4).
Importantly, however, if hygiene factors are taken care of, there may be no dissatisfaction,
but there also may be no satisfaction. Only when motivators are present will there be
satisfaction. In short, hygiene factors help prevent dissatisfaction (thus the term hygiene,
as it is used in the health field), but only motivators lead to satisfaction. Therefore,
according to this theory, efforts to motivate human resources must provide recognition,
a chance to achieve and grow, advancement, and interesting work.
two-factor theory of
motivation
A theory that identifies two
sets of factors that influence
job satisfaction: hygiene
factors and motivators.
motivators
In the two-factor motivation
theory, job-content factors
such as achievement,
recognition, responsibility,
advancement, and the work
itself.
hygiene factors
In the two-factor motivation
theory, job-context
variables such as salary,
interpersonal relations,
technical supervision,
working conditions, and
company policies and
administration.
Table 12–3
Herzberg’s Two-Factor Theory
Hygiene Factors Motivators
Salary Achievement
Technical supervision Recognition
Company policies and Responsibility
administration
Interpersonal relations Advancement
Working conditions The work itself
Table 12–4
The Relationship between Maslow’s Need
Hierarchy and Herzberg’s Two-Factor Theory
Maslow’s Need Herzberg’s
Hierarchy Two-Factor Theory
Self-actualization Motivators
Achievement
Recognition
Responsibility
Esteem Advancement
The work itself
Social Hygiene factors
Salary
Technical supervision
Safety Company policies and administration
Interpersonal relations
Physiological Working conditions
Chapter 12 Motivation Across Cultures 443
Before examining the two-factor theory in the international arena, it is important
to note that Herzberg’s theory has been criticized by some organizational-behavior
academics. One criticism involves the classification of money as a hygiene factor and
not as a motivator. There is no universal agreement on this point. Some researchers report
that salary is a motivator for some groups, such as blue-collar workers, or those for whom
money is important for psychological reasons, such as a score-keeping method for their
power and achievement needs.
A second line of criticism is whether Herzberg developed a total theory of motiva-
tion. Some argue that his findings actually support a theory of job satisfaction. In other
words, if a company gives its people motivators, they will be satisfied; if it denies them
motivators, they will not be satisfied; and if the hygiene factors are deficient, they may
well be dissatisfied. Much of the international research on the two-factor theory discussed
next is directed toward the satisfaction-dissatisfaction concerns rather than complex moti-
vational needs, drives, and goals.
International Findings on Herzberg’s Theory
International findings related to the two-factor theory fall into two categories. One con-
sists of replications of Herzberg’s research in a particular country. This research asks
whether managers in country X give answers similar to those in Herzberg’s original
studies. In the other category are cross-cultural studies that focus on job satisfaction. This
research asks what factors cause job satisfaction and how these responses differ from
country to country. The latter studies are not a direct extension of the two-factor theory,
but they do offer insights regarding the importance of job satisfaction in international
human resource management.
Two-Factor Replications A number of research efforts have been undertaken to replicate
the two-factor theory, and in the main, they support Herzberg’s findings. George Hines,
for example, surveyed 218 middle managers and 196 salaried employees in New Zealand
using ratings of 12 job factors and overall job satisfaction. Based on these findings, he
concluded that “the Herzberg model appears to have validity across occupational levels.”30
Another similar study was conducted among 178 managers in Greece who were
Greek nationals. Overall, this study found that Herzberg’s two-factor theory of job
satisfaction generally held true for these managers. The researchers summarized their
findings as follows:
As far as job dissatisfaction was concerned, no motivator was found to be a source of dis-
satisfaction. Only categories traditionally designated as hygiene factors were reported to be
sources of dissatisfaction for participating Greek managers. . . . Moreover . . . motivators . . .
were more important contributors to job satisfaction than to dissatisfaction . . . (66.8% of the
traditional motivator items . . . were related to satisfaction and 31.1% were related to dissat-
isfaction). Traditional hygiene factors, as a group, were more important contributors to job
dissatisfaction than to job satisfaction (64% of the responses were related to dissatisfaction and
36% were related to satisfaction).31
Dissatisfaction
Traditional View
(hygiene factors)
Satisfaction
Absent
(dissatisfaction)
Two-Factor View
Present
(no dissatisfaction)
(motivators)
Absent
(no satisfaction)
Present
(satisfaction)
Figure 12–4
Views of Satisfaction/
Dissatisfaction
444 Part 4 Organizational Behavior and Human Resource Management
Another study tested the Herzberg theory in an Israeli kibbutz (communal work
group). Motivators there tended to be sources of satisfaction and hygiene factors sources
of dissatisfaction, although interpersonal relations (a hygiene factor) were regarded more
as a source of satisfaction than of dissatisfaction. The researcher was careful to explain
this finding as a result of the unique nature of a kibbutz: Interpersonal relations of a
work and nonwork nature are not clearly defined, thus making difficult the separation of
this factor on a motivator-hygiene basis. Commenting on the results, the researcher noted
that “the findings of this study support Herzberg’s two-factor hypothesis: Satisfactions
arise from the nature of the work itself, while dissatisfactions have to do with the conditions
surrounding the work.”32
Similar results on the Herzberg theory have been obtained by research studies in
developing countries. For example, one study examined work motivation in Zambia,
employing a variety of motivational variables, and found that work motivation was a
result of six factors: work nature, growth and advancement, material and physical pro-
visions, relations with others, fairness/unfairness in organizational practices, and per-
sonal problems. These variables are presented in Figure 12–5. They illustrate that, in
general, the two-factor theory of motivation was supported in this African country.33
Furthermore, a study performed in Romania indicated that hygiene factors (salary, work-
ing conditions, and supervision), though important, were not the driving forces in decid-
ing to accept a senior manager position. The most important aspects of a job to
Romanians were how much recognition and appreciation they would receive. This was
followed by a desire for salary incentives, though the need for increased knowledge and
skills, along with being involved in teams and improving competence and self development,
was also significant.34
Cross-Cultural Job-Satisfaction Studies A number of cross-cultural studies related to
job satisfaction also have been conducted in recent years. These comparisons show that
Herzberg-type motivators tend to be of more importance to job satisfaction than are
hygiene factors. A comparison from selected Herzberg studies is provided in Figure 12–6.
This shows that hygiene is strongly associated with factors that relate to job dissatisfac-
tion (or avoidance of), and motivation correlates with factors that drive job satisfaction.
This is also evident in the research, as seen in one study that administered the
Job Orientation Inventory (JOI) to MBA candidates from four countries.35 As seen in
Table 12–5, the relative ranking placed hygiene factors at the bottom of the list and
High dissatisfaction High satisfactionNeutral point
–2.00
Average standard score of frequency of mention of items
–1.00 +1.00 +2.00
Growth opportunity
Work nature
Material and physical provisions
Relations with others
Fairness in organizational practices
Personal problems
Figure 12–5
Motivation Factors in
Zambia
Source: Adapted from Peter D. Machungwa and Neal Schmitt, “Work Motivation in a Developing Country,” Journal of Applied
Psychology, February 1983, p. 41.
Chapter 12 Motivation Across Cultures 445
61
70
72
86
12
69
31
60
40
30
28
39
MotivatorsHygiene
P
er
ce
n
ta
g
e
All factors contributing to job dissatisfaction
Japan India South
Africa
Zambia Italy Israel
0
20
40
60
80
100
8
34
20
15
85
38
62
33
6766
86
92
All factors contributing to job satisfaction
Japan India South
Africa
Zambia Italy Israel
Figure 12–6 Selected Countries Hygiene and Motivation
Source: Frederick Herzberg, “One More Time: How Do You Motivate Employees?” Harvard Business Review, September–October 1987, p. 118.
Table 12–5
The Results of Administering the JOI to Four Cross-Cultural Groups
Relative Rankings
United States Australia Canada Singapore
(n = 49) (n = 58) (n = 25) (n = 33)
Achievement 2 2 2 2
Responsibility 3 3 3 3
Growth 1 1 1 1
Recognition 10 10 8 9
Job status 7 7 7 7
Relationships 5 5 10 6
Pay 8 8 6 8
Security 9 9 9 10
Family 6 6 5 5
Hobby 4 4 4 4
Source: From G. E. Popp, H. J. Davis, and T. T. Herbert, “An International Study of Intrinsic Motivation Composition,” Management
International Review 26, no. 3 (1986), p. 31.
motivators at the top. What also is significant is that although Singapore students do not
fit into the same cultural cluster as the other three groups in the study, their responses
were similar. These findings provide evidence that job-satisfaction-related factors may
not always be culturally bounded.36
446 Part 4 Organizational Behavior and Human Resource Management
Another, more comprehensive study of managerial job attitudes investigated the
types of job outcomes that are desired by managers in different cultures. Data were
gathered from lower- and middle-management personnel who were attending manage-
ment development courses in Canada, the United Kingdom, France, and Japan.37 The
researchers sought to identify the importance of 15 job-related outcomes and how satis-
fied the respondents were with each. The results indicated that job content is more
important than job context. Organizationally controlled factors (job-context factors, such
as conditions, hours, earnings, security, benefits, and promotions) for the most part did
not receive as high a ranking as internally mediated factors (job-content factors, such
as responsibility, achievement, and the work itself).
The data also show that managers from the four countries differ significantly
regarding both the perceived importance of job outcomes and the level of satisfaction
experienced on the job with respect to these outcomes. These differences are useful in
shedding light on what motivates managers in these countries and, in the case of MNCs,
in developing country-specific human resource management approaches. The most strik-
ing contrasts were between the French and the British. Commenting on the applicability
of this research to the formulation of motivational strategies for effective human resource
management, the researchers noted the following:
The results suggest . . . that efforts to improve managerial performance in the UK should
focus on job content rather than on job context. Changes in the nature of the work itself are
likely to be more valued than changes in organizational or interpersonal factors. Job enrich-
ment programs which help individuals design their own goals and tasks, and which down-
play formal rules and structure, are more likely to improve performance in an intrinsically
oriented society such as Britain, where satisfaction tends to be derived from the job itself,
than in France, where job context factors such as security and fringe benefits are more highly
valued. The results suggest that French managers may be more effectively motivated by
changing job situation factors, as long as such changes are explicitly linked to performance.38
In summary, Herzberg’s two-factor theory appears to reinforce Maslow’s need hier-
archy through its research support in the international arena. As with the application of
Maslow’s theory, however, MNCs would be wise to apply motivation-hygiene theory on
a country-by-country or a regional basis. Although there are exceptions, such as France,
there seems to be little doubt that job-content factors are more important than job-context
factors in motivating not only managers but also lower-level employees around the world,
as Hofstede pointed out.
■ Achievement Motivation Theory
In addition to the need-hierarchy and two-factor theories of work motivation, achievement
motivation theory has been given a relatively great amount of attention in the international
arena. Achievement motivation theory has been more applied to the actual practice of man-
agement than the others, and it has been the focus of some interesting international research.
The Background of Achievement Motivation Theory
Achievement motivation theory holds that individuals can have a need to get ahead, to
attain success, and to reach objectives. Note that like the upper-level needs in Maslow’s
hierarchy or like Herzberg’s motivators, the need for achievement is learned. Therefore,
in the United States, where entrepreneurial effort is encouraged and individual success
promoted, the probability is higher that there would be a greater percentage of people
with high needs for achievement than, for example, in China, Russia, or Eastern European
countries,39 where cultural values have not traditionally supported individual, entrepre-
neurial efforts.
Researchers such as the late Harvard psychologist David McClelland have identi-
fied a characteristic profile of high achievers.40 First, these people like situations in which
job-context factors
In work motivation, those
factors controlled by the
organization, such as
conditions, hours, earnings,
security, benefits, and
promotions.
job-content factors
In work motivation, those
factors internally controlled,
such as responsibility,
achievement, and the
work itself.
achievement motivation
theory
A theory that holds that
individuals can have a need
to get ahead, to attain
success, and to reach
objectives.
Chapter 12 Motivation Across Cultures 447
they take personal responsibility for finding solutions to problems. They want to win
because of their own efforts, not because of luck or chance. Second, they tend to be
moderate risk takers rather than high or low risk takers. If a decision-making situation
appears to be too risky, they will learn as much as they can about the environment and
try to reduce the probability of failure. In this way, they turn a high-risk situation into
a moderate-risk situation. If the situation is too low risk, however, there usually is an
accompanying low reward, and they tend to avoid situations with insufficient incentive.
Third, high achievers want concrete feedback on their performance. They like to
know how well they are doing, and they use this information to modify their actions.
High achievers tend to gravitate into vocations such as sales, which provide them with
immediate, objective feedback about how they are doing. Finally, and this has consider-
able implications for human resource management, high achievers often tend to be lon-
ers, and not team players. They do not form warm, close relationships, and they have
little empathy for others’ problems. This last characteristic may distract from their
effectiveness as managers of people.
Researchers have discovered a number of ways to develop high-achievement needs
in people. These involve teaching the individual to do the following: (1) obtain feedback
on performance and use this information to channel efforts into areas where success
likely will be attained, (2) emulate people who have been successful achievers,
(3) develop an internal desire for success and challenges, and (4) daydream in positive
terms by picturing oneself as successful in the pursuit of important objectives.41 Simply
put, the need for achievement can be taught and learned.
Before examining international research on achievement motivation theory, it is
important to realize that the theory has been cited as having a number of shortcomings.
One is that it relies almost solely on the projective personality Thematic Apperception
Test (TAT) to measure individual achievement, and a number of recent studies have
questioned the validity and reliability of this approach.42 Another concern is that achieve-
ment motivation is grounded in individual effort, but in many countries group harmony
and cooperation are critically important to success. Simply put, the original theory does
not satisfactorily explain the need for achievement in cultures in which individual accom-
plishment is neither valued nor rewarded.43,44
International Findings on Achievement Motivation Theory
A number of international researchers have investigated the role and importance of high-
achievement needs in human resource management.45
Early research among Polish industrialists found that many of them were high achiev-
ers.46 The average high-achievement score was 6.58, quite close to U.S. managers’ average
score of 6.74. This led some to conclude there is evidence that managers in countries as
diverse as the United States and those of the former Soviet bloc in Central Europe have
high needs for achievement.47 In later studies, however, researchers did not find a high need
for achievement in Central European countries. One study, for example, surveyed Czech
industrial managers and found that the average high-achievement score was 3.32, consider-
ably lower than that of U.S. managers.48 Because the need for achievement is learned,
differences in these samples can be attributed to cultural differences. By the same token,
given the dramatic, revolutionary changes that occurred in Central and Eastern Europe with
the end of communism and of centrally planned economies, one could argue that the
achievement needs of postcommunist Europeans, now able to be freely expressed, may well
be high today. The important point is that because achievement is a learned need and thus
largely determined by the prevailing culture, it is not universal and may change over time.
The ideal profile for high-achieving societies can be described in terms of the
cultural dimensions examined in Chapter 4. In particular, two cultural dimensions iden-
tified by Hofstede in Chapter 4—uncertainty avoidance and masculinity—best describe
high-achieving societies (see Figure 12–7). These societies tend to have weak uncertainty
avoidance. People in high-achieving societies are not afraid to take at least moderate risks
448 Part 4 Organizational Behavior and Human Resource Management
or to live with ambiguity. These societies also tend to have moderate-to-high masculinity,
as measured by the high importance they assign to the acquisition of money and other
physical assets and the low value they give to caring for others and for the quality of
work life. This combination (see the upper right quadrant of Figure 12–7) is found almost
exclusively in Anglo countries or in nations that have been closely associated with them
through colonization or treaty, such as India, Singapore, and Hong Kong (countries asso-
ciated with Great Britain) and the Philippines (associated with the United States).
Countries that fall into one of the other three quadrants of Figure 12–7 will not be
very supportive of the high need for achievement. MNCs in these geographic regions,
therefore, would be wise to formulate a human resource management strategy for either
changing the situation or adjusting to it. If they decide to change the situation, they must
design jobs to fit the needs of their people or put people through an achievement moti-
vation training program to create high-achieving managers and entrepreneurs.
A number of years ago, McClelland was able to demonstrate the success of such
achievement motivation training programs with underdeveloped countries. For example,
in India, he conducted such a program with considerable success. In following up these
Indian trainees over the subsequent 6 to 10 months, he found that two-thirds were
unusually active in achievement-oriented activities. They had started new businesses,
investigated new product lines, increased profits, or expanded their present organiza-
tions. For example, the owner of a small radio store opened a paint and varnish factory
after completing the program. McClelland concluded that this training appeared to have
doubled the natural rate of unusual achievement-oriented activity in the group studied.49
If international human resource managers cannot change the situation or train the
participants, then they must adjust to the specific conditions of the country and formulate
a motivation strategy that is based on those conditions. In many cases, this requires con-
sideration of a need-hierarchy approach blended with an achievement approach. Hofstede
offers such advice in dealing with the countries in the various quadrants of Figure 12–7:
The countries on the feminine side . . . distinguish themselves by focusing on quality of life
rather than on performance and on relationships between people rather than on money and
things. This means social motivation: quality of life plus security and quality of life plus risk.50
Weak uncertainty avoidance
Feminine
Feminine
Strong
uncertainty
avoidance
Masculine
Strong
uncertainty
avoidance
Weak uncertainty avoidance
Masculine
Norway
Great
Britain
Austria
Germany
Mexico
France
Brazil
Spain
Others
Costa Rica
South Korea
Others
Japan
India
USA
South Africa
Canada
Others
Finland
Others
U
n
ce
rt
ai
n
ty
a
vo
id
an
ce
in
d
ex
11
16
21
27
32
37
43
48
53
59
64
69
75
80
85
91
96
101
107
110
5 23 41 59
Masculinity index
77 95
Figure 12–7
Selected Countries on the
Uncertainty-Avoidance and
Masculinity Scales
Source: Adapted from Geert Hofstede, “The Cultural Relativity of Organizational Practices and Theories,” Journal of International
Business Studies, Fall 1983, p. 86.
Chapter 12 Motivation Across Cultures 449
In the case of countries that are attempting to introduce changes that incorporate
values from one of the other quadrants in Figure 12–7, the challenge can be even greater.
In summary, achievement motivation theory provides additional insights into the
motivation of personnel around the world. Like the need-hierarchy and two-factor theo-
ries, however, achievement motivation theory must be modified to meet the specific
needs of the local culture. The culture of many countries does not support high achieve-
ment. However, the cultures of Anglo countries and those that reward entrepreneurial
effort do support achievement motivation, and their human resources should probably be
managed accordingly.
■ Select Process Theories
While content theories are useful in explaining motivation for managing international
personnel, process theories can also lead to better understanding. As noted earlier, the
process theories explain how employee behavior is initiated, redirected, and halted; and
some of these theories have been used to examine motivation in the international arena.
Among the most widely recognized are equity theory, goal-setting theory, and expectancy
theory. The following briefly examines each of these three and their relevance to inter-
national human resource management.
Equity Theory
Equity theory focuses on how motivation is affected by people’s perception of how fairly
they are being treated. The theory holds that if people perceive that they are being treated
equitably, this perception will have a positive effect on their job performance and satis-
faction, and there is no need to strive for equity. Conversely, if they believe they are not
being treated fairly, especially in relation to relevant others, they will be dissatisfied, and
this belief will have a negative effect on their job performance and they will strive to
restore equity.
There is considerable research to support the fundamental equity principle in
Western work groups.51 However, when the theory is examined on an international basis,
the results are mixed. Yuchtman, for example, studied equity perceptions among manag-
ers and nonmanagers in an Israeli kibbutz production unit.52 In this setting everyone was
treated the same, but the managers reported lower satisfaction levels than the workers.
The managers perceived their contributions to be greater than those of any other group
in the kibbutz. As a result of this perception, they felt that they were undercompensated
for their value and effort. These findings support the basic concepts of equity theory.
One study, which assumed that Western thought was synonymous with individual-
ism and Eastern thought with collectivism, indicated that there are both similarities and
differences between how cultures view the equity model. The model consists of employee
inputs, subsequent outcomes, areas employees choose to compare the self to, and the
motivation to change any perceived inequity that may exist between the self and the point
of comparison (such as co-workers or employees in similar industries and positions).53
A summary comparison is provided in Table 12–6.
On the other hand, a number of studies cast doubt on the relevance of equity theory
in explaining motivation in an international setting. Perhaps the biggest shortcoming is
that the theory appears to be culture-bound. For example, equity theory postulates that
when people are not treated fairly, they will take steps to reduce the inequity by, for
example, doing less work, filing a grievance, or getting a transfer to another department.
In Asia and the Middle East, however, employees often readily accept inequitable treat-
ment in order to preserve group harmony. Additionally, in countries such as Japan and
Korea, men and women typically receive different pay for doing the same work, yet
because of years of cultural conditioning, women may not feel they are being treated
inequitably.54,55 Some researchers have explained this finding by suggesting that these
women compare themselves only to other women and in this comparison feel they are
equity theory
A process theory that
focuses on how motivation
is affected by people’s
perception of how fairly
they are being treated.
450 Part 4 Organizational Behavior and Human Resource Management
being treated equitably. While this may be true, the results still point to the fact that equity
theory is not universally applicable in explaining motivation and job satisfaction. In short,
although the theory may help explain why “equal pay for equal work” is a guiding moti-
vation principle in countries such as the United States and Canada, it may have limited
value in other areas of the world, including Asia and Latin America, where compensation
differences based on gender, at least traditionally, have been culturally acceptable.
Goal-Setting Theory
Goal-setting theory focuses on how individuals go about setting goals and responding
to them and the overall impact of this process on motivation. Specific areas that are
given attention in goal-setting theory include the level of participation in setting goals,
goal difficulty, goal specificity, and the importance of objective, timely feedback to
progress toward goals. Unlike many theories of motivation, goal setting has been con-
tinually refined and developed.56 There is considerable research evidence showing that
employees perform extremely well when they are assigned specific and challenging
goal-setting theory
A process theory that
focuses on how individuals
go about setting goals and
responding to them and the
overall impact of this
process on motivation.
Table 12–6
Individualistic and Collectivist Approaches to Equity Model
Western Eastern
(Individualistic) (Collectivist)
Cultures Cultures
Inputs Effort Loyalty
Intelligence Support
Education Respect
Experience Organizational tenure
Skill Organizational status
Social status Group member
Outcomes Pay Harmony
Autonomy Social status
Seniority status Acceptance
Fringe benefits Solidarity
Job status Cohesion
Status symbol
Comparisons Situation Organizational Group
Physical proximity Similar industry
Job facet Similar product/service
Personal In-Group
Gender Status
Age Job
Position Tenure
Professionalism Age
Position
Motivation Change personal inputs Organizational Group
to Reduce Provoke alternate outcomes Change points of
Inequity comparison
Psychologically distort inputs Psychologically distort
and outcomes inputs and outcomes
Leave the field In-Group
Change points of comparison Alter inputs of self
Psychologically distort
inputs and outcomes
Source: Adapted from Paul A. Fadil et al., “Equity or Equality?. . . ,” Cross-Cultural Management 12, no. 4 (2005), p. 23.
Chapter 12 Motivation Across Cultures 451
goals that they have had a hand in setting.57 But most of these studies have been con-
ducted in the United States, while few of them have been carried out in other cultures.58
One study that did examine goal setting in an international setting looked at Norwegian
employee participation in goal setting.59 The researchers found that the Norwegian
employees shunned participation and preferred to have their union representatives work
with management in determining work goals. This led the researchers to conclude that
individual participation in goal setting was seen as inconsistent with the prevailing
philosophy of participation through union representatives. Unlike the United States,
where employee participation in setting goals is motivational, it had no value for the
Norwegian employees in this study.
Similar results to the Norwegian study have been reported by Earley, who found
that workers in the U.K. responded more favorably to a goal-setting program sponsored
by the union stewards than to one sponsored by management. This led Earley to conclude
that the transferability across cultural settings of management concepts such as participa-
tion in goal setting may well be affected by the prevailing work norms.60 In order to
further test this proposition, Erez and Earley studied American and Israeli subjects and
found that participative strategies led to higher levels of goal acceptance and performance
in both cultures than did strategies in which objectives were assigned by higher-level
management.61 In other words, the value of goal-setting theory may well be determined
by culture. In the case, for example, of Asian and Latin work groups, where collectivism
is very high, the theory may have limited value for MNC managers in selected countries.
Expectancy Theory
Expectancy theory postulates that motivation is largely influenced by a multiplicative
combination of a person’s belief that (a) effort will lead to performance, (b) performance
will lead to specific outcomes, and (c) the outcomes will be of value to the individual.62
In addition, the theory predicts that high performance followed by high rewards will lead
to high satisfaction.63 Does this theory have universal application? Eden used it in study-
ing workers in an Israeli kibbutz and found some support;64 and Matsui and colleagues
reported that the theory could be applied successfully in Japan.65 On the other hand, it
is important to remember that expectancy theory is based on employees having consider-
able control over their environment, a condition that does not exist in many cultures (e.g.,
Asia). In particular, in societies where people believe that much of what happens is
beyond their control, this theory may have less value. It would seem that expectancy
theory is best able to explain worker motivation in cultures where there is a strong inter-
nal locus of control (e.g., in the United States). In short, the theory seems culture-bound,
and international managers must be aware of this limitation in their efforts to apply this
theory to motivate human resources.
■ Motivation Applied: Job Design, Work Centrality,
and Rewards
Content and process theories provide important insights into and understanding of ways
to motivate human resources in international management. So, too, do applied concepts
such as job design, work centrality, and rewards.
Job Design
Job design consists of a job’s content, the methods that are used on the job, and the
way in which the job relates to other jobs in the organization. Job design typically is a
function of the work to be done and the way in which management wants it to be carried
out. These factors help explain why the same type of work may have a different impact
on the motivation of human resources in various parts of the world and result in differing
qualities of work life.
expectancy theory
A process theory that
postulates that motivation is
influenced by a person’s
belief that (a) effort will
lead to performance,
(b) performance will lead
to specific outcomes, and
(c) the outcomes will be
of value to the individual.
job design
A job’s content, the
methods that are used on
the job, and the way the job
relates to other jobs in the
organization.
452 Part 4 Organizational Behavior and Human Resource Management
Quality of Work Life: The Impact of Culture Quality of work life (QWL) is not the
same throughout the world. For example, assembly-line employees in Japan work at a
rapid pace for hours and have very little control over their work activities. In Sweden,
assembly-line employees work at a more relaxed pace and have a great deal of control
over their work activities. U.S. assembly-line employees are somewhere in between; they
typically work at a pace that is less demanding than that in Japan but more structured
than that in Sweden.
What accounts for these differences? One answer is found in the culture of the
country. QWL is directly related to culture. Table 12–7 compares the United States,
Japan, and Sweden along the four cultural dimensions described in Chapter 4. A brief
look shows that each country has a different cultural profile, helping explain why simi-
lar jobs may be designed quite differently from country to country. Assembly-line work
provides a good basis for comparison.
In Japan, there is strong uncertainty avoidance. The Japanese like to structure tasks
so there is no doubt regarding what is to be done and how it is to be done. Individualism
is low, so there is strong emphasis on security, and individual risk taking is discouraged.
The power-distance index is high, so Japanese workers are accustomed to taking orders
from those above them. The masculinity index for the Japanese is high, which shows
that they put a great deal of importance on money and other material symbols of success.
In designing jobs, the Japanese structure tasks so that the work is performed within these
cultural constraints. Japanese managers work their employees extremely hard. Although
Japanese workers contribute many ideas through the extensive use of quality circles,
Japanese managers give them very little say in what actually goes on in the organization
(in contrast to the erroneous picture often portrayed by the media, which presents
Japanese firms as highly democratic and managed from the bottom up)66 and depend
heavily on monetary rewards, as reflected by the fact that the Japanese rate money as an
important motivator more than the workers in any other industrialized country do.
In Sweden, uncertainty avoidance is low, so job descriptions, policy manuals, and
similar work-related materials are more open-ended or general in contrast with the
detailed procedural materials developed by the Japanese. In addition, Swedish workers
are encouraged to make decisions and to take risks. Swedes exhibit a moderate-to-high
degree of individualism, which is reflected in their emphasis on individual decision mak-
ing (in contrast to the collective or group decision making of the Japanese). They have
a weak power-distance index, which means that Swedish managers use participative
approaches in leading their people. Swedes score low on masculinity, which means that
interpersonal relations and the ability to interact with other workers and discuss job-
related matters are important. These cultural dimensions result in job designs that are
markedly different from those in Japan.
Cultural dimensions in the United States are closer to those of Sweden than to
those of Japan. In addition, except for individualism, the U.S. profile is between that of
Table 12–7
Cultural Dimensions in Japan, Sweden, and the United States
Degree of Dimension
Cultural High/Strong Moderate Low/Weak
Dimension X ← — X — → X
Uncertainty avoidance J USA S
Individualism USA S J
Power distance J USA S
Masculinity J USA S
Source: From Geert Hofstede, “The Cultural Relativity of the Quality of Life Concept,” Academy of Management Review,
July 1984, pp. 391, 393.
Chapter 12 Motivation Across Cultures 453
Sweden and Japan (again see Table 12–7). This means that job design in U.S. assembly
plants tends to be more flexible or unstructured than that of the Japanese but more rigid
than that of the Swedes.
This same pattern holds for many other jobs in these three countries. All job
designs tend to reflect the cultural values of the country. The challenge for MNCs is
to adjust job design to meet the needs of the host country’s culture. For example,
when Japanese firms enter the United States, they often are surprised to learn that
people resent close control. In fact, there is evidence that the most profitable Japanese-
owned companies in the United States are those that delegate a high degree of author-
ity to their U.S. managers.67 Similarly, Japanese firms operating in Sweden find that
quality of work life is a central concern for the personnel and that a less structured,
highly participative management style is needed for success. Some of the best exam-
ples of efforts to integrate job designs with culture and personality are provided by
sociotechnical job designs.
Sociotechnical Job Designs
Sociotechnical designs are job designs that blend personnel and technology. The objec-
tive of these designs is to integrate new technology into the workplace so that workers
accept and use it to increase overall productivity. Because new technology often requires
people to learn new methods and, in some cases, work faster, employee resistance is
common. Effective sociotechnical design can overcome these problems. There are a
number of good examples, and perhaps the most famous is that of Volvo, the Swedish
automaker.
Sociotechnical changes reflective of the cultural values of the workers were intro-
duced at Volvo’s Kalmar plant. Autonomous work groups were formed and given the
authority to elect their own supervisors as well as to schedule, assign, and inspect their
own work. Each group was allowed to work at its own pace, although there was an
overall output objective for the week, and each group was expected to attain this
goal.68 The outcome was very positive and resulted in Volvo building another plant that
employed even more sophisticated sociotechnical job-design concepts. Volvo’s plant lay-
out, however, did not prevent the firm from having some problems. Both Japanese and
North American automakers were able to produce cars in far less time, putting Volvo at
a cost disadvantage. As a result, stagnant economies in Asia, coupled with weakening
demand for Volvo’s product lines in both Europe and the United States, resulted in the
firm laying off workers and taking steps to increase its efficiency.69,70
Without sacrificing efficiency, other firms have introduced sociotechnical designs
for better blending of their personnel and technology. A well-known U.S. example is
General Foods, which set up autonomous groups at its Topeka, Kansas, plant to produce
Gaines pet food. Patterned after the Volvo example, the General Foods project allowed
workers to share responsibility and work in a highly democratic environment. Other U.S.
firms also have opted for a self-managed team approach. In fact, research reports that
the concept of multifunctional teams with autonomy for generating successful product
innovation is more widely used by successful U.S., Japanese, and European firms than
any other teamwork concept.71 Its use must be tempered by the cultural situation, how-
ever. And even the widely publicized General Foods project at Topeka had some prob-
lems. Some former employees indicate that the approach steadily eroded and that some
managers were openly hostile because it undermined their power, authority, and decision-
making flexibility. The most effective job design will be a result of both the job to be
done and the cultural values that support a particular approach.72 For MNCs, the challenge
will be to make the fit between the design and the culture.
At the same time, it is important to realize that functional job descriptions now
are being phased out in many MNCs and replaced by more of a process approach. The
result is a more horizontal network that relies on communication and teamwork. This
approach also is useful in helping create and sustain partnerships with other firms.
sociotechnical designs
Job designs that blend
personnel and technology.
454 Part 4 Organizational Behavior and Human Resource Management
Work Centrality
Work centrality, which can be defined as the importance of work in an individual’s life
relative to his or her other areas of interest (family, church, leisure), provides important
insights into how to motivate human resources in different cultures.73 After conducting a
review of the literature, Bhagat and associates found that Japan has the highest level of
work centrality, followed by moderately high levels for Israel, average levels for the United
States and Belgium, moderately low levels for the Netherlands and Germany, and low
levels for Britain.74 These findings indicate that successful multinationals in Japan must
realize that although work is an integral part of the Japanese lifestyle, work in the United
States must be more balanced with a concern for other interests. Unfortunately, this is
likely to become increasingly more difficult for Japanese firms in Japan because stagnant
population growth is creating a shortage of personnel. As a result, growing numbers of
Japanese firms are now trying to push the mandatory retirement age to 65 from 60 and,
except for workers in the United States, Japanese workers put in the most hours.75,76
Value of Work Although work is an important part of the lifestyles of most people,
this emphasis can be attributed to a variety of conditions. For example, one reason that
Americans and Japanese work such long hours is that the cost of living is high, and
hourly employees cannot afford to pass up the opportunity for extra money. Among
salaried employees who are not paid extra, most Japanese managers expect their subor-
dinates to stay late at work, and overtime has become a requirement of the job. Moreover,
there is recent evidence that Japanese workers may do far less work in a business day
than outsiders would suspect.
Many people are unaware of these facts and have misperceptions of why the Japanese
and Americans work so hard and the importance of work to them. The same is true of
Germans and Americans. In recent years, the number of hours worked annually by German
workers has been declining, while the number for Americans has been on the rise. What
accounts for this trend? Some observers have explained it in cultural terms, noting that
Germans place high value on lifestyle and often prefer leisure to work, while their
American counterparts are just the opposite. In fact, research reveals that culture may have
little to do with it. A study by the National Bureau of Economic Research (NBER) found
a far wider range of wages within American companies than in German firms, and this
large pay disparity has created incentives for American employees to work harder. For
instance, Table 12–8 compares U.S. and German salaries based on a “Step 1” or entry-
level pay scale. In particular, many U.S. workers believe that if they work harder, their
chances of getting pay hikes and promotions will increase, and there are historical data
to support this belief. An analysis of worker histories in the United States and Germany
led NBER researchers to estimate that American workers who increase their working time
by 10 percent, for example, from 2,000 to 2,200 hours annually, will raise their future
earnings by about 1 percent for each year in which they put in extra hours.
Obviously, factors other than culture—such as gender, industry, and organizational
characteristics—influence the degree and type of work centrality within a country. These
factors, in turn, interact with national cultural characteristics. One study of work central-
ity examined the effect of parenthood on men and on women regarding the centrality of
and investment in work and family in the bicultural context of the Israeli high-tech
industry (i.e., the family-centered Israeli society on the one hand and the masculine
work-centered high-tech industry on the other hand). This study found a contrasting
parenthood effect on men and women. Fathers showed higher relative work centrality
than childless men, whereas mothers showed lower relative work centrality than women
without children. Fathers invested more weekly hours in paid work than childless men,
whereas mothers invested fewer weekly hours in paid work than women without children.
In the parents’ sub-sample, mothers evinced higher relative family centrality than fathers.
Mothers also invested more weekly hours in child care and core housework tasks than
fathers. A key finding was that the contrasting parenthood effect prevails even in the
work centrality
The importance of work in
an individual’s life relative
to other areas of interest.
Chapter 12 Motivation Across Cultures 455
demanding high-tech sector, in which women are expected to work long hours and play
down their care-giving activities.77
Another important area of consideration is the importance of work as a part of
overall lifestyle. In the case of Japanese workers, in particular, there has been a growing
interest in the impact of overwork on the physical condition of employees. A report by
the Japanese government noted that one-third of the working-age population suffers from
chronic fatigue, and a recent survey by the Japanese prime minister’s office found that
a majority of those who were surveyed complained of being chronically tired and feeling
emotionally stressed and some complained about abusive conditions in the workplace.78,79
Fortunately, as seen in the International Management in Action box “Karoshi: Stressed
Out in Japan,” the effects of overwork or job burnout—karoshi in Japanese—are begin-
ning to be recognized as a real social problem. Other Asian countries that are subject to
accelerated development are also experiencing job stress. Chinese workers, for example,
are exhibiting classic Western signs of stress and overwork. Burnout, substance abuse,
eating disorders, and depression abound, not to mention time away from the family. The
culture is such that employees will not seek counseling, as it is a sign of weakness and
embarrassment. However, like the Japanese, the Chinese are seeing the issue and
attempting to approach a solution that will alleviate stress and save face.80
Job Satisfaction In addition to the implications that value of work has for motivat-
ing human resources across cultures, another interesting contrast is job satisfaction.
For example, one study found that Japanese office workers may be much less satisfied
with their jobs than their U.S., Canadian, and EU counterparts are. The Americans,
who reported the highest level of satisfaction in this study, were pleased with job chal-
lenges, opportunities for teamwork, and ability to make a significant contribution at
work. Japanese workers were least pleased with these three factors.81 Similar findings
were uncovered by Luthans and his associates, who reported that U.S. employees had
higher organizational commitment than Japanese or Korean workers in their cross-
cultural study. What makes these findings particularly interesting is that a large
percentage of the Japanese and Korean workers were supervisory employees, who
karoshi
A Japanese term that means
“overwork” or “job burnout.”
Table 12–8
2016 Annual Salaries: U.S. and Germany
U.S. Salary German Salary
Grade (Annual, in US$) (Annual, in US$)
1 $ 18,343 $25,405
2 20,623 25,405
3 22,502 26,268
4 25,261 27,448
5 28,282 29,260
6 31,504 30,518
7 35,009 31,072
8 38,771 33,114
9 42,823 35,318
10 47,158 39,794
11 51,811 41,295
12 62,101 42,701
13 73,846 51,571
14 87,263 56,966
15 102,646 71,691
Source: https://www.opm.gov/policy-data-oversight/pay-leave/salaries-wages/salary-tables/
pdf/2016/GS and calculated from http://oeffentlicher-dienst.info/beamte/land/.
456
could be expected to be more committed to their organization than nonsupervisory
employees, and a significant percentage of these employees also had lifetime guaran-
tees.82 This study also showed that findings related to job satisfaction in the interna-
tional arena often are different from expected.83
Conventional wisdom not always being substantiated has been reinforced by cross-
cultural studies that found Japanese workers who already were highly paid, and then
received even higher wages, experienced decreased job satisfaction, morale, commitment,
and intention to remain with the firm. This contrasts sharply with U.S. workers, who did
International Management in Action
Karoshi: Stressed Out in Japan
Doing business in Japan can be a real killer. Overwork,
or karoshi, as it is called in Japan, claims 10,000 lives
annually in this hard-driving, competitive economic soci-
ety according to Hiroshi Kawahito, a lawyer who founded
the National Defense Council for Victims of Karoshi.
One of the cases is Jun Ishii of Mitsui & Company.
Ishii was one of the firm’s only speakers of Russian. In
the year before his death, Ishii made 10 trips to Russia,
totaling 115 days. No sooner would he arrive home from
one trip than the company would send him out again.
The grueling pace took its toll. While on a trip, Ishii col-
lapsed and died of a heart attack. His widow filed a law-
suit against Mitsui & Company, charging that her husband
had been worked to death. Tokyo labor regulators ruled
that Ishii had indeed died of karoshi, and the govern-
ment now is paying annual worker’s compensation to the
widow. The company also cooperated and agreed to
make a one-time payment of $240,000.
The reason that the case received so much publicity
is that this is one of the few instances in which the
government ruled that a person died from overwork.
Now regulators are expanding karoshi compensation to
salaried as well as hourly workers. This development is
receiving the attention of the top management of many
Japanese multinationals, and some Japanese MNCs are
beginning to take steps to prevent the likelihood of
overwork. For example, Mitsui & Company now assesses
its managers based on how well they set overtime
hours, keep subordinates healthy, and encourage work-
ers to take vacations. Matsushita Electric has extended
vacations from 16 days annually to 23 days and now
requires all workers to take this time off. One branch of
Nippon Telegraph & Telephone found that stress made
some workers irritable and ill, so the company initiated
periods of silent meditation. Other companies are fol-
lowing suit, although there still are many Japanese who
work well over 2,500 hours a year and feel both frus-
trated and burned out by job demands.
On the positive side, the Ishii case likely will bring
about some improvements in working conditions for
many Japanese employees. Experts admit, however, that
it is difficult to determine if karoshi is caused by work
demands or by private, late-night socializing that may be
work-related. Other possible causes include high stress,
lack of exercise, and fatty diets, but whatever the cause,
one thing is clear: More and more Japanese families no
longer are willing to accept the belief that karoshi is a
risk that all employees must accept. Work may be a killer,
but this outcome can be prevented through more
carefully implemented job designs and work processes.
At the same time, recent reports show that there is
still a long way to go. In Saku, Japan, for example, the
city’s main hospital has found that 32 percent of the
patients hospitalized in the internal medicine and psy-
chiatric wards are being treated for chronic fatigue syn-
drome, a diagnosis that is made only after six months
of severe, continuous fatigue in the absence of any
organic illness. Japanese doctors attribute this explo-
sion of chronic fatigue syndrome to stress. Moreover,
during the prolonged economic downturn, a growing
number of businesspeople found themselves suffering
from these symptoms. And to make matters worse,
there is growing concern about alcoholism among work-
ers. Over the past four decades, per capita alcohol con-
sumption in most countries has declined, but in Japan
it has risen fourfold. The per capita consumption of alco-
hol in Japan is equal to that in the United States. Even
this comparison is misleading because researchers
have found that most Japanese women do not drink at
all, but Japanese men in their 50s drink more than twice
as much as their American counterparts. Additionally,
young Japanese employees find that drinking is consid-
ered necessary, and some of them have raised com-
plaints about alru-hara, or alcohol harassment (forced/
pressured alcohol consumption).
Dealing with overwork will continue to be a chal-
lenge both for Japanese firms and for the government.
The same is true of the growing problems associated
with alcohol that are being brought on by stress and
business cultures that have long supported alcohol con-
sumption as a way of doing business and fitting into the
social structure.
Sources: Michael Zielenziger, “Alcohol Consumption a Rising Problem
in Japan,” Miami Herald, December 28, 2000, p. 10A; Howard
K. French, “A Postmodern Plague Ravages Japan’s Workers,” New
York Times, February 21, 2000, p. A4; William S. Brown, Rebecca
E. Lubove, and James Kwalwasser, “Karoshi: Alternative Perspectives
of Japanese Management Styles,” Business Horizons, March–April
1994, pp. 58–60; Karen Lowry Miller, “Now, Japan Is Admitting It:
Work Kills Executives,” BusinessWeek, August 3, 1992, p. 35.
Chapter 12 Motivation Across Cultures 457
not experience these negative feelings.84 These findings show that the motivation
approaches used in one culture may have limited value in another.85
Research by Kakabadse and Myers also has brought to light findings that are con-
tradictory to commonly accepted beliefs. These researchers examined job satisfaction
among managers from the United Kingdom, France, Belgium, Sweden, and Finland. It
has long been assumed that satisfaction is highest at the upper levels of organizations;
however, this study found varying degrees of satisfaction among managers, depending
on the country. The researchers reported that senior managers from France and Finland
display greater job dissatisfaction than the managers from the remaining countries. In
terms of satisfaction with and commitment to the organization, British, German, and
Swedish managers display the highest levels of commitment. Equally, British and German
managers highlight that they feel stretched in their job, but senior managers from French
organizations suggest that their jobs lack sufficient challenge and stimulus. In keeping
with the job-related views displayed by French managers, they equally indicate their
desire to leave their job because of their unsatisfactory work-related circumstances.86
On the other hand, research also reveals that some of the conditions that help cre-
ate organizational commitment among U.S. workers also have value in other cultures.
For example, a large study of Korean employees (n = 1,192 in 27 companies in 8 major
industries) found that consistent with U.S. studies, Korean employees’ position in the
hierarchy, tenure in their current position, and age all related significantly to organiza-
tional commitment. Also, as in previous studies in the United States, as the size of the
Korean organizations increased, commitment decreased, and the more positive the cli-
mate perceptions, the greater was the commitment.87 In other words, there is at least
beginning evidence that the theoretic constructs predicting organizational commitment
may hold across cultures.
Also related to motivation are job attitudes toward quality of work life. Recent
research reports that EU workers see a strong relationship between how well they do their
jobs and the ability to get what they want out of life. U.S. workers were not as supportive
of this relationship, and Japanese workers were least likely to see any connection.
This finding raises an interesting motivation-related issue regarding how well,
for example, American, European, and Japanese employees can work together effec-
tively. Some researchers have recently raised the question of how Japanese firms will
be able to have effective strategic alliances with American and European companies if
the work values of the partners are so different. Tornvall, after conducting a detailed
examination of the work practices of five companies—Fuji-Kiku, a spare-parts firm in
Japan; Toyota Motor Ltd. of Japan; Volvo Automobile AB of Sweden; SAAB Auto-
mobile AB, Sweden; and the General Motors plant in Saginaw, Michigan—concluded
that there were benefits from the approaches used by each. This led him to recommend
what he calls a “balance in the synergy” between the partners.88 Some of his suggestions
included the following:
Moving away from Moving toward
Logical and reason-centered, individualistic A more holistic, idealistic, and group
thinking thinking approach to problem solving
Viewing work as a necessary burden Viewing work as a challenging and
development activity
The avoidance of risk taking and the feeling An emphasis on cooperation, trust, and
of distrust of others personal concern for others
The habit of analyzing things in such great depth Cooperation built on intuition and
that it results in “paralysis through analysis” pragmatism
An emphasis on control An emphasis on flexibility
In large degree, this balance will require all three groups—Americans, Europeans, and
Asians—to make changes in the way they approach work.
In conclusion, it should be remembered that work is important in every society.
The extent of importance varies, however, and much of what is “known” about work as
458 Part 4 Organizational Behavior and Human Resource Management
a motivator often is culture-specific. Again, the lesson to be learned for international
management is that although the process of motivation may be the same, the content
may change from one culture to another.
Reward Systems
Besides the content and process theories, another important area of motivation is that of
rewards. Managers everywhere use rewards to motivate their personnel. Sometimes these
are financial in nature such as salary raises, bonuses, and stock options. At other times
they are nonfinancial such as feedback and recognition.89 The major challenge for inter-
national managers is that there are often significant differences between the reward sys-
tems that work best in one country and those that are most effective in another. Some
of these differences are a result of the competitive environment90 or of government leg-
islation that dictates such things as minimum wages, pensions, and perquisites.91 In other
cases, the differences are accounted for very heavily by culture.92 For example, while
many American companies like to use merit-based reward systems, firms in Japan,
Korea, and Taiwan, where individualism is not very high, often feel that this form of
reward system is too disruptive of the corporate culture and traditional values.93
■ Incentives and Culture
Use of financial incentives to motivate employees is very common, especially in coun-
tries with high individualism. In the United States, several chief executive officers earn
over $100 million a year thanks to bonuses, stock options, and long-term incentive pay-
ments.94 These pay systems are common when companies attempt to link compensation
to performance. Typically, these systems range from individual incentive-based pay sys-
tems in which workers are paid directly for their output, to systems in which employees
earn individual bonuses based on how well the organization at large achieves certain
goals such as sales growth, total revenue, or total profit. These reward systems are
designed to stress equity. However, they are not universally accepted.
In many cultures, compensation is based on group membership or group effort. In
these cases, the systems are designed to stress equality, and employees will oppose the
use of individual incentive plans. One example of this is the American multinational
corporation that decided to institute an individually based bonus system for the sales
representatives in its Danish subsidiary. The sales force rejected the proposal because it
favored one group over another and employees felt that everyone should receive the same
size bonus.95 Another example, reported by Vance and associates, was Indonesian oil
workers who rejected a pay-for-performance system that would have resulted in some
work teams making more money than others.96
While financial rewards such as pay, bonuses, and stock options are important
motivators, in many countries workers are highly motivated by other things as well. For
example, Sirota and Greenwood studied employees of a large multinational electrical
equipment manufacturer with operations in 40 countries. They found that in all of these
locales the most important rewards involved recognition and achievement. Second in
importance were improvements in the work environment and employment conditions
including pay and work hours.97 Beyond this, a number of differences emerged in pre-
ferred types of rewards. For example, employees in France and Italy highly valued job
security, while for American and British workers it held little importance. Scandinavian
workers placed high value on concern for others on the job and for personal freedom
and autonomy, but they did not rate “getting ahead” as very important. German workers
ranked security, fringe benefits, and “getting ahead” as very important, while Japanese
employees put good working conditions and a congenial work environment high on their
list but ranked personal advancement quite low.
Very simply, the types of incentives that are deemed important appear to be cultur-
ally influenced. Moreover, culture can even affect the overall cost of an incentive system.
Chapter 12 Motivation Across Cultures 459
In Japan, efforts to introduce Western-style merit pay systems typically lead to an increase
in the overall labor costs because the companies find that they cannot reduce the pay of
less productive workers for fear of causing them to lose face and thus disturb group
harmony.98 As a result, everyone’s salary increases. Culture also impacts profit in that
people tend to perform better under management systems that are supportive of their
own values. Nam, for example, studied two Korean banks that operated under different
management systems.99 One was owned and operated as a joint venture with an American
bank, and the other was owned and operated as a joint venture with a Japanese bank.
The American bank put into place management practices and personnel policies that were
common in its own organization. The Japanese bank put together a blend of Japanese
and Korean human resource management policies. Nam found that employees in the joint
venture with the Japanese bank were significantly more committed to the organization
than were their counterparts in the American joint venture and the Japanese-affiliated
bank had significantly higher financial performance.
Sometimes, however, reward systems can be transferred and used successfully. For
example, Welsh, Luthans, and Sommer examined the effectiveness of common Western
incentive systems in a Russian textile factory.100 They found that both contingently
administered extrinsic rewards and positive recognition and attention from the supervisor
led to significantly enhanced job performance, while participative techniques had little
impact on job behavior and performance. Similarly, many people believe that large annual
financial packages and lucrative golden parachutes are used only in American firms, but
this is untrue. Senior-level managers in many MNCs now earn large salaries, and large
financial packages for executives who are terminated or whose company is acquired by
another firm are gaining in popularity, especially in Europe.101 In other words, the type
of rewards that are used is not culture-bound.
Overall, however, cultures do greatly influence the effectiveness of various rewards.
What works in one country may not work in another. For example, research shows that
Swedish workers with superior performance often prefer a reward of time off rather than
additional money, while high-performing Japanese workers tend to opt for financial
incentives—as long as they are group-based and not given on an individual basis.102 It
is also important to realize that the reasons why workers choose one form of motivation
over another—for example, days off rather than more money—may not be immediately
obvious or intuitively discernible. For example, research has found that Japanese workers
tend to take only about half of their annual holiday entitlements, while French and
German workers take all of the days to which they are entitled. Many people believe the
Japanese want to earn more money, but the primary reason why they do not take all their
holiday entitlements is that they believe taking all of those days shows a lack of com-
mitment to their work group. The same is true for overtime: Individuals who refuse to
work overtime are viewed as selfish. One of the results of these Japanese cultural values
is karoshi, which we discussed a bit earlier in the chapter.
The World of International Management—Revisited
The World of International Management at the start of the chapter introduced you to how
important it is for MNCs and international managers to understand the underlying moti-
vators of workers’ performance. It also discussed various sources of employee satisfaction
or dissatisfaction and how these factors may differ among countries and cultures or how
they may be the same. By ignoring such crucial issues, companies risk losing a vast
talent pool and incurring costs through new hires, training, or settling for less experienced
personnel.
While workers in some countries may be lured into attractive jobs provided by
MNCs through relatively good salary compensation and the promise of upward mobility,
many have become impatient from the lack of institutional follow-through in various
dimensions. Companies moving to other countries may initially save money from low
460 Part 4 Organizational Behavior and Human Resource Management
introductory wages, but they need to consider the costs involved in retaining (or losing)
valuable talent. Until recently, awareness of the needs of employees in the international
context was reflected simply in wage incentives, but more and more organizations are
realizing that the less tangible values of work environment, recognition of intertwined
work/family relationships, and the opportunity to continue education are highly regarded
in many cultures. Identifying specific cultural viewpoints early can help MNCs in any
country to grow and may be the key to continued survival.
The challenge for international managers is to put together a motivational package
that addresses the specific needs of the employee or group in each region where an MNC
serves. Applying the ideas presented in this chapter, answer the following questions:
(1) What are some of the things that successful MNCs do to effectively motivate European
employees? Chinese employees? Southeast-Asian (Indonesian) employees? (2) What kinds
of incentives do scientific and technical employees respond to that might not be as mean-
ingful to other categories of employees? (3) What advantages might employees see in
working for a truly global company (as opposed to a North American MNC)?
1. Two basic types of theories explain motivation:
content and process. Content theories of motivation
have received much more attention in international
management research because they provide the
opportunity to create a composite picture of the
motivation of human resources in a particular coun-
try or region. In addition, content theories more
directly provide ways for managers to improve the
performance of their human resources.
2. Maslow’s hierarchy-of-needs theory has been stud-
ied in a number of different countries. Researchers
have found that regardless of the country, managers
have to be concerned with the satisfaction of these
needs for their human resources.
3. Some researchers have suggested that satisfaction
profiles are not very useful for studying motivation
in an international setting because there are so many
different subcultures within any country or even at
different levels of a given organization. These
researchers have suggested that job categories are
more effective for examining motivation because job
level (managers versus operating employees) and the
need hierarchy have established correspondences.
4. Like Maslow’s theory, Herzberg’s two-factor theory
has received considerable attention in the interna-
tional arena, and Herzberg’s original findings from
the United States have been replicated in other
countries. Cross-cultural studies related to job satis-
faction also have been conducted. The data show
that job content is more important than job context
to job satisfaction.
5. The third content theory of motivation that has
received a great amount of attention in the
international arena is the need for achievement.
Some current findings show that this need is not as
widely held across cultures as was previously
believed. In some parts of the world, however,
such as Anglo countries, cultural values encourage
people to be high achievers. In particular, Dutch
researcher Geert Hofstede suggested that an analysis
of two cultural dimensions, uncertainty avoidance
and masculinity, helps to identify high-achieving
societies. Once again, it can be concluded that
different cultures will support different motivational
needs, and that international managers developing
strategies to motivate their human resources for
improved performance must recognize cultural
differences.
6. Process theories have also contributed to the under-
standing of motivation in the international arena.
Equity theory focuses on how motivation is affected
by people’s perception of how fairly they are being
treated, and there is considerable research to sup-
port the fundamental equity principle in Western
work groups. However, when the theory is exam-
ined on an international basis, the results are mixed.
Perhaps the biggest shortcoming of the theory is
that it appears to be culture-bound. For example, in
Japan and Korea, men and women typically receive
different pay for doing precisely the same work,
and this is at least traditionally not perceived as
inequitable to women.
7. Goal-setting theory focuses on how individuals go
about setting goals and responding to them and
the overall impact of this process on motivation.
There is evidence showing that employees
SUMMARY OF KEY POINTS
Chapter 12 Motivation Across Cultures 461
of interest. In recent years, work has become a rel-
atively greater part of the average U.S. employee’s
life and perhaps less a part of the average Japanese
worker’s life. Research also indicates that Japanese
office workers are less satisfied with their jobs
than are U.S., Canadian, and EU workers, suggest-
ing once again that MNCs need to design motiva-
tion packages that address the specific needs of
different cultures. This is also true for rewards.
Research shows that the relative motivational value
of monetary and nonmonetary rewards is influ-
enced by culture. Countries with high individual-
ism, such as the United States and the U.K., tend
to make wide use of individual incentives, while
collectivistic countries such as those in Asia prefer
group-oriented incentives.
10. A central point of the chapter is that some motiva-
tional practices may have universal appeal, but
more often they need tailoring to fit to the culture
in which an MNC may be working. Research shows
that some motivational approaches in the United
States have been successfully transferred to Russia.
More often creative modification to familiar
approaches is necessary. The importance for inter-
national managers of focusing on employee motiva-
tion is unquestioned. The challenge lies in finding
the appropriate applications of motivational theory
to the specific culture at hand.
perform extremely well when they are assigned
specific and challenging goals that they had a
hand in setting. However, most of these goal-
setting studies have been conducted in the United
States; few of them have been carried out in other
cultures. Additionally, research results on the
effects of goal setting at the individual level are
very limited, and culture may well account for
these outcomes.
8. Expectancy theory postulates that motivation is
largely influenced by a multiplicative combination
of a person’s belief that effort will lead to perfor-
mance, that performance will lead to specific out-
comes, and that these outcomes are valued by the
individual. There is mixed support for this theory.
Many researchers believe that the theory best
explains motivation in countries characterized by an
internal locus of control.
9. Although content and process theories provide
important insights into the motivation of human
resources, three additional areas that have received
a great deal of recent attention in the application of
motivation theory are job design, work centrality,
and reward systems. Job design is influenced by
culture as well as the specific methods that are
used to bring together the people and the work.
Work centrality helps to explain the importance of
work in an individual’s life relative to other areas
KEY TERMS
achievement motivation theory, 446
content theories of motivation, 436
equity theory, 449
esteem needs, 437
expectancy theory, 451
extrinsic, 434
goal-setting theory, 450
hygiene factors, 442
intrinsic, 434
job-content factors, 446
job-context factors, 446
job design, 451
karoshi, 455
motivation, 434
motivators, 442
physiological needs, 437
process theories of motivation, 436
safety needs, 437
self-actualization needs, 437
social needs, 437
sociotechnical designs, 453
two-factor theory of
motivation, 442
work centrality, 454
REVIEW AND DISCUSSION QUESTIONS
1. Do people throughout the world have needs similar
to those described in Maslow’s need hierarchy?
What does your answer reveal about using universal
assumptions regarding motivation?
2. Is Herzberg’s two-factor theory universally applica-
ble to human resource management, or is its value
limited to Anglo countries?
3. What are the dominant characteristics of high
achievers? Using Figure 12–7 as your point of ref-
erence, determine which countries likely will have
the greatest percentage of high achievers. Why is
this so? Of what value is your answer to the study
of international management?
462 Part 4 Organizational Behavior and Human Resource Management
Japanese firm need to know about work centrality
in the United States? Explain.
6. In managing operations in Europe, which process
theory—equity theory, goal-setting theory, or
expectancy theory—would be of most value to an
American manager? Why?
7. What do international managers need to know about
the use of reward incentives to motivate personnel?
What role does culture play in this process?
4. A U.S. manufacturer is planning to open a plant in
Sweden. What should this firm know about the
quality of work life in Sweden that would have a
direct effect on job design in the plant? Give an
example.
5. What does a U.S. firm setting up operations in
Japan need to know about work centrality in that
country? How would this information be of value to
the multinational? Conversely, what would a
INTERNET EXERCISE: MOTIVATING POTENTIAL EMPLOYEES
In order for multinationals to continue expanding their
operations, they must be able to attract and retain highly
qualified personnel in many countries. Much of their
success in doing this will be tied to the motivational
package that they offer, including financial opportuni-
ties, benefits and perquisites, meaningful work, and an
environment that promotes productivity and worker
creativity. Automotive firms, in particular, are a good
example of MNCs that are trying very hard to increase
their worldwide market share. So for them, employee
motivation is an area that is getting a lot of attention.
Go to the web and look at the career opportunities that
are currently being offered by Nestlé, Unilever, and
Procter & Gamble (websites: nestle.com, unilever.com,
us.pg.com). All three of these companies provide infor-
mation about the career opportunities they offer. Based
on this information, answer these questions: (1) What
are some of the things that all three firms offer to moti-
vate new employees? (2) Which of the three has the
best motivational package? Why? (3) Are there any
major differences between P&G and European-based
rivals? What conclusion can you draw from this?
1. Patricia Odell, “Motivating Employees on a
Global Scale: Author Bob Nelson,” PROMO,
November 9, 2005, www.chiefmarketer.com/
motivating-employees-on-a-global-scale-author-
bob-nelson/.
2. Matthew Boyle, “Motivating without Money,”
BusinessWeek, April 24, 2009, https://www.
bloomberg.com/news/articles/2009-04-24/
motivating-without-money.
3. “New Globoforce Survey Shows Recognition Cre-
ates More Human-Focused Workplaces,” Business
Wire, March 24, 2016, www.businesswire.com/
news/home/20160324005325/en/Globoforce-
Survey-Shows-Recognition-Creates-Human-
Focused-Workplaces.
4. Matthew MacLachlan, “Management Tips: How to
Motivate Your International Workforce,” Commu-
nicaid, May 18, 2016, https://www.communicaid.
com/cross-cultural-training/blog/motivating-
international-workforce/.
5. Odell, “Motivating Employees on a Global
Scale.”
6. “Motivating Employees,” How-To Guide: Manag-
ing Your People, The Wall Street Journal, http://
guides.wsj.com/management/managing-your-
people/how-to-motivate-employees/.
7. Odell, “Motivating Employees on a Global
Scale.”
8. Patricia Odell, “Motivating Employees on a
Global Scale: Author Bob Nelson,” PROMO Mag-
azine, November 9, 2005, http://promomagazine.
com/incentives/motivating_empolyees_110905.
9. Boyle, “Motivating without Money.”
10. Jim Leininger, “The Key to Retention: Committed
Employees,” December 26, 2008, https://
vinhnguyen.wordpress.com/2008/12/26/the-key-
to-retention-committed-employees/.
11. Ibid.
ENDNOTES
Chapter 12 Motivation Across Cultures 463
27. Edwin C. Nevis, “Cultural Assumption and
Productivity: The United States and China,” Sloan
Management Review, Spring 1983, pp. 17–29.
28. Geert H. Hofstede, “The Colors of Collars,”
Columbia Journal of World Business, September
1972, pp. 72–78.
29. Ibid., p. 72.
30. George H. Hines, “Cross-Cultural Differences in
Two-Factor Motivation Theory,” Journal of
Applied Psychology, December 1973, p. 376.
31. Donald D. White and Julio Leon, “The Two-
Factor Theory: New Questions, New Answers,”
National Academy of Management Proceedings,
1976, p. 358.
32. D. Macarov, “Work Patterns and Satisfactions in
an Israeli Kibbutz: A Test of the Herzberg
Hypothesis,” Personnel Psychology, Autumn 1972,
p. 492.
33. Peter D. Machungwa and Neal Schmitt, “Work
Motivation in a Developing Country,” Journal of
Applied Psychology, February 1983, pp. 31–42.
34. Farhad Analoui, “What Motivates Senior Manag-
ers? The Case of Romania,” Journal of Manage-
rial Psychology 15, no. 4 (2000).
35. G. E. Popp, H. J. Davis, and T. T. Herbert, “An
International Study of Intrinsic Motivation Com-
position,” Management International Review 26,
no. 3 (1986), pp. 28–35.
36. Also see Rabi S. Bhagat et al., “Cross-Cultural
Issues in Organizational Psychology: Emergent
Trends and Directions for Research in the 1990s,”
in International Review of Industrial and
Organizational Psychology, ed. C. L. Cooper and
I. Robertson (New York: Wiley, 1990), p. 76.
37. Rabindra N. Kanungo and Richard W. Wright, “A
Cross-Cultural Comparative Study of Managerial
Job Attitudes,” Journal of International Business
Studies, Fall 1983, pp. 115–129.
38. Ibid., pp. 127–128.
39. Fred Luthans, “A Paradigm Shift in Eastern
Europe: Some Helpful Management Development
Techniques,” Journal of Management Development
12, no. 8 (1993), pp. 53–60.
40. For more information on the characteristics of high
achievers, see David C. McClelland, “Business
Drive and National Achievement,” Harvard Busi-
ness Review, July–August 1962, pp. 99–112.
41. Luthans, Organizational Behavior, pp. 253–256.
42. S. Iwawaki and R. Lynn, “Measuring Achievement
Motivation in Japan and Great Britain,” Journal of
Cross-Cultural Psychology 3 (1999), pp. 219–220.
12. Cynthia D. Fisher and Anne Xue Ya Yuan, “What
Motivates Employees? A Comparison of U.S. and
Chinese Employees,” The International Journal
of Human Resource Management 9, no. 3
(June 1998), pp. 516–528.
13. Sondra Thiederman, “Motivating Employees from
Other Cultures,” Monster.com, https://www.
monster.com/career-advice/article/Motivating-
Employees-from-Other-Cultures.
14. Ibid.
15. David Beswick, “Management Implications of the
Interaction between Intrinsic Motivation and
Extrinsic Rewards,” Seminar notes, February
16, 2007.
16. Abbass F. Alkhafaji, Competitive Global Manage-
ment (Delray Beach, FL: St. Lucie Press, 1995),
p. 118.
17. Dianne H. B. Welsh, Fred Luthans, and
Steven Sommer, “Managing Russian Factory
Workers: The Impact of U.S.-Based Behavioral
and Participative Techniques,” Academy
of Management Journal, February 1993,
p. 75.
18. Andrew Sergeant and Stephen Frenkel, “Managing
People in China: Perceptions of Expatriate Manag-
ers,” Journal of World Business 33, no. 1 (1998),
p. 21.
19. “Economic Tonic: Japan’s Economy,” The Econo-
mist, May 22, 2004, p. 87.
20. Michael H. Lubatkin, Momar Ndiaye, and Richard
Vengroff, “The Nature of Managerial Work in
Developing Countries: A Limited Test of the Uni-
versalist Hypothesis,” Journal of International
Business Studies 28 (1997), pp. 711–733.
21. For a more detailed discussion, see Fred Luthans,
Organizational Behavior, 12th ed. (New York:
Irwin/McGraw-Hill, 2010), chapter 6.
22. A. H. Maslow, “A Theory of Human
Motivation,” Psychological Review, July 1943,
pp. 390–396.
23. For more information on this topic, see Richard
Mead, International Management: Cross-Cultural
Dimensions (Cambridge, MA: Blackwell, 1994),
pp. 209–212.
24. See Richard M. Hodgetts, Modern Human Rela-
tions at Work, 8th ed. (Hinsdale, IL: Dryden
Press, 2002), chapter 2.
25. Mason Haire, Edwin E. Ghiselli, and Lyman W.
Porter, Managerial Thinking: An International
Study (New York: Wiley, 1966).
26. Ibid., p. 75.
464 Part 4 Organizational Behavior and Human Resource Management
43. For more on this, see J. C. Abegglen and G.
Stalk, Kaisha: The Japanese Corporation (New
York: Basic Books, 1985).
44. See also R. M. Steers, Y. K. Shin, and G. R.
Ungson, The Chaebol: Korea’s New Industrial
Might (New York: McGraw-Hill, 1989).
45. Fred Luthans, Brooke R. Envick, and Mary F.
Sully, “Characteristics of Successful Entrepre-
neurs: Do They Fit the Cultures of Developing
Countries?” Proceedings of the Pan Pacific
Conference, 1995, pp. 25–27.
46. These data were reported in David C. McClelland,
The Achieving Society (Princeton, NJ: Van Nostrand,
1961), p. 294.
47. E. J. Murray, Motivation and Emotion (Englewood
Cliffs, NJ: Prentice Hall, 1964), p. 101.
48. David J. Krus and Jane A. Rysberg, “Industrial
Managers and nAch: Comparable and Compati-
ble?” Journal of Cross-Cultural Psychology,
December 1976, pp. 491–496.
49. David C. McClelland, “Achievement Motivation
Can Be Developed,” Harvard Business Review,
November–December 1965, p. 20.
50. Geert Hofstede, “Motivation, Leadership, and
Organization: Do American Theories Apply
Abroad?” Organizational Dynamics, Summer
1980, pp. 55–56.
51. For more on this, see Richard M. Steers and
Carlos J. Sanchez-Runde, “Culture, Motivation, and
Work Behavior,” in Handbook of Cross-Cultural
Management, ed. Martin J. Gannon and Karen L.
Newman (London: Basil Blackwell, 2002).
52. E. Yuchtman, “Reward Distribution and Work-
Role Attractiveness in the Kibbutz: Reflections on
Equity Theory,” American Sociological Review 37
(1972), pp. 581–595.
53. Paul A. Fadil, Robert J. Williams, Wanthanee
Limpaphayom, and Cindi Smatt, “Equity or Equal-
ity? A Conceptual Examination of the Influence
of Individualism/Collectivism on the Cross-
Cultural Application of the Equity Theory,” Cross
Cultural Management 12, no. 4 (2005),
pp. 17–35.
54. R. M. Steers, S. J. Bischoff, and L. H. Higgins,
“Cross-Cultural Management Research: The Fish
and the Fisherman,” Journal of Management
Inquiry 1 (1992), pp. 321–330.
55. Ken I. Kim, Hun-Joon Park, and Nori Suzuki,
“Reward Allocations in the U.S., Japan, and
Korea: A Comparison of Individualistic and
Collectivistic Cultures,” Academy of Manage-
ment Journal, March 1990, pp. 188–198.
56. Luthans, Organizational Behavior, p. 520.
57. Edwin A. Locke and Gary P. Latham, A Theory of
Goal-Setting and Task Performance (Englewood
Cliffs, NJ: Prentice Hall, 1990).
58. M. Erez, “The Congruence of Goal-Setting Strate-
gies with Socio-Cultural Values and Its Effect on
Performance,” Journal of Management 12 (1986),
pp. 585–592.
59. J. P. French, J. Israel, and D. As, “An Experiment
in a Norwegian Factory: Interpersonal Dimension
in Decision-Making,” Human Relations 13 (1960),
pp. 3–19.
60. P. C. Earley, “Supervisors and Shop Stewards as
Sources of Contextual Information in Goal-
Setting,” Journal of Applied Psychology 71
(1986), pp. 111–118.
61. M. Erez and P. C. Earley, “Comparative Analysis
of Goal-Setting Strategies across Cultures,”
Journal of Applied Psychology 72, no. 4 (1987),
pp. 658–665.
62. Victor Vroom, Work and Motivation (New York:
Wiley, 1964).
63. Lyman W. Porter and Edward E. Lawler III,
Managerial Attitudes and Performance
(Homewood, IL: Irwin, 1968).
64. Dov Eden, “Intrinsic and Extrinsic Rewards and
Motives: Replication and Extension with Kibbutz
Workers,” Journal of Applied Social Psychology 5
(1975), pp. 348–361.
65. T. Matsui, T. Kakuyama, and M. L. Onglatco,
“Effects of Goals and Feedback on Performance in
Groups,” Journal of Applied Psychology 72
(1987), pp. 407–415.
66. For a systematic analysis of this and other
myths of Japanese management, see Richard
M. Hodgetts and Fred Luthans, “Japanese HR
Management Practices,” Personnel, April 1989,
pp. 42–45.
67. David Nicklaus, “Labor’s Pains,” St. Louis Post-
Dispatch, September 2, 2002, p. A1.
68. For more on this topic, see Noel M. Tichy and
Thore Sandstrom, “Organizational Innovations in
Sweden,” Columbia Journal of World Business,
Summer 1974, pp. 18–28.
69. “Automotive Brief—Volvo AB: Profit Rose 80%
in 4th Period, Bolstered by Truck Division,” The
Wall Street Journal, February 4, 2004, p. A1.
70. “Cars Brief: Volvo,” The Wall Street Journal,
March 16, 2004, p. A1.
71. Edward McDonough, “Market-Oriented Product
Innovation,” R&D Management, June 2004,
p. 335.
Chapter 12 Motivation Across Cultures 465
72. Eric Sundstrom, Kenneth P. DeMeuse, and
David Futrell, “Work Teams: Application and
Effectiveness,” American Psychologist, February
1990, pp. 120–133.
73. See Lillian H. Chaney and Jeanette S. Martin,
Intercultural Business Communication (Englewood
Cliffs, NJ: Prentice Hall, 1995), pp. 46–47.
74. Bhagat et al., “Cross-Cultural Issues,” p. 72.
75. Jonathan Watts, “Japan’s Old Shy Away from
Retiring,” The Guardian, August 5, 2002,
p. 12.
76. “U.S. Workers Most Productive; but Study Says
Europeans Have More Output per Hour,” Houston
Chronicle, September 1, 2003, p. 27.
77. Raphael Snir, Itzhak Harpaz, and Dorit Ben-Baruch,
“Centrality of and Investment in Work and Family
among Israeli High-Tech Workers: A Bicultural
Perspective,” Cross-Cultural Research 43, no. 4
(2009), pp. 366–385.
78. Howard W. French, “A Postmodern Plague
Ravages Japan’s Workers,” New York Times,
February 21, 2000, p. A4.
79. “Japanese Workers See Abuses by Bosses,” Los
Angeles Times, June 30, 2003, p. C5.
80. Michelle Conlin, “Go-Go-Going to Pieces in
China,” BusinessWeek, April 23, 2007, p. 88.
81. “Satisfaction in the USA, Unhappiness in Japanese
Offices,” Personnel, January 1992, p. 8.
82. Fred Luthans, Harriette S. McCaul, and Nancy G.
Dodd, “Organizational Commitment: A Compari-
son of American, Japanese, and Korean Employ-
ees,” Academy of Management Journal, March
1985, pp. 213–219.
83. For other research on this topic, see Shahid N.
Bhuian, Eid S. Al-Shammari, and Omar A. Jefri,
“Work-Related Attitudes and Job Characteristics of
Expatriates in Saudi Arabia,” Thunderbird Inter-
national Business Review, January–February 2001,
pp. 21–31.
84. David I. Levine, “What Do Wages Buy?” Admin-
istrative Science Quarterly, September 1993,
pp. 462–483.
85. David Heming, “What Wages Buy in the U.S. and
Japan,” Academy of Management Executive,
November 1994, pp. 88–89.
86. Andrew Kakabadse and Andrew Myers, “Qualities
of Top Management: Comparisons of European
Manufacturers,” Journal of Management Develop-
ment 14, no. 1 (1995), p. 6.
87. Steven M. 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.
88. Anders Tornvall, “Work-Values in Japan: Work
and Work Motivation in a Comparative Setting,”
in Managing Across Cultures: Issues and Perspec-
tives, ed. Pat Joynt and Malcolm Warner (London:
International Thomson Business Press, 1996),
p. 256.
89. Stephen Kerr, “Practical, Cost-Neutral Alternatives
That You May Know, but Don’t Practice,” Organi-
zational Dynamics, Summer 1999, pp. 61–70.
90. “U.S. Workers Most Productive.”
91. Matthew O. Hughes and Andrew Pirnie, “Retire-
ment Reform Worldwide,” LIMRA’s MarketFacts
Quarterly 22, no. 2 (Spring 2003), p. 12.
92. In the case of money, for example, see Swee
Hoon Ang, “The Power of Money: A Cross-
Cultural Analysis of Business-Related Beliefs,”
Journal of World Business 35, no. 1 (2000),
pp. 43–60.
93. J. Milliman, S. Nason, M. A. von Glinow, P. Hou,
K. B. Lowe, and N. Kim, “In Search of ‘Best’
Strategies Pay Practices: An Exploratory Study of
Japan, Korea, Taiwan, and the United States,” in
Advances in International Comparative Manage-
ment, ed. S. B. Prasad (Greenwich, CT: JAI
Press, 1995), pp. 227–252.
94. “Equilar 200 Highest-Paid CEO Rankings,”
New York Times & Equilar, 2015, www.equilar.
com/reports/18-200-highest-paid-CEO-rankings-
2015.html.
95. S. C. Schneider, S. A. Wittenberg-Cox, and L.
Hansen, Honeywell Europe (Insead, 1991).
96. C. M. Vance, S. R. McClaine, D. M. Boje, and
H. D. Stage, “An Examination of the Transferabil-
ity of Traditional Performance Appraisal Princi-
ples across Cultural Boundaries,” Management
International Review 32, no. 4 (1992),
pp. 313–326.
97. David Sirota and J. Michael Greenwood, “Under-
stand Your Overseas Workforce,” Harvard Busi-
ness Review, January–February 1971, pp. 53–60.
98. D. E. Sanger, “Performance Related Pay in Japan,”
International Herald Tribune, October 5, 1993,
p. 20.
99. S. H. Nam, “Culture, Control, and Commitment in
International Joint Ventures,” International Jour-
nal of Human Resource Management 6 (1995),
pp. 553–567.
100. Dianne H. B. Welsh, Fred Luthans, and Steven
Sommer, “Managing Russian Factory Workers:
The Impact of U.S.-Based Behavioral and
466 Part 4 Organizational Behavior and Human Resource Management
104. Ibid.
105. World Bank, “Indonesia,” World Development
Indicators (2016), http://data.worldbank.org/coun-
try/indonesia.
106. Michelle Davidson, “IBM and Indosat Ooredoo
Partner to Bring Cloud Services to Indonesia,”
Silicon Angle, March 11, 2016, http://siliconangle.
com/blog/2016/03/11/ibm-and-indosat-ooredo-
partner-to-bring-cloud-services-to-indonesia/.
107. Ibid.
Participative Techniques,” Academy of Manage-
ment Journal, February 1993, pp. 58–79.
101. Anita Raghavan and G. Thomas Sims, “‘Golden
Parachutes’ Emerge in European Deals,” The Wall
Street Journal, February 14, 2000, pp. A17, A18.
102. Susan C. Schneider and Jean-Louis Barsoux,
Managing Across Cultures, 2nd ed. (London:
Prentice Hall, 2003).
103. CIA, “Indonesia,” The World Factbook (2016),
https://www.cia.gov/library/publications/the-world-
factbook/geos/id.html.
467
In the International
Spotlight
You Be the International Management
Consultant
Indosat Ooredoo, Indonesia’s largest telecommunica-
tions company, partnered with IBM in 2016 to develop
software services specifically designed for the needs of
Indonesian businesses. The five-year agreement, worth
$200 million, has the ultimate goals of helping the
country’s businesses streamline their operations,
increase productivity, and encourage innovation. Mod-
ern technology has become more pervasive in Indonesia
in the last 20 years, and this partnership is aimed at
continuing that growth. Prior to partnering with IBM,
Indosat Ooredoo had attempted to develop and imple-
ment its own version of cloud services without much
success.106
Indosat Ooredoo, as a member of Qatar Ooredoo
Group, reported 69 million subscribers at the end of the
third quarter of 2015. Data usage by its customers
increased by 155 percent year over year. Revenue grew
10.5 percent over the same period. Partnering with IBM
will allow Indosat Ooredoo to leverage IBM’s infrastruc-
ture to support this growth. For example, IBM Global
Technology Services offers end-to-end IT consulting and
business services supported by an unparalleled global
delivery network.107
Questions
1. As an international management consultant,
how do you view this partnership for Indosat
Ooredoo?
2. How does this partnership help IBM? If you
were a consultant for an unrelated company, does
this deal increase your interest in expanding into
Indonesia?
The island nation of Indonesia is located along the Equa-
tor in southeast Asia, straddling the border between the
Indian and Pacific oceans. The country is tropical and
volcanic, and includes more than 14,000 individual
islands. Over 60 percent of the country is covered by rain-
forest. The combined land area of Indonesia is fairly large,
at about three times the size of Texas. Second only to
Brazil in terms of biodiversity, Indonesia’s natural
resources include petroleum, tin, natural gas, nickel, tim-
ber, bauxite, copper, fertile soils, coal, gold, and silver.103
The fourth most populous country in the world,
Indonesia has more than 250 million residents and has a
steady annual population growth rate of about 1 percent.
The country is young, with more than a quarter of
Indonesians under the age of 14. There is a great amount
of ethnic and cultural diversity throughout the various
islands and population centers. Religiously, nearly 90 per-
cent of Indonesians practice Islam, making the country
the largest Muslim population in the world.104
The Dutch colonized Indonesia in the early 17th cen-
tury, retaining control until World War II, when the Japanese
occupied the country. It is estimated that as many as
4 million Indonesians died during the occupation. After
World War II, the Dutch retained control of the islands until
1949, when sovereignty was finally granted to Indonesia.
From 1949 until 1968, the country was essentially under
authoritarian rule under President Sukamo. A successful
coup by General Suharto led to his “New Order” adminis-
tration, which opened trade between Indonesia and the
West but was also steeped in corruption. In the wake of the
Asian financial crisis, Suharto resigned in 1998, giving way
to democratic elections in 1999. A direct presidential elec-
tion was held for the first time in 2004. Indonesia’s GDP
stood at US$888.5 billion in 2014, and GDP per capita was
US$3,475. The Indonesian economy has expanded by
about 5 percent annually over the last several years.105
Indonesia
468
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The World of International
Management
Global Leadership Development:
An Emerging Need
F irms are currently bolstering their leadership development programs to prevent a future shortage of managers. As
reported in The Wall Street Journal in August 2010, the number
of potential managers has decreased as a result of layoffs and
cuts in training during the economic downturn. Larry Looker,
Amway Corp.’s manager of global leadership development, told
The Wall Street Journal, “We’re finding times when we want to
open a new market but don’t have anyone with the capabilities to
do it. It’s a real weakness.”1 When Amway needed country man-
agers for an expansion in Latin America, it could not find qualified
candidates in its local operations. During the recession, Amway
put on hold two leadership development programs. In 2011, it
restarted these programs with the hope of training future manag-
ers. It’s a positive sign that companies are growing their global
leadership development programs.2 What does a global leader-
ship development program look like? What qualities are compa-
nies looking for in candidates for these programs? What are the
benefits to the individual in participating in such a program? To
answer these questions, one MNC will be examined in detail.
Spotlight on Roche
The worldwide health care company Roche has extensive
global leadership development programs. Roche has
81,507 employees and is active in 150 countries. Roche’s
training for employees includes language courses, interper-
sonal skills training, and individual coaching and programs
on leadership and change management.3
According to Roche’s website, “Every Roche site has its
own training and development programs geared to local needs
and resources, and in line with local legal and regulatory
requirements.”4 One such program is Shanghai Roche
Pharma’s “People & Leadership Development Program.”
Shanghai Roche has a specific training program for managers
to reinforce leadership skills, such as strategic leadership.
Furthermore, each employee has an individualized development
plan. Based on the Roche 3E (Experience, Education, and Expo-
sure) development model, each employee works with his or her
manager to work out a customized development plan together.5
Leadership is often credited (or blamed) for the success (or
failure) of international operations. As with other aspects of
management, leadership styles and practices that work well in
one culture are not necessarily effective in another. The lead-
ership approach commonly used by U.S. managers would not
necessarily be the same as that employed in other parts of the
world. Even within the same country, effective leadership
tends to be very situation-specific. However, as with the other
areas of international management you have studied in this
text, certain leadership styles and practices may be more or
less universally applicable and transcend international bound-
aries. This chapter examines some differences and similarities
in leadership styles across cultures.
First, we review the basic foundation for the study of
leadership. Next, we examine leadership in various parts of
the world, Europe, East Asia, and the Middle East, including
some developing countries. Finally, we’ll analyze specific types
of leadership, drawing from recent research on leadership
across cultures. The specific objectives of this chapter are
1. DESCRIBE the basic philosophic foundation and styles of
managerial leadership.
2. EXAMINE the attitudes of European managers toward
leadership practices.
3. COMPARE and CONTRAST leadership styles in Japan
with those in the United States.
4. REVIEW leadership approaches in China, the Middle East,
and developing countries.
5. EXAMINE recent research and findings regarding leader-
ship across cultures.
6. DISCUSS the relationship of culture clusters and leader
behavior on effective leadership practices, including
increasing calls for more responsible global leadership.
Chapter 13
LEADERSHIP ACROSS
CULTURES
469
∙ Completely tailored to your development needs and
areas of interest in line with Roche needs.
∙ Diverse experience: different areas of the business,
functions, countries, sites, markets, leadership styles,
business and ethnic cultures.
∙ Training targeted at accelerating your leadership
capabilities.
∙ Personal Development Coach: dedicated senior
management support throughout the program and
beyond.8
For this program, Roche is looking for candidates with master’s
degrees, fluency in two languages, global mindset and mobil-
ity, strong leadership potential and business acumen, and
excellent communication skills.9
Employee Development Yields Results
Two Roche employees’ experiences demonstrate the results of
Roche’s training programs.
At age 24, Luciana, an employee at the Roche Diagnostics
affiliate in São Paolo, Brazil, participated in one of Roche’s pro-
grams. As part of the program, she had the opportunity to work
at Roche Diagnostics in Rotkreuz, Switzerland, and the Roche
Diagnostics affiliate in Burgess Hill, U.K. Those at Roche believe,
“Experiencing new ways of working and thinking inspires creativ-
ity in employees, advancing their careers and the company.”10
This appears to have been the case for Luciana. As a result
of her experience, Luciana said, “I have no words to describe
how it changes your point of view of life. In two and a half
years at Roche, I feel I’ve gained five years’ growth. I have
opportunities to grow every day, with challenging projects,
good professionals around me, and space to express myself
and to learn how to express myself better.”11
Tuygan Goeker has been at Roche for 30 years. His career
“has scarcely stood still, punctuated by a change in responsi-
bilities or a country move every three to four years.” He has
worked in Roche Istanbul, in Roche Indonesia, and at the
Roche headquarters in Switzerland. Today, he is head of the
Central and Eastern Europe, Middle East, Africa, and Indian
subcontinent region. He is currently working on developing
strategies for maximizing market potential in Brazil, Russia,
India, China, South Korea, Mexico, and his native Turkey. As an
international manager, Tuygan has learned adaptability. Tuygan
said, “Along the way I’ve had to expand the way I define suc-
cess. Sometimes the scope or budget of a new role has been
To prepare its future leaders, Roche offers two distinct
leadership programs, especially designed for managers:
1. Leadership Impact. Through this program, managers
can build their
∙ People management skills (developing, coaching, etc.).
∙ Functional management skills (process knowledge
and compliance).
∙ Leadership skills (creating a vision, guiding a team, etc.).
2. Leadership Excellence. Through this program, senior-
level managers can
∙ Remain honest and transparent regarding the reali-
ties of their roles.
∙ Provide each other with support through peer
networking.
∙ Increase their collective competencies while sharing
common challenges.6
Moreover, Roche has a special global leadership development
program in its home country, Switzerland. One of Roche’s
programs has been highlighted on LinkedIn. The following
is adapted from a description of the Perspectives Global
Accelerated Talent Development Program at Roche:
Our success is built on innovation, curiosity, and diversity, and on
seeing each other’s differences as an advantage. The headquar-
ters in Basel is one of Roche’s largest sites; over 8,000 people
from approximately 80 countries work at Roche Basel.
The Perspectives Global Accelerated Talent Development
Program is a Roche Corporate program designed to provide a
“rapid fire” induction experience to one of the two divisions of
Roche (Pharmaceuticals/Diagnostics). It is targeted at talented
individuals who are at a very early stage of their career and
are seeking to make significant contributions to the industry.
Roche is looking for highly energetic and globally mobile
future business leaders from around the globe.7
Recognizing the central importance of experiential learning
and development, Perspectives provides a unique opportunity
to build a broad global network, experience different areas of
the business, and gain skills that will be necessary for a career
in general management in an accelerated timeframe.
Features of the Perspectives program include
∙ Two years (temporary contract), four assignments of
six months (three or four are typically international
assignments).
470 Part 4 Organizational Behavior and Human Resource Management
Effective global leadership is an essential competency of leading MNCs, and therefore com-
panies are investing in programs to ensure effective global leadership development. Having
leaders who can help companies enter and operate in new markets is especially important.
At Amway, Roche, and other companies, a shortage of such employees could constrain global
growth. Roche like many MNCs has developed a series of formal, structured programs that
are available to employees around the world. These programs are designed to develop skills
and capabilities that will help the firms become more culturally sensitive, adaptable, and able
to effectively manage in challenging global environments. In this chapter we address different
leadership styles as a platform for building effective leadership across cultures.
■ Foundation for Leadership
More academic research over the years has focused on leadership than on nearly any
other social science topic. Much of historical studies, political science, and the behavioral
sciences is either directly or indirectly concerned with leadership. Despite all this atten-
tion, there still is no generally agreed-on definition of leadership, let alone sound answers
to the question of which leadership approach is more effective than others in the inter-
national arena. For our present purposes, leadership can be defined simply as the process
of influencing people to direct their efforts toward achievement of some particular goal
or goals.14,15 Leadership is widely recognized as being very important in the study of
international management, which raises the question, What is the difference between
being a manager and being a leader? While there is no concise answer to this either,
some interesting and helpful perspectives have emerged.
The Manager-Leader Paradigm
While the terms manager and leader have often been used interchangeably in the busi-
ness environment, many believe that there exist clear distinctions in characteristics and
behaviors between the two. Some believe that leaders are born, but managers can be
shaped. MNCs that have simply sought out employees with appropriate skill sets now
face a new challenge: clarifying the seemingly dichotomous roles of managers and
leaders to ensure a cohesive vision going forward.
It has been postulated that managers may provide leadership and leaders perform
management functions. But managers don’t perform the unique functions of leaders.16,17
Managerial positions often consist of sheer responsibility. The attributes necessary to
make a successful manager can be learned through academic study or observation and
training.18 Behaviors of managers vary greatly, but fundamentally they tend to follow
company objectives and rules while attempting to maintain stability as they react to
inevitable change. Essentially, management is something that one does, and the journey
consists of striving to always do things right (as opposed to doing the right thing).
Unfortunately, this often results in focusing on failures as a basis for identifying what
needs improvement and ignoring success or denying praise.19
Leadership is more difficult to articulate as views of what makes a leader are incon-
sistent across studies. Leader status is not something that can be learned, but something
that must be earned through respect.20 In other words, people are not hired as leaders, but
appointed as such via employee perspective on the individual. Leaders guide and motivate
team members and are extremely visible. While managers often merely focus on reaching
objectives by mastering financial information, leaders work to get the right people in the
right positions and motivate them; money matters become a secondary objective. Proactive
behavior is often crucial as these individuals create change on the basis of a vision of the
leadership
The process of influencing
people to direct their efforts
toward the achievement of
some particular goal or
goals.
tiny in comparison to a previous position. On the other hand,
the number of employees and indirect responsibilities turn out
to be infinitely greater.”12
Roche considers its key to success to be: “Placing the best
people with the most advanced skills and attributes in the
right place, at the right time, focused on the right priorities.”
This focus on what’s right requires good leadership. Thus,
good leadership is essential to corporate success. When
companies invest in global leadership development programs,
they are investing in their firms’ future.13
Chapter 13 Leadership Across Cultures 471
future. To sum it up in a word, leadership is about the drive to ultimately do the right
thing.21 The focus of the leader is on the success of team members and building their
morale and motivation, as the firm seeks to implement and execute the right strategy.
Many firms are beginning to search for an all-encompassing package of skill sets,
and while it is imperative for the survival of a business to have both managers and lead-
ers, it is extremely difficult, if not impossible, to find someone who fits the inclusive
criteria of both roles.22 Still, hope abounds that it is a reasonable venture to search for
individuals with the latent attributes of the leader-manager, who may benefit from training
methods that can magnify the most relevant qualities. Skills in effective communication,
planning, organizing, and problem solving are what both leaders and managers should
develop in order to live up to their roles. The manager-leader must exhibit the ability to
focus on the future while maintaining current organizational trends. After that a certain
undefined charisma must come into play, evoking the support and respect of subordinates
because the leadership role is ultimately determined by team member perspectives.23
Table 13–1 provides a comparison of perceived differences between leadership and
management. Again, whether or not these contrasting qualities and abilities are mutually
exclusive or if one list is a subset of the other is highly debatable. But it seems clear that
pitfalls loom when individuals who do not really exhibit the capacities of both a leader and
a manager attempt to fill both sets of shoes. Uncertain and shifting roles and practices can
lead to inconsistencies in execution, leading to a belief among subordinates that those in
positions of authority may not have the qualifications to serve in either capacity.24 In the
context of our discussion of international management, it is important to note that cultural
perspectives are often responsible for how the roles of managers and leaders are seen to
overlap, and, in some cases, viewed as synonymous. In some cultures, especially those char-
acterized by high power distance, the aura of leader is projected onto the manager whether
or not he or she is ready for it. At the same time, globalization and international operations
are evolving such that the manager may be cast into the role of leader out of necessity because
there is no one else or no other choice available. Today, managers that seek to do more than
balance the budget may be shaped through appropriate training into the leaders of tomorrow.
For the purpose of this book and the multiple challenges associated with managing
in an international context, we may assume a high level of overlap in characteristics such
that international managers will often be called upon to assume the role of manager-
leader, or leader-manager. Indeed, in our discussion in the international context, we use
the terms “supervisor,” “leader,” and “manager” somewhat interchangeably.
Leadership definitions may not be universal, yet it is true that relatively little effort
has been made to systematically study and compare leadership approaches throughout the
world. Most international research efforts on leadership have been directed toward a specific
country or geographic area. Two comparative areas provide a foundation for understanding
Table 13–1
Perceived Differences: Managers vs. Leaders
Managers Leaders
Can learn skills necessary Harbor innate characteristics
Take care of where you are Bring you to new horizons
Oversee Motivate
Point out flaws to improve on Give recognition for good work
Deal with complexity Deal with ambiguity
Are fact finders Are decision makers
Focus on efficiency Focus on effectiveness
Are given immediate authority Earn respect through actions
Follow company objectives Set new standards
Have present vision Have future vision
Do things right Do the right things
472 Part 4 Organizational Behavior and Human Resource Management
leadership in the international arena: (1) the philosophical grounding of how leaders view
their subordinates and (2) leadership approaches as reflected by autocratic-participative
behaviors of leaders. The philosophies/approaches common in the United States often are
quite different from those employed by leaders in overseas organizations. At the same time,
the differences often are not as pronounced as is commonly believed. First, we will review
historical viewpoints on leadership and then move on to exploring new findings.
Philosophical Background: Theories X, Y, and Z
One primary reason that leaders behave as they do is rooted in their philosophy or beliefs
regarding how to direct their subordinates most effectively. Managers who believe their
people are naturally lazy and work only for money will use a leadership style that is
different from the style of managers who believe their people are self-starters and enjoy
challenge and increased responsibility. Douglas McGregor, the pioneering leadership
theorist, labeled these two sets of assumptions “Theory X” and “Theory Y.”
A Theory X manager believes that people are basically lazy and that coercion
and threats of punishment must be used to get them to work. The specific philosophical
assumptions of Theory X managers or leaders are
1. By their very nature, people do not like to work and will avoid it whenever
possible.
2. Workers have little ambition, try to avoid responsibility, and like to be directed.
3. The primary need of employees is job security.
4. To get people to attain organizational objectives, it is necessary to use coer-
cion, control, and threats of punishment.25
A Theory Y manager believes that under the right conditions, people not only
will work hard but will seek increased responsibility and challenge. In addition, a great
deal of creative potential basically goes untapped, believes Theory Y, and if these abili-
ties can be tapped, workers will provide much higher quantity and quality of output. The
specific philosophical assumptions of Theory Y leaders are
1. The expenditure of physical and mental effort at work is as natural to people
as resting or playing.
2. External control and threats of punishment are not the only ways of getting
people to work toward organizational objectives. If people are committed to
the goals, they will exercise self-direction and self-control.
3. Commitment to objectives is determined by the rewards that are associated
with their achievement.
4. Under proper conditions, the average human being learns not only to accept
but to seek responsibility.
5. The capacity to exercise a relatively high degree of imagination, ingenuity,
and creativity in the solution of organizational problems is widely distributed
throughout the population.
6. Under conditions of modern industrial life, the intellectual potential of the
average human being is only partially tapped.26
The reasoning behind these beliefs will vary by culture. U.S. managers believe that
to motivate workers, it is necessary to satisfy their higher-order needs. This is done best
through a Theory Y leadership approach. In China, Theory Y managers act similarly—
but for different reasons. After the 1949 revolution, two types of managers emerged in
China: Experts and Reds. The Experts focused on technical skills and primarily were
Theory X advocates. The Reds, skilled in the management of people and possessing
political and ideological expertise, were Theory Y advocates. The Reds also believed
that the philosophy of Chairman Mao supported their thinking (i.e., all employees had
to rise together both economically and culturally). Both Chinese and U.S. managers sup-
port Theory Y, but for very different reasons.27
Theory X manager
A manager who believes
that people are basically
lazy and that coercion and
threats of punishment often
are necessary to get them to
work.
Theory Y manager
A manager who believes
that under the right
conditions, people not only
will work hard but will seek
increased responsibility and
challenge.
Chapter 13 Leadership Across Cultures 473
The same is true in the case of Russian managers. In a survey conducted by Puffer,
McCarthy, and Naumov, 292 Russian managers were asked about their beliefs regarding
work.28 Table 13–2 shows the six different groupings of the responses. Drawing together
the findings of the study, the researchers pointed out the importance of Westerners getting
Table 13–2
Russian Managerial Beliefs about Work
A. Humanistic Beliefs
Work can be made meaningful.
One’s job should give one a chance to try out new ideas.
The workplace can be humanized.
Work can be made satisfying.
Work should allow for the use of human capabilities.
Work can be a means of self-expression.
Work should enable one to learn new things.
Work can be organized to allow for human fulfillment.
Work can be made interesting rather than boring.
The job should be a source of new experiences.
B. Organizational Beliefs
Survival of the group is very important in an organization.
Working with a group is better than working alone.
It is best to have a job as part of an organization where all work together even if you
don’t get individual credit.
One should take an active part in all group affairs.
The group is the most important entity in any organization.
One’s contribution to the group is the most important thing about one’s work.
Work is a means to foster group interests.
C. Work Ethic
Only those who depend on themselves get ahead in life.
To be superior, a person must stand alone.
A person can learn better on the job by striking out boldly on his own than by following
the advice of others.
One must avoid dependence on other persons whenever possible.
One should live one’s life independent of others as much as possible.
D. Beliefs about Participation in Managerial Decisions
The working classes should have more say in running society.
Factories would be better run if workers had more of a say in management.
Workers should be more active in making decisions about products, financing, and
capital investment.
Workers should be represented on the boards of directors of companies.
E. Leisure Ethic
The trend toward more leisure is not a good thing. (R)
More leisure time is good for people.
Increased leisure time is bad for society. (R)
Leisure-time activities are more interesting than work.
The present trend toward a shorter workweek is to be encouraged.
F. Marxist-Related Beliefs
The free-enterprise system mainly benefits the rich and powerful.
The rich do not make much of a contribution to society.
Workers get their fair share of the economic rewards of society. (R)
The work of the laboring classes is exploited by the rich for their own benefit.
Wealthy people carry their fair share of the burdens of life in this country. (R)
The most important work is done by the laboring classes.
Notes: 1. Response scales ranged from 1 (strongly disagree) to 5 (strongly agree).
2. R denotes reverse-scoring items.
3. The 45 individual items contained in the 6 belief clusters were presented to respondents in a mixed fashion, rather than
categorized by cluster as shown above.
4. Participation was a subset of Marxist-related values in Buchholz’s original study but was made a separate cluster in his later work.
Source: Adapted from Sheila M. Puffer, Daniel J. McCarthy, and Alexander I. Naumov, “Russian Managers’ Beliefs about
Work: Beyond the Stereotypes,” Journal of World Business 32, no. 3 (1997), p. 262.
474 Part 4 Organizational Behavior and Human Resource Management
beyond the stereotypes of Russian managers and learning more about the latter’s beliefs
in order to be more effective in working with them as employees and as joint-venture
partners. Obviously, the assumption that Russian managers are strict adherents of Theory
X may be common, but it may also be erroneous.29
The assumptions of Theory X or Y are most easily seen in the managers’ behaviors,
such as giving orders, getting and giving feedback, and creating an overall climate within
which the work will be done.
William Ouchi proposed an additional perspective, which he called “Theory Z,”
that brings together Theory Y and modern Japanese management techniques. A Theory
Z manager believes that workers seek opportunities to participate in management and
are motivated by teamwork and responsibility sharing.30 The specific philosophical
assumptions of a Theory Z leader are
1. People are motivated by a strong sense of commitment to be part of a greater
whole—the organization in which they work.
2. Employees seek out responsibility and look for opportunities to advance
in an organization. Through teamwork and commitment to common
goals, employees derive self-satisfaction and contribute to organizational
success.
3. Employees who learn different aspects of the business will be in a better
position to contribute to the broader goals of the organization.
4. By making commitments to employees’ security through lifetime or long-term
employment, the organization will engender in employees strong bonds of
loyalty, making the organization more productive and successful.
In sum, each of these three theories, Theory X, Y, and Z, provides useful insights
that reveal how different leadership approaches and styles appeal to different constituen-
cies and to certain aspects of human behavior. Theory X has generally fallen out of
fashion and managers and leaders are increasingly aware of nonpecuniary (nonfinancial)
incentives and rewards. Theories Y and Z are somewhat complementary in that each
assumes some degree of intrinsic motivation on the part of employees.
Leadership Behaviors and Styles
Leader behaviors can be translated into three commonly recognized styles: (1) authoritar-
ian, (2) paternalistic, and (3) participative. Authoritarian leadership is the use of work-
centered behavior that is designed to ensure task accomplishment. As shown in
Figure 13–1, this leader behavior typically involves the use of one-way communication
from manager to subordinate. The focus of attention usually is on work progress, work
procedures, and roadblocks that are preventing goal attainment. There is a managerial
tendency toward a lack of involvement with subordinates, where final decisions are in
the hands of the higher-level employees. The distance translates into a lack of a relation-
ship where managers focus on assignments over the needs of the employees. At times,
the organizational leadership behavior is reflective of the political surroundings, as indi-
cated in one study that focused on Romania.31 Leaders in this region were slightly more
authoritarian (55 percent), which could have been influenced by the Romanian commu-
nistic roots that stressed the importance of completing planned productions. Although
this leadership style often is effective in handling crises, some leaders employ it as their
primary style regardless of the situation. It also is widely used by Theory X managers,
who believe that a continued focus on the task is compatible with the kind of people
they are dealing with.
Paternalistic leadership uses work-centered behavior coupled with a protective
employee-centered concern. This leadership style can be best summarized by the state-
ment, “Work hard and the company will take care of you.” Paternalistic leaders expect
everyone to work hard; in return, the employees are guaranteed employment and given
security benefits such as medical and retirement programs. Usually, this leadership
Theory Z manager
A manager who believes
that workers seek
opportunities to participate
in management and are
motivated by teamwork and
responsibility sharing.
authoritarian leadership
The use of work-centered
behavior designed to ensure
task accomplishment.
paternalistic leadership
The use of work-centered
behavior coupled with a
protective employee-
centered concern.
Chapter 13 Leadership Across Cultures 475
behavior satisfies some employee needs, and in turn subordinates tend to exhibit loyalty
and compliance.32
Studies have shown that this behavior is seen throughout Latin America, including
Argentina, Bolivia, Chile, and Mexico,33 but also in China, Pakistan, India, Turkey, and
the United States.34 Mexico appears to be a country that has high paternalistic values,
owing in part to Mexican cultural values of respect for hierarchical relations and strong
family and personal relationships35 and the fact of the absence of welfare or employment
benefits.36 There is also some evidence that paternalistic leadership is still a common
leadership approach in greater China, stemming from Confucian ideology, which is
founded on social relations, such as “benevolent leader with loyal minister” and “kind
father with filial son.” In Malaysia, paternalistic leadership acts as a positive reinforcer
because paternalistic treatment is contingent on subordinates’ task accomplishment. More
broadly, paternalistic leadership has been shown to have a positive impact on employees’
attitudes in collectivistic cultures because the care, support, and protection provided by
paternalistic leaders may address employees’ need for frequent contact and close personal
relationships.37
Participative leadership is the use of both work-centered and people-centered
approaches. Participative leaders typically encourage their people to play an active role in
assuming control of their work, and authority usually is highly decentralized. The way in
which leaders motivate employees could be through consulting with employees,
participative leadership
The use of both work- or
task-centered and people-
centered approaches to
leading subordinates.
Subordinate Subordinate Subordinate
Authoritarian
Leader
One-way downward flow of information and influence from authoritarian leader
to subordinates.
Subordinate Subordinate Subordinate
Paternalistic
Leader
Continual interaction and exchange of information and influence between leader
and subordinates.
Subordinate Subordinate Subordinate
Participative
Leader
Continual interaction and exchange of information and influence between leader
and subordinates and between subordinates.
Figure 13–1
Leader-Subordinate
Interactions
Source: Adapted from Richard M. Hodgetts, Modern Human Relations at Work, 8th ed. (Ft. Worth, TX: Harcourt, 2002), p. 264.
476 Part 4 Organizational Behavior and Human Resource Management
encouraging joint decisions, or delegating responsibilities. Regardless of the method,
employees tend to be more creative and innovative when driven by leaders exhibiting this
behavior.38,39 Participative leadership is very popular in many technologically advanced
countries. Such leadership has been widely espoused in the United States, England, and
other Anglo countries, and it is currently very popular in Scandinavian countries as well.
At General Electric, managers are encouraged to use a participative style that delivers on
commitment and shares the values of the firm. Recent research has shown how participa-
tive leadership contributes to employees’ task performance, especially in the presence of
psychological empowerment on the part of subordinates who are managers themselves
and trust in the supervisors in the case of nonmanagerial subordinates.40
One way of characterizing participative leaders is in terms of the managerial grid,
which is a traditional, well-known method of identifying leadership styles, as shown in
Figure 13–2. Perspectives on and preferences toward where leaders perform on the grid
can be influenced by culture. The next section explores this idea as a way to better
illustrate the managerial grid.
The Managerial Grid Performance: A Japanese Perspective
The managerial grid is a useful visual to chart how leadership behaviors compare with
one another. Participative leaders are on the 9,9 position of the grid. This is in contrast
to paternalistic leaders, who tend to be about 9,5, and autocratic leaders, who are in more
of a 9,1 position on the grid. How does this translate into practice, and how effective are
Figure 13–2
The Managerial Grid
C
o
n
ce
rn
f
o
r
p
eo
p
le
/r
el
at
io
n
sh
ip
s
High 9
Low 1
2
3
4
5
6
7
8
1
Low
2 3 4 5 6 7 8
Concern for production/task
9
High
1,9 Management Style
Thoughtful attention to needs of
people for satisfying relationships
leads to a comfortable, friendly
organization atmosphere and
work tempo.
9,9 Management Style
Work accomplishment is from
committed people; interdependence
through a ”common stake“ in
organization purpose leads to
relationships of trust and respect.
5,5 Management Style
Adequate organization performance
is possible through balancing the
necessity to get out work with
maintaining morale of people at
a satisfactory level.
1,1 Management Style
Exertion of minimum e�ort
to get required work done is
appropriate to sustain
organization membership.
9,1 Management Style
E�ciency in operations
results from arranging
conditions of work in
such a way that human
elements interface to a
minimum degree.
Source: Adapted from Robert S. Blake and Jane S. Mouton, “Managerial Facades,” Advanced Management Journal, July 1966, p. 31.
Chapter 13 Leadership Across Cultures 477
these in motivating employees? One early but still relevant study examined the ways in
which leadership style could be used to influence the achievement motivation of Japanese
subjects.41 Japanese participants were separated into eight subsets: four groups of high
achievers and four groups of low achievers. Leaders were then assigned to the groups.
The first leader focused on performance (called “P supervision” in the study) and mirrored
the autocratic style. There was a work-centered focus where subordinates were compared
to other groups, and if they were behind, they were pressed to catch up. This correlates
to point 9,1 on the grid (high on task, low on people). The second leadership style focused
on maintaining and strengthening the group (called “M supervision” in the study). The
individual used a 1,9 (low on task, high on people) leadership style on the managerial
grid, and created a warm, friendly, sympathetic environment where tensions were reduced,
interpersonal relationships strengthened, and suggestions welcomed.
The third leader combined the first two methods into a performance-maintenance
style (called “PM supervision” in the study). While pressure to complete tasks was
prevalent, supervisors still offered encouragement and support. This style correlates with
participative leadership, and is at point 9,9 on the managerial grid. Finally, the fourth
leader exhibited more absenteeism, as the focus was neither on performance nor main-
tenance (called “pm supervision” in the study). This supervisor simply did not get very
involved in either the task or the people side of the group being led. In other words, the
supervisor used a 1,1 leadership style on the grid.
The results of these four leadership styles among the high-achieving and low-
achieving groups are reported in Figures 13–3 and 13–4. In the high-achieving groups,
the PM, or participative (9,9) style, was most effective across all phases. The P, or
authoritarian (9,1—high on task, low on people), leadership style was second most effec-
tive during early and middle phases of the study, but later phases proved M supervision
(1,9—low on task, high on people) to be more relevant, possibly suggesting that the more
familiar the supervisor and subordinate become with one another, the more significant a
P
ro
d
u
ct
iv
it
y
80
50
0
1 2 3 4
Sessions
5 6 7
PM Leadership style (9,9 high task, high people)
M Leadership style (1,9 low task, high people)
P Leadership style (9,1 high task, low people)
pm Leadership style (1,1 low task, low people)
Figure 13–3
Productivity of Japanese
Groups with High-
Achievement Motivation
under Different Leadership
Styles
Source: Jyuji Misumi and Fumiyasu Seki, “Effects of Achievement Motivation on the Effectiveness of Leadership Patterns,”
Administrative Science Quarterly 16, no. 1 (March 1971).
478 Part 4 Organizational Behavior and Human Resource Management
personal relationship is over a task-focused objective. Finally, the pm (1,1) leadership
style was consistently ineffective.
Among low-achieving groups, the P, or authoritarian (9,1), supervision was most
effective. The M (1,9) leadership style was the second most effective during early ses-
sions, but eventually led to negative results. The PM, or participative (9,9), style was
moderately ineffective during the first three stages but improved rapidly and was the
second most effective by the end of the seventh session. The pm (1,1) leadership style
was consistently effective until the fifth session; then productivity began to level off.
So what does this all mean? One can infer from the results that if an individual is
high-achieving, then he or she may be driven by intrinsic factors. This translates into
being the most motivated when a creative and supportive environment is provided, as
indicated by the success of the participative leadership style. This group preferred to be
actively challenged, and became unproductive when faced with absentee leadership. On
the other hand, low-achieving groups seemed to be driven by extrinsic factors, such as
supervisor behavior toward subordinates. The success of the authoritarian style indicates
that this group prefers to be told what to do, and a creative environment that encouraged
participation was not a successful motivator until after the supervisors and subordinates
were familiar with one another. This group tended to be more self-motivated, as absen-
tee leadership initially resulted in satisfactory production, but this did not last throughout
the study. This could be an indication that subordinates were active because of the
uncertainty involved, but relaxed efforts when it was clear that supervisors would not
intervene.
While results of this study were not specific as to what actually occurs in Japan,
other studies from high-achieving societies have supported the findings. Korean firms,
for example, are relying more heavily on 9,9, or participatory, leadership. Sang Lee and
associates have reported that among Korea’s largest firms, a series of personality criteria
are used in screening employees, and many of these directly relate to 9,9 leadership:
harmonious relationships with others, creativeness, motivation to achieve, future orienta-
tion, and a sense of duty.42 These findings have important implications as to what it
P
ro
d
u
ct
iv
it
y
75
50
25
0
1 2 3 4
Sessions
5 6 7
P Leadership style (9,1 high task, low people)
PM Leadership style (9,9 high task, high people)
pm Leadership style (1,1 low task, low people)
M Leadership style (1,9 low task, high people)
Figure 13–4
Productivity of
Japanese Groups
with Low-Achievement
Motivation under Different
Leadership Styles
Source: Jyuji Misumi and Fumiyasu Seki, “Effects of Achievement Motivation on the Effectiveness of Leadership Patterns,”
Administrative Science Quarterly 16, no. 1 (March 1971).
Chapter 13 Leadership Across Cultures 479
means to be a leader in different cultures. The next section looks at leadership in the
international context in more detail.
■ Leadership in the International Context
How do leaders in other countries attempt to direct or influence their subordinates? Are
their approaches similar to those used in the United States? Research shows that there
are both similarities and differences. Most international research on leadership has
focused on Europe, East Asia, the Middle East, and developing countries such as India,
Peru, Chile, and Argentina.
Attitudes of European Managers toward Leadership Practices
In recent years, much research has been directed at leadership approaches in Europe.
Most effort has concentrated on related areas, such as decision making, risk taking,
strategic planning, and organization design, which have been covered in previous
chapters. Some of this previous discussion is relevant to an understanding of leader-
ship practices in Europe. For example, British managers tend to use a highly par-
ticipative leadership approach. This is true for two reasons: (1) the political
background of the country favors such an approach and (2) because most top British
managers are not highly involved in the day-to-day affairs of the business, they pre-
fer to delegate authority and let much of the decision making be handled by middle-
and lower-level managers. This preference contrasts sharply with that of the French
and the Germans,43 who prefer a more work-centered, authoritarian approach. In fact,
if labor unions had no legally mandated seats on the boards of directors, participative
management in Germany likely would be even less pervasive than it is, a problem
that currently confronts firms like Volkswagen that are trying to reduce sharply their
overhead to meet increasing competition in Europe.44 Scandinavian countries, how-
ever, make wide use of participative leadership approaches, with worker representa-
tion on the boards of directors and high management-worker interaction regarding
workplace design and changes.
As a general statement, most evidence indicates that European managers tend to
use a participative approach. They do not entirely subscribe to Theory Y philosophical
assumptions, however, because an element of Theory X thinking persists. This was made
clear by the Haire, Ghiselli, and Porter study of 3,641 managers from 14 countries.45 (The
motivation-related findings of this study were reported in Chapter 12.) The leadership-
related portion of this study sought to determine whether these managers were basically
traditional (Theory X, or system 1/2) or democratic-participative (Theory Y, or system
3/4) in their approach. Specifically, the researchers investigated four areas relevant to
leadership:
1. Capacity for leadership and initiative. Does the leader believe that employees
prefer to be directed and have little ambition (Theory X), or does the leader
believe that characteristics such as initiative can be acquired by most people
regardless of their inborn traits and abilities (Theory Y)?
2. Sharing information and objectives. Does the leader believe that detailed,
complete instructions should be given to subordinates and that subordinates
need only this information to do their jobs, or does the leader believe that
general directions are sufficient and that subordinates can use their initiative
in working out the details?
3. Participation. Does the leader support participative leadership practices?
4. Internal control. Does the leader believe that the most effective way to con-
trol employees is through rewards and punishment or that employees respond
best to internally generated control?
480 Part 4 Organizational Behavior and Human Resource Management
Overall Results of Research on Attitudes of European Managers Responses by
managers to the four areas covered in the Haire, Ghiselli, and Porter study, as noted in
Chapter 12, are quite dated but remain the most comprehensive available and are relevant
to the current discussion of leadership similarities and differences. The specifics by
country may have changed somewhat over the years, but the leadership processes re-
vealed should not be out of date. The clusters of countries studied by these researchers
are shown in Table 13–3. Results indicate that none of the leaders from various parts of
the world, on average, were very supportive of the belief that individuals have a capac-
ity for leadership and initiative. The researchers put it this way: “In each country, in each
group of countries, in all of the countries taken together, there is a relatively low opinion
of the capabilities of the average person, coupled with a relatively positive belief in the
necessity for democratic-type supervisory practices.”46
An analysis of standard scores compared each cluster of countries against the oth-
ers, and it revealed that Anglo leaders tend to have more faith in the capacity of their
people for leadership and initiative than do the other clusters. They also believe that
sharing information and objectives is important; however, when it comes to participation
and internal control, the Anglo group tends to give relatively more autocratic responses
than all the other clusters except developing countries. Interestingly, Anglo leaders
reported a much stronger belief in the value of external rewards (pay, promotion, etc.)
than did any of the other clusters except that of the developing countries. These findings
clearly illustrate that attitudes toward leadership practices tend to be quite different in
various parts of the world.
The Role of Level, Size, and Age on European Managers’ Attitudes toward Leadership
The research of Haire and associates provided important additional details within each
cluster of European countries. These findings indicated that in some countries, higher-
level managers tended to express more democratic values than lower-level managers;
however, in other countries, the opposite was true. For example, in England, higher-level
managers responded with more democratic attitudes on all four leadership dimensions,
whereas in the United States, lower-level managers gave more democratically oriented
responses on all four. In the Scandinavian countries, higher-level managers tended to
respond more democratically; in Germany, lower-level managers tended to have more
democratic attitudes.
Company size also tended to influence the degree of participative-autocratic atti-
tudes. There was more support among managers in small firms than in large ones regard-
ing the belief that individuals have a capacity for leadership and initiative; however,
respondents from large firms were more supportive of sharing information and objectives,
participation, and use of internal control.
There were findings that age also had some influence on participative attitudes.
Younger managers were more likely to have democratic values when it came to capacity
Table 13–3
Clusters of Countries in the Haire, Ghiselli, and Porter Study
Nordic-European Countries Anglo-American Countries
Denmark England
Germany United States
Norway
Sweden Developing Countries
Argentina
Latin-European Countries Chile
Belgium India
France
Italy Japan
Spain
Chapter 13 Leadership Across Cultures 481
for leadership and initiative and to sharing information and objectives, although on the
other two areas of leadership practices older and younger managers differed little. In
specific countries, some important differences were found. For example, younger
managers in both the United States and Sweden espoused more democratic values than
did their older counterparts; in Belgium, the opposite was true.
Japanese Leadership Approaches
Japan is well known for its paternalistic approach to leadership. As noted in Figure 12–7,
Japanese culture promotes a high safety or security need, which is present among home
country-based employees as well as MNC expatriates. For example, one study examined
the cultural orientations of 522 employees of 28 Japanese-owned firms in the United
States and found that the native Japanese employees were more likely than their U.S.
counterparts to value paternalistic company behavior.47,48 Another study found that
Koreans also value such paternalism.49 However, major differences appear in leadership
approaches used by the Japanese and those in other locales.
For example, the comprehensive Haire, Ghiselli, and Porter study found that
Japanese managers have much greater belief in the capacity of subordinates for leadership
and initiative than do managers in most other countries.50 In fact, in the study, only
managers in Anglo-American countries had stronger feelings in this area. The Japanese
also expressed attitudes toward the use of participation to a greater degree than others.
In the other two leadership areas, sharing information and objectives and using internal
control, the Japanese respondents were above average but not distinctive. Overall, how-
ever, this study found that the Japanese respondents scored highest on the four areas of
leadership combined. In other words, these findings provide evidence that Japanese lead-
ers have considerable confidence in the overall ability of their subordinates and use a
style that allows their people to actively participate in decisions.
In addition, the leadership process used by Japanese managers places a strong
emphasis on ambiguous goals. Subordinates are typically unsure of what their manager
wants them to do. As a result, they spend a great deal of time overpreparing their assign-
ments. Some observers believe that this leadership approach is time-consuming and
wasteful. However, it has a number of important benefits. One is that the leader is able
to maintain stronger control of the followers because the latter do not know with certainty
what is expected of them. So they prepare themselves for every eventuality. Second, by
placing the subordinates in a position where they must examine a great deal of informa-
tion, the manager ensures that the personnel are well prepared to deal with the situation
and all its ramifications. Third, the approach helps the leader maintain order and provide
guidance, even when the leader is not as knowledgeable as the followers.
Two experts on the behavior of Japanese management have noted that salarymen
(middle managers) survive in the organization by anticipating contingencies and being
prepared to deal with them. So when the manager asks a question and the salaryman
shows that he has done the research needed to answer the question, the middle manager
also shows himself to be a reliable person. The leader does not have to tell the salaryman
to be prepared; the individual knows what is expected of him.
Japanese managers operate this way because they usually have less expertise in a
division’s day-to-day business than their subordinates do. It is the manager’s job to
maintain harmony, not to be a technical expert. Consequently, a senior manager doesn’t
necessarily realize that E, F, G, and H are important to know. He gives ambiguous direc-
tions to his subordinates so they can use their superior expertise to go beyond A, B, C,
and D. One salaryman explained it this way: “When my boss asks me to write a report, I
infer what he wants to know and what he needs to know without being told what he
wants.” Another interviewee added that subordinates who receive high performance
evaluations are those who know what the boss wants without needing to be told. What
frustrates Japanese managers about non-Japanese employees is the feeling that, if they
tell such a person they want A through D, they will never extract E through H; instead,
482 Part 4 Organizational Behavior and Human Resource Management
they’ll get exactly what they asked for. Inferring what the boss would have wanted had
he only known to ask is a tough game, but it is the one salarymen must play.51
Some researchers believe that this paternalistic approach may have impeded and
constrained Toyota’s ability to respond quickly to vehicle quality safety problems, result-
ing in major recalls in 2010, 2012, and 2014. The Financial Times reported that, in
response, Toyota has shifted more responsibility to non-Japanese managers by promoting
North Americans and Europeans to run factories outside Japan. Toyota officials concluded
that poor communication between local managers and their bosses in Japan contributed
to the crisis. In the U.S. especially, warnings from local managers about the outcry were
either passed on too slowly or not at all.52
Differences between Japanese and U.S. Leadership Styles
In a number of ways, Japanese leadership styles differ from those in the United States.
For example, the Haire and associates study found that except for internal control, large
U.S. firms tend to be more democratic than small ones, whereas in Japan, the profile is
quite different.53 A second difference is that younger U.S. managers appear to express
more democratic attitudes than their older counterparts on all four leadership dimensions,
but younger Japanese fall into this category only for sharing information and objectives
and in the use of internal control.54 Simply put, evidence points to some similarities
between U.S. and Japanese leadership styles, but major differences also exist.
A number of reasons have been cited for these differences. One of the most com-
mon is that Japanese and U.S. managers have a basically different philosophy of manag-
ing people. Table 13–4 provides a comparison of seven key characteristics that come
from Ouchi’s Theory Z, which combines Japanese and U.S. assumptions and approaches.
Note in the table that the Japanese leadership approach is heavily group-oriented, pater-
nalistic, and concerned with the employee’s work and personal life. The U.S. leadership
approach is almost the opposite.55
Another difference between Japanese and U.S. leadership styles is how senior-level
managers process information and learn. Japanese executives are taught and tend to use
variety amplification, which is the creation of uncertainty and the analysis of many
alternatives regarding future action. By contrast, U.S. executives are taught and tend to
use variety reduction, which is the limiting of uncertainty and the focusing of action
on a limited number of alternatives.56 Through acculturation, patterning, and mentoring,
as well as formal training, U.S. managers tend to limit the scope of questions and issues
variety amplification
The creation of uncertainty
and the analysis of many
alternatives regarding future
action.
variety reduction
The limiting of uncertainty
and the focusing of action
on a limited number of
alternatives.
Table 13–4
Japanese vs. U.S. Leadership Styles
Philosophical Dimension Japanese Approach U.S. Approach
Employment Often for life; layoffs are rare Usually short term; layoffs are common
Evaluation and promotion Very slow; big promotions may not Very fast; those not quickly promoted
come for the first 10 years often seek employment elsewhere
Career paths Very general; people rotate from one Very specialized; people tend to stay in
area to another and become familiar one area (accounting, sales, etc.) for their
with all areas of operations entire careers
Decision making Carried out via group decision making Carried out by the individual manager
Control mechanism Very implicit and informal; people rely Very explicit; people know exactly what
heavily on trust and goodwill to control and how to do it
Responsibility Shared collectively Assigned to individuals
Concern for employees Management’s concern extends to the Management concerned basically with
whole life, business and social, of the individual’s work life only
the worker
Source: Adapted from William Ouchi, Theory Z: How American Business Can Meet the Japanese Challenge (Reading, MA: Addison-Wesley, 1981).
Chapter 13 Leadership Across Cultures 483
before them, emphasize one or two central aspects of that topic, identify specific employ-
ees to respond to it, and focus on a goal or objective that is attainable. Japanese manag-
ers, in contrast, tend to be inclusive in their consideration of issues or problems, seek a
large quantity of information to inform the problem, encourage all employees to engage
in solutions, and aim for goals that are distant in the future.
Further, this research found that the Japanese focused very heavily on problems,
while the U.S. managers focused on opportunities.57 The Japanese were more willing to
allow poor performance to continue for a time so that those who were involved would learn
from their mistakes, but the Americans worked to stop poor performance as quickly as
possible. Finally, the Japanese sought creative approaches to managing projects and tried
to avoid relying on experience, but the Americans sought to build on their experiences.
Still another major reason accounting for differences in leadership styles is that the
Japanese tend to be more ethnocentric than their U.S. counterparts. The Japanese think
of themselves as Japanese managers who are operating overseas; most do not view them-
selves as international managers. As a result, even if they do adapt their leadership
approach on the surface to that of the country in which they are operating, they still
believe in the Japanese way of doing things and are reluctant to abandon it.
Despite these differences, managerial practices indicate that there may be more sim-
ilarities than once believed. For example, at Google, located in the United States, employ-
ees are given freedom to innovate and take the lead in developing new products. The
company adopted a policy of “20 percent time,” which gives employees the opportunity to
spend a portion of their work day dedicated to projects that most interest them. Manage-
ment allows employees to e-mail them directly for any reason, and cross-functional teams
are encouraged to interact and build relationships outside of project work.58 Japanese firms
such as Sony use a similar approach, encouraging personnel to assume authority, use initia-
tive, and work as a team. Major emphasis also is given to developing communication links
between management and the employees and to encouraging people to do their best.
Another common trend is the movement toward team orientation and away from
individualism. The International Management in Action box “Global Teams” illustrates
this point.
Leadership in China
In the past few years a growing amount of attention has been focused on leadership in
China. In particular, international researchers are interested in learning if the country’s
economic progress is creating a new cadre of leaders whose styles are different from the
styles of leaders of the past. In one of the most comprehensive studies to date, Ralston
and his colleagues found that, indeed, a new generation of Chinese leaders is emerging
and they are somewhat different from past leaders in work values.59
The researchers gathered data from a large number of managers and professionals
(n = 869) who were about to take part in management development programs. These
individuals were part of what the researchers called the “New Generation” of Chinese
organizational leaders. The researchers wanted to determine if this new generation of man-
agers had the same work values as those of the “Current Generation” and “Older Genera-
tion” groups. In their investigation, the researchers focused their attention on the importance
that the respondents assigned to three areas: individualism, collectivism, and Confucianism.
Individualism was measured by the importance assigned to self- sufficiency and personal
accomplishments. Collectivism was measured by the person’s willingness to subordinate
personal goals to those of the work group with an emphasis on sharing and group harmony.
Confucianism was measured by the importance the respondent assigned to societal harmony,
virtuous interpersonal behavior, and personal and interpersonal harmony.
The researchers found that the new generation group scored significantly higher on
individualism than did the current and older generation groups. In addition, the new
generation leaders scored significantly lower than the other two groups on collectivism
and Confucianism. These values appear to reflect the period of relative openness and
484
freedom, often called the “Social Reform Era,” during which these new managers grew
up. They have had greater exposure to Western societal influences, and this may well be
resulting in leadership styles similar to those of Western managers.
These research findings show that leadership is culturally influenced, but as the
economy of China continues to change and the country moves more and more toward
capitalism, the work values of managers may also change. As a result, the new generation
of leaders may well use leadership styles similar to those in the West, something that
has also occurred in Japan, as seen in Figures 13–3 and 13–4.
International Management in Action
Global Teams
Institutional productivity used to involve a cavalcade
of employees manning factory floors, where meetings
with international subsidiaries had to be carefully
planned. As technology continues to evolve and the
window for decision-making periods quickly closes,
the need to instantly connect and coordinate with
regional and transnational offices becomes imperative
to stay competitive. But how is this implemented?
International leaders now put increasing focus on
developing global teams that are capable of overcom-
ing cultural barriers and working together in an effi-
cient, harmonious manner. At Dallas-based Maxus
Energy (a wholly owned subsidiary of YPF, the largest
Argentinean corporation), teams consist of Americans,
Dutch, British, and Indonesians who have been brought
together to pursue a common goal: maximize oil and
gas production. Capitalizing on the technical expertise
of the members and their willingness to work together,
the team has helped the company to achieve its
objective and add oil reserves to its stockpiles—an
almost unprecedented achievement. This story is only
one of many that help illustrate the way in which
global teams are being created and used to achieve
difficult international objectives.
In developing effective global teams, companies
are finding there are four phases in the process. In
phase one, the team members come together with
their own expectations, culture, and values. In phase
two, members go through a self-awareness period,
during which they learn to respect the cultures of the
other team members. Phase three is characterized by
a developing trust among members, and in phase
four, team members begin working in a collaborative
way.
How are MNCs able to create the environment
that is needed for this metamorphosis? Several
specific steps are implemented by management,
including
1. The objectives of the group are carefully identi-
fied and communicated to the members.
2. Team members are carefully chosen so that the
group has the necessary skills and personnel to
reinforce and complement each other.
3. Each person learns what he or she is to contrib-
ute to the group, thus promoting a feeling of self-
importance and interdependency.
4. Cultural differences between the members are
discussed so that members can achieve a better
understanding of how they may work together
effectively.
5. Measurable outcomes are identified so that the
team can chart its progress and determine how
well it is doing. Management also continually
stresses the team’s purpose and its measurable
outcomes so that the group does not lose sight
of its goals.
6. Specially designed training programs are used to
help the team members develop interpersonal,
intercultural skills.
7. Lines of communication are spelled out so that
everyone understands how to communicate with
other members of the group.
8. Members are continually praised and rewarded
for innovative ideas and actions.
MNCs now find that global teams are critical to their
ability to compete successfully in the world market. As
a result, leaders who are able to create and lead inter-
disciplinary, culturally diverse groups are finding them-
selves in increasing demand by MNCs.
Sources: Jitao Li, Katherine R. Xin, Anne Tsui, and Donald C.
Hambrick, “Building Effective International Joint Venture Leadership
Teams in China,” Journal of World Business 34, no. 1 (1999),
pp. 52–68; Charlene Marmer Solomon, “Global Teams: The Ultimate
Collaboration,” Personnel Journal, September 1995, pp. 49–58;
Andrew Kakabdse and Andrew Myers, “Qualities of Top Management:
Comparison of European Manufacturers,” Journal of Management
Development 14, no. 1 (1995), pp. 5–15; Noel M. Tichy, Michael I.
Brimm, Ram Chran, and Hiroraka Takeuchi, “Leadership Development
as a Lever for Global Transformation,” in Globalizing Management:
Creating and Leading the Competitive Organization, ed. Vladimir
Pucik, Noel M. Tichy, and Carole K. Barnett (New York: Wiley, 1993),
pp. 47–60; Gloria Barczak and Edward F. McDonough III, “Leading
Global Product Development Teams,” Research Technology Manage-
ment 46, no. 6 (November/December 2003), pp. 14–18; Michael
J. Marquard and Lisa Horvath, Global Teams (Palo Alto, CA:
Davies-Black, 2001).
Chapter 13 Leadership Across Cultures 485
Leadership in the Middle East
Research also has been conducted on Middle East countries to determine the similarities
and differences in managerial attitudes toward leadership practices. For example, in a
follow-up study to that of Haire and associates, midlevel managers from Arab countries
were surveyed and found to have higher attitude scores for capacity for leadership and
initiative than those from any of the other countries or clusters reported in Table 13–3.60
The Arab managers’ scores for sharing information and objectives, participation, and
internal control, however, all were significantly lower than the scores of managers in the
other countries and clusters reported in Table 13–3. The researcher concluded that the
results were accounted for by the culture of the Middle East region. Table 13–5 sum-
marizes not only the leadership differences between Middle Eastern and Western managers
but also other areas of organization and management.
More recent research provides some evidence that there may be much greater sim-
ilarity between Middle Eastern leadership styles and those of Western countries.61 In
particular, the observation was made that Western management practices are very evident
in the Arabian Gulf region because of the close business ties between the West and this
oil-rich area and the increasing educational attainment, often in Western universities, of
Middle Eastern managers. A study on decision-making styles in the United Arab Emirates
showed that organizational culture, level of technology, level of education, and manage-
ment responsibility were good predictors of decision-making styles in such an environ-
ment.62 These findings were consistent with similar studies in Western environments. Also,
results indicated a tendency toward participative leadership styles among young Arab
middle management, as well as among highly educated managers of all ages.63
Leadership Approaches in India
India is developing at a rapid rate as MNCs increase investment. India’s workforce is
quite knowledgeable in the high-tech industry, and society as a whole is moving toward
Table 13–5
Differences between Middle Eastern and Western Management
Management Dimensions Middle Eastern Management Western Management
Leadership Highly authoritarian tone, rigid instructions.
Too many management directives.
Less emphasis on leader’s personality, consider-
able weight on leader’s style and performance.
Organizational structures Highly bureaucratic, overcentralized, with
power and authority at the top. Vague
relationships. Ambiguous and unpredictable
organization environments.
Less bureaucratic, more delegation of
authority. Relatively decentralized structure.
Decision making Ad hoc planning, decisions made at the
highest level of management. Unwillingness
to take high risk inherent in decision making.
Sophisticated planning techniques, modern
tools of decision making, elaborate
management information systems.
Performance evaluation
and control
Informal control mechanisms, routine checks
on performance. Lack of vigorous performance
evaluation systems.
Fairly advanced control systems focusing
on cost reduction and organizational
effectiveness.
Personnel policies Heavy reliance on personal contacts and
getting individuals from the “right social
origin” to fill major positions.
Sound personnel management policies.
Candidates’ qualifications are usually the basis
for selection decisions.
Communication The tone depends on the communicants.
Social position, power, and family influence
are ever-present factors. Chain of command
must be followed rigidly. People relate
to each other tightly and specifically.
Friendships are intense and binding.
Stress usually on equality and a minimization
of difference. People relate to each other
loosely and generally. Friendships not intense
and binding.
Source: From M. K. Badawy, “Styles of Mideastern Managers,” California Management Review 22, no. 3 (Spring 1980), pp. 51–58.
486 Part 4 Organizational Behavior and Human Resource Management
higher education. However, India is still bound by old traditions. This raises the question,
What kind of leadership style does India need to satisfy its traditional roots while head-
ing into a high-tech future? One study showed that Indian workers were more productive
when managers took a high-people and high-task approach (participative). Meanwhile,
the less productive workers were managed by individuals who showed high-people ori-
entation, but low focus on task-related objectives.64 These findings may indicate that it
is important in India to focus on the individual, but in order to be efficient and produce
results, managers need to maintain awareness of the tasks that need to be completed.
Because of India’s long affiliation with Great Britain, leadership styles in India would
seem more likely to be participative than those in the Middle East or in other developing
countries. Haire and associates found some degree of similarity between leadership styles
in India and Anglo-American countries, but it was not significant. The study found Indians
to be similar to the Anglo-Americans in managerial attitudes toward capacity for leadership
and initiative, participation, and internal control. The difference is in sharing information
and objectives. The Indian managers’ responses tended to be quite similar to those of
managers in other developing countries.65 These findings from India show that a participa-
tive leadership style may be more common and more effective in developing countries than
has been reported previously. Over time, developing countries (as also shown in the case
of the Persian Gulf nations) may be moving toward a more participative leadership style.
Recently, researchers have suggested there may be some unique management and leadership
styles that emerge from the polyglot nature of India’s population and some of the unique
challenges of doing business there. For example, some suggest that Indian leaders can
improvise quickly to overcome hurdles, a concept sometimes referred to here as jugaad.66
Leadership Approaches in Latin America
Research pertaining to leadership styles in Latin America has indicated that as globaliza-
tion increases, so does the transitional nature of managers within these regions. One
study that compared Latin American leadership styles reviewed past research indicating
an initial universality among the countries.67 In Mexico, leaders tended to have a com-
bination of authoritarian and participative behaviors, while Chile, Argentina, and Bolivia
also showed signs of authoritarian behaviors. Typically, Mexican managers who wel-
comed input from subordinates were viewed as incompetent and weak. This may be the
reason that in Mexico, as well as in Chile, managers tend to be socially distant from
those working below them. Romero found that Mexican managers who worked close to
the U.S. border, however, exhibited even more participative behavior, and that trend
enhanced as globalization increased.68 Overall, the study found that Mexico is moving
toward a modern leadership style, while other Latin American countries continue to lead
based on tradition. However, this is not the only viewpoint.
Haire and associates originally found quite different results for Chile and Argentina,
and one can only assume that Peru would be similar to the aforementioned countries due
to their geographic and cultural similarities. The results from the study for those two
developing countries were similar to those for India.69 Additional research, however, has
found that leadership styles in Peru may be much closer to those in the United States
than was previously assumed.
As in the case of Middle Eastern managers, these findings in South America indi-
cate there indeed may be more similarities in international leadership styles than previ-
ously assumed. As countries become more economically advanced, participative styles
may well gain in importance. Of course, this does not mean that MNCs can use the same
leadership styles in their various locations around the world. There still must be careful
contingency application of leadership styles (different styles for different situations);
however, many of the more enlightened participative leadership styles used in the United
States and other economically advanced countries, such as Japan, also may have value
in managing international operations even in developing countries as well as in the
emerging Eastern European countries.
Chapter 13 Leadership Across Cultures 487
■ Recent Findings and Insights about Leadership
In recent years researchers have begun raising the question of universality of leadership
behavior. Do effective leaders, regardless of their country culture or job, act similarly? A
second, and somewhat linked, research inquiry has focused on the question, Are there a
host of specific behaviors, attitudes, and values that leaders in the 21st century will need
in order to be successful? Thus far the findings have been mixed. Some investigators have
found that there is a trend toward universalism for leadership; others have concluded that
culture continues to be a determining factor and that an effective leader, for example, in
Sweden will not be as effective in Italy if he or she employs the same approach, most
likely due to motivational factors being different (see Chapter 12). One of the most inter-
esting recent efforts has been conducted by Bass and his associates, and has focused on
the universality and effectiveness of both transformational and transactional leadership.
Transformational, Transactional, and Charismatic Leadership
Transformational leaders are visionary agents with a sense of mission who are capable
of motivating their followers to accept new goals and new ways of doing things. One
recent variant on transformational leadership focuses on the individual’s charismatic traits
and abilities. This research stream, known as the study of charismatic leaders, has
explored how the individual abilities of an executive work to inspire and motivate her
or his subordinates.70 Transactional leaders are individuals who exchange rewards for
effort and performance and work on a “something for something” basis.71 Do these types
of leaders exist worldwide, and is their effectiveness consistent in terms of performance?
Drawing on an analysis of studies conducted in Canada, India, Italy, Japan, New Zealand,
Singapore, and Sweden, as well as in the United States, Bass discovered that very little
of the variance in leadership behavior could be attributed to culture. In fact, in many
cases he found that national differences accounted for less than 10 percent of the results.
This led him to create a model of leadership and conclude that “although this model . . .
may require adjustments and fine-tuning as we move across cultures, particularly into
non-Western cultures, overall, it holds up as having considerable universal potential.”72
Simply stated, Bass discovered that there was far more universalism in leadership
than had been believed previously. Additionally, after studying thousands of international
cases, he found that the most effective managers were transformational leaders and they
were characterized by four interrelated factors. For convenience, the factors are referred
to as the “4 I’s,” and they can be described this way:
1. Idealized influence. Transformational leaders are a source of charisma and
enjoy the admiration of their followers. They enhance pride, loyalty, and
confidence in their people, and they align these followers by providing a
common purpose or vision that the latter willingly accept.
2. Inspirational motivation. These leaders are extremely effective in articulating
their vision, mission, and beliefs in clear-cut ways, thus providing an easy-to-
understand sense of purpose regarding what needs to be done.
3. Intellectual stimulation. Transformational leaders are able to get their follow-
ers to question old paradigms and to accept new views of the world regarding
how things now need to be done.
4. Individualized consideration. These leaders are able to diagnose and elevate
the needs of each of their followers through individualized consideration, thus
furthering the development of these people.73
Bass also discovered that there were four other types of leaders. All of these are
less effective than the transformational leader, although the degree of their effectiveness
(or ineffectiveness) will vary. The most effective of the remaining four types was labeled
the contingent reward (CR) leader by Bass. This leader clarifies what needs to be done
and provides both psychic and material rewards to those who comply with his or
transformational leaders
Leaders who are visionary
agents with a sense of
mission and who are
capable of motivating their
followers to accept new
goals and new ways of
doing things.
charismatic leaders
Leaders who inspire and
motivate employees through
their charismatic traits and
abilities.
transactional leaders
Individuals who exchange
rewards for effort and
performance and work on a
“something for something”
basis.
488 Part 4 Organizational Behavior and Human Resource Management
her directives. The next most effective manager is the active management-by-exception
(MBE-A) leader. This individual monitors follower performance and takes corrective
action when deviations from standards occur. The next manager in terms of effectiveness
is the passive management-by-exception (MBE-P) leader. This leader takes action or inter-
venes in situations only when standards are not met. Finally, there is the laissez-faire (LF)
leader. This person avoids intervening or accepting responsibility for follower actions.
Bass found that through the use of higher-order factor analysis, it is possible to
develop a leadership model that illustrates the effectiveness of all five types of leaders:
I’s (transformational), CR, MBE-A, MBE-P, and LF. Figure 13–5 presents this model.
The higher the box in the figure and the farther to the right on the shaded base area, the
more effective and active is the leader. Notice that the 4 I’s box is taller than any of the
others in the figure and is located more to the right than any of the others. The CR box
is second tallest and second closest to the right, on down to the LF box, which is the
shortest and farthest from the right margin.
Bass also found that the 4 I’s were positively correlated with each other, but less
so with contingent reward. Moreover, there was a near zero correlation between the 4
I’s and management-by-exception styles, and there was an inverse correlation between
these four factors and the laissez-faire leadership style.
Does this mean that effective leader behaviors are the same regardless of country?
Bass concluded that this statement is not quite true—but there is far more universalism
than people believed previously. In putting his findings in perspective, he concluded that
there certainly would be differences in leadership behavior from country to country.74 For
example, he noted that transformational leaders in Honduras would have to be more
directive than their counterparts in Norway. Moreover, culture can create some problems
in using universal leadership concepts in countries such as Japan, where the use of con-
tingent reward systems is not as widespread as in the West. These reward systems can
also become meaningless in Arab and Turkish cultures, where there is a strong belief
that things will happen “if God wills” and not because a leader has decided to carry
them out. Yet even after taking these differences into consideration, Bass contends that
universal leadership behavior is far more common than many people realize.75
LF
MBE-P
MBE-A
Passive Active
Fr
eq
ue
nc
y
E�ective
Ine�ective
CR
I’s
Figure 13–5
An Optimal Profile of
Universal Leadership
Behaviors
Source: Adapted from Bernard M. Bass, “Is There Universality in the Full Range Model of Leadership?” International Journal of Public
Administration 16, no. 6 (1996), p. 738.
Chapter 13 Leadership Across Cultures 489
Qualities for Successful Leaders
Another recent research approach that has been used to address the issue of international
leadership is that of examining the characteristics that companies are looking for in their
new executive hires. Are all firms seeking the same types of behaviors or qualities or,
for example, are companies in Sweden looking for executives with qualities that are quite
different from those being sought by Italian firms? The answer to this type of question
can help shed light on international leadership because it helps focus attention on the
behaviors that organizations believe are important in their managerial workforce. It also
helps examine the impact, if any, of culture on leadership style.
Tollgerdt-Andersson examined thousands of advertisements for executives in the
European Union (EU). She began by studying ads in Swedish newspapers and journals,
noting the qualities, characteristics, and behaviors that were being sought. She then
expanded her focus to publications in other European countries including Denmark,
Norway, Germany, Great Britain, France, Italy, and Spain. The results are reported in
Table 13–6. Based on this analysis, she concluded:
Generally, there seem to be great differences between the European countries regarding their
leadership requirements. Different characteristics are stressed in the various countries. There
are also differences concerning how frequently various characteristics are demanded in each
country. Some kind of personal or social quality is mentioned much more often in the
Scandinavian countries than in the other European countries. In the Scandinavian advertise-
ments, you often see many qualities mentioned in a single advertisement. This can be seen
in other European countries too, but it is much more rare. Generally, the characteristics
mentioned in a single advertisement do not exceed three and fairly often, especially in
Mediterranean countries (in 46–48% of the advertisements) no personal or social
characteristics are mentioned at all.76
At the same time, Tollgerdt-Andersson did find that there were similarities
between nations. For example, Italy and Spain had common patterns regarding desir-
able leadership characteristics. Between 52 and 54 percent of the ads she reviewed in
these two countries stated specific personal and social abilities that were needed by
the job applicant. The same pattern was true for Germany and Great Britain, where
between 64 and 68 percent of the advertisements set forth the personal and social
abilities required for the job. In the Scandinavian countries, these percentages ranged
between 80 and 85.
Admittedly, it may be difficult to determine the degree of similarity between ads
in different countries (or cultural clusters) because there may be implied meanings in
the messages or it may be the custom in a country not to mention certain abilities but
simply to assume that applicants know that these will be assessed in making the final
hiring decision. Additionally, Tollgerdt-Andersson did find that all countries expected
executive applicants to have good social and personal qualities. So some degree of
universalism in leadership behaviors was uncovered. On the other hand, the require-
ments differed from country to country, showing that effective leaders in northern
Europe may not be able to transfer their skills to the southern part of the continent
with equal results. This led Tollgerdt-Andersson to conclude that multicultural under-
standing will continue to be a requirement for effective leadership in the 21st century.
She put it this way: “If tomorrow’s leaders possess international competence and under-
standing of other cultures it will, hopefully, result in the increased competitive coop-
eration which is essential if European commerce and industry is to compete with, for
example, the USA and Asia.”77
Culture Clusters and Leader Effectiveness
Although the foregoing discussion indicates there is research to support universalism in
leadership behavior, recent findings also show that effective leader behaviors tend to vary
by cultural cluster. Brodbeck and his associates conducted a large survey of middle
490 Part 4 Organizational Behavior and Human Resource Management
Table 13–6
Qualities Most Demanded in Advertisements for European Executives
Sweden Denmark Norway Germany
Quality (n = 225) (n = 175) (n = 173) (n = 190)
Ability to cooperate
(interpersonal ability) 25 42 32 16
Independence 22 22 25 9
Leadership ability 22 16 17
Ability to take initiatives 22 12 16
Aim and result orientation 19 10 42
Ability to motivate
and inspire others 16 11
Business orientation 12
Age 10 25 13
Extrovert personality/
contact ability 10 8 12 11
Creativity 9 10 9 9
Customer ability 9
Analytic ability 10
Ability to communicate 12 15
High level of energy/drive 12
Enthusiasm and involvement 14 14
Organization skills 7
Team builder
Self-motivated
Flexibility
Precision
Dynamic personality
Responsibility
Great Britain France Italy Spain
Quality (n = 163) (n = 164) (n = 132) (n = 182)
Ability to cooperate
(interpersonal ability) 7 9 32 18
Independence 16 4
Leadership ability 10 22 16
Ability to take initiatives 10 8
Aim and result orientation 5 2
Ability to motivate and
inspire others 9 26 20
Business orientation 8
Age 12 46 34
Extrovert personality/
contact ability
Creativity 5 4
Customer ability 2
Analytic ability 10
Ability to communicate 23 8
High level of energy/drive 8 20
Enthusiasm and involvement
Organization skills 6 12 12
Team builder 10 5
Self-motivated 10
Flexibility 2
Precision 7
Dynamic personality 6 6
Responsibility 10
Source: Adapted from Ingrid Tollgerdt-Andersson, “Attitudes, Values and Demands on Leadership—A Cultural Comparison
among Some European Countries,” in Managing Across Cultures, ed. Pat Joynt and Malcolm Warner (London: International
Thomson Business Press, 1996), p. 173.
Chapter 13 Leadership Across Cultures 491
managers (n = 6,052) from 22 European countries.78 Some of the results, grouped by
cluster, are presented in Table 13–7. A close look at the data shows that while there are
similarities between some of the cultures, none of the lists of leadership attributes are
identical. For example, managers in the Anglo cluster reported that the five most impor-
tant attributes of an effective manager were having a performance orientation, possessing
an inspirational style, having a vision, being a team integrator, and being decisive. Man-
agers in the Nordic culture ranked these same five attributes as the most important but
not in this order. Moreover, although the rankings of clusters in the North/West European
region were fairly similar, they were quite different from those in the South/East European
region, which included the Latin cluster, countries from Eastern Europe that were grouped
by the researchers into a Central cluster and a Near East cluster, and Russia and Georgia,
which were listed separately.
Leader Behavior, Leader Effectiveness, and Leading Teams
Culture is also important in helping explain how leaders ought to act in order to be effec-
tive. A good example is provided by the difference in effective behaviors in Trompenaars’s
categories (covered in Chapter 4) of affective (or emotional) cultures and neutral cultures.
In affective cultures, such as the United States, leaders tend to exhibit their emotions. In
neutral cultures, such as Japan and China, leaders do not tend to show their emotions.
Moreover, in some cultures people are taught to exhibit their emotions but not let emotion
affect their making rational decisions, while in other cultures the two are intertwined.
Researchers have also found that the way in which managers speak to their people
can influence the outcome. For example, in Anglo cultures it is common for managers to
raise their voices in order to emphasize a point. In Asian cultures managers generally speak
at the same level throughout their communication, using a form of self-control that shows
Table 13–7
Rankings of the Most Important Leadership Attributes by Region and Country Cluster
North/West European Region
Nordic Culture Germanic
(Sweden, Culture
Anglo Culture Netherlands, (Switzerland,
(Great Britain, Finland, Germany, Czech
Ireland) Denmark) Austria) Republic France
Performance-oriented Integrity Integrity Integrity Participative
Inspirational Inspirational Inspirational Performance-oriented Nonautocratic
Visionary Visionary Performance-oriented Administratively skilled
Team integrator Team integrator Nonautocratic Inspirational
Decisive Performance-oriented Visionary Nonautocratic
South/East European Region
Latin Culture
(Italy, Spain, Central Culture Near East
Portugal, (Poland, Culture (Turkey,
Hungary) Slovenia) Greece) Russia Georgia
Team integrator Team integrator Team integrator Visionary Administratively skilled
Performance-oriented Visionary Decisive Administratively skilled Decisive
Inspirational Administratively skilled Visionary Inspirational Performance-oriented
Integrity Diplomatic Integrity Decisive Visionary
Visionary Decisive Inspirational Integrity Integrity
Source: Adapted from Felix C. Brodbeck et al., “Cultural Variation of Leadership Prototypes Across 22 European Countries,” Journal of Occupational and Organizational
Psychology 73 (2000), p. 15.
492 Part 4 Organizational Behavior and Human Resource Management
respect for the other person. Latin American managers, meanwhile, vary their tone of voice
continually, and this form of exaggeration is viewed by them as showing that they are very
interested in what they are saying and committed to their point of view. Knowing how to
communicate can greatly influence leadership across cultures. Here is an example:
A British manager posted to Nigeria found that it was very effective to raise his voice for
important issues. His Nigerian subordinates viewed that unexpected explosion by a normally
self-controlled manager as a sign of extra concern. After success in Nigeria he was posted
to Malaysia. Shouting there was a sign of loss of face; his colleagues did not take him
seriously and he was transferred.79
One of the keys to successful global leadership is knowing which style and which
behavior work best in a given culture and adapting appropriately. In the case of affective
and neutral cultures, for example, Trompenaars and Hampden-Turner have offered the
specific tips provided in Table 13–8.
Table 13–8
Leadership Tips for Doing Business in Affective and Neutral Cultures
When Managing or Being Managed in . . .
Affective Cultures Neutral Cultures
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), pp. 80–82.
Avoid warm, excessive, or enthusiastic behaviors because
these will be interpreted as a lack of personal control over
one’s feelings and be viewed as inconsistent with one’s
high status.
Extensively prepare the things you have to do and then
stick tenaciously to the issues.
Look for cues regarding whether people are pleased or
angry and then amplify their importance.
Avoid a detached, ambiguous, and cool demeanor because
this will be interpreted as negative behavior.
Find out whose work and enthusiasm are being directed into
which projects, so you are able to appreciate the vigor and
commitment they have for these efforts.
Let people be emotional without personally becoming intim-
idated or coerced by their behavior.
Ask for time-outs from meetings and negotiations where
you can patch each other up and rest between games of
poker with the “impassive ones.”
Put down as much as you can on paper before beginning
the negotiation.
Remember that the other person’s lack of emotional tone
does not mean that the individual is uninterested or bored,
only that the person does not like to show his or her hand.
Keep in mind that the entire negotiation is typically focused
on the object or proposition that is being discussed and not
on you as a person.
Do not be put off stride when others create scenes and get
histrionic; take time-outs for sober reflection and hard
assessments.
When others are expressing goodwill, respond warmly.
Remember that the other person’s enthusiasm and readi-
ness to agree or disagree do not mean that the individual
has made up his or her mind.
Keep in mind that the entire negotiation is typically focused
on you as a person and not so much on the object or
proposition that is being discussed.
They often do not reveal what they are thinking or feeling.
Emotions are often dammed up, although they may occa-
sionally explode.
Cool and self-possessed conduct is admired.
Physical contact, gesturing, or strong facial expressions are
not used.
Statements are often read out in a monotone voice.
They reveal their thoughts and feelings both verbally and
nonverbally.
Emotions flow easily, vehemently, and without inhibition.
Heated, vital, and animated expressions are admired.
Touching, gesturing, and strong facial expressions are
common.
Statements are made fluently and dramatically.
When Doing Business with Individuals in . . .
Affective Cultures Neutral Cultures
(for Those from Neutral Cultures) (for Those from Affective Cultures)
Recognize the Way in Which People Behave in . . .
Affective Cultures Neutral Cultures
Chapter 13 Leadership Across Cultures 493
Cross-Cultural Leadership: Insights from the GLOBE Study
As discussed in Chapter 4, the GLOBE (Global Leadership and Organizational Behavior
Effectiveness) research program, a 20-year, multimethod, three-phased study, is examin-
ing the relationships among societal and organizational culture, societal and organiza-
tional effectiveness, and leadership. In addition to the identification of nine major
dimensions of culture described in Chapter 4, the GLOBE program also includes the
classification of leadership behaviors. Through a qualitative and quantitative analysis,
GLOBE researchers determined that leadership behaviors can be summarized into six
culturally endorsed implicit leadership (CLT) dimensions:
∙ Charismatic/Value-Based leadership captures the ability of leaders to
inspire, motivate, and encourage high performance outcomes from others
based on a foundation of core values.
∙ Team-Oriented leadership places emphasis on effective team building and
implementation of a common goal among team members.
∙ Participative leadership reflects the extent to which leaders involve others in
decisions and their implementation.
∙ Humane-Oriented leadership comprises supportive and considerate leadership.
∙ Autonomous leadership refers to independent and individualistic leadership
behaviors.
∙ Self-Protective leadership “focuses on ensuring the safety and security of the
individual and group through status-enhancement and face-saving.”80
As is the case in the classification of culture dimensions, these categories build on
and extend classifications of leadership styles described earlier in this chapter.
Phases 1 and 2 of the GLOBE study, like earlier research, found that certain attri-
butes of leadership were universally endorsed, while others were viewed as effective only
in certain cultures. Among the leadership attributes found to be effective across cultures
are being trustworthy, just, and honest (having integrity); having foresight and planning
ahead; being positive, dynamic, encouraging, and motivating and building confidence;
and being communicative and informed and being a coordinator and a team integra-
tor.81 Several attributes were also found to be universally undesirable in leadership. Traits
such as irritable, malevolent, and ruthless were rated as inhibitors of strong leadership
across all cultures.82
In linking the cultural dimensions of the GLOBE study with the leadership styles
described above, the GLOBE researchers investigated the association between cultural
values and leadership attributes, and cultural practices and leadership attributes. With
regard to the relationship between cultural values and leadership attributes, the GLOBE
researchers concluded the following:
∙ Collectivism I values, as found in Sweden and other Nordic and Scandinavian
countries, were likely to view Participative and Self-Protective leadership behav-
iors favorably while viewing Autonomous leadership behaviors negatively.83
∙ In-Group Collectivism II values, as found in societies such as the Philippines
and other East Asian countries, were positively related to Charismatic/Value-
Based leadership and Team-Oriented leadership.84
∙ Gender Egalitarian values, as found in countries such as Hungary, Russia,
and Poland, were positively associated with Participative and Charismatic/
Value-Based leader attributes.85
∙ Performance Orientation values, as found in countries such as Switzerland,
Singapore, and Hong Kong, were positively associated with Participative and
Charismatic/Value-Based leader attributes.86
∙ Future Orientation values, as found in societies such as Singapore, were posi-
tively associated with Self-Protective and Humane-Oriented leader attributes.87
494 Part 4 Organizational Behavior and Human Resource Management
∙ Societal Uncertainty Avoidance values, as found in Germany, Denmark, and
China, were positively associated with Team-Oriented, Humane-Oriented,
and Self-Protective leader attributes.88
∙ Societal Humane Orientation values, as found in countries such as Zambia,
the Philippines, and Ireland, were positively associated with Participative
leader attributes.89
∙ Societal Assertiveness values, as found in countries such as the United
States, Germany, and Austria, were positively associated with Humane-
Oriented leader attributes.90
∙ Societal Power Distance values, as found in countries such as Morocco,
Nigeria, and Argentina, were positively correlated with Self-Protective and
Humane-Oriented leader attributes.91
One of the most influential and possibly universal leadership attributes is future
orientation. An extension of the GLOBE project compared the future orientation of select
countries, and surprisingly found that “the greater a society’s future orientation, the
higher its average GDP per capita and its levels of innovativeness, happiness, confidence,
and . . . competitiveness.”92 Canada, Denmark, Finland, the Netherlands, and Singapore
are all relatively high on future orientation and also among the most competitive coun-
tries in the world. A recent ranking of countries by the World Economic Forum found
many of these same countries to be among the most innovative in the world. Figure 13–6
plots countries ranked in the competitiveness report on one axis and future orientation
on the other, showing the close correlation between these two variables with countries
such as Singapore and Switzerland high on both Future Orientation and Competitiveness
and Egypt and Venezuela low on both measures.
Phase 3 of the GLOBE project, which was completed in 2012, expanded on the
middle-management studies of phases 1 and 2 by exploring the relationship between the
leadership behavior of CEOs and the effectiveness of their companies. It had been long
Argentina
Brazil
China
Egypt
Germany
Guatemala
India
Malaysia
Mexico
Russia
Singapore
South Africa
Switzerland
United States
Venezuela
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
4.8
5.0
020406080100120140
Competitiveness Rating
F
u
tu
re
O
ri
e
n
ta
ti
o
n
S
co
re
Figure 13–6
Future Orientation Score &
Competitiveness Rating of
Select Countries
Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh, based on the World Economic Forum’s 2016
Competitiveness Rankings and Geert Hofstede’s “Dimensionalizing Cultures: The Hofstede Model in Context,” Online Readings in
Psychology and Culture, Unit 2, 2011.
Chapter 13 Leadership Across Cultures 495
assumed, yet unproven, that successful executives behave and lead in a manner that is
consistent with the preferred leadership style of that particular culture; phase 3 was
intended to fill in this gap in the research.93
Using a survey of over 1,000 CEOs and 5,000 direct reports, phase 3 determined that
CEOs tend to lead in a way that is consistent with the culturally desired leadership dimen-
sions of that society. For example, in societies that prefer participatory leadership (such as
Germany), CEOs tend to lead in a participatory manner. In southern Asia, where the soci-
ety prefers more humane leadership, CEOs act in a humane way. If the ideal type of leader-
ship of a society is known, the actions and behaviors of the CEOs in that society can likely
be predicted. Furthermore, the study found that CEOs tend to lead in the culturally desired
style of their society not just because they were raised in that particular culture, but because
leading in the desired manner of the society leads to success. In the most successful com-
panies, leaders exceeded the cultural expectations of their society. In the least productive
and inefficient companies, CEOs fell short of the idealized leadership style. Across all
cultures, CEOs who exhibited charismatic, value-based, and team-oriented leadership traits
were more likely to also exhibit the desired leadership characteristics of their society.94
In summarizing the GLOBE findings, researchers suggest that cultural values influ-
ence leadership preferences. Specifically, societies that share particular values prefer
leadership attributes or styles that are congruent with or supportive of those values, with
some exceptions. The studies also resulted in some unexpected findings. For example,
societies that valued assertiveness were positively correlated with valuing Humane-
Oriented leadership. According to one interpretation, some of these contradictions may
reflect desires by societies to make up for or mitigate some aspects of cultural values
with seemingly opposing leadership attributes. In the case of societies that value asser-
tiveness, a preference for Humane-Oriented leader attributes may reflect a desire to
provide a social support structure in an environment characterized by high competition.95
A recent study that used GLOBE data explored preferred leadership styles and
approaches and their effectiveness across gender. As reported in Chapter 4 and elsewhere
in Part Two, gender roles differ greatly in various cultures around the world, although there
is some evidence of convergence among many of these cultures. One study showed preferred
leadership prototypes held by female leaders differ from the prototypes held by male leaders,
and that these prototype differences vary across countries, cultures, and especially industries.
In general, female managers prefer participative, team-oriented, and charismatic leadership
prototype dimensions more than males. Contrary to popular belief, both males and females
valued humane-oriented leadership equally. Gender egalitarianism and industry type were
important moderators of the gender-leadership prototype relationship. Gender egalitarianism
increased females’ desire for participative leadership, while prototype differences between
genders were magnified in the finance and food sectors. Interestingly, gender differences
were surprisingly consistent across most of the countries studied. The researchers concluded:
Our findings show that the combination of gender, gender egalitarianism and industry type
is an important determinant of leaders’ role expectations. These factors are likely to influ-
ence women’s success in organizational leadership. Cultures in some industries and nations
are less rigid, and may allow female leaders to express their natural preferences towards a
feminine leadership prototype. Other industries and nations may require a single leadership
prototype for leaders to be effective.96
Positive Organizational Scholarship and Leadership
Positive organizational scholarship (POS) focuses on positive outcomes, processes, and
attributes of organizations and their members.97 This is a dynamic view that factors in
fundamental concerns, but ultimately emphasizes positive human potential, something of
obvious relevance as MNCs are increasingly called upon to make contributions to soci-
ety beyond the bottom line. It consists of three subunits: enablers, motivations, and
outcomes or effects. Enablers could be capabilities, processes or methods, and structure
of the environment, which are all external factors. Motivations focus inward and are
categorized as unselfish, altruistic, or as having the ability to contribute without
positive organizational
scholarship (POS)
A method that focuses on
positive outcomes,
processes, and attributes of
organizations and their
members.
496 Part 4 Organizational Behavior and Human Resource Management
self-regard. Finally, the outcomes or effects in this model accentuate vitality, meaningful-
ness, exhilaration, and high-quality relationships.98
The way POS relates to leadership is encompassed in the name. POS recognizes
the positive potential that people have within. Constructive behavior will yield desired
outcomes, in the sense that those who are able to create meaning in actions and are
relatively flexible will be more successful in receiving praise and creating lasting rela-
tionships. These are characteristics that could be attributed to leaders, as future vision
and relating to employees are positive driving forces that encourage leadership progress.
Next, this method outlines positive organizational actions. For instance, if a firm is doing
financially well due to actions such as downsizing, POS would accentuate the revenue
and its potentials, instead of harping on the negative side effects. As indicated earlier in
the chapter, leaders tend to reward for good things and deemphasize the general tendency
to motivate through pointing out issues. Effective leaders seem to live by the POS model,
as they are constantly innovating, creating relationships, striving to bring the organization
to new heights, and ultimately working for the greater global good through self-
improvement. While positive internal and external factors provide a general framework
for what makes a leader, how does one know that the person in power is a true leader?
Authentic Leadership
What makes a leader “authentic”? Researchers have sought to explain what makes a
leader authentic and why leaders are important to today’s organizations.
As indicated throughout the chapter, leaders tend to be dynamic, forward-thinking,
and pioneers in setting new standards. Therefore, individuals who are stagnant or meet
the status quo without reaching for higher realms could be considered ineffectual, or
inauthentic, leaders. Just as with positive organizational scholarship, authentic leadership
accentuates the positive. Authentic leaders are defined by an all-encompassing package
of personality traits, styles, behaviors, and credits.99 Many interpretations exist as to what
makes a leader authentic. For example, authentic leaders could be defined as “those who
are deeply aware of how they think and behave and are perceived by others as being
aware of their own and others’ values/moral perspectives, knowledge, and strengths;
aware of the context in which they operate; and who are confident, hopeful, optimistic,
resilient, and of high moral character.”100 An interpretation by Shamir and Eilam sug-
gested that authentic leaders have four distinct characteristics: (1) authentic leaders do
not fake their actions; they are true to themselves and do not adhere to external expecta-
tions; (2) authentic leaders are driven from internal forces, not external rewards;
(3) authentic leaders are unique and guide based on personal beliefs, not others’ orders;
and (4) authentic leaders act based on individual passion and values.101 However, the
authors did not accentuate personal moral drive, which is elsewhere considered to be of
great importance to the authentic leader.
Authentic leaders must possess several interrelated qualities. First, they must have
positive psychological aspects, such as confidence and optimism. Next, leaders should
have positive morals to guide them through processes. However, these aspects are not
effective unless the leader is self-aware, as it is essential for leaders to be cognizant of
their duties and be true to themselves. This also means that leaders should periodically
check their actions and make sure they are congruous with ultimate goals, and that they
do not stray from internal standards or expected outcomes. Authentic leaders are expected
to lead by example, and therefore their processes and behaviors should be virtuous and
reflect the positive moral values inherent in the leader. However, a leader cannot exist
without followers, and if the methods are effective, then the open communication and
functionality will motivate followers to exhibit the same characteristics. In other words,
followers will become self-aware, and a new clarity will be created in relation to values,
morals, and drivers.102 This could eventually result in followers being indirectly molded
into leaders, as inspiration is quite effective. Furthermore, followers will tend toward a
sense of trust in their leader, actively engage in processes, and experience a sense of
Chapter 13 Leadership Across Cultures 497
overall workplace well-being.103 Environment also plays a role in leadership development,
and in order for an authentic leader to succeed, the organization should be evaluated. An
optimal situation would be one in which the organization values open communication
and sharing, where leaders can both promote the company values and still have room to
improve through learning and continued self-development. Finally, an authentic leader
consistently performs above expected standards. In other words, in a competitive environ-
ment, it is imperative for the leader to sustain innovation and avoid the tendency to
remain stagnant. Future orientation and personal drives will motivate the leader to per-
form above expectations, as long as he or she remains true to him- or herself and is not
simply acting out a part for superiors.104
How are authentic leaders different from traditional leaders? We discussed trans-
formational leadership earlier in the chapter. Authentic leadership and transformational
leadership are similar but with one important difference. Authentic leadership focuses
mainly on the internal aspects of the leader, such as morals, values, motivators, and so
forth. While transformational leaders may have all the characteristics of an authentic
leader, the key to transformational leadership is how the leader motivates others, which
is a secondary concern with authentic leadership. In other words, transformational lead-
ers may very well be authentic, but not all authentic leaders are inherently transforma-
tional. Charismatic leadership, on the other hand, does not seem to encompass a sense
of self-awareness, with either the leader or the follower. Because this is an important
component of authentic leadership, it is also a key point of differentiating between the
charismatic and authentic leader. Again, charismatic leaders may have similar attributes
to the authentic cohorts, but the individual is just not aware of it.105 Table 13–9 outlines
some other areas where these may differ and where they overlap.
Authentic leadership, while similar to traditional leadership, is becoming more
important in today’s globally marketed world. Through a sense of higher awareness,
authentic leadership can create a better understanding within the organization. As cohe-
sive relationships form, understanding is created, and the authentic leaders’ drive to reach
new standards will motivate everyone to attain their future-oriented goals.
Ethical, Responsible, and Servant Leadership
Related to the concept of authentic leadership is ethically responsible leadership. As dis-
cussed in Part One of the text, globalization and MNCs have come under fire from a num-
ber of areas. Criticisms have been especially sharp in relation to the activities of
companies—such as Nike, Levi’s, and United Fruit—whose sourcing practices in developing
countries have been alleged to exploit low-wage workers, take advantage of lax environmen-
tal and workplace standards, and otherwise contribute to social and economic degradation.
Ethical principles provide the philosophical basis for responsible business practices, and
leadership defines the mechanism through which these principles become actionable.
As a result of scandals at Royal Ahold, Andersen, BP, Enron, Tyco, WorldCom,
and others, there is decreasing trust of global leaders. A recent public opinion survey
conducted for the World Economic Forum by Gallup and Environics found that leaders
have suffered declining public trust in recent years and enjoy less trust than the institu-
tions they lead. The survey asked respondents questions about how much they trust
various leaders “to manage the challenges of the coming year in the best interests of you
and your family.” Leaders of nongovernmental organizations (NGOs) were the only ones
receiving the trust of a clear majority of citizens across the countries surveyed.106 Lead-
ers at the United Nations and spiritual and religious leaders were the next-most-trusted
leaders; over four in ten citizens said they had a lot or some trust in them. Next most
trusted were leaders of Western Europe, “individuals responsible for managing the global
economy,” those “responsible for managing our national economy,” and executives of
multinational companies. Those four groups were trusted by only one-third of citi-
zens.107 Over four in ten citizens reported decreased trust in executives of domestic
companies. Figure 3–2 in Chapter 3 summarizes these findings.
498 Part 4 Organizational Behavior and Human Resource Management
Table 13–9
Comparative Leadership Styles
Components of Authentic
Leadership Development Theory TL CL(B) CL(SC) SVT SP
Positive psychological capital × × × ×
Positive moral perspective × × × × ×
Leader self-awareness
Values × × × × ×
Cognitions × × × × ×
Emotions × × × × ×
Leader self-regulation
Internalized × × ×
Balanced processing ×
Relational transparency ×
Authentic behavior × × × ×
Leadership processes/behaviors
Positive modeling × × × × ×
Personal and social identification × × × × ×
Emotional contagion
Supporting self-determination × × × × ×
Positive social exchanges × × × × ×
Follower self-awareness
Values × × × ×
Cognitions × × ×
Emotions × × ×
Follower self-regulation
Internalized × × × × ×
Balanced processing ×
Relational transparency × ×
Authentic behavior × × ×
Follower development × ×
Organizational context
Uncertainty × × ×
Inclusion × ×
Ethical ×
Positive, strengths-based ×
Performance
Veritable
Sustained × ×
Beyond expectations × × ×
Note: ×—Focal Component. ×—Discussed.
Key: TL—Transformational Leadership Theory. CL(B)—Behavioral Theory of Charismatic Leadership. CL(SC)—Self-Concept
Based Theory of Charismatic Leadership. SVT—Servant Leadership Theory. SP—Spiritual Leadership Theory.
Source: Bruce J. Avolio and William L. Gardner, “Authentic Leadership Development: Getting to the Root of Positive Forms of
Leadership,” The Leadership Quarterly 15 (2005), p. 323.
The decline in trust in leaders is prompting some companies to go on the offensive
and to develop more ethically oriented and responsible leadership practices in their global
operations. Some researchers link transformational leadership and corporate social respon-
sibility, arguing that transformational leaders exhibit high levels of moral development,
including a sense of obligation to the larger community.108 According to this view, authen-
tic charismatic leadership is rooted in strong ethical values, and effective global leaders
are guided by principles of altruism, justice, and humanistic notions of the greater good.
On a more instrumental basis, another research effort linking leadership and cor-
porate responsibility defines “responsible global leadership” as encompassing (1) values-
Chapter 13 Leadership Across Cultures 499
based leadership, (2) ethical decision making, and (3) quality stakeholder
relationships.109 According to this view, global leadership must be based on core values
and credos that reflect principled business and leadership practices, high levels of ethical
and moral behavior, and a set of shared ideals that advance organizational and societal
well-being. The importance of ethical decision making in corporations, governments,
not-for-profit organizations, and professional services firms is omnipresent. In addition,
the quality of relationships with internal and external stakeholders is increasingly critical
to organizational success, especially to governance processes. Relationships involving
mutual trust and respect are important within organizations, between organizations and
the various constituencies that they affect, and among the extended networks of indi-
viduals and their organizational affiliates.
Leaders at many companies have dedicated themselves to responsible global lead-
ership with apparent benefits for their companies’ reputations and bottom lines. Even
British Petroleum (BP), whose drilling practices in the Gulf of Mexico resulted in the
worst oil spill in history in 2010, has attempted to accentuate responsible global leader-
ship. BP will have to work harder now than ever, but keeping a socially responsible and
clear objective will certainly aid in its continued global success. Executives at ICI India,
a manufacturer and marketer of paints and various specialty chemicals, believe that
adhering to global standards, even though doing so increases costs, can boost competi-
tiveness. Aditya Narayan, president of ICI India, explains: “At ICI, standards involving
ethics, safety, health, and environment policies are established by headquarters but are
adapted to meet national laws. I can benefit by drawing on these corporate policies and
in some cases we do far more than required by Indian laws.”110
A concept related to ethical and responsible leadership is servant leadership. Ser-
vant-leaders achieve results for their organizations by giving priority attention to the
needs of their colleagues and those they serve. Servant-leaders are often seen as humble
stewards of their organization’s resources (human, financial, and physical). In order to
be a servant-leader, one needs the following qualities: listening, empathy, healing, aware-
ness, persuasion, conceptualization, foresight, stewardship, growth, and building com-
munity. Acquiring these qualities tends to give a person authority versus power. Some
trace the concept of servant leadership to ancient Indian and Chinese thought. In the
fourth century BC, Chanakya wrote in his book Arthashastra: “the king [leader] shall
consider as good, not what pleases himself but what pleases his subjects [followers]”;
“the king [leader] is a paid servant and enjoys the resources of the state together with
the people.” The following statement appears in the Tao Te Ching, attributed to Lao-Tzu,
who is believed to have lived in China sometime between 570 and 490 BC: “The high-
est type of ruler is one of whose existence the people are barely aware. Next comes one
whom they love and praise. Next comes one whom they fear. Next comes one whom
they despise and defy. When you are lacking in faith, others will be unfaithful to you.
The Sage is self-effacing and scanty of words. When his task is accomplished and things
have been completed, all the people say, ‘We ourselves have achieved it!’”111
More recently, an intellectual movement, led by Robert Greenleaf, but with many
followers, has proposed servant leadership as an underlying philosophy of leadership, dem-
onstrated through specific characteristics and practices. Larry Spears, one of Greenleaf’s
disciples, identifies ten characteristics of servant-leaders in the writings of Greenleaf.
The ten characteristics are listening, empathy, healing, awareness, persuasion, conceptu-
alization, foresight, stewardship, commitment to the growth of others, and building com-
munity. Kent Keith, author of The Case for Servant Leadership and the current CEO of
the Greenleaf Center, states that servant leadership is ethical, practical, and meaningful.
He identifies seven key practices of servant leaders: self-awareness, listening, changing
the pyramid, developing your colleagues, coaching not controlling, unleashing the energy
and intelligence of others, and foresight. Unlike leadership approaches with a top-down
hierarchical style, servant leadership instead emphasizes collaboration, trust, empathy,
and the ethical use of power. At heart, the individual is a servant first, making the con-
scious decision to lead in order to better serve others, not to increase her or his own
500 Part 4 Organizational Behavior and Human Resource Management
power. The objective is to enhance the growth of individuals in the organization and
increase teamwork and personal involvement. Large MNCs, such as Starbucks, have
adopted aspects of servant leadership in their global operations.112
Entrepreneurial Leadership and Mindset
As discussed in Chapter 8, an increasing share of international management activities is
occurring in entrepreneurial new ventures. But given the high failure rate for international
new ventures, what leadership characteristics are important for such ventures to succeed?
Promising start-ups fail for many reasons, including lack of capital, absence of
clear goals and objectives, and failure to accurately assess market demand and competi-
tion. For international new ventures, these factors are significantly complicated by dif-
ferences in cultures; national political and economic systems; geographic distance; and
shipping, tax, and regulatory costs. A critical factor in the long-term success of a new
venture—whether domestic or international—is the personal leadership ability of the
entrepreneurial CEO.
Entrepreneurship research has examined some of the key personal characteristics
of entrepreneurs, some of which coincide with those of strong leaders. In comparison to
nonentrepreneurs, entrepreneurs appear to be more creative and innovative. They tend to
break the rules and do not need structure, support, or an organization to guide their
thinking. They are able to see things differently and add to a product, system, or idea
value that amounts to more than an adaptation or linear change. They are more willing
to take personal and business risks and to do so in visible and salient ways. They are
opportunity seekers—solving only those problems that limit their success in reaching the
vision—and are comfortable with failure, rebounding quickly to pursue another oppor-
tunity.113 Others characterize them as adventurous, ambitious, energetic, domineering,
and self-confident.
In addition to these traits, entrepreneurial leaders operating internationally must
also possess the cultural sensitivity, international vision, and global mindset to effectively
lead their venture as it confronts the challenges of doing business in other countries.
Well-known corporate leaders such as Tim Cook (Apple), Richard Branson (Virgin
Group), Arthur Blank (Home Depot), and Russell Simmons (Def Jam Recordings) have
all been successful leading their companies on a global scale while preserving the integ-
rity and values of the host country.114,115 As Lenovo CEO Yang Yuanqing has shown,
this is a growing trend, and soon we may see more entrepreneurs emerge from countries
where such ventures are not common practice.
The World of International Management—Revisited
The World of International Management that opens this chapter underscores the impor-
tance and value of understanding differences in leadership styles and approaches across
cultures. It also emphasizes the related need to prepare prospective international manag-
ers so that they can be successful in these varying environments. A number of global
companies—including Roche, Amway, and others—have developed comprehensive and
challenging programs to help provide their employees with experiences to understand
when consistent, “universalist” approaches may be appropriate, and when adaptation to
local practices, norms, and expectations is called for.
In this chapter, it was noted that effective leadership is often heavily influenced by
culture. The approach that is effective in Europe is different from approaches used in the
United States or Latin America. For example, according to one Roche employee, defin-
ing success may mean different things in different contexts. Even so, there are threads
of universalism evident, for example, in the case of Japanese and U.S. leadership styles
in managing both high- and low-achieving workers. The research by Bass also lends
Chapter 13 Leadership Across Cultures 501
support to universalism. But can Roche rely on the leadership style that has served it
well in Europe to oversee operations in other countries as it looks to expand? In most
cases, leadership styles need to be adjusted to fit the cultural subtleties of disparate
markets.
After reviewing the chapter and considering the experience of Roche, Amway, and
other companies mentioned in the chapter, respond to the following questions: (1) Do
the leadership programs developed by Roche emphasize development of managerial char-
acteristics, leadership characteristics, or a combination of the two? (2) How do Roche’s
programs prepare prospective leaders to manage in differing cultural contexts? (3) How
might deeper understanding of the GLOBE dimensions and the different leadership
behaviors across countries help Roche in developing future leaders?
1. Leadership is a complex and controversial process
that can be defined simply as influencing people to
direct their efforts toward the achievement of some
particular goal or goals. While some claim that
managers and leaders conduct two separate job
functions, the lack of a universal definition of lead-
ership allows both terms to be used interchangeably,
especially as the world moves toward a manager-
leader model. Two areas warrant attention as a
foundation for the study of leadership in an interna-
tional setting: philosophical assumptions about
people in general and leadership styles. The philo-
sophical foundation is heavily grounded in Douglas
McGregor’s Theories X and Y and William Ouchi’s
Theory Z. Leadership styles relate to how managers
treat their subordinates and incorporate authoritar-
ian, paternalistic, and participative approaches.
These styles can be summarized in terms of the
managerial grid shown in Figure 13–2 (1,1
through 9,9).
2. The attitudes of European managers toward dimen-
sions of leadership practice, such as the capacity for
leadership and initiative, sharing information and
objectives, participation, and internal control, were
examined in a classic study by Haire, Ghiselli, and
Porter. They found that Europeans, as a composite,
had a relatively low opinion of the capabilities of
the average person coupled with a relatively posi-
tive belief in the necessity for participative leader-
ship styles. The study also found that these
European managers’ attitudes were affected by
hierarchical level, company size, and age. Overall,
however, European managers espouse a participative
leadership style.
3. The Japanese managers in the Haire and associates
study had a much greater belief in the capacity of
subordinates for leadership and initiative than man-
agers in most other countries. The Japanese manag-
ers also expressed a more favorable attitude toward
a participative leadership style. In terms of sharing
information and objectives and using internal con-
trol, the Japanese responded above average but were
not distinctive. In a number of ways, Japanese lead-
ership styles differed from those of U.S. managers.
Company size and age of the managers are two fac-
tors that seem to affect these differences. Other rea-
sons include the basic philosophy of managing
people, how information is processed, and the high
degree of ethnocentrism among the Japanese. How-
ever, some often overlooked similarities are impor-
tant, such as how effective Japanese leaders manage
high-achieving and low-achieving subordinates.
4. Leadership research in China shows that the new
generation of managers tends to have a leadership
style that is different from the styles of both the
current generation and the older generation. In
particular, new generation managers assign greater
importance to individualism as measured by such
things as self-sufficiency and personal accomplish-
ments. They also assign less importance to collec-
tivism as measured by subordination of personal
goals to those of the group and to Confucianism as
measured by such things as societal harmony and
virtuous interpersonal behavior.
5. Leadership research in the Middle East traditionally
has stressed the basic differences between Middle
Eastern and Western management styles. Other
research, however, shows that many managers in
multinational organizations in the Persian Gulf
region operate in a Western-oriented participative
style. Such findings indicate that there may be more
similarities in leadership styles between Western
and Middle Eastern parts of the world than has pre-
viously been assumed.
6. Leadership research also has been conducted among
managers in India and Latin American countries.
These studies show that Indian managers have a ten-
dency toward participative leadership styles while
Latin America wavers between participative and
SUMMARY OF KEY POINTS
502 Part 4 Organizational Behavior and Human Resource Management
has confirmed earlier research that specific cultural
values and practices are associated with particular
leadership attributes. Moreover, there is increasing
pressure for MNCs to engage in globally responsi-
ble leadership that incorporates (a) values-based
leadership, (b) ethical decision making, and (c)
quality stakeholder relationships. Leaders of interna-
tional new ventures face particularly challenging
obstacles; however, the integration of a global ori-
entation and entrepreneurial flair can contribute to
successful “born global” leaders and firms.
authoritarian styles. Although there always will be
important differences in styles of leadership between
various parts of the world, participative leadership
styles may become more prevalent as countries
develop and become more economically advanced.
7. In recent years, there have been research efforts to
explore new areas in international leadership. In
particular, Bass has found that there is a great deal
of similarity from culture to culture and that trans-
formational leaders, regardless of culture, tend to be
the most effective. In addition, the GLOBE study
KEY TERMS
authoritarian leadership, 474
charismatic leaders, 487
leadership, 470
participative leadership, 475
paternalistic leadership, 474
positive organizational scholarship
(POS), 495
Theory X manager, 472
Theory Y manager, 472
Theory Z manager, 474
transactional leaders, 487
transformational leaders, 487
variety amplification, 482
variety reduction, 482
REVIEW AND DISCUSSION QUESTIONS
1. What cultures would be the most likely to perceive
differences between managerial and leadership
duties? What cultures would view them as the
same? Use evidence to support your answer.
2. Using the results of the classic Haire and associates
study as a basis for your answer, compare and con-
trast managers’ attitudes toward leadership practices
in Nordic-European and Latin-European countries.
(The countries in these clusters are identified in
Table 13–3.)
3. Is there any relationship between company size and
European managers’ attitude toward participative
leadership styles?
4. Using the GLOBE study results and other support-
ing data, determine what Japanese managers believe
about their subordinates. How are these beliefs
similar to those of U.S. and European managers?
How are these beliefs different?
5. A U.S. firm is going to be opening a subsidiary in
Japan within the next six months. What type of
leadership style does research show to be most
effective for leading high-achieving Japanese? Low-
achieving Japanese? How are these results likely to
affect the way that U.S. expatriates should lead
their Japanese employees?
6. What do U.S. managers need to know about leading
in the international arena? Identify and describe three
important guidelines that can be of practical value.
7. Is effective leadership behavior universal, or does it
vary from culture to culture? Explain.
8. What is authentic leadership? What is ethically
responsible leadership?
Over the last three decades, one of the most successful
global firms has been General Electric. Although GE has
faced challenges, and has shed some of its businesses,
such as the sale of GE Plastics to Saudia Arabian
SABIC in 2007, and sold its stake in broadcaster NBC
Universal to Comcast in 2013, it remains a global pow-
erhouse in energy and power systems, health care,
finance, and appliances. Go to the company’s website at
www.ge.com and review its latest annual report. Pay
close attention to the MNC’s international operations and
to its product lines. Also read about the new members
on the board of directors and look through the informa-
tion on the company’s Six Sigma program. Then, aware
of what GE is doing worldwide as well as in regard to
INTERNET EXERCISE: TAKING A CLOSER LOOK
Chapter 13 Leadership Across Cultures 503
diverse a group of worldwide managers? In what way
would an understanding of the managerial grid be useful
in explaining leadership behaviors at GE? Finally, if GE
were advertising for new managers in England, Italy, and
Japan, what qualities would you expect the firm to be
seeking in these managers? Would there be a universal
list, or would lists differ on a country-by-country basis?
its quality efforts, answer these questions: On how many
continents does the company currently do business?
Based on this answer, is there one leadership style that
will work best for the company, or is it going to have to
choose managers on a country-by-country basis? Addi-
tionally, if there is no one universal style that is best,
how can current CEO Jeffrey Immelt effectively lead so
1. Joe Light, “Leadership Training Gains Urgency
Amid Stronger Economy,” The Wall Street Journal,
August 2, 2010, http://online.wsj.com/article/SB10
001424052748703314904575399260976490670.
html?KEYWORDS=leadership.
2. Ibid.
3. “Employees,” Roche, http://www.roche.com/
corporate_responsibility/employees.htm.
4. “Local Leadership Development,” Roche, http://
careers.roche.com.
5. “People & Leadership Development Program—
Shanghai Roche Pharma,” Roche, http://www.
roche.com/careers/workplaces/wp_marketing/per-
spectives_program.htm.
6. “Development,” Roche, http://www.roche.com/
careers/workplaces/wp_marketing/perspectives_
program/comm_ops_perspectives_faq.htm.
7. “Perspectives—Global Accelerated Talent Devel-
opment Program at Roche,” LinkedIn, http://www.
roche.com/careers/workplaces/wp_marketing/
perspectives_program/comm_ops_perspectives_
faq.htm.
8. Ibid.
9. Ibid.
10. “Case Study,” Roche, http://www.roche.com/
careers/country/switzerland/ch_service.htm.
11. Ibid.
12. Ibid.
13. Ibid.
14. Richard M. Hodgetts, Modern Human Relations
at Work, 8th ed. (Ft. Worth, TX: Harcourt, 2002),
p. 255. Also see Daniel Goleman, “What Makes a
Leader?” Harvard Business Review, November–
December 1998, pp. 93–102.
15. Also see Daniel Goleman, “What Makes a Leader?”
Harvard Business Review, November–December
1998, pp. 93–102.
16. Abraham Zaleznik, “Managers & Leaders: Are
They Different?” Harvard Business Review,
March–April 1992, pp. 126–135.
17. James E. Colvard, “Managers vs. Leaders,” Gov-
ernment Executive 35, no. 9 (July 2003), p. 82.
18. Caroline Hulme, “The Right Place and the Right
Style,” The British Journal of Administrative Man-
agement 55 (October–November 2006), pp. i–iii.
19. Zaleznik, “Managers & Leaders: Are They
Different?”
20. Mike Diamond, “Are You a Manager or a
Leader?” Reeves Journal 87, no. 2 (2007), p. 66.
21. Thomas W. Kent, “Leading and Managing: It
Takes Two to Tango,” Management Decision 43,
no. 7–8 (2005), pp. 1010–1017.
22. L. Gary Boomer, “Leadership and Management:
Your Firm Needs Both,” Accounting Today 21, no.
2 (2007), pp. 22–23.
23. Zaleznik, “Managers & Leaders: Are They Differ-
ent?”
24. Matthew Fairholm, “I Know It When I See It:
How Local Government Managers See Leadership
Differently,” Public Management 88, no. 9 (2006),
pp. 10–14.
25. Douglas McGregor, The Human Side of Enterprise
(New York: McGraw-Hill, 1960), pp. 33–34.
26. Ibid., pp. 47–48.
27. See Nancy J. Adler, International Dimensions
of Organizational Behavior, 2nd ed. (Boston:
PWS-Kent, 1991), p. 150.
28. Sheila M. Puffer, Daniel J. McCarthy, and
Alexander I. Naumov, “Russian Managers’ Beliefs
About Work: Beyond the Stereotypes,” Journal of
World Business 32, no. 3 (1997), pp. 258–276.
29. For other insights into this area, see Manfred F.
R. Kets de Vries, “A Journey into the ‘Wild
West’: Leadership Style and Organizational
Practices in Russia,” Organizational Dynamics,
Spring 2000, pp. 67–80.
30. William Ouchi, Theory Z: How American
Management Can Meet the Japanese Challenge
(New York: Addison-Wesley, 1981).
31. Ingrid Aioanei, “Leadership in Romania,” Journal
of Organizational Change Management 19, no. 6
(2006), pp. 705–712.
32. Jun Yan and James G. Hunt, “A Cross Cultural Per-
spective on Perceived Leadership Effectiveness,”
ENDNOTES
504 Part 4 Organizational Behavior and Human Resource Management
International Journal of Cross Cultural Manage-
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33. For more, see review in Sergio Matviuk, “A Study
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34. Z. Aycan, R. N. Kanungo, M. Mendonca, K. Yu,
J. Deller, G. Stahl et al., “Impact of Culture on
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35. For a review, see Ekin K. Pellegrini and Terri A.
Scandura, “Paternalistic Leadership: A Review and
Agenda for Future Research,” Journal of Manage-
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36. S. Martinez and P. Dorfman, “The Mexican Entre-
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37. M. A. Ansari, Z. A. Ahmad, and R. Aafaqi,
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38. For more, see C. M. Axtell, D. J. Holman, K. L.
Unsworth, T. D. Wall, P. E. Waterson, and
E. Harrington, “Shopfloor Innovation: Facilitating
the Suggestion and Implementation of Ideas,”
Journal of Occupational and Organizational
Psychology 73 (2000), pp. 265–285.
39. See also R. K. Yukl, Leadership in Organiza-
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40. Xu Huang, Joyce Iun, Aili Liu, and Yaping Gong,
“Does Participative Leadership Enhance Work
Performance by Inducing Empowerment or Trust?
The Differential Effects on Managerial and Non-
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41. Iyuji Misumi and Fumiyasu Seki, “Effects of
Achievement Motivation on the Effectiveness of
Leadership Patterns,” Administrative Science
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42. Sang M. Lee, Sangjin Yoo, and Tosca M. Lee,
“Korean Chaebols: Corporate Values and
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43. Michael Woywode, “Global Management Concepts
and Local Adaptations: Working Groups in the
French and German Car Manufacturing Industry,”
Organization Studies 23, no. 4 (2002), p. 497.
44. Chris Reiter and Neal Boudette, “VW Delays
Launch of Microbus to Reduce Its Production
Cost,” The Wall Street Journal, May 20, 2004,
p. D3.
45. Mason Haire, Edwin E. Ghiselli, and Lyman W.
Porter, Managerial Thinking: An International
Study (New York: Wiley, 1966).
46. Ibid., p. 21.
47. James R. Lincoln, Mitsuyo Hanada, and Jon
Olson, “Cultural Orientation and Individual Reac-
tions to Organizations: A Study of Employees of
Japanese-Owned Firms,” Administrative Science
Quarterly, March 1981, pp. 93–115.
48. Also see Karen Lowry Miller, “Land of the Rising
Jobless,” BusinessWeek, January 11, 1993, p. 47.
49. Sangjin Yoo and Sang M. Lee, “Management
Style and Practice of Korean Chaebols,”
California Management Review, Summer 1987,
pp. 95–110.
50. Haire, Ghiselli, and Porter, Managerial Thinking,
p. 29.
51. Noboru Yoshimura and Philip Anderson, Inside
the Kaisha: Demystifying Japanese Business
Behavior (Boston: Harvard Business School Press,
1997), p. 167.
52. Jonathan Soble, “Toyota Promotes Non-Japanese
Managers in Wake of Problems,” Financial Times,
June 25, 2010, p. 13.
53. Haire, Ghiselli, and Porter, Managerial Thinking,
p. 140.
54. Ibid., p. 157.
55. For more on this topic, see Edgar H. Schein,
“SMR Forum: Does Japanese Management Style
Have a Message for American Managers?” Sloan
Management Review, Fall 1981, pp. 55–68.
56. Jeremiah J. Sullivan and Ikujiro Nonaka, “The
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Japanese and American Management,” Journal
of International Business Studies, Fall 1986,
pp. 127–147.
57. Ibid., pp. 130–131.
58. Laura He, “Google’s Secrets of Innovation:
Empowering Its Employees,” Forbes, March 29,
2013, www.forbes.com/sites/laurahe/2013/03/29/
googles-secrets-of-innovation-empowering-its-
employees/#384e881b7eb3.
59. David A. Ralston, Carolyn P. Egri, Sally Stewart,
Robert H. Terpstra, and Yu Kaicheng, “Doing
Business in the 21st Century with the New Gen-
eration of Chinese Managers: A Study of Genera-
tional Shifts in Work Values in China,” Journal of
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60. John Politis, “The Role of Various Leadership
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Journal 24, no. 4 (2003), pp. 181–195.
Chapter 13 Leadership Across Cultures 505
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80. Robert J. House and Mansour Javidan, “Overview
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Robert J. House, Paul J. Hanges, Mansour Javidan
et al. (Thousand Oaks, CA: Sage, 2004), p. 14.
81. Peter Dorfman, Paul Hanges, and Felix Brodbeck,
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cation of Culturally Endorsed Leadership Pro-
files,” in Culture, Leadership, and Organizations,
ed. House et al., pp. 669–720.
82. 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
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83. Michele J. Gelfand, D. P. S. Bhawuk, Lisa H.
Nishii, and David J. Bechtold, “Individualism and
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and Organizations, ed. House et al., pp. 437–512.
84. Ibid.
85. Cynthia G. Emrich, Florence L. Denmark, and
Deanne Den Hartog, “Cross-Cultural Differences
in Gender Egalitarianism,” in Culture, Leadership,
and Organizations, ed. House et al., pp. 343–394.
86. Mansour Javidan, “Performance Orientation,” in
Culture, Leadership, and Organizations, ed. House
et al., pp. 239–281.
87. Neal Ashkanasy, Vipin Gupta, Melinda Mayfield,
and Edwin Trevor-Roberts, “Future Orientation,”
in Culture, Leadership, and Organizations, ed.
House et al., pp. 282–342.
88. Mary Sully De Luque and Mansour Javidan,
“Uncertainty Avoidance,” in Culture, Leadership,
and Organizations, ed. House et al., pp. 602–654.
89. Hayat Kabasakal and Muzaffer Bodur, “Humane
Orientation in Societies, Organizations, and Leader
Attributes,” in Culture, Leadership, and Organiza-
tions, ed. House et al., pp. 564–601.
90. Dean Den Hartog, “Assertiveness,” in House
et al., Culture, Leadership, and Organizations,
pp. 395–436.
91. Dale Carl, Vipin Gupta, and Mansour Javidan,
“Power Distance,” in Culture, Leadership, and
Organizations, ed. House et al., pp. 513–563.
92. Mansour Javidan, “Forward Thinking Cultures,”
Harvard Business Review, July–August 2007,
p. 20.
93. Peter Dorfman, Mansour Javidan, Paul Hanges,
Ali Dastmalchian, and Robert House, “GLOBE: A
Twenty Year Journey into the Intriguing World of
61. Darwish A. Yousef, “Predictors of Decision-Mak-
ing Styles in Non-Western Countries,” Leadership
and Organizational Development Journal 19,
no. 7 (1998), pp. 366–373.
62. Ibid.
63. Ibid.
64. James Thomas Kunnanatt, “Leadership Orientation
of Service Sector Managers in India: An Empiri-
cal Study,” Business and Society Review 122,
no. 1 (2007), pp. 99–119.
65. Haire, Ghiselli, and Porter, Managerial Thinking,
p. 22.
66. Peter Cappelli, Harbir Singh, Jitendra Singh, and
Michael Useem, The India Way: How India’s Top
Business Leaders Are Revolutionizing Management
(Cambridge, MA: Harvard Business School
Publishing, 2010).
67. Eric J. Romero, “Latin American Leadership: El
Patron & El Lider Moderno,” Cross Cultural
Management 11, no. 3 (2004), pp. 25–37.
68. Ibid.
69. Haire, Ghiselli, and Porter, Managerial Thinking,
p. 22.
70. See Jay A. Conger, The Charismatic Leader (San
Francisco: Jossey-Bass, 1989).
71. Hodgetts, Modern Human Relations at Work,
pp. 275–276.
72. Bernard M. Bass, “Is There Universality in the
Full Range Model of Leadership?” International
Journal of Public Administration 16, no. 6 (1996),
p. 731.
73. Ibid., p. 741–742.
74. Ibid., p. 731.
75. For additional insights on recent research by
Bass and his associates, see Bruce J. Avolio and
Bernard M. Bass, “You Can Drag a Horse to
Water but You Can’t Make It Drink Unless It Is
Thirsty,” Journal of Leadership Studies, Winter
1998, pp. 4–17.
76. Ingrid Tollgerdt-Andersson, “Attitudes, Values and
Demands on Leadership—A Cultural Comparison
among Some European Countries,” in Managing
Across Cultures, ed. Pat Joynt and Malcolm War-
ner (London: International Thomson Business
Press, 1996), p. 172.
77. Ibid., p. 176.
78. Felix C. Brodbeck et al., “Cultural Variation of
Leadership Prototypes Across 22 European Coun-
tries,” Journal of Occupational and Organiza-
tional Psychology 73 (2000), pp. 1–29.
79. Fons Trompenaars and Charles Hampden-Turner,
Riding thhe Waves of Culture: Understanding
506 Part 4 Organizational Behavior and Human Resource Management
Culture and Leadership,” Journal of World Busi-
ness 47, (2012), pp. 504–518.
94. Ibid.
95. Narda Quigley, Mary Sully De Luque, and Robert
J. House, “Responsible Leadership and Gover-
nance in a Global Context: Insights from the
GLOBE Study,” in Handbook of Responsible
Leadership and Governance in Global Business,
ed. Jonathan P. Doh and Stephen A. Stumpf
(London: Edward Elgar Publishing, 2005),
pp. 352–379.
96. Lori D. Paris, Jon P. Howell, Peter W. Dorfman,
and Paul J. Hanges, “Preferred Leadership Proto-
types of Male and Female Leaders in 27 Coun-
tries,” Journal of International Business Studies
40, no. 8 (2009), pp. 1396–1405.
97. Kim S. Cameron, Jane E. Dutton, and Robert E.
Quinn, Positive Organizational Scholarship (San
Francisco: Berrett-Koehler, 2003), p. 3.
98. Ibid.
99. C. Cooper, T. A. Scandura, and C. A.
Schriesheim, “Looking Forward but Learning from
Our Past: Potential Challenges to Developing
Authentic Leadership Theory and Authentic Lead-
ers,” The Leadership Quarterly 16, no. 3 (2005),
pp. 475–493.
100. B. Avolio, F. Luthans, and F. O. Walumba,
Authentic Leadership: Theory Building for Veri-
table Sustained Performance (Gallup Leadership
Institute, University of Nebraska–Lincoln, 2004),
p. 4.
101. B. Shamir and G. Eilam, “What’s Your Story? A
Life-Stories Approach to Authentic Leadership
Development,” The Leadership Quarterly 16, no.
3 (2005), pp. 395–417.
102. William L. Gardner, Bruce J. Avolio, Fred
Luthans, Douglas R. May, and Fred Walumbwa,
“Can You See the Real Me? A Self-Based Model
of Authentic Leader and Follower Development,”
The Leadership Quarterly 16 (2005), pp. 343–372.
103. Ibid.
104. Bruce J. Avolio and William L. Gardner, “Authen-
tic Leadership Development: Getting to the Root
of Positive Forms of Leadership,” The Leadership
Quarterly 16 (2005), pp. 315–338.
105. Ibid.
106. World Economic Forum, “Declining Public Trust
Foremost a Leadership Problem,” press release,
January 14, 2003.
107. Ibid.
108. David Waldman, Donald Siegel, and Mansour
Javidan, “Transformational Leadership and Corpo-
rate Social Responsibility,” in Handbook of
Responsible Leadership and Governance in Global
Business, ed. Doh and Stumpf.
109. Jonathan P. Doh and Stephen A. Stumpf, “Toward
a Framework of Responsible Leadership and Gov-
ernance,” in Handbook of Responsible Leadership
and Governance in Global Business, ed. Doh and
Stumpf.
110. Allen Morrison, “Integrity and Global Leader-
ship,” Journal of Business Ethics 31, no. 1 (May
2001), p. 65.
111. Lao Tzu, Tao Te Ching, trans. John C. H. Wu
(Boston, MA: Shambhala, 2006), p. 35.
112. Robert Greenleaf, Servant Leadership: A Journey
into the Nature of Legitimate Power and Great-
ness, 25th anniversary ed. (Mahwah, NJ: Paulist
Press, 2002).
113. Stephen A. Stumpf, “Career Goal: Entrepreneur?”
International Journal of Career Management 4,
no. 2 (1992), pp. 26–32.
114. T. K. Maloy, “Entrepreneurs Need Moms,” United
Press International, March 11, 2004.
115. Dominic Rushe, “Tim Cook Apologises after
Chinese Media Rounds on Apple,” The Guardian,
April 1, 2013, https://www.theguardian.com/tech-
nology/2013/apr/01/apple-tim-cook-china-apology.
116. CIA, “Germany,” The World Factbook (2016),
https://www.cia.gov/library/publications/the-world-
factbook/geos/gm.html.
117. Ibid.
118. World Bank, “Germany,” Country at a Glance
(2016), www.worldbank.org/en/country/germany.
119. Don Clark, “Cisco Steps Up Investments in
Germany and Its Own Slack Competitor,” The
Wall Street Journal, March 9, 2016, www.wsj.
com/articles/cisco-steps-up-investments-in-
germany-slack-competitor-1457463551.
120. Cisco Systems, “Cisco Announces $500 Million
Investment to Accelerate Country Digitization in
Germany,” press release, March 8, 2016, http://
investor.cisco.com/investor-relations/news-and-
events/news/news-details/2016/Cisco-Announces-
500-Million-Investment-to-Accelerate-Country-
Digitization-in-Germany/default.aspx.
507
In the International
Spotlight
Europe and fifth largest in the world. The country’s GDP
stood at US$3.868 trillion in 2014, resulting in a high
GDP per capita of US$46,268. Despite stagnant economic
growth across much of Europe, Germany’s GDP is
expected to expand at 1.5 percent over the next several
years. Germany is a leading exporter of machinery, vehi-
cles, chemicals, and household equipment and benefits
from a highly skilled labor force.118
You Be the International Management
Consultant
In a March 2016 announcement, U.S.-based Cisco Systems
Inc., one of the largest computer-networking equipment
manufacturers worldwide, disclosed plans for major future
investments in Germany. According to the company, it
would spend a half billion U.S. dollars in the country
between 2016 and 2018, with goals of “accelerating its
‘digitization’” and investing in startups. Additionally,
Cisco stated a desire to work together with the German
government on various future technology initiatives.119
With its highly educated workforce, Germany offers a
unique appeal for tech companies. In recent years, the
country has served as a hotbed for companies focusing on
digital security. Cisco, with extensive experience in net-
working security innovations, plans to take advantage of
this specialized market niche by creating a “Security
Center of Excellence” in the country. The center will
focus on bringing customers, academics, small businesses,
and Cisco’s employees together to solve larger security
challenges. Additionally, the company will offer training
programs to build skills for potential future employees.120
Questions
1. As a management consultant, what opportunities do
you see for Cisco in Germany?
2. What are some potential benefits that companies,
like Cisco, can gain by partnering with public sec-
tor entities and foreign governments of developed
nations as opposed to ones in emerging nations?
Situated in the heart of central Europe, Germany straddles
the border of Western and Eastern Europe. Neighboring
countries include the Netherlands, Austria, Belgium,
France, Luxembourg, Switzerland, Denmark, Poland, and
the Czech Republic. Slightly smaller than the state of
Montana, the country maintains shipping routes through
its access to the North and Baltic Seas. Major natural
resources include coal, lignite, natural gas, iron ore, cop-
per, nickel, uranium, potash, salt, construction materials,
timber, and arable land.116
Germany, with a population of 80,854,408, is the sec-
ond largest nation in Europe, behind only Russia. Like
most of Western Europe, its population is slowly declining
at 0.17 percent annually. The country is quickly aging; in
2015, median age reached 46.5 years old. The two largest
age segments of the population are 25–54 year olds
(42 percent) and 65 or older (21.5 percent). The country
is not very ethnically or religiously diverse. Over 90 per-
cent of the population is of German descent, and the
country is primarily Protestant or Roman Catholic. Only
4 percent of the population identifies as Muslim.117
European power struggles immersed Germany in two
devastating World Wars in the first half of the 20th cen-
tury, leaving the country occupied by the Allied powers
of the U.S., U.K., France, and the Soviet Union in 1945.
Tensions between the Soviet Union and the other Allied
powers resulted in the division of Germany in 1949 into
two states: the western Federal Republic of Germany
(FRG) and the eastern German Democratic Republic
(GDR). The democratic FRG embedded itself into key
Western economic and security organizations, the
European Commission, and NATO, while the communist
GDR was the front line of the Soviet-led Warsaw Pact.
The decline of the Soviet Union in the 1980s allowed for
German reunification in 1990. Although 40 years of eco-
nomic isolation left the former East Germany with
significant deficits in education, productivity, and wages,
unified Germany has expended considerable funds to raise
the entire country to Western standards.
In the wake of World War II and its fairly recent uni-
fication, Germany has emerged as the largest economy in
Germany
508
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The World of International
Management
The Challenge of Talent
Retention in India
R etaining talented employees is a challenge for managers around the world. Somewhat to the surprise of MNCs,
this challenge has become particularly acute in India. Accord-
ing to a 2015 study by Ernst & Young, only 6 percent of Indian
firms felt that they had best-in-class capability for recruitment
activities, and only 4 percent stated that they had best-in-class
capability for hiring employees with scarce or critical skills.1
The same study found that employee turnover was particu-
larly high for customer-facing employees, with a fifth of all firms
seeing annual turnover greater than 20 percent.2 Such high
employee turnover has a cost. Shyamal Majumdar of India’s
Business Standard explained that frontline employees in a top
company cost 40 percent of their salaries to replace and top
managers cost 150–200 percent of their salaries to replace.3
Right Management’s Executive Overview described the
business implications of high Indian employee turnover:
In IT, for example, it is important for clients to develop
close relationships with employees working on projects.
Frequent turnover means continually building new
relationships with replacements, thereby slowing down
projects and harming both efficiency and client trust. In
manufacturing, high attrition results in the expensive
and time-consuming exercise of training recent hires
about new technologies.4
Because of the cost of hiring and retraining employees, MNCs
in India may not be able to secure the cost savings that led
them to India in the first place.
More Than Money
Discussing retaining talent in India, Elena Groznaya points out
that MNCs sometimes mistakenly use the same methods to try
to retain employees in India as in the home country. These
methods are often compensation driven. In India’s relationship-
oriented culture, however, employees are primarily motivated
Firms conducting international business need to be particularly
concerned with human resource management issues—including
selection, training, and development—to better prepare their
personnel for overseas assignments. This chapter focuses on
potential sources of human resources that can be employed
for overseas assignments, procedures that are used in their
selection process, and compensation issues. In this chapter we
discuss training and development and the various types of
training that are commonly offered. The specific objectives of
this chapter are
1. IDENTIFY the three basic sources that MNCs can tap
when filling management vacancies in overseas operations
in addition to options of subcontracting and outsourcing.
2. DESCRIBE the selection criteria and procedures used by
organizations and individual managers when making final
decisions.
3. DISCUSS the reasons why people return from overseas
assignments, and present some of the strategies used to
ensure a smooth transition back into the home-market
operation.
4. DESCRIBE the training process, the most common
reasons for training, and the types of training that often
are provided.
5. EXPLAIN how cultural assimilators work and why they are
so highly regarded.
Chapter 14
HUMAN RESOURCE SELECTION
AND DEVELOPMENT ACROSS
CULTURES
509
organization, 65.9 percent had strong satisfaction with
the organization, and only 23.5 percent indicated a
strong intention to leave.” In contrast, of the bottom
third, “only 17.3 percent had strong pride in the organi-
zation, 11.1 percent had strong satisfaction, and
48.8 percent expressed a strong intention to leave.”9
When setting up performance management systems
at Indian firms, managers need to be coached on how
to provide constructive feedback. Indian managers are
often hesitant to criticize their employees, but with
coaching, they can learn how to use criticism to help
employees improve their performance.10
Professional Development Employees who are satisfied
with their firm’s professional development opportunities
are more likely to remain at the firm. For instance, the
researchers found that of those respondents who did
not like the professional development practices at their
companies, “52.3 percent indicated intent to leave
within 12 months vs. 18.7 percent in organizations that
strongly supported those practices.” Employees are
more engaged when they have clear opportunities for
growth in their career. A typical career path may involve
the opportunity to work on different projects, participate
in overseas assignments, and eventually take on a
managerial role.11
Employee assessments should be an important part
of the development process. These assessments “can
ensure that companies hire the right people for the
right jobs and . . . will also help to pinpoint those
people with the potential to move into management
roles.”12
Management Support From the study, the researchers
found that “Due to the urgent need for managerial level
personnel, employees in India are often promoted to
supervisory roles before they’re ready to assume such
responsibilities.” Furthermore, many respondents in the
study were dissatisfied with their manager’s ability to
engage with their team: “Only 47 percent of respon-
dents agreed that their immediate supervisor was able
to provide support and develop his or her team effec-
tively.” This gap in management skills has a negative
impact on employee retention. If employees are working
not by compensation, but by a sense of “family” in their
companies. Groznaya states: “Traditional Indian companies
often play the role of a family extension for their staff” and
give employees a feeling of belonging.5
A comprehensive talent management and HR practices study in
India supported the conclusion that compensation is not the main
factor in retaining Indian employees. Villanova School of Business
and Right Management conducted a survey of 4,811 individuals
from 28 Indian companies in five industries. According to Right
Management’s Executive Overview, the researchers found:
While the common perception is that pay is the key element in
attracting and retaining talent in India, as well as other emerg-
ing countries, our results showed a more complex array of fac-
tors played a significant role. Most notably, they included the
value of intrinsic rewards—the employees’ sense of progress,
competence, influence/choice, and opportunity to do meaning-
ful work. Compensation was not the most significant factor in
either retention or engagement, a phenomenon that held true
across all industries. Among respondents who indicated an
intent to stay, only 30 percent were “very satisfied” with their
compensation.6
The key to high retention is keeping employees engaged. The
researchers discovered that “lack of engagement was by far
the strongest single factor leading to intent to leave an organi-
zation. The lesson is clear: The more engaged an employee,
the likelier he or she will stay.”7
Four Factors Correlated to Employee Engagement
What steps can managers take to keep employees engaged?
The researchers identified four HR practices that are correlated
with employee engagement, as measured by employees’ feel-
ings of pride and satisfaction in the organization. These factors
were performance management, professional development,
manager support, and an organizational commitment to a
larger social purpose.8
Performance Management The researchers found a sig-
nificant relationship between retention and a favorable
assessment of a firm’s performance management sys-
tem. Of employees who were in the top third of those
who rated their company’s performance management
practices highly, “56.1 percent had strong pride in the
510 Part 4 Organizational Behavior and Human Resource Management
Once, India was seen as a source of never-ending talent. Today, India poses some of the
same challenges in attracting, hiring, and retaining talent as do many developed countries,
with some issues that are particular to the Indian context. Originally, MNCs searched
overseas for inexpensive labor, but as countries become more developed and education
levels increase, and as employers in home countries worry about a diminishing labor force,
the search has shifted. As more highly skilled workers become available in other countries,
MNCs have a growing number of sources for their human resources; however, as more
MNCs and local firms vie for this talent, a “talent war” may ensue. MNCs may also be
able to access foreign human resources by hiring them on a temporary or permanent basis
in the home country. Often, they will subcontract or outsource work to foreign employees
in home and host countries. This complex web of relationships creates significant mana-
gerial challenges and opportunities and suggests that there will always be a need for highly
skilled, culturally sensitive, and geographically mobile managerial talent.
for a supervisor who lacks management skills, they are
more likely to leave the company.13
Thus, Indian firms need to train new managers in the
basics of management, such as how to reach team
objectives and how to mentor employees. Mentoring is
an essential management skill in India, where leaders
often act as personal advisers. Having effective manag-
ers to support their employees is critical to increasing
employee retention.14
Social Responsibility Many Indian employees highly
value commitment to the community. Firms can engage
employees by providing them with opportunities to
participate in initiatives to help social causes, such as
alleviating poverty. These initiatives should be high-
lighted in annual reports.15
Start on the First Day
The highlights of the research study mentioned were published in
an article in MIT Sloan Management Review. According to the arti-
cle, “The best companies drive employee satisfaction and pride by
providing management support, training, and professional oppor-
tunities early on. . . . Employers should start an employee’s pro-
fessional development plan on his or her first day.”16
One of the researchers in the study, Dr. Jonathan Doh, told
the MIT Sloan Management Review, “Our findings suggest that
even six months from the start date is probably too late. [At
that point] the employee is already making decisions about
whether to stay around or not.” MNCs can make the decision
to stay an easy one by offering employees effective profes-
sional development, performance management systems, and
manager support.17
Years of Service, Age, Gender, Position, Education
HR Practices
Employee Attitudes
and Beliefs
Retention
Performance
Management
Practices
Pride in
Organization
Intention
to Leave
Professional
Development
Practices
Manager
Support
Satisfaction
with Organization
Social
Responsibility
Chapter 14 Human Resource Selection and Development Across Cultures 511
In this chapter, we explore the procedure of international human resource (HR)
selection and training and examine the difficulties of developing a global human resource
management process in the presence of dissimilar cultural norms. At the same time, we
survey emerging trends in international human resource management, including the
increasing use of temporary and contingent staffing to fill the growing global HR needs
of MNCs. We also review training and development programs designed to help employees
prepare for and succeed in their foreign assignments and adjust to conditions once they
return home.
■ The Importance of International Human Resources
Human resources is an essential part of any organization because it provides the human
capital that keeps operations running. Human resource management is also key to an
efficient, productive workplace. We discussed in Chapter 12 how financial compensation
can motivate employees, but creative human resource management can play an even more
important role. By focusing on the employees, or the human resources themselves, orga-
nizations have found that positive organizational structure leads to company success in
the market.18 Sometimes this is recognized through compensation, such as competitive
salaries, good benefits, promotions, training, education opportunities, and so forth, which
has been known to motivate employees and reduce turnover because there are further
incentives to strive for. Other times, companies will provide employees with daily com-
forts such as meals where an employee’s family is welcome to attend, fitness centers,
laundry rooms, or even services such as oil changes while at work. Showing the employees
that they are not simply cogs in a machine, but that their time is valued and they are
thanked for it, often builds morale and can increase company sales through a shared drive
to succeed. Furthermore, recognizing the potential in employees and encouraging
teamwork can lead to greater risk taking and innovations.19
Getting the Employee Perspective
Whether managers are trying to increase productivity or decrease turnover rates, it is
good to get a sense of how the employees feel they are being treated. Times continue to
change, and while employees in the past could be considered one unit, today people are
realizing their individual talents and their need to be recognized. For instance, global
companies are experiencing a labor shortage as skilled workers are in high demand.20 In
essence, skilled workers can almost walk in and request the kind of compensation they
desire, and companies may be willing to accept the terms. Even outside this context of
labor shortages, firms are restructuring how they look at employees for many good rea-
sons. By segmenting the workforce into categories (but avoiding differentiation based on
age or gender because that may imply a form of discrimination) and by offering choices,
flexibility, and a personal touch to each employee package, employers are able to provide
an underlying sense of commitment because the employee is getting what he or she
wants. In other words, by focusing on employees and tailoring human resource manage-
ment to the individual, people are naturally influenced to stay longer and be more com-
mitted to the organization they have joined.21 However, before a company can keep the
employee, it must first hire.
Employees as Critical Resources
Attracting the most qualified employees and matching them to the jobs for which they
are best suited are important for the success of any organization. For international orga-
nizations, the selection and development of human resources are especially challenging
and vitally important. As prevalent and useful as e-mail and web- and teleconferencing
have become, and despite the increasing incidence of subcontracting and outsourcing,
face-to-face human contact will remain an important means of communication and
512 Part 4 Organizational Behavior and Human Resource Management
transferring “tacit” knowledge—knowledge that cannot be formalized in manuals or writ-
ten guidelines. Hence, most companies continue to deploy human resources around the
world as they are needed, although the range of options for filling human resource needs
is expanding.
Investing in International Assignments
MNCs must send expatriate (“expat”) managers overseas, no matter how good “virtual”
communications become. There are quite a few costs involved, including pre-assignment
training, and potential costs due to failure. According to a recent study, expatriate
employees cost roughly 2.5 times that of a domestic employee. Furthermore, 10 percent
of expatriate projects fail, adding to the overall cost of doing business.22 Given these
high costs, many MNCs are turning to locally engaged employees or third-country nation-
als.23 In addition, the improved education of many populations around the world gives
MNCs more options when considering international human resource needs. The emer-
gence of highly trained technical and scientific employees in emerging markets and the
increased prevalence of MBA-type training in many developed and developing countries
have dramatically expanded the pool of talent from which MNCs can draw. Yet some
companies are still having difficulty in winning the “war for talent.” A recent report from
China noted that despite much greater levels of advanced education, there is still a short-
age of skilled management. “We need a lot more people than we have now, and we need
a higher caliber of people,” said Guo Ming, Coca-Cola’s human resource director for
Greater China.24
Adjustment problems of expats undertaking international assignments can be
reduced through careful selection and training. Language training and cross-cultural
training are especially important, but they are often neglected by MNCs in a hurry to
deploy resources to meet critical needs.25 The demand for globally adept managers will
likely grow, and MNCs will need to continue to invest in recruiting and training the
best future leaders.
MNCs are also under increasing pressure to keep jobs at home, and their interna-
tional HR practices have come under close scrutiny. In particular, the “importing” of
programmers from India at a fraction of domestic wages, combined with the offshore
outsourcing of work to high-tech employees in lower-cost countries, has created political
and social challenges for MNCs seeking to manage their international human resources
efficiently and effectively. All of this suggests an ongoing need for attention to and
investment in this challenging area.
Economic Pressures
It is important to note that the human resources function within MNCs is itself changing
as a result of ongoing pressures for reduced costs and increased efficiencies. There was
a time when human resources departments handled every staffing need at a company,
from hiring and firing to administering benefits and determining salaries. According to
a 2015 study by Bloomberg BNA, HR personnel-to-staff ratios dipped from 1.3 per 100
in 2014 to 1.1 per 100 in 2015. At large companies, defined as having 2,500 employees
or more, the ratio of HR personnel-to-staff drops to just 0.6 per 100. Further, some of
what in-house HR departments oversaw is now being outsourced, due to increased scru-
tiny of the costs associated with these “staff” (versus revenue-generating “line”) func-
tions. The 2015 Bloomberg BNA study found that two-thirds of employers outsourced
at least one HR activity.26
The actions that companies take during an economic recession, in regards to
employee compensation and benefits, vary based on a multitude of factors. However,
looking back to the 2009–2010 global recession can provide some clues as to how com-
panies may react during future economic downturns. Pay freezes or reductions, along
with hiring freezes, were quite common during the global recession. A survey taken
Chapter 14 Human Resource Selection and Development Across Cultures 513
during the global recession by Towers Perrin (now Willis Towers Watson) found that 42
percent of organizations were planning hiring freezes and reductions as well as pay cuts.
Another survey, an update to ECA International’s Salary Trends Survey, conducted annu-
ally for more than 50 countries, found that 40 percent of companies planned to freeze
pay. On average, salary increases were half as high as anticipated before the economic
crisis set in. In Canada, increases dropped from 4 percent to 1 percent. Salary increases
in Western Europe averaged around 2 percent, according to the survey, while those in
Eastern Europe were just under 5 percent. Russia, Romania, and Latvia saw the greatest
increases, while workers in Lithuania, the Irish Republic, and Switzerland were expected
to receive the smallest pay raises in the region.
Likely due in part to the pay and hiring freezes utilized by many companies to
improve financial metrics, employers expressed concern over long-term talent retention
during the global recession. Sixty-two percent of companies in the Towers Perrin survey
stated that they were worried about the potential impact on their ability to keep high-
performing talent or those in pivotal roles. In response, organizations reserved their
salary increases and cash rewards for their most talented and top-performing employees,
even while pay is cut for the rest of the workforce.
■ Sources of Human Resources
MNCs can tap four basic sources for positions: (1) home-country nationals, (2) host-
country nationals, (3) third-country nationals, and (4) inpatriates. In addition, many MNCs
are outsourcing aspects of their global operations and in so doing are engaging temporary
or contingent employees. The following sections analyze each of these major sources.
Home-Country Nationals
Home-country nationals are managers who are citizens of the country where the MNC
is headquartered. In fact, sometimes the term headquarters nationals is used. These man-
agers commonly are called expatriates, or simply “expats,” which refers to those who
live and work outside their home country. Historically, MNCs have staffed key positions
in their foreign affiliates with home-country nationals or expatriates. For many companies
and for the most senior positions, that trend persists. Major U.S. and European companies
such as Cisco Systems and IBM have been sending expats to India. According to a 2015
estimate, about 30,000 expat managers are there now, with that number expected to grow
by 10 to 15 percent per year.27 However, some research has shown that in many instances,
host-country nationals may be better suited for the job. Richards, for example, investigated
staffing practices for the purpose of determining when companies are more likely to use
an expatriate rather than a local manager. She conducted interviews with senior-level
headquarters managers at 24 U.S. multinational manufacturing firms and with managers
at their U.K. and Thai subsidiaries. This study found that local managers were most effec-
tive in subsidiaries located in developing countries or those that relied on a local customer
base. In contrast, expatriates were most effective when they were in charge of larger
subsidiaries or those with a marketing theme similar to that at headquarters.28
There are a variety of reasons for using home-country nationals. One of the most
common is to start up operations. Another is to provide technical expertise. A third is
to help the MNC maintain financial control over the operation.29 Other commonly cited
reasons include the desire to provide the company’s more promising managers with
international experience to equip them better for more responsible positions; the need to
maintain and facilitate organizational coordination and control; the unavailability of
managerial talent in the host country; the company’s view of the foreign operation as
short lived; the host country’s multiracial population, which might mean that selecting
a manager of either race would result in political or social problems; the company’s
conviction that it must maintain a foreign image in the host country; and the belief of
some companies that a home-country manager is the best person for the job.30
home-country nationals
Expatriate managers who are
citizens of the country where
the multinational corporation
is headquartered.
expatriates
Managers who live and work
outside their home country.
They are citizens of
the country where the
multinational corporation is
headquartered.
514 Part 4 Organizational Behavior and Human Resource Management
In recent years, there has been a trend away from using home-country nationals,
given the costs, somewhat uncertain returns, and increasing availability of host-country
and third-country nationals and inpatriates.
Host-Country Nationals
Host-country nationals are local managers who are hired by the MNC. For a number
of reasons, many MNCs use host-country managers at the middle- and lower-level ranks.
One reason in particular is that many countries expect the MNC to hire local talent, and
the use of host-country nationals is a good way to meet this expectation. Also, even if
an MNC wanted to staff all management positions with home-country personnel, it would be
unlikely to have this many available managers, and the cost of transferring and maintaining
them in the host country would be prohibitive.
In some cases government regulations dictate selection practices and mandate at
least some degree of “nativization.” In Brazil, for example, two-thirds of the employees
in any foreign subsidiary traditionally have to be Brazilian nationals. Additionally, the
Brazilian Labor Code states that pay to foreigners must not exceed one-third of the com-
pany’s total payroll. Brazil is not alone; many countries exert real and subtle pressures to
staff the upper-management ranks with nationals. In the past, these pressures by host
countries have led companies such as Standard Oil to change their approach to selecting
managers. These regulations have substantial costs in that shielding local employees from
international competition may create a sense of entitlement and result in low productivity.
Sony is trying the host-country approach in the United States. Employees are
encouraged to accept or decline styles that emerge from Japanese headquarters, depending
on American tastes. Furthermore, innovative creations are birthed at the U.S. site, all with
an American flavor. Sony believes that local citizens are the best qualified for the job, as
opposed to Japanese managers, because they already have a working knowledge of the
language and culture, and it may be difficult for Sony to understand preferred styles oth-
erwise.31 The International Management in Action box “Important Tips on Working for
Foreigners” gives examples of how Americans can better adapt to foreign bosses.
Third-Country Nationals
Third-country nationals (TCNs) are managers who are citizens of countries other than
the country in which the MNC is headquartered or the one in which they are assigned
to work by the MNC. Available data on third-country nationals are not as extensive as
those on home- or host-country nationals.
A number of advantages have been cited for using TCNs. One is that the salary
and benefit package usually is less than that of a home-country national, although in
recent years, the salary gap between the two has begun to diminish. A second reason is
that the TCN may have a very good working knowledge of the region or speak the same
language as the local people. This helps explain why many U.S. MNCs hire English or
Scottish managers for top positions at subsidiaries in former British colonies such as
Jamaica, India, the West Indies, and Kenya. It also explains why successful MNCs such
as Gillette, Coca-Cola, and IBM recruit local managers and train them to run overseas
subsidiaries. Other cited benefits of using TCNs include
1. TCN managers, particularly those who have had assignments in the headquarters
country, can often achieve corporate objectives more effectively than expatriates
or local nationals. In particular, they frequently have a deep understanding of the
corporation’s policies from the perspective of a foreigner and can communicate
and implement those policies more effectively to others than can expats.
2. During periods of rapid expansion, TCNs can not only substitute for expatri-
ates in new and growing operations but also offer different perspectives that
can complement and expand on the sometimes narrowly focused viewpoints
of both local nationals and headquarters personnel.
host-country nationals
Local managers who are
hired by the MNC.
third-country nationals
(TCNs)
Managers who are citizens
of countries other than the
country in which the MNC is
headquartered or the one in
which the managers are
assigned to work by the
MNC.
515
3. In joint ventures, TCNs can demonstrate a global or transnational image and
bring unique cross-cultural skills to the relationship.32
In recent years, a new term has emerged in international management—inpatriates.
An inpatriate, or inpat, is an individual from a host country or a third-country national who
is assigned to work in the home country. Even Japanese MNCs are now beginning to rely
on inpatriates to help them meet their international challenges. Harvey and Buckley report:
The Japanese are reducing their unicultural orientation in their global businesses. Yoichi
Morishita, president of Matsushita, has ordered that top management must reflect the cul-
tural diversity of the countries where Matsushita does business. Sony sells 80 percent of its
products overseas and recently recognized the need to become multicultural. It has appointed
two foreigners to its board of directors and has plans to hire host-country nationals who are
to be integrated into the top management of the parent organization. At the same time, the
Chairman of Sony has stated that in five years the board of directors of Sony will reflect
the diversity of countries that are important to the future of the company. Similarly, Toshiba
plans to have a more representative top management and board of directors to facilitate
long-run global strategies.33
This growing use of inpats is helping MNCs better develop their global core com-
petencies. As a result, today a new breed of multilingual, multiexperienced, so-called
global managers or transnational managers is truly emerging.34 These new managers are
inpatriates
Individuals from a host
country or third-country
nationals who are assigned
to work in the home country.
International Management in Action
Important Tips on Working for Foreigners www.overseasjobs.com
As the Japanese, South Koreans, and Europeans con-
tinue to expand their economic horizons, increased
employment opportunities will be available worldwide. Is
it a good idea to work for foreigners? Those who have
done so have learned that there are both rewards and
penalties associated with this career choice. Following
are some useful tips that have been drawn from the
experiences of those who have worked for foreign MNCs.
First, most U.S. managers are taught to make fast
decisions, but most foreign managers take more time
and view rapid decision making as unnecessary and
sometimes bad. In the United States, we hear the cliché,
“The effective manager is right 51 percent of the time.”
In Europe, this percentage is perceived as much too low,
which helps explain why European managers analyze
situations in much more depth than most U.S. managers
do. Americans working for foreign-owned firms have to
focus on making slower and more accurate decisions.
Second, most Americans are taught to operate with-
out much direction. In Latin countries, managers are
accustomed to giving a great deal of direction, and in
East Asian firms, there is little structure and direction.
Americans have to learn to adjust to the decision-
making process of the particular company.
Third, most Americans go home around 5 p.m. If
there is more paperwork to do, they take it with them.
Japanese managers, in contrast, stay late at the office
and often view those who leave early as being lazy.
Americans either have to adapt or have to convince the
manager that they are working as hard as their peers
but in a different physical location.
Fourth, many international firms say that their official
language is English. However, important conversations
always are carried out in the home country’s language,
so it is important to learn that language.
Fifth, many foreign MNCs make use of fear to moti-
vate their people. This is particularly true in manufactur-
ing work, where personnel are under continuous
pressure to maintain high output and quality. For
instance, those who do not like to work under intense
conditions would have a very difficult time succeeding
in Chinese auto assembly plants. Americans have to
understand that humanistic climates of work may be the
exception rather than the rule.
Finally, despite the fact that discrimination in employ-
ment is outlawed in the United States, it is practiced by
many MNCs, including those operating in the United
States. Women seldom are given the same opportuni-
ties as men, and top-level jobs almost always are
reserved for home-office personnel. In many cases,
Americans have accepted or accommodated to this
ethnocentric (nationalistic) approach.
Nevertheless, as Chapter 3 discussed, ethics and
social responsibility are becoming a major issue in the
international arena, and these moral challenges must be
met now and in the future.
Sources: Martin J. Gannon, Understanding Global Cultures, 2nd ed.
(Thousand Oaks, CA: Sage, 2001); Richard D. Lewis, When Cultures
Collide (London: Nicholas Brealey, 1999); Roger E. Axtell, ed., Do’s and
Taboos around the World (New York: Wiley, 1990); John Holusha, “No
Utopia but to Workers It’s a Job,” New York Times, January 29, 1989,
sec. 3, pp. 1, 10; Faye Rice, “Should You Work for a Foreigner?”
Fortune, August 1, 1988, pp. 123–124; Jeanne Whalen, “American
Finds Himself Atop Russian Oil Giant in Turmoil,” The Wall Street
Journal, October 30, 2003, p. B1.
516 Part 4 Organizational Behavior and Human Resource Management
part of a growing group of international executives who can manage across borders and
do not fit the traditional third-country nationals mold. With a unified Europe and other
such developments in North America and Asia, these global managers are in great demand.
Additionally, with labor shortages developing in certain regions, there is a wave of migra-
tion from regions with an abundance of personnel to those where the demand is strongest.
Subcontracting and Outsourcing
Other potential sources of international management talent are subcontracting and off-
shore outsourcing (introduced in Chapter 1). Offshore outsourcing is made possible by
the increasing organizational and technological capacity of companies to separate, coor-
dinate, and integrate geographically dispersed human resources—whether employed
directly by the firm or contracted out—across distant geographic borders. The develop-
ment of this capacity can be traced to the earlier growth of international subcontracting
as well as to the international diffusion of lean production systems (which originated
with Japanese auto manufacturers) to other manufacturing and service sectors. In par-
ticular, service industries are exploiting inexpensive telecommunications to transmit engi-
neering, medical, legal, and accounting services to be performed in locations previously
viewed as remote. Rising levels of educational attainment in developing countries such
as China, India, and the Philippines, especially in the scientific and technical fields, make
offshoring increasingly attractive for a range of international human resource needs.
These developments are not without controversy, however. On the one hand, offshore
outsourcing, as well as the hiring of temporary workers from abroad on special visas, similar
to inpatriates, presents significant opportunities for cost savings and lower overhead. On the
other hand, the recent wave of media attention has focused on widespread concern that in an
age of cheap telecommunications, almost any job—professional or blue collar—can be per-
formed in India for a fraction of U.S. wages. In particular, as discussed in Chapter 1, union
groups, politicians, and NGOs have challenged MNCs’ right to engage in labor “arbitrage.”
Offshoring is reaching a new era, and while the top reason that MNCs look to
other countries for labor is still to save money, there has been a decline all around in
qualified personnel, which has brought about an emerging focus on other factors, notably
access to qualified personnel.
Moreover, although the cost for a computer programmer or a middle manager in India
remains a small fraction of the cost for a similar employee in the United States (a program-
mer with three to five years’ experience makes about $25,000 in India but about $65,000
in the United States), the wage savings do not necessarily translate directly into overall
savings because the typical outsourcing contract between an American company and an
Indian vendor saves less than half as much as the wage differences would imply.35 Microsoft
faced this challenge when it hired two Indian outsourcing companies, Infosys and Satyam,
to provide skilled software architects for its projects. In this case, the work of software
architects and developers was being done by employees of the Indian companies working
at Microsoft facilities in the United States. Although the actual employees were paid much
less than U.S. counterparts ($30,000 to $40,000), Microsoft was billed $90 an hour for
software architects, or at a yearly rate of more than $180,000. The onsite work was done
by Indian software engineers who came to the United States on H-1B visas, which allow
foreign workers to be employed in the United States for up to six years. Microsoft also
contracted work in India through the firms, with billing rates of $23 to $36 an hour.36
Though politically controversial, outsourcing can save companies significant costs
and is very profitable for firms that specialize in providing these services on a contract
basis. U.S.-based firms such as EDS, IBM, and Deloitte have developed specific com-
petencies in global production and HR coordination, including managing the HR func-
tions that must support it. These firms combine low labor costs, specialized technical
capabilities, and coordination expertise.
Outsourcing can also create quality control problems for some companies, as dem-
onstrated by British telecom giant BT’s decision in 2016 to repatriate some of its call-
center staff from India to the U.K. due to quality control problems. The move, costing
Chapter 14 Human Resource Selection and Development Across Cultures 517
BT roughly £80 million, aims to improve customer satisfaction by increasing the number
of customer calls answered in the U.K. from 50 percent to 80 percent. Roughly 1,000
positions will ultimately be transferred back to the U.K.37
Despite the limitations, offshore subcontracting will remain an important tool for man-
aging and deploying international human resources. A recent study by the Hackett Group
estimated that U.S. and European companies sent an average of 150,000 jobs offshore every
year between 2002 and 2016.38 Although subcontracting provides important flexibility in the
human resource practices of MNCs operating globally, it also requires skilled international
managers to coordinate and oversee the complex relationships that arise from it.
This is especially true as offshoring begins a new generation. In a survey by Duke
University’s Offshoring Research Network, significant differences were found in the per-
spectives of home (source) and host (destination) countries. Specifically, individuals in
home countries were often worried about losing jobs to host countries, exacerbated by
the fact that higher-end jobs are now being shipped overseas.39 This is not the case from
the organizations’ point of view. It is becoming increasingly difficult for managers to
find the appropriate talent. More and more, companies are looking overseas in areas such
as R&D and procurement to supplement the lack of experts in the home country. This
does not take jobs away from home countries; it simply opens jobs globally as managers
attempt to fit the skills of the worker to the job itself.40 Furthermore, companies are very
specific about which country they search when looking to fill particular job functions.
Figure 14–1 provides a graphical depiction of this reality. Overall, offshoring is a trend
that does not appear to be on its way out, but instead is evolving through alternative
motivators and continuing to innovatively help the company grow.
Cost of
Labor
Australia
Middle East
High
Locations Mapped by Cost of Labor, Talent Availability, and Nature of Work O�shored
Low
Low High
Access to Qualified Talent
Virtually all o�shore implementations
in these countries are entirely for
commodity work
O�shore implementations in these
countries are focused largely on
commodity work
O�shore implementations in these
countries are focused equally on
commodity and high-end work
O�shore implementations in these
countries are heavily skewed
towards high-end work
Africa
Mexico
Latin America
Eastern Europe
Western Europe
Canada
Philippines
India
China
Other Asia
Figure 14–1
Skills MNCs Seek within
Countries
Source: Arie Y. Lewin and Vinay Couto, Next Generation Offshoring: The Globalization of Innovation, 2006 Survey Report (Durham:
Duke Center for International Business Education and Research, 2007).
518 Part 4 Organizational Behavior and Human Resource Management
■ Selection Criteria for International Assignments
Making an effective selection decision for an overseas assignment can prove to be a
major problem. Typically, this decision is based on international selection criteria,
which are factors used to choose international managers. These selections are influenced
by the MNC’s experience and often are culturally based. Sometimes as many as a dozen
criteria are used, although most MNCs give serious consideration to only five or six.41
Table 14–1 reports the importance of some of these criteria as ranked by Australian,
expatriate, and Asian managers from 60 leading Australian, New Zealand, British, and
U.S. MNCs with operations in South Asia.42
General Criteria
Some selection criteria are given a great deal of weight; others receive, at best, only
lip service. A company sending people overseas for the first time often will have a
much longer list of criteria than will an experienced MNC that has developed a
“short list.”
Typically, both technical and human criteria are considered. Firms that fail to
consider both often find that their rate of failure is quite high. For example, Peterson,
Napier, and Shul-Shim investigated the primary criteria that MNCs use when choosing
personnel for overseas assignments and found that the Japanese and American MNCs in
their survey ranked both technical expertise and interpersonal skills as very important.43
The following sections examine some of the most commonly used selection criteria for
overseas assignments in more depth.
Adaptability to Cultural Change
Overseas managers must be able to adapt to change. They also need a degree of cul-
tural toughness. Research shows that many managers are exhilarated at the beginning
of their overseas assignment. After a few months, however, a form of culture shock
creeps in, and they begin to encounter frustration and feel confused in their new
environment. This may be a good sign because it shows that the expatriate manager
is becoming involved in the new culture and not just isolating himself or herself from
the environment.
As this initial and trying period comes to an end, expatriates tend to identify more
with the host-country culture, which only increases as managers become more adept at
international selection
criteria
Factors used to choose
personnel for international
assignments.
Table 14–1
Rank of Criteria in Expatriate Selection
Australian Expatriate Asian
Managers Managers* Managers
(n = 47) (n = 52) (n = 15)
1. Ability to adapt 1 1 2
2. Technical competence 2 3 1
3. Spouse and family adaptability 3 2 4
4. Human relations skill 4 4 3
5. Desire to serve overseas 5 5 5
6. Previous overseas experience 6 7 7
7. Understanding of host-country culture 7 6 6
8. Academic qualifications 8 8 8
9. Knowledge of language of country 9 9 9
10. Understanding of home-country culture 10 10 10
*U.S., British, Canadian, French, New Zealand, or Australian managers working for an MNC outside their home countries.
Source: From Raymond J. Stone, “Expatriate Selection and Failure,” Human Resource Planning 14, no. 1 (1991).
Chapter 14 Human Resource Selection and Development Across Cultures 519
the position. As seen in Figure 14–2, upon first arrival, the expatriates identify almost
wholly with the home country. Over time, they become more familiar with their surround-
ings and become more of an integral part of the environment. This integration can lead
to a higher sense of satisfaction with the job and a lessening of stress and alienation.44
Organizations examine a number of characteristics to determine whether an indi-
vidual is sufficiently adaptable. Examples include work experiences with cultures other
than one’s own, previous overseas travel, knowledge of foreign languages (fluency gen-
erally is not necessary), and recent immigration background or heritage. Others include
(1) the ability to integrate with different people, cultures, and types of business organiza-
tions; (2) the ability to sense developments in the host country and accurately evaluate
them; (3) the ability to solve problems within different frameworks and from different
perspectives; (4) sensitivity to the fine print of differences of culture, politics, religion,
and ethics, in addition to individual differences; and (5) flexibility in managing opera-
tions on a continuous basis despite lack of assistance and gaps in information.
In research conducted among expatriates in China, Selmar found that those who
were best able to deal with their new situation had developed coping strategies character-
ized by sociocultural and psychological adjustments including (1) feeling comfortable
that their work challenges can be met, (2) being able to adjust to their new living condi-
tions, (3) learning how to interact well with host-country nationals outside of work, and
(4) feeling reasonably happy and being able to enjoy day-to-day activities.45 And Caligiuri,
after examining how host nationals help expatriates adjust, reported that certain types of
personality characteristics are important in this process. In particular, her findings suggest
that greater contact with host nationals helps with cross-cultural adjustment when the
person also possesses the personality trait of openness. She also found that sociability
was directly related to effective adjustment.46
Physical and Emotional Health
Most organizations require that their overseas managers have good physical and emo-
tional health. Some examples are fairly obvious. An employee with a heart condition or
a nervous disorder would not be considered. The psychological ability of individuals to
withstand culture shock, if this could be discerned, would be an issue, as would the cur-
rent marital status as it affected an individual’s ability to cope in a foreign environment.
Parent Culture
Mastery
Host Culture
Identification
Transitional
Novice
T
im
e
in
a
ss
ig
n
m
e
n
t
Figure 14–2
Evolution of Parent and
Host Culture Identification
Source: Juan Sanchez, Paul Spector, and Cary Cooper, “Adapting to a Boundaryless World: A Developmental Expatriate Model,”
Academy of Management Executive 14, no. 2 (2000), p. 100.
520 Part 4 Organizational Behavior and Human Resource Management
For example, one U.S. oil company operating in the Middle East considers middle-aged
men with grown children to be the best able to cope with culture shock, and for some
locations in the desert, considers people from Texas or southern California to be a better
fit than those from New England.
Age, Experience, and Education
Most MNCs strive for a balance between age and experience. There is evidence that
younger managers are more eager for international assignments. These managers tend to
be more “worldly” and have a greater appreciation of other cultures than older managers
do. By the same token, young people often are the least developed in management expe-
rience and technical skills; they lack real-world experience. To gain the desired balance,
many firms send both young and seasoned personnel to the same overseas post. Many
companies consider an academic degree, preferably a graduate degree, to be of critical
importance to an international executive; however, universal agreement regarding the ideal
type of degree is nonexistent. MNCs, of course, use formal education only as a point of
departure for their own training and development efforts. For example, Siemens of
Germany gives members of its international management team specific training designed
to help them deal more effectively with the types of problems they will face on the job.
Language Training
The ability to speak the language of the country in which a manager is doing business
can be extremely valuable. One recognized weakness of many MNCs is that they do not
give sufficient attention to the importance of language training. English is the primary
language of international business, and most expatriates from all countries can converse
in English. Those who can speak only English are at a distinct disadvantage when doing
business in non-English-speaking countries, however. In other words, language can be a
very critical factor.
Traditionally, managers from English-speaking countries have done very poorly in
the language area. However, in recent years, expatriates have made an effort to improve
their conversational skills. According to the 2015 HSBC Expat Explorer, 63 percent of
employees on an international assignment ultimately learned the local language. The level
of development within the host country appears to significantly impact whether or not
expatriates work to improve their speaking skills; in developed countries, 67 percent of
expatriates made an attempt to learn the host country’s language, while only 51 percent
of those in developing nations made an attempt.47
For many expatriates, being able to speak with locals in their own language is a
major milestone in finally feeling connected to the foreign country. This is especially
important for countries like Russia, where successful integration is heavily dependent on
being able to converse in Russian; of expatriates surveyed there, more than 70 percent
were making an effort to improve their speech skills.48
Motivation for a Foreign Assignment
Although individuals being sent overseas should have a desire to work abroad, this usu-
ally is not sufficient motivation. International management experts contend that the can-
didate also must believe in the importance of the job and even have something of an
element of idealism or a sense of mission. Applicants who are unhappy with their current
situation at home and are looking to get away seldom make effective overseas managers.
Some experts believe that a desire for adventure or a pioneering spirit is an accept-
able reason for wanting to go overseas. Other motivators that often are cited include the
desire to increase one’s chances for promotion and the opportunity to improve one’s
economic status. For example, many U.S. MNCs regard international experience as being
critical for promotion to the upper ranks. In addition, thanks to the supplemental wage
and benefit package, U.S. managers sometimes find that they can make, and especially
save, more money than if they remained stateside.
Chapter 14 Human Resource Selection and Development Across Cultures 521
And while many may romanticize the expatriate life, it is clear that the travel
mystique continues to motivate professionals to desire and seek an assignment abroad.
A recent survey found that at least 40 percent of Britons say that they would like to work
or retire abroad. And according to a report in the British Daily Telegraph:
And it’s not just about the sunshine. Becoming an expatriate is an adventure, a new begin-
ning, a fresh start, and it is in human nature to want to explore. Global mobility is as old
as humankind itself. The ancient migration routes of our earliest ancestors are well docu-
mented and the distances travelled by primitive man still continue to amaze. There were
even expatriates in the Bible—consider the exodus from Egypt for example. Indeed, the
forced expatriation of Adam and Eve from the garden of Eden is the starting point for the
entire Biblical narrative. Was Eve the very first “trailing spouse”? In more recent times
entire civilizations have been influenced by explorers such as Marco Polo, Christopher
Columbus, Captain Cook and the Pilgrim Fathers. So moving across continents is nothing
new but its continued rise has been underpinned by the drive towards globalization aided
by the revolution in communication throughout the 20th century. Technologies have allowed
companies to globalize in ways which were simply unimaginable in earlier times. Indeed
such is the commitment to globalization, that many major companies now structure their
reporting lines along global delivery lines rather than local geographic control.49
Spouses and Dependents or Work-Family Issues
Spouses and dependents are another important consideration when a person is to be
chosen for an overseas assignment. If the family is not happy, the manager often per-
forms poorly and may either be terminated or simply decide to leave the organization.
Shaffer and her associates recently collected multisource data from 324 expatriates in
46 countries and found that the amount of organizational support that an expatriate feels
he or she is receiving and the interplay between the person’s work and family domains
have a direct and unique influence on the individual’s intentions regarding staying with
or leaving the enterprise.50 For this reason, some firms interview both the spouse and
the manager before deciding whether to approve the assignment. This can be a very
important decision for the firm because it focuses on the importance of family as a
critical issue to a successful assignment. One popular approach in appraising the fam-
ily’s suitability for an overseas assignment is called adaptability screening. This pro-
cess evaluates how well the family is likely to stand up to the rigors and stress of
overseas life. The company will look for a number of things in this screening, including
how closely knit the family is, how well it can withstand stress, and how well it can
adjust to a new culture and climate. The reason this family criterion receives so much
attention is that MNCs have learned that an unhappy executive will be unproductive on
the job and the individual will want to transfer home long before the tour of duty is
complete. These findings were affirmed and extended by Borstorff and her associates,
who examined the factors associated with employee willingness to work overseas and
concluded that
1. Unmarried employees are more willing than any other group to accept expat
assignments.
2. Married couples without children at home or those with non-teenage children
are probably the most willing to move.
3. Prior international experience appears associated with willingness to work as
an expatriate.
4. Individuals most committed to their professional careers and to their employ-
ing organizations are prone to be more willing to work as expatriates.
5. Careers and attitudes of spouses will likely have a significant impact on
employee willingness to move overseas.
6. Employee and spouse perceptions of organizational support for expatriates are
critical to employee willingness to work overseas.51
adaptability screening
The process of evaluating
how well a family is likely to
stand up to the stress of
overseas life.
522 Part 4 Organizational Behavior and Human Resource Management
These findings indicate that organizations cannot afford to overlook the role of the
spouse in the expat selection decision process. What, in particular, can be done to address
their concerns?52 Table 14–2 provides some insights into this answer. Additionally, the
table adds a factor often overlooked in this process—situations in which the wife is being
assigned overseas and the husband is the “other” spouse. Although many of the concerns
of the male spouse are similar to those of spouses in general, a close look at Table 14–2
shows that some of the concerns of the males are different in their rank ordering.
Leadership Ability
The ability to influence people to act in a particular way—leadership—is another important
criterion in selecting managers for an international assignment. Determining whether a
person who is an effective leader in the home country will be equally effective in an over-
seas environment can be difficult, however. When determining whether an applicant has
the desired leadership ability, many firms look for specific characteristics, such as maturity,
emotional stability, the ability to communicate well, independence, initiative, creativity, and
Table 14–2
Activities That Are Important for Expatriate Spouses
(scale: 1–5, 5 = Very important)
Mean Score Activity
Average from All Respondents
4.33 Company help in obtaining necessary paperwork (permits, etc.) for spouse
4.28 Adequate notice of relocation
4.24 Predeparture training for spouse and children
4.23 Counseling for spouse regarding work/activity opportunities in foreign location
4.05 Employment networks coordinated with other international networks
3.97 Help with spouse’s reentry into home country
3.93 Financial support for education
3.76 Compensation for spouse’s lost wages and/or benefits
3.71 Creation of a job for spouse
3.58 Development of support groups for spouses
3.24 Administrative support (office space, secretarial services, etc.) for spouse
3.11 Financial support for research
3.01 Financial support for volunteer activities
2.90 Financial support for creative activities
Average from Male Spouses
4.86 Employment networks coordinated with other international organizations
4.71 Help with spouse’s reentry into home country
4.71 Administrative support (office space, secretarial services, etc.) for spouse
4.57 Compensation for spouse’s lost wages and/or benefits
4.29 Adequate notice of relocation
4.29 Counseling for spouse regarding work/activity opportunities in foreign location
3.86 Predeparture training for spouse and children
3.71 Creation of a job for spouse
3.71 Financial support for volunteer activities
3.43 Financial support for education
3.14 Financial support for research
3.14 Financial support for creative activities
3.00 Development of support groups for spouses
Source: Adapted from Betty Jane Punnett, “Towards Effective Management of Expatriate Spouses,” Journal of World Business 33, no. 3
(1997), p. 249.
Chapter 14 Human Resource Selection and Development Across Cultures 523
good health. If these characteristics are present and the person has been an effective leader
in the home country, MNCs assume that the individual also will do well overseas.
Other Considerations
Applicants also can take certain steps to prepare themselves better for international assign-
ments. Tu and Sullivan suggest the applicant can carry out a number of different phases of
preparation.53 In phase one, they suggest focusing on self-evaluation and general awareness.
This includes answering the question, Is an international assignment really for me? Other
questions in the first phase include finding out if one’s spouse and family support the deci-
sion to go international and collecting general information on the available job opportunities.
Phase two is characterized by a concentration on activities that should be completed
before a person is selected. Some of these include (1) conducting a technical skills match
to ensure that one’s skills are in line with those that are required for the job; (2) starting
to learn the language, customs, and etiquette of the region where one will be posted;
(3) developing an awareness of the culture and value systems of this geographic area;
and (4) making one’s superior aware of this interest in an international assignment.
The third phase consists of activities to be completed after being selected for an
overseas assignment. Some of these include (1) attending training sessions provided by the
company; (2) conferring with colleagues who have had experience in the assigned region;
(3) speaking with expatriates and foreign nationals about the assigned country; and (4) if
possible, visiting the host country with one’s spouse before the formally scheduled departure.
■ Economic Pressures and Trends in Expat Assignments
Despite the economic stagnation in many markets across the globe, most MNCs continue
to make overseas assignments. A 2015 survey of 143 MNCs, conducted by Brookfield
Global Relocation Services, found that 95 percent of all international assignments were
successful. Additionally, the companies surveyed appeared optimistic about their global
business outlook, with nearly 90 percent stating that they anticipated increasing or hold-
ing steady their number of international assignments. The most commonly cited objective
of expatriate assignments was filling a managerial or technical gap (49 percent), though
career development and local relationship building were also mentioned by many employ-
ers as intended goals. Employees also reported strong benefits from international assign-
ments, including faster promotions, higher pay, stronger performance ratings, and more
mobility within the company upon assignment completion.54
Despite the relatively high reported success rate, international assignments can fail.
More often, employees reject expatriate opportunities when they arise. Not surprisingly,
issues relating to employees’ families were cited as the most common reasons for assignment
refusal. In total, 38 percent of those surveyed stated that family concerns were their primary
reason for assignment refusal. Another 17 percent indicated that their spouse’s career was
their number one reason to reject an overseas assignment. When asked about overcoming
the challenges that their expatriate programs faced, 40 percent of employers responded that
helping employees overcome family adjustment issues was “very critical.” Overcoming edu-
cational challenges faced by employees’ children was rated equally as high. If employers are
aiming to decrease assignment rejection due to family concerns, they may need to improve
the familial benefits that they provide. For example, of the employers surveyed, only eight
percent provided assistance to help support elderly family members while employees were
away on assignment. Additionally, less than half of the companies surveyed offered any kind
of spousal support in the areas of obtaining a work permit, providing employment search
services, assisting with education, or identifying local support networks.55
International assignments can be incredibly expensive. Three-quarters of the com-
panies survey in 2015 stated that they were facing increasing pressure to reduce the
overall cost of their expatriate programs. Part of this pressure may be due to the fact that
traditional financial metrics, such as return on investment, are not utilized by the
524 Part 4 Organizational Behavior and Human Resource Management
overwhelming majority of companies when evaluating the success or failure of their
overseas program. The primary objectives of most international assignments are not
directly profit-based, and more than half of the employers surveyed indicated that return
on investment would be difficult to quantify. Other findings from the survey included
∙ 19 percent of expatriates were women.
∙ 71 percent of expatriates were 30 to 49 years old.
∙ 74 percent of expatriates were married, higher than the 66 percent historical
average.
∙ 52 percent of expatriates had children accompanying them.
∙ Spouses and partners accompanied 80 percent of expatriates, representing a
slight decrease over the last decade.
∙ Nearly half of the spouses were employed before an assignment but not dur-
ing it. Only four percent were employed during an assignment but not before;
11 percent were employed both before and during the assignment.
∙ 56 percent of expatriates were relocated to or from the headquarters country,
and nearly two-thirds were relocated to a country outside of their region.
∙ The United States, China, and the United Kingdom were the most frequently
cited locations for expatriate assignments.
∙ Brazil, China, and the U.A.E. were the primary emerging destinations.
∙ China, India, and the United Kingdom were cited as the locations with the
highest assignment failure rates.56
■ International Human Resource Selection Procedures
MNCs use a number of selection procedures. The two most common are tests and inter-
views. Some international firms use one; a smaller percentage employ both. Theoretical
models containing the variables that are important for adjusting to an overseas assign-
ment have been developed. These adjustment models can help contribute to more effec-
tive selection of expatriates. The following sections examine traditional testing and
interviewing procedures and then present an adjustment model.
Testing and Interviewing Procedures
Some evidence suggests that although some firms use testing, it is not extremely popu-
lar. For example, an early study found that almost 80 percent of the 127 foreign opera-
tions managers who were surveyed reported that their companies used no tests in the
selection process.57 This contrasts with the more widespread testing that these firms use
when selecting domestic managers. Many MNCs report that the costs, questionable
accuracy, and poor predictive record make testing of limited value.
Many firms do use interviews to screen people for overseas assignments. One
expert notes: “It is generally agreed that extensive interviews of candidates (and their
spouses) by senior executives still ultimately provide the best method of selection.”58
Tung’s research supports these comments. For example, 52 percent of the U.S. MNCs
she surveyed reported that in the case of managerial candidates, MNCs conducted
interviews with both the manager and his or her spouse, and 47 percent conducted inter-
views with the candidate alone. Concerning these findings, Tung concluded:
These figures suggest that in management-type positions which involve more extensive con-
tact with the local community, as compared to technically oriented positions, the adapt-
ability of the spouse to living in a foreign environment was perceived as important for
successful performance abroad. However, even for technically oriented positions, a sizable
proportion of the firms did conduct interviews with both candidate and spouse. This lends
support to the contention of other researchers that MNCs are becoming increasingly
cognizant of the importance of this factor to effective performance abroad.59
Chapter 14 Human Resource Selection and Development Across Cultures 525
The Adjustment Process
In recent years, international human resource management specialists have developed
models that help to explain the factors involved in effectively adjusting to overseas
assignments.60,61 These adjustment models help to identify the underpinnings of the effec-
tive selection of expatriates.
There are two major types of adjustments that an expatriate must make when
going on an overseas assignment: anticipatory and in-country adjustments. Anticipa-
tory adjustment is carried out before the expat leaves for the assignment and is influ-
enced by a number of important factors. One factor is the pre-departure training that
is provided. This often takes the form of cross-cultural seminars or workshops, and
it is designed to acquaint expats with the culture and work life of the country to which
they will be posted. Another factor affecting anticipatory adjustment is the previous
experience the expat may have had with the assigned country or with countries with
similar cultures. The organizational input into anticipatory adjustment is most directly
related and concerned with the selection process. Traditionally, MNCs relied on only
one important selection criterion for overseas assignments: technical competence.
Obviously, technical competence is important, but it is only one of a number of skills
that will be needed. If the MNC concentrates only on technical competence as a
selection criterion, then it is not properly preparing the expatriate managers for suc-
cessful adjustment in overseas assignments. As a result, expats are going to go abroad
believing that they are prepared to deal with the challenges awaiting them, and they
will be wrong.
In-country adjustment takes place once the expatriate is on site, and a number of
factors will influence his or her ability to adjust effectively. One factor is the expat’s
ability to maintain a positive outlook in the face of a high-pressure situation, to interact
well with host nationals, and to perceive and evaluate the host country’s cultural values
and norms correctly. A second factor is the job itself, as reflected by the clarity of the
role the expat plays in the host management team, the authority the expat has to make
decisions, the newness of the work-related challenges, and the amount of role conflict
that exists. A third factor is the organizational culture and how easily the expat can adjust
to it. A fourth is nonwork matters, such as the toughness with which the expatriate faces
a whole new cultural experience and how well his or her family can adjust to the rigors
of the new assignment. A fifth and final factor identified in the adjustment model is the
expat’s ability to develop effective socialization tactics and to understand “what’s what”
and “who’s who” in the host organization.
Another model of expatriate adjustment emphasized the formation of network ties
in the host country to obtain critical informational and emotional support resources,
proposing a five-stage process model that delineates how expatriates form adjustment-
facilitating support ties in a culturally unfamiliar context. These include
∙ Stage 1: Factors influencing expatriates’ motivation to seek support from
actors in the host country.
∙ Stage 2: Factors influencing expatriates’ selection of and support seeking
toward actors.
∙ Stage 3: Factors influencing contacted actors’ ability and willingness to
provide support.
∙ Stage 4: Factors influencing expatriates’ utilization of received support.
∙ Stage 5: Factors influencing expatriates’ addition of actors to network.62
These anticipatory and in-country factors will influence the expatriate’s mode and
degree of adjustment to an overseas assignment. They can help to explain why effective
selection of expatriates is multifaceted and can be very difficult and challenging. But if
all works out well, the individual can become a very important part of the organization’s
overseas operations. McCormick and Chapman illustrated this by showing the changes
526 Part 4 Organizational Behavior and Human Resource Management
that an expat goes through as he or she seeks to adjust to the new assignment.63 As seen
in Figure 14–3, early enthusiasm often gives way to cold reality, and the expat typically
ends up in a search to balance personal and work demands with the new environment.
In many cases, fortunately, everything works out well. Additionally, one of the ways in
which MNCs often try to put potential expats at ease about their new assignment is by
presenting an attractive compensation package.
■ Compensation
One of the reasons there has been a decline in the number of expats in recent years is
that MNCs have found that the expense can be prohibitive. Reynolds estimated that, on
average, “expats cost employers two to five times as much as home-country counterparts
and frequently ten or more times as much as local nationals in the country to which they
are assigned.”64 As seen in Figure 14–4, the cost of living in some of the major cities is
extremely high, and these expenses must be included somewhere in the compensation
package.
The recession of the late 2000s placed additional pressure on firms to control costs
associated with expatriate assignments. Mercer reported in 2009 that nearly 40 percent
of MNCs were planning on revising their current international assignment policy in the
face of declining corporate growth and profitability, as well as an uncertain economic
environment. The increasing trend toward localization reflects companies’ efforts to
either tap into the local talents or to offer less generous packages to locally hired foreign
workers. This localization approach was quite consistent among regions and countries
around the world, including for companies operating in emerging markets (such as China,
India, and Vietnam), where the local compensation and benefits packages are less gener-
ous than home-country plans. In terms of expatriate benefits and allowances, the ele-
ments that are least likely to be eliminated for localized employees are housing allowances
and education benefits. Mercer did find that localization is practiced in Europe and in
Beginning of transition
2. Fantasia
The feeling of
enchantment and
excitement in the
new environment.
4. Acceptance of reality
“Letting go” of past comfortable
attitudes. The realization that you are
a stranger in a strange land.
1. Unreality
The feeling
that the relocation is a
dream.
3. Interest
A deeper
exploration of
the environment
and a realization
that it is
fundamentally
di�erent from
home.
7. Integration of new
skills and behavior.
Acceptance of the new
environment.
6. Search for meaning.
Understanding reasons for success
and failure. New models/personal
theories created.
5. Experimentation and testing
of new approaches. Practice phase,
trying to do things di�erently.
Feedback of results, success and
failure.
Perceived Competence
Time
Figure 14–3
The Relocation Transition
Curve
Source: Adapted from Iain McCormick and Tony Chapman, “Executive Relocation: Personal and Organizational Tactics,” in Managing Across
Cultures: Issues and Perspectives, ed. Pat Joynt and Malcolm Warner (London: International Thomson Business Press, 1996), p. 368.
Chapter 14 Human Resource Selection and Development Across Cultures 527
North America more than in Latin America and Asia Pacific. In recent years, however,
localization has picked up in the Asia Pacific region, particularly as companies want to
tap into the regional talent pool and contain costs.65
Common Elements of Compensation Packages
The overall compensation package often varies from country to country. As Bailey
noted:
Compensation programs implemented in a global organization will not mirror an organiza-
tion’s domestic plan because of differences in legally mandated benefits, tax laws, cultures,
and employee expectation based on local practices. The additional challenge in compensa-
tion design is the requirement that excessive costs be avoided and at the same time employee
morale be maintained at high levels.66
There are five common elements in the typical expatriate compensation package:
base salary, benefits, allowances, incentives, and taxes.
Base Salary Base salary is the amount of money that an expatriate normally receives
in the home country. In the United States, this has often been in the range of $200,000–
$300,000 for upper-middle managers in recent years, and this rate is similar to that paid
to managers in both Japan and Germany. The exchange rates, of course, also affect the
real wages.
Figure 14–4
Cost-of-Living Index
September 2014
0
Singapore (1)
Paris (2)
Oslo (3)
Zurich (4)
Sydney (5)
Melbourne (6)
Geneva (7)
Copenhagen (8)
Hong Kong (=9)
Seoul (=9)
New York (=22)
Algiers (124)
Kathmandu (125)
Tehran (=126)
Damascus (=126)
New Delhi (128)
Chennai* (128)
Caracas (=130)
Mumbai (=130)
Karachi (=132)
Bangalore* (=132)
*Introduced in 2014
20 40 60 80 120 140100
Cost-of-living index
New York, September 2014–100
(September 2014 rank out of 133 cities, 1=most expensive)
5 years earlier
10 years earlier
Source: Economist Intelligence Unit.
528 Part 4 Organizational Behavior and Human Resource Management
Expatriate salaries typically are set according to the base pay of the home countries.
Therefore, a German manager working for a U.S. MNC and assigned to Spain would
have a base salary that reflects the salary structure in Germany. U.S. expatriates have
salaries tied to U.S. levels. The salaries usually are paid in home currency, local currency,
or a combination of the two. The base pay also serves as the benchmark against which
bonuses and benefits are calculated.
Benefits Approximately one-third of compensation for regular employees is bene-
fits. These benefits compose a similar, or even larger, portion of expat compensation.
A number of thorny issues surround compensation for expatriates, however. These
include
1. Whether MNCs should maintain expatriates in home-country benefit
programs, particularly if these programs are not tax-deductible.
2. Whether MNCs have the option of enrolling expatriates in host-country
benefit programs or making up any difference in coverage.
3. Whether host-country legislation regarding termination of employment affects
employee benefits entitlements.
4. Whether the home or host country is responsible for the expatriates’ social
security benefits.
5. Whether benefits should be subject to the requirements of the home or host
country.
6. Which country should pay for the benefits.
7. Whether other benefits should be used to offset any shortfall in coverage.
8. Whether home-country benefits programs should be available to local
nationals.
Most U.S.-based MNCs include expatriate managers in their home-office benefits
program at no additional cost to the expats. If the host country requires expats to con-
tribute to their social security program, the MNC typically picks up the tab. Fortunately,
several international agreements between countries recently have eliminated such dual
coverage and expenses.
Additionally, MNCs often provide expatriates with extra vacation and with special
leaves. The MNC typically will pay the airfare for expats and their families to make an
annual visit home, for emergency leave, and for expenses when a relative in the home
country is ill or dies.
Allowances Allowances are an expensive feature of expatriate compensation packages.
One of the most common parts is a cost-of-living allowance—a payment for differences
between the home country and the overseas assignment. This allowance is designed to
provide the expat with the same standard of living that he or she enjoyed in the home
country, and it may cover a variety of expenses, including relocation, housing, education,
and hardship.
Relocation expenses typically involve moving, shipping, and storage charges that
are associated with personal furniture, clothing, and other items that the expatriate and
his or her family are (or are not) taking to the new assignment. Related expenses also
may include cars and club memberships in the host country, although these perks com-
monly are provided only to senior-level expats.
Housing allowances cover a wide range. Some firms provide the expat with a
residence during the assignment and pay all associated expenses. Others give a prede-
termined housing allotment each month and let expats choose their own residence. Addi-
tionally, some MNCs help those going on assignment with the sale or lease of the house
they are leaving behind; if the house is sold, the company usually pays closing costs and
other associated expenses.
Chapter 14 Human Resource Selection and Development Across Cultures 529
Education allowances for the expat’s children are another integral part of the com-
pensation package. These expenses cover costs such as tuition, enrollment fees, books,
supplies, transportation, room, board, and school uniforms. In some cases, expenses to
attend postsecondary schools also are covered.
Hardship allowances are designed to induce expats to work in hazardous areas or
in an area with a poor quality of life. Those who are assigned to Eastern Europe, China,
and some Middle Eastern countries sometimes are granted a hardship premium. These
payments may be in the form of a lump sum ($10,000 to $50,000) or a percentage
(15 to 50 percent) of the expat’s base compensation.
Incentives In recent years, some MNCs have also been designing special incentive
programs for keeping expats motivated. In the process, a growing number of firms have
dropped the ongoing premium for overseas assignments and replaced it with a one-time,
lump-sum premium. For example, in the early 1990s, over 60 percent of MNCs gave
ongoing premiums to their expats. Today that percentage is under 50 percent and con-
tinuing to decline. Peterson and his colleagues, for example, examined the human re-
source policies of 24 U.S., British, German, and Japanese subsidiaries and found that in
only 10 of the cases did the multinational have a policy of paying expatriates higher
compensation than they would have received if they had stayed in their home country.67
The lump-sum payment has a number of benefits. One is that expats realize that
they will be given this payment just once—when they move to the international locale.
So the payment tends to retain its value as an incentive. A second is that the costs to
the company are less because there is only one payment and no future financial com-
mitment. A third is that because it is a separate payment, distinguishable from regular
pay, it is more readily available for saving or spending.
The specific incentive program that is used will vary, and expats like this. Research-
ers, for example, have found that some of the factors that influence the type and amount
of incentive include whether the person is moving within or between continents and
where the person is being stationed. Table 14–3 provides some of the latest survey
information related to worldwide employer incentive practices.
Finally, it is important to recognize that growing numbers of MNCs are beginning
to phase out incentive premiums. Instead, they are focusing on creating a cadre of expats
who are motivated by nonfinancial incentives.
Taxes Another major component of expatriate compensation is tax equalization. For
example, an expat may have two tax bills, one from the host country and one from the
Table 14–3
Employer Incentive Practices around the World
Percent of MNCs Paying for Moves within Continents
Type of Premium Asia Europe North America Total
Ongoing 62% 46% 29% 42%
Lump sum 21 20 25 23
None 16 27 42 32
Percent of MNCs Paying for Moves between Continents
Type of Premium Asia Europe North America Total
Ongoing 63% 54% 39% 49%
Lump sum 24 18 30 26
None 13 21 27 22
Source: Derived from Geoffrey W. Latta, “Expatriate Incentives: Beyond Tradition,” HR Focus, March 1998, p. S4.
530 Part 4 Organizational Behavior and Human Resource Management
U.S. Internal Revenue Service, for the same pay. IRS Code Section 911 permits a deduc-
tion of up to $100,800 on foreign-earned income. Top-level expats often earn far more
than this, however; thus, they may pay two tax bills for the amount by which their pay
exceeds $100,800.
Usually, MNCs pay the extra tax burden. The most common way is by determining
the base salary and other extras (e.g., bonuses) that the expat would make if based in
the home country. Taxes on this income then are computed and compared with the taxes
due on the expat’s income. Any taxes that exceed what would have been imposed in the
home country are paid by the MNC, and any windfall is kept by the expat as a reward
for taking the assignment.
Tailoring the Package
Working within the five common elements just described, MNCs will tailor compensa-
tion packages to fit the specific situation. For example, senior-level managers in Japan
are paid only around four times as much as junior staff members. This is in sharp con-
trast to the United States, where the multiple is much higher. A similar situation exists
in Europe, where many senior-level managers make far less than their U.S. counterparts
and stockholders, politicians, and the general public oppose U.S.-style affluence. Can a
senior-level U.S. expat be paid a salary that is significantly higher than local senior-level
managers in the overseas subsidiary, or would the disparity create morale problems? This
is a difficult question to answer and must be given careful consideration. One solution
is to link pay and performance to attract and retain outstanding personnel.
In formulating the compensation package, a number of approaches can be used. The
most common is the balance-sheet approach, which involves ensuring that the expat is
“made whole” and does not lose money by taking the assignment. A second and often
complementary approach is negotiation, which involves working out a special, ad hoc
arrangement that is acceptable to both the company and the expat. A third approach,
localization, involves paying the expat a salary that is comparable to the salaries of local
nationals. This approach most commonly is used with individuals early in their careers
who are being given a long-term overseas assignment. A fourth approach is the lump-sum
method, which involves giving the expat a predetermined amount of money and letting
the individual make his or her own decisions regarding how to spend it. A fifth is the
cafeteria approach, which entails giving expats a series of options and letting them
decide how to spend the available funds. For example, expats who have children may opt
for private schooling; expats who have no children may choose a chauffeur-driven car or
an upscale apartment. A sixth method is the regional system, under which the MNC sets
a compensation system for all expats who are assigned to a particular region, so that (for
example) everyone going to Europe falls under one particular system and everyone being
assigned to South America is covered by a different system.68,69 The most important thing
to remember about global compensation is that the package must be cost-effective and
fair. If it meets these two criteria, it likely will be acceptable to all parties.
As a result of the 2008–2010 recession, many companies are making changes
to their expatriate staffing and compensation practices. While many companies have
developed short-term assignment and business-travel policies to more efficiently fill
their staffing needs, more comprehensive measures, such as shifting home-country
employees working in foreign locations from expatriate to “local plus” packages, are
becoming more common.70 Participants in two surveys by HR consultancy ORC
Worldwide—Survey on Local-Plus Packages in Hong Kong and Singapore and Survey
on Local-Plus Packages for Expatriates in China—report a growing trend toward expa-
triate “light” or “local-plus” packages. “These alternative packages often base the
assignee’s salary on host country pay structures,” says Phil Stanley, managing direc-
tor of ORC Worldwide’s Asia-Pacific region, “but then tack on a few expatriate type
benefits, such as some form of housing assistance and possibly an allowance to par-
tially cover children’s education.”71
balance-sheet approach
An approach to developing
an expatriate compensation
package that ensures the
expat is “made whole” and
does not lose money by
taking the assignment.
localization
An approach to developing
an expatriate compensation
package that involves
paying the expat a salary
comparable to that of local
nationals.
lump-sum method
An approach to developing
an expatriate compensation
package that involves giving
the expat a predetermined
amount of money and
letting the individual make
his or her own decisions
regarding how to spend it.
cafeteria approach
An approach to developing
an expatriate compensation
package that entails giving
the individual a series of
options and letting the
person decide how to spend
the available funds.
regional system
An approach to developing
an expatriate compensation
package that involves
setting a compensation
system for all expats who
are assigned to a particular
region and paying everyone
in accord with that system.
Chapter 14 Human Resource Selection and Development Across Cultures 531
■ Individual and Host-Country Viewpoints
Until now, we have examined the selection process mostly from the standpoint of the
MNC: What will be best for the company? However, two additional perspectives for
selection warrant consideration: (1) that of the individual who is being selected and (2)
that of the country to which the candidate will be sent. Research shows that each has
specific desires and motivations regarding the expatriate selection process.
Candidate Motivations
Why do individuals accept foreign assignments? One answer is a greater demand for
their talents abroad than at home. For example, a growing number of senior U.S.
managers have moved to Mexico because of Mexico’s growing need for experienced
executives. The findings of one early study grouped the participating countries into
clusters: Anglo (Australia, Austria, Canada, India, New Zealand, South Africa,
Switzerland, United Kingdom, and United States); Northern European (Denmark,
Finland, Norway); French (Belgium and France); Northern South American (Colombia,
Mexico, and Peru); Southern South American (Argentina and Chile); and Independent
(Brazil, Germany, Israel, Japan, Sweden, and Venezuela).72 Within these groupings,
researchers were able to identify major motivational differences. Some of their findings
included
1. The Anglo cluster was more interested in individual achievement and less
interested in the desire for security than any other cluster.
2. The French cluster was similar to the Anglo cluster, except that less impor-
tance was given to individual achievement and more to security.
3. Countries in the Northern European cluster were more oriented to job accom-
plishment and less to getting ahead; considerable importance was assigned to
jobs not interfering with personal lives.
4. In South American clusters, individual achievement goals were less important
than in most other clusters. Fringe benefits were particularly important to
South American groups.
5. Germans were similar to those in the South American clusters, except that
they placed a greater emphasis on advancement and earnings.
6. The Japanese were unique in their mix of desires. They placed high value on
earnings opportunities but low value on advancement. They were high on
challenge but low on autonomy. At the same time, they placed strong
emphasis on working in a friendly, efficient department and having good
physical working conditions.
Another interesting focus of attention has been on those countries that expatriates
like best. A study conducted by Ingemar Torbiorn found that the 1,100 Swedish expatri-
ates surveyed were at least fairly well satisfied with their host country and in some cases
were very satisfied. Five of the countries that they liked very much were Switzerland,
Belgium, England, the United States, and Portugal.73 These countries are still popular
today, which makes sense because they are included in the top tier of countries with the
highest quality of life. The criteria include such things as family life, economic life,
unemployment rates, political stability, and so forth to determine how safe or attractive
the country is.
Host-Country Desires
Although many MNCs try to choose people who fit in well, little attention has been paid
to the host country’s point of view. Whom would it like to see put in managerial posi-
tions? One study that compared U.S., Indonesian, and Mexican managers found that
532 Part 4 Organizational Behavior and Human Resource Management
behaviors can distinguish them from one another and that host countries would prefer a
managerial style similar to that of their country.74 For example, positive managerial
behaviors, such as honesty and follow-through with employees, distinguish Indonesian
and U.S. managers from Mexican managers. As seen in Chapter 4, this could partially
be due to the power distance suggested by Hofstede. Furthermore, negative managerial
behaviors, such as public criticism and discipline toward employees, also distinguish
Indonesian and U.S. managers from Mexican managers. It has been suggested that the
dynamic in the workplace has to do with the familial structure, namely that Mexican
workers place a higher value on family over work than do their U.S. or Indonesian
counterparts. This can be a factor in how the positive and negative behaviors are expressed
in each country, as outlined in Figures 14–5 and 14–6. Overall, it is important for man-
agers to take the host-country perspectives into consideration, or it could result in an
ineffectual endeavor.
Figure 14–5
Comparative Positive
Managerial Behavior
by Country
Provides
clear work
expectations
Indonesia Mexico
United States
Shows confidence
in employees
Flexible to
individual
employee
needs
Shows loyalty to
employees
Is
honest
with
employees
Shows
respect
for
employees
Provides
regular
feedback
Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from Charles M. Vance and
Yongsun Paik, “One Size Fits All in Expatriate Pre-departure Training? Comparing the Host Country Voices of Mexican, Indonesian
and U.S. Workers,” Journal of Management Development 21, No. 7–8 (2002), p. 566.
Figure 14–6
Comparative Negative
Managerial Behavior by
Country
Engages in unfair
discrimination
Flaunts
power
Practices
favoritism
Does not
understand
employee
values &
traditions
Disciplines
& criticizes in
public
Indonesia Mexico
United States
Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh based on data from Charles M. Vance and
Yongsun Paik, “One Size Fits All in Expatriate Pre-departure Training? Comparing the Host Country Vices of Mexican, Indonesian and
U.S. Workers,” Journal of Management Development 21, No. 7–8 (2002), p. 566.
Chapter 14 Human Resource Selection and Development Across Cultures 533
■ Repatriation of Expatriates
For most overseas managers, repatriation, the return to one’s home country, occurs
within five years of the time they leave. Few expatriates remain overseas for the duration
of their stay with the firm.75 When they return, these expatriates often find themselves
facing readjustment problems, and some MNCs are trying to deal with these problems
through use of transition strategies.
Reasons for Returning
The most common reason that expatriates return home from overseas assignments is that
their formally agreed-on tour of duty is over. Before they left, the expatriates were told
that they would be posted overseas for a predetermined period, often two to three years,
and they are returning as planned. This is considered a successfully completed assign-
ment. According to a 2015 study by Brookfield Global Relocation Services, 94 percent
of all expatriate assignments were completed as intended.76
Though infrequent, early returns do occur. The most common reason, accounting
for 23 percent of all terminated assignments, is family concerns. This encompasses a
variety of issues common to many expatriate families, including spouses who have dif-
ficulty acclimating to a new culture and expatriates who want their children educated in
a home-country school.77 The second most common reason for expatriates to return early
is due to company restructuring. Business opportunities change rapidly, and the useful-
ness of an overseas assignment might decline if a company changes strategy. In these
instances, the expatriate may have had every intent on staying and completing his or her
full assignment. Per Brookfield Global Relocation Services, this accounts for about
19 percent of all early returns.78
Common fears that many expatriates and their families have before embarking on
an overseas assignment rarely pose an issue once the expatriate arrives in the host coun-
try. For example, only 3 percent of all failed assignments were due to security concerns,
and just 5 percent of expatriates faced cultural challenges that resulted in an early leave.
Over the last several decades, MNCs have continually improved their selection process
of suitable employees for expatriate experiences; as a result, the overwhelming majority
of international assignments succeed.79
Readjustment Problems
Many companies that say they want their people to have international experience often
seem unsure of what to do with these managers when they return. One recent survey of
midsize and large firms found that 80 percent of these companies send people abroad
and more than half of them intend to increase the number they have on assignment
overseas. However, responses from returning expats point to problems. Three- quarters of
the respondents said that they felt their permanent position upon returning home was a
demotion. Over 60 percent said that they lacked the opportunities to put their foreign
experience to work, and 60 percent said that their company had not communicated clearly
about what would happen to them when they returned. Perhaps worst of all, within a
year of returning, 25 percent of the managers had left the company.80 These statistics are
not surprising to those who have been studying repatriation problems. In fact, one
researcher reported the following expatriate comments about their experiences:
My colleagues react indifferently to my international assignment. . . . They view me as
doing a job I did in the past; they don’t see me as having gained anything while overseas.
I had no specific reentry job to return to. I wanted to leave international and return to
domestic. Working abroad magnifies problems while isolating effects. You deal with more
problems, but the home office doesn’t know the details of the good or bad effects.
Managerially, I’m out of touch.
I’m bored at work. . . . I run upstairs to see what [another returning colleague] is doing.
He says, “Nothing.” Me, too.81
repatriation
The return to one’s home
country from an overseas
management assignment.
534 Part 4 Organizational Behavior and Human Resource Management
Other readjustment problems are more personal in nature. Many expatriates find
that the salary and fringe benefits to which they have become accustomed in the foreign
assignment now are lost, and adjusting to this lower standard of living is difficult. In
addition, those who sold their houses and now must buy new ones find that the monthly
cost often is much higher than when they left. The children often are placed in public
schools, where classes are much larger than in the overseas private schools. Many also
miss the cultural lifestyles, as in the case of an executive who is transferred from Paris,
France, to a medium-sized city in the United States, or from any developed country to
an underdeveloped country. Additionally, many returning expatriates have learned that
their international experiences are not viewed as important. Many Japanese expatriates,
for example, report that when they return, their experiences should be downplayed if
they want to “fit in” with the organization. In fact, reports one recent New York Times
article, a substantial number of Japanese expatriates “are happier overseas than they are
back home.”82
Other research supports the findings noted here and offers operative recommenda-
tions for action. Based on questionnaires completed by 174 respondents who had been
repatriated from four large U.S. MNCs, Black found the following:
1. With few exceptions, individuals whose expectations were met had the most
positive levels of repatriation adjustment and job performance.
2. In the case of high-level managers in particular, expatriates whose job demands
were greater, rather than less, than expected reported high levels of repatriation
adjustment and job performance. Those having greater job demands may have
put in more effort and had better adjustment and performance.
3. Job performance and repatriation adjustment were greater for individuals
whose job constraint expectations were undermet than for those individuals
whose expectations were overmet. In other words, job constraints were viewed
as an undesirable aspect of the job, and having them turn out to be less than
expected was a pleasant surprise that helped adjustment and performance.
4. When living and housing conditions turned out to be better than expected,
general repatriation adjustment and job performance were better.
5. Individuals whose general expectations were met or overmet had job
evaluations that placed them 10 percent higher than those whose general
expectations were unmet.83
Transition Strategies
To help smooth the adjustment from an overseas to a stateside assignment, some MNCs
have developed transition strategies, which can take a number of different forms. One
is the use of repatriation agreements, whereby the firm tells an individual how long
she or he will be posted overseas and promises to give the individual, on return, a job
that is mutually acceptable. This agreement typically does not promise a specific position
or salary, but the agreement may state that the person will be given a job that is equal
to, if not better than, the one held before leaving.84
Some firms also rent or otherwise maintain expatriates’ homes until they return.
The Aluminum Company of America and Union Carbide both have such plans for man-
agers going overseas. This plan helps reduce the financial shock that often accompanies
home shopping by returning expatriates. A third strategy is to use senior executives as
sponsors of managers abroad.
Still another approach is to keep expatriate managers apprised of what is going on
at corporate headquarters and to plug these managers into projects at the home office
whenever they are on leave in the home country. This helps maintain the person’s visibil-
ity and ensures the individual is looked on as a regular member of the management staff.
One study surveyed 99 employees and managers with international experience in
21 corporations.85 The findings reveal that cultural reentry, financial implications, and
transition strategies
Strategies used to help
smooth the adjustment from
an overseas to a stateside
assignment.
repatriation agreements
Agreements whereby the
firm tells an individual how
long she or he will be
posted overseas and
promises to give the
individual, on return, a job
that is mutually acceptable.
Chapter 14 Human Resource Selection and Development Across Cultures 535
the nature of job assignments are three major areas of expatriate concern. In particular,
some of the main problems of repatriation identified in this study include (1) adjusting
to life back home, (2) facing a financial package that is not as good as that overseas, (3)
having less autonomy in the stateside job than in the overseas position, and (4) not
receiving any career counseling from the company. To the extent that the MNC can
address these types of problems, the transition will be smooth, and the expatriate’s per-
formance effectiveness once home will increase quickly. Some additional steps suggested
by experts in this area include
1. Arrange an event to welcome and recognize the employee and family, either
formally or informally.
2. Establish support to facilitate family reintegration.
3. Offer repatriation counseling or workshops to ease the adjustment.
4. Assist the spouse with job counseling, résumé writing, and interviewing
techniques.
5. Provide educational counseling for the children.
6. Provide the employee with a thorough debriefing by a facilitator to identify
new knowledge, insights, and skills and to provide a forum to showcase new
competencies.
7. Offer international outplacement to the employee and reentry counseling to
the entire family if no positions are possible.
8. Arrange a postassignment interview with the expatriate and spouse to review
their view of the assignment and address any repatriation issues.86
Hammer and his associates echo these types of recommendations. Based on
research that they conducted in two multinational corporations among expats and their
spouses, they concluded:
The findings from the present study suggest that one of the key transitional activities for
returning expatriates and their spouses from a corporate context should involve targeted
communication from the home environment concerning the expectations of the home office
toward the return of the repatriate executive and his/her family (role relationships). Further,
reentry training should focus primarily on helping the repatriate manager and spouse align
their expectations with the actual situation that will be encountered upon arrival in the home
culture both within the organizational context as well as more broadly within the social
milieu. To the degree that corporate communication and reentry training activities help the
returning executive and spouse in expectation alignment, the executive’s level of reentry
satisfaction should be higher and the degree of reentry difficulties less.87
Additionally, in recent years many MNCs have begun using inpatriates to supple-
ment their home-office staff and some of the same issues discussed here with repatriation
come into play.
■ Training in International Management
Training is the process of altering employee behavior and attitudes in a way that increases
the probability of goal attainment. Training is particularly important in preparing employ-
ees for overseas assignments because it helps ensure that their full potential will be
tapped.88,89,90 One of the things that training can do is to help expat managers better
understand the customs, cultures, and work habits of the local culture. The simplest
training, in terms of preparation time, is to place a cultural integrator in each foreign
operation. This individual is responsible for ensuring that the operation’s business sys-
tems are in accord with those of the local culture. The integrator advises, guides, and
recommends actions needed to ensure this synchronization.91
Unfortunately, although using an integrator can help, it is seldom sufficient. Recent
experience clearly reveals that in creating an effective global team, the MNC must
training
The process of altering
employee behavior and
attitudes in a way that
increases the probability
of goal attainment.
536 Part 4 Organizational Behavior and Human Resource Management
assemble individuals who collectively understand the local language; have grown up in
diverse cultures or neighborhoods; have open, flexible minds; and will be able to deal
with high degrees of stress.92 In those cases where potential candidates do not yet possess
all these requisite skills or abilities, MNCs need a well-designed training program that
is administered before the individuals leave for their overseas assignment (and, in some
cases, also onsite) and then evaluated later to determine its overall effectiveness. One
review of 228 MNCs found that cross-cultural training, which can take many forms, is
becoming increasingly popular. Some of these findings included the following:
1. Of organizations with cultural programs, 58 percent offer training only to
some expatriates, and 42 percent offer it to all of them.
2. Ninety-one percent offer cultural orientation programs to spouses, and
75 percent offer them to dependent children.
3. The average duration of the cultural training programs is three days.
4. Cultural training is continued after arrival in the assignment location
32 percent of the time.
5. Thirty percent offer formal cultural training programs.
6. Of those without formal cultural programs, 37 percent plan to add such training.93
The most common topics covered in cultural training are social etiquette, customs,
economics, history, politics, and business etiquette. However, the MNC’s overall
philosophy of international management and the demands of the specific cultural situa-
tion are the starting point. This is because countries tend to have distinctive human
resource management (HRM) practices that differentiate them from other countries. For
example, the HRM practices that are prevalent in the United States are quite different
from those in France and Argentina. This was clearly illustrated by Sparrow and Budh-
war, who compared data from 13 different countries on the basis of HRM factors. Five
of these factors were the following:
1. Structural empowerment that is characterized by flat organization designs,
wide spans of control, the use of flexible cross-functional teams, and the
rewarding of individuals for productivity gains.
2. Accelerated resource development that is characterized by the early identifica-
tion of high-potential employees, the establishment of both multiple and paral-
lel career paths, the rewarding of personnel for enhancing their skills and
knowledge, and the offering of continuous training and development education.
3. Employee welfare emphasis that is characterized by firms offering personal
family assistance, encouraging and rewarding external volunteer activities, and
promoting organizational cultures that emphasize equality in the workplace.
4. An efficiency emphasis in which employees are encouraged to monitor their
own work and to continually improve their performance.
5. Long-termism, which stresses long-term results such as innovation and cre-
ativity rather than weekly and monthly short-term productivity.94,95
When Sparrow and Budhwar used these HRM approaches on a comparative coun-
try-by-country basis, they found that there were worldwide differences in human resource
management practices. Table 14–4 shows the comparative results after each of the 13
countries was categorized as being either high or low on the respective factors. These
findings reveal that countries are unique in their approach to human resource manage-
ment. What works well in the United States may have limited value in France. In fact,
a close analysis of Table 14–4 shows that none of the 13 countries had the same profile;
each was different. This was true even in the case of Anglo nations such as the United
States, Canada, Australia, and the United Kingdom, where differences in employee wel-
fare emphasis, accelerated resource development, efficiency emphasis orientation, and
long-termism resulted in unique HRM profiles for each. Similarly, Japan and Korea
Chapter 14 Human Resource Selection and Development Across Cultures 537
differed on two of the factors, as did Germany and France; and India, which many
people might feel would be more similar to an Anglo culture, because of the British
influence, than to an Asian one, differed on two factors with Canada, on three factors
with both the United States and the United Kingdom, and on four factors with Australia.
These findings point to the fact that MNCs will have to focus increasingly on HRM
programs designed to meet the needs of local personnel. A good example is provided in
the former communist countries of Europe, where international managers are discovering
that in order to effectively recruit college graduates, their firms must provide training
programs that give these new employees opportunities to work with a variety of tasks
and to help them specialize in their particular fields of interest. At the same time, the
MNCs are discovering that these recruits are looking for companies that offer a good
social working environment. A recent survey of over 1,000 business and engineering
students from Poland, the Czech Republic, and Hungary found that almost two-thirds of
the respondents said that they wanted their boss to be receptive to their ideas; 37 percent
wanted to work for managers who had strong industry experience; and 34 percent wanted
a boss who was a good rational decision maker. These findings indicate that multinational
human resource management is now becoming much more of a two-way street: Both
employees and managers need to continually adjust to emerging demands.96
The Impact of Overall Management Philosophy on Training
The type of training that is required of expatriates is influenced by the firm’s overall
philosophy of international management. For example, some companies prefer to send
their own people to staff an overseas operation; others prefer to use locals whenever
possible.97 Briefly, four basic philosophical positions of multinational corporations can
influence the training program:
1. An ethnocentric MNC puts home-office people in charge of key international
management positions. The MNC headquarters group and the affiliated world
company managers all have the same basic experiences, attitudes, and beliefs
about how to manage operations. Many Japanese firms follow this practice.
Table 14–4
Human Resource Management Practices in Select Countries
Accelerated Employee
Structural Resource Welfare Efficiency Long-
Empowerment Development Emphasis Emphasis Termism
High Low High Low High Low High Low High Low
United States X X X X X
Canada X X X X X
United Kingdom X X X X X
Italy X X X X X
Japan X X X X X
India X X X X X
Australia X X X X X
Brazil X X X X X
Mexico X X X X X
Argentina X X X X X
Germany X X X X X
Korea X X X X X
France X X X X X
Source: Adapted from Paul R. Sparrow and Pawan S. Budhwar, “Competition and Change: Mapping the Indian HRM Recipe Against Worldwide Patterns,” Journal of World
Business 32, no. 3 (1997), p. 233.
ethnocentric MNC
An MNC that stresses
nationalism and often puts
home-office people in
charge of key international
management positions.
538 Part 4 Organizational Behavior and Human Resource Management
2. A polycentric MNC places local nationals in key positions and allows these
managers to appoint and develop their own people. MNC headquarters gives
the subsidiary managers authority to manage their operations just as long as
these operations are sufficiently profitable. Some MNCs use this approach in
East Asia, Australia, and other markets that are deemed too expensive to staff
with expatriates.
3. A regiocentric MNC relies on local managers from a particular geographic
region to handle operations in and around that area. For example, production
facilities in France would be used to produce goods for all EU countries.
Similarly, advertising managers from subsidiaries in Italy, Germany, France,
and Spain would come together and formulate a “European” advertising cam-
paign for the company’s products. A regiocentric approach often relies on
regional group cooperation of local managers. The Gillette MNC uses a
regiocentric approach.
4. A geocentric MNC seeks to integrate diverse regions of the world through a
global approach to decision making. Assignments are based on qualifications,
and all subsidiary managers throughout the structure are regarded as equal to
those at headquarters. IBM is an excellent example of an MNC that attempts
to use a geocentric approach.
All four of these philosophical positions can be found in the multinational arena,
and each puts a different type of training demand on the MNC.98 For example, eth-
nocentric MNCs will do all training at headquarters, but polycentric MNCs will rely
on local managers to assume responsibility for seeing that the training function is
carried out.
The Impact of Different Learning Styles on Training
and Development
Another important area of consideration for development is learning styles. Learning is
the acquisition of skills, knowledge, and abilities that result in a relatively permanent
change in behavior.99 Over the last decade, growing numbers of multinationals have tried
to become “learning organizations,” continually focused on activities such as training and
development. In the new millennium, this learning focus applied to human resource
development may go beyond learning organizations to “teaching organizations.” For
example, Tichy and Cohen, after conducting an analysis of world-class companies such
as General Electric, PepsiCo, AlliedSignal, and Coca-Cola, found that teaching organiza-
tions are even more relevant than learning organizations because they go beyond the
belief that everyone must continually acquire new knowledge and skills and focus on
ensuring that everyone in the organization, especially the top management personnel,
passes the learning on to others. Here are their conclusions:
In teaching organizations, leaders see it as their responsibility to teach. They do that
because they understand that it’s the best, if not only, way to develop throughout a com-
pany people who can come up with and carry out smart ideas about the business. Because
people in teaching organizations see teaching as critical to the success of their business,
they find ways to do it every day. Teaching every day about critical business issues avoids
the fuzzy focus that has plagued some learning organization efforts, which have some-
times become a throwback to the 1960s and 1970s style of self-exportation and human
relations training.100
Of course, the way in which training takes place can be extremely important. A
great deal of research has been conducted on the various types and theories of learn-
ing. However, the application of these ideas in an international context often can be
quite challenging because cultural differences can affect the learning and teaching.
Prud’homme van Reine and Trompenaars, commenting on the development of expats,
polycentric MNC
An MNC that places local
nationals in key positions
and allows these managers
to appoint and develop their
own people.
regiocentric MNC
An MNC that relies on
local managers from a
particular geographic region
to handle operations in and
around that area.
geocentric MNC
An MNC that seeks to
integrate diverse regions of
the world through a global
approach to decision
making.
learning
The acquisition of skills,
knowledge, and abilities
that result in a relatively
permanent change in
behavior.
Chapter 14 Human Resource Selection and Development Across Cultures 539
noted that national cultural differences typically affect the way MNCs train and develop
their people. For example, Americans like an experiential learning style, while Ger-
mans prefer a theoretical-analytical learning approach.101 Moreover, there can be sharp
learning preferences between groups that are quite similar in terms of culture. Hayes
and Allinson, after studying cultural differences in the learning styles of managers,
reported, “Two groups can be very similar in ecology and climate and, for example,
through a common legacy of colonialism, have a similar language and legal, educa-
tional and governmental infrastructure, but may be markedly different in terms of
beliefs, attitudes, and values.”102 Moreover, research shows that people with different
learning styles prefer different learning environments, and if there is a mismatch
between the preferred learning style and the work environment, dissatisfaction and poor
performance can result.
In addition to these conclusions, those responsible for training programs must
remember that even if learning does occur, the new behaviors will not be used if they
are not reinforced. For example, if the head of a foreign subsidiary is highly ethnocentric
and believes that things should be done the way they are in the home country, new
managers with intercultural training likely will find little reward or reinforcement for
using their ideas. This cultural complexity also extends to the way in which the training
is conducted.
Reasons for Training
Training programs are useful in preparing people for overseas assignments for many
reasons. These reasons can be put into two general categories: organizational and
personal.
Organizational Reasons Organizational reasons for training relate to the enter-
prise at large and its efforts to manage overseas operations more effectively.103 One
primary reason is to help overcome ethnocentrism, the belief that one’s way of
doing things is superior to that of others. Ethnocentrism is common in many large
MNCs where managers believe that the home office’s approach to doing business
can be exported intact to all other countries because this approach is superior to
anything at the local level. Training can help home-office managers understand the
values and customs of other countries so that when they are transferred overseas,
they have a better understanding of how to interact with local personnel. This train-
ing also can help managers overcome the common belief among many personnel that
expatriates are not as effective as host-country managers. This is particularly impor-
tant given that an increasing number of managerial positions now are held by foreign
managers in U.S. MNCs.104
Another organizational reason for training is to improve the flow of communication
between the home office and the international subsidiaries and branches. Quite often,
overseas managers find that they are not adequately informed regarding what is expected
of them, although the home office places close controls on their operating authority. This
is particularly true when the overseas manager is from the host country. Effective com-
munication can help minimize these problems.
Finally, another organizational reason for training is to increase overall efficiency
and profitability. Research shows that organizations that closely tie their training and
human resource management strategy to their business strategy tend to outperform those
that do not.105 Stroh and Caligiuri conducted research on 60 of the world’s major mul-
tinationals and found that effective HRM programs pay dividends in the form of higher
profits. Additionally, their data showed that the most successful MNCs recognized the
importance of having top managers with a global orientation. One of the ways in which
almost all these organizations did this was by giving their managers global assignments
that not only filled technical and managerial needs but also provided developmental
experiences for the personnel—and this assignment strategy included managers from
ethnocentrism
The belief that one’s own
way of doing things is
superior to that of others.
540 Part 4 Organizational Behavior and Human Resource Management
every geographic region where the firms were doing business. Drawing together the
lessons to be learned from this approach, Stroh and Caligiuri noted:
The development of global leadership skills should not stop with home-country nationals.
Global HR should also be involved in developing a global orientation among host-country
nationals as well. This means, for example, sending not only home-country managers on
global assignments but host national talent to the corporate office and to other divisions
around the world. Many of the managers at the successful MNCs talked about how their
companies develop talent in this way. In addition, they described a “desired state” for human
resources, including the ability to source talent within the company from around the world.
Victor Guerra, an executive at Prudential, commented: We need to continually recognize
that there are bright, articulate people who do not live in the home country. U.S. multina-
tionals are especially guilty of this shortsightedness. Acknowledging that talent exists and
using the talent appropriately are two different issues—one idealist, the other strategic.106
Personal Reasons The primary reason for training overseas managers is to improve
their ability to interact effectively with local people in general and with their person-
nel in particular. Increasing numbers of training programs now address social topics
such as how to take a client to dinner, effectively apologize to a customer, appropri-
ately address one’s overseas colleagues, communicate formally and politely with oth-
ers, and learn how to help others “save face.”107 These programs also focus on
dispelling myths and stereotypes by replacing them with facts about the culture. For
example, in helping expatriates better understand Arab executives, the following
guidelines are offered:
1. There is a close relationship between the Arab executive and his environment.
The Arab executive is looked on as a community and family leader, and there
are numerous social pressures on him because of this role. He is consulted on
all types of problems, even those far removed from his position.
2. With regard to decision making, the Arab executive likely will consult with
his subordinates, but he will take responsibility for his decision himself rather
than arriving at it through consensus.
3. The Arab executive likely will try to avoid conflict. If there is an issue that
he favors but that is opposed by his subordinates, he tends to impose his
authority. If it is an issue favored by the subordinates but opposed by the
executive, he will likely let the matter drop without taking action.
4. The Arab executive’s style is very personal. He values loyalty over efficiency.
Although some executives find that the open-door tradition consumes a great
deal of time, they do not feel that the situation can be changed. Many execu-
tives tend to look on their employees as family and will allow them to bypass
the hierarchy to meet them.
5. The Arab executive, contrary to popular beliefs, puts considerable value on
the use of time. One thing he admires most about Western or expatriate exec-
utives is their use of time, and he would like to encourage his own employees
to make more productive use of their time.108
Another growing problem is the belief that foreign language skills are not really
essential to doing business overseas. Effective training programs can help to minimize
these personal problems.
A particularly big personal problem that managers have in an overseas assignment
is arrogance. This is the so-called Ugly American problem that U.S. expatriates have
been known to have. Many expatriate managers find that their power and prestige are
much greater than they were in their job in the home country. This often results in
improper behavior, especially among managers at the upper and lower positions of over-
seas subsidiaries. This arrogance takes a number of different forms, including rudeness
to personnel and inaccessibility to clients.
Chapter 14 Human Resource Selection and Development Across Cultures 541
Another common problem is expatriate managers’ overruling of decisions, often
seen at lower levels of the hierarchy. When a decision is made by a superior who is from
the host country and the expatriate does not agree with it, the expatriate may appeal to
higher authority in the subsidiary. Host-country managers obviously resent this behavior
because it implies that they are incompetent and can be second-guessed by expatriate
subordinates.
Still another common problem is the open criticizing by expatriate managers of
their own country or the host country. Many expatriates believe that this form of criticism
is regarded as constructive and shows them to have an open mind. Experience has found,
however, that most host-country personnel view such behavior negatively and feel that
the manager should refrain from such unconstructive criticism. It creates bad feelings
and lack of loyalty.
In addition to helping deal with these types of personal problems, training can be
useful in improving overall management style. Research shows that many host-country
nationals would like to see changes in some of the styles of expatriate managers, includ-
ing their leadership, decision making, communication, and group work. In terms of lead-
ership, the locals would like to see their expatriate managers be more friendly, accessible,
receptive to subordinate suggestions, and encouraging to subordinates to make their best
efforts. In decision making, they would like to see clearer definition of goals, more
involvement in the process by those employees who will be affected by the decision, and
greater use of group meetings to help make decisions. In communication, they would
like to see more exchange of opinions and ideas between subordinates and managers. In
group work, they would like to see more group problem solving and teamwork.
The specific training approach used must reflect both the industrial and the cultural
environment. For example, there is some evidence that Japanese students who come to
the United States to earn an MBA degree often find this education of no real value back
home. One graduate noted that when he tactfully suggested putting to use a skill he had
learned during his U.S. MBA program, he got nowhere. An analysis of Japanese getting
an outside education concluded:
Part of the problem is the reason that most Japanese workers are sent to business schools.
Whatever ticket the MBA degree promises—or appears to promise—Americans, the diploma
has little meaning within most Japanese companies. Rather, companies send students abroad
under the life-time employment system to ensure that there will be more English speakers
who are familiar with Western business practices. Some managers regard business schools
as a kind of high-level English language school, returning students say, or consider the two
years as more or less a paid vacation.109
However, as the Japanese economy continues to have problems, American-style
business education is beginning to receive attention and respect. In the 1980s American
managers went to Japan to learn; now Japanese managers are coming to the United States
in increasing numbers to see what they can pick up to help them better compete.
■ Types of Training Programs
There are many different types of multinational management training programs. Some last
only a few hours; others last for months. Some are fairly superficial; others are extensive
in coverage. Organizations can decide what training program works best by determining
the effectiveness of the program, and altering it accordingly. Typically, a combination of
standardized and tailor-made training and development approaches are used.
Standardized vs. Tailor-Made
Some management training is standard, or generic. For example, participants often are
taught how to use specific decision-making tools, such as quantitative analysis, and
regardless of where the managers are sent in the world, the application is the same. These
542 Part 4 Organizational Behavior and Human Resource Management
tools do not have to be culturally specific. Research shows that small firms usually rely
on standard training programs. Larger MNCs, in contrast, tend to design their own. Some
of the larger MNCs are increasingly turning to specially designed video and PowerPoint
programs for their training and development needs.
Tailor-made training programs are created for the specific needs of the participants.
Input for these offerings usually is obtained from managers who currently are working
(or have worked) in the country to which the participants will be sent as well as from
local managers and personnel who are citizens of that country. These programs often are
designed to provide a new set of skills for a new culture. For example, MNCs are now
learning that in managing in China, there is a need to provide directive leadership train-
ing because many local managers rely heavily on rules, procedures, and orders from their
superiors to guide their behaviors.110 So training programs must explain how to effec-
tively use this approach. Quite often, the offerings are provided before the individuals
leave for their overseas assignment; however, there also are postdeparture training pro-
grams that are conducted onsite. These often take the form of systematically familiar-
izing the individual with the country through steps such as meeting with government
officials and other key personnel in the community; becoming acquainted with managers
and employees in the organization; learning the host-country nationals’ work methods,
problems, and expectations; and taking onsite language training.
Training approaches that are successful in one geographic region of the world may
need to be heavily modified if they are to be as effective elsewhere. Sergeant and Frenkel
conducted interviews with expatriate managers with extensive experience in China in
order to identify HRM issues and the ways in which they need to be addressed by MNCs
going into China.111 As seen in Table 14–5, many of the human resource management
Table 14–5
Human Resource Management Challenges Facing MNCs in China
Human Resource
Management Function Comments/Recommendations
Employee recruitment The market for skilled manual and white-collar employees is very tight and characterized by
rapidly rising wages and high turnover rates. Nepotism and overhiring remain a major problem
where Chinese partners strongly influence HR policies; and transferring employees from state
enterprises to joint ventures can be difficult because it requires approval from the employee’s
old work unit.
Reward system New labor laws allow most companies to set their own wage and salary levels. As a result, there
is a wide wage disparity between semiskilled and skilled workers. However, these disparities
must be balanced with the negative effect they can have on workers’ interpersonal relations.
Employee retention It can be difficult to retain good employees because of poaching by competitive organizations.
In response, many American joint-venture managers are learning to take greater control of
compensation programs in order to retain high-performing Chinese managers and skilled workers.
Work performance and Local managers are not used to taking the initiative and are rarely provided with performance
employee management feedback in their Chinese enterprises. As a result, they tend to be risk-averse and are often unwill-
ing to innovate. In turn, the workers are not driven to get things done quickly and they often give
little emphasis to the quality of output. At the same time, it is difficult to dismiss people.
Labor relations Joint-venture regulations give workers the right to establish a trade union to protect employee
rights and to organize. These unions are less adversarial than in the West and tend to facilitate
operational efficiency. However, there is concern that with the changes taking place in labor laws
and the possibility of collective bargaining, unions may become more adversarial in the future.
Expatriate relations Many firms have provided little cross-training to their people and family, education, and health
issues limit the attractiveness of a China assignment. Some of the major repatriation problems
include limited continuity in international assignments and difficulties of adjusting to more
specialized and less autonomous positions at home, lack of career prospects, and undervaluation
of international experience. Management succession and the balancing of local and international
staff at Chinese firms are also problematic.
Source: Adapted from Andrew Sergeant and Stephen Frenkel, “Managing People in China: Perceptions of Expatriate Managers,” Journal of World Business 33, no. 1
(1998), p. 21.
543
approaches that are employed are different from those used in the United States or other
developed countries because of the nature of Chinese culture and China’s economy.
Some organizations have extended cross-cultural training to include training for
family members, especially children who will be accompanying the parents. The Inter-
national Management in Action box “U.S.-Style Training for Expats and Their Teenagers”
explains how this approach to cultural assimilation is carried out.
In addition to training expats and their families, effective MNCs also are develop-
ing carefully crafted programs for training personnel from other cultures who are coming
into their culture. These programs, among other things, have materials that are specially
International Management in Action
U.S.-Style Training for Expats and Their Teenagers
One of the major reasons expatriates have trouble with
overseas assignments is that their teenage children are
unable to adapt to the new culture, and this has an
impact on the expat’s performance. To deal with this
acculturation problem, many U.S. MNCs now are devel-
oping special programs for helping teenagers assimilate
into new cultures and adjust to new school environ-
ments. A good example is provided by General Electric
Medical Systems Group (GEMS), a Milwaukee-based firm
that has expatriates in France, Japan, and Singapore. As
soon as GEMS designates an individual for an overseas
assignment, this expat and his or her family are matched
up with those who have recently returned from this
country. If the family going overseas has teenage chil-
dren, the company will team them up with a family that
had teenagers during its stay abroad. Both groups then
discuss the challenges and problems that must be
faced. In the case of teenagers, they are able to talk
about their concerns with others who already have
encountered these issues, and the latter can provide
important information regarding how to make friends,
learn the language, get around town, and turn the time
abroad into a pleasant experience. Coca-Cola uses a
similar approach. As soon as someone is designated for
an overseas assignment, the company helps initiate
cross-cultural discussions with experienced personnel.
Coke also provides formal training through use of exter-
nal cross-cultural consulting firms that are experienced
in working with all family members.
A typical concern of teenagers going abroad is that
they will have to go away to boarding school. In Saudi
Arabia, for example, national law forbids expatriate chil-
dren’s attending school past the ninth grade, so most
expatriate families will look for European institutions for
these children. GEMS addresses these types of prob-
lems with a specially developed education program.
Tutors, schools, curricula, home-country requirements,
and host-country requirements are examined, and a
plan and specific program of study are developed for
each school-age child before he or she leaves.
Before the departure of the family, some MNCs will
subscribe to local magazines about teen fashions,
music, and other sports or social activities in the host
country so that the children know what to expect when
they get there. Before the return of the family to the
United States, these MNCs provide similar information
about what is going on in the United States so that
when the children return for a visit or come back to stay,
they are able to quickly fit into their home-country envi-
ronment once again.
An increasing number of MNCs now give teenagers
much of the same cultural training they give their own
managers; however, there is one area in which formal
assistance often is not as critical for teens as for adults:
language training. While most expatriates find it difficult
and spend a good deal of time trying to master the local
language, many teens find that they can pick it up quite
easily. They speak it at school, in their social groups,
and out on the street. As a result, they learn not only
the formal language but also clichés and slang that help
them communicate more easily. In fact, sometimes their
accent is so good that they are mistaken for local kids.
Simply put: The facility of teens to learn a language
often is greatly underrated. A Coca-Cola manager
recently drove home this point when he declared: “One
girl we sent insisted that, although she would move, she
wasn’t going to learn the language. Within two months
she was practically fluent.”
A major educational benefit of this emphasis on teen-
agers is that it leads to an experienced, bicultural per-
son. So when the young person completes college and
begins looking for work, the parent’s MNC often is inter-
ested in this young adult as a future manager. The per-
son has a working knowledge of the MNC, speaks a
second language, and has had overseas experience in
a country where the multinational does business. This
type of logic is leading some U.S. MNCs to realize that
effective cross-cultural training can be of benefit for
their workforces of tomorrow as well as today.
Sources: Dawn Anfuso, “HR Unites the World of Coca-Cola,” Personnel
Journal, November 1994, pp. 112–121; Karen Dawn Stuart, “Teens
Play a Role in Moves Overseas,” Personnel Journal, March 1992,
pp. 72–78; Richard M. Hodgetts and Fred Luthans, “U.S. Multination-
als’ Expatriate Compensation Strategies,” Compensation and Benefits
Review, January–February 1993, p. 61; Philip R. Harris and Robert T.
Moran, Managing Cultural Differences: High-Performance Strategies
for a New World of Business, 3rd ed. (Houston: Gulf Publishing,
1991), chapter 9.
544 Part 4 Organizational Behavior and Human Resource Management
designed for the target audience. Some of the specific steps that well-designed cultural
training programs follow include
1. Local instructors and a translator, typically someone who is bicultural,
observe the pilot training program or examine written training materials.
2. The educational designer then debriefs the observation with the translator,
curriculum writer, and local instructors.
3. Together, the group examines the structure and sequence, ice breaker, and
other materials that will be used in the training.
4. The group then collectively identifies stories, metaphors, experiences, and
examples in the culture that will fit into the new training program.
5. The educational designer and curriculum writer make the necessary changes
in the training materials.
6. The local instructors are trained to use the newly developed materials.
7. After the designer, translator, and native-language trainers are satisfied, the
materials are printed.
8. The language and content of the training materials are tested with a pilot group.112
In developing the instructional materials, culturally specific guidelines are carefully
followed so that the training does not lose any of its effectiveness.113 For example, inap-
propriate pictures or scenarios that might prove to be offensive to the audience must be
screened out. Handouts and other instructional materials that are designed to enhance
the learning process are provided for all participants. If the trainees are learning a second
language, generous use of visuals and live demonstrations will be employed. Despite all
these efforts, however, errors sometimes occur.
■ Cultural Assimilators
The cultural assimilator has become one of the most effective approaches to cross- cultural
training. A cultural assimilator is a programmed learning technique that is designed to
expose members of one culture to some of the basic concepts, attitudes, role perceptions,
customs, and values of another culture. These assimilators are developed for each pair
of cultures. For example, if an MNC is going to send three U.S. managers from Chicago
to Caracas, a cultural assimilator would be developed to familiarize the three Americans
with Venezuelan customs and cultures. If three Venezuelan managers from Caracas were
to be transferred to Singapore, another assimilator would be developed to familiarize the
managers with Singapore customs and cultures.
In most cases, these assimilators require the trainee to read a short episode of a
cultural encounter and choose an interpretation of what has happened and why. If the
trainee’s choice is correct, he or she goes on to the next episode. If the response is incor-
rect, the trainee is asked to reread the episode and choose another response.
Choice of Content of the Assimilators One of the major problems in constructing an
effective cultural assimilator is deciding what is important enough to include. Some as-
similators use critical incidents that are identified as being important. To be classified
as a critical incident, a situation must meet at least one of the following conditions:
1. An expatriate and a host national interact in the situation.
2. The situation is puzzling or likely to be misinterpreted by the expatriate.
3. The situation can be interpreted accurately if sufficient knowledge about the
culture is available.
4. The situation is relevant to the expatriate’s task or mission requirements.114
These incidents typically are obtained by asking expatriates and host nationals with
whom they come in contact to describe specific intercultural occurrences or events that
made a major difference in their attitudes or behavior toward members of the other culture.
These incidents can be pleasant, unpleasant, or simply nonunderstandable occurrences.
cultural assimilator
A programmed learning
technique designed to
expose members of one
culture to some of the basic
concepts, attitudes, role
perceptions, customs, and
values of another culture.
Chapter 14 Human Resource Selection and Development Across Cultures 545
Validation of the Assimilator The term validity refers to the quality of being effective,
of producing the desired results. It means that an instrument—in this case, the cultural
assimilator—measures what it is intended to measure. After the cultural assimilator’s
critical incidents are constructed and the alternative responses are written, the process is
validated. Making sure that the assimilator is valid is the crux of its effectiveness. One
way to test an assimilator is to draw a sample from the target culture and ask these
people to read the scenarios that have been written, choosing the alternative they feel is
most appropriate. If a large percentage of the group agrees that one of the alternatives
is preferable, this scenario is used in the assimilator. If more than one of the four alter-
natives receives strong support, however, either the scenario or the alternatives are
revised until there is general agreement or the scenario is dropped.
After the final incidents are chosen, they are sequenced in the assimilator booklet
and can be put online to be taken electronically. Similar cultural concepts are placed
together and presented, beginning with simple situations and progressing to more com-
plex ones. Most cultural assimilator programs start out with 150 to 200 incidents, of
which 75 to 100 eventually are included in the final product.
The Cost-Benefit Analysis of Assimilators The assimilator approach to training can
be quite expensive. A typical 75- to 100-incident program often requires approximately
800 hours to develop. Assuming that a training specialist is costing the company $50 an
hour including benefits, the cost is around $40,000 per assimilator. This cost can be
spread over many trainees, and the program may not need to be changed every year. An
MNC that sends 40 people a year to a foreign country for which an assimilator has been
constructed is paying only $200 per person for this programmed training. In the long
run, the costs often are more than justified. In addition, the concept can be applied to
nearly all cultures. Many different assimilators have been constructed, including Arab,
Thai, Honduran, and Greek, to name but four. Most importantly, research shows that
these assimilators improve the effectiveness and satisfaction of individuals being trained
as compared with other training methods.
Positive Organizational Behavior
We discussed in Chapter 13 how leaders can increase motivation and morale if they focus
on the positives, or strengths, of individuals. The positive internal traits of the leader,
along with the other factors, tend to lead to consistent positive behaviors. Luthans has
done extensive research on positive organizational behavior (POB). He defines it as
The study and application of positively oriented human resource strengths and psychological
capacities that can be measured, developed, and effectively managed for performance
improvement in today’s workplace.115
Positivity in the workplace has been connected to employee satisfaction. The pos-
itive environment, however, consists of many layers. Luthans and Youssef postulated that
in order for an organization to be the most efficient and innovative, it must have positive
traits, states, and systems in order to promote positive behavior. The positive traits were
covered in Chapter 13 and consist of conscientiousness, emotional stability, extroversion,
agreeableness, openness to experience, core self-evaluations, and positive psychological
traits. A positive state is domain-specific, and reactions and behaviors may change
depending on the environment. Research has shown that other “states” are self-efficacy,
hope, optimism, resiliency, and psychological capital.116
Finally, positive organizations focus on the selection, development, and manage-
ment of human resources. This positive approach attempts to match employee skills and
talents with organizational goals and expectations. When employees are treated well, they
will be motivated to give back to the institution. Therefore, when these individual traits,
internal and external states, and organizations all focus on the positive, the resulting
organizational citizenship behavior (OCB) also will be positive. Furthermore, altruism,
conscientiousness, and courtesy will be inadvertently emphasized.117
validity
The quality of being
effective, of producing the
desired results. A valid test
or selection technique
measures what it is intended
to measure.
positive organizational
behavior (POB)
The study and application
of positively oriented
human resource strengths
and psychological
capacities that can be
measured, developed, and
effectively managed for
performance improvement
in today’s workplace.
546 Part 4 Organizational Behavior and Human Resource Management
As with most examples, the description above is culturally specific. That is, what seem
to be positive internal or external factors in one country may not be the same in another.
However, human resources are essential to an organization no matter its location, and MNCs
should do all they can to focus on the power of human capital to drive organizational success.
■ Future Trends
The coming decades will be important and transformational ones for international human
resources. The 2015 Brookfield Global Relocation Services survey concluded that several
issues will emerge as critical for managing a global workforce. At the top of the list,
according to Brookfield, will be the localization of expatriates. As the nature of tempo-
rary assignments evolves, companies and employees will be more closely scrutinizing
the costs and benefits of the assignments.
Some companies are questioning the basic decision of supporting expensive inter-
national assignments. Employees are also questioning the personal and professional value
of an overseas assignment, especially if such assignments have little influence in helping
them to advance in their careers. Current industry estimates indicate that between 25 and
45 percent of employees leave the company within just one year of repatriation. “This
is a key issue for global organizations, since this is a population of employees that they
have invested so heavily in,” Sullivan said. “Losing these employees represents a sig-
nificant loss of experience and talent. Many of the companies we surveyed are beginning
to see the integration of talent management and international assignment mobility as a
strategy to turn this loss into a competitive gain.”
Another trend is the emergence of “cross-border” commuters, employees who regularly
move back and forth between countries. Commuter assignments, as an alternative to short-
term (and even long-term) assignments, have begun to take a larger role, especially in Europe,
given the deepening integration of the European Union and the resultant cross-border
employee mobility. The report suggests this trend is likely to continue and accelerate.118
One of the most profound trends, first explored in Chapter 1 of this book, is the
dramatic rise and growth of emerging markets. Brookfield’s survey notes that emerging
locations run the spectrum of countries from those that are long-time assignment destina-
tions to those that are just this year appearing as locations for expatriate assignments. To
some degree, this trend may offset the effects of the other trends, suggesting that although
the particular structure and duration may evolve, expatriate assignments are likely to
continue as part of the arsenal of MNCs seeking to leverage talent for global success.
The World of International Management—Revisited
The World of International Management that opened this chapter illustrated how the desire
to source and retain talent has become a global phenomenon, affecting most major markets,
including India. In a time of increased globalization, firms must be able to source talent
from a range of locations. Given the increasing presence of foreign MNCs in India—and
the dramatic growth of India’s domestic offshore outsourcing sector—employee retention
has become a critical issue. One interesting observation is that employees are motivated by
intrinsic rewards that go beyond financial compensation. Attracting and retaining talent turns
out be a complex process in which both financial and nonfinancial issues come into play.
As outlined in this chapter, MNCs are realizing the intense challenges associated with
the selection, development, and training of international human resources. MNCs have a
range of options when selecting employees for overseas assignments, and increasing num-
bers of tools and resources are available to help develop, train, and deploy those individu-
als. Human resource selection and development across cultures cannot be taken lightly.
Firms that do not invest in their human resource processes will face additional costs related
to poor labor relations, quality control, and other issues. Now that you have read the chap-
ter and reflected back on the chapter’s opening World of International Management about
International Management in Action
Lessons in Global Leadership Development: The PWC Ulysses Program
PricewaterhouseCoopers (PwC), one of the “Final 4” global
accounting firms, has for several years sent top midcareer
talent to the developing world for eight-week service proj-
ects under its “Ulysses” Program. After the merger of Price
Waterhouse and Coopers Lybrand in 1998, the combined
firm decided it needed a new model for a global profes-
sional services organization. Executives recognized that
global problems were not increasing or decreasing, but
changing and reshaping, the way business is done. In
response, the firm created “Project Ulysses” in 2001, which
sends a number of emerging leaders each year to a devel-
oping nation for two and a half months to work on service
projects and programs. The purpose is not only to aid those
in need, but to develop leadership skills on an individual
level by taking executives out of their comfort zone, on a
team level by pairing two to three partners together from
different nations, and on the organizational level by creat-
ing stakeholder networks on a much broader level. For a
relatively modest investment—about $15,000 per person,
plus salaries—Ulysses both tests the talent and expands
the world view of the accounting firm’s future leaders. Since
the company started the program in 2000, it has attracted
the attention of Johnson & Johnson, Cisco Systems, and
other big companies considering their own programs.
The projects, which range from helping an ecotourism
collective in Belize to AIDS work in Namibia and organic
farming in Zambia, take the participants out of their com-
fort zone and force them to build upon their leadership
skills in a new and challenging environment. The benefit
of pairing partners from three different places is that they
draw on their own cultures to make decisions. As one
participant noted, “You realize that perhaps the way you
see things isn’t necessarily the best way.” In 2003, PwC
partner Tahir Ayub was assigned a consulting gig unlike
anything he had done before. His job was helping village
leaders in the Namibian outback grapple with their com-
munity’s growing AIDS crisis. Faced with language barri-
ers, cultural differences, and scant access to electricity,
Ayub, 39, and two colleagues had to scrap their Power-
Point presentations in favor of a more low-tech approach:
face-to-face discussion. The village chiefs learned that
they needed to garner community support for programs
to combat the disease, and Ayub learned an important
lesson as well: Technology isn’t always the answer. “You
better put your beliefs and biases to one side and figure
out new ways to look at things,” he said.
Although traditional business education and training
have historically focused on helping firms improve finan-
cial performance, increasingly, B-schools and training
programs are adding social responsibility to their cur-
riculum. Further, graduates are increasingly signaling
they want to work for firms with a positive reputation for
social responsibility and service. According to a Wall
Street Journal article, top corporate executives are now
pairing with MBA programs across the country to help
students gain a better understanding of responsible
global leadership. In fact, a recent study showed that 75
percent of Americans consider a company’s commitment
to social issues when deciding where to work, and that
six out of ten employees wish their companies did more
to help globally. According to Liz Maw, executive director
of Net Impact, a corporate nonprofit dedicated to social
responsibility, “The companies most involved in corpo-
rate social responsibility are the ones that have already
seen their bottom line and brand awareness increase.”
While results are hard to quantify, PwC is convinced
that the program works. All two dozen of the initial grad-
uates are still working at the company. Half of them have
been promoted, and most have new responsibilities. Just
as important, all 24 people say they have a stronger com-
mitment to PwC—in part because of the commitment the
firm made to them and in part because of their new vision
of the firm’s values. Says global managing partner Willem
Bröcker: “We get better partners from this exercise.” The
Ulysses Program is PwC’s answer to one of the biggest
challenges confronting professional services companies:
identifying and training up-and-coming leaders who can
find unconventional answers to intractable problems. By
tradition and necessity, new PwC leaders are nurtured
from within. With 8,000 partners, identifying those with
the necessary business savvy and relationship-building
skills isn’t easy. But just as the program gives partners a
new view of PwC, it also gives PwC a new view of them,
particularly their ability to hold up under pressure.
PwC says the program, now in its third cycle, gives
participants a broad, international perspective that’s cru-
cial for a company that does business around the world.
Traditional executive education programs turn out men
and women who have specific job skills but little famil-
iarity with issues outside their narrow specialty, accord-
ing to Douglas Ready, director of the International
Consortium for Executive Development Research. PwC
says Ulysses helps prepare participants for challenges
that go beyond the strict confines of accounting or con-
sulting and instills values such as community involve-
ment that are essential to success in any field.
Ulysses has also given PwC a very positive name in
the accounting and broader professional services com-
munity. The project has taught the partners to under-
stand risks more holistically, to consider all stakeholders
that are involved, and to realize that doing business is
not about one goal, but many.
Sources: Alina Dizik, “Sustainability Is a Growing Theme,” The Wall Street
Journal, March 4, 2010, http://online.wsj.com/article/SB1000142405274
8704541304575099514203847820.html?KEYWORDS=social+responsib
ility (accessed October 21, 2010); Global Giving Matters, “Pricewater-
houseCoopers’ Project Ulysses—Linking Global Leadership Training to a
Community Development,” Synergos, September/October 2004, www.
synergos.org/globalgivingmatters/features/0409ulysses.htm (accessed
October 21, 2010); Jessi Hempel and Seth Porges, “It Takes a Village—
and a Consultant; PricewaterhouseCoopers Tests Partners by Sending
Them to Work in Poor Nations,” Businessweek, September 6, 2004,
https://www.bloomberg.com/news/articles/2004-09-05/it-takes-a-village-
and-a-consultant (accessed October 21, 2010); Jessica Marquez, “Com-
panies Send Employees on Volunteer Projects Abroad to Cultivate
Leadership Skills,” Workforce Management, November 21, 2005,
pp. 50–51, www.workforce.com/2005/12/02/companies-send-employees-
on-volunteer-projects-abroad-to-cultivate-leadership-skills/ (accessed
October 21, 2010); Nicola M. Pless, Thomas Maak, and Günter K. Stahl,
“Developing Responsible Global Leaders through International Service
Learning Programs: The Ulysses Experience,” Academy of Management
Learning and Education 10, no. 2 (2011), pp. 237–260.
548 Part 4 Organizational Behavior and Human Resource Management
employee retention in India, answer the following questions: (1) What are the costs and
benefits of hiring home-, host-, and third-country nationals for overseas assignments?
(2) What skill sets are important for international assignments, and how can employees be
prepared for such assignments? (3) What are the implications of offshore outsourcing for
the management of human resources globally and in India in particular?
1. MNCs can use four basic sources for filling over-
seas positions: home-country nationals (expatriates),
host-country nationals, third-country nationals, and
inpatriates. The most common reason for using
home-country nationals, or expatriates, is to get the
overseas operation under way. Once this is done,
many MNCs turn the top management job over to a
host-country national who is familiar with the cul-
ture and language and who often commands a
lower salary than the home-country national. The
primary reason for using third-country nationals is
that these people have the necessary expertise for
the job. The use of inpatriates (a host-country or
third-country national assigned to the home office)
recognizes the need for diversity at the home office.
This movement builds a transnational core compe-
tency for MNCs. In addition, MNCs can subcon-
tract or outsource to take advantage of lower human
resource costs and increase flexibility.
2. Many criteria are used in selecting managers for
overseas assignments. Some of these include adapt-
ability, independence, self-reliance, physical and
emotional health, age, experience, education, knowl-
edge of the local language, motivation, the support
of spouse and children, and leadership.
3. Individuals who meet selection criteria are given
some form of screening. Some firms use psycholog-
ical testing, but this approach has lost popularity in
recent years. More commonly, candidates are given
interviews. Theoretical models that identify impor-
tant anticipatory and in-country dimensions of
adjustment offer help in effective selection.
4. Compensating expatriates can be a difficult problem
because there are many variables to consider. However,
most compensation packages are designed around five
common elements: base salary, benefits, allowances,
incentives, and taxes. Working within these elements,
the MNC will tailor the package to fit the specific situ-
ation. In doing so, there are five different approaches
that can be used: balance-sheet approach, localization,
lump-sum method, cafeteria approach, and regional
method. Whichever one (or combination) is used, the
package must be both cost-effective and fair.
5. A manager might be willing to take an international
assignment for a number of reasons: increased pay,
promotion potential, the opportunity for greater
responsibility, the chance to travel, and the ability to
use his or her talents and skills. Research shows that
most home countries prefer that the individual who
is selected to head the affiliate or subsidiary be a
local manager, even though this often does not occur.
6. At some time, most expatriates return home, usually
when their predetermined tour is over. Sometimes,
managers return because they want to leave early; at
other times, they return because of poor performance
on their part. In any event, readjustment problems
can arise back home, and the longer a manager has
been gone, the bigger the problems usually are.
Some firms are developing transition strategies to
help expatriates adjust to their new environments.
7. Training is the process of altering employee behav-
ior and attitudes to increase the probability of goal
attainment. Many expatriates need training before
(as well as during) their overseas stay. A number of
factors will influence a company’s approach to
training. One is the basic type of MNC: ethnocen-
tric, polycentric, regiocentric, or geocentric.
Another factor is the learning style of the trainees.
8. There are two primary reasons for training: organi-
zational and personal. Organizational reasons
include overcoming ethnocentrism, improving
communication, and validating the effectiveness
of training programs. Personal reasons include
improving the ability of expatriates to interact
locally and increasing the effectiveness of leader-
ship styles. There are two types of training pro-
grams: standard and tailor-made. Research shows
that small firms usually rely on standard programs
and larger MNCs tailor their training. Common
approaches to training include elements such as cul-
tural orientation, cultural assimilators, language
training, sensitivity training, and field experience.
9. A cultural assimilator is a programmed learning
approach that is designed to expose members of one
culture to some of the basic concepts, attitudes, role
perceptions, customs, and values of another. Assimi-
lators have been developed for many different cul-
tures. Their validity has resulted in the improved
effectiveness and satisfaction of those being trained
as compared with other training methods.
SUMMARY OF KEY POINTS
Chapter 14 Human Resource Selection and Development Across Cultures 549
KEY TERMS
adaptability screening, 521
balance-sheet approach, 530
cafeteria approach, 530
cultural assimilator, 544
ethnocentric MNC, 537
ethnocentrism, 539
expatriates, 513
geocentric MNC, 538
home-country nationals, 513
host-country nationals, 514
inpatriates, 515
international selection criteria, 518
learning, 538
localization, 530
lump-sum method, 530
polycentric MNC, 538
positive organizational behavior
(POB), 545
regiocentric MNC, 538
regional system, 530
repatriation, 533
repatriation agreements, 534
third-country nationals (TCNs), 514
training, 535
transition strategies, 534
validity, 545
REVIEW AND DISCUSSION QUESTIONS
1. A New York-based MNC is in the process of staff-
ing a subsidiary in New Delhi, India. Why would it
consider using expatriate managers in the unit?
Local managers? Third-country managers?
2. What selection criteria are most important in choos-
ing people for an overseas assignment? Identify and
describe the four that you judge to be of most uni-
versal importance, and defend your choice.
3. What are the major common elements in an expat’s
compensation package? Besides base pay, which
would be most important to you? Why?
4. Why are individuals motivated to accept interna-
tional assignments? Which of these motivations
would you rank as positive reasons? Which would
you regard as negative reasons?
5. Why do expatriates return early? What can MNCs
do to prevent this from happening? Identify and
discuss three steps they can take.
6. What kinds of problems do expatriates face when
returning home? Identify and describe four of the
most important. What can MNCs do to deal with
these repatriation problems effectively?
7. How do the following types of MNCs differ: ethno-
centric, polycentric, regiocentric, and geocentric?
Which type is most likely to provide international
management training to its people? Which is least
likely to provide international management training
to its people?
8. IBM is planning on sending three managers to its
Zurich office, two to Madrid, and two to Tokyo. None
of these individuals has any international experience.
Would you expect the company to use a standard train-
ing program or a tailor-made program for each group?
9. Zygen Inc., a medium-sized manufacturing firm, is
planning to enter into a joint venture in China.
Would training be of any value to those managers
who will be part of this venture? If so, what types
of training would you recommend?
10. Hofstadt & Hoerr, a German-based insurance firm, is
planning on expanding out of the EU and opening
offices in Chicago and Buenos Aires. How would a
cultural assimilator be of value in training the MNC’s
expatriates? Is the assimilator a valid training tool?
11. Ford is in the process of training managers for
overseas assignments. Would a global leadership
program be a useful approach? Why or why not?
12. Microsoft is weighing setting up an R&D facility in
India to develop new software applications. Should
it staff the new facility with Microsoft employees?
Indian employees? Or should it subcontract with an
Indian firm? Explain your answer and some of the
potential challenges in implementing it.
As seen in this chapter, the recruiting and selecting of
managers is critical to effective international manage-
ment. This is particularly true in the case of firms that
are expanding their international operations or currently
do business in a large number of countries. These
MNCs are continually having to replace managers who
are retiring or moving to other companies. Coca-Cola is
an excellent example. Go to the company’s website at
www.coke.com and look at the career opportunities that
it offers overseas. In particular, pay close attention to
current opportunities in Europe, Africa, and Asia. Read
what the company has to say, and then contact one of
the individuals whose e-mail address is provided.
Ask this company representative about the oppor-
tunities and challenges of working in that country or
geographic area. Then, using this information, coupled
INTERNET EXERCISE: COKE GOES WORLDWIDE
550 Part 4 Organizational Behavior and Human Resource Management
1. Ernst & Young, “Talent Trends in India, 2015:
People and Organization,” www.ey.com/Publication/
vwLUAssets/ey-talent-trends-in-india-2015/$FILE/
ey-talent-trends-in-india-2015 .
2. Ibid.
3. Shyamal Majumdar, “Retaining Talent: Are Com-
panies Doing Enough?” Business Standard, March
19, 2010, http://business.rediff.com/column/2010/
mar/19/guest-retaining-talent-are-companies-doing-
enough.htm.
4. “Stemming the Tide of Attrition in India: Keys to
Increasing Retention,” Executive Overview, Right
Management, Executive Summary of a paper by
Jonathan P. Doh, Steven A. Stumpf, Walter
Tymon, and Michael Haid, 2008.
5. Elena Groznaya, “Attrition and Motivation: Retain-
ing Staff in India,” tcWorld, July 2009, www.
tcworld.info/e-magazine/business-culture/article/
attrition-and-motivation-retaining-staff-in-india/.
6. “Stemming the Tide of Attrition in India.”
7. Ibid.
8. Ibid.
9. Ibid.
10. Ibid.
11. Ibid.
12. Ibid.
13. Ibid.
14. Ibid.
15. Ibid.
16. Elaine Appleton Grant, “How to Retain Talent in
India,” Synopsis of a paper by Jonathan P. Doh,
Steven A. Stumpf, Walter Tymon, and Michael
Haid, MIT Sloan Management Review 50, no. 1
(Fall 2008).
17. Ibid.
18. “How HR Contributes at Best Small and Midsize
Companies to Work For,” Human Resource Depart-
ment Management Report, August 2004, p. 2.
19. Ann Pomeroy, “Cooking Up Innovation,” HR
Magazine, November 2004, pp. 46–53.
20. Peter Coy and Jack Ewing, “Where Are All
the Workers?” Businessweek, April 9, 2007,
pp. 28–31.
21. Susan Cantrell, “The Work Force of One,” The
Wall Street Journal, June 16, 2007, p. R10.
22. Declan Mulkeen, “Reducing the Cost of Global
Mobility,” Communicaid, August 29, 2014, https://
www.communicaid.com/cross-cultural-training/
blog/reducing-the-cost-of-global-mobility/.
23. Also see Kenneth Groh and Mark Allen, “Global
Staffing: Are Expatriates the Only Answer?” HR
Focus, March 1998, pp. S1–S2.
24. Leslie Chang, “China’s Grads Find Jobs Scarce,”
The Wall Street Journal, June 22, 2004, p. A17.
25. Nick Forster, “Expatriates and the Impact of
Cross-Cultural Training,” Human Resource Man-
agement Journal 10, no. 3 (2000), pp. 63–78.
26. Bloomberg BNA, “HR Department Benchmarks
and Analysis 2015–2016,” October 2015.
27. Sulekha Nair, “Boom Time Again: Expats Make a
Beeline for India as Economy Reviving, Start-ups
Buzzing,” F. Business, July 3, 2015, www.firstpost.
com/business/boom-time-again-expats-make-a-
beeline-to-india-as-economy-reviving-start-ups-
buzzing-2322942.html.
28. Malika Richards, “U.S. Multinational Staffing
Practices and Implications for Subsidiary Perfor-
mance in the U.K. and Thailand,” Thunderbird
International Business Review, March–April 2001,
pp. 225–242.
29. Richard B. Peterson, Nancy K. Napier, and Won
Shul-Shim, “Expatriate Management: A Compari-
son of MNCs Across Four Parent Countries,”
Thunderbird International Business Review,
March–April 2000, p. 150.
30. Arvind V. Phatak, International Dimensions
of Management, 2nd ed. (Boston: PWS-Kent
Publishing, 1989), p. 106.
31. Cliff Edwards and Kenji Hall, “Remade in the
USA,” BusinessWeek, May 7, 2007, pp. 44–45.
32. Calvin Reynolds, “Strategic Employment of Third
Country Nationals,” HR Planning 20, no. 1
(1997), p. 38.
33. Michael G. Harvey and M. Ronald Buckley,
“Managing Inpatriates: Building a Global Core
Competency,” Journal of World Business 32, no. 1
(1997), p. 36.
ENDNOTES
with the chapter material, answer these questions: (1)
From what you have learned from the Coca-Cola
inquiry, what types of education or experience would
you need to be hired by the company? (2) What kinds
of international career opportunities does Coke offer?
(3) If you were hired by Coke, what type of financial
package could you expect? (4) In what areas of the
world is Coke focusing more of its attention? (5) What
kinds of management and leadership training programs
does Coke offer?
Chapter 14 Human Resource Selection and Development Across Cultures 551
47. HSBC Expat, Expat Explorer: Balancing Life
Abroad (2015), https://www.expatexplorer.hsbc.
com/survey/files/pdfs/overall-reports/2015/HSBC_
Expat_Explorer_2015_report .
48. Ibid.
49. Brian Friedman, “How to Move and Manage the
Best People around the World; An Assignment
Overseas Is Often Now Seen as a Vital Career
Move,” The Daily Telegraph, May 15, 2010,
p. 8.
50. Margaret A. Shaffer, David A. Harrison, K. Matthew
Gilley, and Dora M. Luk, “Struggling for Balance
amid Turbulence on International Assignments:
Work-Family Conflict, Support, and Commitment,”
Journal of Management 27 (2001), pp. 99–121.
51. Patricia C. Borstorff, Stanley G. Harris, Hubert S.
Field, and William F. Giles, “Who’ll Go? A
Review of Factors Associated with Employee
Willingness to Work Overseas,” Human Resource
Planning 20, no. 3 (1997), p. 38.
52. See Betty Jane Punnett, “Towards Effective Man-
agement of Expatriate Spouses,” Journal of World
Business 33, no. 3 (1997), pp. 243–256.
53. Howard Tu and Sherry E. Sullivan, “Preparing
Yourself for an International Assignment,” Busi-
ness Horizons, January–February 1994, p. 68.
54. “2015 Global Mobility Trends,” Brookfield Global
Relocation Services, http://globalmobilitytrends.
brookfieldgrs.com/#/collapse8?q=58.
55. Ibid.
56. Ibid.
57. James C. Baker and John M. Ivancevich, “The
Assignment of American Executives Abroad:
Systematic, Haphazard or Chaotic?” California
Management Review, Spring 1971, p. 41.
58. Jean E. Heller, “Criteria for Selecting an Interna-
tional Manager,” Personnel, May–June 1980, p. 53.
59. Rosalie L. Tung, “U.S. Multinationals: A Study of
Their Selection and Training Procedures for Over-
seas Assignments,” National Academy of Manage-
ment Proceedings (Atlanta, 1979), p. 65.
60. This section is based on J. Stewart Black, Mark
Mendenhall, and Gary Oddou, “Toward a Com-
prehensive Model of International Adjustment: An
Integration of Multiple Theoretical Perspectives,”
Academy of Management Review, April 1991,
pp. 291–317.
61. For more on this area, see Jaime Bonache,
Chris Brewster, and Vesa Suutari, “Expatriation:
A Developing Research Agenda,” Thunderbird
International Business Review, January–February
2001, pp. 3–20.
34. For some additional insights about inpatriates and
worldwide staffing, see Michael Harvey and
Milorad M. Novicevic, “Staffing Global Marketing
Positions: What We Don’t Know Can Make a
Difference,” Journal of World Business 35, no. 1
(2000), pp. 80–94.
35. Noam Scheiber, “As a Center for Outsourcing,
India Could Be Losing Its Edge,” New York
Times, May 9, 2004, p. 3.
36. Steve Lohr, “Evidence of High-Skill Work Going
Abroad,” New York Times, June 16, 2004, p. C2.
37. Kate Palmer, “BT Hires 1,000 UK Call-Centre
Staff in Pledge to Improve Poor Customer
Service,” The Telegraph, January 18, 2016,
www.telegraph.co.uk/finance/newsbysector/
mediatechnologyandtelecoms/telecoms/12105305/
BT-to-create-1000-UK-jobs-as-it-bolsters-call-
centres-amid-poor-service-levels.html.
38. “Shape Up,” The Economist, January 19, 2013,
www.economist.com/news/special-report/21569568-
offshored-jobs-return-rich-countries-must-prove-
they-have-what-it-takes-shape.
39. Arie Lewin and Vinay Couto, Next Generation
Offshoring: The Globalization of Innovation, 2006
Survey Report (Durham: Duke Center for Interna-
tional Business Education and Research, 2007),
pp. 7–10.
40. Ibid.
41. Winfred Arthur Jr. and Winston Bennett Jr., “The
International Assignee: The Relative Importance
of Factors Perceived to Contribute to Success,”
Personnel Psychology, Spring 1995, pp. 99–114.
42. Also see Michael G. Harvey, Milorad M. Novicevic,
and Cheri Speier, “An Innovative Global Manage-
ment Staffing System: A Competency-Based
Perspective,” Human Resource Management,
Winter 2000, pp. 381–394.
43. Peterson, Napier, and Shul-Shim, “Expatriate
Management,” p. 151.
44. Juan Sanchez, Paul Spector, and Cary Cooper,
“Adapting to a Boundaryless World: A Develop-
mental Expatriate Model,” Academy of Manage-
ment Executive 14, no. 2 (2000), pp. 96–106.
45. Jan Selmar, “Effects of Coping Strategies on
Sociocultural and Psychological Adjustment of
Western Expatriate Managers in the PRC,” Journal
of World Business 34, no. 1 (1999), pp. 41–51.
46. Paula M. Caligiuri, “Selecting Expatriates for Per-
sonality Characteristics: A Moderating Effect of
Personality on the Relationship between Host
National Contact and Cross-Cultural Adjustment,”
Management International Review 40, no. 1
(2000), pp. 61–80.
552 Part 4 Organizational Behavior and Human Resource Management
81. Nancy J. Adler, International Dimensions of Orga-
nizational Behavior, 2nd ed. (Boston: PWS-Kent
Publishing, 1991), p. 236.
82. Howard W. French, “Japan Unsettles Returnees,
Who Yearn to Leave Again,” New York Times,
May 2, 2000, p. A12.
83. J. Stewart Black, “Coming Home: The Relation-
ship of Expatriate Expectations with Repatriate
Adjustment and Job Performance,” Human Rela-
tions 45, no. 2 (1992), p. 188.
84. Wong and Law, “Managing Localization of
Human Resources,” p. 36.
85. Nancy K. Napier and Richard B. Peterson,
“Expatriate Reentry: What Do Expatriates Have
to Say?” Human Resource Planning 14, no. 1
(1991), pp. 19–28.
86. Charlene Marmer Solomon, “Repatriation: Up,
Down or Out?” Personnel Journal, January 1995,
p. 32.
87. Mitchell R. Hammer, William Hart, and Randall
Rogan, “Can You Go Home Again? An Analysis
of the Repatriation of Corporate Managers and
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no. 1 (1998), p. 81.
88. Karen Roberts, Ellen Ernst Kossek, and Cynthia
Ozeki, “Managing the Global Workforce: Chal-
lenges and Strategies,” Academy of Management
Executive, November 1998, pp. 93–106.
89. See also Mark C. Blino and Daniel C. Feldman,
“Increasing the Skill Utilization of Expatriates,”
Human Resource Management 39, no. 4 (Winter
2000), pp. 367–379.
90. See also Ben L. Kedia and Ananda Mukherji,
“Global Managers: Developing a Mindset for
Global Competitiveness,” Journal of World
Business 34, no. 3 (1999), pp. 230–251.
91. Robert C. Maddox and Douglas Short, “The Cul-
tural Integrator,” Business Horizons, November–
December 1988, pp. 57–59.
92. Michael Hickins, “Creating a Global Team,”
Management Review, September 1998, p. 6.
93. Charlene Marmer Solomon, “Global Operations
Demand That HR Rethink Diversity,” Personnel
Journal, July 1994, p. 50.
94. Paul R. Sparrow and Pawan S. Budhwar,
“Competition and Change: Mapping the Indian
HRM Recipe Against Worldwide Patterns,” Jour-
nal of World Business 32, no. 3 (1997), p. 231.
95. See also Wong and Law, “Managing Localization
of Human Resources,” pp. 32–33.
96. Bodil Jones, “What Future European Recruits
Want,” Management Review, January 1998, p. 6.
62. Crystal I. C. Farh, Kathryn M. Bartol, Debra L.
Shapiro, and Jiseon Shin, “Networking Abroad: A
Process Model of How Expatriates Form Support
Ties to Facilitate Adjustment,” Academy of Man-
agement Review 35, no. 3 (2010), pp. 434–454.
63. Iain McCormick and Tony Chapman, “Executive
Relocation: Personal and Organizational Tactics,”
in Managing Across Cultures: Issues and Perspec-
tives, ed. Pat Joynt and Malcolm Warner (London:
International Thomson Business Press, 1996),
pp. 326–337.
64. Calvin Reynolds, “Expatriate Compensation in
Historical Perspective,” Journal of World Business
32, no. 2 (1997), p. 127.
65. Cathy Loose, “Home and Away,” China Staff 16,
no. 3, pp. 24–26.
66. Elaine K. Bailey, “International Compensation,” in
Global Perspectives of Human Resource Manage-
ment, ed. Oded Shenkar (Englewood Cliffs, NJ:
Prentice Hall, 1995), p. 148.
67. Peterson, Napier, and Shul-Shim, “Expatriate
Management,” p. 155.
68. See Dennis R. Briscoe, Randall S. Schuler, and
Lisbeth Claus, International Human Resource
Management (Global HRM) (Routledge, 2008).
69. See also Ute Krudewagen and Susan Eandi,
“Designing Employee Policies for an International
Workforce,” Workspan 53, no. 6 (2010), p. 74.
70. Cheryl Spielman and Gerald A. Tammaro, “8 Action
Items for Expatriate Planning in an Economic
Downturn,” Workspan 52, no. 10 (2009), p. 58.
71. “Pay Variations in Asia,” HR Magazine, 2010, p. 6.
72. David Sirota and J. Michael Greenwood, “Under-
stand Your Overseas Workforce,” Harvard Busi-
ness Review, January–February 1971, pp. 53–60.
73. Ingemar Torbiorn, Living Abroad (New York:
Wiley, 1982), p. 127.
74. Charles Vance and Yongsun Paik, “One Size Fits
All in Expatriate Pre-departure Training? Compar-
ing the Host Country Voices of Mexican, Indone-
sian and U.S. Workers,” Journal of Management
Development 21, no. 7–8 (2002), pp. 557–572.
75. Chi-Sum Wong and Kenneth S. Law, “Managing
Localization of Human Resources in the PRC: A
Practical Model,” Journal of World Business 34,
no. 1 (1999), pp. 28–29.
76. “2015 Global Mobility Trends.”
77. Ibid.
78. Ibid.
79. Ibid.
80. Jobert E. Abueva, “Return of the Native Execu-
tive,” New York Times, May 17, 2000, p. C1.
Chapter 14 Human Resource Selection and Development Across Cultures 553
110. See Wong and Law, “Managing Localization of
Human Resources,” pp. 32–33.
111. See Andrew Sergeant and Stephen Frenkel, “Man-
aging People in China: Perceptions of Expatriate
Managers,” Journal of World Business 33, no. 1
(1998), pp. 17–34.
112. Michael J. Marquardt and Dean W. Engel, Global
Human Resource Management (Englewood Cliffs,
NJ: Prentice Hall, 1995), p. 44.
113. Ingmar Bjorkman and Yuan Lu, “A Corporate Per-
spective on the Management of Human Resources
in China,” Journal of World Business 34, no. 1
(1999), pp. 20–21.
114. Fred E. Fiedler, Terence Mitchell, and Harry C.
Triandis, “The Culture Assimilator: An Approach
to Cross-Cultural Training,” Journal of Applied
Psychology, April 1971, p. 97.
115. Fred Luthans, “Positive Organizational Behavior:
Developing and Managing Psychological
Strengths,” Academy of Management Executive 16,
no. 1 (2002), p. 59.
116. Fred Luthans and Carolyn M. Youssef, “Emerging
Positive Organizational Behavior,” Journal of
Management 33, no. 3 (June 2007), pp. 321–349.
117. Ibid.
118. “What Are Companies’ Top Concerns for Relocat-
ing Employees over the Next Decade?” Business
Wire, June 28, 2010.
119. CIA, “Russia,” The World Factbook (2016),
https://www.cia.gov/library/publications/the-world-
factbook/geos/rs.html.
120. Ibid.
121. World Bank, “Russian Federation,” World Devel-
opment Indicators (2016), http://data.worldbank.
org/country/russian-federation.
122. Kira Zavyalova, “Russia GDP Seen Down 3.8 Per-
cent in 2015, Minus 0.3 Percent in 2016,” Reuters,
December 24, 2015, www.reuters.com/article/us-
russia-economy-idUSKBN0U70ZO20151224.
123. “From Bad to Worse,” The Economist, April 16,
2014, www.economist.com/news/business/
21601006-domestic-and-foreign-firms-wonder-how-
serious-things-might-get-bad-worse.
124. Stephanie Baker, “BP’s Dudley Relives Russian
Nightmare Alongside Rosneft Boss,” Bloomberg,
December 18, 2014, www.bloomberg.com/news/
articles/2014-12-18/bp-s-dudley-relives-russian-
nightmare-alongside-rosneft-boss.
97. Filiz Tabak, Janet Stern Solomon, and Christine
Nielsen, “Managerial Success: A Profile of Future
Managers in China,” SAM Advanced Management
Journal, Autumn 1998, pp. 18–26.
98. Also see Allan Bird, Sully Taylor, and Schon
Beechler, “A Typology of International Human
Resource Management in Japanese Multinational
Corporations: Organizational Implications,” Human
Resource Management, Summer 1998, pp. 159–176.
99. Fred Luthans, Organizational Behavior, 10th ed.
(New York: McGraw-Hill/Irwin, 2004), chapter 16.
100. Noel M. Tichy and Eli Cohen, “The Teaching
Organization,” Training and Development Journal,
July 1998, p. 27.
101. Peter Prud’homme van Reine and Fons Trompe-
naars, “Invited Reaction: Developing Expatriates for
the Asia-Pacific Region,” Human Resource Devel-
opment Quarterly 11, no. 3 (Fall 2000), p. 238.
102. J. Hayes and C. W. Allinson, “Cultural Differences
in the Learning Styles of Managers,” Management
International Review 28, no. 3 (1988), p. 76.
103. See, for example, Jennifer Smith, “Southeast
Asia’s Search for Managers,” Management Review,
June 1998, p. 9.
104. 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.
105. Allan Bird and Schon Beechler, “Links between
Business Strategy and Human Resource Manage-
ment Strategy in U.S.-Based Japanese Subsidiaries:
An Empirical Investigation,” Journal of Interna-
tional Business Studies, First Quarter 1995, p. 40.
106. Linda K. Stroh and Paula M. Caligiuri, “Increas-
ing Global Competitiveness through Effective Peo-
ple Management,” Journal of World Business 33,
no. 1 (1998), p. 10.
107. For more on this, see Tomoko Yoshida and
Richard W. Breslin, “Intercultural Skills and
Recommended Behaviors,” in Global Perspectives
of Human Resource Management, ed. Shenkar,
pp. 112–131.
108. Alan M. Barrett, “Training and Development of
Expatriates and Home Country Nationals,”
in Global Perspectives of Human Resource
Management, ed. Shenkar, p. 135.
109. Yukimo Ono, “Japanese Firms Don’t Let Masters
Rule,” The Wall Street Journal, May 4, 1992, p. B1.
In the International
Spotlight
554
its days as a purely communist society, the state is still
deeply intertwined in all aspects of the economy. After
the Crimea invasion, the United States imposed sanctions
on dealings with its own companies and certain Russian
individuals and companies. These sanctions have added
to the already-deteriorating consumer confidence and
have prompted Russia to redirect its efforts to Asia to
attract foreign investment.123
You Be the International Management
Consultant
Bob Dudley, currently British Petroleum’s CEO, had to
flee from Russia in 2008 when he headed a joint venture
between BP and a group of Russian billionaires. During
that time, he faced a number of lawsuits from other busi-
nessmen in the oil industry and tax probes from the gov-
ernment. Now, as BP CEO, he is watching his company’s
bet in Russia suffer from declining oil prices and from the
U.S.-imposed sanctions. BP is the largest foreign investor
in the country’s oil industry and holds a 20 percent stake
in a state-owned oil company. Surrounding all of these
factors affecting BP’s stake is also the threat that the gov-
ernment may impose capital controls on state-owned oil
companies—and therefore restricting the dividends that
BP could receive from its investment.124
Questions
1. Given the Russian government’s history of interfer-
ing with private business, would you make as large
of an investment in Russia as BP has done?
2. What are the pros and cons of this investment?
3. Does the fact that BP’s investment is suffering from
Ukraine-related sanctions affect your decision to
invest in the country in any sense?
Straddling the European and Asian continents, Russia
stretches from Belarus in the west to the Pacific Ocean in
the east. Russia is rich in various natural resources includ-
ing oil, natural gas, coal, strategic minerals, reserves of
rare earth elements, and timber. For the last 15 years, the
Russian economy has been disproportionately dependent
on oil and natural gas.119
Russia’s population is currently estimated at over
142 million people. Over three-quarters of the residents are
of Russian descent, though there are sizable populations of
Tatars, Ukrainians, and Bashkirs as well. Russia’s popula-
tion growth is fairly stable. Organized religion is not heavily
practiced, with just 15–20 percent identifying as Russian
Orthodox, 10–15 percent identifying as Muslim, and
approximately 2 percent identifying as Christian. The popu-
lation is concentrated in the age group of 25–54 years old,
representing slightly less than half of the total population.120
Russia’s estimated GDP in 2014 was US$1.861 trillion.121
The Russian economy contracted in 2014 and 2015, and
strong growth is not predicted to return until energy prices
increase.122 Russia’s economic issues go beyond just the
decline in oil prices. The government is one of the biggest
barriers to any sustainable growth to the Russian economy.
Russia’s legal system is largely inefficient and difficult to
maneuver, and the government itself becomes intertwined
in the private sector through its closely managed state-
owned enterprises and varying levels of corruption.
Worsening its already sluggish economy, Russia made a
large and costly financial commitment to its annexation
of Crimea in 2014. This action resulted in a further
worsening of already-strained relations with the West,
including the United States and the European Union.
Russia’s government is a federation. Vladimir Putin
has held most executive power since his first presidential
election in 2000. While Russia has certainly evolved from
Russia
555
culture, which he cultivated in all aspects of IKEA’s busi-
ness model. His openness to change, his drive for innova-
tion, and his focus on his stakeholders have made IKEA
what it is today: the largest and most successful furniture
retailer in the world.
Growth and Expansion
The first IKEA store opened in Almhult, Sweden, in
1958. In 1963 IKEA opened its first international store in
Oslo, Norway, and two years after that opened a flagship
store near Stockholm. In 1973 IKEA spread to mainland
Europe, opening stores in Switzerland and Germany.
Germany, to this day, remains IKEA’s largest market. Fol-
lowing these markets, a store was opened in Australia in
1977 and in the Netherlands in 1979. The first store in
the United States did not arrive until 1985, which is sur-
prising given IKEA’s record-breaking $5 billion in reve-
nue in the U.S. in 2015. The U.S. opening was quickly
followed by the first one in the United Kingdom. See
Table 1 for a more detailed timeline of IKEA’s expansion.
IKEA now operates over 384 stores in 48 countries,
with 155,000 employees as of 2016. The fast growth was
primarily organic, with IKEA maintaining full control
over the company, as it still does today. Several “business
format franchises” currently exist, where local entrepre-
neurs took on the capital investment and the management,
and left the merchandising and marketing to IKEA. Since
1982, IKEA has been owned by a foundation, and remain-
ing private is a keystone of success to ensure that the
culture and values remain intact.
Specifically, the Netherlands-based company Inter
IKEA Systems BV owns the franchise, and Ingka holding
company, of which Kamprad is the senior advisor, oper-
ates over 300 stores worldwide. In addition, a separate
company, Ikano, manages the Kamprad fortune and owns
several other IKEA stores in its own right.
IKEA’s success cannot be ignored in today’s turbulent
market, with IKEA being commended for entering and
remaining in traditionally difficult markets. What keeps
the IKEA group going strong is its corporate initiatives
embedded in Swedish heritage. These corporate initiatives
are visually apparent throughout the stores and have been
considered a “significant force of competitive advantage.”2
The Swedish lifestyle incorporates a “fresh, healthy way
of life” with bright colors and textiles even though Sweden
does not see a great amount of sunlight. The high quality,
stress-free furniture and the caring employees represent a
In September 2015, Swedish furniture retailer IKEA
announced record revenue of $36 billion for 2015 and an
8.9 percent increase in profit over 2014. Despite many
highly publicized setbacks over the years, including a
scandal regarding use of horse meat in its iconic meatballs
in 2013 and accusations of forced labor in the 1980s,
IKEA continues to prosper in markets around the world.
Since expanding outside of Europe over 30 years ago,
IKEA has attempted to balance its unique approach to
both the retail shopping experience and its own expansion
as it has sought to achieve a reputation for social respon-
sibility and sustainability.
IKEA’s Humble Beginnings
The idea of IKEA began in 1935 in the small province
of southern Sweden, Smaland, where the people are
known for their hard work and for making the most
from very little means. Ingvar Kamprad, a nine-year-
old boy with a strong entrepreneurial spirit, began by
selling fish and Christmas decorations to those in the
local community. By age 17, using a gift of money
from his father, Kamprad established the company
IKEA. Kamprad created the name IKEA by combining
his initials, the initials of his hometown farm, and the
initials of a nearby village. During that period he sold
everything from pens to gadgets to stockings, and
within a short time he was able to put together a mail-
order catalog. By 1947 Kamprad decided to introduce
home furnishings to the product mix and by 1951 elim-
inated all other products lines, focusing solely on the
home furniture market.
Kamprad built his empire on the foundation of offering
a “wide range of home furnishings of good design and
functionality at a price low enough to be affordable to
most people.”1 With this idea in hand, he set out to build
a business that met the needs of the Swedish people,
showing no differentiation between rich and poor.
Around this time, he was seeing a great deal of pres-
sure from other furniture providers in his direct market.
In 1956, with his suppliers facing pressure to boycott due
to increased competition, Kamprad decided to design his
own furniture and have a manufacturer produce it. This
seemingly small decision led IKEA to offer low prices
and efficient packaging, which are still the capstones of
the business today.
It is universally believed that IKEA’s growth and suc-
cess are a direct result of Kamprad’s vision, values, and
Brief Integrative Case 4.1
IKEA’s Global Renovations
556 Part 4 Organizational Behavior and Human Resource Management
children’s playgrounds as well as wheelchairs for the dis-
abled.”4 In addition, a receptionist’s desk holds catalogs,
tape measures, and pens and pencils, and a wide range of
staff members are always throughout the store to aid any
customer in need of help.
One of the biggest reasons for IKEA’s success on a
global level has been its ability to enter new international
markets yet keep its core values and brand image consistent.
Swedish tradition where “rich and poor alike were well
looked after.”3 Food stands with Swedish snacks are prom-
inent in every store. Also, the do-it-yourself requirement of
customers to perform some of the work by putting together
and/or transporting the furniture facilitates low prices.
Every IKEA store is built fundamentally similar, but
each has a distinct local flare. Within any IKEA there are
“free pushchairs, supervised childcare and sometimes
Table 1 Timeline of Major Events in IKEA’s History
1926 Founder Ingvar Kamprad is born in Smaland, Sweden.
1931 Kamprad begins selling matches to nearby neighbors.
1933–1935 Kamprad uses his bicycle to expand territory, and begins selling flower seeds, greeting cards, Christmas tree
decorations.
1943 Using money from his father, Kamprad founds IKEA, selling pens, wallets, picture frames, table runners,
watches, jewelry, and nylon stockings.
1945 First IKEA advertisement is in a local newspaper.
1948 IKEA begins selling furniture.
1951 The first IKEA catalog is published and Kamprad decides to focus solely on selling furniture.
1953 First showroom opens in Almhult, Sweden.
1956 IKEA decides to design its own furniture and flat pack it for self-assembly.
1958 First IKEA opens in Sweden.
1960 First IKEA restaurant opens at the Almhult location.
1963 IKEA enters Oslo, Norway.
1969 IKEA enters Copenhagen, Denmark.
1973 IKEA enters Zurich, Switzerland.
1975 IKEA enters Sydney, Australia.
1976 IKEA enters Vancouver, Canada.
1977 IKEA enters Vienna, Austria.
1979 IKEA enters Rotterdam, Netherlands.
1981 IKEA enters Paris, France.
1982 The IKEA Group is formed.
1984 IKEA enters Brussels, Belgium.
1985 IKEA enters Philadelphia, USA.
1986 A new president and CEO, Anders Moberg, takes over.
1987 IKEA enters Manchester, UK.
1989 IKEA enters Milan, Italy.
1990 The IKEA Group develops its first environmental policy.
1990 IKEA enters Budapest, Hungary.
1991 IKEA enters Prague, Czech Republic, and Poznan, Poland.
1993 IKEA Group becomes a member of the global forest certification organization Forest Stewardship Council (FSC).
1996 IKEA enters Madrid, Spain.
1997 Global website is launched.
1997 IKEA’s sustainable approach to shipping, titled “IKEA, Transport and the Environment,” is created.
1998 IKEA enters Shanghai, China.
1999 New president and CEO, Anders Dahlvig, is named.
2000 IKEA enters Moscow, Russia, Kamprad’s “last big hobby.”
2000 IKEA code of conduct, IWAY, is launched.
2000 Online shopping begins.
June 2004 IKEA enters Lisbon, Portugal.
July 2004 The 200th store opens.
December 2004 Opening ceremonies in Moscow are cancelled due to protracted disputes with government over corruption.
May 2006 IKEA enters Tokyo, Japan.
January 2006 IKEA Food is launched.
June 2009 IKEA halts further investment in Russia.
October 2012 IKEA is criticized for removing women from Saudi Arabia ads.
November 2012 IKEA publicly apologizes for forced labor practices in East Germany 25–30 years prior.
February 2013 IKEA is under attack for horsemeat found in European meatballs.
March 2013 IKEA now admits to contamination of chocolate cake in China.
March 2013 IKEA announces future partnership with Marriott for budget hotel chains in Europe.
July 2015 IKEA issues a warning regarding its popular “Malm” line of dressers after it is revealed that dressers had a
tendency to tip over, killing two infants.
September 2015 IKEA announces record-high global revenue of US$35.7 billion for the fiscal year.
Brief Integrative Case 4.1 IKEA’s Global Renovations 557
Working together was added to IKEA’s values in 1956
when the furniture was recreated for self-assembly by cus-
tomers. IKEA even released this statement in 1999: “You
(the customer) do your part. We (IKEA) do our part.
Together we save money.”8 It is very representative of its
belief to work together in every aspect of the business and
help each other along the way.
According to Tarnovskaya et al., the vision, values, and
culture, taken together with systems and networks, form
the “value proposition for customers.”9 In other words,
how these values permeate into the business will be
apparent to customers, allowing them to form their own
opinion on the brand. The customers and stakeholders of
IKEA, therefore, ultimately define the brand essence.
Corporate brand is a construct of “intangible nature,”
built through relationships, perceptions, and behaviors. It
involves all stakeholders, including “customers, competi-
tors, employees, and other business actors.”10 By taking
the values created by Ingvar Kamprad years ago and
embedding them in all company stakeholders, IKEA has
developed strong corporate brand values that have led
them to success both domestically and internationally.
Internationalization Strategies
As the number of stakeholders increases, especially across
country borders, the more difficult it is to maintain a uni-
form brand image and goals. IKEA has found success
when expanding internationally by staying consistent with
the global values described while still allowing some
room for a unique local flare.
“Employees become the ambassadors of the brand val-
ues,” as they are the salesmen of the firm. If employees
do not believe in the values and live them, the customers
surely won’t either. IKEA succeeds by bringing in a staff
of experienced IKEA employees, traditionally Swedish, to
train and reshape the culture in each new market. For
instance, IKEA trains all new staff members on the core
competencies seen as most important to support brand
vision and values, and the success of this lies not only in
training, but also in recruitment.
An IKEA HR corporate manager was quoted as saying,
“Our goal is to employ co-workers who understand and
embrace our core values and will reflect and reinforce
those.”11 By focusing heavily on the recruitment process,
IKEA is able to ensure it hires the right type of employee
who can potentially change his or her own personal tra-
ditional values and become a believer and salesperson of
the IKEA brand. Edvardsson et al. even argued that values
are coproduced with customers, and given that employees
are communicating the brand to the customer, communi-
cation becomes a value in itself.12
Another important stakeholder that plays a strong role
in internationalization is the supplier. The global supplier
plays a large role because it needs to act as a firm base
for the company when entering new markets, to continually
This is something that other companies have not been able
to tackle as successfully, and a brief look into IKEA’s
international strategy will provide a strong understanding
of why the company has been so successful with global
expansion while at the same time maintaining a positive
corporate image.
Global Expansion
IKEA is a unique case, not only because its founder wrote
a vision and a set of core values over 60 years ago that are
still in use today, but also because the founder is still a part
of everyday management. Ingvar Kamprad, now Sweden’s
richest man at over 90 years old, created these core values
that have driven business growth, shaped culture, and ulti-
mately built a brand image that has propelled IKEA to huge
success. In fact, some believe that the culture, embedded
deep in every store, transcends the actual products.
Vision, Core Values, Brand
Kamprad began with his vision to offer “a wide range of
well-designed, functional home furnishing products at prices
so low that as many people as possible will be able to afford
them.”5 From this vision came a set of corporate values that
are still followed today. The three defining values that drive
operations to this day are “common sense and simplicity,”
“dare to be different,” and “working together.”6
Common sense and simplicity, created as a value in
1943, follows the belief that “complicated rules paralyze!”
The principle that simplicity prevails both internally and
externally has been a major driving force in operations
since IKEA’s inception. Simplicity can be seen in large
warehouse stores; in interactions between management,
suppliers, and customers; and in cost cutting.
Cost cutting is seen throughout the business, especially
at the management level. One will not find management
flying first class or staying in luxury hotels. Cost-saving
techniques are seen at every level, allowing IKEA to not
just verbalize its commitment to low prices, but to physi-
cally have significantly lower prices than the competition.
Dare to be different, also created in 1943, is about
always finding a new path by asking the question, “why?”
By constantly questioning the status quo, IKEA has found
success in innovation and in its ability to continually
change and evolve. For instance, Ingvar Kamprad, when
conceiving IKEA, asked himself, “Why must well-
designed furniture always be so expensive? Why do the
most famous designers always fail to reach the majority
of people with their ideas?”7
That simple question has led IKEA to create what it is
known for today, and will continue to guide the company
moving forward. Kamprad believes that it is more difficult
now than ever before to find new ways to solve problems
and, in the face of strong competition, will allow IKEA
to differentiate even further from the competition.
558 Part 4 Organizational Behavior and Human Resource Management
program, but more to formalize this synergy through the
sharing of an ethical code. A code whose purpose is not only
practical in terms of production, but also symbolic of the
ability of the Swedish corporation to use its brand as a means
to ensure the work of all those with whom it collaborates.”18
The goal is to limit manpower and trips by using flat-
packs, and ultimately limit CO2 emissions through decreased
travel. In 2001, with 170 carriers, IKEA asked its suppliers
to meet certain requirements—“. . . IKEA recommended
they update transport vehicles to more modern models. The
company also required a switch to less polluting fuels as well
as the establishment of environmental protection policies and
action plans to control pollution.”19 By 2010, results in Italy,
for example, showed a decrease from 75 percent to 65 per-
cent of road transport as well as CO2 emissions reductions.
According to chief sustainability officer Steve Howard,
IKEA has also installed 700,000 solar panels across its
stores as of 2016 and plans to invest US$600 million more
into renewable energy for its stores by 2020. IKEA also
now owns wind farms in six countries and has committed
to use 100 percent renewable energy sources by 2020.20
IKEA’s dedication to the environment and strong net-
work of stakeholders has been yet another point of success
when entering international markets. A look into a few inter-
nationalization examples will provide further information
on IKEA’s global practices.
IKEA’s Internationalization Journey
China Entry and Expansion
IKEA entered China in 1998 and moved slower than it had
in other locations. By 2006, it had opened three stores, and
there were a total of 19 stores by 2016. The Beijing location,
which opened in 2006, has been tagged as IKEA’s largest-
volume store globally with over 6 million visitors annually.
IKEA originally entered China as a joint venture with
the Chinese government. In 2004, China entered the
World Trade Organization and, as a result, the third loca-
tion in Quangzhou was able to be wholly owned by IKEA,
as well as all subsequent openings.
Asia has been a difficult market for IKEA, notably
because of the extreme cultural differences between Asia and
Sweden. It has not been an easy road for IKEA, yet even in
difficult times, Asia cannot be ignored given its sheer size.
Asia makes up 30 percent of IKEA’s sourcing, and the
large population results in daily visitors, for instance, on
a Saturday in Beijing equaling the number of weekly
visitors to a store in the West. The size and population,
though, also come at a price for the company that created
a successful business based on principles of standardization
with local adaptation.
China is vastly different from all Western markets in
size, culture, and tastes, and has forced IKEA to alter its
marketing strategies to meet demand. The core strategy of
the company is to offer low-cost, high-quality furniture,
support IKEA in order to avoid the necessity of constantly
forming new relationships. Just as important, though, is
the need for local suppliers, who are very beneficial and
most often necessary within each market, but who typi-
cally hold views contradictory to Swedish values.
In 2000, IKEA created a code called “The IKEA Way,”
or “IWAY,” that puts forth standards of acceptable work-
ing conditions for suppliers. The code touches on many
aspects such as child labor, forestry, and corruption, with
the main goal to make “sustainable development the core
business value.”13
With nearly 1,000 suppliers in 50 countries, IKEA
focuses on long-term relationships with suppliers who not
only produce low-cost, high-quality goods, but who posi-
tively impact working conditions, the commodities, and
the environment as well. “On a global scale, IKEA has
more than 1,000 employees involved in purchasing. Pur-
chasing is divided into 16 regional ‘trading areas,’ encom-
passing 43 trading service offices in 33 countries.”14
Every supplier is chosen based on his or her ability to
meet predetermined standards set forth in the IWAY,
focusing specifically around management style, financial
situation, sourcing of materials, equipment, impact on the
environment, and location. The IWAY is made up of
19 areas containing over 90 issues that must be met. It is
revised every two years and IKEA has a staff of internal
auditors selected to research the suppliers’ ability to meet
the IWAY requirements. Once a supplier makes it to the
final stage of approval, goals and plans are set in place to
further improve working conditions.
When entering a new market, IKEA chooses and trains
local suppliers similarly to its processes for recruiting and
hiring employees. For instance, when entering Russia,
IKEA’s strategy was to build a local supplier base through
“active cooperation in the Russian wood indus-
try.”15 IKEA’s proactive strategy was difficult, given that
IKEA bases its strategy for long-term commitments on
feelings of trust, which was very uncommon for Russians,
who “operate under great uncertainty and are reluctant to
enter into long-term commitments.”16 However, IKEA
took the time to understand the Russian positions and
invested heavily to change their opinions and behaviors.
Global expansion has proven historically difficult, yet
IKEA has found a way to not only balance the entire cus-
tomer experience, but also achieve a reputation for social
responsibility and sustainability in the process. One of its
greatest impacts thus far has been on the environment. In
1997, before the IWAY was even finalized, IKEA sought to
increase the efficiency of transportation by writing “IKEA,
transport and the environment.”17 Its purpose was to limit
pollution from travel and strategically place all stakeholders
geographically. Based on responses gathered by a University
of Bari study, 60 percent of stakeholders lived less than
20 km from the store. According to one author, “IKEA’s
intuition was not so much to involve some vendors in this
Brief Integrative Case 4.1 IKEA’s Global Renovations 559
refusing to abandon the country IKEA worked so hard to
enter. This dedication created a strong outlook among the
Russian population. However, IKEA’s challenges in Russia
did not diminish following this symbol of perseverance.
After entering Russia in 2000, IKEA invested $4 bil-
lion in ten years. This amount would seem to be a plan
that would pay in dividends, when looking at the original
statistics, but, according to Kamprad, IKEA “had been
‘cheated’ out of $190 million” due to the rampant corrup-
tion running through Russia. According to the 2015 Cor-
ruption Perception Index, Russia ranked 119th out of 167
countries as the most corrupt, whereas Sweden ranked
3rd21. In addition, Transparency International’s most
recent Bribe Payer Index ranked Russia last out of the
28 countries evaluated, making it the most likely place for
bribes to be paid out of the largest economies globally22.
What is a company dedicated to fair business practices
supposed to do in an opportunistic market flooded with
corruption? IKEA played fair, and dealt with blow after
blow from the Russian government. In 2004, the opening
ceremonies of a new store in Moscow were cancelled at
the last minute due to the location being too near a gas
pipeline. Following that, in 2007, the company planned
on opening a Samara, Russia, location, which a year and
a half later still remained closed.
In June 2009, IKEA announced it would suspend all
further investment in the country due to the troubles it
previously faced with the government. And in 2010, the
company announced that two expatriate executives were
fired for taking part in bribes involving the Russian utility
company, Lenenergo, in the prior year.
IKEA took a great deal of heat for taking bribes during
an anticorruption campaign put forth by the company dur-
ing the Russian turbulence. Although it is never accept-
able to participate in corruption in any way, even turning
a blind eye to it, anticorruption experts were quoted as
saying: “How to reconcile tough antibribery corporate
policies back home with the corrupt rules of the game in
Russia is a nigh-impossible task.”23
It has been pointed out that, given IKEA’s role as one
of Russia’s largest foreign investors, the fact that the com-
pany has always previously performed business ethically
as proven by Sweden’s place on the Corruption Perception
Index shows just how difficult it is to perform business,
and perform it well, in Russia.
Although IKEA is driven by a positive social mission
and proactively seeks out stakeholders who support its
core values, it does not always work out ideally. IKEA has
recently been in the negative media spotlight as a result of
a few cases that go against its code of conduct. It is impor-
tant to mention, though, that IKEA was not acting in haste,
but rather these examples should highlight why the com-
pany must stay on its toes in the midst of ubiquitous infor-
mation, social networks, and media and governments eager
to take advantage of companies in general.
meaning the cost must be low in comparison to other fur-
niture providers in the country. Other businesses in China,
though, are traditionally providing the lowest cost options.
Therefore, IKEA, faced with extreme competition and copy-
cats, had to alter its emphasis to the higher-income popula-
tion, who see its furniture as more of a luxury purchase.
IKEA has also seen challenges in the open-showroom-
selling environment, which is designed to allow customers
to envision the design of a room and touch the furniture.
The Chinese are not accustomed to this and view it as a
hangout. Customers can often be found reading, lounging,
and napping on the furniture, or gathering around looking
for freebies. In fact, during a 2015 heat wave, IKEA had
to issue a formal policy prohibiting customers from sleep-
ing in the air-conditioned bed section of the store. Fur-
thermore, several China locations have now become
hotspots for senior citizen romance.
The seniors show up in groups, sit for hours in the caf-
eteria, and bring their own food and tea. To deal with these
groups taking up all the space without actually making a
purchase, IKEA has added guards and created special seating
areas for those patrons who only want to sit and not shop.
Because of these situations, IKEA had to adapt each store to
its unique surroundings and cultural differences in order to
successfully meet the needs of the Chinese economy.
Although it has been a difficult undertaking, China has
become the most important growth market for IKEA. In
2015, despite a slowing Chinese economy, sales grew over
20 percent.
Russia Entry and Setbacks
IKEA entered Russia in 2000 as a “last big hobby” for
founder Ingvar Kamprad, then age 81. Amid large changes
in culture and a great deal of training, IKEA was a huge
success with its “mega-mall” business model. The first
store in Russia drew 40,000 shoppers on the first day, and
as of 2016 IKEA operates 14 stores with approximately
200 million visitors each year.
Although IKEA has seen success in Russia, the road
to get there was not always easy. Like China, Russia’s
culture is extremely different from Sweden’s, and chang-
ing a culture without changing the IKEA brand values
proved to be extremely difficult. For instance, when hir-
ing, IKEA wants its employees to have a personality that
lends to the IKEA business model rather than a compre-
hensive resume, whereas Russians place a great deal of
emphasis on education and experience.
Training was also an issue for the Russian employees,
who value academic training and had a negative percep-
tion of the “shop floor training” provided by IKEA train-
ers. However, the IKEA trainers stuck to the IKEA model
and began reaching their new Russian counterparts by
altering the Russians’ previously held views.
In 1998, after the currency devaluation and economic
collapse seen throughout Russia, IKEA stood by its side,
560 Part 4 Organizational Behavior and Human Resource Management
markets, India holds great potential for the company, if
IKEA is able to successfully navigate the country’s infa-
mous red tape to begin opening stores.
Images in Saudi Arabia
IKEA came under attack in October 2012 for removing
pictures of women from catalogs destined for Saudi Arabia.
That year alone, IKEA planned to produce over 200 mil-
lion copies of its catalog in 62 different versions. However,
it admitted to tailoring the images “to suit fashion-related
tastes of local markets.”24
IKEA publicly apologized for altering the Saudi images
in a statement, noting that such self-censorship was incon-
sistent with its values. “We’re deeply sorry for what has
happened,”25 Ulrika Englesson Sandman said, “It’s not the
local franchisee that has removed the photos. The error
has occurred in the process of producing the proposal to
Saudi Arabia, and that is ultimately our responsibility.”26
Catalogs still remain the primary source of marketing
for IKEA, and it comes at a time when Saudi Arabia is
in a political firestorm over its treatment of women. The
same photographs had been published in 27 languages for
37 countries with the women present, leaving many to
wonder about IKEA’s stance on gender equality.
Forced Labor Practices
IKEA publicly apologized in November 2012 for having
profited by the use of prisoners in East Germany 25 to 30
years prior. The issue was publicized when, earlier in the
year, the media began reporting on the connection. In
response to the accusation, IKEA hired Ernst & Young,
which researched 20,000 pages of internal records and
80,000 pages of state and federal documents in addition
to interviews of 90 former employees and witnesses.
It was realized that political prisoners were in fact used
in the production of IKEA merchandise during that time,
even though IKEA initially questioned the use of prisoners
by suppliers. Jeanette Skjelmose, sustainability manager,
showed her remorse in a public statement: “We deeply regret
that this could happen. . . . The use of political prisoners in
production has never been acceptable to the IKEA Group.
At the time, we didn’t have today’s well-developed control
systems and obviously didn’t do enough to prevent such pro-
duction conditions among our former G.D.P. suppliers.”27
When speaking of their current control systems,
Skjelmose was probably referring to the previously men-
tioned IWAY code of conduct standards. In addition to
placing provisions on working conditions, touched on in
the code, IKEA also conducts audits on suppliers over
1,000 times every year just to ensure a situation like this
will not arise again.
This news comes as a large surprise to those who fol-
low IKEA and its traditionally positive social impact.
IKEA has even been commended many times over the
years for its strong stance on social issues, such as child
Recent Challenges and Opportunities
Delayed Expansion into India
Despite plans to expand into India for a decade, IKEA
still has yet to open a store in the country. In the wake of
an economic slowdown in China and Russia, IKEA has
attempted to expedite its entry into the Indian market,
only to face red tape and limiting bureaucracy.
In 2007, when IKEA first tried to expand into India, the
company sought to bypass the legal regulations that require
foreign companies to work with a local company in a joint
venture. IKEA believed that it would be far more successful
operating on its own, and the company believed that it could
lobby the Indian government into agreeing. Unfortunately
for IKEA, the lobbying efforts took over five years until the
government finally waived the joint venture requirements,
significantly delaying IKEA’s proposed timeline.
In 2016, IKEA ran into further problems after failing
to find suitable local suppliers that meet IKEA’s stan-
dards. Per Indian law and IKEA’s agreement with the
government, one-third of all products sold in India must
be produced in India. After an extensive search across the
country for local products that the company could add to
its Indian catalog, IKEA came up empty-handed. Local
rugs were discovered to have been woven by child labor,
tables contained unsafe levels of toxic materials, and
plates were found to leak chemicals into food.
In total, IKEA plans to open approximately 25 stores.
With the success that IKEA has achieved in other emerging
Exhibit 1 Location of New Stores by IKEA
Year City/Country
1958 Almhult, Sweden
1963 Oslo, Norway
1969 Copenhagen, Denmark
1973 Zurich, Switzerland
1975 Sydney, Australia
1976 Vancouver, Canada
1977 Vienna, Austria
1979 Rotterdam, Netherlands
1981 Paris, France
1984 Brussels, Belgium
1985 Philadelphia, USA
1987 Manchester, UK
1989 Milan, Italy
1990 Budapest, Hungary
1991 Prague, Czech Republic
1991 Poznan, Poland
1996 Madrid, Spain
1998 Shanghai, China
2000 Moscow, Russia
2004 Lisbon, Portugal
2005 Istanbul, Turkey
2007 Bucharest, Romania
2009 Dublin, Ireland
2013 Cairo, Egypt
2013 Doha, Qatar
2014 Tangerang, Indonesia
2014 Gwangmyeong, South Korea
2015 Casablanca, Morocco
Brief Integrative Case 4.1 IKEA’s Global Renovations 561
that was discovered to contain traces of coliform bacteria,
a contaminant found in the environment and in the feces
of humans and warm-blooded animals, according to The
Wall Street Journal.31 Although the cakes posed no true
health hazards, as the issue was caught before the cakes
hit stores, it came at a bad time publicly.
The Shanghai quarantine bureau destroyed two tons of
the cake, and IKEA performed a formal investigation and
removed the cakes from restaurants in 23 countries. The
company has released a formal apology for all concerns
raised regarding the issue.
Budget Hotel Chain
IKEA, in a more positive light, announced a new partner-
ship with Marriott to open a budget-friendly hotel chain
called “Moxy,” targeted toward next-generation travelers
in Europe. The partnership aims to sneak into the econ-
omy sector of the European travel market, which repre-
sents half of the largest travel market worldwide.
The hope was to secure locations of 50 hotels in the
next five years, as well as 150 hotels in the next 10 years.
The first opened in Milan, Italy, in 2014. All rooms are
designed to be the same size with the same décor, typi-
cally contemporary with large wall art, a flat-screen TV,
and USB ports. The hotel stay also includes a continental
breakfast, bars, and public spaces for the low price of 60
to 85 euros a night.
This comes as a new initiative for the largest furniture
retailer, as well as for Marriott, who currently owns over
3,700 properties in 74 countries but is now seeking a spot
in the economy segment. The brand will be operated by
a franchise and will stay in line with IKEA’s low-cost,
high-quality mentality.
Amid IKEA’s international success, president of the
U.S. IKEA, Mike Ward, believes this is just the begin-
ning. In addition to entering new markets, as seen in its
partnership with Marriott, IKEA is also placing a strong
focus on making its current line of business even better.
The company is investing heavily in core products, par-
ticularly in the U.S. market, to battle the predisposition
that the product line is primarily for those in their “starting-
up phase.” IKEA has also begun offering delivery service
in some markets and plans on putting other strategies into
place throughout 2013 to further highlight itself as a qual-
ity brand that not only acts responsibly, but also listens to
its customers.
There will also be a shift in leadership structure mov-
ing forward, as CEO Mikael Ohlsson plans to leave IKEA
by early September 2013. Although there has been much
speculation as to succession plans for Ingvar Kamprad, he
does plan on providing his three sons with larger owner-
ship roles moving forward, while Kamprad himself will
continue his role as senior advisor to the Ingka holding
company. He plans on staying with the company for years
to come as its key decision maker.
labor. Susan Bissell of UNICEF (the United Nations Chil-
dren’s Fund) in South Asia was quoted as saying,
The risk of falling into disrepute and becoming the victim
of consumer boycotts has driven many companies to
move production from South Asia to areas which are
easier to control. Those companies which stay on do
everything they can to conceal their presence. I wish more
companies had the courage to follow IKEA’s example:
stay on and actively work on the problems and take gen-
uine social responsibility. IKEA is a sponsor of UNICEF
[…] but we regard IKEA as a cooperation partner rather
than a contributor […].28
Many even commended IKEA for how it handled this
situation. IKEA took on the responsibility of hiring Ernst &
Young to investigate the situation at the first mention of
forced labor. It is not the only company to have profited
from such actions, but one of the few that took action
against its prior role. In fact, Christian Sachse, a Berlin his-
torian, spoke of how common this act was, and said it would
“take years of research to properly understand the field.”29
For now, IKEA has accepted its wrongdoing and is mov-
ing forward while trying to make things right. The company
has vowed its commitment to donate funds and provide an
effort to research the issue of forced labor in East Germany,
and stands as one of the only companies that is coming
forward and taking action to turn the negative into a positive.
Horsemeat Scandal
In light of the horsemeat scandal raging across Europe,
inspectors from the Czech Republic found traces of the
meat in IKEA’s European signature meatballs in February
2013. Although the United States’ supply remained unaf-
fected, customer morale is likely to have been impacted.
One customer was even quoted as saying, “I am more
trusting of Swedish companies and it makes me wonder
about corporate integrity in a way I never have questioned
Swedes before.”30
In a public statement, IKEA reassured communities
and supporters across the world that they are committed
to high-quality, safe food and will not stand for any ingre-
dients other than those listed in the recipe. The company
guaranteed the public that it is taking all concerns very
seriously, and assured all that no product is actually harm-
ful if eaten. The real issue is the discrepancy in labeling.
Five percent of IKEA’s total revenue comes from food,
and currently meatballs in 13 countries have been removed.
It is a situation affecting many of Europe’s leading food
companies, including Nestlé SA and ABP Food Group’s
Silvercrest Food. As IKEA’s private investigation contin-
ues, it will need to continue to ease the nerves of the
disheartened public.
Cake Contamination
Just one month after the horsemeat scandal took place,
IKEA again found itself in the news for chocolate cake
562 Part 4 Organizational Behavior and Human Resource Management
contamination, sourcing, working conditions,
and product safety?
4. What motivation, leadership, and international HR
approaches has IKEA pursued to achieve its inter-
national success? What additional steps might it
consider given its expanding global reach and
impending change in leadership?
Source: This case was prepared by Deborah Zachar of Villanova University 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.
Questions for Review
1. How would you describe IKEA’s overall approach
to international expansion? What were some of the
important successes and challenges it experienced
along the way?
2. What macro- and micro-political risks did IKEA face
when it first considered entry into Russia? What
kinds of preemptive and/or proactive political strate-
gies might it have pursued to mitigate these risks?
3. How should IKEA respond to some of
the recent scandals concerning product
1. Bo Edvardsson, Bo Enquist, and Michael Hay, “Values-
Based Service Brands: Narratives from IKEA,” Man-
aging Service Quality 16, no. 3 (2006), pp. 230–246.
2. Jens Hansegard and Sven Grundberg, “IKEA Chief
Executive to Step Down,” The Wall Street Journal
Online, September 17, 2012, www.wsj.com/articles/
SB10000872396390443816804578001922463079746.
3. “Our Swedish Origins,” IKEA, 2013, www.ikea.
com/ms/en_JP/about_ikea/the_ikea_way/swedish_
heritage/index.html.
4. “The Story of IKEA,” Management Practice, no. 8
(1997), pp. 33–34.
5. Veronika Tarnovskaya, Ulf Elg, and Steve Burt, “The
Role of Corporate Branding in a Market Driving
Strategy,” International Journal of Retail & Distribu-
tion Management 36, no. 11 (2008), pp. 941–965.
6. Mats Urde, “Uncovering the Corporate Brand’s
Core Values,” Management Decision 47, no. 4
(2009), pp. 616–638.
7. Edvardsson, Enquist, and Hay, “Values-Based Ser-
vice Brands.”
8. Urde, “Uncovering the Corporate Brand’s Core Values.”
9. Tarnovskaya, Elg, and Burt, “The Role of Corpo-
rate Branding in a Market Driving Strategy.”
10. Ibid.
11. Ibid.
12. Edvardsson, Enquist, and Hay, “Values-Based Ser-
vice Brands.”
13. Dario A. Schirone and Germano Torkan, “New
Transport Organization by IKEA. An Example of
Social Responsibility in Corporate Strategy,”
Advances in Management & Applied Economics 2,
no. 3 (2012), pp. 181–193.
14. “Welcome Inside Our Company,” IKEA, www.ikea.
com/ms/en_US/this-is-ikea/company-information/.
15. Tarnovskaya, Elg, and Burt, “The Role of Corpo-
rate Branding in a Market Driving Strategy.”
16. Ibid.
17. Schirone and Torkan, “New Transport Organization
by IKEA.”
18. Ibid.
19. Ibid.
20. Kowitt, Beth. “Can Ikea turn its blond world
green?” Fortune, March 10, 2015. turhttp://fortune.
com/2015/03/10/can-ikea-turn-green/
21. Transparency International, Corruption Perceptions
Index 2015. https://www.transparency.org/cpi2015/
22. Ibid.
23. Oleg Nikishenkov, “IKEA Case Exposes Bribe Cul-
ture in Russia,” Moscow News, February 23, 2010,
http://www.news.rin.ru/eng/news///14152/all//.
24. Anna Molin, “IKEA Regrets Cutting Women from
Saudi Ad,” The Wall Street Journal, October 1,
2012, www.wsj.com/articles/SB10000872396390444
592404578030274200387136.
25. Ibid.
26. Ibid.
27. Tiffany Hsu, “Ikea: ‘We Deeply Regret’ Use of
Forced Labor in East Germany,” Los Angeles Times,
November 16, 2012, http://articles.latimes.com/
2012/nov/16/business/la-fi-mo-ikea-forced-labor-
germany-20121116.
28. Edvardsson, Enquist, and Hay, “Values-Based
Service Brands.”
29. Nicholas Kulish and Julia Werdigier, “Ikea Admits
Forced Labor Was Used in 1980s,” New York Times,
November 16, 2012, www.nytimes.com/2012/11/17/
business/global/ikea-to-report-on-allegations-of-using-
forced-labor-during-cold-war.html.
30. Anna Molin and John Stoll, “IKEA’s Iconic Meatball
Drawn into Horse-Meat Scandal,” The Wall Street
Journal, February 25, 2013, www.wsj.com/articles/
SB10001424127887323384604578325864020138732.
31. Jens Hansegard, “IKEA: Chinese Officials Find
Coliform Bacteria in IKEA Cakes,” The Wall Street
Journal, March 5, 2013.
ENDNOTES
563
Chinese bank managers did not have the necessary skills
to transform the banks on their own. Guo Shuqing, shortly
after being promoted to chairman of China Construction
Bank, admitted that “more than 90 percent of the bank’s
risk managers are unqualified.”1
Immediately upon accession to the WTO, China’s
banking sector began to open to foreign banks. Initially,
foreign banks were allowed to conduct foreign currency
business without any market access restrictions and
conduct local currency business with foreign-invested
enterprises and foreign individuals. In addition, the lib-
eralization of foreign investment rules made Chinese
banks attractive targets for foreign financial institu-
tions. Sweeping domestic changes have followed.
Strong emphasis has been placed on interest rate liber-
alization and clearer and more consistent regulation,
and a frenzy of IPOs of state-owned banks has fol-
lowed. It was in this context that HSBC rapidly
expanded its presence in China.
HSBC, known for its international scope and careful,
judicious strategy, made a series of key investments in
the early 2000s that arguably gave it the most extensive
position in China of any foreign financial group. These
Introduction
After years of negotiations, China finally acceded to the
World Trade Organization (WTO) in December 2001 (see
Exhibit 1). This development was a significant milestone
in China’s integration with the global economy. One of the
most important and far-reaching consequences was the
transformation of China’s financial sector. China’s banking,
insurance, and securities industries were long due for a
major overhaul, and the WTO requirements guaranteed that
the liberalization of China’s economy would extend to the
important financial sector. China’s banking sector had
become a casualty of the state. Banks and other financial
institutions haphazardly extended loans to state-owned
enterprises (SOEs) based not on sound credit analysis but
favoritism and government-directed policy. As a conse-
quence, crippling debt from bad and underperforming loans
mounted, with no effective market disciplines to rein it in.
China recognized that opening up the banking sector
could bolster its financial system. Foreign management
would help overhaul the banking sector and put the focus
on returns, instead of promoting a social agenda. This
fiscal agenda would ultimately lead to a stronger and more
stable economy. Yet after years of direction from the state,
In-Depth Integrative Case 4.1
HSBC in China
Exhibit 1 China’s WTO Commitments
General Cross-Sector Commitments
∙ Reforms to lower trade barriers in every sector of the economy, opening its markets to foreign companies and their exports from
the first day of accession.
∙ Provide national treatment and improved market access to goods and services from other WTO members.
∙ Special rules regarding subsidies and the operation of state-owned enterprises, in light of the state’s large role in China’s economy.
∙ Undertake important changes to its legal framework, designed to add transparency and predictability to business dealings and
improve the process of foreign market entry.
∙ Agreement to assume the obligations of more than 20 existing multilateral WTO agreements, covering all areas of trade.
∙ Under the acquired rights commitment, agreed that the conditions of ownership, operation, and scope of activities for a foreign com-
pany under any existing agreement would not be made more restrictive than they were on the date of China’s accession to the WTO.
∙ Licensing procedures that were streamlined, transparent, and more predictable.
Commitments Specific to the Financial Services Industry
∙ Allow foreign banks to conduct foreign currency business without any market access or national treatment limitations.
∙ Allow foreign banks to conduct local currency business with foreign-invested enterprises and foreign individuals (subject to geo-
graphic restrictions).
∙ Banking services (with a five-year transitional plan) by foreign banks:
Within two years after accession, foreign banks would be able to conduct domestic currency business with Chinese enter-
prises (subject to geographic restrictions).
Within five years after accession, foreign banks would be able to conduct domestic currency business with Chinese individu-
als, and all geographic restrictions will be lifted.
Foreign banks also would be permitted to provide financial leasing services at the same time that Chinese banks are permit-
ted to do so.
564 Part 4 Organizational Behavior and Human Resource Management
After the First World War, the Hongkong Bank antici-
pated an expansion in its Asian markets and took a lead-
ing role in stabilizing the Chinese national currency. The
tumultuous Second World War, for its part, saw most of
the bank’s European staff become prisoners of war to the
advancing Japanese.
The Postwar Years
In the postwar years, Hongkong Bank turned to dra-
matic expansion through acquisitions and alliances in
order to diversify. The acquisitions began with the Brit-
ish Bank of the Middle East (Persia and the Gulf states)
and the Mercantile Bank (India and Malaya) in 1959,
and were followed by acquiring a majority interest in
Hong Kong’s Hang Seng Bank in 1965. The 51 percent
controlling interest in Hang Seng Bank was acquired
during a local banking crisis for $12.4 million. As of
2016, HSBC’s interest in the bank was 62 percent and
was over US$20 billion. Hang Seng, which retained its
name and management, has been a consistently strong
performer. The bank made further acquisitions in the
United Kingdom and Europe (from 1973), North America
(from 1980), and Latin America (from 1997), as well as
other Asian markets.
Under Chairman Michael Sandberg, Hongkong Bank
entered the North American market with a $314 million,
51 percent acquisition of Marine Midland, a regional bank
in upstate New York. In 1987, the bank purchased the
remaining 49 percent, doubling Hongkong Bank’s invest-
ment and providing the bank a significant U.S. presence.
As a condition of the acquisition, however, Marine
M idland retained its senior management.
Move to London and Acquisitions
In 1991, Hongkong Bank reorganized as HSBC Holdings
and moved its headquarters in 1993 to London from Hong
Kong. Sandberg’s successor, William Purves, led HSBC’s
purchase of the U.K.’s Midland Bank in 1992. This acqui-
sition fortified HSBC’s European presence and doubled
its assets. The move also enhanced HSBC’s global presence
and advanced the bank’s reputation as a global financial
services company.
Other major acquisitions of the 1990s included Repub-
lic Bank and Safra Holdings in the United States, which
doubled HSBC’s private banking business; investment
moves in Brazil and Argentina in 1997; and acquisition
of Mexico’s Bital in 2002. In 2000, HSBC acquired CCF
in France. By 2006, HSBC had assets exceeding $1,860
billion, customers numbering close to 100 million, and
operations on six continents. In recent years, HSBC has
made a major commitment to emerging markets, espe-
cially China and Mexico, but also Brazil, India, and
smaller developing economies.
investments included two separate transactions that
resulted in a 19.9 percent stake in both Ping An insurance
and Bank of Communications, the fifth largest bank in
China. HSBC had a long history in Asia and was uniquely
positioned to take advantage of China’s vast population
and mushrooming middle class, high savings rates (in the
range of 40 percent), and huge capital investments. HSBC
recognized that the current banking system was not cap-
italizing on this vast opportunity and sought to get in on
the ground floor in this new environment. Perhaps, with
further liberalization, however, China would allow future
investors to establish even greater claims to Chinese
banks. Citigroup’s successful effort to gain a controlling
stake in Guandgong Development Bank appeared to
undermine earlier investors who had been limited by
China’s rule that allowed foreigners to own no more than
19.9 percent of domestic financial institutions. Did the
huge potential rewards of being an early mover in China
mitigate the promise of uncertainty and risks of doing
business in an emerging market? After being burned in
Argentina, could HSBC relax its conservative philosophy
in its China strategy? If the economy took a turn for the
worse, HSBC could face heavy losses. On the other hand,
could HSBC afford not to be an early mover in a region
where it had a longstanding presence?
Background on HSBC
History
Thomas Sutherland founded the Hongkong and Shanghai
Banking Corporation (Hongkong Bank) in 1865 to
finance the growing trade between Europe, India, and
China. Sutherland, a Scot, was working for the Peninsu-
lar and Oriental Steam Navigation Company when he
recognized a considerable demand for local banking
facilities in Hong Kong and on the China coast. Hongkong
Bank opened in Hong Kong in March 1865 and in Shanghai
a month later.
The bank rapidly expanded by opening agencies and
branches across the globe, reaching as far as Europe and
North America, but maintained a distinct focus on China
and the Asia-Pacific region. Hongkong Bank helped pio-
neer modern banking during this time in a number of
countries, such as Japan, where it opened a branch in
1866 and advised the government on banking and cur-
rency, and Thailand, where it opened the country’s first
bank in 1888 and printed the country’s first banknotes.
By the 1880s, the bank issued banknotes and held govern-
ment funds in Hong Kong, and also helped manage British
government accounts in China, Japan, Penang, and Singa-
pore. In 1876, the bank handled China’s first public
loan, and thereafter issued most of China’s public loans.
Hongkong Bank had become the foremost financial insti-
tution in Asia by the close of the 19th century.
In-Depth Integrative Case 4.1 HSBC in China 565
likelihood that customers would repay debt, which used a
13-year database of consumer behavior. Household was
controversial and yet presented great opportunity. HSBC
desired to leverage this new skill in developing countries,
yet was unable to find all demographic and credit data
that Household normally relies on in the United States.
HSBC particularly looked to extend the Household model
into China and Mexico. However, the subprime mortgage
crisis hit the United States hard in 2007–2008 and had a
major impact on Household operations.
Six years after acquiring Household International,
HSBC effectively conceded that the deal was a mistake.
In March 2009 HSBC made public that it would close all
800 remaining branches of HSBC Finance Corp., the for-
mer Household Financial, resulting in 6,100 job cuts
nationwide. HSBC had already closed about 600 HFC and
Beneficial branches over the past two years. “High levels
of delinquency, given rising levels of unemployment,
mean that the business model for subprime home equity
refinancing is not sustainable,”2 said Niall Booker, HSBC
Finance chief executive during one of the media confer-
ences. HSBC Finance said it would retain its credit card
business, and HSBC Holdings would keep its New York–
based HSBC Bank USA. HSBC officials also said that
the bank would continue to help mortgage customers with
loan repayments and foreclosure-prevention efforts.
The HSBC Finance (Household) executives pointed
out that it was hard to predict in 2003 that the global
financial crisis and the recession would occur. When the
crisis hit hard in 2008, the subprime mortgage market led
to more than $1.15 trillion of credit losses and write-
downs at financial institutions and government bailouts of
companies ranging from Citigroup Inc. to Royal Bank of
Scotland Group Plc of Edinburgh, as noted by Bloomberg
analysts. HSBC was one of the first banks to acknowledge
the possibility of upcoming subprime mortgage problems
and set aside about $53 billion to cover bad loans during
the past three years.
2008–2009: Economic Crisis and
Financial Performance
The consequences of global economic crisis were severe
for the world’s banking system, prompting thousands of
banks to seek financial assistance from their local govern-
ment. Many banks were burdened with highly overvalued
“bad loans” and suffered huge losses. Unlike many global
players, HSBC reported a profit for 2008, but it still took
a hit: Its pretax profit of $9.3 billion was 62 percent below
the $24.2 billion reported for 2007. The bank also cut its
dividend for the full year by 29 percent to 64 cents per
share. The slide in profits was largely the result of a good-
will impairment charge of $10.6 billion in the United
States. In spite of the bitter loss in North America, HSBC
performed much better in the other parts of the world. For
Expansion, Acquisition, and Succession
Early 1990s: The World’s Local Bank
HSBC Holding Company set up a group policy in 1991
that established 11 quasi-independent banks, each a sepa-
rate subsidiary with its own balance sheet. The head
office provided essential functions, such as strategic plan-
ning, human resource management, and legal, administra-
tive, and financial planning and control. This setup
promoted prompter decision making at a local level and
greater accountability. HSBC portrayed itself as “the world’s
local bank,” recognizing the importance of globalization,
flexibility, and local responsiveness.
HSBC established distinct customer groups or lines of
business that overlaid existing geographic designations.
This encouraged maximizing the benefits of its universal
scope, such as sharing best practices of product develop-
ment, management, and marketing. The geographic per-
spective was melded closely with a customer group
perspective, demanding both global and local thinking.
Traditionally, HSBC’s culture embraced caution, thrift, dis-
cipline, and risk avoidance. The bank looked at long-term
survival and considered markets in 50-year views. Thrift
manifested through the company, and even the chairman
flew economy class on flights less than three hours.
Late 1990s: Bond’s Rein and Move to “HSBC”
Sir John Bond became CEO of HSBC in 1993 and chair-
man in 1998, bringing with him a hands-on entrepreneur-
ial style and exceptionally ambitious goals. He pursued
acquisitions beyond HSBC’s traditional core, in pursuit
of such attractive financial segments as wealth manage-
ment, investment banking, online retail financing, and
consumer finance. Bond considered shareholder value
and economic profit in deciding when acquisition premi-
ums were in order, which was in contrast to his predeces-
sor’s “three times book value” rule. By 2001, Bond had
authorized investments of over $21 billion on acquisi-
tions and new ventures.
In 1998, Bond adopted the HSBC brand and pre-
served “The Hongkong & Shanghai Banking Corp.”
name only for its bank based in Hong Kong. HSBC
branded its subsidiary banks across the world with the
parent bank’s acronym and greatly expanded marketing
efforts in 2000. In March 2002, HSBC’s marketing mes-
sage became “the world’s local bank,” which would help
the brand become one of the world’s top 50 most recog-
nizable brands by 2003.
2000s: Household Acquisition
In 2003, a US$15.5 billion acquisition of Household
International, the U.S. consumer lending business, became
the basis of HSBC’s Consumer Finance customer group.
Household utilized a unique system to forecast the
566 Part 4 Organizational Behavior and Human Resource Management
up the future value of HSBC’s stock market rating and
total shareholder return. HSBC retains its core values of
communication, long-term focus, ethical relationships,
teamwork, prudence, creativity, high standards, ambition,
customer-focused marketing, and corporate social respon-
sibility, all with an international outlook.
Strategic Pillars
As part of the growth strategy, HSBC identified eight
strategic pillars:
Brand: continue to establish HSBC and its hexagon sym-
bol as one of the top global brands for customer experi-
ence and corporate social responsibility.
Personal Financial Services: drive growth in key markets
and through appropriate channels; emerging markets are
essential markets with a burgeoning demand.
Consumer Finance: offer both a wider product range
and penetrate new markets, such as the emerging country
markets.
Commercial Banking: leverage HSBC’s international
reach through effective relationship management and
improved product offerings.
Corporate, Investment Banking, and Markets: acceler-
ate growth by enhancing capital markets and advisory
capabilities.
Private Banking: a focus on serving the highest value
personal clients.
People: draw in, develop and motivate HSBC’s people.
TSR: fulfill HSBC’s TSR target by achieving strong
competitive performances in earnings per share growth
and efficiency.3
Focus on Emerging Markets
Back in 2000, HSBC had half of its assets in develop-
ing countries. Most earnings, however, stemmed from
mature markets, such as Hong Kong and Britain. All
but 5 percent of group profits came from five econo-
mies, while India and Latin America each added only
1 percent to group profit. By 2005, however, HSBC
executives recognized the earnings potential of emerg-
ing markets. As then-Chairman Stephen Green noted,
“There is a general rule of thumb that says the emerg-
ing markets grow faster than mature markets as econo-
mies and the financial services sector grows faster than
the real economy in emerging markets because you are
starting from very low penetration of financial services
in general.”4
Though cost-cutting measures enacted in the 2010s
have stagnated HSBC’s overall net profit before tax, the
proportion of net profit earned in emerging markets has
soared (see Exhibit 2). Across the board, HSBC’s pre-
tax profits in emerging markets have increased from
US$2.4 billion in 2004 to $6.0 billion in 2014. The
largest growth, by far, has come from China. Between
2004 and 2014, HSBC’s profit in China jumped from
example, in Europe, pretax profit rose to $10.9 billion from
$8.6 billion. Profit from Hong Kong fell to $5.46 billion
from $7.34 billion, while earnings from the rest of Asia
rose to $6.47 billion from $6.01 billion. HSBC is still
considered one of the world’s strongest banks by some
measures. The bank’s market value of $68.2 billion in
early 2009 ranked it behind only Industrial & Commercial
Bank of China Ltd., China Construction Bank Corp.,
Bank of China Ltd., and JPMorgan Chase & Co.
To the credit of HSBC management, the bank avoided
taking U.K. government “bailout” funding, unlike other
big banks. Instead, HSBC made plans to raise £12.5 bil-
lion ($17.9 billion) in capital to prepare for further dete-
rioration of the global economy. Also, responding to
growing public anger over the scale of bonuses paid to
many senior bankers, HSBC said no performance share
awards would be made for 2008 and that no executive
director would receive a cash bonus.
2010s: Refocused Strategy & Divestment
In the wake of the financial crisis, HSBC took a fresh
look at its expansion and operational strategies. As part
of this refocusing, the company promoted Stuart Gulliver
to CEO in 2011. Within months, Gulliver announced
plans to decrease overhead by US$3.5 billion, primarily
through cuts to its retail banking operations in developed
markets. The company formally abandoned its “World’s
Local Bank” philosophy, announced plans to withdraw
from 20 countries, and indicated that 25,000 jobs would
be cut within two years. Nearly 200 local banking
branches in the U.S. were sold to First Niagara Financial
Group Inc., halving HSBC’s retail operations in the coun-
try. Additionally, HSBC’s U.S. credit card business was
sold to Capital One Financial Corp. for US$2.6 billion.
Though most downscaling of operations occurred in
developed countries, targeted divestment has occurred in
some emerging markets; in 2015, HSBC sold its Brazilian
operations to Banco Bradesco after several years of poor
performance
Managing for Growth
HSBC’s strategic plan, “Managing for Growth,” was
launched in the early 2000s. This strategy builds on
HSBC’s global, international scope and seeks to grow by
focusing on the key customer groups of personal financial
services; consumer finance; commercial banking; corpo-
rate, investment banking, and markets; and private bank-
ing. “Managing for Growth” is intended to be
“evolutionary, not revolutionary,” and aims to vault HSBC
to the world’s leading financial services company. HSBC
seeks to grow earnings over the long term, using its peers
as a benchmark. It also plans to invest in delivery plat-
forms, technology, its people, and its brand name to prop
In-Depth Integrative Case 4.1 HSBC in China 567
China made a number of implementations immedi-
ately. To begin with, foreign banks were allowed to
conduct foreign currency business without any market
access restrictions. Also, foreign banks were allowed to
conduct local currency business with foreign-invested
enterprises and foreign individuals (with geographic
restrictions). Within two years of accession, China agreed
to allow foreign banks to conduct domestic currency
business with Chinese enterprises (geographic restric-
tions). Within five years, foreign banks could conduct
domestic currency business with Chinese individuals (no
geographic restrictions); and foreign banks were able to
provide financial leasing services at the same time as
Chinese banks. Under the WTO investment provisions,
China agreed to allow foreign ownership of Chinese
banks (up to 25 percent), with no single foreign investor
permitted to own more than 20 percent.
“Bank reform has become the most crucial task for
the government in pushing forward economic reforms,”5
said Yi Xianrong, an economist at the Chinese Acad-
emy of Social Sciences in Beijing. Indeed, bank reform
is critical to stabilizing and advancing the Chinese
economy.
Domestic Reform
China has undertaken a number of domestic reforms in
order to overhaul the banking industry. China has engaged
in interest rate liberalization by removing certain interest
rate and price controls. Instead of being pegged to the
U.S. dollar, as it once was, China’s currency exchange rate
is now pegged to within 0.3 percent of a basket of cur-
rencies, dominated by a group including the U.S. dollar,
euro, Japanese yen, South Korean won, British pound,
Thai baht, and Russian ruble. Throughout the 2000s, ana-
lysts estimated that the yuan was undervalued, leading to
complaints from the international community. However,
most experts believed that the currency was no longer
undervalued by mid-2015.
Regulation has long been a concern in the Chinese
banking industry. China has made major progress by cre-
ating regulatory agencies. In 2003, China created a central
regulator, the China Banking Regulatory Commission
(CBRC), out of the central bank. The regulator’s 20,000
staff members endeavor to shift the banks’ focus from
senseless loans and growth mind-sets to a goal of preserv-
ing capital and generating returns.
Concurrently, China is striving to make regulatory
and reporting requirements more clear because they
have often proved confusing barriers to foreign invest-
ment. Since 1998, China has intensified accounting,
prudential, and regulatory standards. Prior to 1998, the
banks booked interest income for up to three years even
if it was not being paid. Now, the banks can do so for
only 90 days, which is the international norm. Still, it
US$32 million to nearly US$3 billion, and the Chinese
market now accounts for more than 15 percent of
HSBC’s total net profit before tax. Strong gains in
India are also noteworthy, with profits increasing by
more than 200 percent.
Liberalization of China’s Banking Sector
China’s Banking Sector Pre-WTO
Before the WTO accession negotiations, China’s banking
industry operated as a cog in China’s centrally planned
economy. The state commercial banks performed a social
function, during China’s post-Mao drive to industrialize,
instead of operating for economic return. Consequently,
the banks adhered to directed lending practices from the
government and in turn created some of China’s most suc-
cessful enterprises, but also supported thousands of other
inefficient and unprofitable state-owned enterprises. This
practice left state commercial banks with massive amounts
of debt that were largely unrecoverable and hordes of non-
performing loans.
In addition to widespread losses, instability ensued
in the banking system overall. To make matters worse,
corruption and mismanagement ran rampant through-
out the sector, sapping away consumer and investor
confidence.
WTO Accession
Following 15 years of negotiation and two decades of
economic reform in China, December 11, 2001, marked
China’s accession to the World Trade Organization. The
main objective of the WTO agreement was to open China’s
market up to foreign competition. The deadline for com-
plete implementation was December 11, 2006.
Exhibit 2 HSBC Emerging Markets
Pretax Profits 2004 vs. 2014
2004 2014
(US$ (US$ % Change
Country mil) mil) 2004–2014
Argentina 154 384 149.4
Brazil 281 (247) (187.9)
China 32 2,951 9,121.9
India 178 700 293.3
Indonesia 76 198 160.5
Malaysia 214 496 131.8
Mexico 774 51 (93.4)
Saudi Arabia 122 486 298.4
South Korea 89 180 102.2
Taiwan 107 221 106.5
Turkey 142 (64) (145.1)
UAE 192 662 244.8
Total 2,361 6,018 154.9
Total profit 18,943 18,680 (1.4)
before tax
(all countries)
568 Part 4 Organizational Behavior and Human Resource Management
government has also taken steps to eliminate bad loans
by bailing out banks.
IPO Explosion
Over the last 15 years, China has aggressively pursued
IPOs of state-owned banks, a policy that has been met
with a strong response from investors eager to tap into the
populous country and seize first-mover advantages (see
Exhibit 3). HSBC’s purchase of a 19.9 percent stake in
Bank of Communications (BoCOM) in June 2004 was the
pioneering, substantial foreign bank investment in China.
In 2005, the listing of the Industrial and Commercial
Bank of China on the Shanghai and Hong Kong Stock
Exchanges resulted in the then-largest IPO in history.
Bank of America invested heavily in China Construction
Bank between 2005 and 2013, and the Royal Bank of
Scotland, Temasek, and UBS all made significant invest-
ments in the Bank of China. In 2010, the IPO of the
Agricultural Bank of China raised over US$22 billion,
surpassing the record set by the Industrial and Commercial
Bank of China.
The central bank expects foreigners to bring much-
needed improvements to the state banks’ risk-management
and internal control systems, including credit-risk
assessment and more transparent reporting. With capital
has been all too common for Chinese banks to ignore
regulations and not monitor loans. As a result of poor
accounting, the banks themselves are sometimes unsure
of their bad loans. Lai Xiaomin, head of the CBRC’s
Beijing office, admits that “when our banks disclose
information, they don’t always do so in a totally honest
manner.”6 Indeed, the lack of reliable accounting can
hamper investment. As one Hong Kong investor put it,
“When you take a state-owned enterprise that has had
weak internal controls, it can be enormously labor-
intensive to come up with financials we can work
with.”7 In 2006, regulators overhauled the system in
which almost one-third of a company’s shares were
“nontradable.” Fixing this problem has helped energize
the market and welcome in individual investors.
New regulations, it is hoped, will address China’s his-
tory of dishonesty and embezzlement. With the tight con-
nection of Chinese banks with local governments,
corruption has choked the Chinese banking system. As
of 2016, most of China’s commercial banks have intro-
duced better governance, shareholding, and incentive
structures, while also adding independent directors to
their boards. Foreign management and knowledge are
intended to flush the Chinese banking system with man-
agerial talent. To help encourage foreign banks, China is
relaxing some foreign bank restrictions. The Chinese
Exhibit 3 Early Foreign Bank Investments in China
PRC Bank Foreign Partner % Stake Price Date
Bank of Shanghai HSBC 8.00 $62.6 m 12/2001
IFC 7.00 $25.0 m
Shanghai Commercial Bank (HK) 3.00 $15.7 m
Shanghai Pudong Dev. Bank Citigroup 4.62 $72.0 m 12/2003
Fujian Asian Bank HSBC 50.00 Less than $20 m 12/2003
Bank of Communications HSBC 19.90 $1.75 b 6/2004
Xian CCB Scotia Bank 12.4 $3.2 m 10/2004
Jinan City CCB Commonwealth Bank of Australia 11.0 $17 m1 11/2004
Shenzhen Dev. Bank Newbridge Capital 17.9 $1.23 b 12/2004
Minsheng Bank Temasek 4.9 1/2005
Hangzhou CCB Commonwealth Bank of Australia 19.90 $78.0 m 4/2005
China Construction Bank Bank of America 9.00 $3.0 b 6/2005
Temasek 5.1 $1.5 m2
Bank of China Royal Bank of Scotland 5.00 $3.1 b 8/2005
UBS 1.6 $500 m3 9/2005
Temasek 10.00 $3.1 b4 9/2005
Industrial Commercial BOC Goldman, Allianz, AmEx 8/2005
Nanjing CCB BNP Paribas 19.20 $27.0 m 10/2005
Hua Xia Bank Deutsche Bank 9.9 $329 m5 10/2005
Sal. Oppenheim Jr. 4.1 10/2005
Bank of Beijing ING 19.90 $214 m 3/2005
1Guonan Ma, “Sharing China’s Bank Restructuring,” China and World Economy 14, no. 3 (2006), p. 8.
2David Lague and Donald Greenlees, “China’s Troubled Banks Lure Investors,” International Herald Tribune, September 9, 2005.
3“UBS to Invest $500 Million in Bank of China,” NBC News, September 27, 2005, http://www.nbcnews.com/id/9501208/ns/business-world_business/., assessed October 4, 2006.
4Luo Jun and Xiao Yu, “Temasek to Buy 10% of China Bank,” International Herald Tribune, September 1, 2005.
5“Deutsche Bank Seals Chinese Deal,” BBC News, October 17, 2005, news.bbc.co.uk/2/hi/business/4348560.stm, accessed October 4, 2006.
In-Depth Integrative Case 4.1 HSBC in China 569
indicated it was investing an additional HK$8.1 billion
(US$1.04 billion) for an additional 9.91 percent stake in
Ping An, doubling its holding in the number-two life
insurer. HSBC paid HK$13.20 a share for the stakes held
by investment banks Goldman Sachs and Morgan Stanley,
lifting HSBC’s holding to 19.9 percent, the maximum
stake allowed by a single foreign investor.
“This is good news for Ping An,” said Kenneth Lee,
an analyst at Daiwa Institute of Research. “HSBC is buy-
ing at a premium and is replacing Goldman Sachs and
Morgan Stanley, which are venture capital investors.
HSBC is a long-term investor and will help Ping An to
develop its insurance platform,” he said.
The investments proved to be rewarding for HSBC.
In 2011, China’s insurance market reported an 18.5 per-
cent increase in premium income as compared to 2010.
Total premium income in China experienced a 5.3 per-
cent increase during this same time period. In 2013,
HSBC sold its stake in Ping An for a US$2.6 billion
profit.
The BoCOM Deal
HSBC invested $1.8 billion for a 19.9 percent stake in
BoCOM in June 2004. HSBC’s chairman at the time, Sir
John Bond, commented on the company’s long-term per-
spective: “[I]t is inevitable that China will become a
superpower. And indeed, desirable. And we are position-
ing our business for the decades ahead accordingly.”8
HSBC wanted a piece of the alluring Chinese market,
which Goldman Sachs predicts will overtake the United
States as the number-one economy in the world by 2040,
and wanted to deepen its international scope in line with
the “Managing for Growth” strategy.
Speaking one month after HSBC’s big move, then-
CEO and future chair Stephen Green expounded upon
China: “[T]he potential in China’s domestic market is the
largest in history.” China is the “world’s manufacturer,”
and as the population continues to urbanize and industri-
alize, it increasingly has more disposable income, the
workers become greater consumers, and the middle class
expands. China has one of the world’s highest savings
rates, at around 40 percent, and already has around one-
third of the $1.2 trillion of central bank foreign exchange
reserves sitting in Asia. Further, access to capital is not a
problem, as foreign direct investment (FDI) floods the
country. The challenge facing China is to recycle and
invest its pool of savings efficiently.
HSBC recognized the huge potential in the market for
banking services, as well as credit cards. As part of its
emerging market strategy, HSBC wanted to feed the
demand for credit cards in these markets. Green com-
mented: “[O]ur joint venture with Bank of Communica-
tions for credit cards is one which we think has a lot of
allocated more efficiently, a more stable financial system
will follow, and the economy will become more open to
foreign competition.
Two Steps Forward
Pulling back from some of its commitments, China indi-
rectly delayed the implementation of its WTO
commitments. On February 1, 2002, the People’s Bank of
China (PBOC) issued regulations and implementation
rules governing foreign-funded banks. While these mea-
sures met the commitments of the WTO agreement, the
PBOC was taking a very conservative approach in open-
ing up the banking sector. For example, foreign-funded
banks could open only one branch every 12 months.
In the wake of these early obstacles, there have been
positive changes. Capital requirements were reduced,
additional cities were opened up to foreign banking, and
the “one branch every 12 months” restriction was lifted.
Central bank officials have indicated willingness to even-
tually elevate the foreign ownership limit above the cur-
rent 25 percent, but experts doubt it will ever go beyond
50 percent. In January 2007, China opened its financial
sector to foreign investors, which was one of its last WTO
membership commitments. Under the new rules, foreign
banks in China finally have the opportunity to offer ser-
vices in the local currency—yuan—which was previously
prohibited.
Capital is still mostly allocated to state-owned enter-
prises even though private companies have been China’s
growth engine. Private companies produce 52 percent of
GDP in China, but only account for 27 percent of out-
standing loans. By sinking money into state-owned enter-
prises, China’s banks are dragging the economy. China’s
banks had difficulty lending to private companies in the
past because of challenges related to gathering and pro-
cessing the necessary information on them. As a response,
China launched its first national credit bureau in early
2006. By 2014, more than 60 percent of China’s popula-
tion had credit history records maintained by the national
credit bureau. China’s banks have been satisfying a social
role but now must allocate capital efficiently in order to
generate positive economic return.
Investments in Ping An and BoCOM
With its longstanding presence in China, HSBC was
among the best-positioned financial institutions to take
advantage of China’s market opening.
Ping An Insurance: 2002–2013
In October 2002, HSBC announced that it had taken a
10 percent stake in Ping An Insurance, China’s second
largest insurer, for $600 million, and in May 2005, HSBC
570 Part 4 Organizational Behavior and Human Resource Management
The competition in China’s banking industry is
continuing to grow. Recently, foreign banks have
increasingly turned to joint ventures as a strategy for
increasing investment in China. In 2011, Morgan
Stanley formed a joint venture with Huaxin Securities
Co. Ltd. to facilitate expansion into China. Morgan
Stanley owns a third of the venture, while Huaxin
Securities maintains two-thirds control. The deal gives
Morgan Stanley the ability to underwrite and trade
bonds. UBS, Goldman Sachs, Royal Bank of Scotland,
and Deutsche Bank have formed similar joint ventures
in recent years, with the foreign bank maintaining a
minority share while the domestic partner holds the
majority position.
When it comes to utilizing joint ventures as a way to
increase investment in mainland China, HSBC has
lagged behind its peers. In 2015, HSBC finally
announced its first securities joint venture in China,
with Shenzhen Qianhai Financial Holdings as its local
partner. The delay, however, may have proved benefi-
cial; unlike most other foreign banks with joint ventures
in China, HSBC was able to secure a majority share of
the deal.
Shifting towards Asian Operations
Despite the mixed performance results over the last sev-
eral years with its BoCOM joint venture, HSBC shows no
signs of scaling back its operations in China. In fact, CEO
Stuart Gulliver announced plans to do just the opposite in
2015. While the abandonment of the “World’s Local
Bank” strategy resulted in job cuts and branch closings in
many developed markets, Gulliver stated that HSBC was
planning to hire more than 25,000 new employees in the
Asian region in the coming years.
Much of HSBC’s future profitability appears to
hinge on China and other Asian markets. In 2015,
European and North American holdings accounted for
30 percent and 15 percent of HSBC’s assets, respec-
tively, but only 3 percent and 8 percent of net profits
before tax. Additionally, future growth prospects in
those regions appear bleak. In both Europe and the
United States, revenues have remained stagnated for
several years. Conversely, 40 percent of HSBC’s assets
were located in Asian markets by 2015. These markets,
growing at 7 percent annually, accounted for 78 percent
of net profits before tax.
While HSBC only had 200 branches and a deposit
base of US$40 billion in mainland China as of 2015,
GDP growth projections indicate that the Guangdong
province will be the largest banking center worldwide
by 2025. HSBC’s strategy for future investment in the
Guangdong area, and specifically in Shenzhen, is
dependent on increasingly liberal banking reforms by
the Chinese government. As of 2015, China was still
exciting prospects. Bank of Communications has over
30 million debit cards in issue. Over time, a proportion
of those is going to convert to credit cards. And we
are issuing co-branded credit cards with the Bank of
Communications.”9 HSBC saw an opportunity to shep-
herd millions of new people into the banking system.
HSBC’s Green acquiesced that emerging markets do
carry risk. This risk was starkly evident during the
HSBC debacle in Argentina during the country’s eco-
nomic crisis. China’s epic turnaround could conceivably
flop, and heavily invested banks could pay dearly. The
banking system in China was and is very fragile. Would
China’s banks be able to break away from state-directed
lending and its lasting effects? The banks further rely on
the continued acceleration of the economy, and many
rely on volatile real estate loans. HSBC recognized other
challenges for China, including the need to strengthen
regulations, build social security, stem corruption, and
fortify the financial system.
HSBC’s holdings in BoCOM, which are among the
largest by a foreign bank in China, have posted mixed
results over the last ten years. In 2015, BoCOM’s listings
on the Hong Kong stock exchange dropped more than
11 percent. In reaction, BoCOM announced that it would
allow HSBC greater control in decision making, including
the appointment of a new vice chair.
Recent Developments and Future
Competitive Conditions
Current Strategies in China
Foreign banks that operate in China have different
strategies. Some of them have purchased smaller stakes
of Chinese financial institutions, while some prefer to
buy a bigger stake of a small bank. Nevertheless, they
all want to be in China. The best strategy, in theory,
has turned out to be with a local partner. Bob Edgar,
senior managing director at Australia and New Zealand
Banking Group Ltd., said that “it would be very dif-
ficult to go into a market like that and undertake the
cost of establishing a branch network, getting a cus-
tomer base of hundreds of thousands if not millions of
customers. That already exists, so why would we want
to set it up again?”10
Many foreign banks, however, experience difficulties
when working with a local partner. The credit standards
are not as strict as they should be, and there is still
endemic corruption at different levels. In addition, the
partners gain influence in the foreign bank. This is the
reason why HSBC has decided to invest “outside the Big
Four”: so it would have bigger control in operations. Peter
Wong, executive director of HSBC’s Hong Kong and
Mainland China operations, has commented: “[T]he state-
owned banks would be too big.” So only the future will
tell what is the best strategy.
In-Depth Integrative Case 4.1 HSBC in China 571
environmental charities. In 2015, HSBC received
Taiwan’s Excellence in Corporate Social Responsibil-
ity award for its efforts.
Future Competitive Conditions
Despite the economic crisis, there were several geo-
graphical regions that did not fall into economic reces-
sion in the 2008–2010 period. China, foremost,
experienced strong economic growth throughout this
period. China’s gross domestic product expanded
10.7 percent in the fourth quarter of 2009, bringing full-
year growth to 8.7 percent. That came in above the gov-
ernment’s targeted 8 percent growth and well above
many economists’ estimates. China officially surpassed
Japan as the world’s second-largest economy in mid
2010. The growth numbers demonstrate that Beijing’s
stimulus program—a response to the global economic
slowdown that focused on massive bank lending and
public investments in infrastructure—helped avert an
economic slowdown. However, as the developed world
has begun to recover and economies like the United
States, Germany, and the United Kingdom have seen
modest gain in GDP growth, China has shown signs of
a significant slowdown. By 2015, China’s growth rate
had slipped to less than 7 percent.
In 2014, China surpassed the United States to
become the largest recipient of FDI worldwide. More
than US$128 billion in investments flowed into China
in 2014 alone. Despite the economic slowdown that
China is experiencing, FDI inflows continue to increase
year over year.
heavily regulating the opening of new branches, which,
if it remains unchanged, could hinder HSBC’s expan-
sion plans.
HSBC’s Expansion in Vietnam and Taiwan
HSBC has found success in other Asian markets over
the last decade. In 2009, HSBC won approval from the
Vietnamese government to become the first foreign
bank to set up a locally incorporated entity. New laws
that have helped open Vietnam’s banking sector to for-
eign companies were introduced as part of the commu-
nist country’s inclusion in the World Trade Organization.
The change in legal status in Vietnam has made it eas-
ier for HSBC’s local operations to set up branches
across the country. That year, HSBC hired more than
400 additional staff in Vietnam in anticipation of its
expansion. This has brought the number of staff mem-
bers there to more than 1,000. In Vietnam, HSBC also
owns 10 percent of Bao Viet Holdings, an insurance
company, and 20 percent of Vietnam Technological &
Commercial Joint Stock Bank, or Techcombank. In
2015, HSBC was named both Best Foreign Investment
Bank in Vietnam and Best Foreign Commercial Bank
in Vietnam by FinanceAsia.
Similarly, in 2009 HSBC was the first bank to
incorporate locally within Taiwan. Growth has been
slow but steady; by 2015, HSBC was operating
40 branches throughout the island, with half of those
located in Taipei. HSBC has incorpated various cor-
porate sustainability initiatives into its Taiwan opera-
tions, including donating to various educational and
0
Note: As of end-April 2009 (excluding representative o�ces, administrative o�ces, etc.)
10
20
30
40
50
60
70
80
90
HSBC
China
DBS
64
19
46
37
23
10
21
18 15 6
11 8 5 7
BranchesSub-branches
BEA Stanchart Hang Seng
Locally incorporated foreign banks by network
HSBC China—largest and most geographically widespread network of all foreign
banks in mainland China
Citi ABN
572 Part 4 Organizational Behavior and Human Resource Management
HSBC
Latin America
Holdings
(UK) Limited
HSBC Bank
Argentina
S.A.
HSBC
Mexico SA
HSBC North
America
Holdings Inc.
HSBC
Finance
Corporation
HSBC
Securities
(USA) Inc.
HSBC
USA Inc.
HSBC Bank
USA, N.A.
HSBC
Investments
(North
America) Inc.
HSBC
Latin
America BV
HSBC Bank
Canada
HSBC
Bank plc
HSBC
Private Bank
(Suisse) S.A.
HSBC
France
HSBC
Trinkaus &
Burkhardt AG
HSBC Bank
Middle East
Limited
HSBC Asia
Holdings
(UK) Limited
The Hongkong
and Shanghai
Banking Corp-
oration Ltd
Hang Seng
Bank
Limited
Hang Seng
Bank (China)
Limited
Bank of
Commun-
ications
Co Limited
HSBC Bank
(Taiwan)
Limited
HSBC Bank
(China) Co.
Limited
HSBC Bank
Malaysia
Berhad
HSBC Bank
Australia
Limited
The Saudi
British Bank
HSBC Bank
Egypt S.A.E.
94%
40%
HSBC
Holdings
BV
HSBC
Holdings plc
Latin America North America Europe AsiaMENA∗
HSBC Private
Banking
Holdings
(Suisse) S.A.
HSBC
Overseas
Holdings
(UK) Limited
99%
99%
80%
62%
19%
Germany
USA
UK
HK
HK
PRC
UK
Holding company Intermediate holding company Operating company Associate
∗Middle East and North Africa
HSBC group structure chart as of December 2015
Source: “Simplified Structure Chart: Principal Entities,” The HSBC Group, http://www.hsbc.com/about-hsbc/structure-and-network.
Exhibit 4 Top 10 Banks in China, Ranked by Tier 1 Capital in 2014
Rank Foreign
Tier 1 (by Bank
Rank Bank Capital Assets Assets) Shareholder
1 ICBC 207,614 3,100,254 1
2 China Construction Bank 173,992 2,517,734 2
3 Bank of China 149,729 2,273,730 4
4 Agricultural Bank of China 137,410 2,386,447 3
5 Bank of Communications 68,333 976,882 5 HSBC
6 China Merchants Bank 41,690 658,210 7
7 China Citic Bank 37,427 596,721 10 BBVA
8 Shanghai Pudong Development Bank 34,042 603,101 8
9 China Minsheng Bank 33,232 528,714 11
10 Industrial Bank 32,965 602,661 9 Hang Seng
Bank
Source: Ernst & Young, Future Directions for Foreign Banks in China (2014), Appendix C.
HSBC’s future development will depend heavily on
two things. First, the competition will play a major role
in HSBC’s strategy. HSBC competitors are aggressively
seeking opportunities in China, and HSBC has to
constantly work to maintain and expand its market posi-
tion. Second, HSBC’s success will depend on the oppor-
tunities that the company sees in the other emerging
markets of the world.
In-Depth Integrative Case 4.1 HSBC in China 573
HSBC Group’s Overall Current Strategy
HSBC Group’s overall international strategy has evolved
in the years since the global recession. As of 2016, the
overall company strategy is currently designed around two
global trends:
First, HSBC plans to focus on growing markets in
Asia, Latin America, Africa, and the Middle East. Due to
demographic shifts and increasing urbanization, those
emerging markets are predicted to increase by 400 percent
by 2050, providing a large consumer base that could
potentially become retail banking customers. To maxi-
mize return, HSBC plans to focus on wealth management
across these regions, but only enter retail banking in loca-
tions where there are enough middle-class consumers to
return a profit.
Second, HSBC plans to take advantage of increasing
international trade and cross-border capital flows. To
acheive this, HSBC aims to reach small- to medium-sized
multinational enterprises from a variety of home coun-
tries, build loyalty with these companies, and then con-
tinue to serve these companies as they grow from smaller
startups to large conglomerates.
To decide where to expand and invest, HSBC has
developed a decision-making framework. The framework
evaluates the relevance, the quality of the returns, and the
risk of financial crime to determine whether HSBC should
increase investment, improve its operations, or withdraw
from the market.
2016 and Beyond
Despite HSBC’s slimming of operations around the globe
in an effort to cut costs, HSBC has reaffirmed its future
plans for growth in the Chinese market. In late 2015,
HSBC announced plans to add over 3,000 employees to
the Pearl River Delta region in an effort to increase its
retail banking business. The boost is aimed at increasing
HSBC’s pretax profits in the region by a factor of 10 by
the year 2020. The Pearl River Delta, which includes the
cities of Shenzhen and Foshan, includes a rapidly expand-
ing middle-class population that could serve as future
HSBC retail banking customers.
HSBC’s Current China Strategy
HSBC’s strategy in China is carried out by its 100 percent
subsidiary HSBC Bank (China) Company Limited. As of
2016 HSBC Bank (China) was a network of more than
170 bank outlets (branches and sub-branches) with 6,000
employees spread across 50 cities. At this time HSBC had
the largest and most geographically widespread network
of banks in mainland China compared to other foreign
banks operating in China.
In its attempt to mitigate the negative impact of eco-
nomic crisis and strengthen its competitive position,
HSBC took several measures to redefine and clarify its
strategies for the nearest future. China was identified to
be the center of the Group’s emerging markets strategy.
HSBC has formally defined its strategy for China as fol-
lows: “To be the leading foreign bank in China in terms
of market share and profitability, and deliver significant
offshore China-related business to the Group.”
HSBC has identified key priorities aimed at achieving
its strategic goals for China:
1. International connectivity—Connect its Chinese
operations with the rest of HSBC Group’s opera-
tions. This includes maintaining Chinese-dedicated
desks in overseas offices and creating foreign repre-
sentative positions within China.
2. RMB internationalization—Become the leading
bank for RMB globally. Currently, more than
150 countries are doing business with RMB,
with France, Singapore, and the U.K. leading
the way.
3. Network and presence—Use network leadership to
maintain a strong presence in the market.
4. Capabilities and licenses—Maintain product leader-
ship in China, when compared to other foreign
banks operating in the country.
5. People—Hire and retain the best employees, and
leverage those employees as a resource for business
growth and organizational effectiveness.
6. Strategic partners—Maintain and build strong strate-
gic partnerships and facilitate business cooperation.
What is the
strategic relevance?
Using the six filters in decision-making
Are the current
returns attractive?
What is the financial crime risk?
1. Connectivity
2. Economic development
High
Yes
Low
Invest
Turnaround/improve
Continue as is
Risk mitigation
Discontinue/dispose
Risk mitigation
Risk mitigation
High
Yes
No
No
Medium/low
3. Profitability
4. E�ciency
5. Liquidity
6. Financial crime risk
HSBC Decision-Making Framework
Source: HSBC, Strategic Report 2014 (February 2015), http://www.hsbc.com/our-approach/reports-and-documentation.
574 Part 4 Organizational Behavior and Human Resource Management
4. How did HSBC withstand the world economic crisis?
Was HSBC’s position weakened or strengthened as
result of the crisis? How did HSBC alter its strategy
in the wake of the recession?
5. What are some changing economic factors that
HSBC will need to take into consideration in the
coming years?
Exercise
HSBC is considering asking the government of China
(China Banking Regulatory Commission—CBRC) to
allow it to increase its stake in BoCom above the limit
currently in place (25% total foreign ownership; 20% for
an individual foreign investor). Break into four groups:
1. HSBC
2. BoCom
3. Citibank
4. CBRC
Groups 1–3 should prepare a 5-minute presentation on
whether the government of China should grant the request
and, if so, what the ownership limit should be (30%?
50%?) and whether it should be extended to other foreign
financial institutions (e.g., Citibank). Then, Group 4
should discuss the question and report its decision.
Source: This case was prepared by Jonathan Doh of Villanova University as the basis
for class discussion. Additional research assistance was provided by Courtney Asher,
Elizabeth Stewart, Tetyana Azarova, and Ben Littell. It is not intended to illustrate
either effective or ineffective managerial capability or administrative responsibility.
The bank is also working toward being one of mainland
China’s first foreign-listed companies to tap into the coun-
try’s liquidity and to raise its overall profile there. Credit
card usage has been increasing rapidly within the country,
with nearly 500 million credit cards issued by the end of
2015. HSBC has moved to grab a larger share of this
growing market. Between 2004 and 2016, HSBC and Bank
of Communications co-issued over 40 million co-branded
credit cards in China. In early 2016, HSBC was granted
approval to begin issuing credit cards on its own, effec-
tively ending the credit card portion of its joint venture
and allowing HSBC to take complete control over its credit
card operations.
HSBC’s China experience has been one of steady and
consistent expansion and success. While there have been
some setbacks, its overall approach, emphasizing close
collaboration with the Chinese government and local part-
ners, reliance on local staff and talent, and its overall shift
in global strategy from developed to emerging markets,
has served it well.
Questions for Review
1. How has HSBC adapted its global strategy to
operate in China, both before and after China’s
WTO accession?
2. Discuss HSBC’s strategy for entering and operating
in other emerging markets. Where has it found suc-
cess, and where has it faced setbacks? Why?
3. What are the pros and cons of HSBC’s “Managing
for Growth” strategy?
1. “China’s Banking Industry: A Great Big Banking
Gamble,” The Economist, October 25, 2005.
2. Becky Yerak, “HSBC Plans to Close Household
Financial, Beneficial Consumer Loan Units,”
Chicago Tribune, March 3, 2009, http://articles.
chicagotribune.com/2009-03-03/news/0903021009_
1_hsbc-holdings-plc-hsbc-bank-usa-household-
international.
3. “Our Strategy,” HSBC, www.hsbc.com/about-hsbc/
our-strategy.
4. Carrick Mollenkamp, “HSBC CEO Discusses the
Bank’s Expansion Plans,” The Wall Street Journal,
October 23, 2005.
5. Peter S. Goodman, “China Approves Plan for Huge
Bank IPO,” Washington Post, July 20, 2006, p. D5.
6. “China’s Banking Industry: A Great Big Banking
Gamble.”
7. Barney Jopson, “China Struggles to Overcome
Shortage of Good Accountants,” Financial Times,
June 6, 2006, p. 11.
8. Sir John Bond, “China: The Re-emergence of the
Middle Kingdom,” Speech, July 19, 2005.
9. Carrick Mollenkamp, “HSBC Plans Push in Emerging
Markets,” The Wall Street Journal, October 24, 2005.
10. K. C. Swanson, “Buying into China’s Banks,” Cor-
porate Dealmaker, September–October 2006, p. 18.
ENDNOTES
575
Yet despite Chiquita’s apparent turnaround, lingering
problems remained in financial performance, organiza-
tional efficiency, and a strategy for the future. How could
Chiquita sustain the positive momentum from its turn-
around in reputation and employee relations to deliver
improved and sustainable business performance in a
global industry environment plagued by low margins and
intense competition?
Chiquita’s Background
Chiquita Brands International Inc. is a multinational pro-
ducer, distributor, and marketer of bananas and other
fresh produce. The company also distributes and markets
fresh-cut fruit and other branded, value-added fruit prod-
ucts. Approximately 60 percent of its 2003 revenues of
$2.6 billion came from bananas. Since adding new prod-
ucts and acquiring Fresh Express, the U.S. market leader
in fresh salads, in 2005, bananas have totaled 43 percent
of Chiquita’s net sales. In 2003, the banana division con-
sisted of 19,000 employees, mainly working on more
than 100 banana farms in countries throughout Latin
America, including Guatemala, Honduras, Nicaragua,
Ecuador, Costa Rica, Panama, and Colombia. Approxi-
mately 45 percent of all bananas sold by Chiquita are
from Chiquita-owned farms; independent suppliers in
Latin America produce the remainder. Chiquita is one of
the global market leaders in banana supply and produc-
tion (see Table 1). Because Chiquita’s exports are often
a substantial part of the foreign trade of the Latin Amer-
ican countries in which the company operates, relation-
ships with suppliers, workers’ unions, and communities
are critical elements for success.
Chiquita sources bananas from many developing Latin
American countries, countries that historically have strug-
gled with poverty, literacy, access to affordable health care,
On January 12, 2004, Chiquita named Fernando Aguirre
as the company’s new president and CEO, replacing Cyrus
Freidhem, who had held the position since the company’s
emergence from bankruptcy in March 2002. In his 23 years
with Cincinnati-based Procter & Gamble (P&G), Aguirre
served in a variety of positions, including president of
P&G Brazil and president of P&G Mexico. In his first
remarks to Chiquita employees and investors, Aguirre reit-
erated the importance of corporate responsibility: “In
terms of managing businesses and people, while I am
profit-conscious, I make decisions first and foremost based
on values and principles. In that respect, I’m proud to be
joining a company with Core Values that guide day-to-day
operations and one where corporate responsibility is an
important part of our company culture.”1
Over the past several years, social responsibility has
become the watchword of this traditional company with
midwestern roots but a checkered history. In 2004,
Chiquita scarcely resembled the company that once held
a reputation as cold, uncaring, and indifferent, frustrated
with mediocre returns, a lack of innovation, and a demor-
alized workforce. Throughout the 20th century, hostile
relationships with its labor unions and employees and a
reputation for immorality solidified by the actions of
its predecessor company, United Fruit, helped to slow
Chiquita’s growth. In addition, by the late 1990s, con-
sumption of bananas had declined in major markets, and
Chiquita’s position in Europe had been compromised by the
European Union’s preferential import relationships with its
members’ former colonies in the Caribbean, Africa, and
the Pacific. These factors helped push Chiquita to seek
Chapter 11 bankruptcy protection in November 2001.
Through a serious and dedicated internal analysis, a thor-
ough reevaluation of its core mission and business princi-
ples, and a concerted effort to reach out to some of its
primary stakeholders—such as employees—who had
become disenchanted and alienated, by early 2003, Chiquita
had engineered the beginnings of a turnaround. One of the
most impressive aspects of this recovery was Chiquita’s suc-
cess in redirecting and redefining its reputation through a
more open and transparent approach to its global operations
and to the various stakeholder groups with which it inter-
acted. In addition, Chiquita had substantially reformed its
labor practices and relations and initiated a set of projects
in sustainable development and community action in its
various locations around the world. Both labor unions and
nongovernmental organizations (NGOs) lauded these steps.
In-Depth Integrative Case 4.2
Chiquita’s Global Turnaround
Table 1 Banana World Market Share Leaders, 1999, 2002,
and 2005
2005 2002 1999
Chiquita 25% 23% 25%
Dole 25 25 25
Del Monte 15 16 15
Fyfess 8 8 8
Noboa 11 11 11
Source: Banana Link.
576 Part 4 Organizational Behavior and Human Resource Management
Corporate image was further damaged when the firm
emphasized the violation of its privacy instead of addressing
the possible validity of the claims made. According to Jeff
Zalla, current corporate responsibility officer at Chiquita,
the strategy backfired. “It left some people with an unsavory
impression of our company,”3 he said.
Damaging media coverage and a renewed desire to
evaluate its own ethics performance and gain support for
a common set of values and standards for environmental
and social performance served as catalysts for the institu-
tion of corporate social responsibility policies at Chiquita.
After recognizing the need for a complete corporate
makeover, Chiquita’s then-CEO Steve Warshaw declared
his commitment to leading in the area of corporate respon-
sibility and pledged that the company would do much
more than just repair previous damage. Four years later,
despite changes in the executive management group,
Chiquita’s corporate social responsibility programs were
a positive example of leading responsibility change in
today’s multinational business environment.
In January 2001, Chiquita announced that it could no
longer pay the interest on its $862 million debt. The fiercely
competitive banana industry, downward trends in prices due
to excess supply, EU restrictive trade quotas, poor labor-
union relations, and the market view of bananas as a low-
margin commodity all contributed to Chiquita’s bankruptcy
filing. Chiquita attributed much of the responsibility to the
European Union. In 1993, the EU imposed quotas that gave
preferential treatment to banana imports from ACP (Africa,
Caribbean, and Pacific) countries that were former European
colonies, ostensibly to help these former European colonies
boost their international trade and commerce. Before the
1993 act, 70 percent of the bananas sold in Europe came
from Latin America, and Chiquita had a 22 percent share of
the world’s banana market. After the quotas were imposed,
Chiquita claimed that its European market share was cut in
half, costing $200 million a year in lost earnings.
Although many of its difficulties were intensified by
the EU policy, Chiquita’s problems had begun to develop
before the 1993 decision. Most important, miscalculations
of increases in European demand in the 1990s resulted in
an oversupply, leading to depressed banana prices world-
wide. Although prices recovered somewhat (see Table 2),
and limited infrastructure. The image of the banana indus-
try has long been tarnished by its historical support of the
failed U.S. invasion of Cuba in 1961, child labor, unsafe
working conditions, sexual discrimination, low wages, and
accusations of serious brutality against unionizing workers.
Chiquita’s reputation was damaged by past events, notably
those associated with its predecessor company, United
Fruit. These included allegations of the company’s partici-
pation in labor rights suppression in Colombia in the 1920s,
the use of company ships in the U.S. government–backed
overthrow of the Guatemalan government in 1954, and
involvement in a bribery scandal in Honduras in 1975. In
the 1980s and 1990s, Chiquita clearly projected a defensive
and protective culture, conveying a closed-door impression
of its policies and practices.
Because bananas are produced all year long, local com-
munities are closely tied together by the performance of
farms. Many employees live in houses owned by the com-
pany, most of which are located on the farms themselves.
In many areas, Chiquita provides electricity, potable water,
medical facilities, and other basic services. However, labor
relations remained strained throughout the 1980s and 1990s.
Chiquita’s Downward Spiral
Although Chiquita improved its environmental procedures
throughout the 1990s, many human rights groups, includ-
ing Banana Link and US/Labor Education in the Americas,
organized an outspoken campaign against all banana com-
panies to improve social conditions on their plantations.
One morning in early 1998, executives at Chiquita were
devastated to see their company splashed all over the
newspapers after an undercover investigation into “dan-
gerous and illegal business practices” throughout Chiq-
uita’s Latin American operations. This was a watershed
moment for the company.
The Cincinnati Enquirer, a paper based in the same town
as Chiquita’s corporate headquarters, printed an exposé con-
tending that Chiquita was guilty of “labor, human rights,
environmental and political violations in Central America.”2
Although the newspaper was later forced to retract the series
after it was discovered that a reporter had illegally pene-
trated Chiquita’s voicemail system, the damage was done.
Table 2 Banana Prices: Regional Year-over-Year Percentage Change, 2003 vs. 2002
Region Q1, 03 Q2, 03 Q3, 03 Q4, 03 Year
North America 3% 24% 1% 22% 21%
European core markets—US$ 11 12 5 18 12
European core markets—local currency 29 210 29 0 27
Central & E. Europe/Mediterranean—US$ 4 23 4 2 22
Central & E. Europe/Mediterranean—local currency 215 222 210 214 219
Asia—US$ 27 0 3 12 0
Asia—local currency 218 27 3 6 25
Source: Company reports.
In-Depth Integrative Case 4.2 Chiquita’s Global Turnaround 577
sentative, suggesting violations of free trade. In 1994, a
General Agreement on Tariffs and Trade (GATT) panel
ruled that the new regime violates GATT obligations, but
the EU blocked adoption of the ruling by the full GATT.
In 1996, the United States, along with Ecuador, Guatemala,
Honduras, and Mexico, challenged the new regime under
the new World Trade Organization (WTO) dispute-settle-
ment mechanism, which came into force after the Uruguay
Round of GATT negotiations.
In May 1997, a WTO panel ruled that the EU’s banana
import regime violated WTO obligations under the Gen-
eral Agreement on Trade in Services and the Agreement
on Import Licensing Procedures. In September 1997, the
WTO Appellate Body upheld the panel ruling, granting
the EU 15 months, until January 1, 1999, to comply with
the ruling. In January 1999, the deadline for EU compli-
ance expired, and the United States sought WTO autho-
rization to impose retaliatory tariffs. In April 1999, the
WTO Dispute Settlement Body authorized U.S. retalia-
tory tariffs amounting to $191.4 million a year—the level
of damage to U.S. companies calculated by arbitrators—
and the United States immediately began steps to with-
hold liquidation of European imports, the first step in the
imposition of the tariffs.
CEO Keith Linder blamed $284 million in losses in 2001
on a “decline in product quality resulting from an extraor-
dinary outbreak of disease and unusual weather patterns.”4
At the end of 2006, Chiquita still faced financial difficul-
ties as a result of a “perfect storm” of higher tariffs,
increased competition in the EU banana market, U.S. con-
sumer concerns about the safety of fresh spinach (another
Chiquita product), and higher industry costs overall.
While the company expressed dissatisfaction with 2006
results, it also stated that “we firmly believe our 2006
results are not indicative of the underlying strengths of
Chiquita’s business or our long-term potential.”5 Table 3
provides a comprehensive summary of key developments
in Chiquita’s history.
Dispute over Access to European
Banana Markets
Chiquita has long claimed that its recent struggles are a
direct result of the 1993 EU decision to put restrictive
quotas on imports from Latin American suppliers. Imme-
diately after the decision by the EU in 1993 to extend
preferential quotas to its former Caribbean and African
colonies, Chiquita took the issue to the U.S. trade repre-
Table 3 Key Developments in Chiquita’s History
1899 United Fruit Company is created through a merger of fruit companies.
1903 The company is listed on the New York Stock Exchange; it builds refrigerated ships.
1918 Thirteen banana ships are lost after being commissioned by Allied forces in World War I.
1941 Allied forces in World War II commission company ships, and the banana industry nearly shuts down.
1945 Twenty-seven ships and 275 men on company ships are lost serving Allied forces.
1950 The company starts massive postwar banana-planting projects.
1961 Company ships provide support for failed U.S. invasion of Cuba.
1964 The company begins a large-scale branding program for produce and starts using banana stickers bearing the Chiquita
name.
1970 United Fruit merges with AMK Corp. and becomes United Brands Company.
1975 United Brands is involved in Honduran bribery scandal, which leads to enactment of U.S. Foreign Corrupt Practices Act.
Company stocks plunge, and CEO Eli Black commits suicide.
1990 United Brands changes name to Chiquita Brands International.
1993 EU banana regulations cut Chiquita’s market share by more than 50 percent. Chiquita begins working with Rainforest
Alliance and Better Banana Project.
1994 Start of the “banana wars” between the EU and WTO. Follows complaints by Chiquita that EU favors Caribbean banana
suppliers over Latin American importers.
1998 Chiquita becomes largest U.S. private-label fruit canner. Becomes first large company to meet with COLSIBA, an affiliation
of Latin American banana unions.
1999 Faces possible auction proposed by large shareholder American Financial Group.
2000 Adopts expanded code of conduct. All 115 Chiquita-owned farms achieve Better Banana certification.
2001 Restructures debt after stopping payments on $862 million loan; cites prejudiced trade pacts by EU.
2001 Files for Chapter 11 bankruptcy protection.
2001 Issues first (2000) corporate responsibility report.
2002 Chiquita shareholders and bondholders support reorganization plan.
2002 Issues 2001 corporate responsibility report.
2003 Chiquita reports positive net income under reorganized company.
2003 SustainableBusiness.com names Chiquita one of the top 20 sustainable stock picks for the second year in a row.
2004 Maintained market leadership in the growing EU.
2005 Chiquita acquires Fresh Express, U.S. market leader in fresh salads.
2006 Awarded the Contribution to the Community Award by the American-Costa Rican Chamber of Commerce for its Nature &
Community Project in Costa Rica.
2007 Chiquita faces a $25 million fine from the U.S. Department of Justice for payments made to Colombian paramilitary groups
for the protection of its employees.
578 Part 4 Organizational Behavior and Human Resource Management
Opportunity: We believe the continuous growth and
development of our employees is key to our success. We
encourage teamwork. We recognize employees for their
contributions to the company’s success.
Responsibility: We take pride in our work, in our products
and in satisfying our customers. We act responsibly in the
communities and environments in which we live and
work. We are accountable for the careful use of all
resources entrusted to us and for providing appropriate
returns to our shareholders.6
In support of the four core values, Chiquita undertook
reforms to link its corporate governance and corporate
responsibility policies. These reforms included expand-
ing the role of the board’s Audit Committee to oversee
the firm’s corporate responsibility (CR) mission and to
evaluate whether the firm had the right people, policies,
and programs in place to properly advance the CR
agenda. In addition, in May 2000, Chiquita appointed a
full-time vice president and CR officer responsible for all
aspects of corporate social responsibility. According to
Chiquita, the four core values, supported by the senior
management group and CR committee, have helped drive
responsible change throughout the entire organization.
Each business decision must be evaluated through the
lens of CR policies.
Chiquita also began to realize that a corporate social
responsibility platform could mean a competitive advan-
tage in the banana market. Dennis Christou, vice president
of marketing-Europe, explained: “Bananas are, by defini-
tion, a commodity and U.K. consumers do not generally
see fruit as branded. Chiquita is trying to change this. We
have a brand because we own certain values and a rela-
tionship with consumers. And we communicate with
them. They have expectations about Chiquita.”7 In par-
ticular, environmental and social performance are of keen
interest to some leading European customers. In 2002,
56 percent of Chiquita’s sales in northern European mar-
kets were to customers who had either inspected farms or
formally asked questions about environmental and social
performance. This was a 5 percent increase—about 13,000
forty-pound boxes per week—over the prior year.
Chiquita also strengthened its commitment to the Better
Bananas Project. Under this program, external auditors
audit all Chiquita farms annually. Chiquita has made an
important partnership with Rainforest Alliance, which has
been integral in assessing Chiquita’s environmental prac-
tices, especially related to deforestation. The Rainforest
Alliance, which claims that the world’s rainforests are
being deforested at a rate of 1 percent per year (or two
U.S. football fields every second), has annually accredited
every Chiquita farm since 2000. Chiquita also encourages
its independent producers, which supply Chiquita with
about 50 percent of its bananas, to achieve Rainforest
Alliance certification. In 2002, the volume of bananas pur-
chased from certified farms rose from 33 to 46 percent,
In April 2001, the United States and the European
Commission announced that they had reached agreement
resolving their dispute. The agreement took effect on
July 1, 2001, at which time the United States suspended
the retaliatory sanctions imposed on EU imports in 1999.
Import volumes of bananas were returned to levels com-
parable to those prior to 1993, and the EU committed to
moving to a tariff-only system in 2006 as part of its over-
all WTO obligations.
The dispute has taken its toll on the banana trade by
creating uncertainty for smaller producers reliant on EU
markets under the quota system and for large producers
such as Chiquita that were forced to expend considerable
financial and other resources in the course of the dispute.
High tariffs in the EU continue to be a financial burden
for Chiquita.
Corporate Responsibility
Chiquita had begun to initiate corporate responsibility
projects in 1992 when it adopted Better Banana Project
standards designed to improve environmental and worker
conditions on its farms. Then, after the 1998 exposé in
the Cincinnati Enquirer, Chiquita management began to
conduct a series of broader companywide reviews of its
conduct, policies, and internal and external operations and
relationships, all designed to integrate corporate respon-
sibility throughout the company’s operations.
In 1998, Chiquita initiated several projects aimed at
implementing its corporate responsibility efforts world-
wide. Two internal groups were formed: the Senior Man-
agement Group and the Corporate Responsibility Steering
Committee. The former consists of eight top managers of
Chiquita’s global businesses, including the president/
CEO and COO of banana operations. The Senior Man-
agement Group is ultimately responsible for providing
strategic vision and leadership for corporate responsibil-
ity. The Steering Committee, also consisting of eight
members, was constructed to help streamline corporate
social responsibility policies throughout each operational
area of the firm.
In August 1999, Chiquita adopted the four key values
that now guide all strategic business decision making
worldwide. After a year of discussions, interviews, and
debates on the merits of an internal corporate social
responsibility policy, Chiquita defined the following four
core values:
Integrity: We live by our Core Values. We communicate
in an open, honest and straightforward manner. We con-
duct our business ethically and lawfully.
Respect: We treat people fairly and respectfully. We rec-
ognize the importance of family in the lives of our
employees. We value and benefit from individual and
cultural differences. We foster individual expression, open
dialogue and a sense of belonging.
In-Depth Integrative Case 4.2 Chiquita’s Global Turnaround 579
Award for Chiquita’s Nuevo San Juan Home-Ownership
Project in Honduras. Also in 2004, Chiquita earned the
Ethic Award from the AGEPE Editorial Group and KPMG
in Italy for its initiatives in the field of ethics, environ-
mental protection, and workplace improvements.
One recent setback for Chiquita’s corporate responsi-
bility profile involved its banana-producing subsidiary in
Colombia. After a 2003 probe into the company’s finances,
Chiquita self-reported to the U.S. Department of Justice
(DOJ) that it had made payments to left- and right-wing
paramilitary groups in Colombia such as the AUC, ELN,
and FARC. These payments, beginning in 1997, were
made in order to protect the lives of its employees.
Colombia has one of the highest kidnapping rates in the
world and a murder rate 11 times that of the United States.
“It’s certainly a common understanding that in order to
do business in Colombia, payments have to be made for
at best security, or at worst extortion,” explained Ron
Oswald, general secretary of the International Union of
Foodworkers, which represents Chiquita workers in Latin
America (including many in Colombia).
The U.S. 1996 Anti-Terrorism Act makes it illegal to
support any organizations identified as a terrorist threat.
As of September 2001, the list of terrorist threats included
the Colombian paramilitary groups. In a company press
release, Chiquita chairman and CEO Fernando Aguirre
explained, “The payments . . . were always motivated by
our good faith concern for the safety of our employees.
Nevertheless, we recognized—and acted upon—our legal
obligation to inform the DOJ of this admittedly difficult
situation.”9 Officially announced in 2007, Chiquita faced
a $25 million fine for the payments it made in Colombia.
In anticipation of the decision, the company set aside
funds in 2006 to pay the fine. Chiquita does not believe
the fines will hurt its operations. Perhaps as a result of
the pending DOJ investigation and decision, Chiquita sold
its Colombian subsidiary in 2004.
Global Codes of Conduct, Standards,
and Labor Practices
In late 2001, Ron Oswald, general secretary of the Inter-
national Union of Food Workers, was asked if he had seen
improvements in Chiquita’s internal and external corpo-
rate policies. He responded, “Yes. It is a company that is
totally unrecognizable from five years ago.”10 Clearly
Chiquita had come a long way.
Traditionally, relations between Chiquita and labor
unions in Latin America were mired in conflict and mis-
trust. In 1998, after recognizing the need for change in
the way it deals with its line, Chiquita began striving to
adhere to SA8000, the widely accepted international labor
rights standard. Management struggled with the decision
of whether to adopt an outside standard or to develop an
internal measurement gauge for corporate responsibility.
and farms certified through June 2003 brought the total to
65 percent. As of August 2006, all of the farms owned by
the Chiquita Company are certified by the Rainforest Alli-
ance. Along with all of Chiquita’s farms, the Rainforest
Alliance has also certified the majority of the independent
farms connected to Chiquita. TreeHugger.com also con-
tends that “Chiquita now recycles 100 percent of its plas-
tic bags into paving stones and has reduced pesticide use
by 26 percent.”8 Table 4 presents the nine principles of the
Better Banana Project. According to insiders, the adoption
of third-party standards has helped Chiquita drive a stron-
ger internal commitment to achieving excellence—and to
cut costs. In 2003, the Rainforest Alliance estimated that
Chiquita reduced production spending by $100 million as
a result of a $20 million investment to reduce agrochemi-
cal use. In a more recent effort to increase its corporate
responsibility profile, Chiquita Bananas pledged to boycott
oil from Canada’s tar sands in November 2011.
Chiquita is receiving increasing recognition for its
efforts. In 2005, SustainableBusiness.com, publisher of
The Progressive Investor newsletter, named Chiquita to its
list of the world’s top 20 sustainable stock picks, known
as the SB20, for the fourth year in a row. SustainableBusi-
ness.com identifies its picks by asking leading investment
advisers to recommend companies that stand out as world
leaders in both sustainability and financial strength. In
April 2004, the Trust for the Americas, a division of the
Organization of Americas, selected Chiquita Brands as
the winner of the 2004 Corporate Citizen of the Americas
Table 4 Better Banana Project Principles
1. Ecosystem Conservation. Protect existing ecosystems; recovery
of damaged ecosystems in plantation area.
2. Wildlife Conservation. Protect biodiversity, especially
endangered species.
3. Fair Treatment and Good Conditions for Workers. Comply
with local and international labor laws/norms; maintain policy
of nondiscrimination; support freedom of association.
4. Community Relations. Be a “good neighbor,” contributing to
the social and economic development of local communities.
5. Integrated Pest Management. Reduction in use of pesticides;
training for workers in pesticide use/management/risks.
6. Integrated Waste Management. Reduction of the production
of wastes that contaminate the environment and harm human
health; institute recycling.
7. Conservation of Water Resources. Reduce and reuse the
water used in production; establish buffer zones of vegetation
around waterways; protect water from contamination.
8. Soil Conservation. Control erosion; promote soil conservation
and replenishment.
9. Planning and Monitoring. Plan and monitor banana cultivation
activities according to environmental, social, and economic
measures.
Source: Adapted from Rainforest Alliance, Normas Generales Para la Certificación
del Cultivo de Banano, May 2002, www.rainforest-alliance.org.
580 Part 4 Organizational Behavior and Human Resource Management
reluctant to promote its achievements through the typical
mass communication vehicles. Indeed, when Chiquita
attempted to advertise its certification process with com-
mercials in Denmark that equated its Central American
banana farms with a “glorious rainforest,” the ads were met
with skepticism and thought to be unrealistic.
Instead of mass advertising, the firm has opted for a
longer-term marketing strategy based on educating lead-
ing opinion makers and critics alike. According to Dennis
Christou, vice president of marketing–Europe, there is a
natural suspicion among consumers about commercially
driven messages. He believes that customers feel more
trust in the message if it’s delivered by an external body
rather than by the company or by a paid advocate of the
business. That is a main reason why the firm is relying
on viral marketing tactics and third-party testimonials as
the means of spreading its message. Retailers are treated
differently: They must be exposed to improvements at
Chiquita because they determine which exclusive brand to
carry on an annual basis. However, Christou believes that
creating brand recognition with consumers is possible
through nonobtrusive, reputable means.
Defining and conveying a brand’s differences in a com-
modities marketplace is difficult. Nevertheless, Chiquita
believes it can carve out its own niche by distinguishing
itself as a leader in corporate responsibility. Instead of
positioning itself solely on the basis of price, Chiquita is
hoping that its distinctive competency in CR will help it
stand out from the pack. The company got a boost in this
regard in April 2003, when Chiquita, along with Ben and
Jerry’s, received the first Award for Outstanding Sustain-
ability Reporting presented by the Coalition for Environ-
mentally Responsible Economies (CERES) and the
Association of Chartered Certified Accountants. In 2006,
Chiquita won Costa Rica’s Contribution to the Commu-
nity Award for its Nature and Community Project, which
preserves biodiversity and promotes nature conservation
awareness.
Recent Performance, Acquisition,
and Future Path
Chiquita drastically shifted its strategic decision-making
models and broader corporate operating principles in the
wake of its reorganization. Debt repayments and other
reorganization costs resulted in significant losses. Chiquita
made great strides in improving its financial performance
by cutting costs and streamlining its local and global
operations. In 2003, the year after it filed for bankruptcy,
Chiquita’s net sales were $2.6 billion, up from $1.6 billion
the year before. In 2006, net sales reached a record
$4.5 billion (due in part to the acquisition of Fresh Express).
In 2011 the Chiquita Company celebrated its fourth con-
secutive year of increasing profitability. Chair and CEO
Fernando Aguirre stated that Chiquita “had a much better
After much deliberation, management concluded that
adopting the SA8000 standard would yield the most cred-
ibility with external stakeholders because SA8000 gives
detailed requirements for adequacy of management sys-
tems for implementation. Having an external standard
forces Chiquita to push CR change down through each
organizational level so that the firm is able to meet third-
party requirements.
In May 2000 Chiquita expanded its code of conduct to
include SA8000. Standards now included areas such as
food safety, labor standards, employee health and safety,
environmental protection, and legal compliance. Recog-
nizing the importance of labor support and its resounding
effect on corporate image, Chiquita began an open dia-
logue with the International Union of Food Workers and
the Coalition of Latin American Banana Workers’ Unions
(COLSIBA). By June 2001, the firm had reached an
agreement with both organizations, pledging to respect
worker rights as elaborated in ILO conventions, address
long-standing health and safety concerns for workers, and
ensure that its independent suppliers did likewise. This
made Chiquita the first multinational corporation in the
agricultural sector to sign a worker rights agreement.
Management credits this agreement as having helped to
build a positive image, improving relations with both
internal and external stakeholders. In mid-2001, Chiquita
published its first corporate responsibility report detailing
the firm’s future CR strategies and goals. Both stakehold-
ers and media outlets have been impressed with the com-
plete turnaround in the transparency of Chiquita’s
corporate agenda, which has led to a much more favorable
impression of the company.
In order to adhere to the organization’s own core values
and to the SA8000 labor standard, Chiquita routinely per-
forms internal audits in all of its Latin American opera-
tions. NGOs also conduct external audits. After the audits
are completed, each local management team plans correc-
tive actions using the firm’s code of conduct and core
values as decision-making guides. At year-end 2003, inde-
pendent auditors certified Chiquita’s operations in Costa
Rica, Colombia, and Panama to the SA8000 standard.
Chiquita’s operations were the first ever to earn SA8000
certification in each of these countries. In its 2006 corpo-
rate responsibility report, Chiquita announced that it has
maintained 100 percent certification of its banana farms
in Latin America in accordance with the Rainforest
Alliance, Social Accountability 8000, and EurepGAP stan-
dards (environmental, labor, and human rights and food
safety standards, respectively).
Marketing the Message
Although it would seem advantageous for Chiquita to com-
municate and leverage the great strides it has made through
its corporate responsibility effort, management seems
In-Depth Integrative Case 4.2 Chiquita’s Global Turnaround 581
Table 6 Chiquita Brands International Income Statement, 2012–2014 (in thousands)
Year Ended Year Ended Year Ended
12/31/2014 12/31/2013 12/31/2012
Net sales $3,090,224 $3,057,482 $3,078,337
Cost of sales 2,735,117 2,708,428 2,743,040
SG&A 218,061 233,706 275,231
Equity in earnings of subsidiaries (loss) (2,750) (258) 33,433
Operating income (loss) 27,404 49,845 (253,834)
Interest expense (61,896) (61,144) (45,299)
Interest income 2,715 2,856 3,131
Loss on debt extinguishment (521) (6,275) —
Other income (expense), net (9,906) 3,522 (1,793)
Income (loss) before income taxes (42,204) (11,196) (297,795)
Income tax (expense) benefit (20,332) (4,619) (105,239)
Net income (loss) (62,536) (15,815) (405,017)
Source: Company reports.
year in bananas driven by higher pricing and volume in
North America, and initial recovery in Europe. Our salads
business did not perform as well as expected and we’ve
taken a number of corrective actions and adapted our struc-
ture and strategy to be more successful and profitable.”11
Beginning in 2012, however, Chiquita’s sales and prof-
itability began to stall. With global banana sales decreas-
ing, Chiquita’s revenue fell to US$3 billion, and the
company posted losses for three consecutive years (see
Tables 5 and 6). In 2014, following three years of flat
sales, Chiquita’s management began looking externally
for new solutions for cutting costs and increasing revenue.
In early 2014, Chiquita reached a preliminary merger
agreement with Ireland-based fruit and produce company
Fyffes. The deal would have created the largest banana
distributor in the world, with an estimated 160 million
boxes of bananas sold annually. Around the same time,
Brazilian holding company Cutrale-Safra offered Chiquita
shareholders a buyout deal worth around US$14 per
share. In October 2014, shareholders for Chiquita unex-
pectedly rejected the merger with Fyffes and accepted a
slightly revised takeover bid by Cutrale-Safra. With the
close of the deal, Chiquita became a privately held Brazilian
company.
Table 5 Chiquita Brands Balance Sheet as of December 31, 2014, 2013, 2012, 2011 (in thousands)
2014 2013 2012 2011
Assets
Cash and equivalents $ 47,160 $ 54,017 $ 2,601 $ —
Other current assets 535,904 575,178 987 266
Total current assets 583,064 629,195 3,588 266
Investments in and accounts with subsidiaries 110,220 108,077 647,471 1,071,132
Other assets 918,754 921,866 18,919 23,332
Total assets $1,612,038 $1,659,138 $669,978 $1,094,730
Liabilities and Shareholders’ Equity
Accounts payable and accrued liabilities $ 374,241 $ 406,307 $ 15,363 $ 15,354
Total current liabilities 378,944 408,578 15,363 15,354
Long-term debt 637,518 629,353 259,520 249,805
Total liabilities 1,288,704 1,284,700 299,576 294,660
Shareholders’ equity 323,334 374,438 370,402 800,070
Total liabilities and shareholders’ equity $1,612,038 $1,659,138 $669,978 $1,094,730
Source: Company reports.
582 Part 4 Organizational Behavior and Human Resource Management
the media? If not, what does this say about
Chiquita’s old management style?
6. What challenges does Chiquita’s new ownership
face in continuing to turn the company around and
bring profitability back to its operations?
Exercise
Chiquita’s management, represented by the CEO, is con-
sidering input from various groups about its strategic
direction and continued reorganization. Your group repre-
sents one of the following interests:
1. Shareholders of the previous company who lost
most of the value of the shares after the company
declared bankruptcy.
2. Shareholders in the Safra Group.
3. Employees and union representatives of North
American operations.
4. Employees and union representatives of South
American operations.
5. Representatives of the nongovernmental organiza-
tion Rainforest Action Network.
Spend five minutes preparing two or three requests to the
management team about your group’s interests and priorities
for the company. Then conduct an open forum in which you
discuss these requests among the different groups.
Source: This case was prepared by Professor Jonathan Doh and Erik Holt of
Villanova University as the basis for class discussion. Additional research assistance
was provided by Courtney Asher and Benjamin Littell. It is not intended to illustrate
either effective or ineffective managerial capability or administrative responsibility.
We appreciate assistance from Sherrie Terry and Michael Mitchell of Chiquita
International. Any errors remain those of the authors.
Chiquita’s new ownership faces a challenging task of
bringing financial success back to the company. Future
financial stability depends, in part, on external market
factors such as steady or rising international banana
prices and consumer demand. Internally, the company’s
performance will result from the effectiveness of finan-
cial controls on the cost side, and successful marketing,
emphasizing differentiation and value-added produc-
tion, on the revenue side. Although Chiquita has gone
to impressive lengths to turn around its reputation
and performance, it continues to face a challenging and
competitive international business environment and must
make continuous progress in its management and oper-
ations in order to achieve a healthy and sustainable
financial future.
Questions for Review
1. How would you characterize Chiquita’s historical
approach to global management?
2. Describe Chiquita’s approach to human resource
management in its global supply chain. What partic-
ular human resource challenges does Chiquita face as
the purchaser, producer, and supplier of a commodity?
3. Does Chiquita’s global corporate responsibility (CR)
program create a conflict between owners and other
stakeholders? Who are Chiquita’s main stakeholders
in the United States and around the world, and how
are they affected by Chiquita’s CR program?
4. How would you characterize Chiquita’s past and
present leadership? How does leadership affect a
company’s overall reputation?
5. Do you believe Chiquita would have changed its
policies without the presence of damaging stories in
1. “Chiquita Names New CEO,” Cincinnati Business
Courier, January 12, 2004.
2. Geert de Lombaerde, “Chiquita Outlook Improves
Following EU Deal,” Cincinnati Business Courier,
April 20, 2001.
3. Nicholas Stein, “Yes, We Have No Profits,” Fortune,
November 26, 2001, pp. 182–196.
4. Ibid.
5. Chiquita Brands International, Inc., 2006 Annual
Report, http://investors.chiquita.com/phoenix.
zhtml?c=119836&p=irol-reportsAnnual.
6. “Ethics & Code of Conduct,” Chiquita, www.
chiquita.com/The-Chiquita-Difference/Ethics-
Codes-of-Conduct.aspx.
7. Marco Werre, “Implementing Corporate
Responsibility: The Chiquita Case,” Journal
of Business Ethics 44, no. 2 (May 2003),
pp. 247–260.
8. Collin Dunn, “Chiquita Cleans Up Its Act,”
TreeHugger.com, August 10, 2006, www.treehugger.
com/green-food/chiquita-cleans-up-its-act.html.
9. Chiquita Brands International, Inc., “Chiquita
Statement on Agreement with U.S. Department
of Justice,” press release, March 14, 2007, http://
investors.chiquita.com/phoenix.zhtml?c=119836&p
=irol-newsArticle&ID=974081.
10. Stein, “Yes, We Have No Profits.”
11. “Chiquita Brands International, Inc.: Chiquita
Reports Fourth Quarter and Full-Year 2011
Results,” Chiquita, February 21, 2012, http://
investors.chiquita.com/phoenix.zhtml?c=119836&p
=irol-newsArticle&id=1663424.
ENDNOTES
SKILL-BUILDING
AND EXPERIENTIAL
EXERCISES
∙ Personal Skill-Building Exercises
∙ In-Class Simulations (Available in Connect,
connect.mheducation.com)
584
1. The Culture Quiz
Objectives
∙ To stimulate awareness of cultural differences
∙ To promote consideration of the impact of cultural
differences in a global economy
∙ To stimulate dialogue between domestic and interna-
tional students
∙ To explore issues raised by culturally diverse
workforces
Background
Few, if any, traditions and values are universally held.
Many business dealings have succeeded or failed because
of a manager’s awareness or lack of understanding of the
traditions and values of his/her foreign counterparts. With
the world business community so closely intertwined and
interdependent, it is critical that managers today become
increasingly aware of the differences that exist.
How culturally aware are you? Try the questions below.
Instructions
Working alone or with a small group, answer the questions
(without peeking at the answers). When you do look at the
answers, be sure to read the explanations. If you are taking
the quiz with students from countries other than your own,
explore what the answer might be in your country and theirs.
1. In Japan, loudly slurping your soup is considered
to be
a. rude and obnoxious.
b. a sign that you like the soup.
c. okay at home but not in public.
d. something only foreigners do.
2. In Korea, business leaders tend to
a. encourage strong commitment to teamwork and
cooperation.
b. encourage competition among subordinates.
c. discourage subordinates from reporting directly,
preferring information to come through well-
defined channels.
d. encourage close relationships with their
subordinates.
3. In Japan, virtually every kind of drink is sold in
public vending machines except for
a. beer.
b. diet drinks with saccharine.
c. already sweetened coffee.
d. soft drinks from U.S. companies.
4. In Latin America, managers
a. are most likely to hire members of their own
families.
b. consider hiring members of their own families to
be inappropriate.
c. stress the importance of hiring members of
minority groups.
d. usually hire more people than are actually
needed to do a job.
5. In Ethiopia, when a woman opens the front door of
her home, it means
a. she is ready to receive guests for a meal.
b. only family members may enter.
c. religious spirits may move freely in and out of
the home.
d. she has agreed to have sex with any man who
enters.
6. In Latin America, businesspeople
a. consider it impolite to make eye contact while
talking to one another.
b. always wait until the other person is finished
speaking before starting to speak.
c. touch each other more than North Americans do
under similar circumstances.
d. avoid touching one another as it is considered an
invasion of privacy.
7. The principal religion in Malaysia is
a. Buddhism.
b. Judaism.
c. Christianity.
d. Islam.
8. In Thailand
a. it is common to see men walking along holding
hands.
b. it is common to see a man and a woman holding
hands in public.
c. it is rude for men and women to walk together.
d. men and women traditionally kiss each other on
meeting in the street.
9. When eating in India, it is appropriate to
a. take food with your right hand and eat with your
left.
b. take food with your left hand and eat with your
right.
c. take food and eat it with your left hand.
d. take food and eat it with your right hand.
Personal Skill-Building Exercises 585
c. give gifts only to the eldest wife.
d. not give a gift to the wife at all.
18. If you want to give a necktie or a scarf to a Latin
American, it is best to avoid the color
a. red.
b. purple.
c. green.
d. black.
19. The doors in German offices and homes are
generally kept
a. wide open to symbolize an acceptance and
welcome of friends and strangers.
b. slightly ajar to suggest that people should knock
before entering.
c. half-opened, suggesting that some people are
welcome and others are not.
d. tightly shut to preserve privacy and personal
space.
20. In the area that was formerly West Germany,
leaders who display charisma are
a. not among the most desired.
b. the ones most respected and sought after.
c. invited frequently to serve on boards of cultural
organizations.
d. pushed to get involved in political activities.
21. American managers running businesses in Mexico
have found that by increasing the salaries of
Mexican workers, they
a. increased the number of hours the workers were
willing to work.
b. enticed more workers to work night shifts.
c. decreased the number of hours workers would
agree to work.
d. decreased production rates.
22. Chinese culture teaches people
a. to seek psychiatric help for personal problems.
b. to avoid conflict and internalize personal
problems.
c. to deal with conflict with immediate confronta-
tion.
d. to seek help from authorities whenever conflict
arises.
23. One wedding gift that should not be given to a
Chinese couple would be
a. a jade bowl.
b. a clock.
c. a basket of oranges.
d. shifts embroidered with dragon patterns.
10. Pointing your toes at someone in Thailand is
a. a symbol of respect, much like the Japanese bow.
b. considered rude even if it is done by accident.
c. an invitation to dance.
d. the standard public greeting.
11. American managers tend to base the performance
appraisals of their subordinates on performance,
while in Iran, managers are more likely to base
their performance appraisals on
a. religion.
b. seniority.
c. friendship.
d. ability.
12. In China, the status of every business negotiation is
a. reported daily in the press.
b. private, and details are not discussed publicly.
c. subjected to scrutiny by a public tribunal on a
regular basis.
d. directed by the elders of every commune.
13. When rewarding a Hispanic worker for a job well
done, it is best not to
a. praise him or her publicly.
b. say “thank you.”
c. offer a raise.
d. offer a promotion.
14. In some South American countries, it is considered
normal and acceptable to show up for a social
appointment
a. ten to fifteen minutes early.
b. ten to fifteen minutes late.
c. fifteen minutes to an hour late.
d. one to two hours late.
15. In France, when friends talk to one another
a. they generally stand about three feet apart.
b. it is typical to shout.
c. they stand closer to one another than Americans do.
d. it is always with a third party present.
16. When giving flowers as gifts in Western Europe, be
careful not to give
a. tulips and jonquils.
b. daisies and lilacs.
c. chrysanthemums and calla lilies.
d. lilacs and apple blossoms.
17. The appropriate gift-giving protocol for a male
executive doing business in Saudi Arabia is to
a. give a man a gift from you to his wife.
b. present gifts to the wife or wives in person.
586 Skill-Building and Experiential Exercises
Solo (Tokyo: Japan National Tourist Organization,
1990), p. 20.]
2. b. Korean managers use a “divide-and-rule” method
of leadership that encourages competition among
subordinates. They do this to ensure that they can
exercise maximum control. In addition, they stay
informed by having individuals report directly to
them. This way, they can know more than anyone
else. [Source: Richard M. Castaldi and Tjipyanto
Soerjanto, “Contrasts in East Asian Management
Practices,” Journal of Management in Practice 2,
no. 1 (1990), pp. 25–27.]
3. b. Saccharine-sweetened drinks may not be sold
in Japan by law. On the other hand, beer, a wide
variety of Japanese and international soft drinks,
and so forth, are widely available from vending
machines along the streets and in buildings. You’re
supposed to be at least 18 to buy the alcoholic
ones, however. [Source: Eiji Kanno and Constance
O’Keefe, New Japan Solo (Tokyo: Japan National
Tourist Organization, 1990), p. 20.]
4. a. Family is considered to be very important in
Latin America, so managers are likely to hire their
relatives more quickly than hiring strangers. [Source:
Nancy J. Adler, International Dimensions of Organi-
zational Behavior, 2nd ed. (Boston: PWS-Kent, 1991).]
5. d. The act, by a woman, of opening the front door
signifies that she has agreed to have sex with
any man who enters. [Source: Adam Pertman,
“Wandering No More,” Boston Globe Magazine,
June 30, 1991, pp. 10ff.]
6. c. Touching one another during business negotiations
is common practice. [Source: Nancy J. Adler, Inter-
national Dimensions of Organizational Behavior,
2nd ed. (Boston: PWS-Kent, 1991).]
7. d. Approximately 45 percent of the people in
Malaysia follow Islam, the country’s “official” reli-
gion. [Source: Hans Johannes Hoefer, ed., Malaysia
(Englewood Cliffs, NJ: Prentice Hall, 1984).]
8. a. Men holding hands is considered a sign of friend-
ship. Public displays of affection between men and
women, however, are unacceptable. [Source: William
Warren, Star Black, and M. R. Priya Rangsit, eds.,
Thailand (Englewood Cliffs, NJ: Prentice Hall, 1985).]
9. d. In India, as in many Asian countries, toilet
paper is not used. Instead, water and the left hand
are used, after which the left hand is thoroughly
cleaned. Still, the left hand is considered to be
polluted and therefore inappropriate for use during
eating or touching another person. [Source: Gitanjali
Kolanad, Culture Shock! India (Portland, OR:
Graphic Arts Center Publishing Company,
1996), p. 117.]
24. In Venezuela, New Year’s Eve is generally spent
a. in quiet family gatherings.
b. at wild neighborhood street parties.
c. in restaurants with horns, hats, and live music
and dancing.
d. at pig roasts on the beach.
25. If you order “bubble and squeak” in a London pub,
you will get
a. two goldfish fried in olive oil.
b. a very cold beer in a chilled glass, rather than
the usual warm beer.
c. Alka Seltzer and a glass of water.
d. chopped cabbage and mashed potatoes fried
together.
26. When a stranger in India wants to know what you
do for a living and how much you earn, he will
a. ask your guide.
b. invite you to his home and, after getting to know
you, will ask.
c. come over and ask you directly, without
introduction.
d. respect your privacy above all.
27. When you feel you are being taken advantage of in
a business exchange in Vietnam, it is important to
a. let the anger show in your face but not in your
words.
b. say that you are angry, but keep your facial
expression neutral.
c. not show any anger in any way.
d. end the business dealings immediately, and
walk away.
28. When a taxi driver in India shakes his head from
side to side, it probably means
a. he thinks your price is too high.
b. he isn’t going in your direction.
c. he will take you where you want to go.
d. he doesn’t understand what you’re asking.
29. In England, holding your index and middle fingers
up in a V with the back of your hand facing
another person is seen as
a. a gesture of peace.
b. a gesture of victory.
c. a signal that you want two of something.
d. a vulgar gesture.
Answers to the Culture Quiz
1. b. Slurping your soup or noodles in Japan is good
manners in both public and private. It indicates
enjoyment and appreciation of the quality. [Source:
Eiji Kanno and Constance O’Keefe, New Japan
Personal Skill-Building Exercises 587
Subtext: Making Body Language Work (New York:
Viking Penguin Books, 1991), p. 207.]
20. a. Though political leaders in the United States are
increasingly selected on their ability to inspire, cha-
risma is a suspect trait in what was West Germany,
where Hitler’s charisma is still associated with evil
intent and harmful outcomes. [Source: Nancy J. Adler,
International Dimensions of Organizational Behavior,
2nd ed. (Boston: PWS-Kent, 1991), p. 149.]
21. c. Paying Mexican workers more means, in the eyes
of the workers, that they can make the same amount
of money in fewer hours and thus have more time
for enjoying life. [Source: Nancy J. Adler, Interna-
tional Dimensions of Organizational Behavior, 2nd
ed. (Boston: PWS-Kent, 1991), pp. 30 and 159.]
22. b. Psychological therapy is not an accepted concept
in China. In addition, communism has kept most
Chinese from expressing opinions openly. [Source:
James McGregor, “Burma Road Heroin Breeds
Addicts, AIDS Along China’s Border,” The Wall
Street Journal, September 29, 1992, p. 1.]
23. b. The Chinese regard a clock as a bad omen
because the word for clock, pronounced zhong, is
phonetically similar to another Chinese word that
means “the end.” Jade is highly valued as symbol-
izing superior virtues, and oranges and dragon
patterns are also auspicious symbols. [Source:
Dr. Evelyn Lip, “Culture and Customs,” Silver Kris,
February 1994, p. 84.]
24. a. Venezuelans do the reverse of what most people
in other countries do on Christmas and New Year’s.
On Christmas, they socialize. While fireworks are
shot off on both nights, most restaurants are closed
and the streets are quiet. [Source: Tony Perrottet, ed.,
Venezuela (Boston: Houghton Mifflin, 1994), p. 97.]
25. d. Other popular pub food includes bangers and
mash (sausages and mashed potatoes), ploughman’s
lunch (bread, cheese, and pickled onions), and
cottage pie (baked minced meat with onions and
topped with mashed potatoes). [Source: Ravi Desai,
ed., Let’s Go: The Budget Guide to Britain and
Ireland (London: Pan Books, 1990), p. 83.]
26. c. Indians are generally uninhibited about staring at
strangers and asking them about personal details in
their lives. Social distance and personal privacy are
not common social conventions in India. [Source:
Frank Kusy, India (Chester, CT: The Globe Pequot
Press, 1989), p. 27.]
27. c. Vernon Weitzel of the Australian National Uni-
versity advises never to show anger when dealing
with Vietnamese officials or businesspeople. Show-
ing anger causes you to lose face and is considered
rude. Weitzel also recommends always smiling, not
10. b. This is especially an insult if it is done deliber-
ately because the feet are the lowest part of the
body. [Source: William Warren, Star Black, and
M. R. Priya Rangsit, eds., Thailand (Englewood
Cliffs, NJ: Prentice Hall, 1985).]
11. c. Adler suggests that friendship is valued over
task competence in Iran. [Source: Nancy J. Adler,
International Dimensions of Organizational Behavior,
2nd ed. (Boston: PWS-Kent, 1991).]
12. b. Public discussion of business dealings is consid-
ered inappropriate. Kaplan et al. report that “the
Chinese may even have used a premature announce-
ment to extract better terms from executives” who
were too embarrassed to admit that there was never
really a contract. [Source: Frederic Kaplan, Julian
Sobin, and Arne de Keijzer, The China Guidebook
(Boston: Houghton Mifflin, 1987).]
13. a. Public praise for Hispanics and Asians is gener-
ally embarrassing because modesty is an important
cultural value. [Source: Jim Braham, “No, You
Don’t Manage Everyone the Same,” Industry Week,
February 6, 1989.] In Japan, being singled out for
praise is also an embarrassment. A common saying
in that country is, “The nail that sticks up gets
hammered down.”
14. d. Though being late is frowned upon in the United
States, being late is not only accepted but expected
in some South American countries. [Source: Lloyd
S. Baird, James E. Post, and John F. Mahon, Man-
agement: Functions and Responsibilities (New
York: Harper & Row, 1990).]
15. c. Personal space in most European countries is much
smaller than in the United States. Americans generally
like at least two feet of space around themselves,
while it is not unusual for Europeans to be virtually
touching. [Source: Lloyd S. Baird, James E. Post,
and John F. Mahon, Management: Functions and
Responsibilities (New York: Harper & Row, 1990).]
16. c. Chrysanthemums and calla lilies are both associ-
ated with funerals. [Source: Theodore Fischer,
Pinnacle: International Issue, March–April 1991, p. 4.]
17. d. In Arab cultures, it is considered inappropriate
for wives to accept gifts or even attention from
other men. [Source: Theodore Fischer, Pinnacle:
International Issue, March–April 1991, p. 4.]
18. b. In Argentina and other Latin American countries,
purple is associated with the serious fasting period
of Lent. [Source: Theodore Fischer, Pinnacle:
International Issue, March–April 1991, p. 4.]
19. d. Private space is considered so important in
Germany that partitions are erected to separate
people from one another. Privacy screens and
walled gardens are the norm. [Source: Julius Fast,
588 Skill-Building and Experiential Exercises
29. d. In England, this simple hand gesture is consid-
ered vulgar and obscene. In a report to The Boston
Globe, an American who had been working in
London wrote, “I wish someone had told me
before I emphatically explained to one of the
draftsmen at work why I needed two complete
sets of drawings.” [Source: “Finger Gestures Can
Spell Trouble,” The Berkshire Eagle, January 26,
1997, p. E5.]
Source: Exercises 1, 3, 4, and 5 are from Janet W. Wohlberg, Gail E. Gilmore, and
Steven B. Wolff, OB in Action, 5th ed. (Boston: Houghton Mifflin, 1998).
complaining or criticizing anyone, and not being
inquisitive about personal matters. [Source: Daniel
Robinson and Joe Cummings, Vietnam, Laos &
Cambodia (Australia: Lonely Planet Publications,
1991), p. 96.]
28. c. What looks to Westerners like a refusal is really
an Indian way of saying “yes.” It can also express
general agreement with what you’re saying or sug-
gest that an individual is interested in what you
have to say. [Source: Gitanjali Kolanad, Culture
Shock! India (Portland, OR: Graphic Arts Center
Publishing Company, 1996), p. 114.]
589
2. “When in Bogotá . . .”
As Jim Reynolds looked out the small window of the
Boeing 757, he saw the glimmer of lights in the distance.
After a five-hour flight, he arrived in Bogotá, Colombia,
at 9:35 p.m. on a clear Friday evening. It had been nearly
five years since Jim had seen his best friend, Rodrigo
Cardozo. The two had met in college and kept in touch
over the years. During their school years, Rodrigo would
often accompany Jim when he went home to Chicago for
the holidays.
Entering the main terminal, Jim found himself in what
looked like a recently bombed building. Piles of debris
were everywhere. Lights hung from the ceiling by exposed
electrical wires, and the walls and floors were rough,
unfinished concrete. “Certainly, aesthetics are not a major
concern at the Bogotá International Airport,” Jim thought.
As he came to the end of the long, dimly lit corridor,
an expressionless customs official reached out his hand
and gestured for Jim’s travel documents.
“Passaporte, por favor. Bienvenidos a Bogotá, Señor
Reynolds. Estás en vacacciones?”
“Sí,” Jim replied.
After a few routine questions, Jim was allowed to pass
through customs feeling relatively unscathed.
“Loquillo! Loquillo! Estamos aquí! Jim, Jim,” a voice
shouted.
Trying to find the origin of the voice among the dense
crowd, Jim finally spotted Rodrigo. “Hey, man. How’ve
you been? You look great!”
“Jim, it’s so good to see you. How’ve you been? I would
like you to meet my wife, Eva. Eva, this is my best friend,
Jim. He’s the one in all those pictures I’ve shown you.”
Late Night Begins the Day
Close to an hour later, Jim, Rodrigo, and Eva arrived at
Rodrigo’s parents’ house on the other side of Bogotá from
the airport. As Jim was aware, it is customary for couples
to live with their parents for a number of years after their
marriage, and Rodrigo and Eva were following that custom.
Darío, Rodrigo’s father, owned an import/export busi-
ness in Bogotá. He was a knowledgeable and educated
man and, from what Jim knew, a master of business nego-
tiations. Over the years, Darío had conducted business
with people in nearly every country in Central and South
America, the United States, Europe, Hong Kong, and
some parts of Africa. Jim had first met Darío with Rodrigo
in Boston in 1989.
“Jim, welcome to my house,” Darío boomed effusively
as the group walked in. “I am so pleased that you’re
finally in Bogotá. Would you like something to drink—
whiskey, bourbon, Aguardiente?”
“Aguardiente!” Rodrigo urged.
“Yes, Jim would like some Aguardiente. I understand
you’re going to Bahía tonight,” Darío added.
“Where?” Jim asked, looking around. “I didn’t know
we were going anywhere tonight.”
“Don’t worry, Jim, todo bien, todo bien,” Rodrigo assured
him. “We’re going dancing, so get dressed. Let’s go.”
The reality of being in Colombia hit Jim at about 11:15
that night when he and his friends entered Bahía, a Bogotá
nightclub. The rhythms of salsa and merengue filled the
club. Jim’s mind flashed back to the Latin dance parties
he and Rodrigo had had in Boston with their friends from
Central and South America.
“Jim, this is my cousin, Diana. She’ll be your partner
tonight,” Rodrigo said. “You’ll get to practice your Span-
ish too; she doesn’t speak a word of English. Have fun.”
For the next six hours, they danced and drank. This is
the Colombian way. At 5:30 the next morning, Rodrigo
decided it was time to leave to get something to eat. On
the drive home, they stopped at an outdoor grill in the
mountains where many people had congregated for the
same reason. Everyone was eating arepas con queso and
mazorca, and drinking Aguardiente.
Next, they continued to an outdoor party just down the
street. Here, they danced and drank until the sun crested
over the mountains of Bogotá. It was about 7:00 a.m. when
they decided to conclude the celebration—for now.
Saturday was spent recovering from the previous eve-
ning and also touring some local spots in the country.
However, Saturday night was a repeat of Friday. After
being in Colombia for three days, Jim had slept a total of
about four hours. Fortunately, Monday was a national
holiday.
Business before Pleasure before Business?
Although Jim was having a great time, he had also sched-
uled a series of business meetings with directors of busi-
ness schools at various Bogotá universities for the week
to come. Jim worked as an acquisitions editor for Aca-
demia Press, a major publisher of college-level business
textbooks. The purpose of the meetings was to establish
business contacts in the Colombian market. It was hoped
that these initial contacts would lead to others in Latin
America.
At Academia Press headquarters in New York, Jim
and Caroline Evans, his boss, had discussed the oppor-
tunities in Latin America. Although Academia Press
routinely published international editions of its texts,
total international sales never represented more than
15 percent of their gross. Consequently, international
590 Skill-Building and Experiential Exercises
After discussing the restaurants in the area, the profes-
sors decided on El Club Ejecutivo. It was nearly
12:30 p.m. when they arrived.
“It’s been an hour and a half, and we haven’t discussed
anything,” Jim thought. He was concerned that the
Colombians were not very interested in what he had to
offer. Throughout lunch, Jim grew increasingly concerned
that the professors were more interested in his trying
typical Colombian dishes and visiting the sights in Bogotá
than in Academia’s textbooks. They were fascinated that
Jim knew how to dance salsa and merengue and impressed
that he spoke Spanish with a slight Colombian accent;
Señorita Espitia said she found it amusing. That seemed
much more important than his knowledge of business
textbooks and publishing in general.
By the end of lunch, Jim was nearly beside himself. It
was now after 2:30 p.m. and nothing had been accom-
plished.
“Why don’t we all go to Monserate tomorrow? It’s
absolutely beautiful up there, Señor Reynolds,” Professor
Ronderos suggested, going on to describe the mountain
that overlooks Bogotá and the myths and traditions that
surround it.
“That’s a wonderful idea,” Professor Espitia added.
“Monserate it is then. Jim, it has been a pleasure. I
look forward to our meeting tomorrow,” Professor Ron-
deros said with a slight bow.
“Señor Reynolds, would you like a ride home?” Profes-
sor Muñoz asked.
“Yes, if it’s not too much trouble.”
On the way home, Jim was relatively quiet.
“Do you feel okay?”
“It must be jet lag catching up to me. I’m sure it’s
nothing,” Jim responded. Concerned about the way the
meeting had gone, Jim realized that he had never even
had a chance to mention Academia Press’s various titles
and how these texts could be used to create a new cur-
riculum or supplement an existing curriculum at the pro-
fessors’ business school.
When in Bogotá
On arriving at the house, Jim went upstairs and sat in the
living room glumly sipping a cup of aguapanela. “I just
don’t get it,” he thought. “The Colombians couldn’t have
been happier with the way the meeting turned out, but we
didn’t do anything. We didn’t even talk about one book.
I just don’t understand what went wrong.”
In a short time, Darío arrived. “Muy buenas, Jim. How
did your meetings go today with the directors?” he asked.
“I don’t know. I don’t know what to think. We didn’t
do anything. We didn’t talk about business at all. We
talked more about the sights I should see and the places
I should visit before I leave Colombia. I’m supposed to
call my boss this afternoon and tell her how the initial
markets had never been pursued aggressively. Caroline,
however, saw the Latin American markets as having a
lot of potential within the next three to five years. She
envisioned this market alone, in time, representing 15
to 20 percent of gross sales. Moreover, she felt that
within the next ten years, international sales could
reach 40 percent if developed properly. With numbers
like that, it was evident to Jim that this deal was
important, not only to the company but to his career
as well. If Jim was able to open these markets, he
might receive a promotion and be able to continue to
work in Central and South America.
Jim’s first meeting was scheduled for 11:00 a.m. on
Tuesday, the second on Wednesday at 11:00 a.m., and the
third on Friday at 3:00 p.m. At precisely 11:00 a.m. on
Tuesday, Jim arrived at Javeriana University, where he
was to meet with Professors Emilio Muñoz, Diana Espitia,
and Enrique Ronderos. When he arrived, Professor Muñoz
was waiting for him in the conference room.
“Señor Reynolds, I am delighted to meet you. How was
your flight?”
“Wonderful,” Jim replied.
“And how do you like Bogotá so far? Have you been
able to sightsee?”
“No, I haven’t had the chance to get around the city
yet. I hope to see some things later in the week.”
“Well, before you leave, you must visit El Museo de
Oro. It is the finest collection of gold artifacts from the
various indigenous Indian tribes in Colombia. Although
much of the gold was stolen by the Spanish, many pieces
have survived.” For the next 30 minutes, Professor Muñoz
spoke of everything from the upcoming presidential elec-
tions to World Cup soccer.
Jim looked at his watch, concerned about the other
professors who had not yet arrived and about the meeting
for which he had prepared.
“Is there something wrong, Señor Reynolds?”
“No, no, I was just wondering about the others; it’s
11:30.”
“Don’t worry. They’ll be here shortly. Traffic in Bogotá
at this hour is terrible. They’re probably caught in a traf-
fic jam.”
Just then, Professors Espitia and Ronderos walked in.
“Muy buenas, Señor Reynolds,” Professor Espitia said
warmly. “Please forgive us for the delay. Traffic is simply
awful at this time of day.”
“Oh, that’s not necessary. I understand. Traffic in New
York can be absolutely horrendous as well,” Jim replied.
“Sometimes it takes two hours to get from one end of the
city to the other.”
“Have you had lunch yet, Señor Reynolds?” asked Pro-
fessor Ronderos.
Jim shook his head.
“Why don’t we go to lunch, and we can talk there?”
Professor Ronderos suggested.
Personal Skill-Building Exercises 591
As Darío went on to analyze the meeting, Jim realized
that his perception of the situation had been formed by his
experiences in the United States. “When in Bogotá,” he
thought, “I guess I had better think like the Colombians.”
“Jim, you’ve gained the respect and the trust of the
directors. In my opinion, your first meeting was a com-
plete success.”
“What should I expect in the meetings to come?”
Jim asked.
“Don’t worry,” he responded. “Just let the directors
worry about that. You’ll come to an agreement before the
end of the week. I guarantee it.”
Questions for Discussion
1. What differences does Jim notice between life in
the United States and life in Colombia?
2. What differences does Jim notice between doing
business in the United States and doing business in
Colombia? How might these same factors differ in
other countries?
3. What advice would you give Jim for closing his
deals? Why?
Source: Written by Matthew C. Shull, twitter.com/Matthew_Shull. All rights reserved.
Used with permission.
meeting went. What am I going to tell her? ‘Sorry, we
just decided to plan my vacation in Colombia instead of
discussing business.’ I can’t afford to have this deal fall
through.”
Darío laughed.
“Señor, I’m serious.”
“Jim, I understand. Believe me. Tell me about your
meeting today.”
Jim recounted every detail of the meeting to Darío,
who smiled and nodded his head as he listened.
“Jim, you have to understand one thing before you con-
tinue negotiating with the directors.”
“What’s that?”
“You’re in Colombia now,” Darío said simply.
Jim stared at him with a puzzled look. “And?”
“And what, Jim?”
“Is there something else I should know?”
“That’s where you need to start. You let the directors
set the tone of the meeting. It’s obvious they felt very
comfortable with you, or they wouldn’t have invited you
to Monserate. Here in Colombia, Jim, we do business dif-
ferently. Right now, you’re building friendship. You’re
building their trust in you. This is very important in doing
business in all of Latin America.”
After a moment’s pause, “Jim,” Darío continued,
“would you rather do business with a friend or someone
you hardly know?”
3. The International Cola Alliances
Objectives
∙ To introduce some of the complexities involved in
doing business across international borders
∙ To examine what happens when countries seek to do
business with one another without the benefit of a
common language and customs
Background
Even with a common language, communication can break
down, and interpretations of words and actions often can
confound understanding and incur negative attributions of
purpose. Add to this the differences of personal needs that
exist from individual to individual, as well as national and
cultural needs that exist from country to country. These
limitless variables make cooperation across borders even
more complex.
The Story
You are a delegation from a country that would like to
enter into a large cooperative effort with a number of
other countries for the production and distribution of a
popular soft drink produced by the American company
International Cola. In the past, countries in your region
of the world have been resistant to allowing foreign soft
drinks into their markets, despite consumer demands.
However, recent thinking is that the advantages of allow-
ing this competition outweigh the disadvantages.
International Cola has expressed an interest in setting
up a bottling plant, a regional corporate headquarters, and
four distribution depots. Their goal, of course, is to do
this in the most economically efficient way possible to
maximize profits. However, because the executives at
International Cola believe this area to be a rich new mar-
ket with outstanding potential and are therefore eager to
get in, they have ceded to the demands of the various
governments in the proposed alliance. These require Inter-
national Cola to allow for local control of the facilities;
to maintain only 49 percent interest in the facilities with
local partners holding 51 percent ownership; and to allow
the participating governments to work out among them-
selves the details of where the facilities will be located.
For the countries involved, having one or more of these
facilities located within their borders will bring jobs, rev-
enue, and a certain amount of prestige. (It is possible for
a single country to have all six of the facilities: regional
headquarters, bottling plant, distribution depots.)
Each of the countries involved shares at least two bor-
ders with the other countries. This has not always been
the most peaceful area. Border skirmishes are frequent,
most stemming from minor misunderstandings that
became inflated by vast cultural and religious differences.
These distinct cultural differences between your coun-
try and your neighbors will likely become even more evi-
dent as you pursue the negotiation. It will be up to you
to decide how to respond to them. While it is important
for you to retain your own cultural integrity—for example,
when you first meet a delegate from another country you
will likely greet him or her in the cultural style of your
country—you understand the importance of being sensi-
tive to one another. If you understand, for example, that
the cultural style of another country is to bow on meeting,
whereas you shake hands, you may wish to bow instead.
Because you are negotiating the venture across bor-
ders, and each country has a different primary language,
you have agreed to negotiate in English, but none of you
are entirely fluent. Therefore, a few phrases will creep in
from your own languages.
Wear your country’s flag in a visible place at all times.
Instructions
Step 1 (30–40 minutes—may be done before class)
Working in small groups (5–7), develop a profile of your
country and its people based on profile sheets 1 and 2.
After you have completed profile sheets 1 and 2,
briefly discuss them to be sure there is mutual under-
standing of what the group’s behavior and negotiating
stance are to be during the negotiation.
Step 2 (20 minutes—may be done before class) Based
on the profile sheets, decide which International Cola
facilities you believe you should have in your country and
why you believe they should be in your country rather
than one of the others that will be represented. For exam-
ple, if you have a highly educated population, you may
argue that you should be the home of the regional corpo-
rate headquarters; be aware, however, that another country
might argue that you should not have bottling and distri-
bution facilities because these do not require a highly
educated or skilled labor force.
On the negotiation sheet, make a list of the facilities
you believe your country should have and some notes as
to what your arguments will be for having them. Also,
make some notes on what you believe the other countries’
counterarguments will be and how you expect to respond
to them.
Step 3 (30–45 minutes—in class) Everyone in your
group should pin a copy of your country’s flag and motto
on himself or herself in a visible place. One to three
592
Personal Skill-Building Exercises 593
5. To what degree did groups construct their countries
to best justify their position? In situations where
this happened, did it work? Why? Why not?
Profile Sheet 1
1. Select a name for your country:
Be sure that the name of your country appears on or
around the flag (see below).
2. In the space below, design your country’s flag or
emblem. Make enough copies so that each member
of your group has one to wear.
3. Write a slogan for your country that best embodies
your country’s ideals and goals. Include the slogan
on or around the flag.
4. Make up a partial language with a vocabulary
of up to twenty-five (25) words into which you
should translate the following phrases for use
during negotiations:
Phrase Translation
I agree.
I disagree.
This is unacceptable.
I don’t understand your point.
You have insulted me.
Please repeat that. ________________________________
________________________________________________
5. Briefly describe how people in your country react
when they have been insulted.
Profile Sheet 2
Describe your country by selecting one element from each
of the following lists. After you have made your selections,
representatives from your group (delegation) should nego-
tiate the arrangements for International Cola’s facilities
with the representatives from the other delegations. Be
sure to use the cultural norms of your country during the
negotiation, but do not tell the others what your social
norms are.
Representatives should introduce themselves to one
another on an individual basis. After personal introduc-
tions, representatives should form a circle in the center of
the room with their delegations behind them, briefly
describe their countries, state their positions, and begin
negotiations. During negotiations, representatives should
make an effort to use their new language at least three
times. They should not use English for any of the six
phrases listed.
Delegation representatives and the other members of
their groups may communicate with one another at any
point during the negotiation, but only in writing. Group
members may also communicate among themselves, but
only in writing during the negotiation.
Any group or representative may ask for a side meeting
with one or more of the other groups during the negotia-
tion. Side meetings may not last more than five minutes.
At any time in the negotiation, the delegation may
change its representative. When such a change is made,
the new representative and the other delegates must rein-
troduce themselves and greet one another.
Those members of each delegation who are not directly
negotiating should be active observers. Use the observer
sheet to record situations in which other groups insulted
them, shamed them, or were otherwise offensive.
At the end of 45 minutes, the negotiation should be
concluded whether or not an agreement has been reached.
Questions for Discussion
1. What role did cultural differences play in the vari-
ous phases of the negotiation process? Be careful
not to overlook the introductory phase. Was the
negotiation frustrating? Satisfying? Other? Why?
2. At any time, did delegations recognize the cultural
differences between themselves and the others? If
so, was any attempt made to try to adapt to another
country’s norms? Why? Why not? Would there
have been a benefit in doing so? Why?
3. What role did language differences play during the
negotiation? What was the effect of lack of under-
standing or miscommunication on the process?
4. Did the delegations from various countries attempt
to find mutual goals and interests despite their dif-
ferences? In what ways were the best interests of
the overall plan subjugated to the individual inter-
ests of each country? What rhetoric was used to
justify the personal interests?
594 Skill-Building and Experiential Exercises
Dominant Religion
animist
atheist/agnostic
Buddhist
Catholic
Hindu
Islam
Jewish
Mormon
Protestant (specify) ___________________________
other (specify) ______________________________
Negotiation Sheet
1. What facilities do you believe your country should
have?
2. What facilities of those listed above are you willing
to relinquish to reach agreement?
3. On what bases will you justify your need or desire
for having the facilities you have listed?
Observer Sheet
1. List actions taken by members of other delegations
that were insulting, created shame for you and your
delegation, or were otherwise offensive based on
your country’s norms. Include notes on the context
in which the actions were taken.
list the elements that make up your country’s description
on a separate piece of paper and add any additional
elements you wish.
Population Density
high density with overpopulation a problem
moderate density—high end
moderate density—average
moderate density—low end
low density
Average Educational Level
less than 3 years—large percent totally illiterate
3–6 years—widespread functional illiteracy
6–9 years—functional illiteracy a problem in
scattered areas
9–12 years—most read and write at functional
levels
12+ years—a highly educated and functioning
population
Per Capita Income
under $1,000 per year
$1,000–5,000 per year
$5,000–10,000 per year
$10,000–20,000 per year
$20,000–30,000 per year
$30,000–40,000 per year
$40,000+ per year
Climate
tropical
arctic
mixed in different areas
runs range from season to season
Form of Government
socialist
democratic
communist
monarchy
dictatorship
other (specify)
Dominant Racial-Ethnic Group
Asian
black
white
other (specify)
Personal Skill-Building Exercises 595
2. Based on the above list, what happened to your
interest in forming an alliance and your belief that
a mutual agreement could be reached?
4. Whom to Hire?
Objectives
∙ To explore participants’ cultural biases and
expectations
∙ To examine cultural differences
∙ To consider the impact culture has on hiring decisions
Instructions
Step 1 (10–15 minutes) Read the background informa-
tion and descriptions of each of the applicants. Consider
the job and the cultures within which the individual to be
hired will be operating. Rank the candidates from 1 to 5,
with 1 being your first choice, and enter your rankings on
the ranking sheet in the column marked “My Ranking.”
Briefly, list the reasons for each of your rankings.
Do not discuss your rankings with your classmates
until told to do so.
Step 2 (30–40 minutes) Working with three to four of
your classmates, discuss the applicants and rank them in
the order of group preference. Do not vote.
Rank the candidates from 1 to 5, with 1 being the
group’s first choice, and enter your group rankings on the
ranking sheet in the column marked “Group Ranking.”
Briefly list the reasons for each of the group’s rankings.
If your group represents more than one culture, explore
the ways in which each person’s cultural background may
have influenced his or her individual decisions.
Step 3 (open-ended) Report your rankings to the class,
and discuss the areas of difference that emerged within
your group while you were trying to reach consensus.
Questions for Discussion
1. Was your group able to explore openly any cultur-
ally based biases that came up—for example, feel-
ings about homosexuality, religion, personality
traits, politics?
2. Did you make any comments or observations that
you feel would have been fully acceptable in your
own culture but were not accepted by the group?
Explain.
3. If the answer to question 2 was yes, how did the
reaction of the group make you feel about your
membership in it? How did you handle the
situation?
4. What implications do you believe these cultural
differences would have in business dealings?
Background
You are a member of the management committee of a
multinational company that does business in 23 countries.
While your company’s headquarters are in Holland, your
offices are scattered fairly evenly throughout the four
hemispheres. Primary markets have been in Europe and
North America; the strongest emerging market is the
Pacific Rim. Company executives would like to develop
what they see as a powerful potential market in the Mid-
dle East. Sales in all areas except the Pacific Rim have
shown slow growth over the past two years.
At present, your company is seeking to restructure and
revitalize its worldwide marketing efforts. To accomplish
this, you have determined that you need to hire a key
marketing person to introduce fresh ideas and a new per-
spective. There is no one currently in your company who
is qualified to do this, and so you have decided to look
outside. The job title is “vice president for international
marketing”; it carries with it a salary well into six figures
(US$), plus elaborate benefits, an unlimited expense
account, a car, and the use of the corporate jet. The person
you hire will be based at the company’s headquarters and
will travel frequently.
A lengthy search has turned up five people with good
potential. It is now up to you to decide whom to hire.
Although all the applicants have expressed a sincere inter-
est in the position, it is possible that they may change their
minds once the job is offered. Therefore, you must rank
them in order of preference so that if your first choice
declines the position, you can go on to the second, and
so on.
Applicants: Park L., age 41, Married with
Three Children
Park L. is currently senior vice president for marketing at
a major Korean high-technology firm. You have been told
by the head of your Seoul office that his reputation as an
expert in international marketing is outstanding. The mar-
ket share of his company’s products has consistently
increased since he joined the company just over 15 years
ago. His company’s market share is now well ahead of
that of competing producers in the Pacific Rim.
Park started with his present company immediately
after his graduation from the University of Seoul and has
worked his way up through the ranks. He does not have
a graduate degree. You sense that Park has a keen under-
standing of organizational politics and knows how to play
them. He recognizes that because the company he works
for now is family controlled, it is unlikely that he will ever
move much higher than his present situation. Park has told
596
Personal Skill-Building Exercises 597
has a long list of accomplishments and is widely recog-
nized as outstanding in his field. People in your company
who have had contacts with him say that Peter is creative,
hardworking, and loyal. In addition, you have been told
that Peter is a top-flight manager of people who is able
to push his employees to the highest levels of perfor-
mance. And, you are told, he is very organized.
Peter has a PhD in computer science from a leading
South African university and an MBA from Purdue’s
Krannert School of Business.
Peter had been a vehement opponent of apartheid and
is still very much a social activist. His high political vis-
ibility within South Africa had made his life there diffi-
cult, and even now, with the end of apartheid, he would
like to get out. His constant male companion, P. K. Kahn,
would be coming with him to Holland, and Peter would
like your personnel office to help P. K. find an appropri-
ate position.
Peter speaks and reads English, Dutch, Afrikaans, and
Swahili and can converse in German.
Tex P., age 36, Divorced with One Child
Tex is currently job hunting. His former job as head of
marketing for a single-product, high-technology firm—
highly specialized workstations for sophisticated artificial
intelligence applications—ended when the company was
bought out by Texas Instruments. Tex had been with his
previous company virtually from the time the company was
started six years earlier. Having to leave his job was an
irony to Tex as it was largely due to the success of his
efforts that the company was bought out. You sense that he
is a little bitter, and he tells you that jobs offered to him
by TI were beneath him and not worthy of consideration.
Tex has both his undergraduate and MBA degrees from
Stanford University. In addition, he was a Rhodes Scholar
and won a Fulbright scholarship, which he used to support
himself while he undertook a two-year research project on
the marketing of high-technology equipment to Third
World countries.
You have learned through your New York office that
Tex has a reputation for being aggressive and hard driv-
ing. Apparently he is a workaholic who has been known
to work 18 to 20 hours a day, seven days a week. He
seems to have little time for his personal life.
In addition to his native English, Tex has a minimal
command of French—which he admits he hasn’t used
since his college days.
Zvi C., age 40, Married with Five Children
Zvi began his career after receiving his MBA from the
Sloan School of Management at the Massachusetts Insti-
tute of Technology (MIT). His first job was as marketing
manager for a German company doing business in Israel.
you that he is interested in the growth potential offered at
your company.
In addition to his native tongue, Park is able to carry
on a reasonably fluent conversation in English and has a
minimal working knowledge of German and French. His
wife, who appears quiet and quite traditional, and his chil-
dren speak only Korean.
Kiran K., age 50, Widow with One
Adult Child
Kiran K. is a Sikh woman living in Malaysia. She began
her teaching career while finishing her DBA (doctorate in
business administration) at the Harvard Business School
and published her first book on international marketing
ten months after graduation. Her doctoral dissertation was
based on the international marketing of pharmaceuticals,
but she has also done research and published on other
areas of international marketing.
Two months after the publication of her book, Kiran
went to work in the international marketing department
of a Fortune 500 company, where she stayed for the next
ten years. She returned to teaching when Maura Univer-
sity offered her a full professorship with tenure, and she
has been there since that time. Her academic position has
allowed her to pursue a number of research interests and
to write authoritative books and papers in her field. At
present, she is well published and internationally recog-
nized as an expert on international marketing. In addi-
tion, she has an active consulting practice throughout
Southeast Asia.
You have learned through your office in Kuala Lumpur
that Kiran’s only child, a 23-year-old son, is severely men-
tally and physically disabled. You sense that part of her
interest in the job with your company is to have the
income to guarantee his care should anything happen to
her. Her son would go with her to Holland, should she be
given the job, where he will need to be enrolled in special
support programs.
In addition to fluency in Malay, English, and Hindi,
Kiran speaks and writes German and Spanish and is able
to converse in Japanese and Mandarin.
Peter V., age 44, Single
Peter is a white South African. He had worked in a key
position in the international marketing division of an Amer-
ican Fortune 100 company until the company pulled out of
his country eight months ago. While the company wanted
to keep him on, offering to move him from Johannesburg
to its New York headquarters, Peter decided that it was
time to look elsewhere. He had begun to feel somewhat
dead-ended in his position and apparently sees the posi-
tion at your company as an opportunity to try out new
territory. Like your other candidates for the position, Peter
598 Skill-Building and Experiential Exercises
You have learned through your Haifa office that Zvi is
highly respected and has extensive contacts in the scien-
tific and high-tech worlds. He is exceptionally creative in
his approach to marketing, often trying bold strategies that
most of his peers would dismiss as too risky. Zvi, however,
has made them work and work well.
Zvi is a religious man who must leave work by noon
on Friday. He will not work Saturdays or any of his
religion’s major and minor holidays—about 18 a year. He
will, however, work on Sundays.
In addition to his native language, Dutch (Zvi and his fam-
ily moved to Israel from Holland when Zvi was six), he speaks
and writes fluent Hebrew, English, German, and Arabic.
Zvi’s phenomenal success with this company led to his
being hired away by an international office equipment
company in England. Again, he proved to be outstanding,
boosting the company’s market share beyond all expecta-
tions within two years. After five years, Zvi was offered
a chance to go back to Israel, this time to oversee and
coordinate all the international marketing programs for an
industrial park of 14 companies run as an adjunct to Isra-
el’s leading scientific research institution. It has been his
responsibility to interface the research component with
product development and sales as well as to manage the
vast marketing department. Again, he has shown himself
to be a master.
My Ranking Group Ranking
Applicant Rank Reasons Rank Reasons
Park L.
Kiran K.
Peter V.
Tex P.
Zvi C.
Ranking Sheet
Rank candidates from one to five with one as your first choice.
599
Glossary
chronemics The way in which time is used in a culture.
civil or code law Law that is derived from Roman law and
is found in the non-Islamic and nonsocialist countries.
codetermination A legal system that requires workers and
their managers to discuss major decisions.
collectivism The 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).
common law Law that derives from English law and is the
foundation of legislation in the United States, Canada, and
England, among other nations.
communication The process of transferring meanings from
sender to receiver.
communitarianism Refers to people regarding themselves as
part of a group.
conglomerate investment A type of high-risk investment in
which goods or services produced are not similar to those
produced at home.
content theories of motivation Theories that explain work
motivation in terms of what arouses, energizes, or initiates
employee behavior.
context Information that surrounds a communication and
helps convey the message.
controlling The process of evaluating results in relation to
plans or objectives and deciding what action, if any, to take.
corporate governance The system by which business corpo-
rations are directed and controlled.
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.
cultural assimilator A programmed learning technique
designed to expose members of one culture to some of the
basic concepts, attitudes, role perceptions, customs, and values
of another culture.
culture Acquired knowledge that people use to interpret
experience and generate social behavior. This knowledge forms
values, creates attitudes, and influences behavior.
decentralization Pushing decision making down the line and
getting the lower-level personnel involved.
decision making The process of choosing a course of action
among alternatives.
democracy A political system in which the government is
controlled by the citizens either directly or through elections.
diffuse culture A 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.
achievement culture A culture in which people are accorded
status based on how well they perform their functions.
achievement motivation theory A theory that holds that
individuals can have a need to get ahead, to attain success,
and to reach objectives.
act of state doctrine A jurisdictional principle of interna-
tional 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.
adaptability screening The process of evaluating how well
a family is likely to stand up to the stress of overseas life.
administrative coordination Strategic formulation and
implementation in which the MNC makes strategic decisions
based on the merits of the individual situation rather than using
a predetermined economically or politically driven strategy.
alliance Any type of cooperative relationship among
different firms.
ascription culture A culture in which status is attributed
based on who or what a person is.
assessment center An evaluation tool used to identify indi-
viduals with potential to be selected or promoted to higher-
level positions.
authoritarian leadership The use of work-centered behavior
designed to ensure task accomplishment.
balance-sheet approach An approach to developing an expa-
triate compensation package that ensures the expat is “made
whole” and does not lose money by taking the assignment.
base of the pyramid strategy Strategy targeting low-income
customers in developing countries.
bicultural group A 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.
biotechnology The integration of science and technology to
create agricultural or medical products through industrial use
and manipulation of living organisms.
born-global firms Firms that engage in significant interna-
tional activities shortly after being established.
cafeteria approach An approach to developing an expatriate
compensation package that entails giving the individual a
series of options and letting the person decide how to spend
the available funds.
centralization A management system in which important
decisions are made at the top.
chaebols Very large, family-held Korean conglomerates that
have considerable political and economic power.
charismatic leaders Leaders who inspire and motivate
employees through their charismatic traits and abilities.
chromatics The use of color to communicate messages.
600 Glossary
femininity A cultural characteristic in which the dominant
values in society are caring for others and the quality of life.
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.
foreign direct investment (FDI) Investment in property,
plant, or equipment in another country.
formalization The use of defined structures and systems in
decision making, communicating, and controlling.
franchise A business arrangement under which one party
(the franchisor) allows another (the franchisee) to operate an
enterprise using its trademark, logo, product line, and methods
of operation in return for a fee.
geocentric MNC An MNC that seeks to integrate diverse
regions of the world through a global approach to decision
making.
geocentric predisposition A philosophy of management
whereby the company tries to integrate a global systems
approach to decision making.
global area division A structure under which global opera-
tions are organized on a geographic rather than a product basis.
global functional division A structure that organizes world-
wide operations primarily based on function and secondarily
on product.
global integration The production and distribution of prod-
ucts and services of a homogeneous type and quality on a
worldwide basis.
global product division A structural arrangement in which
domestic divisions are given worldwide responsibility for
product groups.
global strategy Integrated strategy based primarily on price
competition.
globalization The process of social, political, economic,
cultural, and technological integration among countries around
the world.
globalization imperative A belief that one worldwide
approach to doing business is the key to both efficiency and
effectiveness.
GLOBE (Global Leadership and Organizational Behavior
Effectiveness) A multicountry study and evaluation of cul-
tural attributes and leadership behaviors among more than
17,000 managers from 951 organizations in 62 countries.
goal-setting theory A process theory that focuses on how
individuals go about setting goals and responding to them and
the overall impact of this process on motivation.
groupthink Social conformity and pressures on individual
members of a group to conform and reach consensus.
guanxi In Chinese, it means “good connections.”
guided missile culture A culture that is characterized by
strong emphasis on equality in the workplace and orientation
to the task.
haptics Communicating through the use of bodily contact.
home-country nationals Expatriate managers who are citi-
zens of the country where the multinational corporation is
headquartered.
direct controls The use of face-to-face or personal meetings
for the purpose of monitoring operations.
distributive negotiations Bargaining that occurs when two
parties with opposing goals compete over a set value.
doctrine of comity A 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.
downward communication The transmission of information
from manager to subordinate.
economic imperative A worldwide strategy based on cost
leadership, differentiation, and segmentation.
Eiffel Tower culture A culture that is characterized by
strong emphasis on hierarchy and orientation to the task.
emotional culture A culture in which emotions are
expressed openly and naturally.
empowerment The process of giving individuals and teams
the resources, information, and authority they need to develop
ideas and effectively implement them.
environmental scanning The process of providing manage-
ment with accurate forecasts of trends related to external
changes in geographic areas where the firm currently is doing
business or is considering setting up operations.
equity theory A process theory that focuses on how motiva-
tion is affected by people’s perception of how fairly they are
being treated.
esteem needs Needs for power and status.
ethics The study of morality and standards of conduct.
ethnocentric MNC An MNC that stresses nationalism and
often puts home-office people in charge of key international
management positions.
ethnocentric predisposition A nationalistic philosophy of
management whereby the values and interests of the parent
company guide strategic decisions.
ethnocentrism The belief that one’s own way of doing
things is superior to that of others.
European Union A political and economic community
consisting of 28 member states.
expatriates Managers who live and work outside their home
country. They are citizens of the country where the multina-
tional corporation is headquartered.
expectancy theory A process theory that postulates that
motivation is influenced by a person’s belief that (a) effort
will lead to performance, (b) performance will lead to spe-
cific outcomes, and (c) the outcomes will be of value to the
individual.
expropriation The seizure of businesses by a host country
with little, if any, compensation to the owners.
extrinsic A determinant of motivation by which the external
environment and result of the activity are of greater impor-
tance due to competition and compensation or incentive plans.
fair trade An organized social movement and market-based
approach that aims to help producers in developing countries
obtain better trading conditions and promote sustainability.
family culture A culture that is characterized by a strong
emphasis on hierarchy and orientation to the person.
Glossary 601
job design A job’s content, the methods that are used on the
job, and the way the job relates to other jobs in the organization.
job-content factors In work motivation, those factors inter-
nally controlled, such as responsibility, achievement, and the
work itself.
job-context factors In work motivation, those factors
controlled by the organization, such as conditions, hours,
earnings, security, benefits, and promotions.
joint venture (JV) An agreement under which two or more
partners own or control a business.
kaizen A Japanese term that means “continuous improvement.”
karoshi A Japanese term that means “overwork” or “job
burnout.”
keiretsu In 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 ser-
vices to end users; members may be bound together by cross-
ownership, long-term business dealings, interlocking
directorates, and social ties.
key success factor (KSF) A factor necessary for a firm to
effectively compete in a market niche.
kinesics The study of communication through body move-
ment and facial expression.
leadership The process of influencing people to direct their
efforts toward the achievement of some particular goal or goals.
learning The acquisition of skills, knowledge, and abilities
that result in a relatively permanent change in behavior.
license An agreement that allows one party to use an indus-
trial property right in exchange for payment to the owning
party.
localization An approach to developing an expatriate com-
pensation package that involves paying the expat a salary com-
parable to that of local nationals.
lump-sum method An approach to developing an expatriate
compensation package that involves giving the expat a prede-
termined amount of money and letting the individual make his
or her own decisions regarding how to spend it.
macro political risk analysis Analysis that reviews major
political decisions likely to affect all enterprises in the country.
management Process of completing activities efficiently and
effectively with and through other people.
maquiladora A 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.
masculinity A cultural characteristic in which the dominant
values in society are success, money, and things.
merger/acquisition The cross-border purchase or exchange
of equity involving two or more companies.
micro political risk analysis Analysis directed toward gov-
ernment policies and actions that influence selected sectors of
the economy or specific foreign businesses in the country.
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.
homogeneous group A group in which members have simi-
lar backgrounds and generally perceive, interpret, and evaluate
events in similar ways.
honne A Japanese term that means “what one really wants
to do.”
horizontal investment An MNC investment in foreign
operations to produce the same goods or services as those
produced at home.
horizontal specialization The assignment of jobs so that
individuals are given a particular function to perform and tend
to stay within the confines of this area.
host-country nationals Local managers who are hired by
the MNC.
hygiene factors In the two-factor motivation theory, job-
context variables such as salary, interpersonal relations, technical
supervision, working conditions, and company policies and
administration.
incubator culture A culture that is characterized by strong
emphasis on equality and orientation to the person.
indigenization laws Laws that require nationals to hold a
majority interest in an operation.
indirect controls The use of reports and other written forms
of communication to control operations.
individualism The political philosophy that people should be
free to pursue economic and political endeavors without con-
straint (Chapter 2); the tendency of people to look after them-
selves and their immediate family only (Chapter 4).
inpatriates Individuals from a host country or third-country
nationals who are assigned to work in the home country.
integrative negotiation Bargaining that involves cooperation
between two groups to integrate interests, create value, and
invest in the agreement.
integrative techniques Techniques that help the overseas
operation become a part of the host country’s infrastructure.
international division structure A structural arrangement
that handles all international operations out of a division cre-
ated for this purpose.
international entrepreneurship A combination of innova-
tive, proactive, and risk-seeking behavior that crosses national
boundaries and is intended to create value for organizations.
international management Process of applying management
concepts and techniques in a multinational environment and
adapting management practices to different economic, politi-
cal, and cultural environments.
international selection criteria Factors used to choose
personnel for international assignments.
international strategy Mixed strategy combining low
demand for integration and responsiveness.
intimate distance Distance between people that is used for
very confidential communications.
intrinsic A determinant of motivation by which an individ-
ual experiences fulfillment through carrying out an activity
and helping others.
Islamic law Law that is derived from interpretation of the
Qur’an and the teachings of the Prophet Muhammad and is
found in most Islamic countries.
602 Glossary
parochialism The tendency to view the world through one’s
own eyes and perspectives.
participative leadership The use of both work- or task-
centered and people-centered approaches to leading
subordinates.
particularism The belief that circumstances dictate how
ideas and practices should be applied and that something can-
not be done the same everywhere.
paternalistic leadership The use of work-centered behavior
coupled with a protective employee-centered concern.
perception A person’s view of reality.
personal distance In communicating, the physical distance
used for talking with family and close friends.
physiological needs Basic physical needs for water, food,
clothing, and shelter.
political imperative Strategic formulation and implementa-
tion utilizing strategies that are country-responsive and
designed to protect local market niches.
political risk The unanticipated likelihood that a business’s
foreign investment will be constrained by a host government’s
policy.
polycentric MNC An MNC that places local nationals in
key positions and allows these managers to appoint and
develop their own people.
polycentric predisposition A philosophy of management
whereby strategic decisions are tailored to suit the cultures of
the countries where the MNC operates.
polychronic time schedule A time schedule in which
people tend to do several things at the same time and place
higher value on personal involvement than on getting things
done on time.
positive organizational behavior (POB) The study and
application of positively oriented human resource strengths
and psychological capacities that can be measured, developed,
and effectively managed for performance improvement in
today’s workplace.
positive organizational scholarship (POS) A method that
focuses on positive outcomes, processes, and attributes of
organizations and their members.
power distance The extent to which less powerful members
of institutions and organizations accept that power is distrib-
uted unequally.
principle of sovereignty An international principle of law
that holds that governments have the right to rule themselves
as they see fit.
proactive political strategies Lobbying, campaign financing,
advocacy, and other political interventions designed to shape
and influence the political decisions prior to their impact on
the firm.
process theories of motivation Theories that explain work
motivation by how employee behavior is initiated, redirected,
and halted.
profit The amount remaining after all expenses are deducted
from total revenues.
protective and defensive techniques Techniques that dis-
courage the host government from interfering in operations.
mixed organization structure A structure that is a combina-
tion of a global product, area, or functional arrangement.
MNC A firm having operations in more than one country,
international sales, and a nationality mix of managers and
owners.
monochronic time schedule A time schedule in which
things are done in a linear fashion.
motivation A psychological process through which unsatis-
fied wants or needs lead to drives that are aimed at goals or
incentives.
motivators In the two-factor motivation theory, job-content
factors such as achievement, recognition, responsibility,
advancement, and the work itself.
multi-domestic strategy Differentiated strategy emphasizing
local adaptation.
multicultural group A group in which there are individu-
als 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.
national responsiveness The need to understand the differ-
ent consumer tastes in segmented regional markets and
respond to different national standards and regulations
imposed by autonomous governments and agencies.
nationality principle A jurisdictional principle of interna-
tional law that holds that every country has jurisdiction over
its citizens no matter where they are located.
negotiation Bargaining with one or more parties for the
purpose of arriving at a solution acceptable to all.
neutral culture A culture in which emotions are held in
check.
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 pov-
erty, social justice, education, health, and the environment.
nonverbal communication The transfer of meaning through
means such as body language and the use of physical space.
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.
oculesics The area of communication that deals with convey-
ing messages through the use of eye contact and gaze.
offshoring The process by which companies undertake some
activities at offshore locations instead of in their countries of
origin.
operational risks Government policies and procedures that
directly constrain management and performance of local
operations.
organizational culture Shared values and beliefs that enable
members to understand their roles and the norms of the
organization.
outsourcing The subcontracting or contracting out of activi-
ties to endogenous organizations that had previously been
performed by the firm.
ownership-control risks Government policies or actions that
inhibit ownership or control of local operations.
Glossary 603
specific culture A 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.
strategic management The process of determining an
organization’s basic mission and long-term objectives, then
implementing a plan of action for attaining these goals.
strategy implementation The process of providing goods
and services in accord with a plan of action.
sustainability Development that meets humanity’s needs
without harming future generations.
tatemae A Japanese term that means “doing the right thing”
according to the norm.
territoriality principle A jurisdictional principle of interna-
tional law that holds that every nation has the right of juris-
diction within its legal territory.
terrorism The use of force or violence against others to pro-
mote political or social views.
Theory X manager A manager who believes that people are
basically lazy and that coercion and threats of punishment
often are necessary to get them to work.
Theory Y manager A manager who believes that under the
right conditions, people not only will work hard but will seek
increased responsibility and challenge.
Theory Z manager A manager who believes that workers
seek opportunities to participate in management and are moti-
vated by teamwork and responsibility sharing.
third-country nationals (TCNs) Managers who are citizens
of countries other than the country in which the MNC is
headquartered or the one in which the managers are assigned
to work by the MNC.
token group A group in which all members but one have
the same background, such as a group of Japanese retailers
and a British attorney.
total quality management (TQM) An organizational strategy
and the accompanying techniques that result in the delivery of
high-quality products or services to customers.
totalitarianism A political system in which there is only one
representative party, which exhibits control over every facet of
political and human life.
training The process of altering employee behavior and atti-
tudes in a way that increases the probability of goal attainment.
Trans-Pacific Partnership (TPP) or Trans-Pacific Partner-
ship Agreement (TPPA) A proposed trade agreement among
12 Pacific Rim countries, including Australia, Brunei, Canada,
Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore,
the United States, and Vietnam.
transactional leaders Individuals who exchange rewards for
effort and performance and work on a “something for some-
thing” basis.
transfer risks Government policies that limit the transfer of
capital, payments, production, people, and technology in and
out of the country.
transformational leaders Leaders who are visionary agents
with a sense of mission and who are capable of motivating their
followers to accept new goals and new ways of doing things.
protective principle A jurisdictional principle of interna-
tional law that holds that every country has jurisdiction over
behavior that adversely affects its national security, even if the
conduct occurred outside that country.
proxemics The study of the way people use physical space
to convey messages.
public distance In communicating, the distance used when
calling across the room or giving a talk to a group.
quality control circle (QCC) A group of workers who
meet on a regular basis to discuss ways of improving the
quality of work.
quality imperative Strategic formulation and implementation
utilizing strategies of total quality management to meet or
exceed customers’ expectations and continuously improve
products or services.
regiocentric MNC An MNC that relies on local managers
from a particular geographic region to handle operations in
and around that area.
regiocentric predisposition A philosophy of management
whereby the firm tries to blend its own interests with those of
its subsidiaries on a regional basis.
regional system An approach to developing an expatriate
compensation package that involves setting a compensation
system for all expats who are assigned to a particular region
and paying everyone in accord with that system.
repatriation The return to one’s home country from an
overseas management assignment.
repatriation agreements Agreements whereby the firm tells
an individual how long she or he will be posted overseas and
promises to give the individual, on return, a job that is mutu-
ally acceptable.
return on investment (ROI) Return measured by dividing
profit by assets.
ringisei A Japanese term that means “decision making by
consensus.”
safety needs Desires for security, stability, and the absence
of pain.
self-actualization needs Desires to reach one’s full potential,
to become everything one is capable of becoming as a human
being.
simplification The process of exhibiting the same orientation
toward different cultural groups.
social distance In communicating, the distance used to
handle most business transactions.
social needs Desires to interact and affiliate with others and
to feel wanted by others.
socialism A moderate form of collectivism in which there is
government ownership of institutions, and profit is not the
ultimate goal.
socialist law Law that comes from the Marxist socialist
system and continues to influence regulations in countries
formerly associated with the Soviet Union as well as China.
sociotechnical designs Job designs that blend personnel and
technology.
specialization An organizational characteristic that assigns
individuals to specific, well-defined tasks.
604 Glossary
values Basic convictions that people have regarding what
is right and wrong, good and bad, and important and
unimportant.
variety amplification The creation of uncertainty and the
analysis of many alternatives regarding future action.
variety reduction The limiting of uncertainty and the focus-
ing of action on a limited number of alternatives.
vertical investment The production of raw materials or
intermediate goods that are to be processed into final
products.
vertical specialization The assignment of work to groups or
departments where individuals are collectively responsible for
performance.
wholly owned subsidiary An overseas operation that is
totally owned and controlled by an MNC.
work centrality The importance of work in an individual’s
life relative to other areas of interest.
World Trade Organization (WTO) The global organization
of countries that oversees rules and regulations for interna-
tional trade and investment.
transition strategies Strategies used to help smooth the
adjustment from an overseas to a stateside assignment.
transnational network structure A multinational structural
arrangement that combines elements of function, product, and
geographic designs, while relying on a network arrangement to
link worldwide subsidiaries.
transnational strategy Integrated strategy emphasizing both
global integration and local responsiveness.
two-factor theory of motivation A theory that identifies
two sets of factors that influence job satisfaction: hygiene
factors and motivators.
uncertainty avoidance The extent to which people feel
threatened by ambiguous situations and have created beliefs
and institutions that try to avoid these.
universalism The belief that ideas and practices can be
applied everywhere in the world without modification.
upward communication The transfer of meaning from
subordinate to superior.
validity The quality of being effective, of producing the
desired results. A valid test or selection technique measures
what it is intended to measure.
605
Name Index
A page number with an e indicates an exhibit; an f a figure; an n, a source note or footnote; a t, a table.
Aaen, Christian, 276
Aafaqi, R., 504n37
AAP (Association of American
Publishers), 417
AAR, 362
Abbott, 292
Abboud, Leila, 372n
AbbVie Inc., 119f
Abegglen, J. C., 464n43
ABInBev, 122, 123–124, 148
ABP Food Group, 561
Abrams, Michael N., 191, 206nn37–38
Abueva, Jobert E., 552n80
AB Volvo, 377
Acano, 303
Accenture, 6, 83–84, 306
Access to Medicine Foundation, 118, 119f
Acer Inc., 418
ACFTU (All-China Federation of Trade
Unions), 279
Ackerman, Matt, 178n30
Actavis, 346
Activia, 255
Adams, Jonathan, 112n11
Adelphia, 89
adidas, 107, 109, 314
adidas Group, 408t
Adler, Nancy J., 177n1, 186, 196–198,
202n, 206n30, 206n47, 206n52,
206n57, 214, 222n, 231, 240n,
243n19, 244n67, 503n27, 552n81
AECOM Economics, 276
Aer Lingus, 334t
Aeroflot, 334t
Aeroméxico, 334t
AES, 30
Affleck, Ben, 104
AFL/CIO, 100, 107
African Outreach Project, 104
Africa Online, 316
Agency for Drugs and Technologies in
Health, 116
AGEPE Editorial Group, 579
Agricultural Bank of China, 568
Aguayuda, 105
Aguirre, Fernando, 575, 579, 580
Ahmad, Z. A., 504n37
Ahmed, Runman, 253n8, 254n20
Ai Ni Group, 380
Aioanei, Ingrid, 503n31
Air Asia, 376
Airbnb, 98
Airbus, 32
Air Canada, 334t
Air China, 334t
Air France, 333, 334t
Air India, 334t
Air New Zealand, 334t
Airtel, 6
Ajmera, Ankit, 322n36
Akiba, Toshiharu, 265
al-Assad, Bashar, 44–45
Alberts, Hana R., 278nn37–38
Albright, Kendra S., 324n74
Alcan Aluminum of Canada, 366
Alcatel-Lucent, 187, 316
Alcatel SA, 186–187
Alderman, Liz, 72nn76–77
Aldi, 279e, 282
Alexander the Great, 8
Alford, Randall J., 205n21
Alibaba, 284, 418
Alibaba Group, 388–390
Alipay, 388–389
Alitalia, 334t
Alkhafaji, Abbass F., 358n58, 463n16
Al-Kurdi, Aylan, 46
All-China Federation of Trade Unions
(ACFTU), 279
Allen, James, 152n15
Allen, Mark, 550n23
Allergan, 292, 346
AlliedSignal, 538
Allinson, C. W., 539, 553n102
Allison, Melissa, 385n71
Al-Meer, A., 244n43
Almeida, James G., 325n117
Alphabet Inc., 418
Al Qaeda, 367
Al-Shammari, Eid S., 465n83
ALSTOM, 91
Alton Towers, 268
Aluminum Company of America, 534
Alusuisse Lonza Group, 366–367
The Amazing Race, 102
Amazon.com, 64, 285, 319, 388–390,
408t, 415
AmBev, 123
Amed, Imran, 105n8
America Movil SAB De CV, 7t
American Airlines, 333, 334t
American Beverages, 339
American Business Centers, 370
American Civil Liberties Union, 100
American Express, 10, 66
Amin, Khoirul, 355–356n4
Amnesty International, 86
Amway Corp., 468, 470
ANA, 334t
Analoui, Farhad, 463n34
Anand, Geeta, 41n96
Andersen, 497
Anderson, Jamie, 325n113
Anderson, Philip, 206n49, 212, 243n15,
504n51
Ando, Ritsuko, 324n80
Andrews, Edmund L., 97n82, 206n50,
383n29
Anfuso, Dawn, 543n
Ang, Swee Hoon, 465n92
Angel Broking, 428
Anheuser-Busch InBev, 123–124, 307
Anne, Colleen, 40n59
Ansari, M. A., 504n37
Aoki Corporation, 264
AOL, 416
Aozora Bank, 170
Apple Inc., 5, 30, 65, 81, 107, 156–158,
175, 209, 296, 298, 397, 408t, 500
Aqua, 256
Areddy, J. T., 261nn49–53, 277nn18–19,
277n22
Aristotle, 47, 78, 95n34
Arizona State University, 101n
ARM Holdings PLC, 336
Arnold, Tom, 384n42
Arpan, Jeffrey, 412n41
Arregle, Jean-Luc, 356n27
Arthur, Winfred, Jr., 551n41
Arthur Andersen, 89
As, D., 464n59
Asakawa, Kazuhiro, 358n62
ASDA Group PLC, 280, 283
Ashe, Suzanne, 95n25
Asher, Courtney, 253n, 277n, 574n, 582n
Ashkanasy, Neal, 505n87
Ashok, Karnataka R., 248, 249
Ashoka, 315t
Asia-Pacific Economic Cooperation, 31
Aspen Pharmacare, 292
Assad, Bashar, 44–45
Assiut Cement Company, 375
Association of American Publishers
(AAP), 417
Association of Chartered Certified
Accountants, 580
Astellas Pharma Inc., 119f
AstraZeneca PLC, 119f, 185, 292
Atamer, Tugrul, 324n90
Athanassiou, Nicholas, 244n54
Athos, Anthony G., 243n23
A to Z, 315t
606 Name Index
AT&T, 30, 307, 380
AUC, 579
Audi, 397
Aurobindo, 292
Australia and New Zealand Banking Group
Ltd., 570
Authors Guild, 417
Autio, Erkko, 325n117
Autoblog Green, 428
Autokonzern, 28
Avianca, 334t
Avolio, B., 506n100
Avolio, Bruce J., 498n, 505n75,
506nn102–103, 506nn104–105
Avon, 201
AvtoVAZ, 361
Awata, Fusahao, 264
Axtell, C. M., 504n38
Axtell, Roger E., 152n20, 244n49, 515n
Aycan, Z., 504n34
Ayre, James, 71n56
Ayub, Tahir, 547
Azarova, Tetyana, 111n, 253n, 260n, 286n,
429n, 574n
Bacardi, 220
BackRub, 415
Backstrom, Lars, 38n3
Badal, E., 261n17
Badawy, M. K., 485n
BAE, 91
Bae, Seung-Hyun, 178n41, 178n42,
357n54, 465n87
Baer, Justin, 57n
Baglole, Joel, 322n25
Baidu.com, 415–417
Bai Fu Qin Ltd., 255, 257
Bailey, Brandon, 40n67, 179n54
Bailey, Elaine K., 527, 552n66
Baker, Aryn, 254n23
Baker, James C., 551n57
Baker, Lianna B., 411n5
Baker, Stephanie, 553n124
Balachandar, G., 39n26
Balfour, Frederik, 278n32, 385n72
Ball, Donald, 70n16, 70n19
Ballmer, Steve, 331
Banana Link, 576
Banco Bradesco, 566
Banco Walmart, 281–282
Banerjee, Mamata, 426
Banerji, Sumant, 430n65
Banjo, Shelly, 40n70, 96n49
Bank of America, 380, 568
Bank of China Ltd., 566, 568
Bank of Communications, 564, 568, 569–570
Bank of Communications Ltd., 282
Bank of East Asia, 275
Banque Indosuez, 267
Banque National de Paris, 266
Bansal, Govind, 71n60
Baojun, 347
Bao Viet Holdings, 571
Barbaro, Michael, 190n
Barboza, David, 96n47, 111nn2–3, 278n26
Barclays, 89
Barczak, Gloria, 484n
Barkema, Harry, 356n11, 385n61
Barnes, Brooks, 278n26
Barnett, Carole K., 484n
Barreda, David M., 177n7
Barrett, Alan M., 553n108
Barrett, Devlin, 287n17
Barsoux, Jean-Louis, 179n69, 466n102
Barstow, David, 287n15
Bartlett, Christopher A., 300n, 323nn62–63
Bartol, Kathryn M., 552n62
BASF AG, 63
Bass, Bernard M., 487–488, 505nn72–75
Bates, Karen, 105n6
B.A.T. Industries PLC, 307
Battelle, John, 419n6
Baudet, Stephane, 270
Bawden, Tom, 287n34
Bayer AG, 119f
Bazerman, Max H., 228n
Beamer, Linda, 244n55
Beamish, Paul W., 338n, 373n, 384n40
Beattie, Alan, 39n30
Bechtel, 370
Bechtolsheim, Andy, 415
Beechler, Schon, 178n49, 553n98,
553n104, 553n105
Beer, Lawrence, 101n
Behring, Kenneth E., 254n50
Beijing Automotive Industry Holding, 377
Beitle, Marcy, 178n29
Bellman, Eric, 71n49, 254nn18–19, 429n5,
429n8, 429n32, 430n67, 430nn70–71
Bello, Walden, 41n76
Ben and Jerry’s, 580
Ben-Baruch, Dorit, 465n77
Bender, Ruth, 325n111
Bendixen, Mike, 206n53
Beneficial Corp., 565
Bengali, Shashank, 41n95, 41n97,
288nn53–54
Bennett, Winston, Jr., 551n41
Bentham, Jeremy, 78, 95n36
Bergsma, Derk, 321n14
Bergsma, Kelley, 260n
Berkeley, Jon, 411
Berkshire-Hathaway, 109, 110
Bernstein, Aaron, 111n5
Berntell, Anders, 252
Berry, Heather, 243n30
Berthod, Marc, 266–267
Best Price Modern Wholesale, 284
Beswick, David, 463n15
Bhagat, Rabi S., 454, 463n36, 465n74
Bhagwati, Jagdish, 39n24
Bharat Integrated Social Welfare Agency
(BISWA), 252
Bharti Enterprises, 43
Bharti Group, 284
Bhatt, Bhal, 244n42
Bhattacharjee, Ashtok, 72n71
Bhuian, Shahid N., 465n83
Bhushan, Ratna, 254n21, 323n48, 323n52
BIC, 20
Bill and Melinda Gates Foundation, 118, 387
Billou, Niels, 325n113
Bilton, Nick, 177n13
Bipartisan Policy Center, 286
Bird, Allan, 553n98, 553n105
Bird, Stephen, 294
Birkitt, Laurie, 39n16
Bischoff, S. J., 464n54
Bishop, Kimberly, 214
Bissell, Susan, 561
BISWA (Bharat Integrated Social Welfare
Agency), 252
Bital Bank, 564
Bjorhus, Ms., 252
Bjork, Christopher, 411n15
Bjorkman, Ingmar, 553n113
Black, J. Stewart, 271n, 534, 551n60, 552n83
Blackberry, 367
Blackberry Ltd., 397
Blackwell, Charles W., 224, 244n50
Blair, Tony, 47
Blake, Robert S., 476n
Blanford, Nicholas, 69n2
Blank, Arthur, 500
Blanket America, 105
Blino, Mark C., 552n89
Blogger, 416
Blondet, Sylvie, 265
Bloomberg, 565
Bloomberg BNA, 512
Blustein, Paul, 39n29
BMW, 24, 310, 397, 408t
Bodega, 280, 281
Bodur, Muzaffer, 505n89
Boehringer Ingelheirn GmbH, 119f
Boeing, 32, 89, 395
Boje, D. M., 465n96
Bolt, James F., 162n
Bompreco, 283
Bonache, Jaime, 551n61
Bond, Michael, 152n31
Bond, Sir John, 565, 569, 574n8
Bonesteel, Matt, 385n81
Bonvillian, Gary, 152n19
Booder, 353
Booker, Niall, 565
Boomer, L. Gary, 503n22
Borstorff, Patricia C., 521, 551n51
Borza, Anca, 356n27
Boston, Willaim, 413n48
Boston College, 110
Boston Consulting Group, 284
Botox, 346
Boudette, Neal, 504n44
Boudreau, John, 40n67, 179n54
Bounteous Company Ltd., 282
Bourguignon, Philippe, 262, 271
Bourke, Juliet, 205nn4–5
Boussois-Souchon-Neuvesel (BSN), 255
Bowler, Tim, 326n131
Bowman, Robert J., 384n49
Boyle, Matthew, 287n6, 287nn39–41,
288nn46–48, 462n2, 462n9
BP (British Petroleum Company PLC), 5t,
49, 336, 342, 360–361, 497, 499,
516–517, 554
Bradsher, Keith, 70n25
Brady, Diane, 253n14, 253n16, 254n24,
254nn32–35
Brake, Terence, 211n
Brandt, William K., 244n51
Name Index 607
Branson, Richard, 500
Brauchli, Marcus W., 370n
Braun, 20
Bray, Chad, 151n1
Brazilian Central Bank, 32
Bremner, Brian, 253n14, 253n16,
254n24
Breslin, Richard W., 553n107
Brett, Jeanne M., 206n39, 244n69
Brewster, Chris, 551n61
Breyer, Stephen G., 100
Brigante, Ricky, 277n14
Bright Dairy, 256
Brimm, Michael I., 484n
Brin, Sergey, 415–416, 419n7
Briscoe, Dennis R., 552n68
Bristol-Myers Squibb Co., 119f
British Airways, 333, 334t
British Bank of the Middle East, 564
British Petroleum Company PLC (BP), 5t,
49, 336, 342, 360–361, 497, 499,
516–517, 554
Broad-Based Black Economic
Empowerment, 33
Bröcker, Willem, 547
Brodbeck, Felix C., 489–491, 505n78,
505n81
Broder, John M., 95n26
Brookfield Global Relocation Services,
523, 533, 546
Brooks, 109
Brown, John Seely, 429n30, 430n34,
430nn36–39
Brown, William S., 456n
Brownback, Sam, 118
Bruce, Bill, 260nn6–7
Brundberg, Sven, 562n2
Brunner Mond, 186
Brunwasser, Matthew, 69n5, 69nn7–8
Brush, Silla, 57n
Brzezinski, Matthew, 384n39
BSN (Boussois-Souchon-Neuvesel), 255
Buckley, M. Ronald, 515, 550n33
Buckley, Peter J., 384n56
Buckman, Rebecca, 70n42
Budhwar, Pawan S., 536–537, 552n94
Budweiser, 122
Buerkle, Tom, 287nn36–37
Buffett, Warren, 110
Bunyaratavej, Kraiwinee, 71n67
Burger King, 336
Burkitt, Laurie, 40n70, 40n71, 288nn51–52,
355n3
Burns, John F., 43n
Burt, Steve, 562n5, 562nn9–11,
562nn15–16
Busch, 122
Bush, George W. (and administration),
100, 366
Bush, Jason, 70n21
Business Roundtable, 100
Business Standard, 508
BusinessWeek, 428, 432–433
Butare, Albert, 316
Butler, Sarah, 287n34
Byham, William C., 243n16
Byme, Andrew, 69n6
C&A, 81, 111
Cahill, Kevin, 420n44
Cahill, Thomas, 8n
Calderón, Felipe, 24, 89
Calico, 418
California State Supreme Court, 99–100
Caligiuri, Paula M., 519, 539–540,
551n46, 553n106
Callus, Andrew, 383n14
Calori, Roland, 324n90
Cameron, David, 26, 46, 47, 49
Cameron, Kim S., 506nn97–98
Campbell, Elise, 244n61
Campbell, Mikey, 96n46, 96n48
Canon, 408t
Cantrell, Susan, 550n21
Capell, Kerry, 323n69
Capital One 360, 64
Capital One Financial Corp., 566
Capon, Noel, 322n42
Cappelli, Peter, 505n66
Carasso, Isaac, 255
CARE, 86, 89
CARE Canada, 46
CARHCO (Central American Retail
Holding Company), 283
Caribbean Beach Resort, 264
Carl, Dale, 505n91
Carlton, 122
Carlton, Jim, 405n
Carney, Scott, 429n7, 429nn16–19,
430nn68–69
Carow, K., 356n12
Carr, Nicholas, 210, 243n13
Carrefour, 279e, 281, 283–284
Carrera, Barbara, 262
Carter, Chris, 244n46
Carter, Shan, 177n12
Cascio, Wayner F., 385n63, 385n67
Casson, Mark, 384n56
Castle, 122
Castro, Fidel, 98
Castro, Raul, 98
Caterpillar, 5
Cathay Pacific, 334t
Cattaneo, Julian, 244n42
Caudron, Shari, 178n44
Cavale, Siddharth, 253n7, 254n49
Cavusgil, S. Tamar, 325nn120–121
CBRC (China Banking Regulatory
Commission), 567–568
CBS, 263
CCF, 564
Cemex, 6, 315t
Cemex SAB, 375
Cendrowicz, Leo, 383n31
Cendrowski, Scott, 70n36
Center for Creative Leadership, 170
Center for Science and Environment
(CSE), 248, 249, 250t
Centers for Disease Control and Prevention
(CDC), 117–118
Central American Retail Holding Company
(CARHCO), 283
Central Ground Water Authority (CGWA), 251
CERES (Coalition for Environmentally
Responsible Economies), 580
CFDT (Confédération Française
Démocratique du Travail), 269
CGT (Confédération Générale du Travail),
267, 269–270
Chaison, Gary, 112nn14–17, 112nn19–20,
112nn22–23
Chajet, Jonathan, 259
Chakravarthy, Balaji S., 160n
Chan, Peng S., 356n10
Chanakya, 499
Chandler, Clay, 287n24
Chandler, Susan, 370n
Chandran, Rina, 430n44, 430n49
Chaney, Lillian H., 125n, 233n, 465n73
Chang, Leslie, 550n24
Chang, Sea Jin, 306, 324n83
Chao, Loretta, 254n52, 420n34
Chapman, Tony, 525–526, 552n63
Charity: Water, 104
Charles, Prince of Wales, 83
Chaturvedi, Mr., 425
Chee, Foo Yun, 384n32
Chen, Chao C., 152n37
Chen, Eva, 170
Chen, George, 277n5, 278n35
Chen, Kathy, 383n18
Chen, Ming-Jer, 179n61
Chen, Xiao-Ping, 152n37
Chernotsky, Harry I., 324n89
Cherry, 335
Cherry, Kendra, 223n
Chesser, Paul, 95n27
Chevron, 5
Child, John, 70n27, 357n45
Chin, Denny, 417
China Airlines, 334t
China Association of Automobile
Manufacturers, 6
China Banking Regulatory Commission
(CBRC), 567–568
China Beverage Industry Association, 257
China Construction Bank, 563, 566, 568
China Europe International Business
School, 170
China Huiyuan Group, 256
China Labour Watch, 280
China National Offshore Oil Group, 7t
China Ocean Shipping (Group) Company, 7t
China Resources Enterprise, 282
China Telecom, 61, 293
Chinese Academy of Social Sciences, 567
Chiquita Brands International Inc., 86,
575–582
Chirac, Jacques, 265
Chitakasem, Parita, 275
Chon, Gina, 322n38
Choudhury, Gaurav, 43n
Chouinard, Yvon, 74–75
Chran, Ram, 484n
Christensen, Clayton, 325n103
Christmann, Petra, 96n64
Christodoulou, Chris, 322n42
Christophe, Stephen, 358n65
Christou, Dennis, 578, 580
Chrysler, 123, 148, 334, 406t
Chung, Olivia, 383n20
Ciaccia, Chris, 420n48
608 Name Index
Cianci, Rebecca, 438n
Cifferri, Luca, 177n25
Cifra, 281, 307
Cigarros La Tabacalera Mexicana SA, 307
Cincinnati Enquirer, 576, 578
Cinderella, 268
Cisco Systems, 6, 303–304, 415, 507,
513, 547
Citi Asia Pacific, 294
Citibank, 293–294, 380
Citicorp, 293
Citigroup, 89, 564, 565
Claessens, Stijn, 97n76
Claris Lifesciences, 292
Clark, Andrew, 287n8, 287n38
Clark, Don, 324n79, 357n33, 506n119
Clark, Liat, 420n45
Claus, Lisbeth, 552n68
Clemens, Jason, 206n56
Clifford, Stephanie, 287n16
Clinton, Bill (administration), 219
Clinton, Hillary, 4, 417
Closer Marketing Group, 102
CNIL, 418
Coakley, Lori A., 162–163, 178n31
Coalition for Environmentally Responsible
Economies (CERES), 580
Coalition of Latin American Banana
Workers’ Unions (COLSIBA), 580
Coca-Cola, 5, 14, 161, 246, 248–254, 256,
257, 296–297, 337, 338, 366, 380,
405, 512, 514, 538, 543
Coca-Cola India, 249, 251, 252
Cohan, Peter, 177n8
Cohen, Eli, 538, 553n100
Cohen, Jared, 4
Cohen, Roger, 269n
Cohen, Tova, 272n1, 322n22
Colao, J. J., 105n10, 106n12
Cole, Wayne, 272n1
Colgate-Palmolive, 408t
Collins, Jamie, 97n78, 325n98, 385n66
COLSIBA (Coalition of Latin American
Banana Workers’ Unions), 580
Colton, Debra, 336n
Columbia University, 110
Columbus, Christopher, 8
Colvard, James E., 503n17
Commerce One, 294
Communist Polish United Workers
Party, 28
Companhia Brasileira de Distribuio Po de
Acar, 283
Compaq, 296
comScore, 4
Confédération Française Démocratique du
Travail (CFDT), 269
Confédération Générale du Travail (CGT),
267, 269–270
Conger, Jay A., 505n70
Conlin, Michelle, 179n62, 465n80
Connor, Stephanie, 70n34
Connor, Tim, 112n6
ConocoPhillips, 398
Conservation International, 86
Continental Gummiwerke, 233–234
Contractor, Farok J., 384n57
Contractor, J., 356n9
Cook, R. Christopher, 70n34
Cook, Tim, 500
Cooper, C., 506n99
Cooper, Cary, 519n, 551n44
Cooper, C. L., 463n36
Coopers Lybrand, 547
Coors, 220
Copa Airlines, 334t
Cora, James B., 265
Corona, 122, 307
Corran, Caroline, 383n6
Corus, 422
Costco, 279e
Cott Beverages, 249
Couto, Vinay, 517n, 551nn39–40
Coy, Peter, 550n20
C.P. Pokphand Company, 281
Crampton, Thomas, 277n3
Credit Suisse, 79, 89
Cremer, Andreas, 413n49
Cresson, Edith, 266
Crisil, 421
Crookell, Harold, 338n, 373n, 384n40
CSE (Center for Science and
Environment), 248, 249, 250t
Cutrale-Safra, 581
Dacia, 158
Dacin, M. Tina, 356n27
Daewoo, 29, 186
Daewoo Commercial Vehicles Company, 422
Dahan, Nicolas, 314, 315n, 325n108
Daiichi Sankyo Co. Ltd., 119f, 292
Daily Telegraph, 521
Daimler, 9, 91, 123, 310, 408t
Daiwa Institute of Research, 569
Damac Properties Company, 375
D’Amour, Rosemary, 69n3
Danette, 255
Daniels, John D., 412n41
Danisco, 122–123
Dannon Milk Products, Inc., 255
Danone, 314
Danone Asia Pte Ltd., 258
Danone Biscuits, 256
Danone Group, 255–260
Danonino, 255
Darlington, Gerry, 152n17
Das, Anupreeta, 322n38
Dastmalchian, Ali, 149n, 153nn51–52,
505–506nn93–94
Datsun, 427
Dauch, Richard, 413n54
Davenport, Cheryl, 106n29
David, Ruth, 429n2, 429n11, 429n13
Davidson, Michelle, 466n106
da Vinci, Leonardo, 268
Davis, Bob, 97n77
Davis, Don, 411n9
Davis, H. J., 445n, 463n35
DeBord, Matthew, 430nn74–75
Decker, Susan, 420n40
Deen, Thalif, 254n51
Def Jam Recordings, 500
Defotis, Dimitra, 325n110
Degelmann, Thor, 269–270
De Guzman, Doris, 71n52
de La Torre, J., 325–326n124
Delios, Andrew, 385n59
Dell Computer, 64, 81, 107
Deller, J., 504n34
Deloitte, 393, 516
Deloitte Touche Tohmatsu, 182–184
de Lombaerde, Geert, 582n2
Delta Airlines, 334t
Delta Motor Corporation, 66
DeMeuse, Kenneth P., 465n72
Deng Xiaoping, 170
Den Hartog, Deanne, 505n85, 505n90
Denmark, Florence L., 505n85
Deogun, Nikhil, 323n49
Deshmukh, Kiran, 425
Deutsche Bank, 10, 64, 79, 89, 391, 570
Devichand, Mukul, 69n12
Dhar, Sujoy, 430n44, 430n49
Diamond, Mike, 503n20
Dickies, 286
Dickinson, Steven M., 257n, 260,
261nn27–34, 261nn55–56
Dick’s Sporting Goods, 110
Diehtl, E., 371n
Dillon, Linda S., 243n17
Dillon, W. Tracy, 219, 243n34
DiMasi, Joseph A., 120n7
Dinur, Adva, 357n44
Disney, 107, 262–271, 273–277, 398, 408t
Disney, Roy, Jr., 263
Disney, Roy, Sr., 263
Disney, Walt, 262–263
Disney Channel, 267
Disneyland, 262–264
Disneyland Paris (Euro Disneyland),
262–271, 273
Disney-MGM Studios, 265, 266
Disney’s Caribbean Beach Resort, 264
Disney’s Dolphin and Swan Hotel, 264
Disney’s Grand Floridian Beach Resort, 264
Disney’s Yacht Club and Beach Resort, 264
Disney World, 264, 267–268, 269e, 270
Distribución y Servicio (D&S), 283–284
DiversityInc magazine, 190
Dixon, George, 243n16
Dizik, Alina, 547n
Djarova, Julia G., 385n64
Dodd, Nancy G., 465n82
Doh, Jonathan P., 3n, 13n, 39n23, 51n,
71n67, 79n, 86n, 91n, 96n63,
97n78, 105n, 111n, 119n, 132n,
134n, 135n, 147n, 148n, 169n,
197n, 211n, 239n, 244n60, 244n66,
253n, 260n, 277n, 286n, 309n,
313n, 314, 315n, 324n93, 324n97,
325n98, 325n100, 325n108, 356n26,
384n41, 384n45, 384n46, 384n51,
385n60, 385n65, 385n66, 419n,
429n, 494n, 506n95, 506n108,
506n109, 510, 532n, 550n4,
550nn16–17, 562n, 574n, 582n
Dolphin and Swan Hotel, 264
Donaldson, Thomas, 95n31, 96n56
Name Index 609
D’Onfro, Jillian, 411n8
Dongfeng Motors, 377
Dorfman, P., 504n36
Dorfman, Peter, 505–506nn93–94, 505n81,
505n82
Dorfman, Peter W., 145n, 149n, 153nn51–52,
153n54, 153n56, 153nn59–60,
178nnn50–51, 506n96
Dou, Eva, 324n79
Doulton, Melanie, 183, 205n7, 205n12
Drivers Ed Direct, 102
Droger, 279e
Dr. Reddy’s Laboratories, 291
Druckman, Daniel, 244n68
D&S (Distribución y Servicio), 283–284
Dudley, Bob, 554
Dudley, Robert, 362
Dudley Sports, 109
Duke, Mike, 190
Duke University, 118, 517
Dumaine, Brian, 95n14
Dunfee, Thomas W, 96n56
Dunn, Collin, 582n8
DuPont, 122–123, 124, 148
Duska, Ron, 96n53
Dutton, Jane E., 506nn97–98
Dvorak, Phred, 384n33
Eandi, Susan, 552n69
Earley, P. C., 451, 464n60, 464n61
Earley, P. Christopher, 153n63, 196n
Eastern Congo Initiative, 104
East-West Center, 370
eBay, 4, 388
Ebbhardt, Tommaso, 356–357n29
Eberle, Otto, 105n
ECA International, 513
Edelman, 85
Eden, Dov, 451, 464n64
Eden, Lorraine, 97n78, 325n98, 385n66
Edgar, Bob, 570
EDS, 516
Edvardsson, Bo, 562n1, 562n7, 562n12,
562n28
Edvardsson, Enquist, 557
Edwards, Cliff, 550n31
E! Entertainment Television, 102
Egelhoff, William G., 412nn44–45
Egri, Carolyn P., 504n59
Eilam, G., 496, 506n101
Einhorn, Bruce, 376n
Eisai Co. Ltd., 119f, 292
Eisner, Breck, 264
Eisner, Michael, 262–265, 267–268
Elashmawi, F., 125n
Elg, Ulf, 562n5, 562nn9–11, 562nn15–16
Eli Lilly & Co., 119f
Ellis, Paul, 171, 179n58
ELN, 579
El Wardany, Salma, 70n28
Embraer, 6, 32, 386
Emirates, 334t
Emirates Defence Industries Company, 347
Emrich, Cynthia G., 505n85
The Energy and Resources Institute
(TERI), 250
Engardio, Pete, 10n, 43n
Engel, Dean W., 553n112
Engels, Friedrich, 48
England, George W., 152n22
Enquist, Bo, 562n1, 562n7, 562n12, 562n28
Enright, Michael J., 325nn105–106
Enron, 89, 370, 497
Envick, Brooke R., 464n45
Environics, 497
Environmental Protection Agency, 88
EPA (U.S. Environmental Protection
Agency), 84
EPCOT Center, 264
Erez, M., 451, 464n58, 464n61
Ericsson, 298, 316
Ernst & Young, 508, 560, 561
Eshgi, Golpira, 413n56
E*Trade, 319
Euro Disneyland (Disneyland Paris),
262–271, 273
Euromonitor International, 274, 275
Euronext Paris, 255
European Central Bank, 25, 57
European Commission, 25, 56–57, 361,
366–367, 507
Evans, Jonny, 323n58
Everland, 276
Evian, 255–256
Ewing, Jack, 72nn76–77, 550n20
Exxon Corporation, 369
Exxon Mobil, 5, 5t, 49, 100, 361, 380
EZ Laundry, 102
Facebook, 2–4, 44–45, 64, 210
Fadil, Paul A., 450n, 464n53
Fahey, Mark, 40n45
Fairholm, Matthew, 503n24
Fair Labor Association, 75, 81, 109, 110
Fairtrade Labeling Organizations
International (FLO), 88
Fair Trade USA, 88
Faison, Seth, 243n38, 383n17
Famous Brands, 154
Fan, Joseph P. H., 97n76
Fannin, Rebecca, 420n18, 420nn21–22
Fanta, 337
FARC, 579
Farchy, Jack, 412n38
Farh, Crystal I. C., 552n62
Farley, John U., 322n42
Fattah, Zainab, 384n43
FDA (U.S. Food and Drug
Administration), 117, 118, 291
Federal Bureau of Investigation (FBI), 281
Federal Trade Commission, 418
Feldman, Daniel C., 552n89
Ferenstein, Gregory, 106n35
Fernandes, Tony, 376
Ferrero, 408t
Fiat, 334
Fiat Group Automobiles, 422
Fidler, Stephen, 70n17
Fiedler, Fred E., 553n114
Field, Hubert S., 551n51
Filmhouse Cinemas, 207
Finance Asia, 571
Financial Times, 161, 248, 482
Fingar, Courtney, 253n10
Fingas, Roger, 323n56
Firger, Jessica, 120n6
First Niagara Financial Group Inc., 566
First Pacific, 65
Fischer, Bill, 356n7
Fisher, Caroline, 205n21
Fisher, Cynthia D., 433–434, 463n12
Fisher, Roger, 235, 237, 245nn76–78
Fisher & Paykel, 328
Fitch, 56
Fitch, Laura, 112n28
Fitzgibbon, Blair, 96n60
Fitzpatrick, Robert, 262, 265–266, 270
Flickr, 4
FLO (Fairtrade Labeling Organizations
International), 88
Florida International University, 32
Flory, Louis, 412nn25–26
Fludder, Steven M., 89
Flynn, D. M., 152n23
FOCAC (Forum on China-Africa
Cooperation), 297
Food and Agriculture Organization, 252
Food and Drug Administration (FDA),
117, 118, 291
Forbes magazine, 407
Ford, Royal, 323n66
Ford Motor Company, 5, 9, 28, 185, 220,
294, 305–306, 335, 379–381,
390–391, 395–397, 406t, 422, 427
Forelle, Charles, 70n17
Forrester Research, 388
Forster, Carl-Peter, 427
Forster, Nick, 550n25
Fortune magazine, 75
Forum on China-Africa Cooperation
(FOCAC), 297
Foster, 122
Foster, Dean, 227–229
Fox, Justin, 243n24
Fox, Vicente, 24
Foxconn, 81
Fox Reality TV, 102
Frakt, Andrew, 120nn29–32
France Cable et Radio, 312
Francesco, Anne Marie, 213n
France-Soir, 270
France Telecom, 312, 316
Francis, June, 244n65
Frankena, W., 95n35
Fredricksen, Clark, 411nn12–13
Freedman, Jennifer M., 322n28
Freidhem, Cyrus, 575
French, Howard W., 95n41, 456n, 465n78,
552n82
French, J. P., 464n59
French’s, 20
Frenkel, Stephen, 435, 463n18, 542,
553n111
Fresh Express, 575, 580
Friedman, Brian, 551n49
Friedman, Thomas, 7, 39n21, 60, 70n40
Frier, Sarah, 38nn1–2, 38n5
Frito-Lay North America, 339
610 Name Index
Fruit of the Loom, 86, 109, 110
FTAA, 12
Fuji-Kiku, 457
Fukushima, Kurumi, 288n56
Fuller, Thomas, 41n73
Futrell, David, 465n72
Fyffes, 581
Gabelli and Co., 275
Gabot-Eremco, 271
GAC Fiat Automobiles Co., Ltd., 334
GAC (Guangzhou Automobile
Group), 334
Gaddafi, Muammar, 51
Gaffney, Alexander, 120n39
Gaines, 453
Gallagher, Henry, 385n73
Galloni, Alessandra, 70n17
Gallup, 497
Galperin, Eva, 69n4
Galuszka, Peter, 370n
Gambrel, Patrick A., 438n
Ganguli, Amulya, 250
Gannon, Martin J., 228n, 464n51, 515n
Ganz, 28
Gap Inc., 30, 81, 107, 111, 286
Garcia-Canal, Esteban, 356n22
Gardner, Greg, 323n55
Gardner, William L., 498n, 506nn102–103,
506nn104–105
Garvin, David A., 413nn50–51
Gazprom, 336, 361–362
Geely, 6, 305, 335
GE Hitachi Nuclear Energy, 89
Gehring, 353
GE Jenbacher, 89
Gelfand, Michele J., 505nn83–84
GEMS (General Electric Medical Systems
Group), 543
Genentech, 62, 292
Général Biscuit, 255
General Electric Appliances, 21
General Electric (GE), 3–4, 5, 6, 10, 21,
28, 30, 89, 294, 328–329, 366, 370,
380, 395, 422, 476, 538
General Electric Medical Systems Group
(GEMS), 543
General Foods, 453
General Motors (GM), 259, 294, 298, 334,
339, 347, 348, 406t, 457
Genting, 276
Gentleman, Amelia, 254n38, 254n48
Genzyme, 292, 294–295
Gerds, Johannes, 411n17
Geringer, Michael, 70n16
Gervais-Danone, 255
Ghemawat, Pankaj, 325nn105–106
Ghiselli, Edwin E., 437–438, 463nn25–26,
479–481, 504nn45–46, 504n50,
504nn53–54, 505n65, 505n69
Ghoshal, Sumantra, 300n, 323nn62–63
Ghoshen, Carlos, 159, 170
Gibson, Cristina, 182, 205nn2–3, 205n9,
205n11, 205nn13–15
Gibson, Jane Whitney, 224, 244n50
Gilbert, Jacqueline A., 206n54
Gilead Sciences Inc., 119f
Giles, William F., 551n51
Gillette, 514, 538
Gilley, K. Matthew, 551n50
Giridharadas, Anand, 429n1, 429n33,
430n73
Gladstone, Rick, 41n80
GlaxoSmithKline (GSK), 119f, 290–292
Gleason, Kimberly C., 325n123
Gleeson, Maureen, 419n15
Global Community-Watershed
Partnership, 250t
Global Water Challenge, 250
Globe Telecom, 65
Globoforce, 432
Gmail, 416, 417
GM (General Motors), 259, 294, 298, 334,
339, 347, 348, 406t, 457
GoAhead Tours, 4
Godiva, 21
Goeker, Tuygan, 469–470
Gogoi, Pallavi, 287n25, 287n29
Gold, Barry Allen, 213n
Gold, Stanley, 263
Goldman Sachs, 15–16, 79, 569, 570
Goleman, Daniel, 503n15
Gong, Yaping, 504n40
Goodell, Roger, 359
Goodman, Leslie, 274
Goodman, Peter S., 574n5
Google, 4, 5, 298, 363, 372, 408t,
415–420, 428, 483
Google+, 3, 4
Google Capital, 419
Google X, 419
Gopalan, Suresh, 179n71
Gorbachev, Mikhail, 370
Gordon, Sandi L., 106n34
Gordon, Sarah, 383n5, 383n7
Gorman, Anna, 117n
Goss, Alannah, 276
Gough, Neil, 245n82
Gouvea, Raul, 179n72
Govindarajan, Vijay, 287nn9–13
Grabowski, Henry, 118, 120n7
Graham, Dave, 40n60
Graham, Edward, 39n24
Graham, Jefferson, 106n21
Graham, John, 70n33
Graham, John L., 238, 239n, 240n, 243n6,
245nn73–74, 245n79
Grameen Danone Foods Ltd., 314
Grand Floridian Beach Resort, 264
Grant, Elaine Appleton, 550nn16–17
Green, Diana J., 218, 243nn32–33
Green, Stephen, 566, 569
Greenberg, Julia, 242n2, 243nn3–5, 243n7
Green Giant, 21
Greenhouse, Linda, 101nn3–4
Greenhouse, Steven, 96n50, 112n29,
112n34, 112n37, 112nn39–40,
112n46, 112n47, 288n68,
288n69, 336n
Greenleaf, Robert, 499, 506n112
Greenleaf Center, 499
Greenlees, Donald, 568n2
Greenspan, Alan, 59
Greenwald, Richard A., 112n13, 112n18
Greenwood, J. Michael, 458, 465n97,
552n72
Gregersen, Hal B., 271n
Gregory, Ann, 374n
Griffith, Sarah, 211n
Grimmett, Stephanie, 430nn42–43
Groh, Kenneth, 550n23
Grolsch, 122
Groupe Danone SA, 255–260
Groznaya, Elena, 508–509, 550n5
Grubel, James, 272n1
Grupo Carso, 312
Grupo Modelo, 307
Grupo Televisa, 6
Gryta, Thomas, 322n37
GSK (GlaxoSmithKline), 119f, 290–292
Gu, Wei, 40n69
Guandgong Development Bank, 564
Guangzhou Automobile Group (GAC), 334
Guardiola, Vincent, 267
Guay, Terrence R., 96n63
Guerra, Victor, 540
Guervil, Antoine, 269
Guest, Peter, 206n62
Guge, 417
Guice, Stephen, 218, 243n31
Guillén, Mauro F., 243n30
Gulati, Nikhil, 253n8, 254n20
Gulf Air, 334t
Gulliver, Stuart, 566, 570
Gunderson, Allison, 222n, 243n19, 244n67
Gundlach, Michael, 70n15
Gunther, Marc, 96n69, 96n70, 96n72
Guo Ming, 512
Guo Quan, 415
Guo Shuqing, 563
Gupta, Anil K., 287nn9–13, 428, 430n72
Gupta, Vipin, 153n54, 505n87, 505n91
Gustafson, Krystina, 288nn49–50
Gustavsson, Peter, 324n90
Gustin, Sam, 412nn30–31
Guthrie, Amy, 287n21
Gutner, Toddi, 243n20
GV, 419
Hachman, Mark, 357n41
Hackett Group, 517
Hagel, John, 429n30, 430n34,
430nn36–39
Hahn, Eugene E., 71n67
Haid, Michael, 550n4, 550nn16–17
Haier, 6, 161, 293, 294, 328–329
Haire, Mason, 437–438, 463nn25–26,
479–482, 485–486, 504nn45–46,
504n50, 504nn53–54, 505n65,
505n69
Hakuhodo Institute, 265
Hall, Allan, 287n34
Hall, E., 243n14
Hall, E. T., 210, 243n14
Hall, Kenji, 550n31
Name Index 611
Hallett, Tony, 10n
Halliburton, 91
Hambrick, Donald C., 484n
Hamm, Steve, 43n
Hammer, Mitchell R., 535, 552n87
Hampden-Turner, Charles, 126, 127n,
128n, 140, 152n21, 152nn47–48,
152nn49–50, 178n32, 178n43,
195n, 232, 243n18, 245n71, 323n67,
399–400, 412n40, 492, 505n79
Hanada, Mitsuyo, 357n55, 358n60, 504n47
Hanges, Paul, 149n, 153nn51–52,
153nn59–60, 505–506nn93–94,
505n81, 505n82
Hanges, Paul J., 153n54, 505n80, 506n96
Hang Seng Bank, 564
Hangzhou Canning Food Factory, 257
Hangzhou Wahaha Group Co. Ltd., 255,
257, 258, 259
Hanley, Steve, 95n21
Hannon, David, 179n73
Hansegard, Jens, 562n2, 562n31
Hansen, L., 465n95
Hanson PLC, 219
Hao, Helen, 357n47
Harbrecht, Douglas, 353n
Hardawar, Devindra, 177n11
Hariharan, Malini, 430nn46–48
Harpaz, Itzhak, 465n77
Harris, Philip R., 125n, 179n60, 179n67,
179n76, 221n, 543n
Harris, Stanley G., 551n51
Harris Moure PLC, 260
Harrison, Ann, 112nn7–9
Harrison, David A., 551n50
Harrison, Virginia, 40n63
Hart, Stuart, 325n103
Hart, Stuart L., 325n104, 325nn105–106
Hart, William, 552n87
Hartman, Laura P., 112n12, 112n21,
112nn24–27
Harvard, 316
Harvard Business Review, 209
Harvard University, 110
Harvey, Michael G., 515, 550n33, 551n34,
551n42
Harzing, Anne-Wil, 323n73, 357n53
Hastings, Reed, 209
Hawksworth, John, 40n46
Hay, Michael, 562n1, 562n7, 562n12,
562n28
Hayes, J., 539, 553n102
Hay Group, 407
Haynes, Brad, 288n45
HCBPL (Hindustan Coca-Cola Beverages
Pvt Ltd), 249, 252
He, Laura, 504n58
Head Start, 100
Healey, James R., 357n30
Heft, Miguel, 97n91
Heineken, 161
Helfand, Carly, 357n42
Helft, Michel, 177n12
Heller, Jean E., 551n58
Heming, David, 465n85
Hempel, Jessi, 547n
Henkoff, Ronald, 405n
Hennessey, 161
Herbert, T. T., 445n, 463n35
Heritage Foundation, 55
Herman Miller, 395
Heron, R., 356n12
Herszenhorn, David M., 70n32
Herzberg, Frederick, 442–446
Hetter, Katia, 412n35
Hewlett-Packard, 81, 107
Hickins, Michael, 552n92
Higgins, L. H., 464n54
Hildebrandt, H. W., 217, 227, 243n28,
244n52
Hill, Charles, 323nn71–72
Hill, Charles W. L, 8n, 70n41
Hill, Raymond, 244n42
Hillman, Amy, 384n47, 384n48
Hilsenrath, Jon E., 43n, 411n14
Hindustan Coca-Cola Beverages Pvt Ltd
(HCBPL), 249, 252
Hines, George, 443
Hines, George H., 463n30
Hirsch, Georges, 347n
Hirschler, Ben, 321n5
Hispano Carrocera, 422
Hitachi, 89, 301, 414
Hitachi Ltd., 347
Hitt, Michael A., 325n118, 356n27,
384n47
Hiuyuan Juice, 246
Hjelmgaard, Kim, 70n24
H. J. Heinz, 392
H&M, 81, 111
Hoa, Tran Van, 247n
Hocking, J., 384n35
Hodge, Shelda, 162n, 221n, 228n
Hodgetts, Richard M., 162, 178n45, 221n,
224, 225n, 244n50, 323n53, 323n54,
356n8, 396n, 412n22, 463n24,
464n66, 475n, 503n14, 505n71, 543n
Hoecklin, Lisa, 152n46, 178n28, 187n,
188n, 189n, 205n18, 206n28, 206n35
Hofheimer, Bill, 358n72
Hofheinz, Paul, 413n48
Hofmann, Mark A., 384n50
Hofstede, Geert, 129–139, 141, 145, 147–148,
152nn27–29, 152n30, 152n31,
152nn34–36, 152nn38–43, 153n62,
166, 186, 438–440, 447, 448, 452n,
463nn28–29, 464n50, 494n, 532
Hofstede, G. J., 131n, 132n, 136n, 137n,
138n, 147n
Holiday Inn, 21, 336
Holland, John, 110
Hollande, François, 46
Hollinger, Dick, 263
Holman, D. J., 504n38
Holodny, Elena, 39n35
Holstein, William, 206n31, 206n33
Holt, Erik, 582n
Holtbrugge, Dirk, 385n62
Holusha, John, 407n, 413n53, 515n
Home Depot, 279e, 284, 500
Honda Motor Co., 24, 81, 294, 298, 299,
304, 311, 406t, 422
Honeywell, 366
Hongkong and Shanghai Banking
Corporation, 564, 565
Hongkong Bank, 564
Hong Kong Disneyland, 273–276
Hong Kong Peregrine Investment, 258
Hon Hai Precision Industries, 7t
Hopewell, Barry, 322n40
Horn, Michael, 84
Horovitz, Jacques H., 401, 412nn42–43
Horvath, Lisa, 484n
Hostetler, Bianca C., 383n30
Hotten, Russell, 84n
Hou, P., 465n93
Hou Liquiang, 356n5
House, Robert J., 145n, 149n, 153nn51–52,
153n53, 153n54, 153n57, 153n58,
153nn59–60, 505–506nn93–94,
505n80, 505n88, 505n89, 505n90,
505n91, 506n95
Household Financial, 565
Household International, 565
Howard, Rebecca, 355n2
Howard, Steve, 558
Howell, Jon P., 506n96
Hoxha, Enver, 28
HSBC, 64, 85, 89, 315t, 520, 563–574
HSBC Bank (China) Company Limited,
573
HSBC Bank USA, 565
HSBC Finance Corp., 565
HSBC Holdings, 391, 564–565
Hsu, Tiffany, 562n27
HTC, 158
Huang, Christine T. W., 356n15
Huang, Xu, 504n40
Huawei Technologies Co. Ltd., 304
Huaxin Securities Co. Ltd., 570
Hubbard, Ann, 70n18
Hubbard, Kelsey, 105n4
Hubbard, R. Glenn, 40nn55–57
Hughes, Matthew O., 465n91
Hughes, Robert, 206n36
Hu Jintao, 415
Hulbert, James, 322n42
Hulbert, James M., 244n51
Hulme, Caroline, 503n18
Human Rights Watch, 361
Hume, David, 47
Hunt, James G., 503–504n32
Hurun Report, 259
Hussein, Saddam, 365
Hutchinson Whampoa Limited, 7t
Hwa-seok, Oh, 206n26
Hyundai, 9, 29
Hyundai Motor Co., 427
Iberia Airlines, 333, 334t
IBM, 83, 107, 129–130, 147, 266, 296, 299,
308, 348, 467, 513, 514, 516, 538
IBM Global Technology Services, 467
ICCR (Interfaith Center on Corporate
Responsibility), 107
612 Name Index
Icelandair, 334t
ICI India, 499
Idemitsu Oil Development Company, 380
Ikano, 555
IKEA, 49, 172, 408t, 555–561
Ikon, 390–391
Ilwa, 28
IMF (International Monetary Fund), 9, 25,
29, 32, 364
IMJ, 306
Immelt, Jeffrey R., 89
IMS, 290
InBev, 123–124
Inbursa, 282
Indica, 422
Inditex, 81, 111
Indosat Ooredoo, 467
Industrial & Commercial Bank of China
Ltd., 566, 568
Infosys, 6, 516
Ingka, 555, 561
Inkpen, Andrew, 152nn11–13, 357n44,
384n58
Inspur Group, 304
Instagram, 2–3, 4
Institute of Public and Environmental
Affairs, 252
Institutional Revolutionary Party, 24
Insurance Institute for Highway Safety, 428
Intel, 85, 408t
Interbrand, 255, 259
Interfaith Center on Corporate
Responsibility (ICCR), 107
Inter IKEA Systems BV, 555
Internal Revenue Service (IRS), 281, 530
International Association of Amusement
Parks and Attractions, 276
International Computers Ltd., 229
International Consortium for Executive
Development Research, 547
International Labour Organization, 80, 108
International Monetary Fund (IMF), 9, 25,
29, 32, 364
International Standards Organization
(ISO), 396
International Telecommunications Union, 65
International Telephone and Telegraph
(ITT), 307, 400
International Union of Foodworkers, 579–580
International Wireless of Boston, 316
Intuit Inc., 306
Inzerilli, Giorgio, 243nn21–22
Ip, Greg, 39nn37–41, 40n42
Ireland, Duane R., 325n118
Irix Pharmaceuticals, 291
IRS (Internal Revenue Service), 281, 530
Irvine Co., 263
Isaza, Marcela, 106n43
Isdell, E. Neville, 251
Ishii, Jun, 456
ISIS (Islamic State of Iraq and Syria),
44–45, 51, 52, 365, 368
ISO (International Standards
Organization), 396
Israel, J., 464n59
Italie, Leanne, 106n43
Ito-Yokado, 281
ITT (International Telephone and
Telegraph), 307, 400
Iun, Joyce, 504n40
Ivancevich, John M., 551n57
Ivanova, Deyana, 179n84
Ivencevich, John M., 206n54
Iwawaki, S., 463n42
Jackson, Michael, 268
Jacob, Rahual, 43n
Jaguar, 335, 422
Jaguar Land Rover, 6, 20, 305
Jajoo, Vaishali, 428
Janssens, Maddy, 206n39
Japan Airlines, 334t
Japan Bank for International
Cooperation, 248
Jargon, Julie, 411n16
Jasper Technologies, 303
Javidan, Mansour, 145n, 149n, 153nn51–52,
153n53, 153n54, 153n58, 153nn59–60,
178nnn50–51, 505–506nn93–94,
505n80, 505n82, 505n86, 505n88,
505n91, 505n92, 506n108
Jayaprakash, Pakshalika, 411n17
JCPenney, 107, 284
J.D. Power and Associates, 298
Jeep, 335
Jefri, Omar A., 465n83
Jerzees, 109
Jet Airways, 334t
Jet Blue, 334t
Jeuchter, W. Mathew, 205n21
Jie, Ma, 412n28
Jie, Yang, 71n66
Jin Jia Investment, 257–258
Jobs, Steve, 156, 157
John, King of England, 8
John, Sujit, 96n55
Johns, Jaclyn, 253n
Johnson, Bobbie, 420n32
Johnson, Carolyn Y., 120n3
Johnson, James Patrick, 179n70
Johnson & Johnson, 5, 119f, 408t, 547
Jolly, David, 206n32, 206n34
Jones, Bodil, 552n96
Jones Day, 55
Jopson, Barney, 574n7
Josefson, Mark, 282
Joynt, Pat, 140n, 152n16, 490n, 526n,
552n63
JP Morgan, 79
JP Morgan Chase & Co., 566
Judson College, 428
Juergen, Michelle, 106n45
Jun, Luo, 568n4
Kabasakal, Hayat, 505n89
Kageyama, Yuro, 177n21
Kahn, Joseph, 243n36
Kakabadse, Andrew, 457, 465n86, 484n
Kakuyama, T., 464n65
Kalaritis, Panos, 291
Kale, Prashant, 206n25, 206n27
Kaleem, Aliya, 357n43
Kam, Andrew, 274
Kamprad, Ingvar, 555–557, 559, 561
Kansara, Vikram Alexei, 105n8
Kant, I., 77–78, 95nn32–33
Kant, Ravi, 421
Kanter, James, 72nn76–77
Kanungo, Rabindra N., 463nn37–38
Kanungo, R. N., 504n34
Kapoor, Charu, 321n8, 321n11
Karam, Zeina, 69nn9–10
Karaman, Bahar, 322n33
Kasky, Marc, 99
Kasparov, Garry, 27n, 32n
Kass, John, 244n41
Kate, Daniel Ten, 412n28
Katyal, Ritika, 41n91
Katzenberg, Jeffrey, 263
Kavanagh, Michael, 383n5, 383n7
Kawahito, Hiroshi, 456
Kazeem, Yomi, 288n63
Kedia, Ben L., 552n90
Keim, Gerald, 384n48
Keith, Kent, 499
Kelion, Leo, 177n14
Kenny, Edna, 46
Kent, Thomas W., 503n21
Kenter, Michael E., 322n44
Kentucky Fried Chicken (KFC), 220, 247,
265, 336
KenyaNet, 316
Kepler Securities, 282
Kerr, Stephen, 465n89
Kets de Vries, Manfred F. R., 503n29
Khanna, Tarun, 325nn105–106
Khomeini, Ruhollah, 365
Khrennikov, Ilya, 383n6
Killing, J. Peter, 338n, 373n, 384n40
Kim, Ken I., 464n55
Kim, N., 465n93
Kindle, 389
King, Neil, 383n27
Kingfisher PLC, 283
Kirby, Jason, 245n84
Kirchner, Cristina de, 31
Kirchner, Néstor, 31
Kirk, Donald, 41nn93–94
Kirkman, Bradley L., 182, 184, 205nn2–3,
205n9, 205n11, 205nn13–15
Kiviniemi, Peppi, 356n25
Klein, Ezra, 420n42
Klein, Roland, 123
Kleiner, Brian H., 356n15
Kleiner Perkins Caufield & Buyers, 415
KLM, 334t
Kluckhohn, Florence Rockwood, 163n
Knight, Ben, 40n62
Knight, Gary A., 325nn120–121
Knight, Phil, 99
Kobayashi-Hillary, Mark, 79
Koepp, Stephen, 265n
Koglmayr, H. G., 371n
Koizumi, Junichiro, 55
Kollewe, Julia, 321n17
Kolodzieski, Edward J., 283
Konda, 293
Kondrasuk, Jack N., 384n34, 384n36
Name Index 613
Koninklijke Philips Electronics N.V., 345
Korber/Hauni, 353
Korean Air, 334t
Korea Telecom, 65
Kossek, Ellen Ernst, 552n88
Kotabe, M., 323n46
Kovach, Carol, 201
Kovalev, Vladimir, 95n39
Kowitt, Beth, 562n20
Kozlov, Vladimir, 243nn8–11
KPMG, 579
Kraft Foods, 256, 391
Kraft Heinz Company, 392
K. R. Choksey Shares & Securities
Pvt., 427
Kreder, M., 412n46
Kripalani, Manjeet, 43n
Krishna, R. Jai, 384n33
Krishna, Sonali, 271n
Krishnan, Herna A., 412n23
Kronenbourg, 255
Krudewagen, Ute, 552n69
Krus, David J., 464n48
Kucera, Danielle, 411n6
Kuivalainen, Olli, 325n122
Kulish, Nicholas, 562n29
Kullman, Ellen, 151nn2–6
Kumar, Arvind, 249
Kumar, Hari, 41n96
Kumar, Rajesh, 253n3
Kunnanatt, James Thomas, 505n64
Kuratko, Donald F., 225n, 356n8
Kurczewski, Nick, 430n41, 430n45,
430n50, 430n55
Kutcher, Ashton, 4
Kuznets, Simon, 82
Kwalwasser, James, 456n
Kwok, Vivian Wai-yin, 261n20
Lago, Umberto, 356n7
Lague, David, 286n3, 568n2
Lai, George Ming-Long, 244n53
Lai Xiaomin, 568
Lakshman, Nandini, 253n14, 253n16,
254n24
Lam, N. Mark, 243n6
LAN Airlines, 333, 334t
Landler, Mark, 40n68, 190n, 287nn31–33,
287n35, 383n25
Land Rover, 305, 335, 422
Lao-Tzu, 499, 506n111
Lashinsky, Adam, 177n4
Lasseter, Tom, 383n24
La Strada International, 418
LATAM, 333
Latham, Gary P., 464n57
Latta, Geoffrey W., 529n
Lau, Justine, 419nn4–5, 420nn28–30
Laubacher, Robert J., 357n51
Laurent, Andre, 186, 206n29
Law, Kenneth S., 552n75, 552n84, 552n95,
553n110
Lawler, Edward E., III, 464n63
Lawrence, Peter, 179n69
Layne, Nathan, 288n45
LeCraw, Donald J., 338n, 373n, 384n40
Lee, Cyrus, 411n2
Lee, Jean, 178–179n53, 198, 206n48
Lee, Kenneth, 569
Lee, Sang M., 152n25, 323n54, 412n22,
478, 504n42, 504n49
Lee, Tosca M., 504n42
Lee Hoon, 276
Lee Tenghui, 219
Le Figaro, 267, 268
Legend, 293
LEGO Group, 408t
Legoland, 276
Lehman Brothers, 89
Lehrer, Mark, 358n62
Lei, David, 356n21
Leininger, Jim, 433, 462nn10–11
Leke, Acha, 41n86
Lenartowicz, T., 179n70
Lenenergo, 559
Lenin, Vladimir Ilyich, 48
Lenovo, 6, 85, 395, 418, 500
Leon, Julio, 463n31
Leonard, Christopher, 71n51
Leonardo da Vinci, 268
LePage, Evan, 38n4
Lessen, Ronald, 189
Leung, K., 504n37
Leung, Kwong, 153n55
Levine, David I., 465n84
Levine-Weinberg, Adam, 242n1
Levi Strauss & Co., 83, 86, 161, 408t, 497
Levitas, Edward, 356n27
Lewin, Arie, 551nn39–40
Lewin, Arie Y., 517n
Lewis, Richard D., 179n63, 179n68, 221n,
228n, 515n
LG Electronics, 6
LG Group, 29
Li, Hao, 245n83
Li, Jitao, 484n
Li, Karl, 419n
Li, Robin, 416
Liao, Pin-Pin, 419n
Liberation, 266
Liberty Asia, 418
Lidl, 279e, 282
Life Magazine, 99
Li & Fung, 296, 337–338
Light, Joe, 503nn1–2
Liker, Jeffrey K., 357n52, 405n, 406n,
413n52
The Limited, 296
Limpaphayom, Wanthanee, 464n53
Lincoln, James R., 357n55, 358n60,
504n47
Linder, Keith, 577
LinkedIn, 4, 469
Lippert, John, 95nn28–29
Lipschutz, Neil, 383n21
Littell, Ben, 3n, 13n, 51n, 86n, 91n, 105n,
111n, 119n, 132n, 134n, 135n, 147n,
148n, 169n, 197n, 211n, 239n, 253,
260n, 277n, 286n, 313n, 419n, 429n,
494n, 532n, 562n, 574n, 582n
Liu, Aili, 504n40
Liu, Fang, 356n7
Liu, Nicole, 277n6
Locke, Edwin A., 464n57
Lockheed Corporation, 91
Lockheed Martin, 347
Loftus, Peter, 321n18
Lohia, Gaurav, 427
Lohr, Steve, 551n36
Long, Tony, 419n10
Looker, Larry, 468
Loose, Cathy, 552n65
Loosemore, Martin, 384n37
Lopez, Raymond H., 277nn1–2, 277n15
Lorange, Peter, 384n57
Lord, Michael D., 244n57
L’Oréal, 314, 408t
Loreto y Pena Pobre, 307
Love, Dylan, 177n3
Lowe, K. B., 465n93
LU, 255
Lu, Yuan, 553n113
Lubatkin, Michael H., 463n20
Lubin, Gus, 413n63
Lublin, Joann S., 39n13, 355n3
Lubove, Rebecca E., 456n
Lucent Technologies, Inc., 186–187
Luciana (Roche Diagnostics
employee), 469
Lufthansa, 333, 334t
Luk, Dora M., 551n50
Lukoil OAO, 7t
Lula da Silva, Luis Inácio, 32
Lumax, 425
Lund, Adrian, 428
Lund, Susan, 41n86
Luo, See Yudong, 325n99
Lustgarten, Abrahm, 383nn8–10
Luthans, Fred, 152n18, 164–165, 168n,
178n35, 178n36, 178n37, 178n38,
178n39, 178n41, 178n42, 178n45,
205n20, 323n54, 357n54, 412n22,
435, 455, 459, 463n17, 463n21,
463n39, 463n41, 464n45, 464n56,
464n66, 465–466n100, 465n82,
465n87, 506n100, 506nn102–103,
543n, 545, 553n99, 553n115,
553nn116–117
Luthans, Kyle W., 168n
Lynn, R., 463n42
Lytle, Anne L., 244n69
M, Greeshma, 177n26
Maak, Thomas, 547n
Macalister, Terry, 383n11
Macarov, D., 463n32
Machungwa, Peter D., 444n, 463n33
Mack, Eric, 420n47
Mackenzie, James, 272n1
MacLachlan, Matthew, 462n4
MacMillan, Douglas, 372n
Macri, Mauricio, 31
Maddox, Robert C., 552n91
Madrazo, Alejandro, 358nn70–71
Magadi Soda, 186
Magretta, Joan, 323n47, 357n37
Ma Guonan, 568n1
Mahajan, Mansi, 321n8, 321n11
614 Name Index
Mahapatra, Rajesh, 39n12
Maharashtra State Electric Board, 370
Maia, Cesar, 375
Mair, Johanna, 322n45
Majumdar, Shyamal, 508, 550n3
Ma Jun, 252
Makino, Shige, 385n59
Malaysia Airlines, 376
Malhotra, Aditi, 372n
Malone, Thomas W., 357n51
Maloy, T. K., 506n114
Mandela, Nelson, 33
Manik, Ulfikar Ali, 288n67
Mao Tse-Tung, 50, 472
Mara Group, 308
Marangi, Christopher, 275
Marcopolo, 422
Marine Midland, 564
Markit, 52
Marklin & Cle, 353
Marquardt, Michael J., 484n, 553n112
Marquez, Jessica, 547n
Marriott, 561
Marroushi, Nadine, 384n44
Marshall, R. Scott, 179n57
Marsnik, Paul A., 168n
Martin, Eric, 40n48
Martin, Jeanette S., 125n, 233n, 465n73
Martinez, S., 504n36
Maruti Suzuki India Ltd., 427
Marvin, Ginny, 419n16
Marx, Karl, 48
Maslow, Abraham, 436–441, 446, 463n22
Massmart, 280, 285
Matsui, T., 451, 464n65
Matsushita, 196, 215–216, 515
Matsushita Electric, 456
Matsushita Electric Industrial, 347
Mattel Inc., 267, 364
Mattioli, Dana, 355n3
Matviuk, Sergio, 504n33
Maw, Liz, 547
Maxus Energy, 484
May, Douglas R., 506nn102–103
Mayeda, Andrew, 57n
Mayer, Louis B., 262
Mayfield, Melinda, 505n87
Mazda Motor Corp., 294, 379–380
McAlone, Nathan, 243n12
McBride, Kerry, 357n55, 358n60
McCarthy, Daniel J., 70n20, 336n,
473, 503n28
McCaul, Harriette S., 465n82
McClaine, S. R., 465n96
McClelland, David, 446, 448, 464n49
McClelland, David C., 463n40, 464n46
McCormick, Iain, 525–526, 552n63
McCubbins, Tipton F., 97n80
McCue, Andy, 10n
McDonald’s, 30, 265, 302, 336, 441
McDonough, Edward, 464n71
McDonough, Edward F. III, 484n
McDougall, Patricia P., 325n114,
325nn115–116
McGrane, Victoria, 57n
McGreal, Chris, 420n32
McGregor, Douglas, 472, 503nn25–26
McKiernan, Peter, 244n46
McKinnon, John, 383n27
McKinsey, 34, 276
McLaughlin, Andrew, 416, 420n20
McLaughlin, Kathleen E., 112n11
McMillon, C. Douglas, 279
McNeilly, Kevin, 179n64
McNett, Jeanne, 70n16
McTaggart, Jennifer, 286n1
McWilliams, Abagail, 96n57
Mead, Richard, 178n34, 463n23
Mei Da Coffee Company, 380
Meindl, James R., 152n37
Mejia, Norma, 109
Melewar, T. C., 261n17
Melin, Leif, 324n90
Mellow, Craig, 336n
Mendenhall, Mark, 551n60
Mendonca, Jochelle, 39n18
Mendonca, M., 504n34
Mengniu, 256
Mennella, Noelle, 322n39
Menzies, Gavin, 8n
Mercantile Bank, 564
Mercedes, 76, 427
Mercedes-Benz, 219, 220, 397, 408t
Merck & Co. Inc., 62, 118, 119f, 292
Merck KGaA, 119f
Meredith, Robyn, 429n3, 429n20
Metro AG, 279e, 281, 282
Metropolitan Life Insurance, 264
Mezher, Michael, 120n39
MGM Studios, 265, 266, 276
Miassaoedov, Serguel, 179n64
Michaels, Daniel, 356n25
Michelin, 408t
Mickey Mouse, 262, 264, 267
Microsoft, 5, 61, 100, 107, 298, 302,
331–332, 336, 367, 374,
408t, 516
Middle East Airlines, 334t
Middle East Broadcasting Centre, 33
Middlemiss, Jim, 412n39
Midland Bank, 564
Migrant Offshore Aid Station, 46
Mihalcik, Carrie, 177n18
Mikesko, Jessica, 178n29
Mildenberg, David, 71n55
Miles, James, 247n
Mill, John Stuart, 78
Mill, J. S., 95n37
Miller, 122
Miller, Claire Cain, 420n43
Miller, Edwin, 244n42
Miller, Greg, 71n46
Miller, Karen Lowry, 196n, 456n, 504n48
Miller, Ronald W., 262–263
Millman, Joel, 324n86, 465n93
Millward, Steven, 411n10
Milner, Mark, 357n31
Mims, Christopher, 71n61
Ming, Wang, 322n26
Mini Cooper, 304, 421
Ministry of Health and Long-Term
Care, 116
Minor, Michael, 70n16
Minus, Paul M., 96n54
Misumi, Jyuji, 477n, 478n, 504n41
MIT, 316
Mitchell, Kenneth L., 219, 243n34
Mitchell, Michael, 582n
Mitchell, Terence, 553n114
MIT Sloan Management Review, 510
Mitsubishi, 299, 362
Mitsui & Company, 362, 456
Mnouchkine, Ariane, 267
Modi, Narendra, 42, 426
Moe, Jeffery, 118
Mohn, Tanya, 244n56
Moire, Jennifer, 69n11
Molin, Anna, 562nn24–26, 562n30
Mollenkamp, Carrick, 574n4, 574n9
Money, R. Bruce, 244n47, 336n
Monsanto, 63, 301
Monti, Mario, 367
Moody’s Investor Services, 56, 154, 180
Moore, Booth, 106n18
Moore, Malcolm, 321n4
Moran, Robert T., 179n60, 179n67,
179n76, 221n, 543n
Morgan Stanley, 86, 569, 570
Morishita, Yoichi, 515
Morrison, Allen, 506n110
Morsi, Mohamed, 51
Moscow Public Telephone Network, 370
Mosk, Mathew, 288n66
Motorola, 156, 298, 316
Motorola Mobility, 298, 418
Motorola University, 214
Motsoeneng, Tiisetso, 288n61
Motwani, Rajeev, 419n7
Mouton, Jane S., 476n
Movember, 104–105
Moxon, R. W., 325–326n124
Moye, Jay, 254n45
Mozur, Paul, 413n64, 420n38
Mpkaru, Kene, 207
Mubadala Development, 347
Mubarak, Hosni, 375
Mueller, Stephen L., 178n33
Muhammad, 8, 53
Mukherji, Ananda, 552n90
Mulally, Alan, 395
Mulkeen, Declan, 550n22
Muoio, Danielle, 324n81
Murphy, Bobby, 2
Murray, E. J., 464n47
Murray, J. Y., 323n46
Murray, Michael, 106n28
Musk, Elon, 75–76
Mycoskie, Blake, 102–105, 105nn1–3,
106nn13–16
Mycoskie, Paige, 102
Mycoskie Media, 102
Myers, Andrew, 457, 465n86, 484n
Nabisco, 255
Nader, Ralph, 100
Nadhe, Shivani Shinde, 288n55
Nadler, Paul, 70n30
Nagayasu, Katsunori, 70n35
Name Index 615
Nair, Sulekha, 550n27
Nair, Vipin V., 429n9
Nakamoto, Satoshi, 59
Nam, S. H., 459, 465n99
Namer, Larry, 102
Nano, 421–428
Napier, Nancy K., 518, 550n29, 551n43,
552n67, 552n85
Narayan, Aditya, 499
Narayandas, Das, 324n95
Narin, Sunita, 249
NASA (National Aeronautics and Space
Administration), 193
NASDAQ, 417
Nash, Nathaniel C., 243n37
Nason, S., 465n93
Nath, Raghu, 412n20
National Aeronautics and Space
Administration (NASA), 193
National Basketball Association (NBA), 110
National Bureau of Economic Research
(NBER), 454
National Defense Council for Victims of
Karoshi, 456
National Employment Law Project, 66
National Football League (NFL), 359
National Health Service (NHS), 115
National Institute for Health and Care
Excellence (NICE), 115
National Organization for Women, 80
NATO, 507
Naumov, Alexander I., 70n20, 473,
503n28
Naver, 416
Naylor, Craig, 170
NBA (National Basketball Association), 110
NBER (National Bureau of Economic
Research), 454
Ndiaye, Momar, 463n20
Neale, Margaret A., 228n
Neff, Robert, 353n
Negandhi, A. R., 152n32
Neild, Barry, 412n36
Nelson, Bob, 432–433
Nelson, Jacqueline, 70n14
Nelson, Reed E., 179n71
Nestlé S.A., 75, 76, 256, 314, 315t,
408t, 561
Netflix, 10, 208–210, 240, 303
Neubauer, Fred, 189
Nevin, Tom, 154n
Nevis, Edwin C., 438, 463n27
Newburry, William, 356n20
Newman, Karen L., 464n51
Newton-Small, Jay, 52n
New York Court of Appeals, 54
New York Stock Exchange, 422
New York University (NYU), 110, 111
Nextel Mexico, 307
Next Thing Company, 61
NFL (National Football League), 359
Nguyen, Trien, 385n74
NHS (National Health Service), 115
NICE (National Institute for Health and
Care Excellence), 115
Nicklaus, David, 464n67
Nielsen, Christine, 553n97
Nieto, Enrique Pena, 359
Nigh, Douglas, 244n54
Nihon Mikon Company, 306
Nike, Inc., 86, 99–101, 107, 109, 111,
363, 408t, 497
Nike Foundation, 100
Nike School Innovation Fund, 100
Nikishenkov, Oleg, 562n23
Nintendo, 298, 408t
Nippon Sheet Glass, 170
Nippon Telegraph & Telephone, 65, 456
Nisen, Max, 413n62
Nissan Motor Co., 24, 158, 170, 298,
299–300, 334, 361, 406t, 427
Niu, Evan, 177n2
NMA (Norwegian Medicines Agency), 115
Nohria, Nitin, 178n46
Nokia, 187, 298, 331–332, 348, 352
Nonaka, Ikujiro, 504nn56–57
Nooyi, Indra, 250
Nordblom, Charlie, 322n24
Norton, Edward, 385n69
Norwegian Medicines Agency (NMA), 115
Novartis AG, 118, 119f
Novicevic, Milorad M., 551n34, 551n42
Novo Nordisk A/S, 119f
Nowlin, William A., 152n19
Numeroff, Rita A., 191, 206nn37–38
Numico, 256
Nussbaum, Bruce, 357n32
Nutricia, 255
NYU (New York University), 110, 111
Oakley, David, 383n5, 383n7
OAS (Organization of American
States), 91
Obama, Barack (and administration),
98, 286
Obama, Michelle, 100
O’Brien, Anthony Patrick, 40nn55–57
O’Brien, Sara Ashley, 323n57
Ocean Park, 276
O’Connor, Sandra Day, 100
Oddou, Gary, 551n60
Odebrecht, 32, 386
Odell, Patricia, 432, 462n1, 462n5,
462n7, 462n8
O’Dell, J., 420n39
OECD (Organization for Economic
Cooperation and Development), 91
Oetzel, Jennifer, 314, 315n, 325n108
O’Grady, Mary Anastasia, 324n85
Ohlsson, Mikael, 561
Ohmae, Kenichi, 229, 244n59
Ohnsman, Alan, 356n28
Oi SA, 331
Olsen, Kelly, 412n37
Olson, Jon, 504n47
Olson, Parmy, 177nn5–6, 177n15
Olympic Games, 238, 386, 415, 441
Olympus, 89, 414
O’Neil, Sharon Watson, 322n41
One World, 334t
Onglatco, M. L., 464n65
Ono, Yumiko, 152n24, 553n109
OnSyria, 45
OPEC (Organization of Petroleum
Exporting Countries), 31–33
Opel, 66
ORC Worldwide, 530
O’Reilly, Lara, 38n7
Organization for Economic Cooperation
and Development (OECD), 91
Organization of American States (OAS), 91
Organization of Americas, 579
Organization of Petroleum Exporting
Countries (OPEC), 31–33
Oriental Land Company, 264–265, 273
Oster, Shai, 254n52, 324n81
Ostle, Dorothee, 151nn8–10
Oswald, Ron, 579
OTC Enterprise Corp., 276
Ouchi, William, 474, 482, 503n30
Oviatt, Benjamin M., 325n114,
325nn115–116
Oxfam, 46, 86
OXG, 32
Oystein, Moen, 325n119
Ozcan, Sinan, 412n21
Ozeki, Cynthia, 552n88
Page, Larry, 415–416
Page, Lawrence, 419n7
Paik, Yongsun, 532n, 552n74
Pakistan Telecom, 65
Palma-Rivas, Nilda, 206n46
Palmer, Eric, 321n7
Palmer, Kate, 551n37
Palmquist, Rod, 110
Panagariya, Arvind, 253n12
Panasonic, 76, 301, 408t
Panchal, Manish, 321n8, 321n11
Panda, Ankit, 41n90
Pangea3, 10
Pantzalis, Christos, 324n91
Paramount Pictures, 263, 276
Paris, Lori D., 506n96
Paris Convention and Visitors Bureau, 52
Park, Daewoo, 412n23
Park, Hun-Joon, 464n55
Park, Mi Young, 219, 243n34
Parsons, Talcott, 139, 152n45
Pascale, Richard Tanner, 243n23
Passariello, Christina, 325n112
Pasteur Institute, 255
Patagonia, 74–75, 76
Patented Medicine Prices Review Board, 115
Pauls, Karen, 41n82
Pearce, John A., II, 384n45
Pechiney of France, 366
Pegolotti, Francisco Balducci, 8
Pellegrini, Ekin K., 504n35
Peña Nieto, Enrique, 24
Penenberg, Adam L., 106n44
Peng, Mike W., 325n99
Peninsular and Oriental Steam Navigation
Company, 564
People’s Bank of China, 569
Pepitone, Julianne, 420n37
PepsiCo, 184–185, 220, 248–250, 252,
257, 311, 337, 339, 366, 538
616 Name Index
Perlmutter, Howard V., 160n
Peroni, 122
Per Pharmaceutical Research and
Manufacturers of America
(PhRMA), 115
Peterson, Mark F., 152n33
Peterson, Richard B., 518, 529, 550n29,
551n43, 552n67, 552n85
Peterson, Suzanne J., 152n25
Peterson Institute, 29
Petrobras, 32, 387
Petronas - Petroliam Nasional Bhd, 7t
Pew Research, 64
Pfeiffer, Ray, Jr., 358n65
Pfizer Inc., 114, 116, 119f, 291, 292
Phadnis, Shilpa, 96n55
Phatak, Arvind V., 550n30
Phatak, A. V., 357n40, 412n47
Philip Morris Cos., 307
Philippine Long Distance Telephone
Company, 65
Philips, 301, 345–346
Philips Electronics, 408t
Philips Lighting, 345
PhRMA (Per Pharmaceutical Research and
Manufacturers of America), 115
Ping An Insurance, 564, 569
Pinocchio, 268
Pinterest, 64
Pirelli, 233–234
Pirnie, Andrew, 465n91
Pitts, Robert A., 356n21
Pizza Hut, 247
Planet Retail, 284
Plato, 48
Platt, Gordon, 287–288n44
Pless, Nicola M., 547n
Pogue, Ronald D., 265
Pointer, Thomas A., 373n, 384n40
Poke, 2
Polaris Project, 418
Polar Lights Company, 398
Politis, John, 504n60
Pollack, Andrew, 95n40, 120n1, 120n2,
120n5, 120n8, 322n20
Pollard, Tim, 430n64
Polo, Marco, 8
Pomeroy, Ann, 550n19
Popp, G. E., 445n, 463n35
Porges, Seth, 547n
Porsche, 161
Porter, Lyman W., 437–438, 463nn25–26,
464n63, 479–481, 504nn45–46,
504n50, 504nn53–54, 505n65,
505n69
Portugal Telecom SGPS SA, 331
Potenza, Alyson, 178n29
Potter, Harry, 276
Powell, Mike, 317n
Power Holding Company of Nigeria, 59
Prahalad, C. K., 325n102, 325n104
Prasad, G. V., 291
Prasad, S. B., 152n32
Prayut Chan-o-cha, 30
Presto, 284
Price Waterhouse, 547
PricewaterhouseCoopers (PwC), 15–18,
259, 547
Primark, 81, 111
Primary Years Literacy Initiative, 100
Prince, Brian, 170
Procter & Gamble, 6, 259, 307, 315t, 575
Prodigy, 316
The Progressive Investor, 579
Project Play, 100
PROMO magazine, 432
Prudential, 540
Prud’homme van Reine, Peter, 538,
553n101
PSI, 315t
Public Citizen, 100
Pucik, Vladimir, 484n
Puffer, Sheila M., 70n20, 336n, 473,
503n28
Punnett, Betty Jane, 206n56, 522n, 551n52
Purves, William, 564
Putin, Vladimir, 554
PwC (PricewaterhouseCoopers), 15–18,
259, 547
Qantas, 334t
Qatar Airlines, 334t
Qatar Ooredoo Group, 467
Qingdao Refrigerator Company, 328
Quaker Foods North America, 339
Qualcomm Corporation, 61
Qualman, Erik, 4, 38nn8–9
Quelch, John, 324n95
Quigley, Narda, 506n95
Quinn, Robert E., 506nn97–98
Racancelli, Vito, 358n61
Radio Page, 370
Radisson, 370
Raghavan, Anita, 466n101
Rahim, Abdul, 244n43
Rahman, Fareed, 357n46
Rai, Saritha, 370n
Rainforest Action Network (RAN), 86
Rainforest Alliance, 578–579, 580
Ralston, David A., 483, 504n59
Ralston Purina, 380
Ramamurti, Ravi, 324n97, 384n41, 384n46
Raman, Anand, 206n25, 206n27
Ramnarayan, Abhinav, 40n64
Ranbaxy’s, 62
Randall, Linda M., 162–163, 178n31
RAN (Rainforest Action Network), 86
Ranft, Annette L., 244n57
Rangan, N. S., 351n, 358n59
Ranger, Steve, 356n16, 356n19
Rapoport, Carla, 228n, 353n
Rapoza, Kenneth, 40n52
Rasulo, Jay, 273
Rauhala, Emily, 179n55
Raybould, Alan, 272n1
Rayner, Steven R., 183, 205n8, 205n10,
205nn16–17
RC Cola (Royal Crown Cola), 249
Ready, Douglas, 547
Reagan, Courtney, 288nn49–50
Reality Central, 102
Recruit Research Corporation, 167
Reddit, 45
Reebok, 107
Reichel, A., 152n23
Reilly, Lori, 115
Reilly, Mark, 291
Rein, Shaun, 245nn85–86
Reis, Anabela, 356n13
Reiter, Chris, 504n44
Reliance, 6
Renault, 158–159, 269, 334, 361
Renault Group, 158
Renault-Nissan, 9, 159, 427
RepTrak, 408t
Republic Bank, 564
Reputation Institute, 407
Research in Motion Ltd., 367, 397
Reuer, Jeffrey J., 244n61
Reuters, 335
Reynolds, Calvin, 526, 550n32, 552n64
Reynolds, Nina, 244n62
Riboud, Franck, 255, 260
Ricart, Joan Enric, 325nn105–106
Rice, Faye, 515n
Rice, John, 6
Richards, Malika, 513, 550n28
Ricks, David A., 244nn39–40
Ridley, David, 118
Right Management, 508–509
Riley, Charles, 420n35
Rimnet Corporation, 200
Riordan, Christine M., 196n
Rivera, Rodrigo, 284
Robert Bosch, 408t
Roberts, Dexter, 111n5
Roberts, Karen, 552n88
Robertson, I., 463n36
Robust, 256, 259
Robust Group, 256
Roche Diagnostics, 469
Roche Holding AG, 119f, 292, 468–470
Rockoff, Jonathan D., 120nn9–11, 321n18
Rodelis Therapeutics, 113
Rodriguez, Peter, 97n78, 325n98, 385n66
Rodriguez, Salvador, 177n16
Rogan, Randall, 552n87
Rolex, 408t
Rolls-Royce Aerospace, 408t
Romero, Eric J., 486, 505nn67–68
Romero, Simon, 41n77
Romm, Joe, 95n18
Rongione, Nicholas M., 96n53
Roper, Patrick P., 268
Rosen, Benson, 182, 205nn2–3, 205n9,
205n11, 205nn13–15
Rosenblum, Andrew, 71n45
Rosenkrantz, Stuart A., 178n35
Rosenthal, Elisabeth, 383n22
Rosenzweig, Philip M., 178n46
Rosevear, John, 324n82
Rosneft, 360, 361, 362, 398
Rosten, Keith A., 336n
Rousseau, Bryant, 41n77
Rousseff, Dilma, 31
Roxburgh, Charles, 41n86
Royal Ahold NV, 283, 497
Name Index 617
Royal Bank of Scotland Group Plc, 565,
568, 570
Royal Crown Cola (RC Cola), 249
Royal Dutch Shell, 5t, 336, 361–362
Royal Philips, 345
Rugman, Alan S., 162, 221n, 309n,
324n93
Rushe, Dominic, 420n36, 506n115
Russell, Benjamin, 109
Russell Athletic, 86, 107–112
Russell Corporation, 109
Russo, Patricia, 187
Rwandatel, 316
Rysberg, Jane A., 464n48
SAAB Automobile AB, 457
Sabbagh, Dan, 323n68
SABMiller, 122, 124, 148
Sachse, Christian, 561
Saenz, Alfredo, 391
Safra Holdings, 564
Sagafi-nejad, Tagi, 353n, 357nn56–57,
358n64
Sahu, Prasanta, 384n33
SAIC (Shanghai Automotive Industries
Corporation), 334, 339, 347
Salgotarjau Iron Works, 28
Salomon Brothers, 65, 267
Sam’s Club, 279, 281, 282
Samsung, 6, 29, 65, 156–158, 298,
301, 397
Samsung Electronics Co., Ltd., 7t, 408t
Samsung Motors, 158
Sanchanta, Mariko, 287n42
Sanchez, Juan, 519n, 551n44
Sanchez-Runde, Carlos J., 464n51
Sandberg, Michael, 564
Sanders, P., 277nn18–19, 277n22
Sandman, Ulrika Englesson, 560
Sandstrom, Thore, 464n68
Sanger, D. E., 465n98
Sanofi, 119f, 292, 295
Sanofi-Aventis, 291, 292
Santander, 6
Sapienza, Harry J., 325n117
Sappenfield, Mark, 253n6, 253n15,
254n25, 254n28, 254n37
SAS Scandinavian Airlines, 89, 334t
Satyam, 516
Saudia, 334t
Save the Children, 86
Saxton, T., 356n12
Scandura, T. A., 506n99
Scandura, Terri A., 504n35
Scanlon, Jessie, 429n31, 430n35
Schechner, Sam, 324n77
Scheer, Steven, 322n22
Schein, Edgar, 185, 205n19
Schein, Edgar H., 504n55
Schering-Plough, 292
Schermerhorn, John R., Jr., 218, 243n29
Schieber, Noam, 551n35
Schifrin, Matthew, 357n50
Schirone, Dario A., 562n13, 562nn17–19
Schlender, Brenton R., 196n, 405n
Schlesinger, Jacob M., 178n52
Schmidt, David A., 369, 384n38
Schmidt, Eric, 363, 415, 417
Schmitt, Bertel, 324n94
Schmitt, Neal, 444n, 463n33
Schneider, S. C., 465n95
Schneider, Susan C., 466n102
Scholer, Kristen, 95n30
Schramm-Nielsen, Jette, 390n,
411–412nn18–19
Schriesheim, C. A., 506n99
Schuler, Randall S., 552n68
Schuman, Michael, 277n4
Schwartz, Jan, 413n49
Schweitzer, Tamara, 106nn23–27
Scorse, Jason, 112nn7–9
Scott, James Calvert, 218, 243nn32–33
Sears, 107
Sebenius, James K., 245n72
Sechin, Igor, 360
Securities and Exchange Commission
(SEC), 55, 56, 281
Segil, Larraine, 379n
Seiyu, 280, 283
Seki, Fumiyasu, 477n, 478n, 504n41
Sekizawa, _, 265
Selmar, Jan, 519, 551n45
Sequoia Capital, 415
Serapio, Manuel G., Jr., 385n63, 385n67
Sergeant, Andrew, 435, 463n18, 542,
553n111
Serono, 62
Servais, Per, 325n122
Seth, Mr., 252
Sethi, Arjun, 178n29
SGS India Pvt Ltd., 249
Shaffer, Margaret A., 521, 551n50
Shah, Sooraj, 412n24
Shambora, Jessica, 105n5, 105n7
Shameen, Assif, 10n
Shamir, B., 496, 506n101
Shanghai Automotive Industries
Corporation (SAIC), 334, 339, 347
Shanghai Bailan Group, 282
Shanghai Disneyland, 274–276
Shanghai Disney Resort, 273
Shanghai Electric, 377
Shanghai Maling Aquarius Co., Ltd.,
256, 259
Shanghai Pudon Development Bank
Co., 293
Shanghai Roche Pharma, 468
Shao, Xiaoyi, 40n66
Shapiro, Debra L., 244n69, 552n62
Sharp, Inc., 414
Shell Oil Company, 166
Shen, Samuel, 277n23, 278n27, 278n30
Shendi, 275
Shenk, Mark, 41n79
Shenzhen Qianhai Financial Holdings, 570
Shenzhen Yili Mineral Water
Company, 256
Shih, Gerry, 96n52
Shin, Jiseon, 552n62
Shin, Y. K., 464n44
Shkreli, Martin, 113
Shokti Doi, 314
Short, Douglas, 552n91
Short, Kevin, 106n30
Shukla, Archna, 253n5
Shul-Shim, Won, 518, 550n29, 551n43,
552n67
Siegel, Donald, 96n57, 506n108
Siemens, 91, 377, 520
Sikorsky, 347
Silvercrest Food, 561
Simanis, Erik, 325n107
Simintiras, Antonis, 244n62
Simmons, Russell, 500
Simon, Hermann, 353n
Sims, Brenda R., 218, 243n31
Sims, G. Thomas, 466n101
Singapore Airlines, 334t
Singapore Telecommunications, 65
Singer, Peter, 39n25
Singh, Atul, 249
Singh, Harbir, 196n, 206n25, 206n27, 505n66
Singh, Jitendra, 505n66
Sing Tao Daily, 274
Sirota, David, 458, 465n97, 552n72
Skiba, Ray, 214
Skjelmose, Jeanette, 560
Sky Team, 334t
Slavjanskaya Hotel, 370
Slocum, John W., Jr., 356n21
Small, J., 261n17
Smart Communications Inc., 317
Smatt, Cindi, 464n53
Smile Squared, 105
Smith, Aaron, 3n
Smith, Adam, 47
Smith, David, 79n
Smith, Frank J., 206n39
Smith, Geri, 287n19
Smith, Jennifer, 553n103
Smith, Peter B., 153n64
Smith, Thomas, 277–278n25
Snapchat, 2–4, 5
Snavely, William B., 179n64
SNC (Société en Nom Collectif), 268e
Snir, Raphael, 465n77
Sobczyk, Marcin, 70n38
Sobek, Durward K., II, 357n52
Sobie, Brendan, 356n24
Soble, Jonathan, 413n64, 504n52
Société en Nom Collectif (SNC), 268e
Société Générale, 391
Society of Indian Automobile
Manufacturers, 427
Soldatkin, Vladimir, 383n14
Solomon, Charlene Marmer, 484n, 552n86,
552n93
Solomon, Erika, 69n6
Solomon, Janet Stern, 553n97
Solsman, Joan, 324n76
Sommer, Steven M., 178n36, 178n37,
178n38, 178n41, 178n42, 435, 459,
463n17, 465–466n100, 465n87
Sommers, Steven M., 357n54
Sonae, 283
Sona Koyo Steering Systems, 425
Sony, 10, 298, 301, 344, 405, 408t, 414,
483, 514, 515
618 Name Index
Soros, George, 39n25
Southern Methodist University, 102
Southwest Airlines, 334t
Southwestern Bell, 312
Sovich, Nina, 322n39
Soyoung, Kim, 277n5, 278n35
S&P, 56
SpaceX, 75
Spalding, 109
Spang, Konrad, 412n21
Sparrow, Paul R., 536–537, 552n94
Spears, Larry, 499
Spears, Lee, 95n30
Special Olympics Oregon, 100
Spector, Paul, 519n, 551n44
Speier, Cheri, 551n42
Spencer, Jennifer W., 244n58
Spencer, Mimosa, 322n19
Spiegel, Evan, 2–3, 5
Spiegel, Henry W., 70n18
Spielman, Cheryl, 552n70
Spindle, Bill, 152n24, 412n33
Sports Authority, 110
Sprint, 98
Squatriglia, Chuck, 95n22
Sreeharsha, Vinod, 41n77
Srivastava, Amit, 254n36
Stackhouse, John, 370n
Stage, H. D., 465n96
Stahl, G., 504n34
Stahl, Günter K., 547n
Stajkovic, Alexander, 178n39
Stalk, G., 464n43
Standard Oil, 514
Standard Oil of Ohio, 342
Standifird, Stephen S., 179n57
Stanford University, 2, 110, 415
Stanley, Phil, 530
Star Alliance, 334t
Starbucks, 43, 259, 380, 500
Start Something That Matters
Foundation, 104
Steele, Chandra, 71n62
Steers, Richard M., 464n51
Steers, R. M., 464n44, 464n54
Stein, Nicholas, 582nn3–4, 582n10
Steinberg, Julie, 322n27
Steinmetz, Greg, 97n81
Stella Artois, 122
Stenman, Jim, 206n62
Stern, David, 96n51
Stern Center for Business and Human
Rights, 111
Stertz, Bradley A., 151n7
Stevis, Matina, 41nn84–85
Stewart, Elizabeth, 574n
Stewart, Sally, 504n59
Stier, Ken, 97n79
Stiglitz, Joseph, 39n25
Stihl, 353
Stockholm Water Institute, 252
Stodtbeck, Fred L., 163n
Stoll, John, 562n30
Stone, Brad, 38nn1–2, 38n5
Stone, Raymond J., 518n
Stott, Lee, 70n44
Stout, Brock, 217, 243nn26–27
Strangler, Cole, 71n68
Streck, 214
Stroh, Linda K., 539–540, 553n106
Strom, Stephanie, 106n20
Strottmann, Freddy, 411n17
Stuart, Karen Dawn, 543n
Stumpf, Stephen A., 506n95, 506n108,
506n109, 506n113, 550n4,
550nn16–17
Subaru, 24, 298
Suburbia, 281
Sugden, Joanna, 372n
Suharto, former President of Indonesia,
365, 467
Sukarno, former President of
Indonesia, 467
Sullivan, _, 546
Sullivan, Jeremiah, 243n35, 413nn57–58
Sullivan, Jeremiah J., 504nn56–57
Sullivan, Sherry E., 523, 551n53
Sully, Mary F., 464n45
Sully de Luque, Mary, 145n, 153n61,
505n88, 506n95
Sun, Nikki, 278n28
Sundqvist, Sanna, 325n122
Sundstrom, Eric, 465n72
Sung, Timmy, 278n31, 278n33
Sun Microsystems, 415
Sun Pharmaceuticals, 291
Superama, 281
SustainableBusiness.com, 579
Sutherland, Thomas, 564
Suutari, Vesa, 551n61
Suzuki, Nori, 464n55
Suzuki, Terukiho, 413nn57–58
Suzuki Motor Corp., 28, 425, 427
Swanson, K. C., 574n10
Swartz, Gordon, 324n95
Swierczek, Frederic, 347n
Syfert, Jan, 71n69
Sylt, Christian, 272n4
Tabak, Filiz, 553n97
Taguchi, Genichi, 406–407
Takahashi, Masatomo, 264
Takeda Pharmaceutical Company,
119f, 170
Takeuchi, Hiroraka, 484n
Tam, Tammy, 277n16, 278n29
TAM Airlines, 333, 334t
Tammaro, Gerald A., 552n70
Tan, Kelven, 276
Tang, Paul, 275
Tanikawa, Miki, 357n48
Target, 107, 279e, 285
Tarnovskaya, Veronika, 557, 562n5,
562nn9–11, 562nn15–16
Tartar, Andre, 70n28
Tata, 6, 43, 159, 305, 380, 396
Tata, Jamsetji, 422
Tata, Ratan, 186, 421, 425, 426, 428
Tata Chemicals, 186
Tata Consultancy Services, 422
Tata Daewoo Commercial Vehicles
Company, 422
Tata Group, 186, 422
Tata Motors Ltd., 7t, 186, 335, 421–428
Tavernise, Sabrina, 120n2, 120n8
Taylor, Edward, 413n49
Taylor, Glen, 96n64
Taylor, Sully, 553n98
Tchuruk, Serge, 186–187
Technicolor SA, 348
Teegen, Hildy, 244n60, 244n66, 356n26,
384n51, 385n60, 385n65
Tejada, Carlos, 384n52
Telecom Asia, 65
Telefonica, 6
Telefonos de Mexico (Telmex), 312–313
Telestra, 65
Telfos Holdings, 28
Telkom, 316
Tellem, Tori, 95n23
Telling, Gillian, 105n9
Temasek, 568
Terhune, Chad, 253n1, 253n5, 254n26,
254n39
TERI (The Energy and Resources
Institute), 250
Terpstra, Robert H., 504n59
Terracom, 316
Terry, Sherrie, 582n
Tesco, 81, 111, 180, 279e
Tesla, Nikola, 75
Tesla Motors, 64, 75–76
Tesluk, Paul E., 182, 205nn2–3, 205n9,
205n11, 205nn13–15
Tetley, 422
Teva Pharmaceuticals, 292
Thatcher, Jonathan, 272n1
Thatcher, Margaret, 47, 49
The New York Times, 76, 116, 281, 291, 534
Then, Sia Khiun, 384n37
Theron, Charlize, 104
Theveno, Danny, 266–267
Thiederman, Sondra, 434, 463nn13–14
Thomas, Adele, 206n53
Thomas, Anisya S., 178n33
Thomas, Kenneth, 433
Thonburi Automotive Assembly Plant
Company, 422
Thornton, Grant, 51, 80, 95n42
Thums Up, 296–297, 337
Tichy, Noel M., 464n68, 484n, 538, 553n100
The Times of London, 425
Timken Company, 364
Timmons, Heather, 321nn9–10, 321n12
Tishman Realty and Construction, 264
Tjosvold, D., 504n37
TNK, 336
TNK-BP, 360, 362
Tokyo Disneyland, 264–265, 276
Tollgerdt-Andersson, Ingrid, 489–490,
505nn76–77
TOMS Marketplace, 104
TOMS Roasting Company, 103, 104, 105
TOMS Shoes, 85, 102–106
Toonkel, Jessica, 411n5
Torbiorn, Ingemar, 531, 552n73
Torkan, Germano, 562n13, 562nn17–19
Tornvall, Anders, 457, 465n88
Name Index 619
Toshiba, 414, 515
Total SA, 5t
Touchstone, 263
Towers Perrin, 513
Toxic Links, 249
Toyota Motor Corporation, 5t, 24, 64, 66,
84, 294, 298, 299, 304, 349–350,
406t, 482
Toyota Motor Ltd., 457
Toys“R”Us, 107
Tracy, Ryan, 57n
Trafficschool.com, 102
Transparency International, 49, 366, 559
TreeHugger.com, 579
Trend Micro, 170
Trevor-Roberts, Edwin, 505n87
Triandis, Harry C., 553n114
Triangle Shirtwaist Company, 108
Trinamool Congress, 426
TripAdvisor, 4
Trius, Vicente, 284
Trompenaars, Fons, 126, 127n, 128n,
139–145, 152n21, 152n44,
152nn47–48, 152nn49–50, 165–166,
178n32, 178n43, 191–195,
206nn40–45, 232, 243n18, 245n71,
323n67, 399–400, 412n40, 491–492,
505n79, 538, 553n101
Tropicana, 21
Trottman, Melanie, 383n23
Trudell, Craig, 71n70
Trust for the Americas, 579
Trust-Mart, 282
Tsang, Eric W. K., 179n56
Tse, David K., 70n27, 244n65
Tsuda, Masumi, 358n63, 358n66
Tsui, Anne, 484n
Tsukayama, Hayley, 323n61
Tu, Howard, 523, 551n53
Tucker, Sundeep, 260n1, 261n54
Tudor, Alison, 322n31
Tumblr, 4
Tung, Ariel, 356n6
Tung, Rosalie L., 179n59, 228n, 524,
551n59
Tungsram, 28
Turing Pharmaceuticals, 113, 114
Tusk, Donald, 180
Twain, Mark, 268
Twitter, 2, 3, 4, 44–45, 64–65, 110, 210
Tyco, 89, 497
Tymon, Walter, 550n4, 550nn16–17
UAC Restaurants Limited, 154
Uber, 369, 372
UBS, 79, 568, 570
Uchida, Mr., 200
Uchitelle, Louis, 336n
Ueberroth, Peter, 238
Uhlenbruck, Klaus, 97n78, 325n98,
385n66
Ulanoff, Lance, 420n46
Ulrich, Lawrence, 412n29
UNCTAD, 20
UNEP (United Nations Environment
Programme), 88
Ungson, G. R., 464n44
UNICEF (United Nations Children’s Fund),
80, 561
Unified Energy System, 49
Unilever, 6, 314
Union Carbide, 54, 534
United Airlines, 334t
United Fruit, 497, 575–576
United Nations, 4, 82–83, 87–88, 92,
108–109, 250, 252–253, 497
United Nations Children’s Fund (UNICEF),
80, 561
United Nations Environment Programme
(UNEP), 88
United Press International, 33
U.S. Agency for International Development
(USAID), 117–118
U.S. Chamber of Commerce, 100
U.S. Congress, 110
U.S. Environmental Protection Agency
(EPA), 84
U.S. Federal Reserve, 57
U.S. Food and Drug Administration
(FDA), 117, 118, 291
U.S. Government Accountability
Office, 107
U.S. Internal Revenue Service, 55, 90
U.S. Justice Department, 55, 84, 281, 579
U.S. Labor Department, 108
U.S. State Department, 55
U.S. Supreme Court, 100
United Students Against Sweatshops
(USAS), 87, 107, 109–110
United Technologies Group, 347
Universal Studios, 274, 276
Universal Studios Japan, 397–398
University of Bari, 558
University of Michigan, 110
University of North Carolina, 110
University of Oregon, 99
University of Tokyo, 200
University of Washington, 110
Unsworth, K. L., 504n38
Urde, Mats, 562n6, 562n8
Ury, William, 235, 237, 245nn76–78
USAID (U.S. Agency for International
Development), 117–118
USAS (United Students Against
Sweatshops), 87, 107, 109–110
Useem, Michael, 505n66
US/Labor Education in the Americas, 576
Valdes Llaneza, Ana, 356n22
Valeant Pharmaceuticals, 113, 114
Vale SA, 7t
Value Club, 281
Vance, Charles, 552n74
Vance, Charles M., 532n
Vance, C. M., 458, 465n96
Vandenberg, Robert J., 196n
Vanian, Jonathan, 324n78
Van Zyl, Sean, 179n74
Vasallo, Ignacio, 266
Vaseline, 21
Vassil, Matthew, 119n
Vengroff, Richard, 463n20
Verizon, 98
Verlaine, Julia-Ambra, 57n
Vermeulen, Freek, 356n11, 385n61
Verne, Jules, 268
Vietnam Motor Corporation, 380
Vietnam Technological & Commercial
Joint Stock Bank, 571
Viiv Healthcare, 292
Villanova University, 105n, 111n,
119n, 509
Vincent, R. J., 95n38
Viorst, Milton, 8n
Virgin Atlantic, 334t
Virgin Group, 500
Viswanatha, Aruna, 287n17
Vlachou, Efi, 244n62
Vlasic, Bill, 151n7
Vlastelica, Ryan, 411n5
Vodafone Group PLC, 5t, 316
Vodafone UK, 303
Vogel, Gretchen, 71n54
Vogt, Heidi, 71n64
Volin, Alexei, 209
Volkswagen, 311, 404, 428, 479
Volkswagen Audi Nippon, 310
Volkswagen Group, 5t, 83–84
Vollgraaf, Rene, 153n68
Volvic, 256
Volvo, 6, 293, 305, 335, 377, 453
Volvo Automobile AB, 457
von Glinow, M. A., 465n93
Vroom, Victor, 464n62
Vuong, Madeline, 288n65
Wagstaff, Jeremy, 372n
Wahaha Group, 255–260
Wahaha Joint Venture, 255
Wahaha Nutritional Food Factory, 256
Wahba, Abde, 384n43
Wahba, Phil, 288n60, 288n64
Waldman, Amy, 179n66
Waldman, David, 506n108
Waldman, David A., 153n61
Waldmeir, Patti, 260n1, 261n54
Walesa, Lech, 28
Walker, Andrew, 52n
Walker, Danielle Medina, 211n
Walker, E. Cardon, 262–263, 264
Walker, Joseph, 120n4
Walker, Thomas D., 211n
Wall, T. D., 504n38
Walls, Ian, 244n65
The Wall Street Journal, 65, 114, 275,
282, 283, 363, 433, 468, 547, 561
Walmart, 5, 29, 30, 42–43, 81, 88–89, 91,
107, 111, 189, 190, 279, 298–299,
302, 307
Walmart International, 279–286
Walt Disney Attractions Japan Ltd., 265
Walt Disney Company, 107, 262–271,
273–277, 398, 408t
Walt Disney Parks & Resorts, 273
Walt Disney Studios Park, 271
Walton family, 280
Walumbwa, Fred, 506n100, 506nn102–103
Wamelen, Arend van, 41n86
620 Name Index
Wang, Haiyan, 428, 430n72
Ward, Allen C., 357n52
Ward, Andrew, 321n1, 321n3, 321n16
Ward, Mike, 561
Warner, Malcolm, 140n, 152n16, 490n,
526n, 552n63
Warner Bros., 263
Warner Chilcott, 346
Warsaw Stock Exchange, 59
Warshaw, Steve, 576
Wasion Group, 377
Water for People, 105
Waterson, P. E., 504n38
Waterstone Human Capital, 284
Watson, Raymond L., 263
Watson Wyatt Beijing, 433
Watts, Jenny, 357n34
Watts, Jonathan, 465n75
Wayne, Leslie, 323n59
Webasto, 353
Webb, Tim, 383n3
Weber, Christophe, 170
Weiss, Stephen E., 245n70
Welch, David, 287n18
Welge, Martin K., 322n43, 322n44
Wells, Frank, 263
Wells, Nicholas, 40n45
Wells Fargo, 86
Welsh, Dianne H. B., 178n35, 178n36,
178n37, 178n38, 435, 459, 463n17,
465–466n100
Wentling, Rose Mary, 206n46
Werbach, Adam, 430n62
Werdigier, Julia, 562n29
Werre, Marco, 582n7
Wertkauf, 282
Western Kentucky University, 110
Whalen, Jeanne, 115n, 120nn12–28,
322n19, 515n
WhatsApp, 2, 45
Wheatley, Jonathan, 357n35
Whelan, Carolyn, 287n20
Whirlpool, 161
White, Donald D., 463n31
White, Gillian B., 112n48
White, Lawrence, 322n30
WHO (World Health Organization), 118
Widodo, Joko, 365
Wiggenhorn, Joan, 325n123
Wildau, Gabriel, 70n37
Wilkinson, Matt, 322n21, 322n23
Willard, Anna, 272n1
Williams, Frances, 39n30
Williams, Robert J., 464n53
Willigan, Geraldine E., 268n
Willis Towers Watson, 513
Wilmot, Bret, 79n
Wilson, Julee, 106n39
Winograd, Terry, 419n7
Winsor, Morgan, 71n63
Winterkorn, Martin, 84
Wipro, 6
Wittenberg-Cox, S. A., 465n95
Womack, Brian, 420n40
Wonacott, Peter, 253n1, 253n4, 254n26,
254n39
Wong, Chi-Sum, 552n75, 552n84, 552n95,
553n110
Wong, Edward, 40n68
Wong, Peter, 570
Wong, Sue-Lin, 40n66
WorkChina, 433
Worker Rights Consortium, 109–110
World Bank, 16, 33, 55, 80, 82, 246, 316,
362, 428
WorldCom, 497
World Cup, 386
World Economic Forum, 35, 80, 88,
494, 497
World Health Organization (WHO), 118
World Trade Organization (WTO), 7–12,
20, 33, 60, 86, 170, 282, 293–294,
363, 366, 380, 558, 563, 567, 569,
577–578
World Wildlife Fund (WWF), 86, 251
Worm, Verner, 253n3
Worstall, Tim, 39n27
Worthy, Ford S., 405n
Woywode, Michael, 504n43
W. P. Carey School of Business, 101n
Wright, Richard W., 178n48, 463nn37–38
Wu, John C. H., 506n111
Wu, Yen-Chun, 405n, 406n, 413n52
Wu Bangguo, 415
WuDunn, Sheryl, 206n51, 244n44
Wuling, 347
WWF (World Wildlife Fund), 86, 251
Wyeth, 292
Wyler, Greg, 316
Xiaomi, 156–158, 175
Xi Jinping, 297
Xu, Chuan, 277n6
Yahoo, 415, 416
Yamaha, 363
Yan, Jun, 503–504n32
Yang, John Zhuang, 178n49, 553n104
Yang Yuanqing, 500
Yanofsky, David, 71n61
Yanukovynch, Viktor, 360–361
Yaohan, 281
Yardley, Jim, 72nn76–77, 96n50, 112n47,
288n67
Yaziji, Michael, 39n23, 314, 315n,
325n108
Ye, Baoxiu, 261nn35–48
Yeh, Rhy-song, 353n, 357nn56–57,
358n64
Yenikeyeff, Shamil, 383n13
Yerak, Becky, 574n2
Yi, Lee Mei, 171, 179n58
Yihaodian, 284
Yingluck Shinawatra, 30
Yip, George S., 357nn38–39
Yiu, Enoch, 322n29
Yi Xianrong, 567
Yoo, Sangjin, 504n42, 504n49
Yoshida, Tomoko, 553n107
Yoshimura, Noboru, 206n49, 212,
243n15, 504n51
Yoshino, Michael, 351n, 358n59
Young, Kathryn M., 356n23
Younglai, Rachelle, 70n14
Yousef, Darwish A., 505nn61–63
Yousef, Fathi S., 244n45, 244n48
Youssef, Carolyn M., 545,
553nn116–117
YouTube, 4, 44–45, 64, 395
YPF, 484
Yu, K., 504n34
Yu, Kaicheng, 504n59
Yu, Rose, 39n11
Yu, Xiao, 568n4
Yuan, Anne Xue Ya, 433–434, 463n12
Yuchtman, E., 449, 464n52
Yukl, R. K., 504n39
Yum! Brands, 29, 30, 247
Yunggar, Manuel, 324n75
Yunus, Muhammad, 314
Zachar, Deborah, 562n
Zahra, Shaker A., 325n118
Zaleznik, Abraham, 503n16, 503n19,
503n23
Zalla, Jeff, 576
Zamiska, Nicholas, 71n49
Zara, 81, 111
Zartman, William, 245n75
Zaun, Todd, 383n26
Zavyalova, Kira, 553n122
Zeidler, Sue, 277n23, 278n27, 278n30
Zeira, Yoram, 356n20
Zeller, M., 412n46
Zhejiang Wahaha Industrial Holdings
Ltd., 258
Zhou, Nan, 243n30
Zhoudong Shangguan, 260n16
Zielenziger, Michael, 456n
Zong Qinghou, 256, 257–258
Zonis, Marvin, 179n75
ZTE Corp., 304
Zuckerberg, Mark, 2–3
Zuo, Mandy, 278n28
621
Subject Index
A page number with an e indicates an exhibit; an f a figure; an n, a source note or footnote; a t, a table.
Achievement culture, 140f, 143, 232
Achievement motivation theory, 446–449
Acquisitions, 303–304, 306
Active management-by-exception (MBE-A)
leaders, 488
Act of state doctrine, 54
Adaptability screening, 521–522
Administrative coordination, 298–299
Advertising
cultural diversity in, 201
executive recruitment via, 489–490
free speech versus, 99–101
perceptual barriers in, 219–220
Affective cultures, leader behavior in,
491–492
Affective verbal style, 211t, 213
Afghanistan, 31, 51, 367
Africa
about, 33–34
China’s strategic planning in, 297
communications technology in, 316–317
economic environment, 18
as frontier market, 308
political environment, 51
technological environment, 63t, 64–65
trading history in, 8
Age, as international selection criteria, 520
Agreement, in negotiations, 231
Airline industry, 304, 333, 376
Albania, 28
Algeria, 55, 280
Alien citizens, treatment and rights of, 54
Alliances. See also Joint ventures
challenge of, 377–378
definition and introduction, 332–335
examples of, 379–381
host government roles, 378–379
life cycle of, 378–379
management of, 377–381
organizational arrangements from,
346, 348
Allowances, 528–529
Amateur terrorism, 367
American Foreign Corrupt Practices
Act, 53
Anglo countries. See also specific country
communication in, 227
cultural dimensions, 137, 169, 448–449
human resources management, 531,
536–537
leadership attributes, 476, 480, 491
Angola, 33, 285
Anti-Dumping Act, 365–366
Anti-Terrorism Act of 1996, 579
Arab countries. See also Middle East;
specific country
communication styles, 210, 212
cultural dimensions, 125, 174–175
economic environment, 30, 31, 33
leadership styles, 488
management across cultures,
174–175, 540
negotiation tactics and styles, 231, 232,
233, 237
political environment, 51
trading history, 8
Western management styles compared
with, 485, 540
“Arab Spring,” 33, 44–46, 51–52, 375
Argentina
cultural dimensions, 141
economic environment, 31
human resources management, 537t
leadership attributes, 475, 486, 494
management across cultures, 169–170
Walmart’s operations in, 279e, 280–281
Aristotelian ethics, 78
Arthashastra (Chanakya), 499
Ascription culture, 140f, 143, 232
ASEAN (Association of Southeast Asian
Nations), 13
Asia. See also specific country
alliance challenges and opportunities,
379–380
Citibank’s operations in, 294
communication styles, 212–213, 215,
219, 222, 225, 229
cultural dimensions, 133–135,
144–145
demographic changes, 14
economic environment, 13, 15, 16–18
emerging markets in, 29–30
as frontier market, 308
HSBC’s operations in, 571
human resources management, 518, 529t
leadership attributes, 491–492, 494
management styles, 347, 485
motivating employees, 438, 449–451
negotiation tactics and styles, 231, 234
technological environment, 63t, 65,
388–390
theme park industry in, 264–265,
273–277
Walmart’s operations in, 280
Asia-Pacific region
Citibank’s operations in, 294
Danone’s operations in, 256
human resources management, 526–527
online commerce in, 388–390
telecommunications services in, 65
theme parks in, 276
trade agreements, 13, 31
Assembly-line work, 452–453
Assertiveness, 146, 169–170, 494–495
Assessment center, 409
Association of Southeast Asian Nations
(ASEAN), 13
Australia
communication styles, 213
cultural dimensions, 131–132, 134–137,
140, 225
ethics, social responsibility, and
sustainability, 80
human resources management, 518,
536–537, 538
motivating employees, 432, 434, 445t
political environment, 49
technological environment, 63, 63t
Austria, 142, 143, 166, 222, 494
Authentic leadership, 496–498
Authoritarian leadership, 474–475,
477–479
Autocratic leadership, 476–477
Auto industry
entry strategies for, 333–335
innovation in, 64, 75–76, 421–428
key success factors, 304
organizational structures, 347
quality performance of, 298, 405–406
sociotechnical designs in, 453
sustainability in, 75–76
Autonomous leadership, 493
B2B transactions, 64, 294, 348
B2C transactions, 64
Balance-sheet approach, 530
Banana industry, 575–582
Bangalore, 81, 111, 285–286
Bangladesh, 15, 81, 83, 111, 285–286
Banking industry
in China, 293–294, 563–574
e-business and, 64
financial reform in, 56–57
Walmart’s entry into, 281–282, 284
Bargaining behaviors, 237–240. See also
Negotiation
Base of the pyramid (BOP) strategy,
313–317
Base salary, 527–528
BATNA (best alternative to a negotiated
agreement), 237
Behavior management, 165
622 Subject Index
Belgium
communication styles, 224
cultural dimensions, 144
leadership styles, 481
M&A activity, 123–124
motivating employees, 454
multiculturalism in, 198
political risk, 372
terrorist attack links to, 52
Benefits, 528, 534
Beverage industry, 248–253, 337
Bias in performance appraisal, 408
Bicultural groups, 199
Biotechnology, 62–63
Bitcoin currency, 59
Bolivia, 475, 486
Bonuses, 56
BOP (base of the pyramid) strategy,
313–317
Born-global firms, 318–319
Born-international firms, 318–319
Bowing, 221
Brazil
about, 386–387
communication styles, 224
cultural dimensions, 123–124, 147–148
economic environment, 15, 19–20,
30–31, 32
entry strategies, 337
ethics, social responsibility, and sustain-
ability, 90
globalization trends, 6
human resources management, 166,
514, 537t
management across cultures, 166, 174
negotiation tactics and behaviors, 235,
238–240
organizational culture, 192
political environment, 49, 372, 375
technology environment, 63
Walmart’s operations in, 279e, 280–281,
283, 284
“Brexit,” 26, 47, 49
Bribery
in China, 291
as cultural misunderstanding, 163–164
FCPA on, 54–55, 90–91
in Mexico, 281
as political risk, 365
in Russia, 172, 559
tracking, 559
BRIC countries. See also specific country
conducting business in, 170–174
economic power shifts, 15, 18–20, 19t
foreign direct investment in, 312
political environment, 49
Britain. See Great Britain; United
Kingdom
Bureaucratization, 55–57, 58t, 403
Business cards, 221
Business Chemistry program, 183
Cafeteria approach, 530
CAFTA-DR, 11–12
CAFTA (Central American Free Trade
Agreement), 11–12
California, health and safety violations
in, 108
Canada
communication styles, 210, 213, 214,
220, 224, 225
cultural dimensions, 131, 132f, 136f, 137
economic performance of, 24
ethics, social responsibility, and sustain-
ability, 114–116
human resources management, 166,
536–537
leadership attributes, 494
legal and regulatory environment, 56
motivating employees, 445t, 446, 450
Walmart’s operations in, 279e, 280–281,
284–285
Capital requirements, 57
The Case for Servant Leadership
(Keith), 499
Case studies
advertising versus free speech, 99–101
Chiquita’s global turnaround, 575–582
Coca-Cola in India, 248–253
Danone in China, 255–261
Disney in Asia, 273–277
Euro Disneyland, 262–272
global drug pricing, 113–120
Google in China, 415–420
HSBC in China, 563–574
IKEA’s global growth, 555–561
Nike and human rights, 99–101
Russell Athletic and sweatshop labor,
107–111
Tata Nano, 421–428
TOMS philanthropy, 102–105
Walmart’s global strategies, 279–286
Cellular technology, 298
Censorship, 415–418
Central American Free Trade Agreement
(CAFTA), 11–12
Central Asia, 31–33
Central Europe. See also specific country
economic environment, 13–14
as emerging market, 27–28
leadership attributes, 491
motivating employees, 447
political risk, 365
Centralization, 352, 390–393
CEVITS countries, 16
Chaebols, 29
Charismatic leaders, 487–488, 493, 495, 497
Child labor, 80, 83
Chile
cultural dimensions, 134–135, 225
as emerging market, 31
household savings accounts in, 281
leadership behaviors and styles, 475, 486
Walmart’s operations in, 279e, 280e,
283–284
China, People’s Republic of. See also
Hong Kong; Taiwan
about, 246–247
alliance management, 377, 380
banking industry in, 293–294, 563–574
communication behaviors and styles,
214, 219–220, 229
as competitive nation, 35
cultural dimensions, 125, 127–129,
131–135, 140–143, 147, 273–275
demographics, 14, 18, 19t
economic environment, 13, 15–20, 23,
28–29
entry strategies, 312, 328–329, 334–335
ethics, social responsibility, and sustain-
ability, 79–81, 83, 90
globalization trends, 6, 9
human resources management, 167–168,
529, 542–543
Internet commerce in, 388–390
Internet users in, 415–418
leadership attributes, 472, 475, 483–484,
491, 494
legal and regulatory environment, 57–59
management across cultures, 167–172
motivating employees, 432–436,
438, 455
negotiation tactics and styles, 208–209,
232, 237, 240
organizational culture, 192, 198
organizational structure, 339, 347
political environment
Danone’s experience, 255–260
Disney’s experience, 273–275
Google’s experience, 415–419
HSBC’s experience, 563–574
IKEA’s experience, 558–559
overview, 48–51
strategy implementation, 307
political risk, 363–364, 372, 375
strategic formulation in, 303–304
strategic management in, 293–294, 297
strategy implementation in, 290–291,
307, 312
technological environment, 61–62,
63, 65
theme park industry, 273–275
trading history, 8
Walmart’s success in, 279–282, 284
WTO obligations in, 50, 170, 282,
293–294, 363, 563, 567, 569
Chromatics, 225–226
Chronemics, 225
CIS (Commonwealth of Independent
States), 162–163
Civil or code law, 53
Classic terrorism, 367
Climate change, 82–83
Code or civil law, 53
Codetermination, 394
Collectivism
definition, 48, 130–131
as GLOBE dimension, 146–147, 493
management across cultures and,
156–157, 171
motivating employees and, 449–450
Trompenaars on, 141
Columbia, 136f, 137, 579
Comity doctrine, 54
Command economy, 23
Common law, 53
Commonwealth of Independent States
(CIS), 162–163
Subject Index 623
Communication
advertising blunders, 219–220
cultural barriers, 221–223
definition and introduction, 210
diversity and problems with, 200
in DOCSA, 187–188
effectiveness in, 226–229
flow of, 214–216
interpretation of, 213–214
language barriers, 216–219
Middle Eastern and Western manage-
ment compared, 485t
motivating employees and, 433
in negotiations, 236
nonverbal, 223–226
as part of global team management, 183
perceptual barriers, 188, 219–221
verbal, 210–213, 491–492
written, 217–219, 227, 232
Communism, 23, 48, 50
Communitarianism, 141–142
Commuter assignments, 546
Compensation
bonuses, 56
cultural differences in, 166
gender inequity, 79–80, 449–450
incentives and culture, 433, 438,
458–459
local rules for, 514
as motivation, 454–455
for overseas assignments, 526–530, 534
wages, 80–81, 166
Competition
decision-making and, 392
environmental scanning for, 302–303
Google in China, 415–417
location decisions and, 396–397
Competitive nations worldwide, 35, 494
Concessions, in negotiations, 171, 231–235
Confucianism, 129
Conglomerate investment, 369
Content theories of motivation
achievement motivation theory, 446–449
definition, 436
hierarchy of needs, 436–441
two-factor theory, 442–446
Context, 210–211
Contextual verbal style, 211t, 212–213
Contingency approach, 162
Contingent reward (CR) leaders, 487–488
Control
approaches to, 401–403
decision-making linkages to, 397–398
in DOCSA, 187–188
introduction, 388, 398–399
mechanisms for, 346t
Middle Eastern and Western management
compared, 485t
performance evaluation as, 403–409
types, 399–401
Controlling, 397
Control of one’s own environment,
144–145
Copenhagen Consensus Investment
Priorities, 92t
Corporate governance, 89–90
Corporate social responsibility (CSR)
Chiquita’s efforts in, 575–580
Coca-Cola in India, 248–253
definition, 77
environmental impact and, 100
ethical behavior and, 77
human rights and, 99–101
IKEA’s values, 558
MNC business practices, 85–89
philanthropy and, 75, 102–105
sweatshop labor and, 107–111
TOMS philanthropy, 102–105
Walmart’s challenges, 285–286
Corruption
in China, 291, 567–568
FCPA and, 54–55, 90–91, 281
as political risk, 365
in Russia, 48–49, 172, 559
“security” payments, 579
Walmart’s challenges, 281, 285
Corruption Perceptions Index, 49, 91,
365, 559
Costa Rica, 90, 279e, 280e, 283
Cost-of-living index, 527f
Costs
cultural assimilators, 545
labor, 311
of overseas assignments, 512, 523–524,
526–530
transition, 331–332
Counterfeit products, 65, 157–158,
363, 364
Country-centered strategy, 296–297
Country selections in strategic
implementation, 306–307
Country-specific advantages (CSAs),
308–309
Credit ratings agencies, 56
Crimea, 360–361, 554
Crisis management, 376, 474
CR (contingent reward) leaders, 487–488
CSAs (country-specific advantages),
308–309
CSR. See Corporate social responsibility
Cuba, 23, 48, 50, 98
Cultural assimilators, 544–546
Cultural barriers. See also Communication
advertising blunders, 220
interpretation, 213–214, 222–223
in M&A, 331
in negotiations, 231–234, 240
perception, 188, 219–220
Cultural integrators, 535–536
Cultural relativism, 77
Cultural training programs, 227–229, 512,
536, 543–546
Culture. See also Culture meanings and
dimensions; Hofstede’s cultural
dimensions; Trompenaars cultural
dimensions
adaptability in overseas assignments,
518–519
definition and nature of, 124–125
differences across, 165–168
similarities across, 164–165
six basic variations in, 163t
Culture clusters, 489–491
Culture meanings and dimensions. See also
Human resources across cultures;
Leadership across cultures;
Management across cultures;
Motivation across cultures
changing values, 128–129, 142
characteristics of, 124–127
diversity, 125–128, 199–201
IKEA’s values, 555–561
international management approaches to,
125–128
joint ventures and alliances management
and, 378
in mergers and acquisitions, 122–124
national and organizational interactions,
182, 186–190
as normal distribution, 127–128
offshoring and, 84–85
proverbs representing cultural values, 222t
recognition of, 27
Currency risk, 311, 403–404
Customer relations
in command economy, 23
diversity and, 190, 201
in market economy, 22–23
Czechoslovakia, former, 141
Czech Republic, 447, 491, 537
Decentralization, 352, 390–393
Decision-making
about competitors, 396–397
centralization/decentralization, 352,
390–393
control linkages to, 397–398
cultural differences in, 27, 126,
132–133, 140, 142, 393–394, 515
definition and introduction, 388, 390–391
diversity and problems with, 200
ethics theories and philosophy in, 77–79
factors affecting authority for, 391–393
location considerations, 396–397
Middle Eastern and Western
management compared, 485t
by multicultural teams, 202
process, 390–391
strategic predispositions in, 159–160
TQM and, 394–396
Defensive and protective techniques,
374–375
Democracy, 50
Demographics
economic power shifts and, 18
of G-7, N-11, BRIC countries, 19t
global trends, 14–15
world population and income, 313
Denmark
communication styles, 213
decision-making in, 393–394
DuPont’s operations in, 122–123
individualism in, 136f, 137
leadership attributes, 494
motivating employees, 458
organizational culture in, 192–193
uncertainty avoidance in, 130
De novo investments, 330
624 Subject Index
Dependents. See Spouses and dependents
Derivatives markets, 56
Development assistance by MNCs, 92–93
Dhaka, India, 111, 286
Diagnosing Organizational Culture for
Strategic Application (DOCSA),
187–188
Dictatorships, 50–52
Diffuse culture, 140f, 142–143
Direct controls, 400–401
Direct verbal style, 211–212
Dispersed subunits, 345
Disputes resolution, 54
Distributive negotiations, 229–230
Diversity. See also Multiculturalism and
diversity; Organizational culture
and diversity
advantages of, 200–201
cultural meanings and dimensions,
125–128
potential problems with, 199–200
DOCSA (Diagnosing Organizational
Culture for Strategic Application),
187–188
Doctrine of comity, 54
Dodd-Frank Act, 56
Domestic firms
multicultural development by, 196–198
multicultural negotiations by, 229
Domestic multiculturalism, 198
Downward communication, 214–215
Drug pricing. See under Pharmaceutical
industry
E-7 economies, 15–16
EAGLES countries, 16
“Ease of Doing Business” (World Bank),
42, 55–57, 58t, 154, 246
East Asian countries, 493, 538. See also
specific country
Eastern Europe. See also specific country
cultural dimensions, 134–135
economic environment, 13–14, 27–28
entry strategies, 333
human resources management, 529
management behaviors and
styles, 189
political environment, 47, 307, 365
Eastern philosophy, 78–79, 499
East Germany, former, 507, 560–561
E-business, 63–64
Economic environment. See also Financial
crisis of 2008–2010
2009 exports, 20
2015-16 prices, 15, 20
following terrorist attacks, 52
forecasting trends in, 303
post-recession slowdown, 18–20
sectors of, 369
strategy implementation and, 312
world outlook projections, 34t, 35
Economic imperative, 295–296
Economic performance by region
Africa, 33–34
Asia, 29–30
Central and Eastern Europe, 27–28
China, 28–29
European Union, 25–26
India, 30, 42–43
Japan, 26
Middle East and Central Asia, 31–33
North America, 24–25
South America, 30–31
world merchandise trade by region, 21t
Economic systems, 22–23
Education, as international selection
criteria, 520
Education, at multinational online
universities, 348
Education allowances, 529
Efficiency, 392
Egypt
cultural dimensions, 134–135
economic environment, 15–16
ethics, social responsibility, and sustain-
ability, 90–91
leadership attributes, 494
political environment, 44, 49, 51, 375
trading history, 8
Eiffel Tower culture, 192–193, 195
EKC (Environmental Kuznets Curve),
81–82
Elaborate verbal style, 211t, 212
Electronic freelancers, 348
Electronic network organizations, 348
El Salvador, 279e, 280e, 283
Emerging and developing markets
bureaucratization in, 55–57, 58t
compensation in, 526–527
demographic changes, 14
economic performance of, 26–30
economic power shifts in, 15–20
entry strategies for, 333
environmental concerns, 83
as frontier markets, 308
globalization trends, 6, 546
less-developed economies, 30–35
market potential rankings, 36t
MNCs coming from, 7
motivating employees in, 432–434
pharmaceutical industry access by,
117–118, 119f
political risk in, 363
pressure for change in, 9
risk and reward in, 564, 566–567,
569–570, 573
strategy implementation in, 311–317
telecommunications in, 65
Emotional and physical health, 519–520
Emotional cultures, 140f, 142, 491–492
Emotional factors, in negotiations, 236
Employees. See also Human resource
management
behavior management of, 165
as critical resources, 511–512
empowerment of, 395
human resources tailoring to, 511
overseas assignment motivations
of, 531
rewards and recognition of, 395
training of, 395, 406
Employee welfare, 75
Employment trends, 65–67
Empowerment, 395
Enablers and POS, 495
England, 114–115, 212, 476, 480. See also
Great Britain; United Kingdom
Entrepreneurship
achievement motivation theory and,
446–448
as entry strategy, 317–318, 330
global trends in, 129
in India’s auto industry, 425–426, 428
leadership attributes and, 500
TOMS Shoes, 102–105
Entry strategies
alliances and joint ventures, 332–335
export-import, 317–318, 330, 338–339
first movers, 312–313
franchising, 336
introduction, 328–330
licensing, 335–336
mergers and acquisitions, 331–335
wholly owned subsidiaries, 330–331
Environmental foundation. See
Globalization; Legal and regulatory
environment; Political environment;
Technology environment
Environmental Kuznets Curve (EKC),
81–82
Environmental protection
Chiquita’s efforts in, 578–580
CSR and, 100
food served at theme parks, 273
pesticides and water contamination,
248–253
sustainability and, 81–84
Walmart’s sustainability initiatives,
88–89
Environmental scanning, 302–304
Environmental standards, 9–10
Equity joint venture, 332
Equity-oriented cultures, 191,
192–194, 195
Equity theory, 449–450
Established economies evaluation, 24–26
Esteem needs, 437
Ethically responsible leadership, 497–499
Ethics. See also Corporate social
responsibility; Corruption; Human
rights; Sustainability
corporate governance, 89–90
cultural differences in, 84–85,
172, 190
definition, 77
in global drug pricing, 113–120
international assistance, 92–93
theories and philosophies, 77–78
Ethnocentric MNC, 537–538
Ethnocentric predisposition, 159–160
Ethnocentrism, 539
Europe. See also Central Europe; Eastern
Europe; European Union (EU);
specific country
communication barriers and styles,
215–217, 223, 225–226, 228
cultural dimensions, 223
demographic changes, 14
Subject Index 625
foreign direct investment by, 20
human resources management, 526–527,
529t, 530–531, 538
leadership attributes, 479–481
motivating employees, 457, 459
negotiation tactics and styles, 234
organizational culture, 188–189, 202
pharmaceutical industry in, 117, 293
technological environment, 63t
trading history in, 8
Walmart’s operations in, 280,
282–283
European Union (EU)
banana trade war, 576–578
definition, 12
economic environment, 12–13,
25–26, 73
human resources management, 167
leadership attributes, 489
legal and regulatory environment,
56–57, 59–60
political environment, 47–48, 366–367
technological environment, 63
Exacting verbal style, 211t
Exchange rate risk, 311
Expatriates (expats)
definition, 513
demographics of, 520, 524
host country integration by, 518–519
motivation for overseas assignments,
520–521
repatriation of, 533–535, 546
Expectancy theory, 451
Experience, as international selection
criteria, 520
Exports and imports
2009 recession levels of, 20
as entry strategy, 318, 330, 338–339
world trade by region, 21t
Expropriation, 368
External controls, 399–400
External networking, 351
External risk, 360–361
Extreme behaviors, in negotiations,
237–238
Extrinsic, 433, 434–435
Fair Labor Standards Act, 108
Fair trade certification, 87–88
Family culture, 191–192, 195
Family overseas assignments. See Spouses
and dependents
Fascism, 48
FCPA (Foreign Corrupt Practices Act),
54–55, 90–91, 281
FDI (foreign direct investment), 20,
21t, 22t, 294, 312, 369–371,
563–574
Federal Republic of Germany (FRG), 507
Feedback systems, 226
Femininity, 132
Finance function, 311
Finance goals, 305
Financial crisis of 2008–2010
banking industry effects of,
565–566, 571
economic pressures on HR function,
512–513, 526, 530
foreign direct investment effects of, 20
jobs lost during, 66
regulatory failures and, 54, 56–57
Financial performance evaluation,
403–404
Financial services
banking industry in China, 294,
563–574
corporate governance scandals, 89
e-business, 63–64
offshoring activities, 79
regulation of, 54, 56–57
Walmart’s operations in, 281, 284
Finland, 457, 494
Firm-specific advantages (FSAs), 308–309
First-mover strategies, 312–313
Food production, 63
Foreign CEOs of Japanese firms, 170
Foreign citizens, treatment and rights
of, 54
Foreign Corrupt Practices Act (FCPA),
54–55, 90–91, 281
Foreign direct investment (FDI), 20, 21t,
22t, 294, 312, 369–371, 563–574
Foreign selections. See International
selection criteria
Formalization, 350–351
Four I’s of leadership, 487
Four Ps of marketing, 310
France
communication styles, 215,
223–224, 228
controlling process in, 401–402
cultural dimensions, 127–128, 131, 132f,
143–144
decision-making in, 393–394
ethics, social responsibility, and sustain-
ability, 80
Euro Disneyland, 262–272
human resources management,
531, 537
leadership across cultures, 479, 491
legal and regulatory environment, 52, 57
management across cultures, 166,
173–174, 189
motivating employees, 446, 457–459
negotiation tactics and styles, 189
organizational culture and diversity,
186–187
political environment, 47, 48, 49, 372
Walmart’s operations in, 281
Franchises, 336
Free speech versus advertising, 99–101
FRG (Federal Republic of Germany), 507
Frontier markets, 308
FSAs (firm-specific advantages), 308–309
Functional areas in implementation,
310–311
Future-oriented cultures, 144, 146–147,
493–494
G-7 nations, 15–16, 19t, 361
G-8 nations, 27, 361
G-20 reforms, 56
Game console industry, 298
GATT (General Agreement on Tariffs and
Trade), 10–11, 577–578
GDP (GNP)
economic power shifts and, 15–19
individualism correlations to, 131–132
GDR (German Democratic Republic), 507,
560–561
Gender
attitudes toward women, 79–80, 221
expat spouse activities by, 522
leadership styles and, 495
work centrality and, 454–455
Gender egalitarianism, 146, 493, 495
Gender equity, 79–80, 449–450
General Agreement on Tariffs and Trade
(GATT), 10–11, 577–578
General nature of investment, 369
Genetically modified organisms, 63, 301
Geneva Convention on Human Rights, 53
Geocentric MNC, 538
Geocentric predisposition, 159–160
Georgia, 491
German Democratic Republic (GDR), 507,
560–561
Germanic culture, leadership attributes
of, 491
Germany
about, 507
communication styles, 212, 215, 217,
220–221, 223, 228
controlling process in, 401–403, 404
cultural dimensions, 123, 130, 140–144
decision-making in, 394
demographics, 14
ethics, social responsibility, and
sustainability, 80, 116
human resources management, 167–168,
403, 527–528, 529, 531, 537
leadership attributes, 479, 480,
489, 494
legal and regulatory environment, 57,
233–234
management across cultures, 166,
167–168
motivating employees, 454,
457–458, 459
negotiation tactics and styles, 233–234
organizational culture, 187, 189, 190,
192–193, 202
organizational structure, 352–353
political and legal environment, 47–49,
233–234
Walmart’s operations in, 190, 279, 280e,
281, 282
Getting to Yes (Fisher and Ury), 235–237
Ghana, 64, 213
Gifts, 163–164, 172, 175
Global area division, 342–343, 346t
Global economic systems, 22–23
Global firms and multicultural
development, 197–198
Global functional division, 343
Global Fund to Fight AIDS, Tuberculosis
and Malaria, 91
Global integration, 299–302
626 Subject Index
Globalization. See also Economic
performance by region
business practices and, 81, 111
criticisms of, 9–10
definition and overview, 7–9
demographic changes and, 14–15, 18, 19t
economic power shifts, 15–22
economic systems and, 22–23
environmental and social impacts, 9–10
global and regional integration, 10–14
history of, 8
management and, 5–7
social media and, 2–5, 35
world economic projections, 34t, 35
Globalization imperative, 160
Global Leadership and Organizational
Behavior Effectiveness (GLOBE)
study, 130, 145–149, 169–170,
493–495
Global product division, 340–342, 346t
Global sourcing, 296
Global strategy, 301–302
Global virtual teams, 184
GLOBE (Global Leadership and
Organizational Behavior
Effectiveness) study, 130, 145–149,
169–170, 493–495
Goals, in Maslow’s need hierarchy, 438–440
Goal-setting theory, 450–451
Goals for strategy formulation, 304–306
Government, public trust of, 86f
Government relations. See Political
environment; Political risk
Great Britain. See also England;
United Kingdom
communication styles, 219, 224–225, 228
controlling process in, 401–402
cultural dimensions, 130, 136f, 137
ethics, social responsibility, and sustain-
ability, 80, 108
human resources management,
166–167, 529
leadership attributes, 479, 489
management across cultures, 167
motivating employees, 454, 457, 458
negotiation tactics and styles, 235
political environment, 47, 48, 49
technological environment, 63
Greece
about, 73
economic environment, 25–26, 59
leadership attributes, 491t
motivating employees, 443
political environment, 48
Greenfield investments, 330
Group multiculturalism, 199
Group orientation. See also Team
structures
communications interpretation in, 213
in decision making, 394, 395
Japanese versus American leadership
styles, 482
kibbutz setting, 444, 449, 451
management with, 157, 166–167, 169, 171
motivation and, 435, 437, 447, 449,
452–453, 458–459
in national cultures, 126, 128, 130–131,
141–142, 146–148
in performance evaluation, 409
quality control circles, 215, 352, 404–405
Groupthink, 201
Guanxi, 171
Guatemala, 279e, 280e, 283
Guided missile culture, 193–194, 195
Guinea, 33
HAIRL system of appraisal, 166
Handshakes, 125, 173
Haptics, 224
Hardship allowances, 529
Headquarters nationals, 513–514
Health, as international selection criteria,
519–520
Health insurance, 113, 115
Hedge funds, 56
Herzberg’s two-factor theory, 442–446
Hierarchical system of authority, 186,
191–193
Hierarchy-of-needs theory, 436–441
High-context cultures, 164, 210–213
High-definition optical disc industry, 301
Hofstede’s cultural dimensions
GLOBE project and, 145, 147–148
individualism, 130–131, 132f,
136–137, 452
indulgence versus restraint, 134–135
integration of, 136–139
introduction, 129–130
masculinity, 131–133, 138, 147, 378,
447–448, 452
motivations theory and, 438–441, 447–448
power distance, 130, 136–138, 452
time orientation, 133–134
Trompenaars expansion of, 139–145
uncertainty avoidance, 130, 137–138,
447–448, 452
Holidays and culture, 459
Home-country managers, 513–514
Home-country nationals, 513–514
Home furnishings industry, 555–561
Homogeneous groups, 199
Honduras, 86–87, 107, 109–111, 279e,
280e, 283
Hong Kong
communication in, 215, 218
competitive ranking of, 35
cultural dimensions, 136f, 137, 225–226
as emerging market, 29
leadership attributes, 493
motivating employees, 448
organizational culture, 192
theme park industry in, 273–276
Walmart’s operations in, 279, 280, 281
Honne, 394
Horizontal investment, 369
Horizontal specialization, 351–352
Host countries, 519, 531–532
Host-country managers, 514, 538–542
Host-country nationals, 514
Host governments. See also Political
environment; Political risk
proactive political strategies, 375–377
protective and defensive techniques,
374–375
role of, in alliances, 378–379
Housing allowances, 528
Howard Award, 279
Humane orientation, 147, 493–495
Human resource management (HRM),
165–168, 305
Human resources across cultures. See also
Compensation; Training
adjustment to international assignments,
525–526
candidate motivations, 531
costs of international assignments, 512,
523–524
cultural perspectives, 165–168
economic pressures on MNCs, 512–513
host-country viewpoints, 531–532
importance of, 511–513
international selection criteria, 518–523
international selection procedures,
524–526
Middle Eastern and Western manage-
ment compared, 485t, 540
performance evaluations, 407–409
positive organizational behavior, 545–546
repatriation of expats, 533–535
selection procedures, 524–526
sources of, 513–517
success rates of international assign-
ments, 523, 533
talent retention in India, 508–510
tips on working for foreigners, 515
TQM techniques, 297–298, 394–396, 404
trends, 523–524, 546–547
Human rights
child labor, 80, 83
corporate social responsibility for,
79–83, 576, 579–580
forced labor, 560–561
political environment and, 415–418
sweatshop labor and, 81, 86–87, 99–100,
107–111
working conditions, 81, 111, 285–286
Hungary, 28, 493, 537
Hygiene factors, 442
Iceland, 80
ICT (information and communications
technology), 316–317
Idealized influence, 487
Ideologies, 47–50
Implementation. See Strategy
implementation
Imports. See Exports and imports
Incentives, 458–459, 529
Incubator culture, 194–195
India
about, 42–43
business climate in, 248–253, 337, 560
Coca-Cola’s operations in, 248–253
communication styles, 183, 213
cultural dimensions, 130, 134–135, 225
economic environment, 15–18, 19t,
30, 248
entry strategies, 337, 380
Subject Index 627
ethics, social responsibility, and sustain-
ability, 79–81, 83, 248–253
globalization trends, 6, 9
human resources management, 508–510,
513, 516, 537
leadership behaviors and styles, 475,
485–486
legal and regulatory environment, 54
management across cultures, 172–173
motivating employees, 445f, 448
political environment, 49, 248–253, 284,
307, 560
political risk, 364, 370, 372, 375
strategic management, 290–291
strategy implementation, 307
Tata’s auto operations in, 421–428
technological environment, 61–62, 65–66
Walmart’s operations in, 279e, 280e,
284, 285
Indigenization laws, 368
Indirect controls, 401
Indirect verbal style, 211–212
Individualism
changing values in, 129, 142
definition, 130
Hofstede’s study of, 130–131, 132f,
136–137
management across cultures and, 156–157
motivating employees and, 449–450, 452
in political environment, 47–48
in strategic alliances, 378
Trompenaars study of, 140f, 141–142
Individualized consideration, 487
Individual-oriented cultures, 187–188,
191–192, 194–195
Indonesia
about, 467
cultural dimensions, 133, 140, 143–144
economic environment, 15–16, 29–30
human resources management, 531–532
motivating employees, 458
political risk, 365
Walmart’s operations in, 279
Indulgence versus restraint, 134–135
Industrial piracy. See Intellectual property
Industrial sector investments, 369–371
Information and communications
technology (ICT), 316–317
In-group collectivism, 146, 493
Innovation
in auto industry, 64, 75–76, 421–428
bureaucratization and, 55
as cultural dimension, 126
entrepreneurship and, 317–318, 500
leadership styles and, 476, 483, 494,
496–497
in market/command economies, 22–23
organizational culture, 156–157, 162,
202, 453, 545
organizational structure and, 418–419
in pharmaceutical industry, 291–292
strategic management and, 296, 301,
314, 337
sustainability and, 89
trends in, 60–62
Inpatriates, 515–516
Inspirational motivation, 487
Instrumental verbal style, 211t, 213
Insurance policies, for political risk, 376
Integrative negotiations, 230
Integrative Social Contracts Theory
(ISCT), 85
Integrative techniques, 373–374
Intellectual property
copyright infringement, 417
counterfeit products, 65, 157–158,
363, 364
patents, 157–158, 291–293
political risk and, 363, 364
trademarks, 255–261
WTO initiatives, 33, 86
Intellectual stimulation, 487
Interdependent relationships, 345
Interests over positions, in negotiations, 236
Internal controls, 399–400
Internal networking, 351
Internal resource analysis, 304
Internal risk, 361–362
International division structure,
339–340, 346t
International entrepreneurship, 317–318.
See also Entrepreneurship
International firms and multicultural
development, 196–198
Internationalization, 7
International jurisdiction, 53
International law, principles of, 53–54
International management, 5–7. See also
Management across cultures;
Strategy formulation; Strategy
implementation
International selection criteria. See also
Human resources across cultures
adaptability to cultural change, 518–519
age, experience, and education, 520
definition, 518
general criteria, 518
language training, 520
leadership ability, 522–523
motivation for overseas assignment,
520–521
physical and emotional health, 519–520
preparedness, 523
spouses and dependents, 521–522
International selection procedures, 524–526
International strategic alliances (ISAs), 377
International strategic management. See
Strategy formulation; Strategy
implementation
International strategy, 301–302
Internet
access to, 61, 316–317
Chinese government controls, 363, 372,
415–418
entrepreneurial and new ventures, 317,
319, 348
online commerce, 294, 388–390
worldwide usage, 63–65
Interpersonal relationships, in negotiations,
230–231, 232, 235–236
Interpretation, as communications barrier,
213–214, 222–223
Interviewing procedures, 524
Intimate distance, 224, 225f
Intrinsic, 433–434
Investment
general nature of, 369
regulation of, 60
special nature of, 369–371
Iran, 15, 51, 365
Iraq war, 24, 31, 47, 51, 174, 220, 365
Ireland, 25, 167, 494
ISAs (international strategic
alliances), 377
ISCT (Integrative Social Contracts
Theory), 85
Islamic law, 51, 53, 327
ISO 9000 standard, 396
ISO 14000 standard, 87
Israel, 444, 445f, 449–451, 454
Italy
communication styles, 228
cultural dimensions, 144
demographics, 14
ethics, social responsibility, and sustain-
ability, 116
human resources management, 537t
leadership attributes, 489
management behaviors and styles, 189
motivating employees, 445f, 458
political environment, 48
Japan
about, 414
alliance challenges and opportunities,
379–380
communication in, 210, 212–213, 215,
217, 221, 224–226, 232
cultural dimensions, 125–126, 128–130,
133, 142, 144–145, 276
decision-making in, 394, 397–398
demographics, 14
economic power and performance, 13,
16–18, 20, 26
ethics, social responsibility, and sustain-
ability, 78, 80, 91, 117
human resources management, 167–168,
518, 527, 529–531, 534, 536–537
leadership attributes, 476–479, 481–483,
488, 491
legal and regulatory environment, 53,
55–56, 60
management across cultures, 166, 170,
405, 474
motivating employees, 435–436, 445f,
446, 449, 452–459, 515
negotiation tactics and styles, 231–235,
238–240
organizational characteristics of MNCs,
350–354
organizational cultures and diversity,
196, 199–201
quality performance in, 298, 394–395,
404–407
strategy implementation, 310
technological environment, 63, 65, 66
theme park industry, 264–265, 276
Walmart’s operations in, 279, 280, 283
628 Subject Index
Job-content factors, 446
Job-context factors, 446
Job design, 451–453
Job Orientation Inventory (JOI), 444–445
Job satisfaction studies, 444–446,
455–458
Joint ventures
in China, 255–261, 273, 275, 563–574
definition and overview, 332–333
differing views of, 27, 162–163
as entry strategy, 332–333, 336
management of, 377–381
organizational arrangements from,
346–348
political risk of, 364–365
in Russia, 27, 336, 360–362, 370
Walmart’s global strategies, 279,
281, 284
Jugaad, 486
Kaizen, 395–396, 405
Kantian ethics, 77–78, 79
Karoshi, 455–456
Kasky v. Nike Inc., 99–100
Keiretsu, 26
Kenya, 64, 316
Key success factor (KSF), 304
Kinesics, 224
Korea. See North Korea; South Korea
Kuwait, 55
Labor costs, 311
Labor practices. See Human rights
Labor unions
in China, 279
Chiquita’s relationship with, 575–576,
579–580
in France, 267, 269–270
in Germany, 190, 353
in Japan, 167
Laissez-faire (LF) leaders, 488
Language
as communication barrier, 216–219
as international selection criteria, 520
training programs, 226–227, 515, 520,
540, 543
Laos, 50
Largest global retailers, 279e
Latin America. See also specific country
Chiquita’s operations in, 575–582
communication styles, 213
cultural dimensions, 200, 225
economic environment, 11–12, 15, 24
human resources management,
526–527
leadership attributes, 475, 486, 492
motivating employees, 435, 441,
450, 451
negotiation tactics and styles, 231
organizational culture, 202
political environment, 47, 365
technological environment, 63t
Walmart’s operations in, 283–284,
298–299
Latin cultures, 201, 227, 491t
Leadership, defined, 470
Leadership across cultures
authenticity in, 496–498
Chinese managers, 483–484
company size, level, and age roles in,
480–481
culture clusters, 489–491
democratic values in, 480–481
development programs, 468–470
entrepreneurial, 500
ethically responsible, 497–499
European managers, 479–481
GLOBE study insights, 493–495
Indian managers, 485–486
Japanese managers, 476–479, 481–483,
488, 491
Latin American managers, 486
managerial grid, 476–479
manager-leader paradigm, 470–472
Middle Eastern managers, 485
positive organizational scholarship,
495–496
qualities for success, 489
subordinates roles, 481
Theories X, Y, and Z, 472–474
universalism in, 487–488
U.S. managers, 482–483
Leadership behaviors and styles
authentic, 496–498
authoritarian, 474–475, 477–479
autocratic, 476–477
autonomous, 493
charismatic, 487–488, 493, 495, 497
participative, 475–478, 493–495
paternalistic, 474–476, 481–482
self-protective, 493–494
servant, 499–500
team-oriented, 493–495
transactional, 487–488
transformational, 487–488, 497
universal, 487–488
Learning, 538–539
Learning organizations, 538
Legal and regulatory environment
bureaucratization, 55–57, 58t
corruption, 54–55, 90–91, 281
financial services, 54, 56–57
forecasting trends in, 303
international law, 53–54
introduction, 52–53
negotiations and, 233
privatization, 57–60
trade and investment, 60
Libya, 44, 51, 375
Licenses, 335–336
Local issues
in strategic implementation, 307–308
Tata’s manufacturing plants, 426–427
Localization, 526–527, 530, 546
Location considerations
competition and, 396–397
decision-making for, 396–397
for implementation, 306–308
negotiation tactics and, 234
Long-term oriented cultures, 133–134
Low-context cultures, 164, 210–213
Lump-sum method, 530
Macro political risk analysis, 364–365
Malaysia
as emerging market, 29
leadership behaviors and styles,
475, 492
management across cultures, 164
multiculturalism and diversity in, 196
theme parks in, 276
Management
comparative behaviors of, 531–532
cultural impacts on, 125–128, 146
definition and introduction, 5–7
effectiveness of, in motivation, 433
globalization trends in, 5–7
home-country, 513–514
host-country, 514, 538–542
women in, 79–80
Management across cultures
Asian and Western styles compared, 347
bias in performance appraisal, 408
control strategies and, 399–400, 403
differing values and, 262–272
foreign CEOs of firms, 170
GLOBE project and, 169–170
human resources, 165–168
introduction, 158–159
in joint ventures and alliances, 378
manager-leader paradigm, 470–472
Middle Eastern and Western styles com-
pared, 485, 540
parochialism and simplification,
162–164
religion and, 164, 174–175, 488
similarities across cultures, 164–165
specific examples (see also individual
countries)
Arab countries, 170, 174–175
Brazil, 174
China, 170–172
France, 173–174
India, 172–173
Russia, 172
strategic predispositions, 159–160
strategies for different cultures,
160–162
success factors, 162
training in, 535–541
Manager-leader paradigm, 470–472
Manufacturing
controlling process in, 298–399
ethics and sustainability in, 80–81,
84, 89
foreign direct investment in, 369
offshoring of, 10
organizational structure for, 337–339,
342, 351–352
TQM in, 395
Maquiladoras, 25
Market economy, 22–23
Market environment, forecasting trends
in, 302
Marketing, 161, 201, 305, 310
Market orientation and multicultural
development, 197
Masculinity, 131–133, 138, 147, 378,
447–448, 452
Subject Index 629
Maslow’s hierarchy-of-needs theory
Herzberg theory linkage to, 442, 446
international findings on, 437–441
introduction, 436–437
occupational group goals, 440
professional technical personnel
goals, 439
Maternity leave, 166
Matrix structure, 343–344, 346t
MBE-A (active management-by-exception)
leaders, 488
MBE-P (passive management-by-exception)
leaders, 488
Media, public trust of, 86f
Medicare, 113–116
Mediterranean countries, 489
Memorandum of understanding
(MOU), 426
Mercosur, 12, 31
Mergers/acquisitions
culture clashes in, 122–124
definition, 331
as entry strategy, 331–332
EU authority over, 366–367
organizational arrangements from, 346
Mexico
about, 359
cultural dimensions, 130–131, 132f,
134–135, 141–144
economic environment, 15–16, 24–25
human resources management, 166–168,
531–532, 537t
leadership behaviors and styles,
475, 486
negotiation tactics and styles, 233
strategy implementation, 306–307,
312–313
trade agreements, 11–13
Walmart’s operations in, 279–282
Micro political risk analysis, 364–367
Middle East. See also Arab countries;
specific country
communication styles, 213–214, 222,
224–225
conducting business in, 174–175
cultural dimensions, 174, 225
economic environment, 31–33
human resources management, 529
leadership styles, 485, 486
legal and regulatory environment, 55
motivating employees, 449
organizational culture, 201, 202
political environment, 44–46, 51, 365,
367–368
strategic management in, 300
technological environment, 63t
trading history, 8
Military regimes, 51–52
Millennium Development Goals
(U.N.), 100
Minimum wage, 80
Ministry of International Trade and
Industry (MITI), 26
Misinterpretation, as communications
barrier, 213–214, 222–223
MIST countries, 15
Mixed economy, 23
Mixed organization structure, 343–344
MNCs (multinational corporations). See
also Corporate social responsibility;
Organizational culture and
diversity; Organizational structure;
Sustainability
corporate governance, 89–90
corruption and, 90–91
definition and introduction, 5–7
development assistance by, 92–93
globalization of, 83–85
legal and regulatory environment, 52–60
management philosophy on training,
537–540
multicultural development phases of,
196–198
organizational characteristics of,
350–354, 454
organizational cultures in, 185,
190–195
organizational training programs,
539–540
political environment and, 46–52
technological environment, 60–67
Monochronic time schedule, 225
Morocco, 494
“Motivating Employees from Other
Cultures” (Thiederman), 434
Motivation, defined, 434
Motivation across cultures
achievement motivations theory,
446–449
assumptions about, 434–436
in emerging markets, 432–434
equity theory, 449–450
for foreign assignments, 520–521
goal-setting theory, 450–451
hierarchy-of-needs theory, 436–441
Hofstede’s dimensions and, 187–188
incentives, 458–459, 529
job design, 451–453
nature of, 434–436
POS and, 495–496
reward systems, 458
two-factor theory, 442–446
work centrality, 454–458
Motivators, 442
MOU (memorandum of
understanding), 426
Multicultural groups, 199
Multiculturalism and diversity
advantages of, 200–201
development phases, 196–198
problems with, 199–200
team effectiveness building, 201–203
types, 198–199
Multi-domestic strategy, 301–302
Multinational corporations. See MNCs
Multinational universities, 348
Mutual benefit in negotiations, 235–237
Myanmar, 52
N-11 economies, 15
NAFTA (North American Free Trade
Agreement), 11–12, 24–25, 60, 359
National cultures. See Culture meanings
and dimensions; Management
across cultures
Nationalism, 49–50
Nationality principle, 53
Nationalization of business, 49
National responsiveness, 299–302
Neglected tropical diseases (NTDs),
117–118
Negotiation
bargaining behaviors, 237–240
cultural differences in, 231–234, 240
definition and introduction, 229
France and Spain contrasted, 189
for mutual benefit, 235–237
Netflix’s strategies, 208–210
power positions for, 373–377
process of, 230–231
style of, 233–234
tactics for, 234–235
types of, 229–230
Negotiations
communication skills in, 236
Netherlands
cultural dimensions, 126, 142
HRM and cultural differences, 166
leadership attributes, 494
motivating employees, 454
organizational culture in, 192–193
Neutral cultures, 140f, 142, 491–492
News media, 45, 86f
New Zealand, 63, 136f, 137, 443
NGOs (nongovernmental organizations),
85–87, 108–110, 117–118,
314–315, 497
Nicaragua, 279e, 280e, 283
Nigeria
about, 207
as emerging market, 15, 33
leadership attributes, 492, 494
political environment, 59, 65
technological environment, 64, 316
Nike Inc., Kasky v., 99–100
Nonequity venture, 332
Nongovernmental organizations (NGOs),
85–87, 108–110, 117–118,
314–315, 497
Nonprofit organizations. See
Nongovernmental organizations
Nonverbal communication
definition and overview, 223–226
negotiation behaviors, 237, 239–240
Nordic culture, leadership attributes
in, 491
Normal distribution, culture viewed as,
127–128
North America. See also specific country
Arab Spring effects in, 51
communication and cultural values, 222
communication styles, 183
cultural dimensions, 141
economic environment, 24–25
human resources management,
526–527, 529t
online commerce in, 388–390
technological environment, 63t
630 Subject Index
North American Free Trade Agreement
(NAFTA), 11–12, 24–25, 60, 359
Northern Europe, 189, 225. See also
specific country
North Korea, 23, 48, 50
Norway, 49, 114–115, 133, 451
NTDs (neglected tropical diseases),
117–118
OAS Inter-American Convention Against
Corruption, 91
Objectivity, in negotiations, 236–237
O.B.Mod. (organizational behavior
modification), 165
OCB (organizational citizenship
behavior), 545
Oceania, 63t
Oculesics, 224
Offshoring, 7. See also Outsourcing
1001 Ways to Reward Employees
(Nelson), 432
Open-source model, 61
Operational risks, 368–369
Operations goals, 305
Options creation, in negotiations, 236
Organizational behavior. See Human
resources across cultures;
Leadership across cultures;
Motivation across cultures
Organizational behavior modification
(O.B.Mod.), 165
Organizational characteristics of MNCs,
350–354, 454
Organizational citizenship behavior
(OCB), 545
Organizational culture, defined, 185
Organizational culture and diversity
characteristics of, 185–186
external culture compared with,
184–185
global teams, 182–184
Hofstede’s dimensions, 187–188
Lessem and Neubauer’s dimensions, 189
management of, 196–203
Middle Eastern and Western manage-
ment compared, 485, 540
in MNCs, 185, 190–195
national culture interactions with, 182,
186–190
Trompenaars’s four corporate cultures,
191–195
Organizational structure
global arrangements, 340–344
initial entry strategies, 338–339
international division, 339–340
matrix, 343–344
Middle Eastern and Western manage-
ment compared, 485, 540
network-based, 348
nontraditional, 346–348, 425–426
for product integration, 349–350
for strategy formulation, 337–338
for strategy implementation, 337–338
summary, 346t
Tata in India, 422–423
transnational network, 344–346
Organization of American States Inter-
American Convention Against
Corruption, 91
Orphan and specialty drugs, 116–117
Outsourcing
criticisms of, 7, 10, 516–517
CSR and, 285–286
definition, 7
ethics of, 79, 83–85
as human resources source, 511,
516–517
sweatshop labor and, 107–111
technological advancements and, 65–67
Overseas selections. See International
selection criteria
Ownership-control risks, 369
Pacific Rim, 13, 166
Pakistan, 15, 42, 60, 90, 192, 475
Parenthood and work centrality, 454–455
Paris Agreement on Climate Policy, 82–83
Parochialism, 162–163
Participative leadership, 475–478, 493–495
Particularism, 139–141
Partnerships. See Alliances; Joint ventures
Passive management-by-exception
(MBE-P) leaders, 488
Past-oriented cultures, 144
Patents, 157–158, 291–293
Paternalistic leadership, 474–476, 481–482
PC industry, 296, 398–399
People’s Republic of China (PRC).
See China
Perception
of Americans by foreigners, 540
as communication barrier, 188, 219–221
definition, 219
differences in, 188, 199–200
of foreigners by Americans, 220
in negotiations, 232
Performance evaluation
financial, 403–404
Middle Eastern and Western manage-
ment compared, 485t
motivating employees and, 433
personnel, 407–409
quality, 404–407
Performance orientation, 147, 172, 493
Personal distance, 224, 225f
Personal information gathering, 418
Personal verbal style, 211t, 212–213
Personnel performance evaluation,
407–409
Persuasion, in negotiations, 231
Peru, 31, 225, 486
Pesticides use, 248–253
Pharmaceutical industry
biotechnology research and, 62–63
developing countries access to,
117–118, 119f
intellectual property provisions, 86
prices, 113–116, 118
specialty and orphan drugs, 116–117
strategic management, 290–293
Philanthropy, 75, 102–105
Philippines, 15, 79, 448, 493–494
Philosophical perspectives, 77–78, 472–474,
499, 537–540
Physical and emotional health, 519–520
Physiological needs, 437
Planning, strategic, 295
Planning for negotiations, 230
POB (positive organizational behavior),
545–546
Poland, 28, 59, 180, 447, 493, 537
Political environment. See also
Political risk
in China, 48–51, 255–260, 273–275,
307, 415–419, 558–559, 563–574
country selection and, 307
forecasting trends in, 303
ideologies, 47–50
in India, 248–253, 284, 560
negotiations and, 233
political systems, 50–52
in Russia, 360–362, 559
sanctions, 360–361
social media and, 44–46
strategy implementation and, 312
Political imperative, 296–297
Political risk. See also Political
environment
definition, 362
international sanctions, 360–362
in joint ventures, 255–261, 336,
364–365
management framework for, 368–372
nature and analysis of, 362–368
responding to, 373–377
Political systems, 50–52
Polycentric MNC, 538
Polycentric predisposition, 159–160
Polychronic time schedule, 225
Portugal, 25, 136f, 137, 227
Positive organizational behavior (POB),
545–546
Positive organizational scholarship (POS),
495–496
Power distance
comparative managerial behavior
and, 532
GLOBE project and, 145t, 146–148,
169–170
Hofstede on, 130, 136–138
motivating employees and, 452
organizational behavior and, 494
in strategic alliances, 378
Power positions for negotiation, 373–377
PRC (People’s Republic of China).
See China
Predispositions, 159–160
Present-time-oriented cultures, 144
Price orientation, 197, 421–428
Primary sector investments, 369–371
Principle of sovereignty, 53
Private equity investments, 56
Privatization, 57–60, 312–313
Proactive political strategies, 375–377
Process theories of motivation, 436,
449–451
Product development, organizational
mechanisms for, 349–350
Subject Index 631
Product focus, 157
Production and strategic implementation,
310–311
Product/service orientation and
multicultural development, 197
Profit, 403
Profitability goals, 305
Promises, in negotiations, 238–239
Protective and defensive techniques,
374–375
Protective principle, 53
Proverbs representing cultural
values, 222t
Proxemics, 224–225
Public distance, 224, 225f
Public trust, 85–86
Puerto Rico, 280e
Purchasing power parity, 313f
Quality control circles (QCCs), 215, 352,
404–405
Quality imperative, 297–298
Quality management, 297–298,
394–396, 561
Quality of work life (QWL), 452–453
Quality performance, 404–407
Recession of 2009. See Financial crisis of
2008–2010
Reciprocity, 171
Refugee crisis, 45–46
Regiocentric MNC, 538
Regiocentric predisposition, 159–160
Regional system, 530
Regulatory environment. See Legal and
regulatory environment
Relationship-oriented cultures, 202
Relationships
as corporate culture dimension, 187–188,
191–192, 197–198
customer, 190, 201
in foreign countries, 376–377
interdependent, 345
in negotiations, 230–231, 232,
235–236
with stakeholders, 499, 557–559
Relative bargaining power, 373–377
Relativism, 77
Religion and culture
in Arab countries, 174–175, 488
Islamic law, 51, 53, 327
in Malaysia, 164
terrorism motivated by, 367
Religiously motivated terrorism, 367
Relocation expenses, 528
Repatriation, 533–535, 546
Repatriation agreements, 534
Responsible global leadership, 498–499
Restraint versus indulgence, 134–135
Retailers, largest worldwide, 279e
Return on investment (ROI), 403
Reward systems, 458
Right-wing totalitarianism, 52
Ringisei, 394
Risks. See also Political risk
currency, 311
in emerging markets, 312
external/internal, 360–361
operational, 368–369
ownership-control, 369
systemic, 57
transfer, 368
ROI (return on investment), 403
Romania, 444, 474
Russia
about, 554
alliance challenges and opportunities,
380
controlling process in, 398
corruption in, 48–49, 172, 559
cultural dimensions, 134–135
economic environment, 13–15, 19–20,
27–28
entry strategies for, 336
ethics, social responsibility, and sustain-
ability, 90
human resources management, 520
IKEA’s operations in, 558
joint ventures in, 336, 360–362, 370
leadership attributes, 473–474,
491, 493
management across cultures, 27,
164–165, 172
motivating employees, 435, 459
negotiation process in, 208–209,
231, 240
political environment, 48–49,
360–362, 559
political risk, 336, 360–362, 364,
369–370
sanctions against, 27, 208,
360–361, 554
Rwanda, 316
SA8000 standard, 87, 579–580
Safety needs, 437
Salaries, 454–455, 527–528, 534
Sanctions, 27, 208, 360–361, 554
Saudi Arabia
about, 327
communication and cultural values, 222
economic environment, 33
legal and regulatory issues, 55,
543, 560
political environment, 51
Scandinavian countries, 394, 476, 480,
489, 493. See also specific country
School systems, 132–133, 543
Securitization, 57
Selection for overseas assignments,
524–526. See also International
selection criteria
Self-actualization needs, 437
Self-protective leadership, 493–494
Senegal, 64, 317
September 11, 2001 terrorist attacks, 220
Sequential-time orientation, 143
Servant leadership, 499–500
Service sector investments, 369–371
Short-term oriented cultures, 133–134
Similarities across cultures, 164–165
Simplification, 163–164
Singapore
communication flow, 215
cultural dimensions, 136f, 137, 198
as emerging market, 29, 35
leadership attributes, 493–494
motivating employees, 445, 448
organizational culture, 192
theme parks in, 276
Singapore Free Trade Agreement, 11
Smartphone market, 156–158, 175,
417–418
Social aspects of globalization, 9–10
Social class, 173
Social democracy, 49
Social distance, 224, 225f
Social environment trends, 303
Socialism, 48–50
Socialist law, 53
Social media
crisis management via, 376
globalization and, 2–5, 35
global terrorism and, 52
political environment and, 44–46
Social needs, 437
Social responsibility. See Corporate social
responsibility
Societal collectivism, 146
Sociotechnical designs, 453
South Africa
about, 154
as emerging market, 33
ethics, social responsibility, and
sustainability, 90
motivating employees, 445f
political environment, 33, 79, 86
technology environment, 64, 66
Walmart’s operations in, 280, 285
South America. See also specific country
communication styles, 215, 224–225
cultural dimensions, 131, 132f, 227
economic performance of, 30–31
human resources management, 531
negotiation process in, 234
South Korea
communication styles, 219
cultural dimensions, 130
economic environment, 14–16, 29
human resources management, 536–537
leadership attributes, 476–479, 481–482
management across cultures,
163–165
motivating employees, 449, 455,
457–458
organizational characteristics of
MNCs, 350
technological environment, 63
theme parks in, 276
Walmart’s operations in, 279, 280e, 282
Sovereignty and sovereign immunity, 53
Soviet Union, former countries of
cultural values of, 140–141
as emerging markets, 30–32
entry strategies, 333, 336
management across cultures, 162–163
motivating employees, 447
political environment, 47, 365
632 Subject Index
Spain
communication barriers, 220
communication effectiveness, 228
cultural dimensions, 130, 134, 142,
144, 227
economic environment, 25
ethics, social responsibility, and sustain-
ability, 116
leadership attributes, 489
negotiation strategies, 189
organizational culture, 201
political environment, 48, 49
Specialization, 351–352
Specialized operations, 345
Special nature of investment, 369–371
Specialty and orphan drugs, 116–117
Specific culture, 140f, 142–143
Spouses and dependents, 521–522, 524,
533–535, 543
Stakeholders
political environment and, 375–376
relationships with, 499, 557–559
social responsibility and, 85, 90,
109–111, 113
Start Something That Matters (Mycoskie),
104
Stereotyping, 127–128, 170, 199
Strategic alliances. See Alliances
Strategic management. See also Strategy
formulation; Strategy
implementation
definition and introduction, 293–294
global and regional strategies, 299–302
need for, 294–295
planning benefits, 295
Strategic orientation and multicultural
development, 197
Strategic planning, 295
Strategic predispositions, 159–160
Strategy formulation
approaches to, 295–299
environmental scanning, 302–304
goal setting for, 304–306
internal resource analysis, 304
introduction, 290–292
organizational structure for, 337–338
Strategy implementation
approaches to, 295–299
born-global firms, 318–319
country and firm-specific factors,
308–309
definition, 306
in emerging markets, 311–317
entrepreneurship, 317–318
finance and, 311
location considerations, 306–308
marketing and, 310
organizational structure for, 337–338
production and, 310–311
Student advocacy, 107–111
Subcontracting, 7, 10, 511, 515–516
Subordinates, 471, 472, 474–475, 481
Subsidiaries, 330–331, 338–339, 370,
391–393
Succinct verbal style, 211t, 212
Supply chain management
across cultures, 157
at IKEA, 557–558, 560
innovation in, 296, 337–338, 425–426
organizational structure for, 337
quality performance and, 405–406
strategy formulation and
implementation, 296
sustainability in, 74–75
Sustainability
Chiquita’s efforts in, 575–582
definition, 88
Eastern philosophy views of, 78
environmental protection and, 81–84
MNC business practices, 74–76,
85–89
philanthropy and, 102–105
water, 248–253
Sweatshop labor, 81, 86–87, 99–100,
107–111
Sweden
communication styles, 212
cultural dimensions, 140
decision-making in, 394
human resources management, 166, 531,
555–561
leadership styles, 481, 493
motivating employees, 452–453,
457, 459
negotiation tactics and styles, 237
political environment, 47, 49
Switzerland, 142–143, 198, 202,
213, 493
Synchronous-time culture, 143–144
Syria, 31, 44–46, 51, 52
Systemic risk, 57
Taguchi method, 406–407
Taiwan
communication barriers, 219–220
economic performance, 29
HSBC’s operations in, 571
Japanese and U.S. subsidiaries in,
350–354
motivating employees, 433, 458
negotiation tactics and styles, 240
Walmart’s operations in, 282
Tanzania, 64
Tao Te Ching (Lao-Tzu), 499
Tariffs, 10–11, 60
Task orientation, 202, 231
Task-oriented cultures, 191, 192–193,
195, 202
Tatemae, 394
TAT (Thematic Apperception Test), 447
Taxes, 529–530
TCNs (third-country nationals), 514–516
Teaching organizations, 538
Team-oriented leadership, 493–495
Team structures. See also Group
orientation
building multicultural effectiveness in,
201–203
global, 484
leadership of, 184, 203
organizational culture and, 182–185,
193–194, 199
virtual, 184
Technology environment. See also Internet
biotechnology, 62–63
controlling process in, 398–399
e-business, 63–64
employment effects of, 65–67
environmental scanning and, 302
nature of investment in, 369–370
organizational cultures in, 193–194
sophistication level of, 369–370
telecommunications, 64–65, 298,
316–317
trends in, 60–62, 65–67, 298, 302
work centrality in, 454
Teenagers, training programs for, 543
Telecommunications, 64–65, 298, 316–317
Territoriality principle, 53
Terrorism, 44–45, 52, 220, 365, 367–368,
579
Testing, human resources, 409, 447,
524, 545
Thailand, 29–30, 142, 294
Thematic Apperception Test (TAT), 447
Theme park industry
in Asia, 264–265, 273–277
in France, 262, 265–277
in the U.S., 262–264
Theory X managers, 472–474
Theory Y managers, 472–474
Theory Z managers, 474, 482
Third-country nationals (TCNs), 514–516
Threats, in negotiations, 238–239
Time orientation
in Brazil, 174
in China, 171
as cultural dimension, 222, 225
deadlines, 144, 232
in decision-making process, 394
diversity and problems with, 200
Hofstede on, 133–134, 147
in Latin America, 200, 225
in mergers/acquisitions, 331
in Middle East, 174, 225
in negotiations, 234–235
Trompenaars on, 143–144
Togo, 33
Token groups, 199
Totalitarianism, 50–52
Total quality management (TQM),
297–298, 394–396, 404
TPP (Trans-Pacific Partnership), 13, 24, 31
TQM (total quality management),
297–298, 394–396, 404
TRACE (Transparent Agents Against
Contracting Entities) standard, 91
Trade, history of, 8
Trade agreements, 10–14, 21t, 24–25, 31,
60, 359
Trade policies, 363–364
Training
cultural, 227–229, 512, 536, 543–546
definition, 535
for expat teenagers, 543
Subject Index 633
in international management,
535–537, 547
language, 226–227, 515, 520, 540, 543
learning styles, 538–539
management philosophy impact on,
537–538
organizational structure and, 349
program types, 541–544
reasons for, 539–541
TQM and, 395, 406
Transactional leaders, 487–488
Transatlantic Trade and Investment
Partnership (T-TIP), 12
Transfer risks, 368
Transformational leaders, 487–488, 497
Transition strategies, 534–535
Transnational network structure, 344–346,
346t
Transnational strategy, 301–302
Trans-Pacific Partnership (TPP), 13, 24, 31
Transparent Agents Against Contracting
Entities (TRACE) standard, 91
Trompenaars cultural dimensions
achievement versus ascription, 140f, 143
control strategies, 399–400
environment, 144–145
GLOBE project and, 145–148
individualism versus communitarianism,
140f, 141–142
introduction, 139
neutral versus emotional, 140f, 142
specific versus diffuse, 140f, 142–143
time, 143–144
universalism versus particularism,
139–141
Trust
of business and government, 85–86
in diverse groups or teams, 199, 202
ethically responsible leadership and, 497
as part of global team management, 183
T-TIP (Transatlantic Trade and Investment
Partnership), 12
Tunisia, 44, 51, 375
Turkey
economic environment, 15–16
leadership attributes, 475, 488, 491t
legal and regulatory issues, 55, 59
organizational culture, 192
Two-factor theory of motivation, 442–446
Uganda, 64
Ugly American problem, 540
Ukraine, 360–361
Ulysses Program, 547
Uncertainty avoidance
as cultural dimension, 130, 137–138
leadership and, 494
managerial differences and, 169–170
motivating employees and, 447–448, 452
in strategic alliances, 378
verbal communication styles and,
211t, 212
UNEP (United Nations Environment
Programme), 88
Unifying Free Trade Agreement, 24
United Arab Emirates, 485
United Kingdom. See also England; Great
Britain
Brexit vote, 26, 47, 49
cultural dimensions, 131–132, 134,
140–143
European management characteristics,
189
human resources management, 166,
536–537
management across cultures, 166
motivating employees, 446, 451
organizational culture, 193–194
political environment, 46, 47
Walmart’s operations in, 279, 280e,
282–283
United Nations Environment Programme
(UNEP), 88
United Nations Global Compact, 87
United Nations Global Reporting
Initiative, 87
United Nations Sustainable Development
Goals, 92–93
United States
communication
cultural impacts, 222–223
feedback systems, 226
flow of, 215
language barriers, 216–219
nonverbal, 224–226
perceptual barriers, 220–221
verbal styles, 210, 212–213
controlling process in, 402–403
cultural dimensions
achievement culture, 143
competitiveness, 35t
control of one’s environment,
144–145
individualism, 131, 132f, 136f,
137, 141
indulgence, 134–135
in M&A activity, 122–124
nationalism, 49
priorities of, 125
specific culture, 142–143
stereotypical views, 127
time orientation, 134, 143–144
transitional nature of, 128–129
universalism, 140–141
economic environment, 8, 16–18, 24, 35
ethics, social responsibility, and sustain-
ability, 80, 83, 85–88, 90–91, 108,
113–118
foreign direct investment by, 20
human resources management
comparative management behavior,
531–532
compensation, 527–528, 529, 530
cross-cultural management, 167
HRM practices, 536–537
international selection criteria, 518
repatriation of expatriates,
533–535, 546
leadership, 475–476, 480–483,
491, 494
legal and regulatory environment,
10–12, 60
management across cultures, 162–164,
167, 169–170
motivating employees
assumptions about, 435
content theories, 445t, 446–448
job satisfaction studies, 455–457
process theories, 450–451
quality of work life, 452–453
rewards and incentives, 458–459
Theory Y approach, 472
work centrality, 454
negotiation
behaviors and styles, 233, 237,
238–240
process, 231, 232, 235
organizational characteristics of MNCs,
350–354
organizational culture, 186–188, 192–194,
198, 202
pharmaceutical industry in,
290–291, 293
political risk in, 363–366
quality performance in, 404–407
steel industry in, 365–366
technological environment, 63, 66
Universalism, 139–141
Universal leadership behavior, 487–488
Upward communication, 215–216
Utilitarianism, 78–79
Validity, 545
Value of work, 454–455
Values, 128. See also Culture meanings
and dimensions
Variety amplification, 482
Variety reduction, 482
Venezuela
GLOBE study insights, 494
national culture dimensions, 140,
142–144
organizational culture in, 192
Verbal behaviors, in negotiations, 237–239
Verbal communication styles, 210–213,
491–492
Vertical investment, 369
Vertical specialization, 351–352
Vienna Convention of Diplomatic
Security, 53
Vietnam
alliance challenges and opportunities,
380–381
economic environment, 15–16, 23, 29
HSBC’s operations in, 571
labor environment, 81
political environment, 48, 50, 53,
364–365
technology environment, 61
Virtual teams, 184
Virtue theory, 78–79
“Volcker Rule,” 56–57
Wages, 80–81, 166
Warsaw Pact, 507
634 Subject Index
Western Europe, 14, 134, 141, 189, 290,
347. See also specific country
Western management styles, 347, 485
Western philosophies, 77–78
Wholly owned subsidiaries,
330–331, 370
Wireless network business, 298, 316–317
Work centrality, 454–458
Working conditions. See Human rights
Working for foreigners, 515
Workplace culture, 190–195
Workplace layout, 214, 225
The World Is Flat (Friedman), 7, 60
“World’s Most Admired Firms”
(Hay Group), 407–408
World Trade Organization (WTO)
China’s obligations, 50, 170, 282,
293–294, 363, 563, 567, 569
definition and overview, 10–12
dispute-settlement mechanism of,
577–578
trade monitoring by, 60
Written communication, 217–219, 227, 232
Zambia, 444, 494
1
Supplemental In-Depth Integrative Case
Nokia Targets the Base of the Pyramid
One of the most widely used clichés in the world of busi-
ness is the so-called 80/20 rule. In the realm of sales, the
rule is sometimes interpreted as “80 percent of our sales
come from 20 percent of our customers.”1 One recent
business theory that has challenged this rule is the so
called BOP or Bottom of the Pyramid perspective, devel-
oped and popularized by C.K. Prahalad.2 It refers to the
around 4 billion people at the bottom of the economic
pyramid with a purchasing power of US$2,000 per year
or less. Prahalad and colleagues have proposed that these
low-income consumers represent great potential but
require a unique mix of pricing, promotion, low cost
delivery, and effective communication in order to success-
fully reach.3 The key to selling to BOP consumers is that
an MNC strategy be affordable, accessible, and socially
driven. Nokia is one company that is taking this perspec-
tive seriously.
Business interest in BOP markets is rising. Multina-
tional companies have been leaders in this trend, espe-
cially in food and consumer products. And large national
companies have also taken a leadership role, proving to
be among the most innovative in meeting the needs of
BOP consumers and producers, especially in such sectors
as housing, agriculture, consumer goods, and financial
services. And small start-ups and social entrepreneurs
focusing on BOP markets are rapidly growing in number.
But perhaps the strongest and most dramatic BOP leader-
ship success story is mobile telephony.4
The Global ICT Market
The measured BOP market for ICT—information and com-
munication technologies and the services they provide—is
$30.5 billion for Africa (11 countries), Asia (9), Eastern
Europe (6), and Latin America and the Caribbean (9). This
represents annual household ICT spending in the 35 low-
and middle-income countries for which standardized data
exist, covering 2.1 billion of the world’s BOP population.
The total BOP household ICT market in these four regions,
including 3.96 billion people in all surveyed countries, is
estimated to be $51.4 billion.5
But the ICT sector has been growing explosively in
developing regions in the interval since countries were
surveyed, with Internet services and especially mobile
phone companies adding customers at rates that may well
have doubled BOP sector spending since that time. More-
over, rapid market growth is expected to continue for some
time: In both Africa and India less than 15 percent of the
population has mobile phones.6
Asia has the largest measured regional BOP market
for ICT, $14.3 billion, reflecting the region’s significant
BOP population of 1.49 billion. Its estimated total BOP
market for ICT (including the Middle East) is $28.3 bil-
lion, including the spending of 2.9 billion people. Not
far behind is Latin America’s measured BOP market,
$11.2 billion, accounting for the ICT spending of 276 mil-
lion people. The region’s estimated total BOP market is
$13.4 billion (360 million people). In Eastern Europe the
measured BOP market for ICT is $3.0 billion (148 mil-
lion people); the estimated total market is $5.3 billion
(254 million people). In Africa the measured BOP mar-
ket is $2.0 billion (258 million people), and the estimated
total BOP market $4.4 billion (486 million people).
Though smallest, the African ICT market is the most
rapidly growing one—and it has already generated very
profitable companies and significant wealth.7
The BOP share of the total household ICT market in
measured countries varies across regions. In Asia the BOP
share is about half of the total market, 51 percent; in other
regions it is smaller though still substantial: 36 percent in
Eastern Europe, 28 percent in Africa, 26 percent in Latin
America. Africa shows the greatest disparity between the
BOP share of the population (95 percent) and the BOP
share of ICT spending (28 percent)8.
At the national level there are wide disparities in the
BOP share of ICT spending. These disparities stem in
part from regulatory differences affecting the pace at
which mobile phone networks expand. They also reflect
national differences in urban-rural demographics, since
mobile networks start in urban areas and only then spread
to rural areas.9
In Asia the extremes are represented by Pakistan and
Bangladesh, where the BOP accounts for more than 89 per-
cent of the ICT market, and Thailand, where the BOP pop-
ulation, though substantial, accounts for only 29 percent of
the market. In Africa the extremes are Nigeria (98 percent)
and Burundi (12 percent). In Eastern Europe the extremes
are represented by Belarus and Kazakhstan (74 percent)
and FYR Macedonia (21 percent). In Latin America and
the Caribbean, only in Jamaica does the BOP account for
more than half of total ICT household spending (71 percent);
the other extreme is Colombia, where the BOP accounts for
only 12 percent of ICT spending.10
2 Part 4 Organizational Behavior and Human Resource Management
Between 2000 and 2005 the number of mobile sub-
scribers in developing countries grew more than fivefold—
to nearly 1.4 billion. Growth was rapid in all regions, but
fastest in sub-Saharan Africa—Nigeria’s subscriber base
grew from 370,000 to 16.8 million in just four years
(World Bank 2006). Household surveys confirm substan-
tial and growing mobile phone use in the BOP population,
which has clearly benefited from the access mobile phones
provide to jobs, to medical care, to market prices, to fam-
ily members working away from home and the remittances
they can send, and, increasingly, to financial services.11
A strong value proposition for low-income consumers
has translated into financial success for mobile compa-
nies. Celtel, an entrepreneurial company operating in
some of the poorest and least stable countries in Africa,
went from start-up to telecom giant in just seven years.
Acquired for US$3.4 billion in 2005, the company now
has operations in 15 African countries and licenses cover-
ing more than 30% of the continent.12
Nokia’s BOP Strategy
Another major player on the ICT (information and com-
munication technologies) market has been the Finnish
MNC Nokia. Nokia terms its BOP market strategy as
“user-centered innovation”—the search for insights and
inspiration that starts with observing an intended audience
in order to understand them. The goal was to discover
unmet needs or opportunity gaps where existing products,
services, or business models left their customers unful-
filled. This reduced the “hit or miss” gamble of new prod-
uct introductions and increased the rate of diffusion of an
innovation in the market.13
According to a company press release, in 2002, Nokia
unveiled a strategy to lower the cost of owning and oper-
ating a mobile phone and to bring the benefits of mobile
telephony to people in emerging markets. Later, Nokia was
expanding that vision by introducing a number of devices
and services that aimed to bring the power of the Internet
to these markets as well. By introducing products and ser-
vices that are affordable, relevant, and easy-to-use, Nokia
believes it can connect people with each other, accessing
information, news, entertainment, and sharing.14
The challenge for most MNCs entering BOP markets is
how to address the increasing needs at the bottom of the
social and economic pyramid around the developing world.
These emerging consumer markets have been either
unknown or never studied as consumer markets at the great
extent conventional mainstream consumer markets have
been studied, where decades of research and metrics are
available for sophisticated analysis of the market players.
To gather more information about the new BOP customers,
Nokia employed a participatory approach to reach new
markets. They allocated full-time in-house resources to
conduct continuous ongoing exploratory research in order
to inspire and inform their product design and development
and position Nokia as a global company and leading brand.15
For example, field observations in Uganda demon-
strated that entry level customers of the mobile phone
providers at the bottom of the pyramid segment could
rarely afford their own personal handsets. Often an entire
family would share one cell phone. In response to this
observation, Nokia launched a shared phone device in
emerging markets, one that permits up to five separate
profiles, contact directories and other personalization fea-
tures so that each user can have his or her “own” phone.
Over time as income permitted, people would purchase
the brand and phone they’d already become accustomed
to using, increasing Nokia’s sales.16
Observing how people live and behave with mobile
phones at BOP in developing nations, how they’ve accessed,
enhanced and shaped communications in many different
locales and socioeconomic segments around the world has
shown Nokia the “weak signals” or early indicators that
enabled them to anticipate future trends, emerging needs,
and market behavior. Recently, Nokia has reinvented itself
as a mobile computing company, focusing on services and
on creating the Internet experience on the mobile platform.17
Nokia Sharing Survey:
Understanding and
Responding to BOP Markets
The Nokia sharing survey was conducted in emerging
markets (India, China, Brazil, Pakistan, Vietnam, Russia,
and Egypt) in October and November 2007, which con-
firmed that mobile phone sharing was on the rise. Accord-
ing to the survey more than 50% of respondents in India
and Pakistan and nearly 30% in Vietnam indicate that they
share, or would share, their mobile phone with family or
friends, a figure which contrasts with consumer behavior
in more mature markets.18 Because of its ability to quickly
spot this important trend and receive important feedback
from consumers, Nokia was able to introduce new phones
meeting the needs of its BOP customers and gain more
respect and popularity on the ICT market.
“Phone sharing is a logical trend. More and more fami-
lies are purchasing a mobile phone for the entire family to
use, not just the head of the household. In addition, digital
cameras are quickly becoming more popular in these mar-
kets, and as such taking and sharing digital images is
becoming more common,” said Alex Lambeek, Vice Pres-
ident, Entry Devices, Nokia. “In response, Nokia has devel-
oped a number of innovative features like the multiple
phonebook to support phone sharing, and we have added
technologies like Bluetooth to some models to make trans-
ferring images and ringtones easy and affordable.”19
In January 2008, Nokia unveiled the Nokia 2600 clas-
sic and the Nokia 1209, two mobile handsets that offered
useful features, range of colors, or exchangeable covers
Supplemental In-Depth Integrative Case Nokia Targets the Base of the Pyramid 3
the exception of a few, companies have not succeeded in
the rural market. Nokia has been flourishing in rural India
by customizing its phones according to market needs.24
“Filling in the information gaps in agriculture and edu-
cation with Nokia Life Tools, we strive to contribute
towards empowering people with the right tools to help
them make informed decisions in their daily lives,” said
Jawahar Kanjilal, Global Head of Emerging Market Ser-
vices, Nokia. “Nokia Life Tools was developed to help
bridge the digital divide in the emerging markets.”25
“Nokia is a global innovator with a strong pulse of
local markets. Agriculture employs more than 60 percent
of all workforce in India. This sector of the economy
needs fresh inputs via technology for the sector to get to
a 3 percent growth,” said Shiv Shivakumar, Vice Presi-
dent, Nokia India. “Education and English language, on
the other hand, are springboards for a number of small
town and rural youth to move into the employment mar-
ket. Nokia, through services in agriculture and education,
will fulfill these opportunities for the Indian population.”26
Before the end of 2008 Nokia announced plans to con-
duct a limited scale pilot in India. Reuters Market Light
(RML) was chosen as the content service provider, col-
laborating with Nokia for agriculture services in the pilot,
where accurate and regular information on weather, prices
and availability of seeds, fertilizers, pesticides, and pre-
vailing market prices for the produce would be sent to the
farmer. The information should be customized to the
farmer’s location and selection of crops, and be delivered
directly to his Nokia mobile phone. By getting the latest
information directly on their mobile phones, farmers can
overcome uncertainty and get just the right information
that they need to grow and sell their crops.27
“Technology is changing the way farmers, their families,
and their surrounding communities are contributing to the
economy, as well as benefiting from it. Reuters Market
Light has already proven the value of customized and local-
ized information to the farming community, with thousands
of farmers having already made significant additional prof-
its using RML,” said Amit Mehra, Managing Director,
Reuters Market Light. “Through our collaboration with
Nokia, we hope to reach even more farmers so that they
can make informed decisions that have a direct and positive
impact on their productivity and yield.”
The Education Service of Nokia Life Tools aimed
to give students a decisive advantage by boosting their
English language skills and local, national, and interna-
tional general knowledge via language lessons, quizzes on
English words and phrases, and the general knowledge
information toolkit. Together with EnableM for the pilot,
these services were designed to give students an edge they
otherwise lacked. In the future, the Education Service
will also come with information on higher education and
career guidance and tips, exam preparation, quizzes, and
access to exam results.
for consumers in emerging markets. Nokia 2600 classic
also allowed consumers to customize their phones with
colorful, fully changeable Xpress-on covers and MP3
ring tones. The cheerful Nokia 2600 classic also features
a number of entertainment features, including an FM
radio and a VGA camera. Nokia 2600 classic, which was
projected to retail for approximately 65 euros before
applicable taxes or subsidies, was introduced in all key
markets during the first quarter of 2008. Nokia 1209 was
available globally during the second quarter of 2008 and
retailing for approximately 35 euros before applicable
taxes or subsidies.20
“While cost sensitivity is an important element in cre-
ating mobile devices for emerging markets, the over-
whelming feedback we receive from consumers in these
markets is that they want their mobile device to comple-
ment their personality and offer a range of colors and
entertainment features,” said Alex Lambeek. “The Nokia
2600 classic offers a colorful sense of flair and a robust
set of features at an exceptionally accessible price. As
with all Nokia devices, it is backed by a brand that stands
for quality and durability.”21
The second model, the Nokia 1209, offered additional
cost management features to make phone sharing easy and
convenient. Innovations included the pre-paid tracker, a
cost-tracking application, and the multiple phonebook,
which allowed up to five people to store personal contact
lists of up to 200 numbers on a single phone. Designed
for first-time buyers, the Nokia 1209 incorporated Nokia’s
intuitive user interface and dust resistance, and offered up
to 80 languages. The Nokia 1209 also had a one-piece
key mat for durability and reliability.22
Nokia Life Tools:
Service for the BOP
In November 2008 Nokia introduced a range of affordable
mobile devices and innovative new services specifically
for people in emerging markets. In addition to Nokia’s
lowest cost handset, as well as its first handset for emerg-
ing markets with an integrated digital music player, Nokia
unveiled a range of services that leverage the power of
the Internet. Estimated retail prices of the new devices
ranged from 25 to 90 EUR, with several models expected
to begin shipping in 2008. Nokia’s suite of Internet ser-
vices for emerging markets was projected to be available
beginning in 2009.23
In 2008 Nokia launched Life Tools, a service aimed to
tap the unmet information needs of rural farmers. Since
2000, the rural market has emerged into a gold mine for
MNCs wanting to expand their market share. Due to rising
income level, literacy rate, and disposable income, the rural
consumer market has been growing at twice the rate of the
urban market, accounting for nearly 50 percent of the sales
of many product categories like FMCG and consumer
durables. However, despite the booming opportunities, with
4 Part 4 Organizational Behavior and Human Resource Management
an integrated camera. The Nokia 2320 classic and the
Nokia 2323 classic were expected to begin shipping dur-
ing the second quarter of 2009 with an estimated retail
price of 40 EUR. The Nokia 2330 classic was expected
to begin shipping during the second quarter of 2009 with
an estimated retail price of 50 EUR.32
The Nokia 1202 and Nokia 1661 offered exceptional
value. At only 25 EUR, the Nokia 1202 was Nokia’s low-
est cost mobile device to date. Developed specifically for
people in rural areas, the Nokia 1202 included standard
features like a flashlight, extended battery life, loud ring-
tones, and a phone book for up to five users. The Nokia
1661 was Nokia’s lowest cost color phone including an
FM radio and a large color screen with an estimated retail
price of 30 EUR. The Nokia 1661 also supported a flash-
light, loud ringtones, and multiple phonebooks.33
Nokia, Siemens, and
Internet for the Next Billion
In April 2007 Nokia began operating in a joint venture
with German corporation Siemens AG, creating Nokia
Siemens Networks. The company, jointly owned by
Nokia and Siemens (50 percent/50 percent) and consoli-
dated by Nokia, combined Nokia’s networks business and
Siemens’ carrier related operations for fixed and mobile
networks.34 With more than 60,000 employees in over
150 countries, Nokia Siemens Networks is one of the
largest telecommunications hardware, software, and ser-
vices companies in the world. The company is committed
to innovation and sustainability and offers a complete
portfolio of mobile, fixed, and converged network tech-
nologies as well as professional services including con-
sulting and systems integration, network implementation,
maintenance and care, and managed services.35 Nokia
Siemens company projects tomorrow’s connected world
as “smart, simple, and efficient.” It introduces a new
innovative concept of “smart connectivity.” The company
states on its Web site: “Tomorrow’s networks will be
smarter as well as simpler. Smart connectivity is an inno-
vative concept that will provide powerful connectivity
solutions for heterogeneous networks. It will enable easy,
transparent, and efficient access to services anytime and
anywhere on the users’ preferred device. When imple-
mented, it will generate significant benefits for consum-
ers, CSPs, and enterprises.”36
The Nokia Siemens venture had started a separate ini-
tiative called “Internet for the next billion”. Nokia Sie-
mens Network envisioned that by 2015, five billion people
will be connected in a worldwide community brought
closer together by voice and increasing data communica-
tions, and that nowhere will the impact of this revolution
be more pronounced than in emerging markets.37 As a
first step toward the realization of that vision, Nokia Sie-
mens is addressing the concrete challenges of connecting
the “next billion.” These people will be predominantly users
“Nokia Life Tools was developed in collaboration with
the target users and the industry. The success of this ini-
tiative can be assured through regular consumer feedback
to ensure that their needs are best met. More importantly,
it will require a collaborative effort between Nokia, our
operator partners, industry participants, and information
providers across the agriculture and education sectors as
we connect the next billion mobile phone subscribers,
many of whom will indeed hail from these developing
regions,” added Mr Kanjilal.28
Nokia and Continuous Innovation to Meet
BOP Customer Needs
Another innovation in late 2008 that was developed by
Nokia especially for emerging markets was Mail on Ovi,
a new affordable Internet service, which was enabled on
Nokia Series 40 devices, offering the possibility to create
an e-mail account directly on the mobile phone without
having to use a personal computer, giving millions of
users the ability to create their first Internet identities and
communicate in new ways. Mail on Ovi was easy to find,
setup, and use for immediate e-mail access from one’s
mobile phone. The global rollout of Mail on Ovi was
scheduled for the end of 2008.29
At the end of 2008, to support the range of new mobile
services for emerging markets, Nokia announced that it
would expand its portfolio of affordable mobile phones,
including the following: Nokia 7100 Supernova, Nokia
5130 XpressMusic, Nokia 2320 classic, Nokia 2323 clas-
sic, Nokia 2330 classic, Nokia 1202, and Nokia 1661. The
Nokia 7100 Supernova was designed for style and enter-
tainment. This colorful device was highlighted by its
large, high resolution color screen, FM radio, 1.3 mega-
pixel camera, and support for Share on Ovi, Nokia’s
online photo sharing service, and other photo sharing
sites, also included support for Mail on Ovi, as well as a
browser for surfing information on the Internet. The
Nokia 7100 Supernova was expected to begin shipping in
the fourth quarter of 2008 with an estimated retail price
of 75 EUR.30
Nokia 5130 XpressMusic is Nokia’s most affordable
music phone to date, featuring dedicated music keys, a
digital music player, FM radio, and a standard 3.5 mm
connector for headphones. Equipped with an integrated
2 megapixel camera, the Nokia 5130 XpressMusic also
supports image sharing through Share on Ovi, as well as
the Mail on Ovi e-mail service. The Nokia 5130 Xpress-
Music was planned to begin shipping in the first quarter
of 2009 with an estimated retail price of 90 EUR.31
Premium looks and practicality were the hallmarks of
the Nokia 2320 classic, Nokia 2323 classic, and Nokia
2330 classic. These affordable devices supported Mail on
Ovi and Nokia Life Tools. In addition, the Nokia 2323
classic offered an FM radio with recording and an Internet
browser. The Nokia 2330 classic was also equipped with
Supplemental In-Depth Integrative Case Nokia Targets the Base of the Pyramid 5
the rapidly declining price of some handheld devices is
further accelerating this demand.42 Nokia Siemens Net-
works has offered an end-to-end 3G solution that allows
rapid building of a 3G footprint and capacity, especially
addressing the specific needs of emerging markets.
According to Nokia Siemens, this solution provides low
total cost of ownership while maintaining good service
quality. It also helps operators in emerging markets intro-
duce 3G easily, based on a sound business plan backed
by solid experience and research.43
Connectivity Scorecard
In 2008, Nokia Siemens Networks published findings
from a connectivity research study carried out across
25 countries. The study, which analyzes not only a nation’s
ICT infrastructure but how well it is being used, ranks
each nation’s performance on a Connectivity Scorecard.
Designed by Leonard Waverman, the Scorecard investi-
gates how “usefully connected” countries around the
world really are. The Connectivity Scorecard is designed
to provide a comparison of how countries rank in relation
to each other at a given point in time. The Scorecard
assesses performance against approximately 30 indicators
of connectivity, including broadband, fixed-line, mobile,
and computing technologies, that contribute to a country’s
social and economic prosperity. Measures of positive ICT
deployment include workforce IT skills, literacy, the use
of enterprise software, and women’s access to ICT.44
The Connectivity Scorecard has enabled Nokia Siemens
Networks to track ICT progress in the countries covered,
and to issue an urgent wake-up call to governments and
businesses. Nokia Siemens wants to raise awareness of the
fact that better use must be made of infrastructure if coun-
tries are to experience the full social and economic ben-
efits of ICT. The Connectivity Scorecard also provides a
platform for dialogue with regulators, financial institu-
tions, multinational organizations, universities, and com-
munications service providers. Through this dialogue,
Nokia Siemens Networks want to encourage stakeholder
action and engagement to help improve individual country
scores.45
In 2009 a second version of the Nokia Siemens Net-
work Connectivity Scorecard came out. It included double
the number of countries, including many from the Asia
Pacific and Africa regions, altogether 25 innovation-
driven economies (advanced economies) and 25 resource
and efficiency-driven economies (emerging markets).
This broader study gave further insights into the correla-
tion between ICT deployment and usage and social and
economic development. The results confirmed that even
the wealthiest and most technologically advanced coun-
tries still have plenty of room to develop their ICT infra-
structure and improve its use. The findings suggest that
the best connectivity is yet to come, and that there is still
much work to be done.46
from low-income segments of the population, from poorly
connected rural areas, or from emerging markets and
developing countries.38
Network Village, Internet Kiosk,
and 3G Future
Nokia Siemens Network has launched a number of initia-
tives to develop solutions supporting sustainable develop-
ment in emerging markets. For example, during 2008 the
Nokia Siemens Networks Village Connection was rolled
out in India, with trials in Africa, the AsiaPacific region
and Latin America. By the end of the year, some 50 vil-
lages were covered by this innovative, cost-efficient solu-
tion that enables operators to extend their reach to remote
villages and bypass the technology that typically would
be required. In 2008, Nokia Siemens Networks also
launched Internet Kiosk, an extension to the Village Con-
nection program that lowers Internet costs by sharing
access.39
Many people living in rural villages require access to
mobile communications in order to reap the considerable
socio-economic benefits that technology brings. However,
bringing modern technology to remote regions can be
challenging for an operator. Service providers need to
adopt innovative solutions to provide access for these
communities at a level which is affordable for the con-
sumer but also a sustainable business for the service pro-
vider. Village Connection is a unique GSM and IP-based
solution that extends mobile voice and data coverage to
rural villages enabling the use of a franchise-based busi-
ness model that is entirely new in the telecoms sector. For
service providers, rural coverage becomes a realistic busi-
ness opportunity, while a village entrepreneur becomes an
integral part of a service provider’s distribution and mar-
keting network. The new services contribute to the whole
community, while the entrepreneur benefits from the busi-
ness opportunity.40
Nokia Siemens believes that the Village Connection
and Internet Kiosk models are viable ways of bringing
commercial mobile services to poor and rural areas, but
they realize that more efforts need to be undertaken jointly
with governments and regulators to create effective mar-
kets for mobile operators. As one example of the work in
this area, they launched an eCommerce Solution pilot
project in China in 2008, aiming to provide the kind of
services needed to support rural development needs.41
In the beginning of 2009 Nokia Siemens Networks had
posted a number of articles related to 3G expansion in
emerging markets. Nokia Siemens assessed that Internet
connectivity via mobile broadband is proving to be a
highly successful service in many emerging markets,
whether through PCs powered by 3G dongles or handheld
devices. According to Nokia Siemens, 3G can provide
much-needed and inexpensive voice capacity in areas with
congested 2G networks. The low price of PC dongles and
6 Part 4 Organizational Behavior and Human Resource Management
divide in support of the Millennium Development Goals
set by the United Nations for 2015, in particular the
reduction of poverty and the improvement of education
and health.48
Targeting Rural Regions
for Growth
Overall, Nokia has been redirecting its overall corporate
strategy to emerging and rural regions. One new service
we have alluded to is the monthly program that provides
farmers with real-time market data on current prices for
commodities. Since 2009, 6.3 million people have signed
up to pay Nokia $1.35 a month for commodity data in
India, China, and Indonesia. In November 2010, Nokia
According to Nokia Siemens, connectivity is the key
enabler of the information flow that defines modern econ-
omies. It is integral to economic productivity in advanced
economies and to the transformation of the economies of
many Asian and African countries. However, as stated in
Nokia Siemens 2008 Corporate Responsibility Report,
access to mobile communications is not only about having
the right technology and infrastructure. The Connectivity
Scorecard, developed with the London Business School,
identifies countries, such as Malaysia, that are leaders in
the developing world in realizing the potential of com-
munications technology. It also highlights unused poten-
tial in many countries. By extending communications in
such challenging areas of the world, Nokia Siemens Net-
works are taking a real step toward bridging the digital
Source: www.nokiasiemensnetworks.com.47
Connectivity Scorecard 2009:
Efficiency and Connectivity
resource driven score
economies
Malaysia 7.07 Tunisia 3.50
Turkey 6.71 China 3.19
Chile 6.59 Philippines 3.17
South Africa 5.76 Egypt 3.02
Mexico 5.39 Sri Lanka 2.87
Russia 5.37 Vietnam 2.75
Argentina 5.14 India 1.88
Brazil 5.12 Indonesia 1.87
Colombia 4.08 Kenya 1.75
Botswana 3.98 Bangladesh 1.60
Thailand 3.75 Pakistan 1.54
Iran 3.62 Nigeria 1.30
Ukraine 3.60
Innovation driven Connectivity
economies score
United States 7.71 Hong Kong SAR 5.33
Sweden 7.47 France 5.22
Denmark 7.18 New Zealand 4.85
Netherlands 6.75 Belgium 4.65
Norway 6.51 Korea 4.17
United Kingdom 6.44 Italy 3.99
Canada 6.15 Czech Republic 3.71
Australia 6.14 Spain 3.49
Singapore 5.99 Portugal 3.02
Japan 5.87 Hungary 2.72
Finland 5.82 Greece 2.62
Ireland 5.70 Poland 2.49
Germany 5.37
Supplemental In-Depth Integrative Case Nokia Targets the Base of the Pyramid 7
Questions for Review:
1. Is the concept of “serving the poor” really an
attractive business opportunity? How does business
leadership drive companies such as Nokia to pursue
such an opportunity?
2. What are the trends in the ICT (information and
communication technologies) market? How attrac-
tive is the ICT market in the BOP countries? How
fast is that market growing?
3. What is Nokia’s BOP strategy? Describe Nokia’s
products/services developed specifically for emerging
markets. What cultural challenges are associated with
developing, marketing, and distributing telecommuni-
cations products and services in emerging markets?
4. How has Nokia leveraged its presence in both mobile
devices and value-added services to offer poor custom-
ers a bundle of services? Is this an effective product
development/marketing strategy? Why or why not?
Source: This case was prepared by Tetyana Azarova of Villanova
University under the supervision of Professor Jonathan Doh as the basis
for class discussion. It is not intended to illustrate either effective or
ineffective managerial capability or administrative responsibility.
announced it was expanding this Life Tools program, part
of its Ovi mobile services business, to Nigeria. With 152
million residents, Nigeria is Africa’s most populous coun-
try. But, Nokia says, only 29 percent of the Nigerian
population owns a cellphone, although other figures place
the level higher because some phones are shared.
While most analysts and media focus attention on the
competition for high-end smart-phones, nearly 80 per-
cent of handsets sold are simpler models that can be
used for voice and text messaging, but not much more.
Two-thirds of the world’s nearly 5 billion mobile phone
subscribers live in emerging and developing markets,
where Nokia is the market leader with more than a third
of the market. Nokia’s goal is to encourage handset users
to take advantage of their value-added services and to
stimulate cellphone purchases among those who do not
yet own a mobile phone, so that they can receive these
services. “The premise here is that we will be able to
complement good hardware with services that will
attract and create a sticky situation with the consumer,”
said Mary T. McDowell, Nokia’s executive vice presi-
dent in charge of the company’s cellphone business.
“This is not only good business but also about doing
good for the community.”49
17. Ibid.
18. “Nokia Unveils Two Handsets That Offer a Range of Useful
Features and Colours Aimed at Consumers in Emerging
Markets,” Nokia press release, January 22, 2008, http://www.
nokia.com/A4805502.
19. Ibid.
20. Ibid.
21. Ibid
22. Ibid.
23. “Inform, Involve, Empower—Nokia’s Service Mantra for Emerg-
ing Markets with Nokia Life Tools,” Nokia press release,
November 4, 2008, http://www.nokia.com/A41403254.
24. Shreya Tantia and Priti Krishnan, “Nokia’s Rural Marketing
Strategies in India,” Reaching Out to the Bottom of Pyramid
Marketing Strategies Case Study, February 2009, http://www.
ibscdc.org/Case_Studies/Marketing/Marketing%20Strategies/
MKS0119.htm.
25. “Inform, Involve, Empower.”
26. Ibid.
27. Ibid.
28. Ibid.
29. “Nokia Introduces Affordable Mobile Devices and Services That
Make the Internet Available for Emerging Markets,” Nokia press
release, November 4, 2008, http://www.nokia.com/A41403253.
30. Ibid.
31. Ibid.
32. Ibid.
1. Bruce Kidd, Senior VP, Managing Strategic Accounts, “The Cost
to Serve Rule,” July 28, 2009, http://blog.walkerinfo.com/blog/
creating-customer-value/0/0/the-cost-to-serve-rule.
2. C. K. Prahalad and Allen Hammond “Serving the World’s
Poor Profitably,” Harvard Business Review, September 2002.
3. Ibid.
4. Allen Hammond, William J. Kramer, Julia Tran, Rob Katz,
and Courtland Walker, “The Next 4 Billion: Market Size and
Business Strategy at the Base of the Pyramid,” IFC & World
Resource Institute, March 2007, http://www.wri.org/publication/
the-next-4-billion.
5. Ibid.
6. Ibid.
7. Ibid.
8. Ibid.
9. Ibid.
10. Ibid.
11. Ibid.
12. Ibid.
13. Niti Bhan, “The Fortune at the Bottom of the Pyramid
Begins with Understanding,” September 9, 2008,
http://www.emergingfutureslab.com/perspective_20/
2008/09/how-does-unders.html.
14. Nokia, press release, http://www.nokia.com/A4405102.
15. Bhan, “The Fortune at the Bottom of the Pyramid Begins with
Understanding.”
16. Ibid.
Endnotes
8 Part 4 Organizational Behavior and Human Resource Management
42. Nokiasiemensnetworks.com, “Internet for the Next Billion; 3G
Solution Brings Internet and Voice to Emerging Markets,” http://
www.nokiasiemensnetworks.com/insight/enriched-customer-
experience/recommended-solutions/3g-solution.
43. Ibid.
44. Nokiasiemensnetworks.com, “Corporate Responsibility: Connectivity
Scorecard,” http://www.nokiasiemensnetworks.com/about-us/
corporate-responsibility/bringing-connectivity/connectivity-
scorecard.
45. Ibid.
46. Ibid.
47. http://www.nokiasiemensnetworks.com/about-us/corporate-
responsibility/bringing-connectivity.
48. Ibid.
49. Kevin J. O’Brien, “Nokia Sees Cellphone Growth among the
World’s Poorest,” New York Times, November 2, 2010, p. B3.
33. Ibid.
34. Nokia Corporation, Form 20-F for the fiscal year ended
December 31, 2008, http://www.nokia.com/NOKIA_COM_1/
About_Nokia/Financials/form20-f_08 .
35. http://www.nokiasiemensnetworks.com/about-us/company.
36. http://www.nokiasiemensnetworks.com/about-us/company/
innovation-and-technology.
37. http://unite.nokiasiemensnetworks.com/internetforthenextbillion.
38. Nokiasiemensnetworks.com, “Corporate Responsibility: Bringing
Connectivity,” http://www.nokiasiemensnetworks.com/about-us/
corporate-responsibility/bringing-connectivity.
39. Nokia Corporation, Form 20-F for the fiscal year ended
December 31, 2008.
40. Nokiasiemensnetworks.com, “Internet for the Next Billion;
Village Connection with Internet Kiosk Brings the Internet to
First-time Users,” http://www.nokiasiemensnetworks.com/insight/
internet-for-the-next-billion/recommended-solutions/village-
connection-with-internet-kiosk-brings-the-internet-to-first.
41. Nokiasiemensnetworks.com, “Corporate Responsibility: Bringing
Connectivity.”
1
This simulation is designed to develop skills in cross-
cultural negotiations with an emphasis on multi-stake-
holder dialogue and exchange.
Synopsis
On August 18, 2003, members of the World Trade
Organization (WTO) met in Geneva to hear a U.S.
request for a full-blown dispute-settlement proceeding
regarding European Union (EU) restrictions on the
import and sale of goods produced with or containing
genetically modified organisms (GMOs). In late 1996,
Monsanto exported the first genetically modified soy-
beans to Europe, assuming that consumers would accept
them as Americans had. The timing was not good, how-
ever, as the GMO issue became linked in the minds of
Europeans with “mad cow” disease, an outbreak that
was first thought limited to animals but eventually
killed several humans. Neither GMO companies nor
European authorities were prepared for the reaction, as
public sentiment immediately turned against the technol-
ogy. Britain’s Daily Mirror ran a front-page headline in
1998 warning against “Frankenfood.” In 1998, five
European countries said they wouldn’t process any more
applications for genetically modified crops, and the EU
upheld this decision.1
In May 2003, the United States filed a complaint with
the WTO in hopes of getting the ban lifted. In response,
in the summer of 2003, the European Parliament passed
groundbreaking legislation that would require detailed
labeling of all food products containing as little as 0.9
percent of genetically modified ingredients, and would
require origin tracing in order to gain approval. Although
these steps were designed to move toward lifting the
moratorium, many in the United States charged that these
rules would be unworkable, would be discriminatory
toward imports, and would violate WTO sanitary and
phytosanitary (SPS) agreements.2
Paradoxically, both sides claimed to be concerned
about public health and environmental safety. The U.S.
government and industry argued that the EU was in
violation of WTO provisions requiring nondiscriminatory
treatment of like or similar goods. The Americans con-
tended that uninformed Europeans were spreading
unfounded fears about GMOs.3 In addition, the U.S.
government argued that requiring labels for GMO prod-
ucts would result in segregating GMO foods from non-
GMO foods and, in so doing, limit their consumer appeal.
Furthermore, the threshold of 0.9 percent was far too
restrictive, according to U.S. officials.
Description of Exercise
This exercise provides an interactive case simulation in
which you will be assigned to a group that will assume
the role of one of several stakeholder groups in the
actual dispute between the United States and the EU
over trade in GMOs. In this case, the U.S. government,
on behalf of U.S. farmers and the biotech industry, argued
that the EU is in violation of global trading rules. Europe
responded that it has the right to protect the health and
safety of its population and domestic crops, given the
uncertainties over the effects of GMOs on humans, ani-
mals, and plants.
This simulation assumes that the United States and the
EU proceed through the WTO dispute-settlement proce-
dures, and it places participants in the roles of the various
disputants: the U.S. government, the European Union, a
consortium of GMO companies, a group of interested
developing countries, a group of NGOs, and a WTO Dis-
pute Settlement Panel.
Genetically Modified Food
According to some estimates, over half the world’s soy, a
key ingredient in products ranging from candy bars to
animal feed, comes from genetically modified strains. In
2005, about 8.5 million farmers in 21 countries were
planting genetically altered seeds.4 The global market
value of genetically modified crops in 2006 was $6.15
billion. Yet genetically modified food has quickly become
as controversial as cloning. The central feature of a GMO
is human alteration of the DNA of an organism through
the use of biotechnology. Proponents and opponents in the
genetic-modification debate have been eager to weigh in
on the benefits and risks associated with using GMOs.
Each side has identified a number of key arguments to
support its position:
In-Class Simulation
1. “Frankenfoods” or Rice Bowl for the World:
The U.S.-EU Dispute over Trade in Genetically
Modified Organisms
2 Skill-Building and Experiential Exercises
food not only is hurting U.S. commerce but also is dis-
couraging developing countries from growing genetically
modified crops for export.
The U.S. government believes that genetically modi-
fied products could reduce hunger and poverty in the
world’s poorest nations, and that by restricting the use of
GMOs, the EU is aggravating starvation in the develop-
ing world.7 Biotechnology, according to U.S. policy mak-
ers and biotech executives, offers the prospect of crops
that are more resilient, require less water, and give higher
yields. Thus, the EU ban on genetically modified foods
indirectly contributes to starvation by denying access to
more efficient agricultural techniques.8 Furthermore,
according to Robert B. Zoellick, the U.S. trade represen-
tative, uninformed European attitudes continue to spread
unfounded fears in developing countries, where the need
for the increased yields offered by genetically modified
foods is greatest.9 In addition, according to the U.S. gov-
ernment, GMO technologies would help developing
countries dramatically increase export earnings. The U.S.
government is not only concerned that Europe will pre-
vent the use of GMOs, but also that the EU model could
serve as a blueprint for other countries, including those
in the developing world, that plan to regulate GMOs.
In its recent WTO dispute with the EU, the United States
argued that the EU’s ban on GMOs violated international
trade rules. In February 2006, the WTO dispute panel ruled
in favor of the United States, Canada, and Argentina, decid-
ing that the EU and six member states had broken trade
rules by banning the import of genetically modified foods.
The ban caused “undue delays” in the approval of GMO
products, thereby violating the SPS Agreement.10
Along with continued criticism from Europe, the GMO
cause has experienced some setbacks in the United States
as well. For example, Aventis CropScience, developer of
StarLink corn, was forced to pay $10 million to Iowa farm-
ers and grain elevators in premiums and compensation for
losses tied to growing and handling genetically modified
grain that contaminated the grain supply. Although the
government had approved StarLink for use in livestock
feed, it was not cleared for human consumption after pos-
sibly allergic reactions were reported in people who con-
sumed the protein that StarLink produces. Hundreds of
food products were recalled in 2001 after testing showed
residues of the StarLink protein in taco shells and other
food. Some estimates suggest costs could eventually exceed
$200 million.11 Anti-GMO activists in the United States
continue to make progress. In 2007, rice producers in
California called for a moratorium on transgenic rice in
the state, and a USDA ruling could stop the production of
genetically modified alfalfa throughout the United States.12
The EU Position
For most Europeans, the debate over genetically modified
foods is closely intertwined with cultural, environmental,
Benefits
∙ Increased yields.
∙ Herbicide-tolerant crops encourage less tilling/soil
erosion.
∙ Insecticidal crops encourage less use of harmful
pesticides.
∙ Virus-resistant crops.
∙ Development of drought-resistant crops.
Risks
∙ Possible allergic or other health responses in
humans/livestock.
∙ Creating new or more vigorous pests and pathogens.
∙ Harm to “nontarget” beneficial species.
∙ Unwanted gene flow.
∙ Irreparable changes in species diversity and in ge-
netic diversity within a species.
Genetically engineered products are not new. Insulin
used in medicine is an example of genetic engineering. The
insulin gene from the intestines of pigs is inserted into bac-
teria.5 The bacteria grow and produce insulin, which is then
purified and used for medical purposes. Other genetically
engineered products include the chemical compound aspar-
tame, used as a sugar substitute, and the hepatitis B vaccine.
A large barrier to the acceptance of GMOs worldwide
is the fuzzy international law regulating GMO trade. The
Agreement on Sanitary and Phytosanitary Measures (SPS
Agreement), part of the 1994 agreement that established the
World Trade Organization, requires that food safety regula-
tions be based on scientific risk assessments.6 Most studies
to date seem to point to the conclusion that foods contain-
ing GMOs are safe for human consumption. But the fact
that a majority of these studies were conducted by or for
U.S. biotech firms independent of any third-party overseers
suggests to some that the findings are suspect. In 1997, the
United States won a complaint with the WTO against the
EU concerning an EU ban on hormone-treated beef, but the
EU continued to enforce the broader ban on approval of
newly introduced GMO products because a large majority
of Europeans are steadfastly against the use of GMOs.
The United States, along with Canada and Argentina,
filed another complaint with the WTO in 2003, claiming
that the EU’s ban on genetically modified products vio-
lates international trade rules. In 2006 the WTO ruled in
favor of the United States, claiming that the EU had indeed
violated recognized trade rules. Now the EU is seeking to
limit GMO sales through tougher approval processes.
The U.S. Position
In the United States, 86 percent of soy and more than 40
percent of corn are genetically modified. The U.S. gov-
ernment argues that the EU ban on genetically modified
In-Class Simulation 1. “Frankenfoods” or Rice Bowl for the World: The U.S.-EU Dispute over Trade in Genetically Modified Organisms 3
and health issues. Earlier surveys suggested that nearly
80 percent of Europeans do not want to consume products
with GMOs,13 although European opinion about GMOs
seems to be getting more optimistic. A 2006 Eurobarom-
eter survey reported that, of those with a decided opinion
on “green” biotechnology, only 58 percent discouraged it.
This brings European opinion on GMOs close to that of
Canada.14
At the heart of the debate over genetically modified
products is the growing disagreement between the United
States and Europe over what steps are necessary to protect
public health and the environment.15 A major obstruction
to settling this argument is deeply embedded in European
culture. Food and culture are closely linked in Europe’s
historical and contemporary life. Many European regions
celebrate their unique food traditions and local produce.
Unlike Americans, whose food choices are driven by acces-
sibility and convenience, Europeans try to limit the influ-
ence of corporate food companies on their food choices.
Respecting their preferences, global food companies such
as McDonald’s, Burger King, and Coca-Cola have pledged
to keep all products for sale in Europe free of GMOs.16
Another obstacle to the use of GMOs is the fact that,
in recent years, Europe experienced several health crises—
notably the outbreak of bovine spongiform encephalopathy
(BSE), commonly known as “mad cow” disease—that
alerted people to the possible dangers lurking in the food
supply. Experts agreed that beef from cows with the dis-
ease was perfectly safe; then dozens of people died. Bio-
tech firms will have difficulty convincing Europeans to
consume GMOs in the absence of long-term statistical
evidence from third parties supporting their safety claims.
Exacerbating the issue is the persistent view in Europe
that the United States continues to engage in a unilateral—
some would say imperial—foreign policy. Regardless of the
ongoing battle over GMOs, many people in Europe support
challenging U.S. positions as a matter of principle—as a
demonstration of European strength and cultural unity.
These strong views will continue to influence European
consumer choices no matter the outcome of the current
dispute. Resistance by European customers to all U.S. foods
could overshadow any GMO benefits to the U.S. economy
if, for example, the labeling provision is not upheld. The
EU also argues that U.S. corporations are squeezing farm-
ers around the world through their control of exporting and
processing activities with the goal of developing a lower-
cost, vertically integrated global supply chain.
European and North American protesters have been
seen with banners calling genetically modified products
“Frankenfoods,” a label that deliberately associates them
with frightening and unpredictable risks. Europe formally
adopted a “precautionary principle” (described below)
that takes a cautious approach to the approval of new
bioengineered food, assuming that there may be unfore-
seen effects unless proven otherwise.
The EU argues the United States is motivated exclu-
sively by economic considerations and that the U.S. gov-
ernment is responding only to the agribusiness and biotech
firms that stand to gain financially if current restrictions
are lifted. For example, in 2003, ten agricultural conglom-
erates, many of which are active in GMOs, owned almost
40 percent of the world’s seed market.17 According to
Martin Rocholl, director of Friends of the Earth Europe,
“The U.S. Administration, funded by the likes of GMO
giant Monsanto, is using the undemocratic and secretive
WTO to force-feed the world foods containing GMOs.
Decisions about the food we eat should be made in Europe
and not in the White House, the WTO or Monsanto’s HQ.
We welcome the European Commission’s commitment to
fight this aggressive U.S. policy and ensure that Europe’s
wildlife and people are protected from the threats of GM
crops.”18
Since the WTO’s 2006 decision, which ruled the EU’s
ban on genetically modified products illegal, the EU has
fought to control the presence of GMOs on its own turf.
Under the SPS Agreement, the EU originally banned all
genetically modified products on the grounds that they
could not be proven “safe.” However, the WTO decision
claimed that enough evidence is now available to perform
adequate risk assessments of genetically modified prod-
ucts and, furthermore, that most existing risk assessments
do not provide enough of a reason for banning such prod-
ucts.19 The EU’s new authorization process will likely be
the stage for new disputes regarding the international sale
of genetically modified products.
GMOs are starting to become more prevalent in
Europe, with GMO crop area expected to increase over
the next decade. “It will be slow but within 10 years
GMOs will have reached the point of no return,” said
Jean-Michel Duhamel, Monsanto’s director for southern
Europe.20 But common anti-GMO sentiment is still
strong. Some European companies, such as Unilever, pro-
duce genetically modified products, but they don’t sell
those products in Europe because of consumer opposi-
tion. Germany’s Metro AG chain, like other major Euro-
pean grocery stores, doesn’t allow bioengineered
ingredients in its store brands.21 Labeling rules proposed
to replace the ban have generated heated responses from
European GMO opponents. Greenpeace promised to mar-
shal thousands of volunteers throughout Europe to police
grocery stores in the weeks that follow the launch of
labeling. “If consumers start buying it and get used to it,
we will lose,” says Dan Hindsgaul, the head of Green-
peace’s effort. In 2006, Greenpeace sent a petition, call-
ing all EU member states to alter their GMO-labeling
rules to include products such as meat, eggs, and milk,
which come from animals that are fed with genetically
modified products. According to Greenpeace, the typical
diet of a farm animal in Europe consists of up to 30
percent GMOs.22
4 Skill-Building and Experiential Exercises
The reluctance of key foreign trading partners—the EU,
Japan, and other nations—to import genetically modified
products has become a significant problem for American
farmers as they compete in the international marketplace.
(In 2003, Australia joined the United States as a third-
party supporter in the WTO dispute against the EU over
the ban on GMO products. Australia is a minor producer
of GMO crops, including cotton and carnations.23 Support
for GMOs in Australia primarily comes from the national
government, while state governments and public opinion
tend to oppose GMOs.) In the United States, genetically
modified crops, including corn and soybeans, are now
planted on millions of acres of farmland. If current
restrictions on genetically modified foods aren’t lifted,
American farmers will lose millions of dollars from
unusable crops. In March 2004, the American Soybean
Association (ASA) stepped forward to take a lead role in
preparing the WTO challenge of the EU’s labeling ban.
In addition, the ASA claims the labeling threshold of
0.9 percent is too stringent and lacks statistical backing.
Also worsening the farmers’ plight is the fact that world-
wide commodity prices have dropped over the past decade.24
Developing Countries
In developing countries, farmers have been resisting pres-
sure to grow bioengineered crops—even if they could
improve their productivity and reduce hunger—for fear of
losing their European market.
GMO supporters believe that the modified organisms
can resist certain viruses and extreme temperatures,
enabling crops to survive with less energy than is nor-
mally required with nonmodified seeds. This ability could
be very useful in regions that don’t have much fertile soil
and lack other usable resources. More abundant yields
would help feed the large population in most developing
countries. For example, yields could be increased by
growing insect-resistant crops in regions where bugs have
seriously restricted outputs. Proponents believe that foods
containing GMOs will be able to alleviate starvation and
hunger in needy places. The United States insists that
GMOs do not pose a risk to developing nations because
the seeds are destined for consumption, not planting.25
GMO crops are also considered by some to be better for
regions such as Africa where lack of education and train-
ing in the use of fertilizers and other modern farming
techniques hampers agricultural development. Transgenic
crops make up for this lack of education because the tech-
nology to control insects is already packaged in the seeds
and farmers just have to plant them.
Skeptics argue that the skewed food distribution sys-
tem, not lack of access to GMOs, is responsible for food
shortages in developing countries. According to this view,
developing countries are underfed because most of the
food that they generate is sold in the export market to the
wealthy developed nations. Furthermore, they question
Substantial Equivalence and
the Precautionary Principle
The issue of scientific proof has been a major point of
contention. At the heart of the debate are the concepts of
substantial equivalence and the precautionary principle.
The term substantial equivalence was first mentioned in
a 1993 Organization for Economic Cooperation and
Development (OECD) report on the safety of biotechnol-
ogy. Members of the OECD agreed that the most practical
approach to determining the safety of foods derived by
biotechnology is to consider whether they represent a
“substantial equivalent” to analogous traditional products.
The term substantial equivalence was borrowed from the
U.S. Food and Drug Administration’s (FDA) definition of
a class of new medical devices that do not differ materi-
ally from their predecessors and thus do not raise new
regulatory concerns. However, after considering the pos-
sible unseen effects of foods that contain GMOs, the EU
argues that it is difficult to directly apply the FDA defini-
tion of substantial equivalence in this case. The concept
of substantial equivalence was applied for the first time
to a GMO in the safety assessment of the Flavr Savr
tomato before it went to market in 1994. Data collected
revealed that the modified tomato was equivalent to the
nonmodified parent plant, and genetically modified toma-
toes were accepted under FDA rules.
The EU adopted an approach to health and safety risks
known as the “precautionary principle.” In common par-
lance, this approach may be summed up as, “Better safe
than sorry.” Under this policy, new products are not
assumed to be safe unless scientifically shown to be so.
According to some in the EU, there is little scientific,
third-party evidence that shows foods containing GMOs
are safe for consumption. The precautionary principle
thus provides justification for restricting GMOs unless
they can be shown to be safe in all respects.
Biotech and Agricultural Firms
Because of their international reach, several large U.S.
firms, including Monsanto and DuPont, that support bio-
tech and use biotech crops in their products have pressed
the U.S. government to take a strong stand on the issue.
The United States is the largest agricultural exporter in
the world, and U.S. officials argue that trade restrictions
of any kind will only undermine an already sluggish
global economy. At stake for large biotech multinationals
is a substantial amount of future commerce. These firms
have claimed huge losses since the EU ban was put into
effect in 1998, projecting that the ban has cost them close
to $300 million annually. U.S. government policy has
been supportive of biotech firms and a strong advocate of
their ability to help alleviate famine in developing coun-
tries by producing more abundant yields in areas notori-
ous for infertile soil and a lack of other resources.
In-Class Simulation 1. “Frankenfoods” or Rice Bowl for the World: The U.S.-EU Dispute over Trade in Genetically Modified Organisms 5
how poor developing countries will be able to afford the
genetically modified seeds. U.S. agricultural firms own
the patents, and the suspicion is widespread that U.S.
companies will limit the availability of nonmodified seeds
in order to support the sale of modified ones. Also, many
people in the developing world remain skeptical about the
health effects. In late June 2002, Zambia’s minister of com-
merce, trade, and industry, Dipak Patel, proclaimed that
African nations would not accept genetically modified food
until it has been proved safe for human consumption.26
South Africa, one of only a few African nations that
allow the planting of genetically modified crops, is expected
to test a strain of genetically modified maize in late 2007.
The prospects for GMOs in Africa, especially maize, could
be on the rise since the 2006 maize streak virus, which
destroyed anywhere between 5 and 100 percent of African
farmers’ crops.27
In Brazil, controversy surrounded President Lula da
Silva’s Provisionary Measure 131, which authorized the
commercialization of genetically modified soy. Opponents
of GMOs in Brazil suggested that the governing admin-
istration, notorious for bribery and scandals, was influ-
enced by its relationship with Monsanto, which owns the
patent on the most popular genetically modified soy.
Brazilian legislators agreed and proposed that genetically
modified soy in Brazil be burned and replaced with con-
ventional crops beginning in February 2004. Later, under
pressure from some farming interests, the legislators
reversed position, and genetically modified crops and
seeds are now permitted.
The UN Cartagena Protocol, an agreement intended to
educate emerging-market countries about the benefits and
risks of genetically modified products, was activated in
June 2003 when the Republic of Palau became the 50th
country to ratify the bill. The agreement is designed to
help educate emerging-market countries about the risks of
proliferated GMOs.
Simulation Instructions
You will be assigned to one of six groups:
1. The U.S. government.
2. The European Union.
3. A consortium of companies that manufacture or use
GMO products, including Monsanto and Cargill.
4. A group of interested developing countries.
5. A group of nongovernmental organizations (NGOs)
opposed to the exchange of GMO products.
6. A WTO Dispute Settlement Panel.
Participants should spend 20 to 30 minutes reviewing
the case and formulating arguments that advance the
agenda of their group. Refer to the “GATT/WTO Princi-
ples” section below and to the background material above
for information. After the initial session, groups whose
interests may be similar may consult with each other for
an additional 10 to 15 minutes to coordinate presentations
and minimize duplication. For example, the consortium of
GMO companies might consult with the U.S. government.
The WTO Dispute Settlement Panel is composed of
“judges” and should be treated respectfully. Each group
should make an opening presentation of no more than 10
minutes to the WTO panel. The presentation should sum-
marize the main points of the argument and urge a par-
ticular decision by the panel. Panel members may then ask
questions of the groups for an additional 15 minutes. After
each group presents its argument, the WTO panel will
deliberate for 20 minutes and present its findings.
The issue for decision by the WTO Dispute Settlement
Panel is whether the EU prohibition on imports of genet-
ically modified products is consistent with WTO princi-
ples. Depending on the ruling in this matter, the WTO
panel may offer specific remedies for how the ruling
should be implemented. Further, the panel may wish
to consider whether the proposed labeling and origin
requirements (which in theory would allow the resumption
of imports of genetically modified products) would or
would not resolve the dispute, and whether this ban itself
would be consistent with WTO principles.
GATT/WTO Principles:
General Obligations
The General Agreement on Tariffs and Trade (now the
World Trade Organization) was founded after World War II
to establish rules for international trade practices and to
resolve disputes among nations. Two fundamental prin-
ciples govern most GATT/WTO provisions: most-favored-
nation treatment and national treatment. National treatment
refers to the obligations of the contracting parties to treat
the nationals of foreign countries no less favorably than
they treat the nationals of their own country. A more com-
mon term for this obligation is “nondiscrimination.” The
GATT/WTO also requires that the parties extend most-
favored-nation treatment to other parties, so that some
countries are not treated more favorably than others. Dis-
pute settlement resolution (when one or more countries
accuse another contracting party of violating GATT/WTO
rules) is carried out by three- to five-member panels that
render reports (decisions).
Exceptions
The GATT/WTO provides for limited exceptions to the
above-mentioned obligations. For example, preferential
trade agreements such as the EU and NAFTA are permit-
ted to extend better than most-favored-nation treatment to
their members under certain conditions. There are also
“general” exemptions, which excuse otherwise illegal
actions if they are designed to protect public morals, pre-
serve national heritage, and limit commerce in goods made
6 Skill-Building and Experiential Exercises
Questions for Discussion After
Conclusion of Simulation
1. How does your solution compare to your expecta-
tion of the likely actual outcome? What is different
or similar in the two approaches?
2. How would you characterize the cultures of Europe
(France and Germany) and the United States in
terms of Hofstede’s scheme? In what ways are the
cultures similar, and in what ways do they differ?
How might the differences influence approaches to
disputes like this one?
3. Why would an approach emphasizing “substantial
equivalence” result in an outcome different from the
outcome of a policy driven by the “precautionary
principle”?
4. How might the United States and EU resolve differ-
ences such as this in the future?
Source: © McGraw-Hill Irwin. This simulation was prepared by
Professor Jonathan Doh as the basis for class discussion. It is not
intended to illustrate either effective or ineffective managerial capabil-
ity or administrative responsibility.
ENDNOTES
1. Scott Miller, “EU’s New Rules Will Shake
Up Market for Bioengineered Food,” Wall
Street Journal, April 16, 2004, p. A1.
2. Kerry Capell, “The Genetically Modified
Food Fight,” BusinessWeek Online, July
21, 2003, bw.com/news/941856.
asp?0dm5C18LB.
3. Elizabeth Becker, “U.S. Contests Europe’s
Ban on Some Food,” New York Times, May 13,
2003, p. B4.
4. Nina V. Fedoroff, “Genetically Modified
Foods: Making the Earth Say Beans,” Sci-
ence Journal, Penn State Eberly College of
Science, vol. 26, Spring 2007.
5. Bacillus thuringiensis, www.bt.ucsd.edu.
6. John Hulsman, “Cherry-Picking: U.S.
and European Relationship,” Heritage
Foundation, www.heritage.org/research/
tradeandforeignaid/tst061103.cfm.
7. Mark Drajem, “EU Pledges to Begin
Approving Gene-Modified Crops This Year,”
Bloomberg News, June 17, 2003.
8. Jeremy Rifkin, “The Fight over GMO Crops
Exposes the Weaknesses of Globalization,”
The Guardian, June 2, 2003, p. 16.
9. Becker, “U.S. Contests Europe’s Ban on
Some Food.”
with prison labor. Although the word environment is never
mentioned, the GATT/WTO does offer a basis for deviat-
ing from GATT/WTO principles in support of environ-
mental protection. Specifically, Article XX holds that the
GATT/WTO does not prevent contracting parties from
taking actions (1) necessary to the protection of human,
animal, or plant life or health and (2) relating to the con-
servation of exhaustible natural resources—provided trade
measures affecting international commerce are joined by
restrictions on domestic production or consumption.
The Uruguay Round agreement established agree-
ments on the application of sanitary and phytosanitary
(SPS) measures and technical barriers to trade (TBT).
SPS measures are those necessary to safeguard human,
animal, and plant health. Typically, when applied by an
individual country, they are designed to safeguard its
citizens, animal and plant industries, and environment
against the risks posed by exotic pests and diseases, and
against general threats to health entering from outside,
and to control the incidence and spread of pests and dis-
eases already present.
These agreements established the basis for reducing or
eliminating nontariff regulatory barriers unless they respect
scientifically substantiated and internationally recognized
standards and conformance procedures and technical and
labeling regulations. As applied to international trade,
SPS protocols include a range of control measures—
for example, import requirements; methods of treatment,
manufacture, handling and packaging, and storage; inspec-
tion and certification requirements; and in some cases
outright import bans on some products from certain areas.
The major areas covered are plant quarantine measures,
animal quarantine measures, and food safety standards.
Thus, governments may restrict imports of products that
have been found to pose health or safety risks, based on
sound, scientific evidence. Specifically, SPS measures
must be designed to accomplish one or more of the fol-
lowing objectives:
1. To protect animal or plant life or health within the
territory of the member from risks arising from the
entry, establishment, or spread of pests, diseases,
disease-carrying organisms, or disease-causing
organisms.
2. To protect human or animal life within the territory
of the member from risks arising from additives,
contaminants, toxins, or disease-carrying organisms
in food, beverages, or feedstuffs.
3. To protect human life or health within the territory
of the member from risks arising from diseases car-
ried by animals, plants, or products thereof, or from
the entry, establishment, or spread of pests.
4. To prevent or limit other damage within the terri-
tory of the member from the entry, establishment,
or spread of pests.
In-Class Simulation 1. “Frankenfoods” or Rice Bowl for the World: The U.S.-EU Dispute over Trade in Genetically Modified Organisms 7
10. Regulatory Compliance Systems, LLC,
“Precautionary Principle will ‘Run in Place’
in 2007, Trade Expert Predicts,” Pesticide.net
Insider eJournal 4, no. 2 (January 30, 2007).
11. Jerry Perkins, “Iowa StarLink Costs $9.2
Million—Aventis CropScience Pays Claims
to Farmers, Elevators,” Des Moines Register,
September 15, 2001.
12. The Center for Urban Education about Sus-
tainable Agriculture (CUESA), “News about
Our Food’s Genes,” Weekly Newsletter,
March 3, 2007.
13. Sara Fitzgerald, “Putting the EU in Its Place:
Why Filing a GMO Case with the WTO Is
Crucial,” Heritage Foundation, www.heritage.
org/research/Europe/em855.cfm.
14. GMO Compass, “Majority of Europeans
Believe Biotech Will Improve Quality of
Life,” June 20, 2006, www.gmo-compass.org/
eng/news/messages/200606 u.html.
15. John Connor, “GM Corn Variety Classed as
Safe,” New Zealand Herald, July 7, 2002,
p. A6.
16. Becker, “U.S. Contests Europe’s Ban on
Some Food.”
17. John Schoen, “Is This Biotech Boom for
Real?” www.msnbc.com/news/930313.
asp?0dm=L1BmB, June 23, 2003.
18. Press release from Friends of the Earth
Europe, www.foeeurope.org/press/2003/
AW_18_Aug_GMO_trade_war.htm,
August 18, 2003.
19. Regulatory Compliance Systems, “Precaution-
ary Principle will ‘Run in Place’ in 2007.”
20. Sybille de La Hamaide, “Europe GMO Area
to Surge over 10 Years: Monsanto,” Reuters,
June 25, 2007.
21. Miller, “EU’s New Rules.”
22. “Better GMO Labelling Backed by a Million
Europeans,” Euractiv.com, February 5, 2007.
23. “Australia Struggles to Win Support for
GMO Crops,” Reuters, March 10, 2005.
24. Interview with Keith Dittrich, president of
the American Corn Growers Association,
June 12, 2003.
25. Arpad Pusztai, “Genetically Modified Foods:
Are They a Risk to Human/Animal Health?”
http://www.mindfully.org/GE/GE2/
Pusztai-Risk-To-Health.htm.
26. Daniel Levine, “Mapping a New Plan for
Biotech,” San Francisco Business Times,
March 10, 2003, p. 12.
27. Crystal Davis, “Genetically Modified Crops
May Boost African Agriculture,” Earth
Trends, World Resources Institute, January 16,
2007, earthtrends.wri.org/updates/node/142.
1
This simulation is designed to develop skills at interna-
tional negotiation with an emphasis on cross-cultural
communication and negotiation.
Case Summary
During the NAFTA negotiations, many U.S. firms were con-
cerned about the reduction of U.S. tariffs on flat glass, which
averaged 20 percent, and the perceived competitive advan-
tages Mexican glass firms would have in the event these
tariffs were removed. In the fall of 1991, in the midst of the
NAFTA negotiations, Vitro S.A., the $3 billion Mexican
glassmaker, signed a tentative $800 million joint venture
with Corning Inc. Two mirror companies were established—
Corning-Vitro and Vitro-Corning—and each company took
an equity stake in each of these joint-venture firms. In addi-
tion, the two parent companies agreed to a series of market-
ing, sales, and distribution relationships to support the
activities of each of the new companies.1 Two years later,
the joint venture was in distress, and some of the interested
parties were suggesting that it be dissolved. This simulation
provides participants with an opportunity to undertake nego-
tiations designed to resolve these differences.
Background
Vitro Sociedad Anonima is a 100-year-old Mexican com-
pany with roughly $3.5 billion in sales and 40,000 employ-
ees. As Vitro positioned itself to take advantage of the
emerging North American market, CEO Ernesto Martens-
Rebolledo described the tightrope the company must walk:
“We don’t want to lose our identity as a Mexican company
with a unique culture and relationship with our employ-
ees, but we don’t want to be battered in the world
marketplace either.”2 In 1989, Vitro completed a hostile
takeover of Anchor Glass Container Corporation, and in
1992, Vitro laid off some 3,000 workers, an unusual move
in Mexico at that time, given traditional notions about
labor-management relations and job security.
Corning, an upstate New York maker of glass, traces its
roots back to the mid-1800s. In recent years, Corning has
diversified into fiber optics and other high-technology
applications of glass, ceramics, and composite materials.
During the 1980s, Corning’s business increasingly relied
on sales of fiber optics to telecommunications firms. These
firms were beginning construction of the new infrastructure
to support high-speed voice and data transmission. At the
same time, sales of household, flat glass, and other tradi-
tional glass products remained important to the company.
NAFTA and Glass3
During the early part of NAFTA negotiations (1989–1991),
U.S. makers of household and flat glass products expressed
concern about their ability to compete against cheaper
Mexican imports, and some even accused Corning S.A.
of unfair trading practices. Guardian Industries Corp., a
Michigan-based manufacturer of float glass—the high-
quality flat glass used in mirrors, insulated windows, fur-
niture, and automobiles—complained that Vitro, the only
Mexican producer of float glass, was engaged in anticom-
petitive practices by trying to intimidate a Mexican glass
distributor that was considering buying a product from
Guardian. Vitro exported approximately $120 million in
float glass and related products to the United States in
1990. Other glassmakers argued that even with present U.S.
duties averaging over 20 percent on household glassware
from Mexico, the after-duty prices of the Mexican products
were significantly below those of U.S. producers, owing in
large part to considerably lower labor and energy costs.
In February 1991, the International Trade Commission
(ITC) issued a report on these allegations. Vitro Crisa (an
operating subsidiary of Vitro S.A.) allegedly priced its
glass beverageware at about 20 to 30 percent below that
of U.S. producers in the U.S. market. Vitro Crisa’s lower
productivity relative to U.S. industry, said the ITC, was
offset by considerably lower labor costs (about $1.50 an
hour versus $15 an hour in 1987 in the United States),
which constituted nearly half of the production costs of
the U.S. household glassware industry. The cost of natural
gas, another major production input, was about 15 percent
lower in Mexico.
Problems Arise4
“Vitro and Corning share a customer-oriented philosophy
and remarkably similar corporate cultures.” This was the
characterization of the joint venture offered at the time by
Julio Escamez, a Vitro executive. Both companies had long
histories of successful joint ventures. Corning Inc. had been
an innovative leader in foreign alliances for over
73 years. One of the company’s first successes was an alli-
ance with St. Gobain, a French glassmaker, to produce
Pyrex cookware in Europe during the 1920s. Corning has
In-Class Simulation
2. Cross-Cultural Conflicts in the Corning-Vitro Joint
Venture
2 Skill-Building and Experiential Exercises
The Mexicans sometimes thought Corning moved too
fast; the Americans felt Vitro was too slow.
Cultural differences generally, said Richard Sinkin, the
corporate consultant, are “the No. 1 problem for doing
business in Mexico.” That may be an exaggeration, but it
underscores the difficulty of transferring a culture across
the border. Sinkin’s own experience bears that out. He is
bilingual and often works in Mexico but finds that it isn’t
always easy to get paid because the Mexican view of con-
tracts differs markedly from the view commonly held in
the United States. In Mexico, the terms of a contract “are
kind of ideal things that you strive to achieve,” Sinkin said,
“while in the U.S. they are law.” In general, corporate style
is more formal in Mexico than in the United States. Titles
are common, and nearly everyone is “licenciado,” which
loosely refers to having any professional training. Forget-
ting the honorific can be seen as a serious insult.
In Mexico, executives can expect the unquestioned loy-
alty of employees, but outsiders are often viewed with
mistrust. Horace E. Scherer, director general of Hobart
Dayton Mexicana, the Mexican subsidiary of the Hobart
Corporation, said his salespeople must often make four
trips to complete one transaction because of that lack of
trust. To sell the company’s scales and other equipment,
a salesperson starts with a visit to the client’s top official.
If a sale is made, a representative of the company itself
must deliver the goods because the customer won’t accept
delivery from DHL or some other service. If all the papers
are in order on delivery, the company representative is
told to come back on an appointed day to present an
invoice, in person; if the invoice is accepted, an appoint-
ment is made for the rep to return to receive payment.
Many companies that have formed joint ventures end up
creating their own new corporate culture, taking bits and
pieces from each side. At Vitro-Whirlpool in Monterrey,
assembly-line workers have a long tradition of taking what
in Mexico is referred to as “el puente,” or the bridge, which
commonly extends a formal holiday into a mini-vacation.
When, for instance, Mexico’s version of Mother’s Day fell
on Tuesday, May 10, workers did not show up on Monday,
bridging the gap to the holiday. (If an American holiday
falls on a Tuesday, of course, absenteeism will be high on
Monday, but in Mexico the custom is far more entrenched—
and can even shut a plant down.) The company now allows
workers to take the “puente,” but only if they agree to work
an extra hour each day for eight days beforehand.
Because their corporate conversations can be filled with
so many feints and pleasantries, Mexicans often use memos
to convey dissatisfaction. When Labatt’s (the Canadian
brewer) Mexican manager, Noel Trainor, decided to cut
back employees’ lunch from two hours to one, he had to do
it in a memo that all 30 employees had to sign. Trainor said
he abided by a strict holiday policy, priding himself on the
degree to which his compatriots had been able to adapt to
the expectations of the United States and seemingly only
formed approximately 50 ventures over the years. Only nine
failed (dissolved), an impressive number considering one
recent study found that over one-half of foreign and national
alliances do not succeed. From 1985 to 1990, Corning’s
sales from joint ventures were over $3 billion, contributing
more than $500 million to its net income. Corning enters
into joint ventures primarily to gain access to markets that
it cannot penetrate quickly enough to obtain a competitive
advantage. In addition, both companies were globally ori-
ented, and both had founding families still at their centers.
Yet the joint venture became subject to a series of cultural
and other conflicts that began to undermine this vision.
U.S.-Mexico Alliances5
“There are many reasons why corporate marriages between
Mexican and U.S. companies fail,” says Richard Sinkin,
managing director of InterAmerican Holdings, a consul-
tancy based in San Diego, California, that advises U.S.
companies doing business in Mexico. Sinkin says that U.S.
and Mexican companies often get together for the wrong
reasons. Unless the two partners contribute essential quali-
ties to the marriage, the alliance soon founders. The second
difficulty is corporate control. “Most Mexican firms are
still run as family businesses,” Sinkin says, “and these
firms are often reluctant to share control with an outside
investor.”
In the case of the Corning-Vitro JV, Corning managers
said that they were sometimes left waiting for important
decisions about marketing and sales because in the
Mexican culture, only top managers could make them and
at Vitro those people were busy with other matters. Vitro’s
sales approach was less aggressive than Corning’s, the
remnant of years in a closed economy, and was sometimes
at odds with the pragmatic approach Corning had devel-
oped over decades of competition.
NAFTA and Alliances6
To varying degrees, such cultural issues have plagued many
mergers and alliances with their roots in the North Ameri-
can Free Trade Agreement. “Mexico initially appears to be
the United States except that people speak Spanish,” said
Harley Shaiken, a labor economist who often works in
Mexico. “That’s just not the case, which everyone finds out
in the short term rather than the long term.” The trade pact
may have created false expectations about how much like
the United States Mexico has become. In discussing cul-
tural differences, it’s difficult not to slip into stereotypes
about “mañana”—Mexicans who move at a slower pace.
But what the gap separating the two business cultures really
amounts to is a different approach to work, reflected in
everything from scheduling to decision making to etiquette.
In the Corning venture, the Mexicans sometimes saw
the Americans as too direct, and Vitro managers, in their
dogged pursuit of politeness, sometimes seemed to the
Americans unwilling to acknowledge problems and faults.
In-Class Simulation 2. Cross-Cultural Conflicts in the Corning-Vitro Joint Venture 3
companies over whether to stay in or dissolve the JV.
Groups 1 and 3 should consider the following:
1. The logic and original rationale for the JV.
2. How that logic may still hold.
3. How the JV could be made to work better.
Groups 2 and 4 should consider the following:
1. What caused the JV relationship to sour.
2. Why the partner has not lived up to expectations.
3. What the terms of dissolution should be.
Each company agrees on a position to bring forward to
the partner. This position need not necessarily be a demand
to maintain the joint venture or to dissolve it; rather it could
be a contingency laying the conditions for maintaining the
relationship, or demands for how it should be dissolved.
Once each company has decided on its position, representa-
tives from each Corning group (two to four representatives
total) will meet with their counterparts from the Vitro groups.
Negotiation 2
Each company must decide, collectively, through negotia-
tion, whether to remain within the joint venture or dis-
solve it. The representatives from each company have
60 minutes to reach some resolution. They must consult
with the remainder of their company throughout the nego-
tiation to ensure support for the outcome. The main issues
for consideration include:
1. The logic and original rationale for the JV.
2. How that logic may still hold.
3. How the JV could be made to work better.
4. What caused the JV relationship to sour.
5. Why the partner has not lived up to expectations.
6. Whether the JV should be terminated and, if so,
what the terms of dissolution should be.
Ultimately, issue 3 or 6 must be resolved. Any solution,
whether to maintain the JV, dissolve it, or some hybrid
approach, should be comprehensive and address these
elements:
∙ Financial structure: Terms for financing existing or
new ventures under the arrangement or payments for
dissolution of the relationship.
∙ Governance: Board, management, or other top-level
changes in ownership and leadership under the pres-
ent or revised relationship.
∙ Marketing: Agreements about marketing, distribu-
tion, and sales relationships either under the current
arrangement or in any new structure.
∙ Competition/cooperation: Changes in the way in
which each company operates in the other’s territo-
ries or markets.
half aware of the degree to which he had compromised. “We
only give what we are obligated by law to give,” he said,
“and of course half a day on Mother’s Day.”
Financial and Commercial Concerns7
Added complications emerged from the relatively strong
peso, increased overseas competition, and a reconsidera-
tion of marketing strategies by both companies. The joint
ventures suffered from the different administrative prac-
tices of the two companies. “Managing from two countries
was more complicated than we anticipated,” said Corning.
“There were different (management) structures, styles and
accounting systems.” Corning said the different needs of
customers in the United States and Mexico complicated
the integration of sales and distribution. Corning’s U.S.
customers, especially the large discount stores, expect the
timely and regular delivery of products packaged in a cer-
tain way; Vitro’s Mexican customers are less demanding.
In 1992, Corning-Vitro had sales of approximately
$700 million, and Vitro-Corning achieved turnover of
about $230 million.
Issues for Decision
As a result of cultural clashes, failure to integrate comple-
mentary product lines, and disappointing sales, both Corn-
ing and Vitro are contemplating dissolving the joint
ventures. Within the two companies, however, there are
those who support maintaining the relationship, and others
who oppose it. Corning and Vitro must first decide on
whether they want to remain in the joint ventures and, if
they do, under what conditions. If they decide to dissolve
the relationship, they must negotiate the terms of the dis-
solution. If they decide to remain in the arrangement, some
changes must be made to address the growing problems.
Simulation Instructions
You will be assigned to one of four groups.
The groups are ad hoc. Each group represents an ad-hoc
committee appointed by the CEO of each company to make
recommendations about the future of the alliance. The
groups’ initial positions can be characterized as follows:
1. Vitro—supports keeping JVs
2. Vitro—against keeping JVs
3. Corning—supports keeping JVs
4. Corning—against keeping JVs
Negotiation 1
The initial negotiation occurs within each company.
Hence, Vitro Groups (1 and 2) discuss their differing
positions, and Corning Groups (3 and 4) exchange their
views with each other. Each pair of groups (1∕2 + 3∕4)
should decide whether their company wants to remain
within the joint venture or dissolve it. Each pair of
groups has 45 minutes to negotiate within the respective
4 Skill-Building and Experiential Exercises
Questions for Discussion After
Conclusion of Simulation
1. Compare your solution to the joint venture’s prob-
lems with the actual outcome. What is different or
similar in the two approaches?
2. How would you characterize the Mexican and U.S.
culture in terms of Hofstede’s scheme (see Table 1)?
In what ways were the cultures similar and in what
ways were they different?
3. Compare Corning-Vitro’s problems to those of some
of the other international joint ventures described in
this simulation. How were they similar, different,
and more or less challenging?
4. How have other companies in Mexico and Latin
America addressed these cultural divisions in the
recent past? How should they do so as they go for-
ward with comprehensive regional Latin American
strategies?
Source: © McGraw-Hill Irwin. This simulation was prepared by
Jonathan Doh of Villanova University as the basis for class discussion.
It is not intended to illustrate either effective or ineffective managerial
capability or administrative responsibility.
ENDNOTES
1. “Glassmakers’ Complaints Aired in NAFTA
Hearings,” LDC Debt Report/Latin American
Market, September 9, 1999, p. 10.
2. Nancy A. Nichols, “From Complacency to
Competitiveness: An Interview with Vitro’s
Ernesto Martens,” Harvard Business Review,
September–October 1993, p. 162.
3. “Glassmakers’ Complaints Aired in NAFTA
Hearings.”
4. Anthony Depalma, “It Takes More than a
Visa to Do Business in Mexico,” New York
Times, June 26, 1994, sec. 3, p. 5.
5. Leslie Crawford, “Anheuser’s Cross-Border
Marriage on the Rocks: Modelo Deal Is the
Latest U.S.-Mexican Partnership to Be Soured
by Disagreement,” Financial Times, March 18,
1998, p. 46.
6. Depalma, “It Takes More than a Visa.”
7. John Holusha, “Corning to Buy Northern
Telecom Assets,” New York Times, December
16, 1993, sec. D, p. 4.
Table 1
Hofstede’s Cultural Ratings for the United States and Key Latin Countries
Power Uncertainty
Distance Avoidance Individualism Masculinity
United States 40 46 91 62
Mexico 81 82 38 69
Canada 39 48 80 52
Argentina 49 86 46 56
Brazil 69 76 38 49
Colombia 67 80 13 64
Peru 64 87 16 42
Venezuela 81 76 12 73
Spain 57 86 51 42
Portugal 63 104 27 31
Source: Geert Hofstede, Culture’s Consequences: International Differences in Work-Related Values (Beverly Hills, CA: Sage, 1980).
Cover
Title Page
Copyright Page
Dedication
Preface
About the Authors
Brief Contents
Table of Contents
Part One Environmental Foundation����������������������������������������
1 Globalization and International Linkages�������������������������������������������������
The World of International Management: An Interconnected World���������������������������������������������������������������������
Introduction�������������������
Globalization and Internationalization���������������������������������������������
Globalization, Antiglobalization, and Global Pressures for Change������������������������������������������������������������������������
Global and Regional Integration��������������������������������������
Changing Global Demographics�����������������������������������
The Shifting Balance of Economic Power in the Global Economy�������������������������������������������������������������������
Global Economic Systems������������������������������
Market Economy���������������������
Command Economy����������������������
Mixed Economy��������������������
Economic Performance and Issues of Major Regions�������������������������������������������������������
Established Economies����������������������������
Emerging and Developing Economies����������������������������������������
Developing Economies on the Verge����������������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Answers to the In-Chapter Quiz�������������������������������������
Internet Exercise: Global Competition in Fast Food���������������������������������������������������������
Endnotes���������������
In the International Spotlight: India��������������������������������������������
2 The Political, Legal, and Technological Environment������������������������������������������������������������
The World of International Management: Social Media and Political Change�������������������������������������������������������������������������������
Political Environment����������������������������
Ideologies�����������������
Political Systems������������������������
Legal and Regulatory Environment���������������������������������������
Basic Principles of International Law��������������������������������������������
Examples of Legal and Regulatory Issues����������������������������������������������
Privatization��������������������
Regulation of Trade and Investment�����������������������������������������
Technological Environment and Global Shifts in Production����������������������������������������������������������������
Trends in Technology, Communication, and Innovation����������������������������������������������������������
Biotechnology��������������������
E-Business�����������������
Telecommunications�������������������������
Technological Advancements, Outsourcing, and Offshoring��������������������������������������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Hitachi Goes Worldwide������������������������������������������������
Endnotes���������������
In the International Spotlight: Greece���������������������������������������������
3 Ethics, Social Responsibility, and Sustainability����������������������������������������������������������
The World of International Management: Sustaining Sustainable Companies������������������������������������������������������������������������������
Ethics and Social Responsibility���������������������������������������
Ethics and Social Responsibility in International Management�������������������������������������������������������������������
Ethics Theories and Philosophy�������������������������������������
Human Rights�������������������
Labor, Employment, and Business Practices������������������������������������������������
Environmental Protection and Development�����������������������������������������������
Globalization and Ethical Obligations of MNCs����������������������������������������������������
Reconciling Ethical Differences across Cultures������������������������������������������������������
Corporate Social Responsibility and Sustainability���������������������������������������������������������
Corporate Governance���������������������������
Corruption�����������������
International Assistance�������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Endnotes���������������
In the International Spotlight: Cuba�������������������������������������������
Brief Integrative Case 1.1: Advertising or Free Speech? The Case of Nike and Human Rights������������������������������������������������������������������������������������������������
Endnotes���������������
Brief Integrative Case 1.2: TOMS Puts Its Right Foot Forward�������������������������������������������������������������������
Endnotes���������������
In-Depth Integrative Case 1.1: Student Advocacy and "Sweatshop" Labor: The Case of Russell Athletic����������������������������������������������������������������������������������������������������������
Endnotes���������������
In-Depth Integrative Case 1.2: The Ethics of Global Drug Pricing�����������������������������������������������������������������������
Endnotes���������������
Part Two The Role of Culture�����������������������������������
4 The Meanings and Dimensions of Culture�����������������������������������������������
The World of International Management: Culture Clashes in Cross-Border Mergers and Acquisitions������������������������������������������������������������������������������������������������������
The Nature of Culture����������������������������
Cultural Diversity�������������������������
Values in Culture������������������������
Values in Transition���������������������������
Cultural Dimensions��������������������������
Hofstede���������������
Trompenaars������������������
Integrating Culture and Management: The GLOBE Project������������������������������������������������������������
Culture and Management�����������������������������
GLOBE's Cultural Dimensions����������������������������������
GLOBE Country Analysis�����������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Renault-Nissan in South Africa��������������������������������������������������������
Endnotes���������������
In the International Spotlight: South Africa���������������������������������������������������
5 Managing Across Cultures���������������������������������
The World of International Management: Taking a Bite Out of Apple: Corporate Culture and an Unlikely Chinese Start-Up����������������������������������������������������������������������������������������������������������������������������
The Strategy for Managing across Cultures������������������������������������������������
Strategic Predispositions��������������������������������
Meeting the Challenge����������������������������
Cross-Cultural Differences and Similarities��������������������������������������������������
Parochialism and Simplification��������������������������������������
Similarities across Cultures�����������������������������������
Many Differences across Cultures���������������������������������������
Cultural Differences in Selected Countries and Regions�������������������������������������������������������������
Using the GLOBE Project to Compare Managerial Differences����������������������������������������������������������������
Managing Culture in Selected Countries and Regions���������������������������������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Haier's Approach������������������������������������������
Endnotes���������������
In the International Spotlight: Poland���������������������������������������������
6 Organizational Cultures and Diversity����������������������������������������������
The World of International Management: Managing Culture and Diversity in Global Teams��������������������������������������������������������������������������������������������
The Nature of Organizational Culture�������������������������������������������
Definition and Characteristics�������������������������������������
Interaction between National and Organizational Cultures���������������������������������������������������������������
Organizational Cultures in MNCs��������������������������������������
Family Culture���������������������
Eiffel Tower Culture���������������������������
Guided Missile Culture�����������������������������
Incubator Culture������������������������
Managing Multiculturalism and Diversity����������������������������������������������
Phases of Multicultural Development������������������������������������������
Types of Multiculturalism��������������������������������
Potential Problems Associated with Diversity���������������������������������������������������
Advantages of Diversity������������������������������
Building Multicultural Team Effectiveness������������������������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Lenovo's International Focus������������������������������������������������������
Endnotes���������������
In the International Spotlight: Nigeria����������������������������������������������
7 Cross-Cultural Communication and Negotiation�����������������������������������������������������
The World of International Management: Netflix's Negotiations: China and Russia��������������������������������������������������������������������������������������
The Overall Communication Process����������������������������������������
Verbal Communication Styles����������������������������������
Interpretation of Communications���������������������������������������
Communication Flows��������������������������
Downward Communication�����������������������������
Upward Communication���������������������������
Communication Barriers�����������������������������
Language Barriers������������������������
Perceptual Barriers��������������������������
The Impact of Culture����������������������������
Nonverbal Communication������������������������������
Achieving Communication Effectiveness��������������������������������������������
Improve Feedback Systems�������������������������������
Provide Language Training��������������������������������
Provide Cultural Training��������������������������������
Increase Flexibility and Cooperation�������������������������������������������
Managing Cross-Cultural Negotiations�������������������������������������������
Types of Negotiation���������������������������
The Negotiation Process������������������������������
Cultural Differences Affecting Negotiations��������������������������������������������������
Negotiation Tactics��������������������������
Negotiating for Mutual Benefit�������������������������������������
Bargaining Behaviors���������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Working Effectively at Toyota�������������������������������������������������������
Endnotes���������������
In the International Spotlight: China��������������������������������������������
Brief Integrative Case 2.1: Coca-Cola in India�����������������������������������������������������
Endnotes���������������
Brief Integrative Case 2.2: Danone's Wrangle with Wahaha���������������������������������������������������������������
Endnotes���������������
In-Depth Integrative Case 2.1a: Euro Disneyland������������������������������������������������������
Endnotes���������������
In-Depth Integrative Case 2.1b: Disney in Asia�����������������������������������������������������
Endnotes���������������
In-Depth Integrative Case 2.2: Walmart's Global Strategies�����������������������������������������������������������������
Endnotes���������������
Part Three International Strategic Management����������������������������������������������������
8 Strategy Formulation and Implementation������������������������������������������������
The World of International Management: GSK's Prescription for Global Growth����������������������������������������������������������������������������������
Strategic Management���������������������������
The Growing Need for Strategic Management������������������������������������������������
Benefits of Strategic Planning�������������������������������������
Approaches to Formulating and Implementing Strategy����������������������������������������������������������
Global and Regional Strategies�������������������������������������
The Basic Steps in Formulating Strategy����������������������������������������������
Environmental Scanning�����������������������������
Internal Resource Analysis���������������������������������
Goal Setting for Strategy Formulation��������������������������������������������
Strategy Implementation������������������������������
Location Considerations for Implementation�������������������������������������������������
Combining Country and Firm-Specific Factors in International Strategy����������������������������������������������������������������������������
The Role of the Functional Areas in Implementation���������������������������������������������������������
Specialized Strategies�����������������������������
Strategies for Emerging Markets��������������������������������������
Entrepreneurial Strategy and New Ventures������������������������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Infosys's Global Strategy���������������������������������������������������
Endnotes���������������
In the International Spotlight: Saudi Arabia���������������������������������������������������
9 Entry Strategies and Organizational Structures�������������������������������������������������������
The World of International Management: Building a Global Brand: Haier's Alignment of Strategy and Structure������������������������������������������������������������������������������������������������������������������
Entry Strategies and Ownership Structures������������������������������������������������
Export/Import��������������������
Wholly Owned Subsidiary������������������������������
Mergers/Acquisitions���������������������������
Alliances and Joint Ventures�����������������������������������
Alliances, Joint Ventures, and M&A: The Case of the Automotive Industry������������������������������������������������������������������������������
Licensing����������������
Franchising������������������
The Organization Challenge���������������������������������
Basic Organizational Structures��������������������������������������
Initial Division Structure���������������������������������
International Division Structure���������������������������������������
Global Structural Arrangements�������������������������������������
Transnational Network Structures���������������������������������������
Nontraditional Organizational Arrangements�������������������������������������������������
Organizational Arrangements from Mergers, Acquisitions, Joint Ventures, and Alliances��������������������������������������������������������������������������������������������
The Emergence of the Network Organizational Forms��������������������������������������������������������
Organizing for Product Integration�����������������������������������������
Organizational Characteristics of MNCs���������������������������������������������
Formalization��������������������
Specialization���������������������
Centralization���������������������
Putting Organizational Characteristics in Perspective������������������������������������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Organizing for Effectiveness������������������������������������������������������
Endnotes���������������
In the International Spotlight: Mexico���������������������������������������������
10 Managing Political Risk, Government Relations, and Alliances����������������������������������������������������������������������
The World of International Management: Russian Roulette: Risks and Political Uncertainty�����������������������������������������������������������������������������������������������
The Nature and Analysis of Political Risk������������������������������������������������
Macro and Micro Analysis of Political Risk�������������������������������������������������
Terrorism and Its Overseas Expansion�������������������������������������������
Analyzing the Expropriation Risk���������������������������������������
Managing Political Risk and Government Relations�������������������������������������������������������
Developing a Comprehensive Framework or Quantitative Analysis��������������������������������������������������������������������
Techniques for Responding to Political Risk��������������������������������������������������
Relative Bargaining Power Analysis�����������������������������������������
Managing Alliances�������������������������
The Alliance Challenge�����������������������������
The Role of Host Governments in Alliances������������������������������������������������
Examples of Challenges and Opportunities in Alliance Management����������������������������������������������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Nokia in China����������������������������������������
Endnotes���������������
In the International Spotlight: Brazil���������������������������������������������
11 Management Decision and Control�����������������������������������������
The World of International Management: Global Online Retail: Amazon v. Alibaba�������������������������������������������������������������������������������������
Decision-Making Process and Challenges���������������������������������������������
Factors Affecting Decision-Making Authority��������������������������������������������������
Cultural Differences and Comparative Examples of Decision Making�����������������������������������������������������������������������
Total Quality Management Decisions�����������������������������������������
Decisions for Attacking the Competition����������������������������������������������
Decision and Control Linkages������������������������������������
The Controlling Process������������������������������
Types of Control�����������������������
Approaches to Control����������������������������
Performance Evaluation as a Mechanism of Control�������������������������������������������������������
Financial Performance����������������������������
Quality Performance��������������������������
Personnel Performance����������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Looking at the Best���������������������������������������������
Endnotes���������������
In the International Spotlight: Japan��������������������������������������������
Brief Integrative Case 3.1: Google in China: Protecting Property and Rights����������������������������������������������������������������������������������
Endnotes���������������
In-Depth Integrative Case 3.1: Tata "Nano": The People's Car�������������������������������������������������������������������
Endnotes���������������
Part Four Organizational Behavior and Human Resource Management����������������������������������������������������������������������
12 Motivation Across Cultures������������������������������������
The World of International Management: Motivating Employees in a Multicultural Context: Insights from Emerging Markets�����������������������������������������������������������������������������������������������������������������������������
The Nature of Motivation�������������������������������
The Universalist Assumption����������������������������������
The Assumption of Content and Process��������������������������������������������
The Hierarchy-of-Needs Theory������������������������������������
The Maslow Theory������������������������
International Findings on Maslow's Theory������������������������������������������������
The Two-Factor Theory of Motivation������������������������������������������
The Herzberg Theory��������������������������
International Findings on Herzberg's Theory��������������������������������������������������
Achievement Motivation Theory������������������������������������
The Background of Achievement Motivation Theory������������������������������������������������������
International Findings on Achievement Motivation Theory��������������������������������������������������������������
Select Process Theories������������������������������
Equity Theory��������������������
Goal-Setting Theory��������������������������
Expectancy Theory������������������������
Motivation Applied: Job Design, Work Centrality, and Rewards�������������������������������������������������������������������
Job Design�����������������
Sociotechnical Job Designs���������������������������������
Work Centrality����������������������
Reward Systems���������������������
Incentives and Culture�����������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Motivating Potential Employees��������������������������������������������������������
Endnotes���������������
In the International Spotlight: Indonesia������������������������������������������������
13 Leadership Across Cultures������������������������������������
The World of International Management: Global Leadership Development: An Emerging Need���������������������������������������������������������������������������������������������
Foundation for Leadership��������������������������������
The Manager-Leader Paradigm����������������������������������
Philosophical Background: Theories X, Y, and Z�����������������������������������������������������
Leadership Behaviors and Styles��������������������������������������
The Managerial Grid Performance: A Japanese Perspective��������������������������������������������������������������
Leadership in the International Context����������������������������������������������
Attitudes of European Managers toward Leadership Practices�����������������������������������������������������������������
Japanese Leadership Approaches�������������������������������������
Differences between Japanese and U.S. Leadership Styles��������������������������������������������������������������
Leadership in China��������������������������
Leadership in the Middle East������������������������������������
Leadership Approaches in India�������������������������������������
Leadership Approaches in Latin America���������������������������������������������
Recent Findings and Insights about Leadership����������������������������������������������������
Transformational, Transactional, and Charismatic Leadership������������������������������������������������������������������
Qualities for Successful Leaders���������������������������������������
Culture Clusters and Leader Effectiveness������������������������������������������������
Leader Behavior, Leader Effectiveness, and Leading Teams���������������������������������������������������������������
Cross-Cultural Leadership: Insights from the GLOBE Study���������������������������������������������������������������
Positive Organizational Scholarship and Leadership���������������������������������������������������������
Authentic Leadership���������������������������
Ethical, Responsible, and Servant Leadership���������������������������������������������������
Entrepreneurial Leadership and Mindset���������������������������������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Taking a Closer Look����������������������������������������������
Endnotes���������������
In the International Spotlight: Germany����������������������������������������������
14 Human Resource Selection and Development Across Cultures������������������������������������������������������������������
The World of International Management: The Challenge of Talent Retention in India����������������������������������������������������������������������������������������
The Importance of International Human Resources������������������������������������������������������
Getting the Employee Perspective���������������������������������������
Employees as Critical Resources��������������������������������������
Investing in International Assignments���������������������������������������������
Economic Pressures�������������������������
Sources of Human Resources���������������������������������
Home-Country Nationals�����������������������������
Host-Country Nationals�����������������������������
Third-Country Nationals������������������������������
Subcontracting and Outsourcing�������������������������������������
Selection Criteria for International Assignments�������������������������������������������������������
General Criteria�����������������������
Adaptability to Cultural Change��������������������������������������
Physical and Emotional Health������������������������������������
Age, Experience, and Education�������������������������������������
Language Training������������������������
Motivation for a Foreign Assignment������������������������������������������
Spouses and Dependents or Work-Family Issues���������������������������������������������������
Leadership Ability�������������������������
Other Considerations���������������������������
Economic Pressures and Trends in Expat Assignments���������������������������������������������������������
International Human Resource Selection Procedures��������������������������������������������������������
Testing and Interviewing Procedures������������������������������������������
The Adjustment Process�����������������������������
Compensation�������������������
Common Elements of Compensation Packages�����������������������������������������������
Tailoring the Package����������������������������
Individual and Host-Country Viewpoints���������������������������������������������
Candidate Motivations����������������������������
Host-Country Desires���������������������������
Repatriation of Expatriates����������������������������������
Reasons for Returning����������������������������
Readjustment Problems����������������������������
Transition Strategies����������������������������
Training in International Management�������������������������������������������
The Impact of Overall Management Philosophy on Training��������������������������������������������������������������
The Impact of Different Learning Styles on Training and Development��������������������������������������������������������������������������
Reasons for Training���������������������������
Types of Training Programs���������������������������������
Standardized vs. Tailor-Made�����������������������������������
Cultural Assimilators����������������������������
Positive Organizational Behavior���������������������������������������
Future Trends��������������������
The World of International Management-Revisited������������������������������������������������������
Summary of Key Points����������������������������
Key Terms����������������
Review and Discussion Questions��������������������������������������
Internet Exercise: Coke Goes Worldwide���������������������������������������������
Endnotes���������������
In the International Spotlight: Russia���������������������������������������������
Brief Integrative Case 4.1: IKEA's Global Renovations������������������������������������������������������������
Endnotes���������������
In-Depth Integrative Case 4.1: HSBC in China���������������������������������������������������
Endnotes���������������
In-Depth Integrative Case 4.2: Chiquita's Global Turnaround������������������������������������������������������������������
Endnotes���������������
Skill-Building and Experiential Exercises������������������������������������������������
Personal Skill-Building Exercises����������������������������������������
1. The Culture Quiz��������������������������
2. "When in Bogotá . . ."��������������������������������
3. The International Cola Alliances������������������������������������������
4. Whom to Hire?�����������������������
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���������������
Name and Organization Index����������������������������������
Subject Index��������������������
2017-04-02T03:01:14+0000
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