National Cultural Differences and Multinational
The eminent Dutch psychologist, management researcher, and
culture expert Geert Hofstede, early in his career, interviewed unsuccessfully
for an engineering job with an American company. Later, he wrote of typical cross-cultural
misunderstandings that crop up when American managers interview Dutch recruits
and vice versa:
“American
applicants, to Dutch eyes, oversell themselves.
Their CVs are worded in superlatives…during the interview they try to
behave assertively, promising things they are very unlikely to realize…Dutch
applicants in American eyes undersell themselves. They write modest and usually short CVs,
counting on the interviewer to find out by asking how good they really are…they
are very careful not to be seen as braggarts and not to make promises they are
not absolutely sure they can fulfill.
American interviewers know how to interpret American CVs and interviews
and they tend to discount the information provided. Dutch interviewers, accustomed to Dutch
applicants, tend to upgrade the information.
To an uninitiated American interviewer an uninitiated Dutch applicant
comes across as a sucker. To an
uninitiated Dutch interviewer an uninitiated American applicant comes across as
a braggart.”1
Cultural differences, while difficult to observe and
measure, are obviously very important.
Failure to appreciate and account for them can lead to embarrassing
blunders, strain relationships, and drag down business performance. And the effects of culture persist even in
life-and-death situations. Consider the
example of Korean Air’s high incidence of plane crashes between 1970 and
2000. As an analysis of conversations
recorded in the black boxes of the crashed planes revealed, the co-pilots and
flight engineers in all-Korean cockpits were too deferential to their
captains. Even in the advent of a
possible crash, Korean Air co-pilots and flight engineers rarely suggested
actions that would contradict the judgments of their captains. Challenging
one’s superior in Korea was considered culturally inadequate behavior.2
The Korean Air example is particularly noteworthy for two
reasons. First, if national culture can have significant – not to say
existential – consequences among people of the same cultural origin, we need to
be very cautious in how we deal with national cultural differences in cross-border interactions. Second, it is interesting
to note that the attitudes and behaviors revealed by Korean Air co-pilots and
flight engineers persisted in such a highly regulated environment like
commercial aviation. National culture shapes behavior and this influence
reaches beyond administrative attributes such as governmental policies, laws
and public institutions. Therefore, this
note focuses on how the influence of culture materializes and how cultural
differences affect the operation of firms around the globe.
For the purpose of this note, culture shall be defined as a set of shared values, assumptions and
beliefs that are learnt through membership in a group, and that influence the
attitudes and behaviors of group members. This definition includes three
key characteristics: First, culture can be understood as a group phenomenon
that distinguishes people of one group from another. From this perspective,
cultures exist at many different levels, including organizational functions or
business units, occupational groups, organizations, industries, geographical
regions, and nations. 3 This note focuses in particular on national
culture and the role of cultural differences across countries rather than other
cultural groups because this level of culture is particularly relevant for
multinational business.
Second, the above definition
implies that culture is not obtained by birth but rather acquired through a
process of socialization. The learning of shared values, assumptions and
beliefs occurs through interactions
Copyright ©
2011 Pankaj Ghemawat and Sebastian Reiche. This material was developed for
students in the GLOBE course at IESE Business School and should not be cited or
circulated without the authors’ written permission.
with family, teachers, officials,
experiences, and society-at-large. In this respect, Geert Hofstede speaks of
culture as a process of “collective programming of the mind”4.
Third, it is this collective programming that determines what is considered
acceptable or attractive behavior. In
other words, cultural values provide preferences or priorities for one behavior
over another.
It is important to note that national cultural differences
have remained fairly stable over time.
While at the surface level there may be some convergence in cultural
habits, artifacts and symbols, for example as witnessed by the spread of
American consumer culture across the globe, at a deeper level cultural
differences persist. For example, data
from the World Value Survey, a study of 65 countries reflecting 75% of the
world’s population, showed a remarkable resilience of distinctive cultural
values even after taking into account the far-reaching cultural changes caused
by modernization and economic development.5 Consider the following high-stakes
example. You are riding in a car with a
close friend, who hits a pedestrian.
“You know that 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 only driving 20 miles per hour it may save him from serious
consequences.” More than 90% of mangers
in Canada, the United States, Switzerland, Australia, Sweden, Norway, and
Western Germany reported that they would not
testify falsely under oath to help their close friend, while fewer than half of
managers in South Korea (26%), Venezuela (34%), Russia (42%), Indonesia (47%),
and China (48%) said they would refuse to testify falsely in this hypothetical
situation.6 Some cultures put
more emphasis on universal
commitments (like honesty) while others put more weight on loyalty to particular people and relationships.
Thus, the potential for misunderstanding is large, even between wealthy and
deeply inter-connected countries like the United States and South Korea.
The persistence of cultural value differences is
particularly relevant for large multinational companies that are exposed to multiple national cultures in their
daily operations. This suggests that managing across borders introduces
substantial complexity because it forces multinationals to tailor their
practices and approaches to each and every cultural context they operate in.
Therefore, while the concepts discussed in this note will apply to different
aspects of cross-border activities, the primary focus is on multinational
business firms.
Section 1 of this note
discusses cultural frameworks and value dimensions that have been used to study
national cultural differences. These frameworks are subjective in the sense
that they are based on data that were self-reported by individual members of
cultural groups. Section 2 introduces a range of objective indicators of
cultural differences. Section 3 examines
how culture shapes various aspects of multinational business. Section 4 discusses business implications and
how multinational companies can manage adaptation to cultural differences.
I. Cultural Frameworks
The analogy
of an iceberg is useful to conceptualize culture as consisting of different
layers. 7 Certain aspects of a culture are more visible, just like
the tip of an iceberg. This manifest culture includes observed elements such as
behaviors, language, music and food. A deeper understanding of a culture only
develops by looking at the submerged tip of the iceberg. This deeper layer
consists of expressed values that reflect how cultural members explain the
manifest culture. Finally, the very bottom of the iceberg consists of basic and
taken-for-granted assumptions which form the foundations of each culture. It is
these basic assumptions that provide the ultimate meaning to the expressed
values and behaviors. For example, in many Asian cultures it is considered rude
not to carefully study a business card that is presented to you because
business cards reflect a person’s professional identity, title and social
status. Failing to study the business
card is therefore a sign of disrespect towards that person. In other words, the ritual of exchanging
business cards (a behavior) can be explained by the deeper-seated meaning that
is associated with business cards in this particular context (expressed
values). The expressed values, in turn,
can only be fully understood by taking into account the underlying importance
of respect towards seniority and status in that culture (basic assumptions).
Dealing with national cultural
differences therefore requires not only knowledge about adequate behaviors but,
more importantly, an understanding of deeper-level assumptions and values that
explain why certain behaviors are more appropriate than others. A number of cultural
frameworks exist that characterize and describe cultures along different value
dimensions.
Hofstede’s Cultural Dimensions
The most widely used framework for categorizing national
cultures is the one developed by Geert Hofstede, a Dutch social psychologist
and management scholar.8 The data used to derive relevant cultural
value dimensions came from IBM employee surveys conducted between 1967 and 1973
in more than 50 cultures. Analysis of responses from over 116,000 IBM employees
to questions about their job and work settings revealed systematic cultural
differences across four dimensions: power
distance, individualism/collectivism,
uncertainty avoidance, and masculinity/femininity.
Probably the most important cultural dimension identified in
Hofstede’s research is power distance,
which concerns the degree to which a culture accepts and reinforces the fact
that power is distributed unevenly in society. Members of high power distance cultures such as Malaysia
accept status differences and are expected to show proper respect to their
superiors. Status differences exist within the organizational hierarchy but
they may also be based on age, social class, or family role. It is important to note that although these
differences in rank will always be evident, a superior in a high power distance culture will treat those
at lower levels with dignity. Low power distance cultures such as Denmark
are less comfortable with differences in organizational rank or social class
and are characterized by more participation in decision-making and a frequent
disregard of hierarchical level. The
concept of power distance helps to
explain the importance of deference Korean Air’s co-pilots showed towards their
captains. It is important to note, however, that a culture’s position along a
certain cultural dimension (e.g., the higher level of power distance in Korea)
is not an evaluation of whether members of that culture approach situations
better or worse than in other cultures. Instead, the cultural dimensions simply
demonstrate different preferences or priorities for how issues should be
approached.
A second dimension Hofstede identified is individualism/collectivism.
Individualist cultures show a relative preference for the individual in
contrast to the group. Members of individualist
cultures such as the UK maintain loose social structures that are characterized
by independence, the importance of individuals’ rights and the recognition of
personal initiative and achievement. In contrast, collectivist cultures such as Venezuela value the overall good of
and loyalty to the group. Members of collectivist
societies clearly distinguish between in-groups and out-groups and are expected
to subordinate their individual interests for the benefit of their in-groups
(e.g., family, organization). In Hofstede’s research, this cultural dimension
was shown to strongly correlate with power
distance, which means that individualist
cultures tend to have a preference for lower power distance. A notable exception is France where a preference
for status differences (relatively high power distance) goes hand-in-hand with
a focus on individual rights and personal achievement.
Uncertainty avoidance
concerns the degree to which cultural members are willing to accept and deal
with ambiguous or risky situations. Cultures with high levels of uncertainty avoidance such as Greece
prefer structure and predictability, which results in explicit rules of
behavior and strict laws. Members of these cultures tend to be risk averse
towards changing employers, embracing new approaches, or engaging in
entrepreneurial activities. In societies with low uncertainty avoidance such as Singapore there is a preference for
unstructured situations and ambiguity, which favors risk taking (i.e., starting
a new business), innovation and the acceptance of different views.
The fourth dimension Hofstede identified is Masculinity/Femininity. Masculine cultures such as Japan are
thought to reflect a dominance of tough values such as achievement,
assertiveness, competition and material success, which are almost universally
associated with male roles. In contrast, feminine
cultures focus on tender values such as personal relationships, care for
others, and quality of life. In addition, feminine
cultures such as Sweden are also characterized by less distinct gender roles.
Compared to masculine cultures, firms
in feminine cultures place a relatively stronger emphasis on overall employee
well-being rather than bottom-line performance.
Based on the responses to the
IBM employee surveys, Hofstede was able to compute average scores for each
national culture involved in the study along these four dimensions. Over the
years, Hofstede’s study has been replicated by other scholars and extended to
over 80 cultures for which data on the four dimensions are available. Exhibit 1 lists the cultural scores for
each dimension across 30 selected cultures. Using these scores, Hofstede
developed national cultural profiles to compare cultures and highlight cultural
differences (see Exhibit 2). This
provides a useful tool to analyze what to expect when entering into a new
culture and which value differences will be relatively more pronounced.
Limitations of Hofstede’s Cultural Framework
Although Hofstede’s framework remains the most widely used
approach to classify and compare national cultures, it is not without
limitations. An obvious weakness is that the data are relatively old and,
despite the study’s replications, may not fully capture recent changes in the
political environment (e.g., the end of the Cold War and the decline of
communism) or the work place (stronger focus on cooperation, knowledge-sharing
and empowerment). Furthermore, Hofstede’s study was restricted to data from a
single organization. Generalizing about national cultural characteristics based
on the analysis of a small subset of cultural members relies on the untenable
assumption that each nation consists of a uniform national culture and that
data from a section of IBM employees would be representative of that supposed
national uniformity.9
It is also worth noting that the dimension of uncertainty avoidance did not emerge as
a distinct cultural dimension in a later study that Hofstede conducted using a
Chinese equivalent of his original survey developed by Chinese social
scientists.10 Based on data from 23 countries, including 20 from
Hofstede’s original study, the scholars identified a different fourth dimension
representing Chinese values related to Confucianism. Originally termed
Confucian Work Dynamism, this dimension was later re-labeled longterm/short-term orientation and
added as a fifth dimension rather than replacing uncertainty avoidance. Therefore, while the dimension of uncertainty avoidance is conceptually
relevant, its applicability is necessarily limited. Further, beyond the mere
confusion associated with the labels of masculinity
and femininity, it is also less clear
what exactly this dimension involves. For example, the finding that Japan
scored as the most masculine culture
appears to contradict the high levels of concern and care that Japanese
organizations usually show towards their employees and that would be more
indicative of a feminine culture as
defined by Hofstede. It is possible that four cultural dimensions are simply
insufficient to capture the complexity of national culture.
Hofstede’s cultural value scores have also been used to compute
aggregate cultural distances between countries along these four dimensions in
order to quantify cultural differences between countries.11 Although
these cultural distance scores have been widely used to explain different
phenomena in international business such as entry mode choice, international
diversification, and performance of multinational companies12, this
approach has also been heavily criticized. 13 First, the calculation
of distances based on Hofstede’s scores suggests that the distances are
symmetric. In other words, a Swedish firm investing in China is thought to face
exactly the same cultural distance as a Chinese firm investing in Sweden, an
assumption that has however received little support.
Second, the concept of cultural
distance assumes homogeneity within each nation, a criticism already voiced
against Hofstede’s data collection per se. It becomes even more serious when
the data are then used to compute distance scores between countries, taking
into account neither different intra-cultural variations nor the actual
physical distance between both locations. For example, we would expect
significant differences for a Spanish firm investing in France depending on
whether the home and host units are located in Barcelona and Perpignan, respectively,
or in Seville and Le Havre, respectively. This is particularly relevant for
large and diverse countries like the BRICs (Brazil, Russia, India, and China)
but it also applies to smaller countries: The computed cultural distance
between the Czech Republic and Slovakia, two states that shared the same
national flag for a long time, is higher than for most other cultural pairs!
This not only highlights the role of intra-cultural variation but it also
raises doubts over whether the country is necessarily a suitable proxy for
defining cultural regions.
Other Cultural Frameworks
In addition to Hofstede’s work, a number of other frameworks
exist that categorize national cultures along different dimensions. While some
dimensions conceptually match the ones identified by Hofstede’s a few others
are worth mentioning. Fons Trompenaars, another Dutch researcher, collected
more recent data in over 40 countries. Out of the seven dimensions identified
in his study, five focus on relationships between people (for example the
relative importance of applying universal and standardized rules across
cultural members, or the extent to which people are free to express their
emotions in public) whereas the remaining two dimensions concern time
management and a culture’s relationship with nature.14 Shalom
Schwartz, an Israeli psychologist, provides yet another approach to describe
and classify national cultures. Schwartz argues that cultural values reflect
three basic issues societies are confronted with: the nature of the relation
between the individual and the group, how to guarantee responsible behavior,
and how to regulate the relation of people to the natural and social world.
Using data from schoolteachers and university students in over 60 countries,
Schwartz derived three dimensions that represent solutions to the above issues.15
In one of the most ambitious efforts to characterize cultures, an international
team of researchers around Robert House mainly focused on cultural differences
in leadership. Termed the GLOBE study (Global Leadership and Organizational
Behavior Effectiveness), the research derived nine cultural dimensions that
addressed both previously identified (e.g., power distance and
individualism/collectivism) and new (e.g., gender egalitarianism and performance
orientation) value categories.
It is important to note that
the application of any of the cultural value dimensions described above comes
with an important caveat. While the
cultural frameworks are certainly useful in comparing one culture with another,
they only represent central tendencies at the level of the nation rather than a
description of specific individuals within that nation. Information about the
actual values and behaviors of a particular individual should therefore always
supersede the group tendency.
2. Objective Indicators of Cultural Differences
Objective indicators of cultural differences abound at the
behavioral level and become progressively more elusive as one moves through the
levels of expressed values toward basic assumptions. As we get farther away from those aspects of
difference that are directly observable, the comparisons themselves become
subject to greater degrees of uncertainty as they inevitably rely on
theoretical positions linking observable behaviors to thought processes that
are not directly observable.
Cultural differences at the level of behavior form the basis
for much of the casual comparison that takes place in diverse settings like
business schools, for both serious and humorous purposes. Citizens in the United States maintain a
culture around owning guns that most Europeans can’t fathom. The Czechs drink
far more beer than people in Saudi Arabia, and even more than the Irish, who
come in second. 16 India and
China are so close geographically that they still haven’t resolved their
territorial disputes, but couldn’t display more distinct food cultures,
particularly around which animals and parts of animals should or shouldn’t be
eaten. Argentines see psychotherapists
more often than other nationalities.
Brazilians spend a higher proportion of their income on beauty products
than the citizens of any other major economy.17 And so on.
Focusing on the submerged tip of the iceberg that reflects
the level of expressed values, one objective indicator of differences is the
diversity of religious beliefs around the world. According to the World Christian
Encyclopedia, “there are 19 major world religions, which are subdivided into
270 large religious groups, and many smaller ones.” The largest high-level groupings are
Christianity (33% of the world population in 2000), Islam (21%), non-religious
(16%), and Hindu (14%). And the
diversity within these, as well as smaller religious groupings, is tremendous. The world’s 2.1 billion Christians subdivide
into some 34,000 separate groupings!18 The fact that the largest religion in the
Czech Republic is Christianity (in which wine is consumed as part of ritual
practice) and an even larger number of Czechs are not religious, while the
official religion of Saudi Arabia is Islam (which prohibits alcohol
consumption), is probably the best explanation for those countries’ widely
divergent alcoholic beverage sales.
Similarly, we can understand dietary differences between Indians and
Chinese in large part based on religious distinctions.
Most research using religion as a marker of cultural
differences has focused only on the binary condition of whether or not national
communities share a common religion.
Based on a sample of 163 countries, 51% of country pairs have at least
thirty percent or more of both populations practicing the same religion. But that analysis does not account for
differences between denominations within religions. Metrics that do exist of religious distance
treat commonalities at the level of denomination or sect as closest (e.g.
Methodist), then consider matches at broader levels of aggregation within a
single religion (e.g. Protestant), then at the level of a religion (e.g.
Christianity), and then most broadly combine groups of religions with a similar
origin and some common beliefs (e.g. “monotheistic religions of a common
Middle-Eastern origin,” the category that encompasses Judaism, Christianity,
and Islam).19 Note also that
religions differ in their level of internal diversity.20
Language is another observable aspect of culture, which
according to some researchers offers a window into deeper beliefs and thought
processes.21 Writing on potential implications of linguistic
differences on thought patterns across cultures dates back at least to early
work by Edward Sapir (1921)22 and Benjamin Whorf (1940).23
Michael Agar provided the following description of the language’s deeper
impact, “Language carries with it patterns of seeing, knowing, talking, and
acting…patterns that mark the easier trails for thought and perception and
action.”24 Later scholars,
particularly in the 1960s, moved decisively away from this view as they focused
on universal patterns across languages, but more recently research in
linguistics has again shown a “growing appreciation of how interpretive
differences can be rooted as much in systematic uses of language as in its
structure.”25
One simple way to summarize the persistence of linguistic
differences is to note that among the same sample of 163 countries referenced above,
in only ten percent of the country pairs do twenty percent or more of the
populations of both countries speak a common language.26 Furthermore, the concept of linguistic
distance allows us to measure cultural distance based on the genealogical classification
of languages, i.e. the presence of common linguistic ancestors. Exhibit
3 presents such a linguistic distance table calculated versus English as
the focal language.
What is particularly interesting about the use of linguistic
distance as an objective indicator of cultural differences is that it has been
shown to correlate with cultural distinctions such as those described in the
previous section. Two examples will be
presented here, based on distinctions between English and Spanish that will be
familiar to many readers. First, consider Hofstede’s dimension of individualism/collectivism. English speaking cultures are considered more
individualistic (they score 84 on
this dimension) whereas Spanish speaking cultures are deemed more collectivistic (22). Linguistically, the requirement in Spanish,
but not English, to specify a person’s gender when describing his or her
occupation is seen as reflecting the collectivist pattern of rooting
description in social context. English,
by casting aside the requirement to communicate such contextual information,
“tends to elevate individuals vis-à-vis their groups.”27 Hofstede’s dimension of power distance is also
related to linguistic differences between Spanish and English. Spanish speaking countries score much higher
on this dimension (69) versus English speaking countries (32). And in Spanish, we note the distinct formal
(usted) and informal (tu) forms of the English “you.” This hierarchical emphasis is also seen in
speech patterns such as the tendency in Mexico to introduce an engineer as
“ingeniero” or a lawyer as “licenciado” whereas both would just be called
“mister” in English.28 More
sophisticated statistical tests have also validated linguistic distance as a
marker of cultural distance.
In addition to serving as
observable markers of cultural differences at deeper levels than behavior,
religion and language categories are also useful for grouping countries. It quickly gets overwhelming to try to look
at the world in terms of countries where business cards are received in
particular ways or in terms of the presence or absence of particular
ingredients in local cuisine. Thinking
in terms of countries where English is the main language or where most of the
population are Catholic can be useful, though again one has to be careful of
oversimplification. More sophisticated
efforts at classifying countries into cultural clusters have often relied on
geography, language, and religion as primary factors, while others have also
used cultural frameworks such as Hofstede’s as well as levels of economic
development.29 The clusters
resulting from a synthesis across eight such studies are shown in Exhibit 4.
3. Effects of National Cultural Differences
One broad indicator of the effects of cultural differences
is provided by patterns of trust within versus between countries. The best data available come from
Eurobarometer surveys that measure trust among citizens of different countries,
mainly within Europe.30
Surveys in 16 West European countries asked people whether they trusted
their countrymen, the citizens of the other 15 countries, and people from some
East European countries, Japan, the United States, and China “a lot.”31 The results are summarized in Exhibit 5. In Sweden, for example, the data indicate
differences between trust in fellow citizens (64%), in other Nordic countries
(63%), in the remaining European countries in the sample (40%), and trust in
all other countries (29%). Scholars
looking to explain patterns of international trust have concluded that trust
falls as the populations of any two countries grow more different in terms of
their languages, religions, genes, body types, geographic distance, and
incomes, and if they have a more extensive history of wars.32
To provide a more systematic review of the effects of
cultural differences, this section will review impacts on four types of
international flows: information, people, products, and capital. We begin with information flows because
economists often consider information costs (an aspect of transaction cost) as
a factor that reduces the other types of flows.
People flows are treated next because of the importance of relationships
in facilitating product and capital flows, which are covered third and fourth,
respectively.
As we have seen, linguistic differences are a useful proxy
for cultural differences. One way of
quantifying the impact of language barriers on information flows is to look at
the intensity of international telephone calls on a population-weighted
basis. The intensity of minutes of phone
calls between countries where at least twenty percent of the populations share
a common language is ten times greater than between other countries.33 The impact of language barriers on
information flows is also seen in the analysis of patent citations. According to one study conducted in Europe,
“having the same language increases the amount of knowledge flows between two regions
by up to 28 percent.”34 And while language barriers are more
amenable to quantification, one can easily think of other more subtle ways in
which cultural differences impede information flows, ranging from
misinterpretation to unwillingness to share information across cultural
boundaries (note the information already presented on the geography of
trust).
The impact of cultural
differences on people flows are evidenced by migration patterns. 60 percent of migrants move to a country with
the same major religion, and 40 percent go to a country with the same major
language.35 And research on
diasporas and international business networks has shown migration to have an
important effect on information flows as well as patterns of trade and
investment. As one study noted, “in
addition to being used to transmit information about past opportunistic
business conduct, [diaspora] networks can be used to transmit information about
current opportunities for profitable international trade
(or investment).”36
Shifting to evidence directly linking cultural factors to
product flows (trade), language is the factor that has been studied most
widely. A common language has been shown
to increase the bilateral merchandise trade between a pair of countries by 42
percent.37 While there is
less research on services trade, one study indicates that a common language
increases services trade by 50 percent.38 It seems reasonable that language barriers
would be even more formidable when trading services rather than products. And it’s useful to dig deeper into the
impacts of linguistic differences on trade.
While communication via a translator can indeed facilitate trade, one
analysis indicates that “direct communication appears about three times more
effective than indirect communication in promoting trade.” And the same study also indicates that
linguistic diversity within a country as well as higher levels of literacy
promote foreign over domestic trade.39 Language barriers have also been shown to
pose more of a problem for those receiving information than those providing it,
as evidenced by the finding that people tend to tune out on accents they have
trouble understanding.
Countries that share a common religion have also been shown
to trade more than countries that don’t, with one study showing that a common
religion increases trade by 22 percent.40 Some religious communities have also been
shown to be more conducive to the development of international trade networks
than others.41 Hofstede’s
cultural framework has also been linked to trade flows. One of the more intuitive findings from such
research is that “countries high in uncertainty-aversion export disproportionately
less to distant countries (with which they are presumably less familiar).”42 Other research looking at Hofstede’s original
four dimensions (and their aggregation into a single measure of cultural
distance) has produced results that don’t fit as well with theory and
intuition. One study indicates that
cultural distance actually increases bilateral trade, which its authors surmise
may result from companies preferring to export to culturally different markets
rather than invest to serve them via local production.43 This, however, contrasts with the general
view that cultural differences are an impediment to trade.
Much research has also been done linking Hofstede’s cultural
framework to foreign investment flows, and in particular to patterns of foreign
market entry. A summary article reports
that, “Firms from countries with large power
distance prefer subsidiary and equity JV entry modes whereas firms from
countries high in uncertainty avoidance
prefer contract agreements and export entry modes.”44 The same summary article also cited various
studies analyzing the effects of cultural distance on entry modes, though we
have already noted methodological concerns about such studies: “Findings
demonstrated that as the cultural distance between countries increased, the
tendency to choose a joint venture (JV) over an acquisition increased Also, as
cultural distance increased, Japanese firms were more likely to choose
green-fields or wholly owned subsidiaries over shared ownership; the tendency
to choose licensing over JVs or wholly owned subsidiaries increased; the
tendency to choose a greenfield over an acquisition increased; wholly owned
subsidiaries were less preferred than either shared-equity ventures or
technology licensing; the tendency to choose management-service contracts over
franchising increased…”45
Moving beyond entry modes
specifically, it has also been shown that “cultural distance is a significant
deterrent to Foreign Portfolio Investment (FPI), with a coefficient one third
the size of geographic distance….[and] Hofstede’s power distance in the originating country is negatively related to
cross-border debt and equity holdings…uncertainty
avoidance is positively related to cross-border debt holdings…[and] both masculinity and individuality are positively related to cross-border debt and
equity FPI.”46 Language
differences have also been shown to have a significant and negative impact on
Foreign Direct Investment (FDI).47
Similar findings have also been found for M&A flows, however, one
comparative study found that “while geographic, linguistic, and colonial
variables explain 39% of variations in telephone traffic and trade, they
explain only 24% of the variations in M&A flows.”48
4. Business Implications of National Cultural Differences
As we have seen, differences in national culture are
reflected in business decisions, such as choices about foreign entry
modes. But how can we use our
understanding of national culture to make better decisions? The basic answer is that improving the
alignment or congruence between management practices and cultural contexts
yields tangible business benefits:49
• Participative
management can improve profitability in low power
distance cultures but worsen it in high power
distance cultures
• Quick
fixes can improve profitability in more short-term
oriented cultures but worsen it in more longterm
oriented cultures
• Merit-based
pay and promotion policies can improve profitability in more masculine cultures and reduce it in more
feminine cultures
• Emphasizing
individual contributions can improve profitability in more individualistic cultures and worsen it in more collectivistic cultures
Based on such findings, this
section proceeds to highlight key points that can help align business practices
to national culture. It often makes
sense to structure such analyses around the intersection of specific dimensions
of cultural distance and business functions or activities in order to arrive at
a meaningful level of specificity. Thus,
we begin with a look at the implications of Hofstede’s dimensions across
functions, focusing specifically on power
distance. The section concludes with material on managing adaptation to
cultural differences.
Power Distance across Functions and Activities
This review of the implications of Hofstede’s power distance begins at the company’s
external boundary (marketing) and progressively moves to more internally
oriented functions (organization and human resources). The endpoints of this review, marketing and
organization, are areas where human culture is of particular importance in the
sense that marketing requires a deep understanding of customers and
organization requires a deep understanding of employees; hence more extended
treatments are provided in these areas.
Begin with humor as an introduction to the impact of
national culture and power distance
in marketing. Humor is widely employed
in marketing communications and particularly apt to fall flat if not well
tailored to national culture. According
to one study, 63% of humorous television advertisements in Thailand and Korea
(countries with high power distance)
contain characters of unequal status, versus only 29% in the U.S. and Germany
(countries with low power distance).50 In fact the use of humor itself in advertising
is more prevalent in countries with lower power
distance as well as low uncertainty
avoidance.51 Indeed,
cultural differences are one of the main impediments to globally standardized
advertising campaigns.
High power distance
also correlates with consumers making purchase decisions based on emotion
rather than information, which has clear implications for advertising as well
as other aspects of marketing communications.
Shifting to public relations, research indicates that in countries with
high power distance and collectivism, public relations focuses
more on building and maintaining relationships whereas in low power distance and individualistic cultures, it entails more explicit dissemination of
information. And looking at online
marketing, “high power distance
explains less consumer-marketer interactivity because of a larger gap between
marketers and consumers.” There also
tend to be higher service expectations in high power distance cultures, and even the organization of products in
retail stores has been shown to vary based on this dimension of culture.52 Power
distance may also impact adoption patterns of some products, as in the case
of a negative impact found in the adoption of Enterprise Resource Planning
(ERP) software.53
The link between marketing and innovation/new product
development seems to work better when managed in a centralized way in cultures
with high power distance.54 And looking at innovation more broadly, there
are studies indicating that countries with low power distance tend to have stronger innovation capabilities, which
might impact a company’s thinking about alternative locations for work
requiring high levels of innovation. Low
uncertainty avoidance and high individualism also correlate with
innovation capability.55
Marketing and product development both need to account for the impact of
national culture on consumers’ product preferences. In cultures with high power distance, consumers are more likely to want products that
help them demonstrate their status, but there are also less obvious
correlates. Consumption of mineral water
and newspapers both correlate with power
distance, along with more obvious dimensions (such as mineral water
consumption fitting with higher levels of uncertainty
avoidance).56
Entire books have been written on cross-cultural
negotiations. A typical prescription is
that in higher power distance
cultures, the seniority of the negotiator (and size of the negotiating team)
send important signals. Companies from
low power distance cultures can run
into trouble by sending a junior negotiator (who might be better versed in the
content) or by trying to save money by limiting the size of the negotiating
team. There are also indications that
negotiators from high power distance
cultures may be less attuned to synergistic negotiation, as they may be more
accustomed to power differences simply determining outcomes.
National culture has also been shown to have an impact on
manufacturing and supply chain practices, which can be useful to consider in a
variety of contexts: analyzing manufacturing footprints, managing multi-plant
operations, assessing competitors and suppliers and different countries, and so
on. Consider the adoption of quality
management practices. One European study
indicates that in cultures with low power
distance and uncertainty avoidance,
implementation of formal quality management systems may require external market
pressure, versus internal management initiative.57 Higher power
distance scores are also associated with companies purchasing rather than
manufacturing in-house a larger proportion of inputs for products they make. 58
Finance is an area where one might expect rather limited
cultural influence, and indeed power
distance has not been researched heavily in this function. Among other dimensions, uncertainty avoidance has been linked to greater reliance on bank
finance.59 Power distance, however, has been
researched in the related area of Accounting.
Hofstede wrote that, “In large power
distance countries, the accounting system will be used more frequently to
justify the decisions of the top power holder(s); in fact it usually is their
tool to present the desired image, and figures will be twisted to this end.”60 Subsequent research, however, has cast doubt
on the impact of power distance on
accounting disclosure, but does indicate that high levels of uncertainty avoidance do fit with
disclosure and conservatism in accounting.61
Finally, there are important
organizational or human resources implications of national culture. In countries with high (versus low) power distance, employee selection tends
to give more emphasis to social class (over education), training tends to
emphasize conformity (versus autonomy), evaluations focus on compliance or
trustworthiness (over performance), wage differences between managers and
workers are larger, leadership is more authoritarian (instead of
participative), motivation is based on the assumption that subordinates dislike
work and hence is more coercive (rather than assuming employees like work and
trying to strengthen their motivation through intrinsic and extrinsic rewards),
and organizations are more hierarchical (versus flat).62 Managers who wish to achieve significant
change in high power distance
cultures are advised to put senior staff front and center in communication
efforts, use legitimate authority, and “tell subordinates what to do.” In contrast, in lower power distance cultures, it is more important to explain the
reasons for change, “allow for questions and challenges” and involve employees
in figuring out how to implement the desired change.63
Managing Adaptation to Cultural Differences
We have seen that operating in ways that are congruent with
their cultural contexts can improve business performance. So, it’s clearly a bad idea to simply ignore
cultural differences. For multinational
companies, some variation in operating practices across locations is normally
required. And as companies push farther
with variation across locations, complementary moves such as decentralization
of decisionmaking and indigenization of in-country management teams can support
a company’s ability to be responsive to local conditions. But simply varying practices everywhere to
maximize congruence and pushing all important decision-making authority down to
the country level or below isn’t a very good idea either, because the result is
likely to be a tremendous amount of costly complexity. At the extreme, a multinational becomes so
localized that it gives up all of its potential international synergies and
performs no better (and perhaps even worse) than a series of separate local
firms would. So, managing adaptation (to
cultural as well as other types of differences) entails finding ways to limit
the need for and/or cost of variation.
Focusing on cultural similarities is one way to reduce the
need for variation. The simplest way to
do this is by focusing operations on locations with more similar cultures. Focusing on serving members of a company’s
home country’s diaspora can ease entry into new markets by reducing the
cultural distance that has to be crossed to reach local customers. Internally, using expatriates (typically from
the company’s home country) in particular roles also represents a type of
focus. Employing an expatriate as
country finance chief reduces the scope for potential culture-related
misunderstandings around sensitive financial matters, and reflects the patterns
of trust we have reviewed.
Externalization, e.g. via joint ventures, is a way that companies
can reduce the cost of adapting to local cultures. Partnering with a local firm can provide
access to local cultural understanding, business networks, and so on, that
would be costly and time-consuming for a foreign company to develop on its
own. As long as the partners can set up
an effective interface to address cultural (and other) differences in managing
the partnership, broader cultural congruence can be improved. Moving beyond joint ventures, companies can
acquire foreign firms, gaining access to local knowledge and networks as well
as direct managerial control but requiring acquiring firms to have sufficient
cross-cultural capability to manage and in most cases integrate acquired
firms.
Another approach to reducing the need for variation is to
promote a strong corporate culture. By
attracting and cultivating employees and customers who are drawn to a
particular corporate culture, the need to respond to national cultural
differences might be reduced. However,
it’s important not to place too much confidence in a typical corporate culture
overpowering national cultural differences.
Recall that Hofstede’s original research took place within a single
company – IBM – and still revealed large cultural differences. Furthermore, research by Andre Laurent
indicates that bringing employees from different cultures together in the same
company might actually strengthen rather than mitigate national cultural
differences among them.64
More broadly, an organization can also improve its
capabilities for bridging cultural differences.
Hiring for adaptability and investing in cross-cultural training can
improve workforce capabilities and flexibility.
Exposure to and deeper experience with foreign locations and cultures
via participation in international teams, travel, and expatriation can inform
and grow these kinds of capabilities.
For many companies with high growth targets in foreign markets, increasing
the diversity of their management teams should also be a priority. However, firms currently make only little use
of this source of cultural capability. Of the 2008 Fortune Global 500 companies, only 14 percent had a nonnative CEO.65 And among the directors of U.S. S&P 500
companies in 2008, only seven percent were foreign nationals, only 9 percent
had degrees from non-U.S. institutions, and only 27 percent had any
international work experience.66
Most firms from emerging markets have even less internationalized
leadership teams.
In thinking through decisions
about how far to push efforts to adapt to local cultural conditions, it’s also
important to account for industry characteristics that increase or decrease
sensitivity to cultural differences.
Generally, businesses that sell directly to consumers (rather than to
other businesses) are less sensitive to cultural differences. Service industries are generally more
sensitive to cultural differences than industries focused on selling physical
products. Thus, while they sell to other
businesses, most kinds of IT services are highly sensitive to language
differences. In contrast, industrial
machinery (sold to other companies for use in their factories) tends to be
relatively insensitive to cultural distance.
This is one factor that helps explain the global success of Germany’s
relatively small mittelstand firms in
many such sectors even though they have fewer resources for cultural adaptation
than larger firms.
5. Conclusions
Cultural
differences remain persistent and present an array of challenges for
multinational companies. Firms that
manage adaptation effectively are able to achieve congruence in the various
cultures where they operate while extending their main sources of advantage
across borders, and in some cases even making cultural diversity itself a
source of advantage. While this note has
emphasized cultural differences, which are often underappreciated, it’s equally
important to take note of cultural similarities. High and low power distance cultures, for example, both reflect responses to
common challenges around how human beings should properly interact with each
other in the face of inevitable differences in the power they hold in
particular contexts. In managing
adaptation, as well as more broadly, there’s also a great deal to be gained by
focusing on what unites us rather than what divides us.
Exhibit 1
Hofstede’s Cultural
Value Scores for 30 Selected Cultures
|
Country
|
Power Distance
|
Individualism/
Collectivism
|
Uncertainty Avoidance
|
Masculinity/ Femininity
|
|
Argentina
|
49
|
46
|
86
|
56
|
|
Australia
|
36
|
90
|
51
|
61
|
|
Brazil
|
69
|
38
|
76
|
49
|
|
Canada*
|
39
|
80
|
48
|
52
|
|
Chile
|
63
|
23
|
86
|
28
|
|
China
|
80
|
20
|
30
|
66
|
|
Colombia
|
67
|
13
|
80
|
64
|
|
Denmark
|
18
|
74
|
23
|
16
|
|
France
|
68
|
71
|
86
|
43
|
|
Germany
|
35
|
67
|
65
|
66
|
|
Greece
|
60
|
35
|
112
|
57
|
|
Indonesia
|
78
|
14
|
48
|
46
|
|
India
|
77
|
48
|
40
|
56
|
|
Iran
|
58
|
41
|
59
|
43
|
|
Israel
|
13
|
54
|
81
|
47
|
|
Italy
|
50
|
76
|
75
|
70
|
|
Japan
|
54
|
46
|
92
|
95
|
|
Korea (South)
|
60
|
18
|
85
|
39
|
|
Malaysia
|
104
|
26
|
36
|
50
|
|
Mexico
|
81
|
30
|
82
|
69
|
|
Netherlands
|
38
|
80
|
53
|
14
|
|
Philippines
|
94
|
32
|
44
|
64
|
|
Poland
|
68
|
60
|
93
|
64
|
|
Portugal
|
63
|
27
|
104
|
31
|
|
Russia
|
93
|
39
|
95
|
36
|
|
Singapore
|
74
|
20
|
8
|
48
|
|
Spain
|
57
|
51
|
86
|
42
|
|
Sweden
|
31
|
71
|
29
|
5
|
|
United Kingdom
|
35
|
89
|
35
|
66
|
|
United States
|
40
|
91
|
46
|
62
|
|
Mean
|
58.4
|
49.0
|
64.5
|
50.2
|
|
Median
|
60
|
46
|
70
|
51
|
Source: Geert
Hofstede, Culture’s Consequences:
International Differences in Work-Related Values, 1980, Beverly Hills, CA:
Sage.
*English-speaking part
Exhibit 2
Cultural Profiles
Based on Hofstede’s Cultural Dimension
Exhibit 3
Linguistic Distance
from English
Source: Joel West and John L. Graham, “A Linguistic-based Measure of
Cultural Distance and Its Relationship to Managerial Values,” Management
International Review, vol. 44, no. 3, 2004, p. 249 (Table 1).
Exhibit 4
Source: “Integrated Land-Use Management for Sustainable Development”
Stig ENEMARK. April 2007, p 6. See
figure 2 The Cultural Map of the world. Adapted form Gert Hofstede, 2001
Exhibit 5
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