ECOFORUM

[Volume 7, Issue 1(14), 2018]

SOCIO-CULTURAL FACTORS AND THEIR IMPACT ON THE PERFORMANCE OF

MULTINATIONAL COMPANIES

Azemina MASOVIC
Integrated Business Faculty - Skopje, Republic of Macedonia
[email protected]

Abstract
The paper deals with the concepts of socio-cultural factors and performance of multinational companies.
Multinational companies operate in different host countries around the world and have to deal with wide variety
of economic, political, legal, socio-cultural and technological factors. One of the significant components of the
business environment is a socio-cultural environment. A socio-cultural environment is a combination of social
and cultural factors. Due to the strong interaction that exists between them, it is very difficult to assess their
separate influence on the business operation of multinational companies. The socio-cultural factors are one of
the main environmental factors that significantly affect the economic activity of multinational companies and
their performance as well. Moreover, socio-cultural factors are beyond the control of foreign subsidiaries’
managers. The purpose of this paper is to describe the influence of certain socio-cultural factors on the
performance of foreign subsidiaries. On the basis of the obtained results, the contribution of the paper is
reflected in the determination of key socio-cultural factors that multinational companies should take into
consideration in order to evaluate the actual performance of foreign subsidiaries and their managers.

Key words: environmental factors; foreign subsidiaries, multinational companies; performance evaluation;
socio-cultural factors;

JEL Classification: F23

I. I NTRODUCTIO N

Society and culture have an impact on every aspect of the overseas business of multinational companies.
Although society and culture are not directly included in business operations, they indirectly appear as key
elements in shaping how the business is managed, from what goods are produced, and how and through what
means they will be sold, to the establishment of managerial and operational patterns and the determination of the
success or failure of foreign subsidiaries. Consequently, multinational companies should be aware of
predominant attitudes, values, and beliefs in each host country where decided to expand their business activities.
Differences in attitudes and values among management of a parent company and expatriate managers at the
subsidiary level, on the one hand, and managers and employees in host countries, on the other, can contribute to
serious functional problems (Ajami, Cool et al, 2006).
The socio-cultural environment is important for multinational companies. There are various socio-cultural
factors that significantly affect the economic activity as well as the performance of multinational companies. The
key socio-cultural factors that have a major impact on the operation of the multinational companies are (Trehan
and Trehan, 2009):
1. Culture;
2. Language;
3. Religion;
4. Level of education;
5. Customer preferences;
6. The attitude of the society towards foreign goods and services.
Socio-cultural factors are beyond the control of the managers of a foreign subsidiary. Consequently, in
order to evaluate the actual performance of its foreign subsidiary, a multinational company should anticipate the
impact of all socio-cultural factors that are beyond the control of the subsidiary’s managers. When assessing the
managerial performance, on the other hand, a multinational company should disregard the impact of the socio-
cultural factors that are beyond the control of the subsidiary’s managers (Drury, 2012).
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1.1. C ULTURE

There are many definitions of culture. According to the definition by House, Javidan et al. (2001, p. 494),
culture is defined as „shared motives values, beliefs, identities, and interpretations or meaning of significant
events that result from common experiences of members of collectives and are transmitted across age
generations“. In general, culture is considered as the accepted behaviors, customs, and values of a given society
(Dlabay and Scott, 2011).
Many components can be considered as elements of culture. These elements arise and are related to the
beliefs and behavior of people. Form multinational companies’ perspective, a culture of every foreign country
through its elements affects their business activities. Тhe main elements of culture that may have an impact on
the operation of multinational companies are (Vasudeva, 2007):
1. Attitude and beliefs – In every host country, there are norms of behavior based on attitudes and beliefs
that constitute a part of its culture. The attitudes and beliefs vary from country to country. Multinational
companies face a different set of attitudes and beliefs of a culture in each foreign country separately, and it
influences all aspects of human behavior, providing organization and directions to a society and its individuals.
Identifying the difference in attitudes and beliefs among various countries helps the multinational managers
more easily understand people's behavior;
2. Attitude toward time – It refers to people’s behavior about punctuality, responses to business
communication, responses to deadlines and the amount of time that they spent waiting for an appointment. For
instance, Americans are known to be punctual and the phrase time is money exactly explains their attitude
towards time. In contrast, people from other countries may show more flexibility towards time. Analogically,
multinationals operating in various countries should take into consideration these differences in attitudes towards
time;
3. Attitude toward work and leisure – There are differences in attitude towards work and leisure among
various countries. In some countries, people work much more hours than is necessary to satisfy their basic needs
of living. This attitude is indicative of their views towards wealth and material gains;
4. Attitude toward achievement – Cultural diversity in the general attitudes towards work is related to
people's achievement motivation.
5) Attitude toward change – Multinational companies should anticipate a difference in attitudes toward
change between separate countries. They should take into consideration some key cultural issues, such what
aspects of a culture resist change, how the process of change takes place in different foreign countries, how the
areas of resistance differ among them, and how long it takes time for implementing same change;
6) Attitude toward job – The importance of certain profession in country significantly determinate a
number and quality of people who want and seek to join that profession. Consequently, if the business is
considered as a prestigious occupation in some country, multinational companies will have at their disposal
broader pool of local professionals.
The influence of culture on the operation of multinational companies is real and widespread.
Multinational companies are affected by more than one culture at a time. Through their subsidiaries located in
various countries, they are exposed to different national cultures. Consequently, a certain multinational company
builds its corporate culture based on the cultural differences that exist among the countries where it operates.
Therefore, it is very important for multinational companies to adapt their production, marketing, and sales
activities depending on the culture of the given country. Culture in particular country directly, or indirectly,
reflect on the achieved performance of multinational companies.
However, cultural differences among various national countries are often quite challenging for
multinational managers. In order to carry out many managerial tasks successfully, it is very significant for them
to acquire a cross-cultural proficiency. In addition to that, multinational managers should be also proficient in
(Cavusgil, Knight et al, 2008):
 Comunicating and cooperating with business partners in host countries;
 Cooperating with national institutions in host countries;
 Selecting appropriate distributors and partners in host countries;
 Connecting with customers in host countries;
 Negotiating international alliances;
 Developing products and services in host countries;
 Preparting relevant promotional and advertising materials for each host county separately.
On the basis of results obtained from various surveys, it can be concluded that successful multinational
companies develop acceptance and understanding of cultural diversity among countries and learn how to take
advantage of opportunities, and cope with disadvantages that arise from different national cultures (Early and
Mosakowski, 2004).
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1.2. LANGUAGE

The diversity of language among various foreign countries is a source of many challenges for
multinational companies. Although there is a tendency of accepting the English language as a universal business
language, the companies are aware that it also provokes resistance by locals in many of countries where they
operate. Table 1 highlights the most common languages in the world.
Business communication is further complicated by the nonverbal components of the language. Nonverbal
communication creates difficulties for multinational companies due of various meanings of its elements in the
separate countries, such as eye contact, facial expressions, gestures, etc. (nonvocal elements of speaking) and
pitch, volume, speaking rate, etc. (vocal elements of speaking) (Hargie, 2011).

Table 1. The main languages of the world

Approximate number of Number of

Rank Language speakers (in millions) countries
1 Mandarin Chinese 848 13
2 Spanish 406 31
3 English 335 101
4 Hindi 260 4
5 Arabic 223 59
6 Portuguese 202 11
7 Bengali 193 4
8 Russian 162 16
9 Japanese 122 3
10 Javanese 84.3 3

Source: author's elaboration according to S.T. Cavusgil, Op. cit., p. 108;

From the perspective of the multinational company, it is very notable to have good knowledge of the local
language. The lack of knowledge of a local language is reflected on the performance of foreign subsidiaries and
their managers. The languages difficulties can be reduced by appointing expatriates on the top managerial
positions in the local subsidiary or nationals that have good knowledge of parent company’s language and
corporate culture.
The most common problem is that a large proportion of the parent company’s staff has limited or no
knowledge of local language and that contributes the parent-subsidiary communication to be reduced to
subsidiary's staff who knows the parent’s language or to the translators. Consequently, the volume of
information that parent company’s staff receives and processes are significantly decreased. This problem is
significantly enhanced if several languages are spoken by the local workforce. The presence of more than one
language in a given country is an indicator of diversity in its population. In some European countries, such as
German, which employ a large number of guest workers, the language difficulties increase from the linguistic
variety. In German, for instance, many companies employ guest workers from Turkey and Spain. Consequently,
the periodic meetings with workers are held in German, Turkish and Spanish (Fatehi, 2008).

1.3. RELIGION
Religion is considered as “a socially shared set of beliefs, ideas, and actions that relate to a reality that
cannot be verified empirically yet affects the course of natural and human events-a way of life woven around
people’s ultimate concerns” (Hill, 2009, p. 519).
The largest religion groupings in the world are Christianity and Islam (see Fig. 2). Christianity numbers
about 2.1 billion followers or approximately 33% of the world’s population. On another hand, Islam is
considered as the world’s second most practiced religion with 1.3 billion followers or about 21% of the world’s
population (Morrison, 2008).
In many countries around the world, religion plays a significant role in people's life. Religion even
determines the way people think of work. Consequently, religion considerably affects on business activity and
corporate culture. Many companies adapt their working process according to a predominant religion of a given
country in terms of the holidays, working hours, food habits, a way of dressing, etc.
From the perspective of the multinational company, religion is an important social factor that should
take in consideration when some company decides to operate in a given country. Religion, through its effects on
people, affects a multinational company and its operations. Multinational companies, for instance, should be
aware of religious holidays in each country where they operate. The most of the Islamic countries have
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significantly lower productivity during the month of the Ramadan fast. Likewise, the pace of work in many
Asian countries is slow down during the celebrations of the Chinese New Year. The situation is similar during
the Easter holidays in many European countries as well (Parboteeah and Cullen, 2017).
In some countries, the followers of particular religions are required to dress or to maintain their physical
appearance in a manner that is not appropriate to the company’s appearance norms. Also, multinational
company’s products or ingredients used in manufacturing are forbidden in the certain country. For instance,
multinational companies cannot produce or sell pork products because pork and all that is associated with it is
rigorously forbidden according to Islam (Ajami and Goddard, 2014).

Figure 2 - The world religions, as percentages of world population, 2005

Source: author's elaboration according to J. Morrison, Op. cit., p. 124;

Based on the foregoing, it can be concluded that an appropriate understanding and respecting of religions
is extremely important for the efficient functioning of multinational companies.

1.4. LEVEL OF EDUCATION

Education significantly affects the lifestyle of a population of any country in the world, the way of their
thinking, their attitude toward work, etc. The level of education varies among countries. However, in many
countries, the level of education has a tendency to increase. Education level and level of literacy of population of
a given country are indicators of the quality of their potential workforce.
Economic potential and progress of any country depend on the education of its population. Analogously,
education has notably impact on international business. The most significant economic implications of education
that are reflected on the operation of multinational companies are (Aswathappa, 2010):
1. Countries with a well-educated population attract high-wage industries. Every country that invests in
education tends to create high-wage industries that are known as “brain power” industries;
2. The market potential of any country primarily depends on education. The counties rich in educational
facilities, such Germany and England, are more likely to attract high-tech industries than the less
educated countries such as Romania and Poland. The technology level of the company’s products may
depend on the education level of the local population;
3. The level of education and the level of literacy of population in a given country considerable determine
the way of marketing research, packaging and advertising conducted by multinational companies.
In a country where the level of education of local population is higher, it is considered that expectations
from multinational companies are proportionally higher. Buyers with a higher level of education require more
quality products and services, a better price-quality ratio (a better VALUE-for-MONEY RATIO) and know their
right as customers. Also, well-educated local workforce requires better working conditions, more stable work,
and greater opportunities for further improvement as the business environment changes.

1.5. CUSTUMER PREFERENCES

The needs and tastes of consumers in various countries are significantly becoming similar. According to
some experts, this social trend is known as “global convergence”. As a result of the spread of global
communication and facilitated travel opportunities, certain social behaviors are getting similar globally. Today,
people around the world watch same movies, listen to the same music, play the same video games and use the
same Internet websites. Consequently, the needs, tastes, and habits become identical on a global level. The
global convergence is most present among the younger population. Therefore, many multinational companies
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with global strategy offer same or very similar products in many various countries. As result, global market
convergence is created whereby the world is considered as a global market of same products and services
(Frynas and Mellahi, 2015).
At another hand, many experts claim that multinational companies should be very careful about the
“global convergence” because there are still visible cultural and social differences between countries. Something
that is liked by the people of one country does not mean that will be liked by those in some other country. Even
if people like or use same or very similar products in various countries, they may use them for different reasons,
on different occasions and under different circumstances in each country. Therefore, is very significant for
multinational companies to modify their product and promotion strategies that will suit the preferences of the
population of the different countries. The multinational company should implement strategies that will be
appropriate for a given socio-cultural environment. This type of strategic approach LEADS TO SUCCESSFUL
BUSINESS outcomes (Cherunilam, 2011).

1.6. THE ATTITUDE OF THE SOCIETY TOWARDS FOREIGN BUSINESS

The social and government attitudes towards foreign business, especially towards foreign companies and
their products, are one of the social factors that may have a significant impact on the performance of
multinational companies. The social and governments attitudes of the particular country towards foreign
companies and their products can range from complete acceptance and trust to complete distrust and antagonism.
Analogously, if the society of a given country is friendly towards foreign business, multinational
companies will certainly benefit from a supportive local environment. On another hand, if social attitudes of a
given country are antagonistic, the multinational companies may face difficulties, such as boycotts of their
products. The antagonistic social attitude that companies may face in some foreign countries is often the result of
their government's position towards some political issues (Shenkar, Luo et al, 2015).
The purpose of boycotts is to shout completely the companies out of the particular market. The most
publicized boycott campaign ever was 50 years boycott run by Arab countries against the companies that were
engaged in business activities with Israel (Gillespie and Hennessey, 2016).

II. CONCLUSION

The main purpose of this paper was to understand the importance of socio-cultural factors’ influence on
the performance of multinational companies.
Society and culture have an impact on every aspect of the overseas business of multinational companies.
Analogously, the socio-cultural environment is significant for multinational companies. The key socio-cultural
factors that have a major impact on the operation of the multinational companies are 1) culture; 2) language; 3)
religion; 4) level of education, 5) customer preferences, and 6) the attitude of the society towards foreign goods
and services.
The influence of culture on multinational companies is real and widespread. Multinational companies are
affected by more than one culture at a time. Through their subsidiaries located in various countries, they are
exposed to different national cultures. Culture in particular country directly, or indirectly, reflect on the achieved
performance of multinational companies. On the basis of the results obtained from various surveys, it can be
concluded that successful multinational companies develop acceptance and understanding of cultural differences
among various country and learn how to take advantage of opportunities, and cope with disadvantages that arise
from different national cultures.
Religion is an important social factor that should take in consideration when some company decides to
operate in a given country. Religion, through its effects on people, affects a multinational company and its
operations. Consequently, it can be concluded that an appropriate understanding and respecting of religion is
extremely important for the efficient FUNCTIONING of multinational companies.
From the perspective of the multinational companies, it is very notable to have good knowledge of the
local language. The lack of knowledge of a local language is reflected on the performance of foreign subsidiaries
and their managers. Consequently, the languages difficulties can be reduced by appointing expatriates on the top
managerial positions in the local subsidiary or nationals that have good knowledge of parent company’s
language and corporate culture.
Education has notably impact on international business. In a country where the level of education of local
population is higher, it is considered that expectations from multinational companies are proportionally higher.
Buyers with a higher level of education require more quality products and services, a better price-quality ratio (a
better VALUE-for-MONEY RATIO) and know their right as customers. Also, well-educated local workforce
requires better working conditions, more stable work, and greater opportunities for further improvement as the
business environment changes.
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[Volume 7, Issue 1(14), 2018]

Even if people like or use same or very similar products in various countries, they may use them for
different reasons, on different occasions and under different circumstances in each country. Therefore, it is very
important for multinational companies to modify their product and promotion strategies that will suit the
preferences of the population of different countries. The multinational company should implement strategies that
will be appropriate for the given socio-cultural environment. This type of strategic approach LEADS TO
SUCCESSFUL BUSINESS outcomes.
In summary, it can be concluded that it is very significant for multinational companies to anticipate the
key socio-cultural factors in each host country separately in order to evaluate the actual performance of foreign
subsidiaries and their managers.

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