Chapter 3 Outline

Implications for Business

International business is different from national business because countries and societies are different. In this chapter, we have seen just how different societies can be. Societies differ because their cultures vary. Their cultures vary because of profound differences in social structure, religion, language, education, economic philosophy, and political philosophy. Two important implications for international business flow from these differences. The first is the need to develop cross-cultural literacy. There is a need to appreciate not only that cultural differences exist, but also to appreciate what such differences mean for international business. A second implication for international business centers on the connection between culture and national competitive advantage. In this section, we will explore both of these issues in greater detail.

Cross-Cultural Literacy

One of the biggest dangers confronting a company that goes abroad for the first time is the danger of being ill-informed. International businesses that are ill-informed about the practices of another culture are likely to fail. Doing business in different cultures requires adaptation to conform with the value systems and norms of that culture. Adaptation can embrace all aspects of an international firm's operations in a foreign country. The way in which deals are negotiated, the appropriate incentive pay systems for salespeople, the structure of the organization, the name of a product, the tenor of relations between management and labor, the manner in which the product is promoted, and so on are all sensitive to cultural differences. What works in one culture might not work in another.

To combat the danger of being ill-informed, international businesses should consider employing local citizens to help them do business in a particular culture. They must also ensure that home-country executives are cosmopolitan enough to understand how differences in culture affect the practice of international business. Transfering executives overseas at regular intervals to expose them to different cultures will help build a cadre of cosmopolitan executives. Hitachi is now taking this approach as it transforms itself from a Japanese into a global company (see the Management Focus for details).

An international business must also be constantly on guard against the dangers of ethnocentric behavior. Ethnocentrism is a belief in the superiority of one's own ethnic group or culture. Hand in hand with ethnocentrism goes a disregard or contempt for the culture of other countries. Unfortunately, ethnocentrism is all too prevalent; many Americans are guilty of it, as are many French people, Japanese people, British people, and so on. Ugly as it is, ethnocentrism is a fact of life, one that international businesses must be on continual guard against.

Culture and Competitive Advantage

One theme that continually surfaced in this chapter is the relationship between culture and national competitive advantage. Put simply, the value systems and norms of a country influence the costs of doing business in that country. The costs of doing business in a country influence the ability of firms to establish a competitive advantage in the global marketplace. We have seen how attitudes toward cooperation between management and labor, toward work, and toward the payment of interest are influenced by social structure and religion. It can be argued that the class-based conflict between workers and management found in British society, when it leads to industrial disruption, raises the costs of doing business in that culture. Similarly, we have seen how the ascetic "other worldly"ethics of Hinduism may not be as supportive of capitalism as the ethics

embedded in Protestantism and Confucianism. Also, Islamic laws banning interest payments may raise the costs of doing business by constraining a country's banking system.

Japan presents us with an interesting example of how culture can influence competitive advantage. Some scholars have argued that the culture of modern Japan lowers the costs of doing business relative to the costs in most Western nations. Japan's emphasis on group affiliation, loyalty, reciprocal obligations, honesty, and education all boost the competitiveness of Japanese companies. The emphasis on group affiliation and loyalty encourages individuals to identify strongly with the companies in which they work. This tends to foster an ethic of hard work and cooperation between management and labor "for the good of the company." Similarly, reciprocal obligations and honesty help foster an atmosphere of trust between companies and their suppliers. This encourages them to enter into long-term relationships with each other to work on factors such as inventory reduction, quality control, and joint design--all of which have been shown to improve an organization's competitiveness. This level of cooperation has often been lacking in the West, where the relationship between a company and its suppliers tends to be a short-term one structured around competitive bidding, rather than one based on long-term mutual commitments. In addition, the availability of a pool of highly skilled labor, particularly engineers, has helped Japanese enterprises develop cost-reducing process innovations that have boosted their productivity.⁴³ Thus, cultural factors may help explain the competitive advantage enjoyed by many Japanese businesses in the global marketplace. The rise of Japan as an economic power during the second half of the 20th century may be in part attributed to the economic consequences of its culture.

It can also be argued that the Japanese culture is less supportive of entrepreneurial activity than, say, American society. In many ways, entrepreneurial activity is a product of an individualistic mind-set, not a classic characteristic of the Japanese. This may explain why American enterprises, rather than Japanese corporations, dominate industries where entrepreneurship and innovation are highly valued, such as computer software and biotechnology. Of course, there are obvious exceptions to this generalization. Masayoshi Son recognized the potential of software far faster than any of Japan's corporate giants, set up his company, Softbank, in 1981, and has since built it into Japan's top software distributor. But individuals such as Son are the exception that proves the rule, for there has been no surge in entrepreneurial high-technology enterprises in Japan equivalent to what has occurred in the United States.

For the international business, the connection between culture and competitive advantage is important for two reasons. First, the connection suggests which countries are likely to produce the most viable competitors. For example, US enterprises are likely to see continued growth in aggressive, cost-efficient competitors from those Pacific Rim nations where a combination of free market economics, Confucian ideology, group-oriented social structures, and advanced education systems can all be found (e.g., South Korea, Taiwan, Japan, and increasingly China).

Second, the connection between culture and competitive advantage has important implications for the choice of countries in which to locate production facilities and do business. Consider a hypothetical case when a company has to choose between two countries, A and B, for locating a production facility. Both countries are characterized by low labor costs and good access to world markets. Both countries are of roughly the same size (in terms of population) and both are at a similar stage of economic development. In country A, the education system is undeveloped, the society is characterized by a marked stratification between the upper and lower classes, the dominant religion stresses the importance of reincarnation, and there are three major linguistic groups. In country B, the education system is well developed, there is a lack of social stratification, group identification is valued by the culture, the dominant religion stresses the virtue of hard work, and there is only one linguistic group. Which country makes the best investment site?

Country B does. The culture of country B is supportive of the capitalist mode of production and social harmony, whereas the culture of country A is not. In country A, conflict between management and labor, and between different language groups, can be expected to lead to social and industrial disruption, thereby raising the costs of doing business. The lack of a good education system and the dominance of a religion that stresses ascetic behavior as a way of achieving advancement in the next life can also be expected to work against the attainment of business goals.

The same kind of comparison could be made for an international business trying to decide where to push its products, country A or B. Again, country B would be the logical choice because cultural factors suggest that in the long run, country B is the nation most likely to achieve the greatest level of economic growth. In comparison, the culture of country A may produce economic stagnation.